M/s. Bilcare Limited, Pune V. Deputy Commissioner of Income Tax Central Circle-2(2), Pune

CO 21/PUN/2021

AI Insights

The case involves Bilcare Limited, which appealed against the transfer pricing adjustments made by the Transfer Pricing Officer (TPO) and the Deputy Commissioner of Income Tax (DCIT) for the assessment year 2015-16. The primary issues were the method of determining the Arm's Length Price (ALP) for manufacturing activities and the corporate guarantee fees charged to Associated Enterprises (AEs). The Tribunal had to decide whether to apply the internal or external Transactional Net Margin Method (TNMM) for manufacturing activities and the appropriate rate for corporate guarantee fees. The Tribunal found that the external TNMM was more appropriate due to significant differences in geographical and volume factors between transactions with AEs and non-AEs. For corporate guarantees, the Tribunal set aside the CIT(A)'s decision and remitted the matter for re-evaluation based on actual expenditures incurred by the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 137588 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 3 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 01-02-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 31-01-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 28-11-2021
• Other Referred Cases: Bilcare Limited vs. DCIT for A.Yrs. 2013-14 and 2014-15
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA No.333/PUN/2021 िनधा रण वष / Assessment Year: 2015-16 Bilcare Limited, 6 th Floor, B-Wing, ICC Trade Tower, Senapati Bapat Road, Pune 411 006 PAN : AABCB2242F Vs. DCIT, Central Circle-2(2), Pune Appellant Respondent ITA No.272/PUN/2021 िनधा रण वष / Assessment Year: 2015-16 DCIT, Central Circle-2(2), Pune Vs. Bilcare Limited, 6 th Floor, B-Wing, ICC Trade Tower, Senapati Bapat Road, Pune 411 006 PAN : AABCB2242F Appellant Respondent Cross Objection No.21/PUN/2021 (Arising out of ITA No.272/PUN/2021) Bilcare Limited, 6 th Floor, B-Wing, ICC Trade Tower, Senapati Bapat Road, Pune 411 006 PAN : AABCB2242F Vs. DCIT, Central Circle-2(2), Pune Appellant Respondent Assessee by: Shri Kishor Phadke Revenue by: Shri J.P. Chandraker Date of hearing 01-02-2023 Date of pronouncement 02-02-2023 Bilcare Limited A.Y.2015-16 2 आदेश / ORDER PER R.S.SYAL, VP : These two cross appeals - one by the assessee and the other by the Revenue; and a Cross Objection by the assessee arise out of the order passed by the CIT(A) on 31-03-2011 in relation to the assessment year 2015-16. 2. The assessee’s appeal as well as cross objection are time barred by 79 days and 89 days respectively. The assessee had filed condonation petitions explaining the reasons. We are satisfied with the reasons so stated. No serious objection was taken by the ld. DR. Ergo, the delay in presenting the appeal as well as the cross objection by the assessee is condoned. 3. Briefly stated, the facts of the case are that the assessee is an outbound Multi National company engaged in manufacturing and trading of Pharma packaging products. A return was filed declaring loss of Rs.240.29 crore, which was revised to loss of Rs.43.50 crore. Such return was accompanied by Form No.3CEB containing details of certain international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international Bilcare Limited A.Y.2015-16 3 transactions. The TPO recommended two transfer pricing adjustments, one, in Manufacturing activity and the other on account of Corporate guarantee fee, which are under challenge. We will espouse them one-by-one. I. MANUFACTURING ACTIVITY – T.P. ADJUSTMENT 4. The major issue raised by the assessee as well as the Revenue is in respect of transfer pricing adjustment made in the ‘Manufacturing activity’. The assessee made purchases of pharma packaging material from its AE for a sum of Rs.5,17,41,946/- and sold the pharma packaging material worth Rs.16.27 crore to its AEs. For determining the ALP, the assessee employed the Comparable Internal Uncontrolled Price (CUP) method. The TPO observed that the assessee had used the transactional net margin method (TNMM) in the preceding years. He rejected the assessee’s selection of the CUP and applied the TNMM as the most appropriate method. The assessee segregated its AE and non-AE segments of the manufacturing activity and computed Profit Level Indicator (PLI) of Operating Profit (OP) to Operating Costs (OC) under the AE segment at (-)11.22% and non-AE segment at (-)10.91% for demonstrating that no transfer pricing adjustment was called for Bilcare Limited A.Y.2015-16 4 under the internal TNMM. Though the TPO verified such calculations and accepted the same as correct, but did not approve the internal TNMM and went ahead with the external TNMM by choosing eight companies as comparable having median margin at 5.11%. In this way, he applied the benchmark PLI of 5.11% to the total operating costs under the AE segment at Rs.18.32 crore for working out the transfer pricing adjustment at Rs.2.99 crore by reducing the Revenue from AE transactions at Rs.16.27 crore from the figure determined at Rs.19.26 crore (Rs.18.32 crore x 1.0511). The assessee went in appeal against such adjustment as made by the AO in his order. The ld. CIT(A) approved the application of the internal TNMM as the most appropriate method. By considering non-AE PLI of OP/OC at (-)10.91%, he deleted the addition. Whereas, the Revenue is aggrieved by the deletion of addition by the ld. CIT(A) on the strength of applying the internal TNMM, the assessee is aggrieved by non-granting of the capacity utilization adjustment. Internal or External TNMM ? 5.1. The assessee applied the CUP method as the most appropriate method, which was substituted by the TPO with the external Bilcare Limited A.Y.2015-16 5 TNMM. The ld. CIT(A) echoed the application of the TNMM but internal TNMM. The assessee is not aggrieved by non-adoption of the CUP as the most appropriate method. Thus, the employment of the TNMM as the most appropriate method is impliedly approved. The core of controversy is on the application of internal or external TNMM, that is, whether the internal or external comparables should be considered for determining the ALP under this method? 5.2. There can be no doubt that ordinarily the internal TNMM gets precedence over the external TNMM because it takes care of differences between the material factors, conditions and features of products of the assessee vis-a-vis of comparables and dispenses with the need to make adjustments for bringing such varying factors, conditions and features at a common pedestal. Howbeit, the essential requirement for resorting to the internal TNMM is that no differences, having bearing on the operating profits, should persist in factors, conditions and features in the sale of products made by the assessee to its AEs and non-AEs. If not capable of quantification, such material differences thwart the applicability of the internal TNMM. Bilcare Limited A.Y.2015-16 6 5.3. Here is a case in which the assessee’s total revenue from sales to AEs is Rs.16.27 crore, which is just 4.83% of the combined sales made to AEs and non-AEs. Volume of sales is an important factor in the price determination and the consequential profit rate. Further, sales to AEs are in Germany, Singapore and USA etc., whereas roughly 90% of the non-AE sales are in domestic market only. It deciphers that there are vast geographical differences between the AE and non-AE sales. It goes without saying that geographical locations largely impact the pricing of a product and the resultant profit. Neither any PLI in respect of non-AE exports has been placed on record nor the geographical location of such exports vis- à-vis exports to AEs is provided. To sum up, we are confronted with a situation in which not only there are huge volume differences inasmuch as sales made to AEs are less than 5% of total sales, the geographical differences also largely exist in the pattern of sales made to AEs and non-AEs. These factors cause a serious threat to the application of the internal TNMM. Under such circumstances, we hold that there can be no comparison between the price charged or profit realized by the assessee in domestic market from non-AEs and in the international markets from its AEs, Bilcare Limited A.Y.2015-16 7 thereby frustrating the application of the internal TNMM. In the hue of such significant differences, we are satisfied the internal TNMM is not the most appropriate method to be applied. We therefore, hold that it is the external TNMM which should prevail for determining the ALP of the international transaction in the manufacturing activity. Capacity utilization adjustment 6.1. The TPO in the application of the external TNMM chose certain external comparables and determined the arm’s length margin at 5.11% as against the assessee’s OP to OC under the AE segment at (-)11.22%. The assessee raised a claim before the TPO that adjustment on account of lower capacity utilization should be granted. The TPO, on the penultimate page of his order, observed in para 8.3.10 that “Capacity utilization data has been submitted and the same is being considered for application on the comparables” However, while computing the margin of the comparables, he probably forgot to give effect of the capacity utilization adjustment. The assessee raised the issue of non-granting of the capacity utilization adjustment before the ld. CIT(A), who Bilcare Limited A.Y.2015-16 8 found merit in the contention but did not delve into it for having granted necessary relief by applying the internal TNMM. 6.2. In principle, there can be no hindrance in granting capacity utilization adjustment, if all the necessary particulars are made available by the assessee. In the extant case, the assessee’s contention for granting the capacity utilization adjustment in the profit margin of the comparables has remained to be given effect to notwithstanding the fact that the TPO agreed for its grant and the ld. CIT(A) not going into its nuances for having allowed relief by upholding the application of the internal TNMM. As we have overturned the impugned order in applying the internal TNMM and directed to apply the external TNMM, the assessee’s claim for capacity utilization adjustment will reoccur and require adjudication. We, therefore, set-aside the impugned order on this score and send the matter to the file of the AO/TPO for re- computing the ALP of the ‘Manufacturing activity’ afresh in above terms. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. 7. The ground raised by the Revenue urging to apply the external TNMM is thus allowed and the ground of the assessee in its cross Bilcare Limited A.Y.2015-16 9 objection for granting capacity utilization adjustment in case of external TNMM is also accepted for statistical purposes. II. CORPORATE GUARANTEE FEE- T.P. ADJUSTMENT 8.1. The next issue raised by the assessee as well as the Revenue in their respective appeals is against the transfer pricing adjustment in respect of Corporate Guarantee. It has two components, viz., Loan Guarantee and Performance Guarantee provided by the assessee for its Associated Enterprises (AEs) in different countries, including, Singapore, Germany and USA etc. In all, there were nine transactions comprising of seven of loan guarantees and two of performance guarantees. Albeit such guarantee transactions were declared in Form No. 3CEB, but neither any guarantee fee was charged nor their ALP determination was done. On being called upon to explain as to why the guarantee fee was not charged, the assessee tendered certain explanation. Not convinced, the TPO held that 2% guarantee fee was required to be charged as arm’s length price. Consequently, he proposed transfer pricing adjustment at Rs.23.84 crore. For calculating such amount, he took note of the fact that the assessee recovered corporate guarantee fee of Rs.6.56 crore from one of its AE in an earlier year. Considering the fact that Bilcare Limited A.Y.2015-16 10 the credit for Rs.2.91 crore was already given in an earlier year, he allowed further credit of Rs.2.43 crore against the gross corporate guarantee fee determined by him at Rs.26.27 crore by applying 2% rate, which resulted into proposing transfer pricing adjustment of Rs.23.84 crore (Rs.26.27 crore minus Rs.2.43 crore). The ld. CIT(A) reduced the arm’s length rate of loan guarantee fee to 1.75% as against 2% applied by the TPO; held that the two transactions of giving performance guarantee were immune from guarantee fee transaction not requiring any ALP determination; and that a further credit of Rs.1,21,44,208/- from the recovery of corporate fees in an earlier year was required to be given in addition to Rs.2.43 crore already allowed by the TPO. Both the sides are in appeal on their respective stands. 8.2. Having heard the rival submissions and gone through the relevant material on record, it is seen that the issue of transfer pricing adjustment on corporate guarantee fee came up for consideration before the Tribunal in the assessee’s own case for the A.Yrs. 2013-14 and 2014-15. The lead order was passed for the A.Y. 2014-15 in ITA No.1693/PUN/2018 holding that guarantee fee should be charged at 0.5%, which should be further increased by Bilcare Limited A.Y.2015-16 11 any expenditure actually incurred by the assessee in furnishing the guarantee. This order was followed for the A.Y. 2013-14 as well. Both the sides are in agreement that the facts and circumstances of the respective grounds for the instant year are similar. We, therefore, set-aside the impugned order and remit the matter to the file of the AO/TPO for computing the ALP of the transaction under consideration by firstly, ascertaining the amount of expenditure actually incurred by the assessee in furnishing the seven loan guarantees and two performance guarantees; and thereafter adding 0.5% as guarantee fee. The impugned order holding that the transactions of performance guarantee should be excluded is also hereby overturned as this issue has also been decided in the Tribunal order against the assessee. Another important factor which requires consideration is that the TPO allowed credit of Rs.2.43 crore against the gross amount of guarantee fee determined by him at Rs.26.27 crore. The assessee agitated the issue before the ld. CIT(A), who allowed further credit of Rs.1.21 crore. It is seen from para 7.4 of the order passed by the Tribunal for the A.Y. 2014- 15 that the assessee recovered a sum of Rs.2,43,26,467/- from Bilcare AG during the year. This shows, that the credit of Rs.2.43 Bilcare Limited A.Y.2015-16 12 crore against the gross guarantee fee determined for the year under consideration got wrongly allowed by the TPO since such credit was already allowed in the A.Y. 2014-15. Though, the ld. CIT(A) allowed further credit of Rs.1.21 crore, which was actually required to be given, but did not reduce the credit of Rs.2.43 crore that stood allowed in an earlier year as well. It is axiomatic that credit for Rs.2.43 crore allowed in an earlier year cannot be allowed once again for the year under consideration. In that view of the matter, the credit against the guarantee fee is directed to be restricted only to the extent of Rs.1.21 crore and the excess credit allowed for Rs.2.43 crore is directed to be reduced after verification. Needless to say, the assessee will be allowed an opportunity of hearing while re- determining the amount of guarantee fee in line with the above observations and those given by the Tribunal for earlier years. Thus, the Departmental ground against exclusion of performance guarantee is allowed; and for reducing the rate of guarantee fee from 2% applied by the TPO to 1.75% by the CIT(A) is dismissed. The assessee’s ground against the application of corporate guarantee fee at 1.75% by the ld. CIT(A) is partly allowed in above terms. Bilcare Limited A.Y.2015-16 13 9.1. The last issue in the Revenue’s appeal is against the deletion of addition by the ld. CIT(A) at 10% of expenses made by the AO. The facts anent to this issue are that the AO called for details of various expenses claimed by the assessee. Such details were not furnished. Accordingly, the assessment was framed u/s.144 of the Act by making disallowance at 10% of various expenses including Employee cost, Consumable cost, office expenses etc. The ld. CIT(A) deleted the addition. 9.2. After considering the rival submissions and perusing the relevant material on record, it is seen that the assessee did not furnish necessary details during the course of assessment proceedings which led to the passing of the assessment order u/s.144. In such circumstances, the AO had no option but to frame the assessment to the best of his judgment. The ld. CIT(A) deleted the addition by considering that no such addition was made in the preceding or succeeding year. He, however, overlooked the fact that the assessee did not furnish any details of the expenses claimed in the Profit and loss account. In such a situation, the view point of the ld. CIT(A) cannot be countenanced. The ld. AR submitted that the assessee has got all the necessary details in support of the Bilcare Limited A.Y.2015-16 14 expenses and the same can be produced before the AO, if an opportunity is given. Considering the totality of the facts and circumstances of the case, we set-aside the impugned order on this score and remit the matter to the file of the AO for deciding disallowance of expenses as per law after allowing reasonable opportunity of hearing to the assessee. 10. In the result, the appeals of the Revenue and assessee are partly allowed and the cross objection of the assessee is allowed for statistical purposes. Order pronounced in the Open Court on 02 nd February, 2023 Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 02 nd February, 2023 Satish Bilcare Limited A.Y.2015-16 15 आदेश की ितिलिप अ ेिषत/Copy of the Order is forwarded to: 1. अपीलाथ / The Appellant; 2. थ / The Respondent; 3. The CIT(A) concerned 4. 5. The Pr.CIT concerned िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे “C” / DR ‘C’, ITAT, Pune 6. गाड फाईल / Guard file आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune Date 1. Draft dictated on 01-02-2023 Sr.PS 2. Draft placed before author 02-02-2023 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *