ORDER
G.E. Veerabhadrappa, Vice President
1. These are cross appeals arising out of the orders of the Commissioner (Appeals) for the assessment years 1996-97 and 1997-98. Most of the issues in these appeals are common and we have heard them together and find it convenient to dispose of the same by a consolidated order.
Assessee’s appeals
2. The first common issue in both the appeals filed by the assessee relates to the disallowance of provision in respect of Early Retirement Scheme. During the previous year relevant to the assessment year 1996-97 the assessee-company formulated a scheme of Early Retirement for employees offering some benefits. There were two types of payments to the employees under the scheme; (i) payment under the approved Voluntary Retirement Scheme which are exempt from income-tax; and (it) the additional benefits offered over and above the scheme, 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 ns 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 profit and loss account. The assessing officer’ was of the view that it was only a contingent liability and therefore cannot be allowed. In taking the above view the assessing officer went by the ratio of decision of the Karnataka High Court in the case of CIT v. Motor Industries Co. Ltd. . Following this finding the assessing officer allowed a deduction of Rs. 2,01,32,986 for the assessment year 1997-98 when the actual amount was paid under the said scheme. The assessee contended before the Commissioner (Appeals) that the claim of deduction should be made on the basis of the provisions for the discounted value made in the books of account. The Commissioner (Appeals) justified the disallowance. According to him the disallowance was justified in the light of the agreement between the assessee and its employees. The liability to make the payment for the additional benefit arose only in the year of actual payment and not before. The learned Commissioner (Appeals) for the subsequent assessment year 1997-98 followed his own finding for the assessment year 1996-97 to make a disallowance of Rs. 2,03,03,185. The assessee is aggrieved.
3. The learned counsel for the assessee filed the copy of this scheme in pages 1-6 of the paper book and also filed a copy of the so-called actuarial valuation indicating the present value as at the end of the previous year in respect of the year as payable to the employees who opted for the scheme. The learned counsel for the assessee pointed out that the scheme under which the liability arose was not only formulated during the assessment year 1996-97 but the employees who availed of the scheme had also retired during the previous year itself and only the actual payment of incentive was deferred. The provision according to him represented the discounted value of the future payment based on scientific and actuarial valuation and according to him the deduction was allowable. He relied upon the decision of the Supreme Court in Bharat Earth Movers v. CIT wherein the Apex Court has accepted that if a business liability has arisen in the accounting year the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. In the light of the authorities to pronouncement the decisions of Karnataka High Court in Motor Industries Co. (supra) and also the decision of the same High Court in Bharat Earth Movers Ltd.(1995) 211 ITR 515 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 lndia Ltd. v. Their Workmen .
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 assessment year 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 (supra) 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 pages 7 and 8 of the paper book the assessee has filed a statement of computation of the present value as on 31-3-1996 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 p.a. which, in our opinion, is very low having regard to the interest rate prevailed during the assessment years in question. We therefore direct the assessing officer to adopt the present value by adopting interest rate at 16 per cent p.a. as against 12 per cent which the assessee has computed. The assessee shall give the fresh calculations to the assessing officer and the assessing officer shall apply the above percentage rate of interest to arrive at the present value of the future liabilities and accordingly allow the deduction based on such computation. The deduction, if any, given in any subsequent year on the basis, of the actual payments are liable to be withdrawn in those respective years.
5. The next common dispute in the assessee’s appeals relates to the assessability of the property income in respect of the 5th floor of the Hoechst House which the assessee has taken at Rs. 1,70,342. The departmental authorities have taken the same at Rs. 24 lakhs. We have heard both sides and find the discussions in the impugned orders are based on their own decisions for the assessment year 1994-95. Identical issue came up for consideration by the Tribunal in assessee’s own case for the assessment year 1994-95 wherein the Tribunal has accepted the annual letting value determined by the Municipal Corporation for the purpose of assessing the rental income from the said property. It may be stated that in arriving at the conclusion we have only followed Bombay High Court in the cases of M.V. Sonavala v. CIT , DewanDaulatRai Kapoor v. New Delhi Municipal Committee and Mrs. Sheila Kaushish v. CIT . The assessing officer is directly accordingly.
department’s appeals
6. The first common issue in department’s appeals for both the assessment years under consideration is that the Commissioner (Appeals) erred in allowing pension for pension without verifying the calculation of the amount. Identical issue came up for consideration of the Tribunal for assessment years 1985-86, 1994-95, 1995-96. For assessment year 1995-96 vide its order in ITA No. 288/Mum./2001, dated 27-11-2005 the Tribunal followed the earlier orders to decide the issue in favour of the assessee. Respectfully B following the precedent we do not see any merit in the ground taken by the department for both the assessment years under consideration. The same is rejected.
