1988 PLP rib (PTD)

MUHAMMAD MAZHAR ALI (CHAIRMAN).--This departmental appeal pertaining to charge year 1979-80 has been brought against the order of the learned Commissioner of Income-tax (Appeals), Zone 2, Karachi. It is sought to be assailed on the following grounds:- (1) "That the learned C.I.T. (Appeals) Zone II Karachi has erred in deleting the addition of Rs.27,94,232 made by the I.T.0 under section 79 of the I.T. Ordinance, 1979. (3) That the learned C.I.T. (Appeals) Zone II Karachi has erred in deleting the addition made by the I.T.O. under the head 'advertising and sales promotion' of Rs.16,76,415. (4) That the learned C.I.T. (Appeals) was not justified in directing that the taxes payable may be treated as retained income and not leviable to surcharge."

2. Taking the last above-noted ground first, we would uphold the impugned order for the obvious reason that the learned Commissioner of Income-tax (Appeals) has allowed the relief to the, assessee in terms of the decision of the Tribunal reported as 1988' PTD (Trib.) 155 which has been consistently adhered to by the various Benches of the Tribunal in large number of cases. Relevant facts pertaining to this issue as brought to our notice at the hearing of this appeal are that the assessee disclosed total income ate Rs.1,12,53,235 which was assessed by the Income-tax Officer at Rs.1,70,63,

345. The tax liability thereon was worked out at Rs.93,84,

840. Treating the amount of tax liability as an income not retained for meeting working capital requirement, the Income-tax Officer levied surcharge at Rs.5,24,

416. On Appeal, the learned Commissioner has allowed the relief as stated above. The Tribunal in its reported decision has held as under:- "The working capital, as was rightly pleaded before us is the 'excess of current assets over current liabilities". The requirements of working capital are too numerous to mention, but all authorities on Accountancy are unanimous that payment of tax would amount to meeting the' requirements of working capital. This general principle is not be lost sight of, while levying the surcharge, as prescribed by Ordinance II of 1978" .

3. In the result, the appeal fails on this ground.

4. Now we take up the first abovenoted ground, which concerns the deletion of addition of Rs.27,94,234 made by the Income-tax Officer under section 79 of the Income-tax Ordinance, 1979. The assessee respondent is basically a pharmaceutical company although it also manufactures and sells toiletries. During the assessment proceedings, the Income-tax Officer found that the assessee had made purchases of raw material of its produce "Ampicillin Trihydrate marketed under the brand name of "Penbritin" from Beecham Pharmaceutical (Pvt.) Ltd., Singapore, a subsidiary of Beecham Group P.I.C. (U.K.) at $ 165 (or Rs.1674.38) per Kg. whereas certain other pharmaceutical companies in Pakistan, who were manufacturing Ampicillin with same formulae and raw material as that of the appellant abovenamed had imported same raw material from various European countries in the same period at too low landed cost ranging from $90 to $ 96.7 per Kg. The Income-tax Officer, therefore, issued a notice under section 62 to the assessee requiring it to explain as to why it claimed high import purchase price of its raw material "Ampicillin Trihydrate" particularly when other pharmaceutical companies were importing the same material from various countries of western Europe and their medicines were in no way inferior. The assessee filed a detailed explanation on 12-6-1982 mainly emphasising that its drug is superior to that of the other companies. It also submitted, suo moto, that provisions of section 79 of the income-tax Ordinance were not applicable to its case. Moreover, it pleaded that the purchases by themselves cannot produce any profits. For detailed reasons and after examining the various aspects of the matter the Income-tax Officer repelled all the pleas of the assessee and held that the assessee company had in fact tried to direct its profits by way of paying high purchase price for the raw material to its sister company in Singapore. He further held that 'such a collusive transaction attracts the mischief of section 79 of the Income-tax Ordinance, 1979. Consequently the Income-tax Officer added the sum of Rs.27,94,332 to the total income of the assessee company by invoking the provisions of section 79 of the Ordinance, with following remarks:- "So the difference of purchase price of 4030 Kgs of Ampicillin Trihydrate Powder imported for Rs.E7,47,762 at the rate of Rs.1,674.38 or U.S. % 165 per kg. and the highest imported value of the same item imported by the other pharmaceutical companies being at the rate of % 96.70 or Rs.981 per kg from Holland is treated as the profits of the assessee company. It is worked out as under: Total purchase cost of 4030 kgs. as per Company's A/Cs Rs.67,47, 762 Less: cost of 4030 kgs. at the rate of 981 per kg. Rs.39,53,430 Difference Rs.'27,94,332 On appeal before the learned Commissioner, several argument were advanced on behalf of the assessee-appellant including the applicability of section 79 ibid, to the facts of the instant case. Reliance was also placed on behalf of the assessee on a decision of the Appellate Tribunal in appeal ITA No.708(KB) of 1974-75 dated 25-8-1976 wherein it was held that the learned AAC was correct in arriving at the conclusion that the profits accrue on sales and not on purchases. Another decision of the Tribunal given in I.T.A. No.5051 of 1973-74 dated 8-1-1978 was also relied upon. The Commissioner of Income Tax (Appeals) deleted the said addition. The relevant portion from the order of the learned Commissioner is reproduced below:- "The arguments of the Appellant's authorised representative has a lot of force. There is no doubt in my mind, that the basic condition for falling within the mischief of the provisions of section 79 is that the transactions with the non-resident should produce to the resident either no profit or less than ordinary profits. This is clearly not the case here. The records of the appellant clearly bear out that the profits have increased considerably. The gross profit percentage increased from 27.12 31.30 and the net profit from Rs.3 million to Rs.10.3 million. Furthermore the appellant has clearly demonstrated that the higher purchase price of raw material did not result in lower profits. This by itself is adequate proof that the provisions of section 79 are not attracted. Furthermore, from the record it is also clear that the only transaction that the appellant resident company had with the non'-resident was limited to purchase of raw materials and the Honourable Tribunal has held in a number of cases that in such circumstances the provisions of section 79 cannot be attracted. I have decided a similar issue in Appeal Order No.Z-2/2990/B2 dated November 23, 1981 in the case of another pharmaceutical company, where relying upon the Tribunal case, the additions made under section 42 of the Repealed Act (section 79 of the Ordinance) were deleted. For reasons stated above, I see no reason for deviating from the established position. The addition of Rs.27,94,332 under section 79 is deleted for the same reasons as given by the Honourable Tribunal in ITA 708(KB) of 1974-75 dated 25-8-1976, which still holds the field."

6. Having heard the arguments of the parties' representatives and upon perusal of our order in ITA No.708/KB of 1974-75 dated 25th August 1976 we have not the least hesitation in holding that the learned appellate authority has rightly allowed the relief to the assessee. The finding of the learned Appellate Commissioner of Income-tax (appeals) to the effect that the profits of the assessee- respondent company have considerably increased and hence the basic condition laid down by section 79 of the Ordinance to the effect that the course of business is so arranged that the business transacted between a resident and a non-resident produces to the resident either no profits or lesser than the ordinary profits which might be expected to arrive in that business was missing in the instant case. The following categorical finding recorded by the learned Commissioner of Income-tax (appeals) has in no manner been assailed either in the grounds of appeal or at the hearing of this appeal by the learned Departmental Representative:- "Furthermore, the appellant had clearly demonstrated that the higher price of raw material will not result in lower profit in Ampicillin products as compared to the other manufacturers but in higher profit. This by itself is adequate to prove that provisions of section 79 are not attracted."

7. Precisely this issue had also recently come up before the Appellate Tribunal at the instance of another pharmaceutical company vide I.T.A. No.622/ K B and 623/ K B of 1981-82 where also the learned Commissioner of Income Tax (Appeals) had deleted the additions made under section 42(2) of the repealed Income-tax Act and under section 79 of the Ordinance. The Tribunal by its decision dated 25th October 1985 passed thereon upheld the impugned order of the learned Commissioner of Income-tax (Appeals). The relevant portion from the said decision of the Tribunal is reproduced below:- "The second issue, which the department has agitated in both the assessment years, in its appeal is regarding addition of Rs.13,55,763 under section 42(2) of the repealed Income-tax Act and Rs.4,17,781 under section 79 of the Income-tax Ordinance. Mr. Mohammad Farid, the learned Departmental Representative cited before us (1) C. I. T. v. Mazagaon (1955) 28 ITR 35, (2) Mazagaon v C.I.T. (1958) 34 ITR 36 S C. He further cited C.I.T. v. Remington Typewriter, 5 T.C. 177 (P.C.), C.J WEB Sons Ltd. v C.I.T. (1950) ITR 33, Anglo French Textile v. C.I.T. (1950) 18 ITR

888. The learned counsel, however, conceded that there was no direct authority available on point under consideration, Mr. K. Salahuddin, the learned counsel for the assessee, however, pointed out that the learned Commissioner of Income-tax (Appeals) was right in relying upon the decision of this Tribunal recorded in the case of same assessee right from 1971-72 to 1977-78 in various, appeals which have been mentioned in the impugned order. The learned counsel for the assessee further submitted that since the point involved was taken to High Court by way of Reference Applications, we should await then by verdict of High Court instead of creating uncertainty by departing from our earlier decision. We have heard both the learned departmental Representative as well as the learned counsel for the assessee and with due respect to both of them we agree with the submissions of Mr. K. Salahuddin."

8. The learned Departmental Representative relying upon certain decision from Indian jurisdiction reported as (1950) 18 ITR 33 and another decision appearing in the same volume at page 888; (1953) 23 ITR 101, submitted that profits can be made during the stage of purchases. He submitted that the Income-tax Officer had determined that purchase had been made at a higher figure and hence section 79 was rightly invoked by him. The learned counsel for the assessee respondent, on the other hand, supported the impugned order for the reasons recorded by the first appellate authority as well as by relying upon the abovenoted decisions of this Tribunal on the issue in hand. The learned Departmental representative also urged that this issue has for the first time come up in the case of this assessee and that since the decisions recorded by the Appellate Tribunal in the cases of other pharmaceutical companies requires re-consideration, it would by in the fitness of things if this issue is referred to a Full Bench for decision.

9. We do not find any substance in the contentions of the learned Departmental Representative, It is an admitted fact that the various Benches of this Tribunal have consistently been holding same view as was expressed in ITA No. 708/KB of 1974-75 as far back as 25th August 1976 and that the point involved herein has been taken to High Court by way of Reference Applications, we do not therefore consider it worthwhile to refer this matter to the Full Bench as prayed by the learned Departmental Representative. We are on our part also in agreement with the decision recorded by the Appellate Tribunal in ITA No.708/KB of 1974-75 (supra) and so we do not deem it proper to accede to the request of the learned Departmental Representative. In the result, the appeal fails in this behalf. Now we take up the second abovenoted ground of appeal. The relevant facts pertaining to this grievance of the department are these. The assessee had claimed sales promotion expenses at Rs.57,92,271 against sales of Rs.8,23,17,

130. The Income-tax Officer observed that "in the assessment year 1978-79 the company was allowed only 5% of the turnover as sales promotion expenses on the basis of three factors which also exist for 1979-80 namely:- (i) The maximum limit of such expenses is 5% under Rule 33 of Drug Rules 1978. (ii) The distribution of free samples of medicines is not supported by documentary evidence. (iii) Other expenses are also not fully vouched and verifiable." The Income-tax Officer, therefore, for the same reasons allowed 5% of the total turnover as sale promotion expenses in the sum of Rs.41,15,856 and disallowed the balance of Rs.15,76,

415. It is pertinent to note here that the Income-tax Officer has not pin-pointed any single item of expense which was found to be unvouched and unverifiable nor has he given any instance in respect of distribution of free samples of medicines which was not supported by documentary evidence. It appears from the trend of his order that he restricted the add backs to 5% of the total turnover by keeping in view Rule 33 of Drug (Licensing, Registering and Advertising) Rules 1976. The assessee preferred an appeal before the learned Commissioner of Income-tax (Appeals), Zone 2, Karachi assailing, inter alia, this add back as well. It was asserted by the assessee before the first appellate authority that the Income-tax Officer can riot put any restriction on the quantum of allowability of an expense unless stipulated under the Income-tax Law or Rules, and since there was no such limit placed in respect of a liability of advertising and sales promotion expenses in the Income-tax law and Rules, the Income-tax Officer's action was unsustainable at law. It was further urged that if the legislature so intended it would have made a specific provision to that effect as it has done in the case of Head-office expenses. Attention of the learned Commissioner of Income-tax (4ppealsl was also invited to his combined order dated 1-1-1983 on this issue passed on appeal for the charge years 1974-75 to 1978-79, whereby similar add backs had been knocked off. Relying upon his said decision, the learned Commissioner of Income-tax (Appeals) deleted the entire disputed add back at Rs.16, 76,

415. Hence the department has filed this further appeal.

10. The learned Departmental Representative at the outset drew our attention to the fact that this Tribunal vide its combined order dated 26th June 1986 passed in ITA Nos.1297/KB of 1982-83 etc on departmental appeals for the charged years 1974-75 to 1978-79 reversed the said decision of the learned Commissioner of Income-tax (Appeals) on the basis whereof he has allowed the relief to the assessee. Mr. Ali Athar, the learned counsel for the assessee-respondent, on the other hand, strongly urged that the decision of the Tribunal dated 26-6-1986 (supra) has not correctly decided the issue inasmuch as it has placed reliance on a decision of the Appellate Tribunal reported as 43 Tax. 63 Trib., which was not pertinent to the issue in hand. It was, he so urged, a case where penal interest paid by a bank to State Bank of Pakistan for failure to maintain tax reserve and liquidity ratio was disallowed. There was no such issue involved in the instance case inasmuch as no amount of penalty levied was claimed as an expense by the assessee-respondent and hence the question of infraction of law or breach of statutory obligation as such was not at all involved.

