Pramod Kumar, Accountant Member - These three appeals pertain to the same assessee, involve some common and interconnected issues and were heard together. As a matter of convenience, therefore, all the three appeals are being disposed of by way of this consolidated order.
2. We will first take up the ITA No. 1946/Mum/14, i.e. assessee's appeal for the assessment year 2009-10.
3. This appeal, filed by the assessee, is directed against the order dated 31st January 2014 passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961, for the assessment year 2009-10.
4. Ground no. 1 is general in nature and does not call for any specific adjudication by us.
5. In ground no. 2.1, the assessee has challenged correctness of arm's length price adjustment of Rs. 69,76,105 in respect of purchase of raw material, Bisoprolol— an active pharmaceutical ingredient (API) purchased from the assessee's associated enterprises, namely Merck & CIE KG, Switzerland. In a connected grievance for the assessment year 2010-11, which is raised in ground no. 2.1 in the appeal for that assessment year, the assessee is aggrieved that the Transfer Pricing Officer was in error in proposing an arm's length price adjustment of Rs 1,03,05,503 in respect of the same active pharmaceutical ingredient, and the DRP was also in error in confirming this adjustment to the extent of Rs 67,69,943 in respect of the same. Ground no. 1 taken by the Assessing Officer's appeal for the assessment year 2010-11 also raises a connected issue regarding DRP falling in error to direct adoption of simple arithmetic mean, rather than weighted average mean, for computation of average CUP price. In ground no. 2 of the same appeal, an issue is raised regarding DRP's directing to de facto restricting the arm's length price adjustment with respect to purchases of API to the adjustment with respect to consumption of API. All these grievances are interconnected and we will take up all these grievances together.
6. So far as this grievance of the assessee is concerned, the relevant material facts, as necessary for adjudicating upon this grievance, are as follows. The assessee before us is a company, one of the pioneer in pharmaceutical industry in India, and in fact in Asia, and is a subsidiary of Merck KgaA, Germany. During the relevant financial period, the assessee imported Bisoprolol Fumerate, an active pharmaceutical ingredient (API) used in manufacturing of finished dosage form (FDF) of medicine. These imports were made from an associated enterprise, i.e. Merck & CIE KG, Switzerland. Taking up the facts of the assessment year 2010-11 for illustrative purposes, the total imports during the financial period was 345 kgs for an aggregate consideration of Rs 2,30,12,198. The average cost of this API thus comes to Rs 66,702 per kg. The assessee had claimed these imports to be at arm's length price on the basis of transactional net margin method (TNMM) as OP/OI of the assessee was 12.17% in the pharmaceutical segment, as against the arithmetic mean of 64 comparables which came to 12.30%. However, relying upon the decision of this Tribunal in the case of Serdia Pharmaceuticals India (P.) Ltd. v. Asstt. CIT[2011] 44 SOT 391/9 taxmann.com 13 , holding that CUP method is the most appropriate method for determining arm's length price in the case of generic APIs and armed with the requisite CUP inputs gathered by him under section 133(6), the Transfer Pricing Officer proceeded to compute the arm's length price under CUP method. As number of comparable uncontrolled prices for small quantities as well, the Transfer Pricing Officer adopted the arithmetic mean of prices of Bisoprolol, in the cases where quantities were more than 20 kgs., in the cases of inland sales as also exports. This amount came to Rs 36,831 per kg. The CUP was thus adopted at Rs 36,831 and the arm's length price for purchase of 345 kg was adopted at Rs 1,27,06,695, and the amount paid in excess of this amount, i.e. Rs 1,03,05,503 was recommended for an arm's length price adjustment. When the Assessing Officer proposed to make this ALP adjustment in the daft assessment order, assessee raised an objection before the Dispute Resolution Panel. While the DRP upheld the application of CUP as the most appropriate method, and the course thus adopted by the TPO, the DRP did direct that appropriate adjustment for the quality difference be given. This was to be done in the light of the directions given by the CIT(A) for the assessment year 2004-05. However, the directions given by the CIT(A) for the assessment year 2004-05 were with respect to adoption of simple arithmetic mean rather than weighted average. The contention regarding the API imported by the assessee being of superior quality was categorically rejected by the CIT(A), in his order for the assessment year 2004-05, in paragraph 9.4.1 at page 22 (Page 139 of paper-book III filed before us). Be that it as may, the Assessing Officer, in response to these directions, computed a relief of Rs 35,35,560 since the ALP based on the simple arithmetic mean was Rs 47,079, as against the ALP based on weighted arithmetic mean which was Rs 36,831, and this difference of Rs 10,248 per kg, for 345 kgs. of imports worked out to Rs 35,35,560. The balance ALP adjustment, i.e. Rs 1,03,05,503 minus Rs 35,35,560, of Rs 67,69,943 was thus confirmed for the assessment year 2010-11. As regards the assessment year 2009-10, the ALP adjustment on the same line and in respect of the same API, of Rs 69,76,105 was computed on the basis of simple arithmetic mean of Rs 44,401. The assessee is not satisfied and is in appeal before us. The Assessing Officer is also in appeal, so far as the assessment year 2010-11 is concerned, on the short point that the TPO should have computed weighted average rather than simple average. The Assessing Officer is also in appeal on the DRP's directing that the arm's length price adjustment being restricted to actual consumption of the API from the AE rather than the total imports of the API from the AE.
7. We have heard the rival contentions, perused the material on record and duly consider facts of the case in the light of the applicable legal position.
8. As regards the application of CUP method on the facts of this case, learned counsel for the assessee has fairly accepted that the issue is covered against the assessee by a coordinate bench of this Tribunal in the case of Serdia Pharmaceuticals (India) (P.) Ltd. (supra) and the matter is right now pending before Hon'ble Bombay High Court. In this view of the matter, and respectfully following the views of the coordinate bench in Serdia Pharmaceuticals (India) (P.) Ltd.'s case (supra), we confirm the stand of the authorities below on this point, and decline to interfere in the matter at this stage. However, even on the correct application of CUP, the assessee has some issues.
9. The first point is that since the quality of products of the assessee is inherently superior, as it is manufactured in a German plant where quality control requirements are much more stringent than in India, and since the quality of the product is said to be physically superior, as evidenced by the independent laboratory test by Bee Pharma Lab, the assessee should be allowed quality adjustment in the prices vis-à-vis the same generic product manufactured in India. It is also pointed out that it is for this reason of API superiority that the medicines produced by the assessee are sold at much higher a price vis-à-vis similar medicines, with the same API, produced by other pharmaceutical companies in India. We have also noticed that the Transfer Pricing Officer himself has allowed a quality adjustment of 10% in the assessment year 2010-11. Learned Departmental Representative, on the other hand, relies upon the stand of the authorities below. He points out that there is no independent evidence of superiority of the product. As for the lab report, he submits that the samples for analysis were not independently obtained and that, even on these handpicked samples, there is a small variation only on two parameters. He submits that there are no reasons to proceed on the basis that the products manufactured in Indian facilities are any but inferior in quality. It is also submitted that there is no cogent basis for the claim of product superiority. As regards the higher sale price of the end products, according to the learned departmental representative, such higher prices per se cannot lead to the conclusion that the raw materials are of better quality.
10. We see merits in learned counsel's plea. Under 10B(1)(a)(ii), the price of the comparable uncontrolled transaction "is adjusted to account for differences, if any..... which could materially affect the price in the open market". It is thus not even necessary that the differences in the product involved in comparable uncontrolled transaction are very significant or even real, because as long as these differences, whether having intrinsic value or merely in perceptions, could "materially affect the price in the open market", these differences are required to be taken into account. Even though the generic product may be the same, the same generic product manufactured in a plant, with higher and more stringent quality control requirements, command a premium in the market and greater acceptability with the end consumers of the resultant end product. We have also noted that the Transfer Pricing Officer himself has allowed a quality adjustment @ 10% in the assessment year 2011-12. As regards the Serdia Pharmaceuticals (India) (P.) Ltd. (supra), on which so much reliance is placed by the Assessing Officer, the Transfer Pricing Officer herself had allowed almost 40% adjustment in this regard as evident from the following observations in the said decision:—
"102. The technical superiority of the APIs imported by the assessee is in terms of purity standards and in terms of the lower standards of manufacturing facilities of Nivedita Chemicals. The highest of differences between products as per Japanese Pharmocopia standards, as was being manufactured by Nivedita Chemicals and the same product as per British Pharmocopia standards, as was the product imported by the assessee from its AE, worked out to Rs. 4,850. In addition to the CUP of Rs. 12,000 per kg., the TPO allowed Rs. 4,850 per kg. for higher quality standard as also an additional allowance of Rs. 5,000 towards impurities. The assessee has not made out a case for higher adjustments to be allowed in respect of the same, and it is not, therefore, the case that an adjustment for higher quality of product has been declined to the assessee. Even as we confirm the orders of the authorities below on this issue, we make it clear that the assessee is not prevented from making any such claim for adjustments in value, as he may deem appropriate and can justify, in future, and, to this extent, the issue is left open. Subject to these observations, in our considered view and on the given facts, these adjustments reasonably cover the variations in quality of API manufactured by Nivedita Chemicals vis-a-vis API manufactured by Servier Egypt which was purchased by the assessee for Rs. 52,546 per kg"
11. It will be being too detached from the ground realities to be oblivious of the inherent edge that the same products, as manufactured in India, manufactured in a location like Germany, which is bound to have or is perceived to have, much more stringent regulatory framework and quality control. That apart, in the case of a more trusted global corporation, where much more in the international reputation is at stake, the quality of product is perceived to be much more reliable. Even in the case of Glaxosmithkline Inc v. Her Majesty the Queen [2010] 194 Taxman 335 (FC) where the comparison was between the same generic drug manufactured by a local manufacturer in Canada vis-à-vis Glaxo's manufacturing facilities in Singapore, around 10% of quality adjustment was allowed. As the assessee has settled the matter with the tax authorities, upon the case having been restored to the file of the Tax Court of Canada by Canadian Supreme Court, this aspect has reached finality. In Indian context, the quality adjustment at around 40% has been allowed at the stage of transfer pricing scrutiny proceedings itself. In any event, it is an undisputed position that on two significant features, namely particle size (sieve analysis) and bulk density test, the product imported by the assessee is demonstrably superior to the locally manufactured drug. The fairness which has dawned on the Transfer Pricing Officer in 2011-12 is thus certainly in the right direction. The only issue is quantification of this adjustment. In the absence of any assistance to arrive at a fair rate of adjustment, we consider it appropriate to adopt the quality adjustment @ 10%, as granted by the Transfer Pricing in the assessment year 2011-12, in these assessment years as well. Accordingly, the ALP computed by the Assessing Officer, in the light of the CUP inputs, is to be adjusted by 10% for the quality difference as the product in manufactured by a globally reputed company and an industry pioneer in its own facilities in Germany. To this extent, we modify the manner in which the ALP adjustment is to be recomputed. This also take account the assessee's claim that the product manufactured with this API, being more reliable than comparable product with the locally sourced API, commands higher price in the market.
12. As we have allowed 10% quality adjustment in the absence of any cogent material to demonstrate product superiority and only on the basis of what the TPO himself has allowed in the subsequent year, it will be open to the assessee to raise issue regarding higher quantification of the quality difference, as and when he can gather and produce evidence in support of the same, in any subsequent assessment year. To that extent, the issue is left open.
13. The next point raised by the assessee, with regard to the application of CUP, is that only the domestic prices of the product should have been taken into account and not the export price. The contention of the assessee is that not only the markets are different, even the pricing considerations, which are influenced by many other considerations in the case of export prices, are different.
14. This plea also deserves to be accepted. The pricing considerations in the context of exports are not essentially the same as in the case of domestic pricing. What we are comparing right now is the price at which the assessee has purchased the product from the AE at the landed cost in India, and it will only be appropriate that it is compared with the price which at which the product is available in the domestic market. We, therefore, accept the plea of the assessee that only domestic prices need to be taken into account for computing the arm's length price under the CUP method. However, as we direct so, we must add that only such transactions, as are in respect of a reasonable quantity—at 20 kg as adopted by the TPO, will be taken into account so as to ensure that these are bona fide commercial transactions in the regular course of business. We see no reasons to disturb this quantity filter of 20 kgs., nor any arguments in respect of the same have been addressed before us. The average of comparable uncontrolled prices will have to be recomputed in the light of these directions.
15. As regards the question of simple arithmetic mean versus weighted average, we find that proviso to Section 92C(2) categorically states that "where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices". There is no room for importing the concept of weighted average here. The law refers to arithmetical mean and the arithmetical mean is, in plain words, "a mathematical representation of the typical value of a series of numbers, computed as the sum of all the numbers in the series divided by the count of all numbers in the series". We are not, therefore, persuaded by the grievance raised by the Assessing Officer. In our considered view, it was only arithmetical mean which is relevant in this context. There is no infirmity in the stand of the DRP on this issue.
16. As regards other points raised by the assessee with regard to the application of CUP, all we can point out is that all these issues are covered against the assessee by coordinate bench decision in the case ofSerdia Pharmaceuticals India (P.) Ltd. (supra) and the matter is right now pending before Hon'ble Bombay High Court. We, therefore, reject these grievances at this forum and at this stage.
17. As regards the question that the ALP adjustment should be made in respect of the entire purchases and that it should not be restricted to the quantity consumed, we can only say that the specific directions to that effect were given by the CIT(A) in the order for the assessment year 2004-05 but the Assessing Officer did not really challenge these directions in the appeal before this Tribunal at that stage. In the present year, in any case, this question does not arise since no such adjustment seems to have been given to the assessee. It is in this background that we dismiss this grievance of the Assessing Officer as ill conceived.
18. Ground of appeal no 2.1 of the assessee is thus partly allowed for statistical purposes, in the terms indicated above, for the assessment years 2009-10 and 2010-11. Grounds of appeal nos. 1 and 2 of the Assessing Officer, for the assessment year 2010-11, are thus dismissed.
19. In the ground of appeal no. 2.2 of the assessee, which is materially similar for the assessment years 2009-10 and 2010-11, barring for the difference in amounts - which are Rs 3,56,56,500 for the assessment year 2009-10 and Rs 2,70,00,000 for the assessment year 2010-11, grievance of the assessee is that the Transfer Pricing Officer erred in treating the arm's length price of the technical know-how fees as NIL and, thereby, making ALP adjustments in respect of the entire amounts paid to the parent company for technical know-how fees.
20. As regards this ALP adjustment for the assessment year 2009-10, the Transfer Pricing Officer has justified the same by stating that "the documents submitted by the assessee could not demonstrate tangible and direct benefit derived by the taxpayer in paying the above amounts to the AEs". The TPO also noted that the assessee claims to make payment for technical consultancy services and the fact that it also reimburses certain direct third party costs incurred on its behalf to its AEs, and thus concluded that no separate payment is warranted for these services. The evidences, by way of emails, reports, manuals, brouchers and details of visit by AE's personnel, were rejected as too vague and as not pertaining to the relevant financial period. It was in this backdrop that the TPO proposed an ALP adjustment reducing the value of these services to 'nil' value. When assessee carried the matter before the Dispute Resolution Panel, the DRP also confirmed the stand of the Transfer Pricing Officer. The DRP was of the view that the agreement, by itself, could not be treated as conclusive about the worth of the services rendered. What is to be really seen is whether any significant intra-group services were actually rendered. As regards the evidences in support of the services having been rendered, the DRP noted that these evidences have been rejected by the TPO on account of following reasons:—
| • |
The services claimed to have been rendered to the assessee are the same as claimed to have been rendered to another group entity by the name of Merck Specialities India Pvt Ltd. This fact, according to the DRP, establishes that services were non-exclusive in nature. |
• |
Emails in support of engineering technology of production and quality control pertain to other period and are too general in nature. Similarly, emails in support of equipment sourcing and supplies are general in nature. |
• |
Certain monthly reports have been produced regarding SAP performance. These documents do refer to the consultancy, information technology and some other corporate information services. However, DRP dismissed the same and observed that "certain operation level agreement regarding IT services were also produced which contain IT policy and standard operating procedures of the group" |
• |
Some emails regarding world gastro conferences were produced but these could be accepted as evidences as these are unrelated to the products manufactured by the assessee. |
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"In sum", to use the words of the DRP, "the TPO observed that the documents presented by the assessee lacked credible evidentiary value to support the assessee's claim that it has received technical and consultancy services from the AE so as to justify the payment made by it during the year" |
21. The DRP approved this stand of the TPO on the basis of the following line of reasoning:
"4.12 In their submission before us, the assessee has not produced any additional documents, except for the afore-stated e-mails/correspondences/documents relating to conference, etc, which have been presented under different headings in consonance with the scheduled services mentioned in the agreement. Under the circumstances, we cannot persuade ourselves to rely on these documents to find any unimpeachable evidence in support of actual receipt of the scheduled services as listed out in the agreement. In this connection, we also note that the assessee has made separate payments towards travel, hotel, printing, consultants, training expenses, etc. to the AE under the category of reimbursements under the head 'other expenses'. These expenses are reportedly incurred by the AE for making payments to 3rd parties on behalf of the assessee. Thus, when the assessee is habitually reimbursing actual amounts on the basis of different specific services rendered by the AE to the on a cost to cost basis, there is no reason as to why the assessee could not have followed such direct-charge method to make payments to the AE, i.e. by paying as and when a specific service is received, instead of making a provision for a lump sum amount payable through an agreement for certain services which are not backed up with any reliable evidence. Moreover, the fact that the 'assessee is not an exclusive recipient of such services, which are also made available by the AE to other group companies, raises a valid question with regard to the justification and the quantum of such expenses being borne by the assessee.
4.13 The assessee is aggrieved that the TPO has not adopted any specific method to benchmark the ALP of the transaction. To this, we would like to state that the benchmarking of ALP of a transaction particularly in the nature of intra-group services is germane to the actual existence of the services concerned, which is found, to-be absent in this case, hence there was apparently no occasion for the TPO to take the next step of benchmarking the same by adopting a MAM. Our attention has been drawn to an extract from the OECD guidelines to justify the payment made to AE, but in our considered view, the extract cited by assessee does not help its cause since, the transaction under question does not resemble nor can it be compared to the retainer's fees paid by an independent/enterprise to a Lawyers' Firm for assured legal service. The assessee has referred to a few decisions of Delhi ITAT in the case of McCann Erickson India Pvt. Ltd, AWB India Pvt. Ltd, Ericsson India Pvt. Ltd.; in which the Ld. ITAT apparently have dealt with the issues as to whether CUP is the correct method to benchmark Management Services Fees and whether the TPO is authorized to question the commercial expediency of the transactions. However, in the instant case the TPO has not questioned the commercial expediency of the transaction. The transaction has been found to have yielded in no actual services being rendered to assessee by the AE as required to be provided in the agreement; hence no ALP could be attributed to it. When there are no services availed, there is no question of 'benchmarking the transaction and in such cases determination of ALP at Rs. NIL has been upheld by the Hon'ble ITAT in the following cases:.
| (a) |
Deloitte Consulting India Pvt. Ltd. v. DCIT (2012) 137 ITD 21 (Mumbai) |
(b) |
Gem Plus India Pvt. Ltd. v. Asst. CIT-IT No.352/Bang/2009, dt.21/10/2010 |
(c) |
Knorr Bremse India (P) Ltd. v. ACIT [2013] 56 SOT 349 (Delhi) |
4.14 In view of the above observations, the decision of the TPO/AO to determine the ALP of the transaction in question at nil with consequential adjustment is upheld and confirmed."
22. As regards the assessment year 2010-11, things are not materially different either. The Transfer Pricing Officer adopted the same approach in this year as well. While he noted that the assessee was entitled to a package of services, on as and when required basis, under the agreement, he required the assessee to submit "full set of documentation to demonstrate the fulfilment of benefit test for payment of aforementioned consultancy fees" and required the assessee to show cause as to why "the stand of the Transfer Pricing Officer in the earlier years should not be followed in case the assessee fails to substantiate the fulfilment of benefit test". The Transfer Pricing Officer also noted that each of the item is required to be separately benchmarked, and as such the mere fact that the operational income of the assessee is more than that of the comparables cannot be reason enough to hold that the payment for technical services is at arm's length price. The evidences furnished by the assessee were rejected, one by one, as general, vague, inconclusive and even as something "which can be done by any member of the assessee's team by having a check list for verification". He then posed a question by observing that "the moot question that needs to be asked is whether for rendering such auditing (services), the assessee will employ an outsider" and proceeded also to add "If at all the answer is yes, then the next question arises as to what would be consideration to a person in 3rd party scenario". His answer to the question that he thus posed was "there would hardly be any substantial payment". Summing up, the TPO concluded that no services are rendered on the facts of this case, and that "when no services are availed, there is no question of benchmarking the transactions, and, in such cases, determination of ALP at Rs NIL has been upheld by the Hon'ble ITAT in the following cases -Deloitte Consulting India (P.) Ltd. v. Dy. CIT [2012] 137 ITD 21/22 taxmann.com 107 (Mum),Gemplus India (P.) Ltd. v. ACIT (ITA No. 352/Bang/2009; order dated 21st October 2010, and Knorr-Bremse India (P.) Ltd. v. Asstt. CIT [2013] 56 SOT 349/[2012] 27 taxmann.com 16 (Delhi - Trib.)". Aggrieved, assessee did raise an objection before the DRP but without any success. On the same line, as in the earlier years and broadly on the basis of the same reasoning, the DRP confirmed the action of the Transfer Pricing Officer. The assessee is not satisfied and is in further appeal before us.
23. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
24. We find that there is a clear contradictions in the findings of the authorities below. On one hand, the stand of the authorities below is that no services are rendered, and, on the other hand, there are categorical findings that the services rendered are so general in nature that even an employee of the assessee could have rendered the same. In the event of no services actually having been rendered, there cannot be any occasion for the same services being rendered by a person without specialized knowledge. On one hand, it is held that arm's length price of these services is zero value, and, in the same breath, it is held that "there would hardly be any substantial payment" for these services. Clearly, services are rendered on the facts of the present case. There is sufficient material on record to show that the assessee was, under the agreement, entitled to receive a package of services on as and when required basis. The emails and other documentary evidences show that the assessee was in receipt of these services. Just because these services were too general, in the perception of the authorities below, or just because the assessee did not need these services from the outside agencies, cannot be reason enough to hold that the services were not rendered at all. We have perused the material before us, and, in our considered view, the assessee has reasonably established rendition of services. The assessee may not have received all the services under the agreement but essentially the assessee had right to receive all these services, as and when required, under the agreement. The payment is made for the rights accruing to the assessee for the bundled services under the contract and not for each service on ala carte basis. The reason that the assessee did not use a particular service cannot justify holding that no payment was warranted for such services. To give an example from day to day life, if an assessee is paying for having right to view a bouquet of television channels, which come as a package, he does not decline to pay the consideration for the bouquet of television channels because he did not view a particular television channel. The example may seem to be so simplistic but it does hammer the massage, as we would like to, that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing is the benefit test. We do not think benefit test has too much relevance in the arm's length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. In case TPO can demonstrate that the consideration for similar services, under the CUP method, is NIL, he can very well do so. That's not, however, his case. He only states that these services are not worth the amount paid by the assessee. Such band statements and sweeping generalizations cannot help the case of the revenue authorities. The assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm's length price on the facts of this case will be more appropriate a method of ascertaining the arm's length price, the TNMM cannot be discarded. Dealing with almost a similar situation, as we are in seisin of, a coordinate bench of this Tribunal, in the case of AWB India (P.) Ltd v. Dy. CIT[2015] 152 ITD 770/[2014] 50 taxmann.com 323 (Delhi - Trib.), has observed as follows:
"11. In ground nos. 5 to 9, which we will take up together, the assessee has raised the following grievances:
5. |
That, on the facts and circumstances of the case, the DRP and TPO/AO have failed to appreciate the business model and business realities of the appellant and role of its AE, while conducting the economic analysis, and concluding that no service is received or no benefit, and/or services received are duplicative in nature. |
6. |
That, on the facts and circumstances of the case, the DRP and TPO/AO erred in presumptively holding that the revenue authorities are empowered to question the commercial decision of the appellant and in not appreciating the jurisprudence that the DRP and the AO/TPO cannot go beyond their powers to question the business decision of the company. |
7. |
That, on the facts and circumstances of the case, the DRP has erred in confirming that the TPO has discharged his statutory onus by establishing the conditions specified in (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm's length price determined by the appellant and proceeding to decide the arm's length price himself. |
8. |
That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in conducting economic analysis of the international transactions without relying on any comparable transaction/companies using inappropriate method. |
9. |
That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in determining the arm's length price of international transactions consisting of cost and profit margin at 'nil'. |
12. So far as these grievances of the assessee are concerned, the relevant material facts are as follows. The assessee is engaged in the business of trading in food grains. It is a part of AWB group Australia and its 99.999% equity is held by AWB Australia Limited and the balance. 001% equity is held by another group company, namely AWB Investments Limited. One of the international transactions that the assessee entered into with its AEs was payment of Rs 58,20,571 towards 'management services'. On an analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head 'management services' was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP method because the value under CUP method will be best indicator of the value of these services. It was in this background that the TPO made certain adverse inferences against the assessee. The TPO was of the view that while the assessee has made a payment of Rs 20,35,907 towards financial management and reporting services, "but the services rendered are negligible compared to the cost incurred". The TPO was also of the view that "a minor clarification or seeking of certain guidance on verify basic issue does not call for a payment of Rs 20 lakhs. Therefore, the ALP of these services was taken as 'NIL'. He further noted that while the assessee has made a payment of Rs 1,23,476 towards human resources services, the assessee has "not furnished any specific input on training and development of human resources and it is also noticed that these services are of routine nature and duplicate at best". Accordingly, the TPO also treated ALP of these services as 'NIL'. As regards the payment of Rs 96,355 towards 'legal services', the TPO did take note of the services that the assessee was entitled to under these arrangements but as there is no evidence of any services having been actually rendered by the AE, the TPO concluded that it does not have any value in an arm's length situation. The value of this service was also taken as NIL. The same was the case with respect to the payments for other services. Accordingly, no arm's length value was assigned to these services also. In respect of these cases TNMM was rejected and CUP was applied— though, even under CUP method, value assigned was nil as, in the opinion of the TPO, these services were worthless.
13. When Assessing Officer proposed to make disallowance in respect of payments for the above services, arm's length value of which was taken at 'zero', aggregating to Rs 31,23,325, as against total management fees of Rs 58,20,571 paid by the assessee, assessee carried the matter before the DRP but without any success. The DRP confirmed the stand so taken by the TPO, Accordingly, an ALP adjustment of Rs 31,23,325 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us.
14. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
15. One of the very basic pre-condition for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same".
16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions.
17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments.
18. We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned action cannot meet our judicial approval.
19. For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of Rs. 31,23,325. The assessee gets the relief accordingly."
25. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench.
26. In the present case, though a finding is given to the effect that no services are rendered, in the light of the contradictions in this finding and the observations above, it is clear that in effect commercial expediency of this payment is questioned. That exercise, in our considered view— particularly in the light of Hon'ble Delhi High Court's judgment in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 , cannot be conducted in the course of ascertaining the arm's length price.
27. In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accord
28. Ground no. 2.2 of the assessee, for both the assessment years before us, is allowed.
29. In ground no. 3, the assessee is aggrieved of the disallowance of Rs. 4,72,86,219 being 70% of the expenses claimed on account of distribution of free samples. In the assessment year 2010-11, in a connected grievance i.e. ground no. 6, the assessee is aggrieved of a similar disallowance, on the basis i.e. 70% of claimed deduction, for an amount of Rs 3,39,59,527.
30. We find that identical issue, for the assessment year 2007-08, has been set aside to the file of the Assessing Officer vide coordinate bench's order dated 2nd August 2013. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. Respectfully following the same, we uphold the grievance of the assessee to the limited extent that the matter is restored to the file of the Assessing Officer for adjudication de novo after giving yet another opportunity of hearing to the assessee, in accordance with the law and by way of a speaking order so.
31. Ground no. 3 for the assessment year 2009-10 and ground no. 6 for the assessment year 2010-11 are thus allowed for statistical purposes in the terms indicated above.
32. In ground no 4, the assessee is aggrieved of the disallowance of Rs 33,04,238 under section 14A.
33. The short grievance of the assessee in this respect is that the investments in REC bonds are also included in the computation of disallowance under section 14A r.w.r. 8D even though the income of the REC bonds is taxable in nature.
34. With the consent of the parties, this issue is remitted to the file of the Assessing Officer for factual verification and resultant adjustment in the disallowance under section 14A r.w.r. 8D. If this investment does not result in a tax exempt income, it cannot be taken into account in computation of disallowance under rule 8D. The Assessing Officer will, therefore, modify the disallowance accordingly.
35. Ground no. 4 is also thus allowed for statistical purposes.
36. In ground no. 5, the assessee is aggrieved of the adjustment of Rs. 1,40,24,617 under section 145A of the Act. In a connected and materially similar ground of appeal for the assessment year 2010-11, i.e. ground no. 9, the assessee has raised a grievance against the adjustment of Rs 1,40,24,617 under section 145A. This ground for the assessment year 2009-10 reads as follows:
"On the facts and in the circumstances of the case and in law, the learned AO/Hon'ble DRP erred in:
| (a) |
applying the provisions of Section 145A of the Act, though however it was contended by the appellant that the provisions of the Act were not applicable in their case as they followed net method of accounting; |
(b) |
confirming the application of gross method of accounting under section 145A of the Act and making addition of Rs.1,40,24,617; and |
(c) |
and further not rectifying the mistake apparent from record by not granting the deduction of Rs 1,36,67,817 in respect of the addition made to the closing stock as on 31st March 2008 (assessment year 2008-09) though however the same was pointed out that the same has to be granted in terms of the observations of the DRP in their orders as well as the order of the Tribunal, in appellant's own case for the earlier years." |
37. As regards this issue, learned counsel for the assessee has submitted the following note and she submits that she has no objection to the matter being restored to the file of the Assessing Officer for adjudication de novo by way of a speaking order, in accordance with the law and after giving an opportunity of hearing to the assessee:
'1. An addition of Rs. 1,36,67,817/- was made in the assessment order for the assessment year 2008-09 under Section 145A of the Act representing the balance of "Unutilized Modvat Credit" outstanding at the year end (31-03-2008).
The Commissioner of Income Tax (Appeals) in his Order also has confirmed the said addition on the ground that in the assessment year 2007-08 the Hon'ble Dispute Resolution Panel also confirmed the same and also that there were no change in the facts.
2. The AO in the draft Order had disallowed an amount of Rs. 1,51,50,936/- representing difference between the Modvat credit balance at the close of the year Rs. 2,88,18,753/-and at the beginning of the year Rs. 1,36,67,817/-.
3. The Hon'ble DRP in their Order held that credit in the value of the opening stock of Rs. 1,36,67,817/- is allowable by way of adjustment in the value of the opening stock in assessment year 2009-10. (Para No. 7.11 and Para No. 7.19). It is therefore submitted that the same is allowable as deduction in the said year.
4. It is submitted that the appellant is entitled to deduction of Rs. l,03,62,063/- instead of addition of Rs. 1,40,24,617/-, if the "Gross Method" as followed by the AO and confirmed by the Hon'ble DRP has to be followed under Section 145A of the Act as depicted in the Chart appearing on page No. 21 of Hon'ble DRP's Order (vide para No. 4).
The Hon'ble DRP have wrongly withdrawn the deduction of Rs.2,43,86,680/- being the excise duty and VAT paid which is included in Rs. 44,49,79,263/- in the value of the "Opening Stock" as per "Inclusive Method" as shown in the said Chart.
5. Without prejudice to the submissions made hereinabove, if at all the addition of Rs. 1,40,24,617/- is upheld, the same should be allowed as deduction in the assessment year 2010-11, the same should be allowed as deduction on the ground that the said amount is included in the payments made against excise duty/sales tax collected in the earlier year.'
38. Learned Departmental Representative does not oppose this prayer.
39. In view of the above, we hereby remit the matter to the file of the Assessing Officer for adjudication de novo by way of a speaking order, in accordance with the law and after giving an opportunity of hearing to the assessee. Ordered accordingly.
40. Ground no. 5 for the assessment year 2009-10 and ground no. 9 for the assessment year 2010-11 are thus allowed for statistical purposes in the terms indicated above.
41. In ground no. 6, the assessee is aggrieved of the disallowance of Rs 16,53,013 under section 43B(f) of the Act.
42. Learned representatives fairly agree that this issue is covered, in favour of the assessee by Hon'ble Calcutta High Court's judgment in the case of Exide Industries Ltd. v. Union of India[2007] 292 ITR 470/164 Taxman 9 , but the said decision, holding section 43B(f) to be constitutionally invalid, is stayed by Hon'ble Supreme Court. As the said decision is stayed by Hon'ble Supreme Court, we see no reasons to interfere in the matter. The disallowance must stand confirmed for the time being.
43. Ground no. 6 is, accordingly, dismissed.
44. In ground no. 7, the assessee is aggrieved of the addition on account of interest on income tax refund of Rs 19,33,153. In ground no. 8 for the assessment year 2010-11, the same issue is raised with respect to taxability of interest on income tax refund, amounting to Rs 64,18,102.
45. Learned counsel, however, fairly accepts that the issue is covered against the assessee, by a special bench decision of this Tribunal in the case of Avada Trading Co. (P.) Ltd. v. Asstt. CIT [2006] 100 ITD 131 .
46. Ground no. 7 is accordingly dismissed. Ground no. 8 for the assessment year 2010-11 must also stand dismissed for the same reason.
47. No specific arguments were addressed in support of ground nos. 8 and 9, and, accordingly, these grounds are dismissed. In any case, these grounds only seek consequential relief.
48. In the result, appeal of the assessee for the assessment year 2009-10 is partly allowed in the terms indicated above.
49. We now take up the assessee's appeal for the assessment year 2010-11, i.e. ITA No. 1222/Mum/2011.
50. Ground no. 1 is general in nature and does not call for any adjudication.
51. As a result of the discussions earlier in this order, ground no. 2.1 is partly allowed, ground no. 2.2 is allowed, ground no. 6 is allowed for statistical purposes, ground no. 8 is dismissed and ground no. 9 is allowed for statistical purposes
52. In ground no. 3, the assessee is aggrieved of the deduction under section 36(1)(va) being declined in respect of Rs 17,127 pertaining to the payment of employees' contribution for the provident fund before the due date of filing of the income tax return.
53. Learned representatives fairly agree that this issue is now squarely covered, in favour of the assessee, by Hon'ble jurisdictional High Court's judgment in the case of CIT v. Ghatge Patil Transports Ltd.[2014] 368 ITR 749/[2015] 53 taxmann.com 141 (Bom)]. In this view of the matter, the impugned disallowance is hereby deleted.
54. Ground no. 3 is thus allowed.
55. Ground no. 4, with respect to section 14A disallowance of Rs 21,44,477, is not pressed before us.
56. Ground no. 4 is thus dismissed as not pressed.
57. In ground no. 5, the assessee has raised a grievance with respect to disallowance of share buyback expenses of Rs 36,70,816.
58. Having heard the rival contentions and having perused the material on record, we find this issue is also covered, in favour of the assessee, by Hon'ble Delhi High Court's judgment in the case of CIT v. Selan Exploration Technology Ltd. [2010] 188 Taxman 1 (Del). In this case, Their Lordships have, inter alia, observed as follows:
'5. Insofar as the amount of Rs. 20,40,000 is concerned, it was paid by the assessee to HSBC Securities and Capital Markets (India) (P) Ltd. for advisory services in regulatory compliance undertaken by them to enable the assessee to prove exist opportunity to the shareholders of the company by buyback of the shares. According to the assessee, the payment was made as a normal business activity for the aforesaid purpose in order to maintain good and cordial relationship with the shareholders and, at the same time, safeguarding the interests of the existing shareholders. For this reason, the assessee company contended that it was an expenditure incurred wholly and exclusively for the purpose of assessee's business and should be allowed as business expenditure.
This was the explanation furnished to the query of the AO as to the nature and type of services which had been provided by the HSBC.
6. Another submission of the assessee company was that buyback enhances the earnings per share of the company in the future and creates long-term shareholder value and also prevents outflow of funds in the shape of dividends by reducing capital base of the company. The AO, however, was not satisfied with this explanation and, according to him, expenses were incurred for the buyback of the shares, which is directly related to the capital of the assessee. Therefore, he treated it as capital expenditure.
7. The Tribunal differed with the AO and CIT(A) holding that the expenditure in question was not in relation with the share capital of the assessee company. For coming to this conclusion, the Tribunal has relied upon the judgment of the Supreme Court in the case of CIT v. General Insurance Corporation (2006) 205 CTR (SC) 280 : (2006) 286 ITR 232 (SC). In that case, the issue involved was regarding expenses by way of stamp duty and registration for issue of bonus shares. These expenses were also in connection with the capital base of the assessee company therein. Under these facts, the Apex Court held that since there is no flow of funds or increase in the capital employed, it cannot be said that the company had acquired benefit or advantage of enduring nature.
8. We may also mention at this stage that to the same effect is the judgment of the Supreme Court inEmpire Jute Co. Ltd. v. CIT [1980] 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) wherein the following principle of law was enunciated :
"In short, what has been held in this case is that if the expenditure is made once and for all with a view to bringing into existence an asset or an advantage for the enduring of a trade then there is good reason for treating such an expenditure as properly attributable not to revenue but to capital. This is so, in the absence of special circumstances leading to an opposite conclusion."
9. It would be of interest to note that in Empire Jute Co. (supra) [sic - General Insurance Corpn.], the Supreme Court considered its earlier two judgments in the case of Brooke Bond India Ltd. v. CIT(1997) 140 CTR (SC) 598 : (1997) 225 ITR 798 (SC) and Punjab State Industrial Development Corporation Ltd. v. (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC). Distinguishing these two judgments, the Supreme Court pointed out that those cases related to the issue of fresh shares which led to an inflow of fresh funds into the company, which expands or adds to its capital employed in the company resulting in the expansion of its profit making apparatus. The expenditure incurred for the purpose of increasing the company's share capital by the issue of fresh shares would be treated as capital expenditure, as held in those cases. Further, when the expense incurred in connection with bonus shares, there is no increase in the capital employed, which remains the same.
For this reason, and on this distinction, the Court held that such an expenditure would be treated as revenue expenditure/business expenditure as it cannot be such (sic-said) that in that case the company had acquired benefit or addition of enduring nature because the total funds available with the assessee company would remain the same.
10. It is clear from the aforesaid judgments that a fine distinction is made by the Supreme Court in classifying the expenditure under two categories :
(a) When the expense incurred relates to the issue of fresh shares, which leads to an inflow of fresh funds into the company, such expenditure is to be treated as capital expenditure.
(b) On the other hand, where no such flow of funds or increase in the capital employed, the expenditure incurred would be revenue expenditure, as in such a case the company would not acquire benefit or addition of enduring nature.
11. In the present case, consultancy fee for advisory services was paid by the assessee company for buyback of shares. Instead of increase in the share capital, it was going to result in the decrease in funds with the buyback of the shares. In these circumstances, the Tribunal rightly held that the assessee had not acquired the benefit or addition of enduring nature because after the buyback, benefit or addition of enduring nature would not arise as capital employed had, in fact, gone down. The expenditure incurred had not resulted into bringing into existence any asset. Therefore, it was rightly held to be an expense of revenue nature.
12. The contention of learned counsel for the Revenue that with lesser capital dividend in future payable shall be less and, therefore, it shall be treated as a benefit of enduring nature cannot be accepted. We further find that in these circumstances the Tribunal rightly held that such an expenditure was allowed under s. 37 of the Act as expense incurred for business purpose in the following manner :
"15. Once we decide that the impugned expenditure is not capital in nature, we have to see its allowability under s. 37. In this regard, we find that the expenses were incurred by the assessee company for compliance of SEBI guidelines with regard to buyback of shares. The buyback of shares is stated to be for the purpose of providing an exit opportunity to the existing shareholders who so desire. This Tribunal is taking a consistent view that expenditure incurred with regard to AGM is business expenditure. The AGM is held by a company for the benefit of existing shareholders. On the same reasoning, the impugned expenditure which were also incurred for the benefit of existing shareholders in the ordinary course of business is also an expenditure incurred for business purpose and hence the same is allowable under s. 37. We, therefore, decide this issue in favour of the assessee."
13. We, thus, are of the opinion that no question of law arises, which needs determination by this Court, in the present appeal. This appeal is accordingly, dismissed.'
59. Respectfully following the views so expressed by Hon'bel Delhi High Court, we uphold the grievance of the assessee. Accordingly, the disallowance of Rs. 36,70,816 on account of buyback expenses stands deleted.
60. Ground no. 5 is thus allowed.
61. In ground no. 7, the assessee is aggrieved of the disallowance of Rs 1,48,998 on account of sales promotion expenses.
62. The sole basis for the impugned disallowance is circular no. 5 of 2012 which provides as follows:
"It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956.
2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries.
3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law.
Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income.
4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action.
This may be brought to the notice of all the officers of the charge for necessary action."
63. We have also noted that the disallowance is restricted to the expenses incurred after the amendment in code of conduct.
64. As there were no specific arguments in this regard, perhaps in view of the smallness of amount, we confirm the disallowance. We, however, make it clear that the question whether a disallowance can be made only because of this amendment in the code of conduct is indeed a contentious issue, and, we, therefore, leave it open for adjudication in an appropriate case. To this extent, the confirmation of disallowance will have no precedence value.
65. Ground no. 7 is thus dismissed.
66. In the result, the appeal of the assessee for the assessment year 2010-11 is partly allowed in the terms indicated above.
67. We now take up the appeal of the Assessing Officer for the assessment year 2010-11.
68. In the light of discussions earlier in this order, ground nos. 1 and 2 are already dismissed.
69. In ground nos. 3 to 5, grievance of the Assessing Officer is against deletion of disallowance of Rs. 28,16,536, in respect of sales promotion and conference expenses, on the ground that there is no evidence of benefit from these activities and that even the expenses incurred prior to 10th December 2009, i.e. amendment in the code of conduct of the medical professionals, should have been disallowed.
70. Having heard the rival contentions and having perused the material on record, however, we see no reasons to interfere in the matter. The thrust of Assessing Officer's disallowance was that there was nothing to show that expenses were necessarily required to be incurred inasmuch as there was no direct cause and effect relationship between the expenses incurred and the business profits of the assessee. Obviously, the Assessing Officer was swayed by irrelevant consideration. This expenses may or may not be necessary in that sense but that does not matter. As long as the expenses are incurred wholly and exclusively for the business, whether necessarily or not, these expenses are deductible in nature. We find guidance from a passage from the judgment of House of Lords in the case of Atherton v. British Insulated & Helsbey Cables Ltd. (1925) 10 Tax Cases 155, referred to with approval by the Hon'ble Supreme Court in the case of CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601, which reads as follows:
"It was made clear in the above cited cases of Usher's Wilshire Brewery v. Bruce (supra) and Smithv. Incorporated Council of Law Reporting (1914) 6 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of business may yet be expended wholly and exclusively for the purpose of the trade; and it appears to me that the findings of the CIT in the present case, bring the payment in question within that description. They found (in words which I have already quoted) that payment was made for the sound commercial purpose of enabling the company to retain the existing and future members of staff and for increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of Sterling Pound 31,784 was not money wholly and exclusively laid out for the purpose of the trade under the rule above referred to, they found deduction was admissible—thus in effect, though not in terms, negativing the Crowns contentions. I think that there was ample material to support the findings of the CIT, and accordingly hold that this prohibition does not apply."
71. It will, therefore, be clear that even if an expense is incurred voluntarily, it may still be construed as 'wholly and exclusively'. Explaining this principle, Hon'ble Supreme Court has, in the case of Sassoon J David & Co. (P) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485, inter alia observed that :
'It has to be observed here that the expression "wholly and exclusively" used in s. 10(2)(xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of s. 37 of the IT Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made in the IT Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under s. 37. Sec. 37(1) in the Bill read "any expenditure.. laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed.." The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when s. 37 was finally enacted into law, the word "necessarily" came to be dropped.'
72. As regards the relevance of the MCI code of conduct, the disallowance is made only because the expenses are held to be hitting the provisions of Explanation to Section 37(1) of the Act. That point, due to smallness of the amount, has not been contested before us, and we need not deal with it in detail.
73. In the light of the above discussions, as also bearing in mind entirety of the case, we see no merits in the grievance of the Assessing Officer. We, therefore, decline to interfere in the matter.
74. Ground nos. 3, 4 and 5 are thus dismissed.
75. In the result, the appeal of the Assessing Officer for the assessment year 2010-11 is dismissed.
76. To sum up, while both the appeals filed by the assessee are partly allowed in the terms indicated above, the appeal filed by the Assessing Officer is dismissed.