7. Ground 2 in both the appeals 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 assessment years 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 annual letting value 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 assessment years 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 Section 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 v. 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 pertains to deletion of addition made under Section 92 of the Act.
11. The facts in both the assessment years runs abreast so we, as a matter of convenience, shall deal with the issue as pertaining to assessment year 1996-97 which would equally be applicable to assessment year 1997-98 also. The brief facts are that the assessee-company was importing a drug known as “Cefotaxime Sodium” from Hoechst AG, Germany, the parent F company of the assessee which is a 51 per cent shareholder of the assessee company. Hoechst AG is the world-wide holder of the patent right in “Cefotaxime Sodium” which is a third generation Cephalospurin group of drugs, used for treatment of actue infections which are resistant to ordinary antibiotics. “Cefotaxime Sodium” is sold in the form of injections in India under the brand name Omnatax. The price of “Cefotaxime Sodium” was brought under the Drugs Price Control Order, 1995 (hereinafter referred to as ‘DPCO’ as a result of which the price at which Omnatax could be sold was fixed by the Government, which was much less than the rate at which it had been sold by the assessee-company before DPCO came into effect. Thus whereas the assessee made substantial profits on the sales of Omnatax before 1995, it started making substantial loss in the drug after this price was fixed by the Government of India under the DPCO. Thus as per the cost audit report prepared by the assessee-company, loss of Rs. 10,30,46,331 was suffered by the assessee as a result of manufacturing and sale of Omnatax injections.
12. According to the assessing officer this was not genuine loss suffered by the assessee in the course of its business. It is the opinion of the assessing officer that owing to the close business connection between the assessee and its parent company, Hoechst AG, Germany, the business between the two in respect of import transactions of Omnatax was so arranged as to produce less than ordinary profits which might be expected to arise in that business and thereby attracting the provisions of Section 92 of the Act. The assessing officer came to this conclusion by comparing the price at which the assessee imported “Cefotaxime Sodium” and the rates at which other pharmaceutical companies imported the same raw materials from other manufacturers outside India. Accordingly the assessing officer made the following comparison:
Name of the Company
Average cost of Imports
in Rs.
Remarks
Assessee company
57,635
Imported from Hoechst AG, Germany
IPCA Laboratories Ltd.
30,784
Imported 75 kg. from Hanmipharma 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 assessing officer 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 assessing officer proposed to assess these amounts as income of the assessee by invoking provisions of Section 92 of the Act.
13. The assessee while contending that there was no arrangement be tween the assessee and the parent company such as the one contemplated in provisions of Section 92, the assessee argued that the price paid to the parent company was reasonable for the following reasons :
i Cefotaxime Sodium” is a patented product of Hoechst AG, Germany and is a product of original research, The said product meets the various stringent international standards of quality and good manufacturing practices. In view of the fact that a lot of investment was made by Hoechst AG and Hoechst Marion Roussel, France (which were subsequently merged) for original research of this product and for adhering to quality safety etc. their price was necessarily higher than similar products manufactured by the competitors in India or imported from other sources.
ii In India due to absence of patent protection, cheap substandard products are manufactured or imported by competitors at substantially lower prices than what the assessee paid for its imports from Hoechst AG, Germany.
iii Irrespective of its purchase price the assessee had to sell its products only at the price notified by the Government under DPCO which resulted in unavoidable loss.
iv. The custom authorities approved the import price paid by the assessee to its parent company which proved that the price charged by the parent company was reasonable having regard to its international prices.