11. We have perused the said order of the Division Bench comprising of our learned brothers Mr. Farhat Ali Khan, Judicial Member and Mr. Ghulam Sadiq, Accountant Member and we are of the opinion that the said decision does require re-consideration by a Full Bench. We, therefore, refrain to adjudicate this issue finally and direct that this file may be placed before the Chairman for necessary orders of formation of Full Bench.

12. In the result, the appeals on the two abovenoted issues stand finally decided; whereas the issue concerning the disallowance of Rs.16,76,415 under the head 'advertising and sales promotion' is recommended to be heard by a Full Bench. MANZURUL HAQ (ACCOUNTANT MEMBER).--I beg to differ respectfully from the views of my learned brother on ground No.1. The main contention of the appellant is that:- (a) section 79 does not apply in his case; (b) his products are superior to others. He placed reliance on a case decided by the Tribunal and quoted as I.T.A. No. 708/KB of 1974-75. I feel that the assessing officer was fully justified in invoking section 79 of the Income-tax Ordinance. This provision had to be brought on the statute book to deal with the collusive arrangement of the Transnational Corporation (TNC) with their Principals abroad. Section 79 of the Income-tax Ordinance, 1979 is reproduced below:- "Income from transactions with non-residents.-- Where business is carried on between a resident and a non-resident and it appears to the I.T.O. that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the Income-tax Officer shall determine the amount of profits which may reasonably be deemed to have accrued to the resident and include such amount in the total income of the resident." To tax the income from transactions with non-resident the following conditions, as laid down in the section, have to be fulfilled- (i) That there should be relationship between a resident and a non-resident; (ii) there must be close connection between them (of Principal and agent) (iii) the course of business is so arranged that it-- (a) produces to the resident no profit; or (b) lesser than the ordinary profits which might be expected to arise in that business. The I.T.O will then determine the amount of profit, which may reasonably be deemed to accrue to the resident. Nowhere the section says that if profit returned in a particular year is higher than the one disclosed by the resident company in the preceding year the Income-tax Officer is barred from taking action under that section. The C.I.T. (Appeals) is not looking at the profit in its real perspective as section 'it requires us to see. The profit is not to be seen by way of comparison as suggested by him and held by the Tribunal that profit accrue on sales alone and not purchase, vide its order quoted as I.T.A. No.708IKB of 1974-75. It was very rightly pointed out by the D.R. that profit can) be earned at the stage of purchase and he rightly relied on cases quoted in the C.I.T. (A's) order. To the students of accountancy three methods of suppressing profit have been known for long. The books of accounts can be manipulated to show lesser profit by employing the following methods:- (i) by inflating purchases; (ii) by suppressing sales or receipts; (iii) by inflating expenses. If for once it is accepted that inflation of purchases cannot lead t lesser profit then words such as "over-invoicing" and "under-invoicing" lose all significance and could be rendered redundant as commercial terms. It is for the Income-tax Officer to determine the amount of profit which may reasonably be deemed to have accrued to the resident.' We have, therefore, to see whether the Income-tax Officer in his order has, or has not been able to determine the reasonable profit that might have accrued to the resident company had he imported the raw-material, without collusive arrangement with its principal at Singapore, from elsewhere in the European countries. In my opinion the assessing officer has very rightly discussed at length, in his assessment order what in commercial parlance has come to be known as transfer pricing. Through this device the T.N.Cs. are sucking the country's meagre foreign exchange resources. In one of the articles published in the Economic and Business Review of the daily 'Dawn' dated March 14 to Starch 20, 1987, the writer on 'Drug Prices should be linked to transfer pricing' says: 'According to an estimate made by this correspondent even a 10% cut in the transfer pricing by the pharmaceutical T. N. Cs. could save the country's foreign exchange worth Rs.62 million in a year. The pharmaceutical industries' total import during the last fiscal year were around Rs.1,900 million out of which Rs.627 million or 33% was for the formulation of patent drugs. "By checking the transfer pricing in the import of bulk drugs which are registered as patent the Ministry of Health would also be contributing to the increase in the -profits of the formulating companies, "Consequently, the rise in profits would push up the Government's revenue and may bring down the end product prices to give some relief to the consumer

