Bausch & Lomb India Pvt. Ltd., Gurgaon V. ACIT, New Delhi

ITA 1399/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5012 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 15-06-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 07-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANDEEP KARHAIL S
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 263; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO.1399/DEL/2017 ASSESSMENT YEAR : 2012-13 BAUSCH & LOMB INDIA PVT. LTD., 4 TH FLOOR, TOWER-B, UNITECH BUSINESS PARK, SOUTH CITY-1, GURGAON. PAN: AABCB3877E VS. ACIT, CIRCLE-4(1), ROOM NO.398D, CR BUILDING, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NAGESHWAR RAO & SHRI SANDEEP KARHAIL, ADVOCATES DEPARTMENT BY : SHRI H.K. CHOUDHARY, CIT, DR DATE OF HEARING : 24.08.2017 DATE OF PRONOUNCEMENT : 25.08.2017 ORDER PER R.S. SYAL, VP: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER DATED 31.01.2017 PASSED BY THE ASS ESSING OFFICER ITA NO.1399/DEL/2017 2 (AO) U/S 143(3) READ WITH SECTION 144C OF THE INCOM E-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2012-13. 2. ONLY TWO ISSUES ARE RAISED IN THIS APPEAL. FIRS T IS AGAINST THE ADDITION OF RS.33,11,21,660/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN AMP EXPENSES. 3. BRIEFLY STATED, THE FACTS OF THE CASE AS RECORDE D IN THE ASSESSMENT ORDER ARE THAT THE ASSESSEE IS ENGAGED IN THE MANUF ACTURING AND TRADING OF SOFT CONTACT LENSES, EYECARE SOLUTION AND PROTEI N REMOVING ENZYME TABLETS. THE ASSESSEE IS ALSO INVOLVED IN THE TRAD ING OF SURGICAL EQUIPMENTS, SUCH AS, EXCIMER LASER SYSTEM AND CATA RACT MACHINES AND INTRA OCULAR LENSES. THE ASSESSEE REPORTED CERTAIN INTERNATIONAL TRANSACTIONS IN FORM NO.3CEB. THE ASSESSING OFFICE R MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINI NG THE ARMS LENGTH PRICE (ALP) OF THESE TRANSACTIONS. THE TPO PROPOSE D TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.13.69 CRORE IN RESPECT O F AMP EXPENSES PRIMARILY UNDER BRIGHT LINE APPROACH ON PROTECTIVE BASIS AND AN ADDITION ITA NO.1399/DEL/2017 3 OF RS.33,11,21,660/- ON SUBSTANTIVE BASIS BY CONSID ERING TOTAL ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES INC URRED BY THE ASSESSEE AS CONTRIBUTING TO THE BRAND PROMOTION OF THE AE PLUS GROSS PROFIT MARGIN RATE EARNED BY THE ASSESSEE. THE ASS ESSEE REMAINED UNSUCCESSFUL BEFORE THE DRP. THAT IS HOW, THE ASSE SSING OFFICER MADE AN ADDITION OF RS.33.11 CRORE ON ACCOUNT OF AMP EXP ENSES ON SUBSTANTIVE BASIS AGAINST WHICH THE ASSESSEE HAS CO ME UP IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT SIMILAR ISSU E CROPPED UP IN THE ASSESSEES APPEALS FOR PRECEDING YEARS. THE HON'BL E JURISDICTIONAL HIGH COURT IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2006-07 TO 2010-11 HAS HELD THAT THERE IS NO INTERNATIONAL TRA NSACTION OF AMP EXPENSES AND THE RESULTANT ADDITIONS WERE DELETED. THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, NAMELY, 2011-12 CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL. VIDE ITS ORDER DATED 23.09.20 16, THE TRIBUNAL IN ITA NO.1399/DEL/2017 4 ITA NO.6778/DEL/2015, ORDERED FOR THE DELETION OF A DDITION ON ACCOUNT OF AMP EXPENSES BY FOLLOWING THE JUDGMENT OF THE HO N'BLE HIGH COURT. 