14. Relying on the decision of the Hon’ble Supreme Court in the case of Mazgaon Dock Ltd. v. CIT the assessing officer rejected the above explanations of the assessee. He insisted that the provisions of Section 92 were applicable to the case of the assessee for the following reasons:
i The pricing strategy of “Cefotaxime Sodium” between the assessee and its parent company was a controlled transaction dictated by the objective of Hoechst AG, Germany to maximise its turnover and margin even if it resulted in heavy losses in the hands of the assessee-company. In view of such losses year after year in respect of its product, no prudent business person would have continued this line of manufacture, knowing fully well that Omnatax comes under the price controlled category and there was no leverage for upward adjustment of the selling price of the finished product.
ii. Procurement is a vital strategic area and its optimal handling can cause the difference between a company’s failure and success. The assessee was made to suffer because, (i) personal relationships had brought to bear and influence business relationship; (ii) Incremental buying was done without challenging previous decisions; and (iii) 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 Section 92 applies.
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 the normal circumstances sourced the raw materials from an economical supplier. The extraneous factor of close business connection with Hoechst AG has influenced the price paid on the raw materials.
v. The assessee did not furnish any laboratory test reports on the basis of which it could be established that raw materials which were available from Korea at 1 /3 of the rates charged by Hoechst AG were inferior in quality to such an extent as to justify the purchase of the same from its parent company at grossly inflated prices. Further, the drugs manufactured by other Indian companies using these raw materials imported from other sources have not been rejected by FDA authorities. Therefore, the argument that raw materials imported by these companies were substandard is untenable.
vi By not transacting business at arm’s length, it has not only reduced its tax liability but also tax on dividend payable to its parent shareholder company on which it should have deducted tax.
vii For the purposes of Section 92, the only finding that is required to be given is whether to the resident no profit or profit less than would have ordinarily arisen due to the arrangement of import at a price higher than available from other competitive sources. Section 92 does not require assessing officer to give a finding as to whether the non-resident made the profits which it would have ordinarily made or made less or more than the profits that would normally arise as a result of the non-resident’s transaction. Therefore, it is irrelevant whether the French Company sold raw materials to the assessee at a price it had charged from others.
15. Subsequently, the assessee, though after filing the first appeal before the Commissioner (Appeals), addressed a letter to the assessing officer supply the following information on the basis of which the income was estimated under Section 92 since he has estimated the income by comparing the landed cost of raw G materials paid by the assessee to the German company and the other three manufacturers to the Korean companies, so as to make its submissions before the learned Commissioner (Appeals) :
i Quantities of raw materials imported by each company from the Korean suppliers.
ii Components of the cost of raw materials in each case including customs duty paid, if any
iii Quantities consumed during the year in each case and the number of units of the finished products sold by them.
iv. Net realisation per unit in each case.
v. The length of the period ror which such imports were made by the three manufacturers from the same Korean suppliers and the quantities supplied during the period.
16. The assessing officer replied to the assessee with a copy marked to the CLT(A) that in the course of assessment proceedings the assessee that c 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 DF’CO. The assessee therefore argued before the learned Commissioner (Appeals) that failure on the part of the assessing officer to furnish the information asked for proved that the assessing officer had no valid material to invoke the provisions of Section 92 in its case. On this the ‘-‘ successor assessing officer has also stated that the request for various details asked by the assessee were not relevant as far as the estimate of income under Section 92 was concerned. With regard to the element of profit factored in the sale price of the drug prescribed under DPCO the successor assessing officer stated as under :
The sale price is fixed under the drug price equalisation order. The said order determining the price would obviously be issued after considering the relevant factors, the most important of which is undoubtedly the cost of raw material. If Cefotaxime produced by Hoechst AG is the only reliable raw material, then the DPCO would not have fixed such a low price in the order. It is very clear that the authority in question would have examined availability of reliable, safe and quality raw material at a reasonable price before fixing the same price at the present level. It is not possible for the FDA to determine a price which would have resulted in the pharmaceutical companies incurring huge losses year after year.