But the investigations done by this correspondent relating to a sample of six items show that in some cases the transfer pricing element is, ridiculously high. For instance, the price of Rifampicin from West German source was dollar 163 kg. in 1986, while the same is being imported by a T.N.C from its Switzerland principals by air for dollar 993 per kg. Ampicillin price in Turkey was dollar 80 a kg. and in Italy dollar 88 a kg. but it -has been imported from Singapore supply point by a T.N.C. at dollar 100 a kg." The writer has thus quoted a number of patent medicines in which the pharmaceutical companies are indulging in transfer pricing on a very large scale thus defrauding the Government of its rightful revenue. In the case before us the appellant has claimed superiority of its product 'Penbritin' in the name of research product. In the words of the Income-tax Officer which I could not resist quoting at length:- "These products are stated to be the Research Products of Beecham. A Research Product of a pharmaceutical company is a medicine-or drug produced after the exclusive research of that Company. As it puts lot of investment and labour, the said company is given the exclusive right to produce and sell drug/medicine for 15 years. In other words it has the monopoly to manufacture and market it for long 15 years after which other pharmaceutical companies are also allowed to manufacture it. In the case BEECHAM also its research products. 'Ampiciline Trihydrate', sold with the brand name of 'Penbritin' was discovered long ago and the monopoly period of the Company has also ended several years ago. Now this drug/medicine is being manufactured by the so many pharmaceutical companies. As long as an item is a Research Product the monopolist company can sell it on high rates and claim as high purchase price/cost of its raw material as it can manage to suppress actual product. But when the monopoly period is over and other pharmaceutical companies are also in the field of competition, it is hard to ascertain that a particular company would still be claiming high purchase price/cost of its raw material, particularly where the potency and other properties as well as the composition of the same raw material used by other companies are the same." The Income-tax Officer having studied the case thoroughly and examining the various factors involved in the production of patent drug called 'Penbritin', issued a letter under section 62 of the Ordinance and brought out the following points for the clarification and explanation of the appellant: (i) that it had already been allowed a margin of 20 years of monopoly period (Beecham Group) from 1940 onwards, and it is unreasonable to believe that the appellant is still incurring huge expenses on these drugs. (ii) in what respect the drug produced by the appellant was superior to those manufactured by others. (iii) and why prices of (raw material) imported by others are much lower than the one quoted by the appellant from Singapore. In the words of the I.T.O. 'as the products of other companies are not inferior in quality than one manufactured by you, what special reason you attribute for the import of 'Ampicillin Trihydrate' at the costlier price from Singapore than the same raw material available elsewhere in Europe, at a much lower price'. In reply to the above letter issue& by the Income-tax' Officer under section 62 of the Income-tax Ordinance, instead of providing with necessary documentary evidence the appellant contended just by saying that their drugs are superior in comparison to similar drugs manufactured by others. It was further stated by the appellant that the. Ampicillin Trihydrate was discovered by Beecham Group in 1961 instead of 1940 a;: stated by the assessing officer and that Penbritin was registered in Pakistan in 1965. The Income-tax Officer drew appellant's attention to MERCK INDEX (8th Edition) page 75 according to which Ampicillin was registered under various brand names and a number of pharmaceutical companies were allowed patent rights in early 1960's as under:- "(1) British pat. 902703 in 1962 to Beecham Research Lab. Ltd. (2) U.S. Pat. 3079307 in 1963 to Farb. Bayer A.G. (3) U.S. Pat. 3144445 in 1964 to American Home Product Corp. (4) U.S. . Pat. 3140282 in 1964 to Bristol - Mayers Co. The above reference clearly indicates that in early sixties the monopoly of BEECH AM for the manufacture of Ampicillin had come to an end because patent rights were also being granted to other companies to manufacture this drug. The monopoly period normally extended to 15 years from the date first discovery manufacture for commercial use of the research products of a company'. In fact 'Ampicillin Trihydrate' is the latest and updated and developed type of Pencillin. It is not a new discovery but the result of evolution from crude form of Pencillin which was discovered in 1940 to its present form known as 'Ampicillin'. This evolution completed in 1961 and so ended the research period of the Company." Thus, the assessing officer had rightly discovered that monopoly period of the appellant in the manufacturing of Penbritin had ended in early 1960's and thus he concluded: "The above discussion shows that the main research expenditure on Ampicillin was incurred between 1940 to 1961. However even if the marketing year is taken as 1961, the monopoly period ended in 1976 and thus there remains no justification for claiming high purchases prices for the period from 1-4-1978 to 31-3-1979, relevant to assessment year 1979-80. Hence department's contention that it was- discovered in 1940 (for early forties) is not that much incorrect as, that of the assessee company that it was discovered in 1961: In this respect reference is also made to 'BRITISH PHARMACOPOEIA' 1968 (page XXVIII) mentioning that monograph o Ampicillin Trihydrate' was added to the British Pharmacopoeia 1963 by means of the Addendum 1964. This also brings home the point of the Department that actual discovery of the said drug was made much earlier, as a medicine is monographed in British Pharmacopoeia only when it is patented, which event takes place when there is open competition in the market for the preparation of the same produce. Such a patent right, as, discussed earlier is not necessitated during the research monopoly period. Further, the assessed has pleaded that the cost of Ampicillin Trihydrate imported by the assessee company is higher as compared to the raw material available elswhere in Europe. Here discussing the superior quality of its drug it has been stated that the chemical similarity of all drugs cannot necessarily mean that their bio- availability' effectiveness 'stability' and side effect are similar. However, here again the assessee company has failed to point out the specific quality and the particular ingredient, if any, which distinguishes its drug from others. It has only tried to support its point by referring to the monopoly, which the product of assessee company (Penbritin) has in the local market. But the monopoly of an item/product in a market may not be the result of its superior quality. In the case of a medicine, e.g. Penbritin, other factors equally affect the sales, such as the goodwill of the company publicity media, distribution of free samples in large quantity and easy availability of the drug in the market. Beecham (Pakistan) Ltd. has in fact monopolised the market of this drug due to above factors plus the fact that except Pfizer Laboratories Ltd. there is no other multinational Pharmaceutical Company in competition with Beecham. Since it is not a research product of Pfizer and it has started the production in Pakistan very late, it is not a good competition of Beecham as regards the sale of Ampicillin. Other Pakistani Companies due to limited capital, small scale production and not affording the free distribution of samples on large scale are also not in competition with Beecham. So it is not the, superior quality of 'Penbritin' but other factors, as discussed above, which help Beecham Monopolized the local market. To be specific on the point of quality control, it is worthwhile to note that:- (a) As per specification of 'Ampicillin Trihydrate' in British Pharmaceutical (page 50 1968 Edition), 'it contains not less than 95.0% of C16 H19 N3 04 S, (ASSAY) calculated with reference to the anhydrous substance'. This has also been quoted by Beecham Pharmaceutical (Pte) Co. Ltd. Singapore in its material specification report of June 1980, furnished by the Assessee Company 83.8%. These all reports have been submitted by the assessee and form a part of the record of the case. The Quality Assurance Labs of the assessee company further tests each batch of this imported drug. Accordingly, it also tested the drug imported vide Batch Nos. 1639-N, 10054-N and 10061-N and submitted its analysis reports, dated 7-11-1980, 16-9-1981 and 12-10-1981. These reports reflect the finding that the ASSAY in these batches was even lower than even as reported by the exporting company. It was found to be only 83.16% (Batch No. 1639-N) 84.2% (Batch No. 10054-N) and 83.7% (Batch No. 10061-N) against normal standard of 95% as discussed earlier. (c) For the sake of further clarification regarding the quality of the imported rug some fresh sample of the imported drug was collected from the assessee company in November, 1981 an was submitted to P.C.S.I.R. Laboratories, Karachi for chemical analysis. The result of this test or 'ASSAY was declared at 85.9 only, vide a report of P.C.S.I.R. Laboratories, dated 4-1-1982. This is again lower than minimum of quantity o ASSAY of 95 as per normal standard.' The Income-tax Officer thus fully exploded the appellant's contention of superiority of its products. It appears that the learned Commissioner of Income-tax (Appeals) has not 'fully appreciated, the exposition made by the I.T.O. The learned C.I.T. (A) also failed to distinguish this case from the one relied upon by the appellant quoted as I. T. A. No. 708/KB of 1974-75. In that case Messrs Pfizer Laboratories Ltd., Karachi made purchases of Penicillin C-Sodium, Chloro-Prapamide and Oxy-Tetracycline from their principals in the Panama. Purchases were made at rates higher than prices for these very items in the International Market. But the purchases were such as could not be secured from any other source than Pfizer Corporation who happened to be the principal of the respondent. In view of the above discussion, I am of the view that section 79 does apply, with full force, in the case of the appellant and the additions made at Rs.27,94,332 is fully justified and should be added to the net income of the appellant. I would, therefore, like the following issue to be referred to the third Member of the Tribunal for his valuable advice. "Whether in the facts and circumstances of the case, the respondent company was justified in importing raw material from its sister concern in Singapore at a cost much higher than the rate obtaining in the European market." SIKANDAR HAYAT KHAN (ACCOUNTANT MEMBER),--Since a difference of opinion arose between learned Chairman of the Tribunal and learned Accountant Member in regard to the applicability of section 79 of the Income-tax Ordinance, 1979, (hereinafter called the Ordinance), to purchases made by the assessee at much higher prices from the sister concern namely Messrs Beecham Pharmaceuticals (Pvt.) Ltd., Singapore rather than from the West European markets where its price was much lower, the following question emerging out of their respective orders has been referred to the with the object of evolving a majority view:- "Whether in the facts and circumstances, of the case, the respondent company was justified in importing raw material from its sister concern in Singapore at a cost much higher than the rate obtaining in European market." At the outset I drew attention of both the parties in regard to the fact that the question had rot been happily framed so as to tender a rational opinion on it. I said so as the question in its present form implies that there was no difference between the parties in regard to the applicability of section 79 of the Ordinance to purchases made by the assessee and that the only difference related to the fact whether raw material on the facts and in circumstances of the case was rightly imported at a cost much higher from a sister concern in Singapore rather than importing it at a lower rate from the European market. Therefore, on a suggestion from me both the parties have agreed to the reformulation of the question to be read as under:- "Whether on the facts and in circumstances of the case section 79 of the Ordinance was applicable in relation to purchases made by the assessee from its sister concern in Singapore at a cost much higher than the rate obtaining in the European market." Before tendering my opinion in regard to the reformulated question it is desirable to refer briefly to the facts leading to the purchase of 'Ampicillin Trihydrate, which was marketed by the assessee under the brand name Of Penbritin. The assessee, which is a subsidiary of Beecham Group P.I.C. Of Industries (U.K.) (hereinafter called the Group) purchased Ampicillin Trihydrate from Beecham Pharmaceutical (Pvt.) Ltd., Singapore, a subsidiary of the group, at $165 per kg. whereas its price in West European market per kg. ranged from $90 to $96.7. Therefore, the I.T.O. with the object of ascertaining as to why the assessee had imported Ampicillin Trihydrate at a much higher price per kg. in comparison to other companies which had imported the same material from certain West European countries at much lesser prices and particularly when: the medicines manufactured by the latter were in no way inferior to that of Beecham (Pakistan) Ltd., a notice under section 62 of the Ordinance was served on the assessee with a view to affording it an opportunity of explaining its case. The assessee filed a detailed explanation on 12-6-1985, emphasising primarily that since its drug is superior to that of other companies, it had made purchases at a higher price from its sister concern namely Beecham. Pharmaceuticals (Pvt.) Ltd., Singapore. Simultaneously and suo motu, the assessee took the position that section 79 of the Ordinance was riot attracted to its case as purchases by themselves do not produce any profit. The I.T.O., however, after recording detailed reasons repelled all the pleas taken by the assessee and held that it had diverted its profit by buying raw material from its sister concern at Singapore at a cost higher than the prevailing prices in the international market. Therefore, holding the arrangement to be collusive he applied the provisions of section 79 of the Ordinance to purchases made from Messrs Beecham Pharmaceuticals (Pvt.) Ltd., Singapore in consequence of which difference between the purchase price paid to the said company and the highest purchase price of the same item imported by the other Pharmaceutical Companies was added to the disclosed income amounting in all to Rs.27,94,

332. On first appeal, learned C.I.T. (Appeals) by relying on a decision on the Tribunal handed out vide I.T.A. No. 708/KB of 1974-75, dated 25-8-19 7 6 and I.T.A. No. 5051 of 1973-74, dated 8-1-1978, deleted the impugned addition. In this connection relevant part of his order is set out below:- The argument of the appellant's authorised representative has a lot of force. There is no doubt it my mind, that the basic condition for falling within the mischief of the provisions of section 79 is that the transaction with non-resident should produce to the resident either no profit or less than the ordinary profits. This is clearly not the case here. The records of the appellant clearly bear out that the profits have increased considerably. The gross profit percentage increased from 27.17 to 31.30% and the net profit from Rs.3 million to Rs.10.3 million. Furthermore the appellant has clearly demonstrated that the higher purchase price of raw material did not result in lower profits in Ampicillin products as compared to the other manufacturers but in higher profits. This by itself is an adequate proof of the fact that the provisions of section 79 are not attracted. Furthermore, from the record it is also clear that the only transaction that the appellant resident company had with the non-resident was limited to purchase of raw materials and the Honourable Tribunal has held in a number of cases that in such circumstances the provisions of section 79 cannot be attracted. I have decided a similar 'issue in Appeal No.Z-2/2990/B2, dated November 23, 1981 in the case of another pharmaceutical company, where relying upon the Tribunal's case, the additions made under section 42 of the Repealed Act (section 79 of the Ordinance) was deleted

I see no reason for deviating from the established position. The addition of Rs.27,94,332 under section 79 is deleted for the same reasons as given by the Honorable Tribunal in I.T.A. No. 708(KB) of 1974-75, dated 25-8-1976, which still holds the field" The department having objected to the deletion amounting in all to Rs.27,94,332 under section 79 of the Ordinance filed second appeal before the Tribunal. This was earlier heard before a Division Bench comprising of learned Chairman and learned Accountant Member. While the Chairman approved finding of learned C.I.T. (Appeals) deleting a sum of Rs.27,94,332 added to the disclosed income under section 79 of the Ordinance, learned Accountant Member took a different view. Therefore, with the object of evolving a majority view the question of difference of opinion as formulated by me and to which the parties have agreed is now before me for an adjudication. The question as has been formulated by me first requires a finding whether or not on the facts and in circumstances of the case section 79 of the Ordinance was attracted, in respect of purchases made by the assessee from its sister concern in Singapore at a much higher cost in relation to the cost of same raw material available at lower prices in the European market? Before a finding could be recorded on it, it is necessary to refer to the said section which reads as under: - "Where business is carried on between a resident and a non-resident and it appears to the Income-tax Officer that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profit or less than the ordinary profit which might be expected to anise in that business, the Income-tax Officer shall determine the amount of profits which may reasonably be deemed to have accrued to the resident and include such amount in the total income of the resident." The above section in scope and extent is somewhat different from section 42 of the Repealed Income-tax Act, 1922 (hereinafter called the Act), as has been stated by Kanga & Palkhiwalla at page 621 but section 79 of the Ordinance would apply in respect of all cases which are covered by the ratio of decision in a case reported as (1958) 34 I T R 368 (SC India). Therefore, before this section can be imported with 'the object of taxing deemed profit the following conditions are required to be fulfilled in respect of business with a non-resident-- (i) A business connection between a resident and a non-resident. `I (ii) Close connection between the resident and non-resident. (iii) The course of business, is so arranged that it-- (a) produces to the resident no profit, or (b) less than the ordinary profit which might be expected to arise in that business If the above three conditions are found in a business carried on by a resident with a non-resident, the ITO will determine the, amount of profit which may reasonably be deemed to have accrued to the resident. However, section 79 of the Ordinance -does not stipulate that if the profit of the year is higher in comparison with the earlier year the said section cannot be roped in with the object of taxing deemed profit based on a legal fiction. Therefore, I have no hesitation in stating that learned C.I.T. (Appeals) committed a patent error when he referred to a comparative increase in the declaration of profit for the charge year 1979-80 in comparison to the charge years 1978-79 with a view to concluding that section 79 was not applicable in this case. What he really missed was the point that but for purchases of Ampicillin Trihydrate made from its sister concern at Singapore, the profit of the assessee would have been higher by a sum of Rs.27,94,332, for the charge year 1979-80. On account of this reason applicability of section 79 of the Ordinance to purchases made from Messrs Beecham Pharmaceuticals (Pvt.) Ltd., Singapore has to be considered in all seriousness. At this stage it is relevant to put on record that both parties have admitted the fact that there was a close connection between the assessee namely Beecham (Pak.) Ltd., and Beecham Pharmaceuticals (Pvt.) Ltd., Singapore. Therefore, .the next point for consideration is whether there was a business relationship between the resident in Pakistan and the non-resident in Singapore or not? Since the assessee had made its purchases after a careful review of prices prevalent in the international market and had opted to purchase its raw material namely Ampicillin Trihydrate from its sister concern at Singapore at a price much higher than its price, in the West European markets, I have been left in no manner of doubt that business was carried on between the resident in Pakistan and the non-resident in Singapore. Lastly a finding is required in regard to the fact whether the course of business was so arranged between the resident and the non-resident that it produced to the resident in Pakistan either no profit or less than the ordinary profit which might be expected to arise in that business. This question on a careful consideration of arguments put in by both the parties is decided hereunder. First of all a finding is required in regard to the fact whether there was a course of business between the resident which in this case is Beecham (Pak.) Ltd. Karachi and the non-resident namely Beecham Pharmaceutical (Pvt.) Ltd., Singapore. This question I believe can be answered by defining the word 'business'. Business according to Blacks Law Dictionary Fifth Edition) page 179, has been defined as under:- Employment, occupation, profession, or commercial activity engaged in for gain or livelihood. Activity or enterprise for gain, benefit, advantage or livelihood Union League Club v. Johnson, 18, Cal. 2d 275, 108 p.2d

487. Enterprise in which person engaged shows willingness to invest time and capital on future outcome. Dogget v. Burnet 62 App. D.C.103, 65 F.2nd 191,

194. That which habitually busies or occupies or engages the time, attention, labour, and effort of persons as a principal serious concern or interest or for livelihood or profit. " The business, however, 'is not a unilateral act. Business is brought about by a transaction between two or more persons and if there is an activity which is a business activity and that activity is carried on between two persons, then each is carrying on business with the other and not only one party to that activity is carrying on business with the other. All that is necessary in order that it could be said that a non-resident is carrying on business with a resident is that the non-resident must carry on an activity in relation to the resident which activity can be characterised as a business activity. It is perfectly true that every activity of a non-resident in relation to a resident would not be a business activity. But if the activity is sufficiently continuous and if the activity is in relation to the business) of the non-resident, then there is no reason to suggest that non resident is not carrying on business with the resident. (C.I.T. / I E.P.T., Bombay City II v. Mazagaon Dock Ltd.)' In respect of the case before me Beecham (Pak.) Ltd., Karachi made its purchases from Beecham Pharmaceuticals (Pvt.) Ltd., Singapore, which could only be classified as sales in the books of accounts of the latter. Since the amount of purchases Beecham (Pak.) Ltd., Karachi during the previous year relevant to the charge year 1979-80, amounted to Rs.67,47,762 on account of import of 4,030 kg.1 of Ampicillin Trihydrate, it can be reasonably presumed that the activity was sufficiently continuous and as purchases of the assessee were sales in the books of accounts of the non-resident, it can be said without any reservation that the latter had carried on business with the resident in Pakistan. Conversely speaking sales of the non-resident were purchases in the hands of the resident, which in this case was the assessee. There is thus no manner of doubt left with me that both of them had carried on business with each other. Finally a finding is also required in regard to the third condition that the course of business was so arranged between the resident and the non-resident that it produced to the resident either no profit or less than the ordinary profit which might be expected to arise in that business. Learned counsel of the assessee has argued at length to establish that since the assessee had disclosed a better gross profit rate in comparison to the charge year 1978-79, the third condition was in any case not attracted so as to invoke the' provisions of section 79 of the Ordinance. This line of reasoning has not found favour with me as the discussion will show hereunder. The assessee by importing its raw material namely Ampicillin Trihydrate from its sister concern in Singapore paid a sum of Rs.27,94,332 in excess as its market price in the West European, market was much less. If this excess is added to the disclosed gross profit, it would be much higher than what was disclosed in the books of accounts. Therefore, plea of comparatively better margin of profit for not invoking the provision of section 79 of the Ordinance does not hold good in respect of this case. During the course of discussion a lot of emphasis was placed on a case disposed of vide I.T.A. No.708/KB of 1974-75, dates'. 25-8-1976, with the object of establishing that profit does not accrue on purchases. In this connection my attention was also drawn to the famous commentry on the Income-tax Act by Messrs Kanga and Palkiwala (1969 edition page 28), wherein it was said by the learned authors that no profit could be deemed to accrue on purchases. This thing apart my attention has also been drawn to a case decided by the Supreme Court of India namely Messrs Mazagaon Dock Ltd. v. C.I.T., E. P. T., wherein .it was observed that, 'it may be conceded that when a person purchases his requirements from a particular dealer, he cannot without more be said to carry on business with him'. Learned D.R. who is present on behalf of the department has however, repelled the contention of Mr. Ali Athar learned counsel of the assessee with equal emphasis. He has stated that where the activity is sufficiently continuous and if it is in relation to the business of the non-resident then there is no justification to suggest that the non-resident was not carrying on business with the resident. Finally he has pointed out that words used by the Supreme Court of India in Mazagaon Dock Ltd. v. C.I.T., E.P.T. have to be read carefully on the facts of each case. Since in this 'case the assessee over a period of one year made purchases worth Rs.67,47,662 from its sister concern in Singapore it can be said with certainty that the process of making purchases was continuous. The matter does not end here as purchases were made in a calculated manner so as to minimise profit to the resident in Pakistan. There was thus something more in the pattern of purchases so as to fall in the net of business. The foregoing conclusion which is based on a serious analysis of the purchases made by the assessee from its non-resident sister concern has led me to conclude that purchases were not made on the principle of arms length dealings but purely with a view to minimising profit in Pakistan. Learned D.R. on his part has tried to establish his contention by placing reliance on two cases namely Anglo French Textile Co. Ltd. v. C.I..T. Madras No.2 and Chas J. Webbsons and Co. Inc. Philadelphia v. C. I. T. East Punjab. In the former case it was held that where there is a regular agency established in British India for the purchases of entire raw material for the purpose of manufacture and sale abroad and the agent is chosen by reason of his skill, reputation and experience in line of trade it can be said that there is a business connection in British India. This case is however, not on all fours with the case of the assessee and this observation is equally true in respect of the other cases namely Chas. J. Webbsons and Co. Inc., Phildelphia v. Commissioner of Income-tax, East Punjab, and Anglo French Textile Co. Ltd. v. C.I.T. Madras No.

2. I say so because in respect of the said three cases interpretation of section 42(i) and (3) of the Repealed Act was involved rather than interpretation of section 79 of the Ordinance which has been held to the applicable in respect of assessee's case. However, judgment of the Supreme Court cited as (1958) 34 I T R 368 (SC India) 'will apply in all respects to cases' falling under section 79' and its correctness with reference to the provisions of this section would not be in doubt' This observation was recorded by Kanga and Palkiwala in their commentry under section 92 of the Indian Income-tax Act which is at par with section 79 of the Ordinance. Therefore, I respectfully agree with the finding of the Supreme Court that 'the word business is as has often been said of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense'. Discussing the connotation of the word 'trade', Scott, L.J., observed in Smith Barry v. Cordy:- "The history of judicial decisions has been similar, showing a l strong tendency not to restrict scope of schedule D; a tendency which was we think, in sympathy with the general social and economic outlook of the country. There is hardly any activity for gaining a livelihood and not covered by the other schedules which does not seem to us to be swept into the fiscal net by the schedule D." Therefore, based on the above definitions of the word 'Business' purchases made by the assessee over a period of one year from its non-resident sister concern namely Beecham Pharmaceuticals (Pvt.) Ltd., Singapore amounted to business on which profit was diverted to it by ignoring raw material of equal quality available at cheaper rates in West European markets. Learned counsel of the assessee has also argued at length to establish that the I.T.O. did not record a finding in regard to the fact that the course of business was so arranged that the business transacted between the resident and non-resident either produced to the resident no profit or less than the ordinary profit which might be expected to arise in that business. This contention has not found favour with me as the I.T.O. has given elaborate reasons in the body of the assessment order to establish this point. Therefore, even at the cost of repetition it is desirable to incorporate relevant part of the assessment order to clinch the issue: "Some other companies in Pakistan manufacturing Ampicillin have also used the same formula and same raw material imported from various countries in the same period. The figures of landed cost of Ampicillin Trihydrate power imported by them, were collected for comparison. This showed that the landed cost or import value shown by the other manufacturers in the same item was much too low, as can be observed from figures noted below:- Country/ Source of Import Rate per K.G Holland $ 96.7 Italy $ 96.0 Germany $ 96.0 West Germany $ 90.00 Compared to above, the landed cost of the same raw material as declared by the assessee company at $ 165 (or Rs.1,674.38) per kg. is almost double of the highest imported cost declared by other companies. It is interesting to note that other companies are importing from different countries in European whereas the assessee Company has imported the same from Singapore and has still shown very high cost of purchases. Notwithstanding other factors, such as-the cost of manufacturing including wages, if we only consider the freight expenses incurred on import these would be much lower on imports from Singapore than on imports from European countries. The assessee Company has referred to the notice under section 62 in which it was mentioned that Ampicillin Trihydrate was discovered by Beecham Group in 1940. It has tried to correct the record by stating that the said event took place in 1961 and Penbritin was registered and launched in Pakistan in 1965. In this respect, however, reference is made to MERCK INDEX (8th Edition) page No.75 according to which Ampicillin was registered under various brand names and a number of pharmaceutical Companies were allowed patent rights in early 1960, as for example:- (i) British Pat. 902703 in 1962 to Beecham Research Laboratories, Ltd. (ii) United States Pat. 3079307 in 1963 to Farb. Bayer A.G. (iii) United States Pat. 3144445 in 1964 to American Home Products Corporation. (iv) United States Pat. 3140282 in 1964 to Bristol Mayers Co. The above reference clearly indicates that in early sixties the monopoly of Beecham for the manufacture of Ampicillin had come to an end 'because patent rights were also being granted to other companies to manufacture this drug. The company has particularly alleged that in countries such as Italy there are no stringent regulations on drugs exports with the result that raw material being imported into Pakistan from Italian sources could be cheaper The assessee company however, deliberately omitted to mention the Companies manufacturing in West Germany which are very much committed to quality control and research and are governed by quite stringent regulations on drugs exports. As mentioned above, even the imports from West Germany are much cheaper than those of Beecham. Hence this point also does not carry enough weight." Based on the above extract, the I.T.0 recorded a finding in regard to the fact that the course of business was so arranged that business transacted between the resident in Pakistan and the non-resident in Singapore, produced to the resident either no profit or less than the ordinary profit which might be expected to arise in that business. Therefore, even on this score learned A.R. has no case. A lot of reliance was placed on cliches lake bio availability and quality control exercised by Beecham (Pak.) Ltd., in respect of products manufactured by it. Here also contention of the assessee was not found to be correct on the basis of a sample tested by P. C. S. I. R. Laboratories, ' Karachi after chemical analysis. In this connection relevant part of the assessment order which stands uncontroverted is set out below:- "For the sake of further clarification regarding the quality of the imported drug some fresh sample of the imported drug was collected from the assessee Company in November, 1981 and was submitted to P.C. S. I. R. Laboratories, Karachi for chemical analysis. The result of this test for ASSAY was declared at 85.9% only, vide report of P.C.S.I.R. Laboratories, dated 4-1-1982. This is again lower than minimum of quantity of ASSAY of 95% as per normal standard. Learned counsel of the assessee has raised a plea that the I.T.O. did not record a finding in regard to the fact that either no, profit was made by the assessee on purchases made from its sister concern in Singapore or the profit made was less than the ordinary profit which might be expected to arise in that business. This contention has not found favour with me as the assessee by making purchases of its raw material from its sister concern in Singapore at the rate of %165 per kg. in comparison to the import value of the same raw material by other Pharmaceutical companies in West Europe at rates ranging from % 90 to % 96.7 per kg. had certainly managed to transfer its profit to the non-resident. The mere fact that gross profit disclosed at 31.38% during the previous year relevant to the charge year 1979-80 was higher in comparison to the charge year 1979-79, did not make any difference because had the assessee made purchases from pharmaceutical companies of West Europe its profits would have been more by U sum of Rs.27,94,