5. THE LD. DR CONTENDED THAT THE FACTS AND CIRCU MSTANCES OF THE INSTANT YEAR ARE DIFFERENT INASMUCH AS THE ASSESSEE DID ONL Y `DISTRIBUTION ACTIVITY IN THE YEAR UNDER CONSIDERATION AS AGAINST THE `MANUFACTURING AND DISTRIBUTION ACTIVITIES DONE FOR EARLIER YEARS . THIS CONTENTION DOES NOT APPEAR TO BE CORRECT. IT IS APPARENT FROM THE F IRST PAGE OF THE TPOS ORDER WHEREIN HE HAS RECORDED THAT: THE ASSESSEE I S ENGAGED IN MANUFACTURING AND TRADING OF SOFT CONTACT LENSES .. SIMILARLY, THE AO IN THE IMPUGNED ORDER HAS ALSO RECORDED IN PARA 2 THAT THE ASSESSEE IS : `ENGAGED IN THE BUSINESS OF MANUFACTURING LENSE CARE SOLUTIONS AND TRADING OF CONTACT LENSES AND OPHTHALMIC INTRA OCUL AR LENSES AND SURGICAL EQUIPMENTS. IT IS, THEREFORE, PALPABLE THAT THE NA TURE OF ACTIVITY CARRIED OUT BY THE ASSESSEE DURING THE INSTANT YEAR IS SIMI LAR TO THAT DONE IN THE EARLIER YEARS, BEING THAT OF MANUFACTURING AND TRAD ING AS WELL. IN THE ABSENCE OF ANY DIFFERENCE IN THE FACTUAL POSITION P REVAILING IN THE YEAR ITA NO.1399/DEL/2017 5 UNDER APPEAL VIS--VIS THE EARLIER YEARS AND RESPECTFULLY FOLLOWING THE PRECEDENTS, WE ORDER FOR THE DELETION OF THE ADDITI ON. 6. THE ONLY OTHER ISSUE IS AGAINST THE ADDITION OF RS.15,15,98,787/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF TRANSFE R PRICING ADJUSTMENT IN INTRA GROUP SERVICES. 7. BRIEFLY STATED THE FACTUAL MATRIX OF THIS ISSUE IS THAT THE TPO DID NOT PROPOSE ANY TRANSFER PRICING ADJUSTMENT IN HIS ORDER ON ACCOUNT OF INTRA GROUP SERVICES. THE DRP FOUND DURING THE COUR SE OF HEARING THAT THE TPO FOLLOWED DUE PROCESS AND HAD ISSUED A DETAI LED SHOW CAUSE NOTICE ON THIS SCORE. HOWEVER, WHILE PASSING THE OR DER, THIS POINT WAS INADVERTENTLY OVERLOOKED AND HENCE COULD NOT BE INC ORPORATED IN THE ORDER OF THE TPO. THE DRP REQUIRED THE TPO TO INCO RPORATE THE BENCHMARKING ANALYSIS AND PROPOSE TRANSFER PRICING ADJUSTMENT W.R.T. INTRA GROUP SERVICES IN HIS ORDER. EX CONSEQUENTI, THE TPO CARRIED OUT SUCH BENCHMARKING ANALYSIS AND DETERMINED NIL ALP O F SUCH A TRANSACTION. THE DRP, AFTER DUE NOTICE TO THE ASSES SEE AND HAVING ENTERTAINED ITS OBJECTIONS, DIRECTED TO MAKE TRANSF ER PRICING ADJUSTMENT ITA NO.1399/DEL/2017 6 OF RS.15,15,98,787/-. THAT IS HOW, THE AO MADE SUCH AN ADDITION IN THE IMPUGNED ORDER, AGAINST WHICH THE ASSESSEE IS IN AP PEAL BEFORE US. 8. THE LD. AR CONTENDED AT THE OUTSET THAT THE DR P OVERSTEPPED ITS JURISDICTION IN DIRECTING THE AO TO MAKE SUCH AN AD DITION. IT WAS STATED THAT THE DRP HAD NO POWER TO ASK THE TPO TO CARRY O UT BENCHMARKING ANALYSIS OF THE INTERNATIONAL TRANSACTION OF INTRA- GROUP ANALYSIS, ONCE THE TPO DID NOT PROPOSE ANY TRANSFER PRICING ADJUSTMENT ON THIS COUNT IN HIS ORIGINAL ORDER. IT WAS SUBMITTED THAT IF, AT ALL, THERE WAS SOME INFIRMITY IN THE ORDER OF THE TPO OR THE DRAFT