The foreign AE purchased software on behalf of the assessee and the license fee was reimbursed by the assessee to the AE. The AO held that the payment was in the nature of royalty and tax was required to be deducted, in the absence of which, the expenditure was to be disallowed under section 40. Held that the payment was in the nature of business income and since the AE did not have a PE in India, its income was not taxable and accordingly tax was not deductible at source. In any event, the payment was only a reimbursement of cost and there was no income element, therefore the question of deducting tax at source does not arise.

Assessee entered into an agreement with a third party manufacturer who was required to carry out manufacturing on behalf of the assessee. In consideration for the same, the assessee was liable to pay certain minimum conversion charges and if the actual charges were in excess, the assessee required to make good the short-fall. For the relevant previous year, there was an alleged short-fall, however, the same was in dispute between the parties. Such dispute was settled in the subsequent years when the actual payment required to be made crystallized. Held that in view of the dispute in this year, the deduction for the expenditure could not be granted in this year. The same would be granted only in the subsequent year in which the dispute was settled and the payable amount had crystallized.

The assessee had two segments. Under one segment, it sold active pharmaceutical ingredients/bulk drugs to the AE, which were further processed by the AE before selling the final product to the customer. Under the second segment, the assessee directly manufactured and sold formulations, which were in the nature of final products, to the end customers. Held that the nature of product manufactured in the two segments was different. Also, the risk undertaken in the two segments was different in so far as there was limited risk in the AE sales, as compared to full fledged risk in the third party sales. Accordingly, the two segments were not comparable. (AY. 2005-06)