332. Therefore, the assessee on account of close connection with its sister concern in Singapore managed to declare less than the ordinary profit, which could be realised in that business. Another plea raised by learned counsel of the assessee relates to the fact that selling prices of Beecham products were investigated by the Ministry of Health in 1980, and based on assessee's explanation proceedings initiated against it were dropped. This however, is not a relevant consideration for the purpose of clinching the issue under consideration. If the assessee had managed to establish its selling prices with the Ministry of Health, it did not imply that the I.T.O. was debarred from invoking the provisions of section 79 of the Ordinance against the assessee. Since raw material of the same quality approved by the Ministry of Health was available at cheaper prices in the West European market, the assessee by opting to purchase it at a much higher price from its sister concern in Singapore had deliberately invited the applicability of the provisions contained in section 79 of the Ordinance. Learned counsel of then assessee has also drawn my attention to the fact that since the assessee had paid higher cost for its raw material it was obliged to fix selling rate its products after taking into consideration the price paid for the raw material. Even this plea has hardly any relevancy to the point under consideration which centres round the fact whether or not on the basis of higher price paid for the same quality of raw material to the sister concern in Singapore in comparison to much lower prices in the European market where the standard of manufacture and quality control could at least be at par if not higher, the provisions of section 79 of Ordinance were rightly invoked by the I. T. O.? Having given my earnest consideration to the facts of the case before me I have no hesitation in stating that the assessee by making payment for the same quality of raw material at much higher cost to its sister concern in Singapore in comparison to the lower prices available in West European market had rightly induced the I.T.O. to bring in aid the provisions of section 79 of the Ordinance with object of taxing profits which could reasonably be deemed to have accrued to the resident in Pakistan. In this case D.R. was assisted by Mr. M.S. Lai, Inspecting Assistant Commissioner of Income-tax, Karachi. While arguing for the department he has stated that consistency of purchases between the assessee and its sister concern in Singapore amounted to an arrangement in consequence of which profit that could reasonably be deemed to have accrued to the resident in Pakistan was transferred abroad. Therefore, he has argued that the Tribunal in its various decision had erroneously concluded that no profit could be deemed to accrue on purchases. This thing apart he has stated that Tribunal's decision handed out in I.T.A. No. 708/KB of 1974-75, dated 25-8-1976 was routinely followed by subsequent Benches of the Tribunal without appreciating the fact that circumstances of that case were different from the rest. He has consequently emphasised that on account of the consistency of purchases and their quantum the I.T.O. had rightly invoked the provisions of section 79 of the Ordinance with the object of assessing to tax deemed income that could reasonably be imputed to have accrued to the assessee in Pakistan. This line of reasoning has not been successfully met by Mr. Ali Athar, learned counsel of the assessee. At this stage it is relevant to put on record that in the case of Messrs Pfizer Laboratories Ltd., Karachi disposed of vide I. T. A. No. 708/ K B of 1974-75, dated 25-8-1976, the impugned addition under section 42(2) of the Repealed Act was not maintained by the Tribunal as raw material purchased by it could not be secured from any other source except Pfizer Corporation, of Panama a non-resident in respect of the said case. Therefore, the case of Pfizer Laboratories Ltd., Karachi was somewhat distinguishable from the rest of the cases, which was made the basis for making deletions either under section 42(2) of the Repealed Act of section 79 of the Ordinance in a number of decisions subsequently handed out by the Tribunal. Since in respect of the case before me the assessee had the option to buy same quality of material in West European markets at cheaper rates and as this option was not exercised by the assessee, it certainly facilitated transfer of profits based on manufacturing mechanisim by making purchases from a sister concern in Singapore at a much higher rate per kg. Now it is common knowledge that standard of quality and production of West European market and particularly West Germany and Holland could not be stated to be lower than that of Singapore. Even overwise the Ministry of Health which issues licence for the import of raw material would not allow any sub-standard raw material to be imported which is not according to the standard specification set by it. Therefore, plea of the assessee that its raw material in terms of quality control was better in comparison to the raw material available from West European sources has no legs to stand. Finally, I have not been persuaded to accept the proposition that profit does not accrue on purchases. In reaching this conclusion, I have drawn support from the fact that purchases being an integral part of the trading account will either result in the disclosure of profit or loss. Therefore, purchases made by the assessee could not be examined in isolation from sales. This is on account of the fact that purchases are made with the object of making sales and to earn profit thereon. However, it is conceded that a single purchase may not establish business relationship. Even that position is not present here as purchases were made calculatedly and deliberately from a sister concern not resident in Pakistan at a much higher price in respect of raw material of the same quality which was available at a lower price in West European markets. Therefore, the Income-tax Officer rightly brought in aid the provisions of section 79 of the Ordinance with the object of bringing to tax less than the ordinary profit to which the resident assessee was entitled as deemed income. Hence, I have absolutely no doubt in my mind that the conclusion reached by the Income-tax Officer and by my learned brother, Accountant Member, is right on the facts and in the circumstances of this case. In consequence thereof, the question referred to me is answered in the affirmative. M.BA./501/T Question answered in affirmative.