17. The main thrust of argument of the assessee before the learned Commissioner (Appeals) was that provisions of Section 92 cannot be applied in its case because the following clauses of the Section 92 were not satisfied in its case :
(a) the course of business “is so arranged” that the business transacted between the appellant and the non-resident;
(b) produces to the resident either no profits or less than the ordinary profits; and
(c) which might be expected to arise in that business.
The assessee accordingly contended that the assessing officer did not prove any arrangement between the assessee and its parent company that was responsible for the loss incurred by the assessee in the import and sale of Cefotaxime Sodium. Secondly Rousell Uclaf confirmed that in fact the B rate at which Cefotaxime Sodium had been sold to the assessee’s sister concern, Russel India Ltd. (since merged with the assessee), in whose hands an identical addition was made at the same price, was the lowest price at which Cefotaxime Sodium was sold world-wide. The auditors of Roussel Ulcaf (now known as Hoechst Marion Roussel S.A., France) also confirmed this fact in their report dated 27-9-1999. Similarly, the statutory auditors of HMR Deutschlana, Germany also confirmed that the price at which Cefotaxime Sodium was sold to the assessee was the lowest charge to customers world-wide.
18. In his remand report, the successor assessing officer defended the addition on the following grounds :
i While Omnatax is a brand name which enjoys some legal protection, there is no evidence whatsoever that the raw material Cefotaxime Sodium is a patented product The assessee was not justified in
ii. putting such value on the brand name tolerating such huge losses year after year.
iii. The ‘arrangement’ between the assessee and its 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.
iv. 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 issue 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 verification of vouchers and that without assuming responsibility for the consistency of the invoices verified with the accounts.
19. Rebutting the contentions of the assessing officer the assessee argued that over invoicing by the supply can be proved only if the assessing officer could give a finding that the same supplier has charged less to other parties. The assessee produced a certificate from the auditors of the suppliers certifying that the suppliers did not charge lower price to other parties of the same product The laboratory analysis also proved that the g quality of the product supplied by Hoechst AG, the patent holder of the product was much superior to the product supplied by the Korean companies whereas Cefotax Sodium was protected by world-wide patent, ‘Omnatax’ is a registered trade mark of Hoechst AG under which the patented product was sold. The assessing officer failed to understand that the use of trade mark ‘Omnatax’ presupposes the use of patented raw materials in the product during the validity of the patent. It is a policy of the assessee to procure materials only from the patent holders or any party authorised by the patent holders.
20. Further the judgment of Hon’ble Supreme Court in the case of Mazgaon Dock Ltd. (supra) was not applicable to the facts of the case in invoking provisions of Section 92 of the Act as in that case the issue was whether an addition could be made under Section 42(2) of the Income Tax Act, 1922 in case of a resident assessee who had entered into an agreement with the non-resident party (with whom the assessee has a close connection) to d repair their ships at cost and charged no profits and it was contended that they were just repairing the ships of the non-resident party and hence no business was carried on with the non-resident. The court however, held that repairing ships tantamounted to a business and also pointed that since the ships were repaired at cost Le. under a special arrangement which the non-resident could not have been in a position to make with any other unrelated ship repairer, the addition could be made in the case of the resident assessee. It was contended that the facts in Mazgaon Dock’s case (supra) are entirely different from the facts in assessee’s case inasmuch as the non-resident did not supply the same material to any other party at a price lower than the price charged to the assessee, the loss incurred by t he assessee in the business of Cefotaxime Sodium 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 Commissioner (Appeals) that at the same import price prior to the year 1995 i.e. before fixation of price under the Drugs Price Control Order, 1995 (hereinafter referred to as ‘DPCO’ 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 expectation/circumstances mentioned herein before. In regards to the comparable cases referred to by the assessing officer the assessee submitted that the landed price paid by them did not include customs duty and that they imported the product for purpose of export whereas in the case of the assessee the price included customs duty which is almost 1 /3rd of the gross price. Further the assessee’s request for obtaining information in the case of other manufacturers was not met with. In view of the settled legal position the department cannot deny to the assessee the material relied upon for making the impugned addition. The customs valuation report also proved that there was no over invoicing in the import price. The assessing officer was not justified in rejecting the certificate stating that they supplied the product to other companies also at the same price issued by the Finance Manager of HMB, France. The assessee also contended before the Commissioner (Appeals) that the assessing officer was not justified in rejecting the auditor’s certificate as the certificate is issued on the basis of audit technique universally applied by the auditors and the qualifications attached to the certificate did not invalidate the fact stated in the certificate.
22. The evidence in the form of letter written by Mr. J.B. Movdawala was never confronted to the assessee. The assessee clarified that in any case this can be taken as a warning to the management with forecast of loss which would be made by Roussel India Ltd. that might lead to difficult tax assessment since it has never incurred overall loss in the past. Mr. J.B. Movdawala only contemplated, difficulties arising on account of the department gathering more information leading to extra efforts being asked to put in by the department. With regard to the observation of the assessing officer that the letter was not challenged before the court during the merger proceedings, the assessee clarified that an affidavit was filed in the court and the court approved the legal merger in spite of such letter before it. Even in the case of assessment of Roussel India Ltd. the assessing officer has not stated to have made any addition on the basis of that letter. On askance from the Commissioner (Appeals) the assessee furnished the details of purchase price of Cefotaxime Sodium at different points of times during the earlier years from which was apparent that the prices had been reduced progressively from year after year. It was argued that it 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 Commissioner (Appeals) 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 Section 92 was not justified.
24. The learned Commissioner (Appeals), upon consideration of the elaborate submissions made from both sides deleted the addition for the various reasons mentioned in his order at pages 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 copies the manufacturing process of the product without obtaining licence from the patent holders and without having invested anything in basic research and development. Therefore they were in advantageous position to sell the product at a price much cheaper than the price at which Hoechst AG was selling, whereas Omnatax was a registered trade mark of the drug under which the assessee was selling; the product in India. He also found that qualitatively the German product was superior to the Korean one, though the degree of difference in quality alone might not be a determinative factor for the disparity in the prices of the two products. But if all the factor’s viz. patent right, trade mark and qualitative difference were n combinedly taken into account the German company was justified in charging higher price than the Korean companies. The learned Commissioner (Appeals) accordingly held that the assessing officer was therefore not justified in relying on such relatively higher price alone for invoking the provisions of Section 92 and for invoking provisions of Section 92 the requirement is to prove the “arrangement” between the resident and non-resident companies which deprived the resident company from deriving the ordinary profits from the transactions in question. The learned Commissioner (Appeals) also held that the certificates issued by the finance manager and the auditors of the foreign company could be accepted as evidence in support of assessee’s claim that Cefotaxime Sodium was not sold to others at a price less than the price charged to the assessee. With regard to the letter written by Mr. JB Movdawala the Commissioner (Appeals) found that much could not be made out of it as the context in which the letter was written was different and the contents of the letter could not be pressed into service to prove any “arrangement” between the assessee and the non-resident company F within the meaning of Section 92. With regard to the contention of the assessee that the loss on account of sale of Omnatax was only Rs. 4,84,72,079 as against Rs. 10,30,46,332 as reported by successor at Rs. 10,30,46,332 (whereas the assessing officer made the disallowance at Rs. 7,42,46,618) the learned Commissioner (Appeals) observed that even if the alleged “arrangement” were held to be existed between the assessee and the nonresident companies, the deprived profit should be restricted to the extent of the over invoiced price only and the overhead expenses taken into account for the purpose of cost audit should not be considered for purpose of Section 92.
