DCIT, Circle 3(3), Hyderabad V. M/s United States Pharmacopeia India Pvt Ltd, Hyderabad

ITA 1052/HYD/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6666 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 08-03-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 27-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S NARASAMMA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Related party transaction; Transfer pricing; International transaction; Revenue expenditure

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. 1052/HYD/2014 ASSESSMENT YEAR: 2010-11 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 3(3), HYDERABAD. VS. M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HYDERABAD. PAN AAACU 7542 C (ASSESSEE) (RESPONDENT) REVENUE BY : SMT. S. NARASAMMA ASSESSEE BY : SHRI R. VIJAYARAGHAVAN DATE OF HEARING 08-03-2016 DATE OF PRONOUNCEMENT 07-04-2016 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) - IV, H YDERABAD DATED 14/03/2014 FOR AY 2010-11 WHEREIN THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT(A) ERRED IN REJECTING THE COMPAN IES (I) ASIAN BUSINESS EXHIBITION AND CONFERENCES LTD (II) EMPIRE INDUSTRIES LTD & (III) ENTERTAINMENT NETWORK INDIA LTD AS, COM PARABLE, BY APPLICATION OF TURNOVER FILTER. 2. THE CIT(A) IS NOT CORRECT IN APPLYING THE DECISI ON IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD VS CIT & ORCHID CHEMICALS & PHARMACEUTICALS LTD VS ACIT, WHICH ARE NOT AT ALL APPLICABLE TO THE FACTS OF THE PRESENT CASE. 2 ITA NO. 1052 /HYD/2014 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. 3. THE CIT(A) ERRED IN NOT FOLLOWING THE DECISION O F THE JURISDICTIONAL HIGH COURT IN THE CASE OF MR G SEETH A KAMRAJ VS CIT, AS THE FACTS OF WHICH ARE CLEARLY APPLICABLE T O THE FACTS OF THE PRESENT CASE. 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 29/09/2 010 DECLARING AN INCOME OF RS. 76,89,956/-. THE AO MADE AN ADJUSTMEN T OF RS. 25,54,7242 U/S 92CA(3). SHE ALSO DISALLOWED BUSINES S LOSS OF RS. 1,91,582 AND LEASE PREMIUM OF RS. 99,03,750. THE TO TAL INCOME WAS ASSESSED AT RS. 2,03,40,030. 3. AS REGARDS GROUND NO. 1 RELATES TO AN ADJUSTMENT TO THE ARMS LENGTH PRICE OF RS. 25,54,742/- OF THE INTERNATIONA L TRANSACTION PERTAINING TO CUSTOMER OUTREACH SEGMENT OF THE BUSI NESS, THE ASSESSEE HAD ENTERED INTO TRANSACTIONS WITH ASSOCIA TED ENTERPRISES FOR TWO SEGMENTS OF ITS BUSINESS, FIRSTLY FOR TESTI NG AND CERTIFICATION SERVICES AND SECONDLY FOR CUSTOMER OUTREACH SERVICE S. THE AO ACCEPTED THE PROFIT IN THE TESTING AND CERTIFICATIO N SERVICES SEGMENT AS BEING IN ACCORDANCE WITH ALP. 3.1 WITH REGARD TO THE CUSTOMER OUTREACH SERVICES, THE AO NOTED THAT THE ASSESSEE, WHILE COMPUTING THE ALP IN ACCOR DANCE WITH TNM METHOD HAD APPLIED THE FOLLOWING FILTERS: 1. TURNOVER FILTER, REJECTING COMPANIES HAVING TUR NOVER MORE THAN 30 TIMES THE ASSESSEES TURNOVER. 2. RELATED PARTY FILTER, REJECTING COMPANIES HAVIN G RELATED PARTY TRANSACTION MORE THAN 25% OF THE TURNOVER. THE AO ACCEPTED THE RELATED PARTY FILTER. HOWEVER, SHE REJECTED THE TURNOVER FILTER. SHE ALSO NOTED THAT THE ASSESSEE H AD ADOPTED MULTIPLE YEAR DATA IN ITS TP STUDY AND REWORKED THE AVERAGE PROFIT RATIO ON THE BASIS OF THE OPERATING RESULTS FOR THE FY 2009-10 A LONE AS FOLLOWS: 3 ITA NO. 1052 /HYD/2014 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. S.NO. NAME OF THE COMPARABLE SALES OPERATING EXPENSES OPERATING PROFIT OPERATING PROFIT/TOTAL COST 1 IDC (INDIA) LTD. 127926731 113461479 14465252 12.75% 2 PRIYA INTERNATIONAL LTD. 121357187 112180098 9177089 8.18% 3. QUADRANT COM.LTD. 46498018 41164997 5333021 12.96% 4. ASIAN BE CONF. LTD. 531830656 337026402 194804254 57.80% 5. EMPIRE INDUSTRIES LTD. 22.16% 6. ENTERT. NETWORK (I) LTD. 417201246 424036944 (6835698) -1.61% 3.2 THE AO COMPUTED THE ALP AS FOLLOWS: AVERAGE PROFIT RATIO 18.70% OPERATING COST 1,36,61,826 ARMS LENGTH PRICE (118.70% OF COST) 1,62,16,588 LOWER RANGE OF COST (95% OF 1,36,61,826) 1,29,78,7 35 UPPER RANGE OF COST (105% OF 1,36,61,826)1,43,44,9 17 SINCE THE ALP DID NOT FALL WITHIN +/- 5% RANGE, THE AO MADE AN ADJUSTMENT OF RS. 25,54,742/-. 4. BEFORE THE CIT(A), THE AR OF THE ASSESSEE SUBMIT TED THAT THE AO OUGHT TO HAVE ACCEPTED THE TURNOVER FILTER APPLI ED BY THE ASSESSEE AND RELIED ON VARIOUS DECISIONS, WHICH ARE EXTRACTE D BY THE CIT(A) IN HIS ORDER AT PAGES 4 TO 5. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) OBSERVED THAT IN THE CASE OF DELOITTE CONSULTING IN DIA PVT. LTD., THE ITAT, HYDERABAD BENCHES HELD THAT THE COMPANIES HAV ING TURNOVER 20 TIMES MORE THAN THE ASSESSEE, COULD NOT BE ACCEP TED AS A COMPARABLE. IN ALL THE OTHER DECISIONS, RELIED ON B Y THE ASSESSEE, ITAT HAS EXPRESSED SIMILAR VIEWS AS EXPRESSED IN DE LOITTE CONSULTING INDIA P. LTD. I.E. THE COMPARABLES HAVING ABNORMALL Y HIGH TURNOVER 4 ITA NO. 1052 /HYD/2014 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. SHOULD NOT BE TAKEN AS COMPARABLES. HE, THEREFORE, DIRECTED THE AO TO ACCEPT ASSESSEES TURNOVER. ACCORDINGLY, THE CIT (A) REJECTED THE FOLLOWING COMPANIES AS COMPARABLES: I. ASIAN BUSINESS EXHIBITION AND CONFERENCES LTD. II. EMPIRE INDUSTRIES LTD. III. ENTERTAINMENT NETWORK INDIA LTD. THE CIT(A) DIRECTED THE AO TO RECOMPUTE THE ALP AS PER THE SAID DIRECTIONS. THE CIT(A) OBSERVED THAT THE ALP AS COM PUTED IN ACCORDANCE WITH THE DIRECTIONS ABOVE FALLS WITHIN T HE RANGE OF +/- 5% OF THE INTERNATIONAL TRANSACTION AND, HENCE, SET AS IDE THE ADJUSTMENT MADE BY THE AO. 6. CIT(A) HAS ALSO DIRECTED THE AO TO ADOPT THE OPE RATING COST AT RS. 1,32,27,581/- INSTEAD OF RS. 136,61,826/-, WHIC H WAS ADOPTED BY THE AO BY MISTAKE. 7. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 8. CONSIDERED THE SUBMISSIONS OF BOTH THE COUNSELS AND PERUSED THE RELEVANT FACTS AND DECISIONS CITED. IN GROUND N O.1 OF REVENUE, THE REVENUE HAS OBJECTED FOR DELETION OF ASIAN BUSINESS EXHIBITION (SUPRA), EMPIRE INDUSTRIES LTD(SUPRA) AND ENTERTAI NMENT NETWORK INDIA LTD. (SUPRA), BASED ON TURNOVER FILTER. AR RE LIED ON DELOITTE CONSULTING INDIA PVT. LTD. (ITA NO. 1084/HYD/2010) THAT THE COMPANIES HAVING TURNOVER 20 TIMES MORE THAN THE AS SESSEE COULD NOT BE ACCEPTED AS A COMPARABLE. IN THE FOLLOWING D ECISIONS OF THE TRIBUNAL, THE COMPARABLES WITH ABNORMAL TURNOVER AR E ELIMINATED FROM THE LIST OF COMPARABLES: 1. HELLO SOFT INDIA (P) LTD. VS. DCIT, [2013] 40 T AXMANN.COM 235 (HYD.) 2. HSBC ELECTRONIC DATA PROCESSING INDIA PVT. LTD. VS. ADDL. CIT, 38 TAXMANN.COM 141 (HYD.) 5 ITA NO. 1052 /HYD/2014 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. 3. HYUNDAI MOTORS INDIA ENGG. (P.) LTD., 44 TAXMAN N.COM 34 (HYD.) 4. GRANULES INDIA LTD., VS. DCIT, 59 TAXMANN.COM 3 16 (HYD.) 5. INTOTO SOFTWARE INDIA (P.) LTD. VS. ITO, 65 TA XMANN.COM 119 IN THE PRESENT CASE ALSO, THE ABOVE CITED COMPANIES IN PARA 5ARE HAVING ABNORMAL TURNOVER COMPARED WITH THE ASSESSEE . WE FIND IT APPROPRIATE TO ACCEPT THE FINDINGS OF THE LD. CIT(A ) AND ACCORDINGLY DISMISS THE GROUND NO. 1 OF THE REVENUE. 9. WITH REGARD TO GROUND NO. 2 OF THE REVENUE OBJEC TING TO APPLY THE DECISION OF M/S MADRAS INDUSTRIAL INVESTMENT CO RPORATION LTD. VS. CIT AND ORCHID CHEMICALS & PHARMACEUTICALS LTD. VS. ACIT. ON RECORD, WE FIND THAT THE ASSESSEE HAD TAKEN THE ABO VE GROUND BEFORE THE CIT(A) AS ALTERNATE GROUND AND LD. CIT(A) HAD N OT ADJUDICATED ON THIS COUNT. ACCORDINGLY, WE DISMISS THIS GROUND. 10. WITH REGARD TO GROUND NO. 3, CIT(A) HAD NOT FOL LOWED 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 AGREEMENT WITH ICICI K NOWLEDGE PARK FOR LEASE OF VACANT LAND FOR 33 YEARS FOR AN ANNUAL LEASE AMOUNT VARYING FROM RS. 16,901/- TO RS. 1,47,298/-. THE AS SESSEE HAD ALSO PAID A ONE TIME CONSIDERATION AS LEASE PREMIUM OF R S. 99,03,750/-. IN THE PRESENT CASE, THE ASSESSEE HAD PAID THE ABOVE S UM AS LEASE PREMIUM AND CLAIMING THE SAME AS REVENUE EXPENDITUR E . WHEREAS IN THE CASE REFERRED BY THE REVENUE IN THE GROUND IS D ISTINCT FROM THE PRESENT CASE AS THE ASSESSEE (MRS. G. SEETHA KAMRAJ ) TOOK ON LEASE FOR 99 YEARS A BUILDING FROM HER HUSBAND AND AS PER TERMS OF THE LEASE, ASSESSEE PAID RS. 5000 AS PREMIUM FOR OBTAIN ING THE LEASE AND WAS TO PAY MONTHLY RENT OF RS. 300/-. THE LEASE HAD ALSO A RIGHT TO CREATE SUB-LEASE AND SHE CREATED A SUB-LEASE IN FAVOUR OF 3 RD PARTY. THE ASSESSEE RECEIVED A LUMPSUM OF RS. 4,30,000/- A S CONSIDERATION. 6 ITA NO. 1052 /HYD/2014 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. IT WAS STATED TO ADJUSTABLE AGAINST MONTHLY RENT OF RS. 367.83. LD. AO ASSESSED THE SAME AS CAPITAL GAIN. THE SAME WAS UPH ELD BY THE HONBLE HIGH COURT THAT ON THE FACTS AND CIRCUMSTAN CES, CONSTRUING THE SUB-LEASE AGREEMENT AND HOLDING THE DEPOSIT OF RS. 4,30,000/- RECEIVED BY THE ASSESSEE WAS A CONSIDERATION FOR GR ANTING SUB-LEASE OF THE ASSESSEES RIGHTS AND NOT A PAYMENT OF MONTH LY RENT IN ADVANCE AND AS SUCH WAS LIABLE TO TAX AS SHORT TERM CAPITAL GAINS. IN THE PRESENT CASE, ASSESSEE HAD MADE THE PAYMENT AS PREM IUM AND NOT RECEIVED TO CONSIDER THE G. SEETHA KAMRAJS CASE AS THEY ARE NOT SIMILAR. HENCE, WE CANNOT CONSIDER G. SEETHA KAMRAJ S CASE IN THE PRESENT CASE AS THE SAME IS NOT SIMILAR. HOWEVER, THE AR HAD RELIED ON THE VARIOUS DECISIONS WHICH ARE PRESENTED BEFORE THE CIT(A). THESE CASES ARE SIMILAR TO THE PRESENT CASE IN PART ICULAR, 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 NOT ACQUIRED B Y THE ASSESSEE. MERELY, BECAUSE THE DEED WAS REGISTERED, THE TRANSA CTION IN QUESTION WOULD NOT ASSUME A DIFFERENT CHARACTER. THE LEASE R ENT WAS VERY NOMINAL. BY OBTAINING THE LAND ON LEASE, THE CAPIT AL STRUCTURE OF THE ASSESSEE DID NOT UNDERGO ANY CHANGE. THE ASSESSEE O NLY ACQUIRED A FACILITY TO CARRY ON BUSINESS PROFITABLY BY PAYING NOMINAL LEASE RENT. THE LEASE RENT PAID BY THE ASSESSEE TO GIDC WAS ALL OWABLE AS REVENUE EXPENDITURE. IN THE PRESENT CASE, THE ASSE SSEE ACQUIRED THE LAND ON LEASE FOR 33 YEARS, THE CAPITAL STRUCTURE D ID NOT GO ANY CHANGE. THE ASSESSEE HAS MERELY ACQUIRED THE FACILI TY TO CARRY ON BUSINESS PROFITABLY BY PAYING NOMINAL LEASE RENT. T HE LEASE RENT PAID BY THE ASSESSEE WAS ALLOWABLE AS REVENUE EXPENDITUR E. BY RELYING ON THE ABOVE JUDGMENT, WE ARE INCLINED TO ACCEPT THE O RDER OF CIT(A) AND ACCORDINGLY THE GROUNDS RAISED BY THE REVENUE ARE D ISMISSED. 7 ITA NO. 1052 /HYD/2014 M/S UNITED STATES PHARMACOPEIA INDIA PVT. LTD., HY D. 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. PRONOUNCED IN THE OPEN COURT ON 7 TH APRIL, 2016. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAH MAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 7 TH APRIL, 2016 KV COPY TO:- 1) DCIT, CIRCLE 3(3), 7 TH FLOOR, B BLOCK, IT TOWERS, AC GUARDS, HYDERABAD. 2) M/S UNITED STATES PHARMACOPECIA INDIA PVT. LTD., LAB NO. 7 TO 10, PHASE III, ICICI KNOWLEDGE PARK, GENOME VALLEY, HYDERABAD 3 CIT(A) - IV, HYDERABAD 4) CIT-III, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.