DCIT, Circle-17(2), Hyderabad, Hyderabad V. United States Pharmacopeia India Pvt. Ltd., Hyderabad, Hyderabad

CO 5/HYD/2017

• Counselvise Citation: [2017] 123 COUNSELVISE.COM (IT) 3241 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 5 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 27-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 21-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BANDI RAMA KRISHNA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Transfer pricing; Business expenditure; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 92C; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1693/HYD/2016 AND C.O. NO. 05/HYD/2017 ASSESSMENT YEAR: 2011-12 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 17(2), HYDERABAD. VS. M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HYDERABAD. PAN AAACU 7542 C (APPELLANT) (RESPONDENT/CROSS OBJECTOR) REVENUE BY : SHRI BANDI RAMAKRISHNA ASSESSEE BY : SHRI R. VIJAYARAGHAVAN DATE OF HEARING 03-10-2017 DATE OF PRONOUNCEMENT 27-10-2017 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) - 5, HY DERABAD DATED 30/09/2016 FOR AY 2011-12. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE IS ENGAGED IN RESEARCH AND ANALYTICAL TESTING OF PHARMACOPEIA AND OTHER RELATED PROCESSES. IT FILED ITS RETURN OF INCOME ON 29/11/2 011 DECLARING AN INCOME OF RS. 2,41,55,041 AND OFFERED BOOK PROFIT U /S 115JB AT RS. 2,00,18,344/-. THE AO MADE AN ADJUSTMENT OF RS. 13 ,52,778/- U/S 92CA(3). HE ALSO DISALLOWED LEASE PREMIUM PAID OF R S. 68,87,500 TREATING THE SAME AS REVENUE EXPENDITURE. THE TOTAL INCOME WAS ASSESSED AT RS. 3,23,95,320/-. 2 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A). 4. AS REGARDS ADJUSTMENT OF RS. 13,52,778/- U/S 92C A(3), THE CIT(A) UPHELD THE ACTION OF THE AO. AS REGARDS THE DISALLOWANCE OF AN AMOUNT OF RS. 68,87,500/- ON ACCOUNT OF LEASE PREMI UM, THE CIT(A) DELETED THE DISALLOWANCE FOLLOWING THE DECISION OF HIS PREDECESSOR IN ASSESSEES OWN CASE FOR AY 2010-11 AS WELL AS THE D ECISION OF THE ITAT IN ASSESSEES OWN CASE IN AY 2010-11 WHEREIN T HE COORDINATE BENCH DISMISSED THE APPEAL OF THE REVENUE UPHOLDING THE DECISION OF CIT(A). 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE LD. CIT (A) ERRED BOTH ON FACTS AND IN LAW IN HOLDING THAT THE LEASE RENT PAID OF RS. 68,87,500/- IS ALLO WABLE AS REVENUE EXPENDITURE. 2. THE LD. CIT (A) ERRED IN LAW IN IGNORING THE DEC ISION OF THE HON'BLE SUPREME COURT IN THE CASE OF M/ S. PANBARI TEA LTD. 057 ITR 0422 (1965) WHEREIN THE HON'BLE SUPREME COU RT HELD THAT THE LEASE RENT PAID IS CAPITAL EXPENDITURE. 3. THE LD. CIT (A) ERRED IN LAW IN IGNORING THE DEC ISION OF HON'BLE SUPREME COURT IN THE CASE OF DURGA DAS KHAN NA 072 ITR 0796 (1969) WHEREIN THE HON'BLE APEX COURT HAD SPECIFICALLY DECIDED THAT THE LEASE PREMIUM RECEIVE D IS A CAPITAL RECEIPT IN THE HANDS OF THE RECIPIENT AND T HE CORRESPONDING PAYMENT IS A CAPITAL EXPENDITURE IN T HE HANDS OF THE PAYER. 4. THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FAC T THAT THE ISSUE IS NOT A SETTLED MATTER BECAUSE THE DECISION OF THE HON'BLE ITAT IN ASSESSEE'S CASE FOR A.Y. 2010-11 WAS CONTES TED BY THE DEPARTMENT BEFORE THE HON'BLE HIGH COURT AND THE AP PEAL IS STILL PENDING FOR DISPOSAL. 6. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD. THE FACTS RELATING TO THIS GROUND ARE TH AT DURING THE YEAR THE ASSESSEE COMPANY HAD ENTERED INTO A LEASE AGREE MENT WITH IKP KNOWLEDGE PARK IKP. AS PER THE TERMS OF THE LEASE D EED, IKP HAD LEASED OUT VACANT LAND FOR A PERIOD OF 33 YEARS, FO R WHICH ONE TIME 3 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. CONSIDERATION, WHICH WAS REFERRED TO AS LEASE PREMI UM, OF RS. 68,87,500/- WAS PAID BY THE COMPANY. FURTHER, AN AN NUAL LEASE RENTAL VARYING FROM RS. 10,985/- TO RS. 2,55,125/- HAD BEE N AGREED BETWEEN BOTH THE PARTIES. WHEN THE AO ASKED THE ASSESSEE AS TO WHY THE SAID LEASE PREMIUM CANNOT BE TREATED AS CAPITAL EXPENDIT URE, THE AR OF THE ASSESSEE SUBMITTED THAT THE LEASE PREMIUM WAS PAID FOR ACQUIRING THE LAND ON LEASE AND THE LEASE OF LAND IS SOLELY FOR T HE PURPOSE OF THE BUSINESS OF THE COMPANY. FURTHER, HE SUBMITTED THAT THE LEASE PREMIUM WAS PAID AS AN ADVANCE RENT WHICH IS NON-RE FUNDABLE IN NATURE AND, THEREFORE, THE LEASE PREMIUM IS ALLOWAB LE AS BUSINESS EXPENDITURE IN THE YEAR OF PAYMENT. REJECTING THE S UBMISSIONS OF THE ASSESSEE, THE AO HELD THAT THE AMOUNT PAID BEING IN THE NATURE OF ONETIME PAYMENT FOR ACQUIRING LEASE RIGHTS FOR 33 Y EARS, I.E. RIGHTS OVER ASSET OF ENDURING NATURE, THE PAYMENT WAS CAPI TAL IN NATURE. FOLLOWING HIS DECISION IN AY 2010-11, THE AO DISALL OWED THE SAID AMOUNT TREATING THE SAME AS CAPITAL IN NATURE. ON A PPEAL, THE CIT(A) DELETED THE DISALLOWANCE. 6.1 IN GROUND NO. 2, THE REVENUE HAS RAISED THAT LD . CIT(A) HAS IGNORED THE DECISION OF APEX COURT IN THE CASE OF M /S PANBARI TEA LTD. (SUPRA) IN WHICH THE LEASE RENT PAID IS HELD T O BE CAPITAL EXPENDITURE. IN THE ABOVE CASE, THE ASSESSEE HAS R ECEIVED PREMIUM TO THE EXTENT OF RS. 2,75,000/-. THE SAME WAS PAYAB LE AT THE TIME OF EXECUTION OF THE DEED RS. 45,000/- AND BALANCE OF R S. 1,80,000/- WAS PAYABLE IN 16 HALF YEARLY INSTALMENTS. THE QUESTIO N WAS WHETHER SUCH INSTALMENTS TOWARDS PREMIUM WAS A REVENUE OR CAPITA L RECEIPTS. IT WAS HELD, ON THOSE FACTS, THAT IT WAS CAPITAL RECEI PTS. THE HONBLE COURT OBSERVED THAT THE REAL TEST OF A SALAMI OR P REMIUM IS WHETHER THE AMOUNT PAID, IN LUMPSUM OR IN INSTALMENTS, IS T HE CONSIDERATION PAID BY THE TENANT FOR BEING LET INTO POSSESSION. W HEN THE INTEREST OF THE LESSOR IS PARTED WITH FOR PRICE, THE PRICE PAID IS PREMIUM. FROM THE ABOVE, IT IS CLEAR THAT THE RECEIPT OF PREMIUM WHET HER IN LUMPSUM OR INSTALMENTS IS IMMATERIAL, IT IS THE INTENTION OF T HE PARTY AND THE PRICE PAID FOR PARTING OF THE POSSESSION. IN THE GIVEN CA SE, THE ASSESSEE 4 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. HAS PAID THE ONE TIME PREMIUM. HENCE, THIS CASE IS MATERIALLY DISTINGUISHABLE FROM THE PRESENT CASE, HENCE, CANNO T BE APPLIED. 6.2 FURTHER, REVENUE HAS RAISED IN GROUND NO. 3 THA T LD. CIT(A) HAS IGNORED ANOTHER DECISION OF APEX COURT IN THE CASE OF DURGA DAS KHANNA (SUPRA) IN WHICH LEASE PREMIUM RECEIVED IS A CAPITAL RECEIPT IN THE HANDS OF RECIPIENT AND CORRESPONDING PAYMENT IS A CAPITAL EXPENDITURE IN THE HANDS OF THE PAYER. ON CAREFUL R EADING OF THE ABOVE DECISION, THE LESSEES AGREED TO PAY UNDER LEA SE RS. 55,200/- TO THE LESSOR TOWARDS THE COST OF ERECTING THE CINEMA HOUSE. THE LEASE DID NOT CONTAIN ANY CONDITION OR STIPULATION FROM W HICH IT COULD BE INFERRED THAT THE SUM HAD BEEN PAID BY WAY OF ADVAN CE RENT, NOR WAS THERE PROVISION FOR ITS ADJUSTMENTS TOWARDS RENT OR ANY REPAYMENT. IT WAS HELD THAT IN THE ABSENCE OF ANY MATERIAL ON REC ORD TO THAT EFFECT, THE SUM PAID TO THE LESSOR WAS IN THE NATURE OF A P REMIUM. IN THE GIVEN CASE, THE ASSESSEE HAS PAID THE PREMIUM BUT AS PER THE ABOVE RATIO, THE PAYMENT OF PREMIUM WAS TREATED AS CAPITA L RECEIPT IN THE HANDS OF LESSOR I.E. RECIPIENT. THE CONTENTION OF REVENUE THAT THE PREMIUM RECEIVED WAS TREATED AS CAPITAL, THE PAYMEN T SHOULD ALSO BE TREATED AS CAPITAL IS NOT PROPER. IT DEPENDS UPON T HE FACTS OF EACH CASE. IN THE GIVEN CASE, THE HONBLE GUJARAT HIGH C OURT HAS CONSIDERED THE FACTS WHICH ARE SIMILAR TO THE FACTS OF THE ASSESSEE AND ADJUDICATED IT AS REVENUE IN NATURE. WE RELIED ON THE ABOVE RATIO AND ADJUDICATED IN THE ASSESSEES OWN CASE IN AY 20 10-11, WHICH IS EXTRACTED AS UNDER: 10. WITH REGARD TO GROUND NO. 3, CIT(A) HAD NOT F OLLOWED THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF MRS. G. SEETHA KAMRAJ VS. CIT, WE FIND FROM THE RECORD THAT IN THE PRESENT CASE, THE ASSESSEE HAD ENTERED INTO AN AGRE EMENT WITH ICICI KNOWLEDGE PARK FOR LEASE OF VACANT LAND FOR 3 3 YEARS FOR AN ANNUAL LEASE AMOUNT VARYING FROM RS. 16,901/- TO RS. 1,47,298/-. THE ASSESSEE HAD ALSO PAID A ONE TIME CONSIDERATION AS LEASE PREMIUM OF RS. 99,03,750/-. IN THE PRESENT CASE, THE ASSESSEE HAD PAID THE ABOVE SUM A S LEASE PREMIUM AND CLAIMING THE SAME AS REVENUE EXPENDITUR E . WHEREAS IN THE CASE REFERRED BY THE REVENUE IN THE GROUND IS DISTINCT FROM THE PRESENT CASE AS THE ASSESSEE (MRS . G. SEETHA 5 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. KAMRAJ) TOOK ON LEASE FOR 99 YEARS A BUILDING FROM HER HUSBAND AND AS PER TERMS OF THE LEASE, ASSESSEE PAID RS. 50 00 AS PREMIUM FOR OBTAINING THE LEASE AND WAS TO PAY MONT HLY RENT OF RS. 300/-. THE LEASE HAD ALSO A RIGHT TO CREATE SU B-LEASE AND SHE CREATED A SUB-LEASE IN FAVOUR OF 3 RD PARTY. THE ASSESSEE RECEIVED A LUMPSUM OF RS. 4,30,000/- AS CONSIDERATI ON. IT WAS STATED TO ADJUSTABLE AGAINST MONTHLY RENT OF RS. 36 7.83. LD. AO ASSESSED THE SAME AS CAPITAL GAIN. THE SAME WAS UPH ELD BY THE HONBLE HIGH COURT THAT ON THE FACTS AND CIRCUM STANCES, CONSTRUING THE SUB-LEASE AGREEMENT AND HOLDING THE DEPOSIT OF RS. 4,30,000/- RECEIVED BY THE ASSESSEE WAS A CONSI DERATION FOR GRANTING SUB-LEASE OF THE ASSESSEES RIGHTS AND NOT A PAYMENT OF MONTHLY RENT IN ADVANCE AND AS SUCH WAS LIABLE TO TAX AS SHORT TERM CAPITAL GAINS. IN THE PRESENT CAS E, ASSESSEE HAD MADE THE PAYMENT AS PREMIUM AND NOT RECEIVED TO CONSIDER THE G. SEETHA KAMRAJS CASE AS THEY ARE NOT SIMILAR . HENCE, WE CANNOT CONSIDER G. SEETHA KAMRAJS CASE IN THE PRES ENT CASE AS THE SAME IS NOT SIMILAR. HOWEVER, THE AR HAD RELIED ON THE VARIOUS DECISIONS WHICH ARE PRESENTED BEFORE THE CI T(A). THESE CASES ARE SIMILAR TO THE PRESENT CASE IN PARTICULAR , THE CASE OF DCIT VS. SUN PHARMACEUTICALS INDIA LTD. (329 ITR 47 9 (GUJ.) ARE SIMILAR TO THE ASSESSEES CASE. IT WAS HELD BY THE HONBLE GUJARAT HIGH COURT, DISMISSING THE REVENUE APPEAL, THAT THE TRIBUNAL HAD FOUND THAT THE LAND IN QUESTION WAS N OT ACQUIRED BY THE ASSESSEE. MERELY, BECAUSE THE DEED WAS REGIS TERED, THE TRANSACTION IN QUESTION WOULD NOT ASSUME A DIFFEREN T CHARACTER. THE LEASE RENT WAS VERY NOMINAL. BY OBTAINING THE L AND ON LEASE, THE CAPITAL STRUCTURE OF THE ASSESSEE DID N OT UNDERGO ANY CHANGE. THE ASSESSEE ONLY ACQUIRED A FACILITY T O CARRY ON BUSINESS PROFITABLY BY PAYING NOMINAL LEASE RENT. T HE LEASE RENT PAID BY THE ASSESSEE TO GIDC WAS ALLOWABLE AS REVEN UE EXPENDITURE. IN THE PRESENT CASE, THE ASSESSEE ACQ UIRED THE LAND ON LEASE FOR 33 YEARS, THE CAPITAL STRUCTURE D ID NOT UNDERGO ANY CHANGE. THE ASSESSEE HAS MERELY ACQUIRED THE FA CILITY TO CARRY ON BUSINESS PROFITABLY BY PAYING NOMINAL LEAS E RENT. THE LEASE RENT PAID BY THE ASSESSEE WAS ALLOWABLE AS RE VENUE EXPENDITURE. BY RELYING ON THE ABOVE JUDGMENT, WE A RE INCLINED TO ACCEPT THE ORDER OF CIT(A) AND ACCORDINGLY THE G ROUNDS RAISED BY THE REVENUE ARE DISMISSED. AS THE ISSUE UNDER CONSIDERATION IS SIMILAR TO AY 2 010-11 AND THE LD. DR DID NOT BRING ANY CONTRARY DECISION IN THIS REGA RD, FOLLOWING THE DECISION OF COORDINATE BENCH IN AY 2010-11, WE UPHO LD THE ORDER OF THE CIT(A) IN DELETING THE DISALLOWANCE MADE BY THE AO TOWARDS LEASE PREMIUM PAID BY THE ASSESSEE FOLLOWING THE ORDER OF ITAT IN AY 2010- 11 AND DISMISS THE GROUNDS RAISED BY THE REVENUE. 6 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. 6.2 IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. C.O. NO. 05/HYD/2017 7. IN C.O. THE ASSESSEE HAS RAISED THE FOLLOWING OB JECTIONS: TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF REIMBURSE MENT OF EXPENSES RECEIVED FROM ASSOCIATED ENTERPRISES ('AES ') 1. THAT ON THE FACTS AND CIRCUMSTANCE OF THE CASE A ND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) - 5 ['CIT(A)'] ERRED, BOTH IN FACTS AND IN LAW, IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT OF RS. 13,52,778 WITH RESPECT TO REIMBUR SEMENTS RECEIVED FROM ITS ASSOCIATED ENTERPRISES (AES'). 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE AD-HOC M ARK-UP OF 10% ON SALARY RECHARGED TO THE AES, AS APPLIED BY T HE LEARNED AO/TPO WHILE COMPUTING TRANSFER PRICING ADJUSTMENT. 3. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LEAR NED CIT(A) ERRED IS REJECTING, WITHOUT COGENT REASONS, THE JUD ICIAL PRECEDENTS RELIED UPON BY THE RESPONDENT. 4. THE RESPONDENT CRAVES, TO CONSIDER EACH OF THE A BOVE GROUNDS OF CROSS-OBJECTION WITHOUT PREJUDICE TO EAC H OTHER AND CRAVES LEAVE TO ADD, ALTER, DELETE OR MODIFY ALL OR ANY OF THE ABOVE GROUNDS OF CROSS-OBJECTION. 8. BRIEFLY THE FACTS ARE THAT IT WAS MENTIONED IN T HE TP DOCUMENT THAT DURING THE YEAR DR. SRINI SRINIVASAN, EMPLOYEE OF USP LLC WAS TRANSFERRED TO THE ROLLS OF USP INDIA IN JUNE 2010 AS A WHOLE TIME DIRECTOR. DR. SRINI HAD OVERSIGHT RESPONSIBILITY FO R SCIENTIFIC BUSINESS AND INFRASTRUCTURE OPERATIONS OF CERTAIN USP AFFILI ATES (USP CHINA AND USP BRAZIL) WHILE HE WAS EMPLOYED IN USP LLC., DR. SRINI CONTINUED OVERSIGHT RESPONSIBILITY OF THESE AFFILIATES FROM U SP INDIA. HIS RESPONSIBILITIES INCLUDE OVERSEEING THE CONSTRUCTIO N PROCESS, INVOLVEMENT IN STAFF RECRUITMENT, CAPITAL PROCUREME NT, OVERSIGHT OF BUDGETING, ESTABLISHING AND MAINTAINING RELATIONS W ITH KEY 7 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. STAKEHOLDERS ETC. USP INDIA RECHARGED THE APPORTION ED SALARY AND OTHER DIRECT EXPENSES OF DR. SRINI INCURRED BY USP INDIA TO RESPECTIVE USP AFFILIATES ON A COST TO COST BASIS. 8.1 WHEN THE AO/TPO ASKED THE ASSESSEE AS TO WHY A MARK-UP OF 10% BE NOT CHARGED ON THE SERVICES RENDERED IN THE NATURE OF REIMBURSEMENT, THE ASSESSEE REPLIED THAT SHRI SRINI HAS ACTED IN FIDUCIARY CAPACITY AND THE COMPANY IS NOT THE FULL BENEFICIARY OF THE SERVICES OF SHRI SRINI. HENCE THE EXPENDITURE RELAT ED TO THE COST OF SHRI SRINI WAS RECHARGED TO THE AES, FOR WHOSE BENE FIT HE WAS WORKING. AFTER CONSIDERING THE SUBMISSION OF THE AS SESSEE, THE TPO OBSERVED THAT THE RECEIPT OF REIMBURSEMENT HAD NOT BEEN ROUTED THROUGH BOOKS OF ACCOUNT AND NO INDEPENDENT PARTY W OULD RENDER SUCH SERVICES WITHOUT ANY MARK UP. HE FURTHER OBSER VED THAT EVEN OTHERWISE, RECOVERY OF EXPENSES ALWAYS FORMS PART O F OPERATING COST IN THE CASE OF INDEPENDENT COMPARABLE COMPANIES. IN THE PRESENT CASE, THE PAYMENTS WERE DIRECT AND NOT IN THE NATUR E OF THIRD PARTY PAYMENTS. TPO, THEREFORE, HELD THAT THESE EXPENSES INCURRED BY THE ASSESSEE AND SUBSEQUENTLY REIMBURSED BY AES WERE TO BE ADDED TO THE OPERATING REVENUES AS WELL AS THE OPERATING COS T FOR THE PURPOSE OF AGGREGATION OF TRANSACTIONS AND DETERMINING ARM S LENGTH PRICE UNDER TNMM. ACCORDINGLY, TPO COMPUTED THE ARMS LEN GTH PRICES AS UNDER: REIMBURSEMENT RECEIVED RS. 1,35,27,785 ARMS LENGTH PRICE OF REIMBURSEMENT @10% RS. 1,48, 80,563 ADJUSTMENT ON REIMBURSEMENT RS. 13,52,778 THE TPO, THUS, CONCLUDED THAT THE ARMS LENGTH PRIC E OF REIMBURSEMENTS RECEIVED WAS RS. 1,48,80,563/- AND T HE SHORTFALL OF RS. 13,52,778/- WAS TREATED AS ADJUSTMENT U/S 92CA OF THE ACT AND THE TOTAL INCOME OF THE ASSESSEE ENHANCED ACCORDING LY U/S 92CA(3) OF THE ACT. 8 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. 9. AGGRIEVED BY THE ORDER OF TPO/AO, THE ASSESSEE C ARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) AND CONTENDED TH AT REIMBURSEMENTS RECEIVED BY THE ASSESSEE CANNOT BE C ONSTRUED AS OPERATIONAL IN NATURE AS ALLEGED BY THE LD. TPO. TH E REIMBURSEMENTS RECEIVED BY THE ASSESSEE WERE NOT CONNECTED TO THE PRINCIPAL TRANSACTIONS OF PROVIDING SERVICES TO AE AND THEREF ORE, CANNOT BE CONSIDERED AS PART OF SERVICES RENDERED BY THE ASSE SSEE TO THE AE. HE SUBMITTED THAT IT MERELY ACTED AS AN INTERMEDIA RY/FACILITATOR IN THE ENTIRE TRANSACTION. THEREFORE, THE ASSESSEE SUBMITT ED THAT IT IS A PURE COST-TO-COST REIMBURSEMENT AND HENCE APPLICATION OF MARK-UP IS NOT PROPER IN THE INSTANT CASE. IN SUPPORT OF THE ASSES SEES CONTENTION THAT REIMBURSEMENTS SHOULD BE NOT SUBJECTED TO MARK -UP, IT RELIED ON VARIOUS CASE LAWS. 10. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) UPHELD THE ACTION OF TPO BY OBSERVING AS BELOW: THE RECEIPT OF REIMBURSEMENT HAS NOT BEEN ROUTED T HROUGH BOOKS OF ACCOUNT. I AGREE WITH THE TPO THAT NO INDE PENDENT PARTY WOULD RENDER SUCH SERVICES WITHOUT ANY MARK U P. THE RECOVERY OF EXPENSES ALWAYS FORMS PART OF THE CASE OF INDEPENDENT COMPARABLE COMPANIES. IN THE PRESENT CA SE, THE PAYMENTS ARE DIRECT AND NOT IN THE NATURE OF THIRD PARTY PAYMENTS. THUS, THESE EXPENSES INCURRED BY THE TAXP AYER AND SUBSEQUENTLY REIMBURSED BY AES ARE TO BE ADDED TO T HE OPERATING REVENUE AS WELL AS THE OPERATING COSTS FO R THE PURPOSE OF AGGREGATION OF TRANSACTIONS AND DETERMIN ING ARM'S LENGTH PRICE UNDER TNMM. THE TAXPAYER HAS MADE PAYM ENTS TOWARDS THE OPERATIONS AND ON THE EMPLOYEES AS ALSO ARE OPERATIONAL IN NATURE AND THEREFORE CANNOT BE EXCLU DED. THE MARGIN OF THE TAXPAYER IS QUANTIFIED AT 12.98%. THU S. MARK-UP OF 10% MADE BY THE TPO/AO IS REASONABLE. THUS, THER E IS SHORTFALL OF RS 13,52,778 AS THE ARM'S LENGTH PRICE OF REIMBURSEMENTS RECEIVED IS RS. 1,48,80,563/- AS DET ERMINED BY THE TPO. THUS I HOLD THAT OF ADDITION OF RS.13,52,7 78/ - IS JUSTIFIED. 11. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. DR. SRINI SRINIVASN, EMPLOYEE OF USP LL C WAS TRANSFERRED TO THE ROLLS OF USP INDIA IN JUNE 2010 AS A WHOLE T IME DIRECTOR. DR. 9 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. SRINI HAD OVERSIGHT RESPONSIBILITY FOR SCIENTIFIC B USINESS AND INFRASTRUCTURE OPERATIONS OF CERTAIN USP AFFILIATES (USP CHINA AND USP BRAZIL) WHILE HE WAS EMPLOYED IN USP INDIA, HIS RESPONSIBILITIES INCLUDE OVERSEEING THE CONSTRUCTION PROCESS, INVOLV EMENT IN STAFF RECRUITMENT, CAPITAL PROCUREMENT, OVERSIGHT OF BUDG ETING, ESTABLISHING AND MAINTAINING RELATIONS WITH KEY STAKEHOLDERS ETC . USP INDIA RECHARGED THE APPORTIONED SALARY AND OTHER DIRECT E XPENSES OF DR. SRINI INCURRED BY USP INDIA TO RESPECTIVE USP AFFIL IATES ON A COST TO COST BASIS. 11.1 TPO HAS SUGGESTED THAT 10% MARK UP SHOULD BE A PPLIED. THE SAME WAS UPHELD BY THE LD. CIT(A) BY OBSERVING THAT THE RECEIPT OF REIMBURSEMENT HAS NOT BEEN ROUTED THROUGH BOOKS OF ACCOUNT. SINCE THE LD. CIT(A) HAS FOUND THAT THE TRANSACTION WAS N OT ROUTED THROUGH THE BOOKS, WE ARE INCLINED TO REMIT THIS CASE BACK TO THE FILE OF AO WITH A DIRECTION TO VERIFY THE TRANSACTION. IN CASE , THE TRANSACTIONS ARE NOT ROUTED THROUGH THE BOOKS, THE ACTION OF TPO MAY BE SUSTAINED. OTHERWISE, IT IS NORMAL PRACTICE IN THE MULTINATION AL COMPANIES TO UTILIZE THE EXPERTISE OF THE VARIOUS EXECUTIVES IN THE GROUP COMPANIES. IN THIS CASE, DR. SRINI SRINIVASAN WAS EMPLOYED IN USP INDIA AND HIS EXPERTISE IN THE MANAGEMENT OF CONSTRUCTION, RECRUI TMENT, CAPITAL PROCUREMENTS, BUDGETING ETC., WERE UTILIZED BY THE OTHER SISTER CONCERNS. CERTAIN PORTION OF HIS CTC WAS CHARGED T O THE OTHER SISTER CONCERNS. THE CONCEPT OF UTILIZING THE EXPERTISE WI TH OTHER INDEPENDENT COMPANIES ARE NOT HEARD OF IN THE MARKE T NOR ENCOURAGED IN THE NORMAL BUSINESS. SINCE THERE ARE NO COMPARABLE CASES IN THE MARKET, AND ALSO IT IS THE BUSINESS DE CISION OF THE ASSESSEE TO SHARE THE EMPLOYEE COST WITH OTHER SIST ER CONCERNS ON COST TO COST BASIS. ACCORDINGLY, THE ADDITION OF M ARKUP SHOULD BE DELETED. FOR THE LIMITED PURPOSE OF VERIFICATION OF TRANSACTION WHETHER THE TRANSACTIONS ARE ROUTED THROUGH BOOKS, IT IS RE MITTED TO THE AO. ACCORDINGLY, GROUND RAISED IN C.O. IS ALLOWED FOR S TATISTICAL PURPOSES. 10 ITA NO. 1693 /HYD/2016 & CO NO. 5/HYD/17 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. 12. IN THE RESULT, REVENUE APPEAL IS DISMISSED AND THE C.O. FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 27 TH OCTOBER, 2017. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 27 TH OCTOBER, 2017 KV COPY TO:- 1) DCIT, CIRCLE 17(2), 9 TH FLOOR, SIGNATURE TOWERS, OPP. BOTANICAL GARDEN, KONDAPUR, HYD 500 084 HYDERABAD. 2) M/S UNITED STATES PHARMACOPECIA INDIA PVT. LTD., LAB NO. 7 TO 10, PHASE III, ICICI KNOWLEDGE PARK, GENOME VALLEY, HYDERABAD - 78 3 CIT(A) - 5, HYDERABAD 4) PR. CIT - 5, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE.