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TMI Blog2007 (5) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... eme, which are liable to income-tax. During the previous year relevant to the assessment year, some employees availed of the benefit under this scheme and retired from service to whom payments aggregating to Rs. 9,56,40,868 were made as per the approved scheme which was allowed as deduction. However the assessee also made provision for the discounted value of the other benefits over and above the approved scheme promised to the employees to be paid in the subsequent three years. No payment of this additional benefit was made during this year. As per the agreement such payments were made in the following years as per the formulated scheme. Discounted value of such amounts payable to the retired employees was computed at Rs. 2,13,52,911 and provision was made in the accounts by debiting the same in the P L a/c. The AO was of the view that it was only a contingent liability and therefore cannot be allowed. In taking the above view the AO went by the ratio of decision of the Karnataka High Court in the case of CIT vs. Motor Industries Co. Ltd. (1998) 144 CTR (Kar) 101 : (1998) 229 ITR 137 (Kar). Following this finding the AO allowed a deduction of Rs. 2,01,32,986 for the asst. yr. 1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in CIT vs. Bharat Earth Movers Ltd. (1995) 123 CTR (Kar) 276 : (1995) 211 ITR 515 (Kar) are no longer good laws. The learned Departmental Representative on the other hand strongly supported the disallowance in the light of the apex Court decision in the case of Metal Box Company of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC). 4. We have carefully considered the rival submissions and gone through the records. We have also gone through the scheme of Early Retirement Incentive Scheme, 1995 which is applicable for the asst. yr. 1996-97 under which these liabilities are claimed. The Scheme is almost identical in the later assessment year also. In the light of the authority to pronouncement of the Supreme Court in the case of Bharat Earth Movers the contention of the assessee deserves to be accepted. In principle, therefore in the light of the above decision we accept the claims of the assessee. But at pp. 7 and 8 of the paper book the assessee has filed a statement of computation of the present value as on 31st March, 1996 of the future liabilities. As we may see the actuary has arrived at the present valuation by taking the rate of interest at 12 per cent per annum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertains to provisions for liability towards long service entitlement and leave salary encashment. We find that this issue also stands decided by the Tribunal in favour of the assessee for asst. yrs. 1994-95 and 1995-96. Respectfully following the earlier decisions of the Tribunal we dismiss this ground too in both the assessment years. 8. Ground No. 3 in both the appeals pertaining to adoption of ALV in computing property income in respect of 5th floor of Hoechst House. We find that this issue also stands covered by the decision of the Tribunal in favour of the assessee for asst. yrs. 1994-95 and 1995-96. Respectfully following the earlier decisions of the Tribunal we dismiss this ground also in both the assessment years. 9. Ground No. 4 in both the appeals pertains to exclusion of sales-tax from total turnover for the purpose of deduction under s. 80HHC. We find that the issue stands settled in favour of the assessee by the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. Sudarshan Chemicals Industries Ltd. In view of this, the ground taken by the Revenue in both the appeals are rejected. 10. Ground No. 5 and ground Nos. 6 and 7 pertain to deletion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imports in Rs. ------------------------------------------------------------- Assessee company 57,635 Imported from Hoechst AG, Germany IPCA Laboratories 30,784 Imported 75 kg. from Hanmipharma Ltd. Co. Ltd., South Korea sold under the brand name "Talcef' Lyka Labs Ltd. 32,013 Imported from Hanipharma Co. Ltd. Aristopharma 27,270 Imported from Woo Pyung Co. Ltd., South Korea for use in its Formulation ------------------------------------------------------------- From the above rates, the AO concluded that whereas the raw material from South Korean companies was imported by others at a cost of around $ 450 per kg. the assessee paid $ 1350 per kg, to its parent company in Germany for importing the same product. Thus he observed that the assessee company indulged in over invoicing of the imports of the products by $ 900 per kg. Quantifying such over invoicing in respect of the imports of Omnatax at Rs. 7,42,46,618 the AO proposed to assess these amounts as income of the assessee by invoking provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s optimal handling can cause the difference between a company's failure and success. The assessee was made to suffer because, (a) personal relationships had brought to bear and influence business relationship; (b) Incremental buying was done without challenging previous decisions; and (c) it acted as a surrogate cog in the overall game plant of Hoechst AG, Germany since the parent company held 51 per cent shares in the assessee company it is in a position to control and dictate its terms to the assessee company and hence provisions of s. 92 apply. (iii) The price differential between the price at which the raw materials were purchased from Hoechst AG and the price at which these materials were available from Korean companies should have been explained by the assessee by submitting relevant documentation. It is not established by the assessee that these products which are being manufactured by other companies are inferior in quality or do not meet the quality and safety standard laid down by the Food and Drug Administration of India. (iv) The assessee company, as a prudent business practice would have in the normal circumstances sourced the raw materials from an economical suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imports were made by the three manufacturers from the same Korean suppliers and the quantities supplied during the period. 16. The AO replied to the assessee with a copy marked to the CIT(A) that in the course of assessment proceedings, the assessee that imports of Cefotaxime Sodium during 1995-96 were mainly from Korea and the approximate CIF price per kg. ranged between $ 450 to $ 500. Further there could be no controversy as to the net realisation per unit in each case of the competitors as the formulation could be sold only at the price fixed by the DPCO. The assessee therefore argued before the learned CIT(A) that failure on the part of the AO to furnish the information asked for proved that the AO had no valid material to invoke the provisions of s. 92 in its case. On this the successor AO has also stated that the request for various details asked by the assessee were not relevant as far as the estimate of income under s. 92 was concerned. With regard to the element of profit factored in the sale price of the drug prescribed under DPCO the successor AO stated as under: "The sale price is fixed under the drug price equalisation order. The said order determining the price w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-resident principal cannot always be established by direct evidence. It is sufficient if such an arrangement can be inferred from the surrounding circumstances. The fact that a huge loss is being incurred year after year in one product is sufficient evidence when combined along with the price paid by other competitors and the fact that the foreign supplier is closely related to the assessee to establish that there was an inferred arrangement to benefit the non-resident company at the cost of the Indian assessee. (iii) Since the loss incurred in production of Omnatax is Rs. 10 crores as against addition of Rs. 742 lakhs made in the assessment, the question of enhancing the disallowance to Rs. 10 crores should be considered. (iv) It was wrong on the part of the financial manager of Hoechst Marion Roussel, France to certify that supplier to Roussel, India were at the lowest price when suppliers to other customers such as the present assessee were also at the same price. (v) The certificate issued by the auditors was also not reliable because no evidence was produced as to under which statute they were constituted as statutory auditors. The certificate was issued on random ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be said to be on account of any arrangement which the assessee apparently had with the related non-resident supplier and hence this decision cannot be applied in the assessee's case. 21. With regard to incurrence of loss the assessee contended before the CIT(A) that at the same import price prior to the year 1995 i.e. before fixation of price under the DPCO, 1995 the assessee had made profits in its Cefotaxime Sodium business and also submitted that the loss started occurring to the assessee since unremunerative price was fixed under DPCO. It was the business decision of the assessee to continue in the business in spite of the losses, since the assessee company believed that as per the Drug Policy, 1994, these products would be taken out of the purview of DPCO and in the meanwhile did not want to lose its market share of the product which it had built since 1989-90. Further, the assessee company, in view of its policy of procuring patented materials from the patent holders or their authorised licences could not have departed from the policy and buy the similar material or perhaps inferior quality from the non-patent holders and thus to remain in the market in the expectat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was common that when a new product is developed the prices in the initial years would be high owing to the huge investments made in its research and development and sell the product at a lesser price in the later years. 23. It was further submitted before the learned CIT(A) that the loss in Omnatax business was not Rs. 10,30,46,341 but Rs. 4,84,72,079. The allocated expenses which were included in arriving at the loss of Rs. 10 crores included fixed charges and financial charges which cannot be said to be actual expenses incurred. Thus the allocation of expenses in the context of addition under s. 92 was not justified. 24. The learned CIT(A), upon consideration of the elaborate submissions made from both sides, deleted the addition for the various reasons mentioned in his order at pp. 26 to 33. He found that Cefotaxime Sodium was a patented product of Hoechst AG. Except in some countries like India which do not recognise and protect patented products, the drug cannot be manufactured and sold anywhere else without obtaining the required licence from Hoechst AG. The Korean companies copy the manufacturing process of the product without obtaining licence from the patent holders an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) held that the transactions between the resident company and the non-resident parent company, were not the kind of transactions in respect of which s. 92 could be invoked. He supported the above finding with the observations appended at paras 40 to 46. Aggrieved the Revenue is in appeal before us. 26. We have carefully considered the rival contentions. The learned counsel for the assessee reiterated his stand that was taken before the CIT(A) and the learned Departmental Representative strongly relied upon the findings in the assessment order. We have also considered the documents and material placed before us towards which our particular attention was drawn at the time of hearing. 27. The assessee is a company engaged in the pharmaceutical business for a number of years. It is a subsidiary of Hoechst AG, Germany subsequently known as Hoechst Marion Roussel and Aventis Pharma Ltd. Assessee and Roussel India Ltd. manufactured formulations known as "Omnatax" and "Claforan" the active ingredient of which is Cefotaxime Sodium, a drug which is the result of original research of Roussel Uclaf, France and Heochst AG. Omnatax contains Cefotaxime Sodium which is an antibiotic used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The details discussed by the AO are insufficient and are clearly not comparable to the purchases made by the assessee company. The CIT(A) has elaborately discussed this aspect of the matter in his order on pp. 9 to 33 at paras 11 to 45 which deals with each and every contention of the AO as well as the CIT(A). The learned CIT(A) also afforded an opportunity to the AO for his comments on the material placed before the learned CIT(A) by the assessee from time to time. It is our considered view that the learned CIT(A) has properly appreciated all the facts of the case, the prevailing conditions and the provisions of s. 92 to reach to a conclusion that the price paid by the assessee was not higher than the price paid by the other buyer of Cefotaxime Sodium from the same non-resident company. There are certain other facts found by the learned CIT(A) that remain uncontroverted before us that Cefotaxime Sodium supplied by the Korean companies were of inferior quality and the Korean company had no patent right by itself and so naturally the price paid for Cefotaxime Sodium supplied by the Korean companies cannot be compared with that of the drugs imported by the assessee from Hoechst AG. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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