25. In view of the above the Commissioner (Appeals) held that the transactions between the resident company and the non-resident parent, company, were not the kind of transactions in respect of which Section 92 could be invoked. The supported the above finding with the observations appended at paragraphs 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 Commissioner (Appeals) 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 in the treatments of various infections including gastrointestinal, genito-uninary, respiratory tract infections, septicemia, etc. The drug was therefore claimed as a life saving drug. This Cefotaxime Sodium originally discovered/manufactured by its parent company Hoechst AG and Roussell Uclaf and is one of the most successful and valuable antibiotics in the world. It is protected by numerous valid and subsisting patents taken out jointly by Hoechst AG and Roussel Uclaf and these patents are sought to be enforced world-wide by the said companies. It. is the contention of the assessee that to bring Cefotaxime Sodium to the stage of being a viable antibiotic the discovering companies spent billions of dollars and are constantly engaged in research and development in an attempt to discover and produce life saving pharmaceutical products. The cost of such research will have to be recovered in order to sustain useful research and development further to produce such life saving medicines. The pricing strategy of Hoechst AG and Roussel Uclaf took into account various factors such as the need to recover research costs, the affordability of the population of the purchasing country, the prevalence of infections in the purchasing country, etc. During the assessment year 1996-97 the assessee-company purchased Cefotaxime Sodium at the price of US$ 1350 per kg. and the landed cost in India (including duties, etc.) amounted to Rs. 57,635 per kg. It is to be appreciated that given the purchasing power of the Indian population, the level and prevalence of infections which are treated by Cefotaxime Sodium and other relevant factors the price was fixed at a level that was lower than the price at which the companies had sold Cefotaxime Sodium anywhere in the world. This fact has been certified by the Report of the Auditors of Hoechst Marion Roussel Deloitte Touche & Tohmastsu dated 27-9-1999, placed at pages 73 to 75 of the compilation and by the Board of Hoechst Marion Roussel’s certificate dated 8th September, 1999 (placed at page 76 of the paper book) as also by the certificate of M/s. Pricewaterhouse Cooper, the auditors of Aventis Pharma Deutscheland GmbH dated 29-9-2001 (placed at paper book page 77). The assessing officer has made a comparison of the prices with the purchase of 75 kgs. by IPCA Laboratories at Rs. 30,784 and Lyka Labs Ltd., which purchased undisclosed quantity at Rs. 32,013 and similar undisclosed small quantity by Aristopharma at 27,270. The details discussed by the assessing officer are insufficient and are clearly not comparable to the purchases made by the assessee-company. The Commissioner (Appeals) has elaborately discussed this aspect of the matter in his order on pages 9 to 33 at paragraphs 11 to 45 which deals with each and every contentions of the assessing officer as well as the C1T(A). The learned Commissioner (Appeals) also afforded an opportunity to the assessing officer for his comments on the material placed before the learned Commissioner (Appeals) by the assessee from time to time. It is our considered view that the learned Commissioner (Appeals) has properly appreciated all the facts of the case, the prevailing conditions and the provisions of Section 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 Commissioner (Appeals) that remains 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, Germany. No doubt provisions of Section 92 can be invoked in a case where it appears to the assessing officer that (a) the course of business “is so arranged” that the p business transacted between the assessee and the non-resident, (b) produces to the resident either no profits or less than the ordinary profits; and (c) which might be expected to arise in that business. But in the instant case the assessing officer has not made out a case to show that provisions of Section 92 are clearly applicable to the case for violation of any of the above clauses. It cannot be said that the course of business yielded no profit to the assessee for the simple reason that prior to the notification issued by the Government under DPCO the assessee, in the past, has been F making lot of profits on sale of the drug “Omnatax”. It is only because the Government regulated the sale price of the drug, for being a life saving medicine, the sale of the drug resulted in loss.
28. In view of the above we hold that the transaction between the assessee and the non-resident company was not an “arranged transaction”. The certificates produced by the assessee from various parties establish that the assessee did not buy the product Cefotaxime Sodium at a price higher than the price at which the same product was sold to others. Accordingly we hold that the assessing officer failed to establish a case where provisions of Section 92 could be applied to disown the loss incurred by the assessee. Therefore, we do not find a reason to take a different view than the one arrived at by the learned Commissioner (Appeals). We therefore reject the ground of the revenue.
29. The decision so arrived at above is equally applicable to assessment year 1997-98 also.
30. The remaining ground in appeal for assessment year 1997-98 pertains to sales promotion expenses of Rs. 50 lakhs. It is the contention of the department that the same should be disallowed under Section 6B. This issue also came up for consideration by the Tribunal for assessment years right from 1984-85 to 1990-91 and the Tribunal in all those assessment years decided the issue in favour of the assessee. Respectfully following the precedent, we dismiss the ground taken by the revenue.
31. In the result appeals filed by the assessee are allowed whereas the appeals filed by the revenue are dismissed.