ORDER, THE REM EDY LIED ONLY WITH THE CIT TO REVISE SUCH ORDER U/S 263. THIS WAS OPPOSED BY THE LD. DR. 9. AFTER HEARING BOTH THE SIDES, IT IS FOUND AS A N ADMITTED POSITION THAT THE TPO OR THE AO IN THE DRAFT ORDER DID NOT PROPOS E ANY TRANSFER PRICING ADJUSTMENT OR ADDITION ON ACCOUNT OF INTRA GROUP SE RVICES. IT WAS DONE AT THE INSTANCE OF THE DRP. NOW THE QUESTION IS WHETHE R THE DRP IS EMPOWERED TO ADOPT THIS COURSE OF ACTION. AT THIS S TAGE, IT IS RELEVANT TO TAKE NOTE OF THE MANDATE OF SUB-SECTIONS (7) AND (8 ) OF SECTION 144C AS UNDER : - ITA NO.1399/DEL/2017 7 `(7) THE DISPUTE RESOLUTION PANEL MAY, BEFORE ISSUI NG ANY DIRECTIONS REFERRED TO IN SUB-SECTION (5), ( A ) MAKE SUCH FURTHER ENQUIRY, AS IT THINKS FIT; OR ( B ) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INCO ME-TAX AUTHORITY AND REPORT THE RESULT OF THE SAME TO IT. (8) THE DISPUTE RESOLUTION PANEL MAY CONFIRM, REDU CE OR ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER SO, HOWEVER, THAT IT SHALL NOT SET ASIDE ANY PROPOSED VARIATION OR ISSUE ANY DIRECTION UNDER SUB-SECTION (5) FOR FURTHER ENQUIRY AND PASSING OF THE ASSESSME NT ORDER. EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED T HAT THE POWER OF THE DISPUTE RESOLUTION PANEL TO ENHANCE TH E VARIATION SHALL INCLUDE AND SHALL BE DEEMED ALWAYS TO HAVE INCLUDED THE POWER TO CONSIDER ANY MATTER ARISING OUT OF THE ASSESSMENT P ROCEEDINGS RELATING TO THE DRAFT ORDER, NOTWITHSTANDING THAT SUCH MATTE R WAS RAISED OR NOT BY THE ELIGIBLE ASSESSEE. 10. IT IS CLEAR FROM THE MANDATE OF SUB-SECTION (8) THAT THE DRP IS EMPOWERED, INTER ALIA, TO ENHANCE THE VARIATIONS PROPOSED IN THE DRAFT ORDER. THE EXPLANATION TO THIS SUB-SECTION IN SERTED RETROSPECTIVELY FROM 1.4.2000 CLARIFIES THAT THE PO WER OF THE DRP TO ENHANCE THE VARIATION SHALL INCLUDE THE POWER TO CO NSIDER ANY MATTER ARISING OUT OF THE ASSESSMENT PROCEEDINGS RELATING TO THE DRAFT ORDER, NOTWITHSTANDING THAT SUCH MATTER WAS NOT RAISED BY THE ASSESSEE. WHEN WE CONSIDER THE LANGUAGE OF SUB-SECTION (8) IN CONJUNCTION WITH THE EXPLANATION, IT CLEARLY EMERGES THAT THE D RP HAS A POWER TO ITA NO.1399/DEL/2017 8 ENHANCE VARIATIONS PROPOSED IN THE DRAFT ORDER ON A N INTERNATIONAL TRANSACTION, EVEN IF IT WAS NOT RAISED BY THE ASSES SEE. `ENHANCE THE VARIATIONS INCLUDE NOT ONLY INCREASING THE AMOUNT OF TRANSFER PRICING ADJUSTMENT ALREADY PROPOSED, BUT ALSO MAKIN G A NEW TRANSFER PRICING ADJUSTMENT, WHICH WAS OMITTED TO BE PROPOSE D/MADE BY THE AO/TPO. THERE IS NO DOUBT AND CANNOT BE THAT THE PO WER OF THE DRP IS CO-TERMINUS WITH THAT OF THE AO/TPO. IN OTHE R WORDS, THE DRP CAN ALSO DO ALL SUCH THINGS, WHICH THE AUTHORIT IES COULD HAVE DONE BUT OMITTED TO DO. IF THE LANGUAGE OF THE PROV ISION IS READ AS DISABLING THE DRP TO EXERCISE THE POWER OF ENHANCEM ENT IN THE CIRCUMSTANCES AS ARE OBTAINING IN THE INSTANT CASE, AS HAS BEEN CANVASSED ON BEHALF OF THE ASSESSEE, IT WOULD AMOUN T TO DILUTING THE POWER, WHICH THE STATUTE HAS EXPRESSLY GRANTED. 11. SUB-SECTION (7) OF SECTION 144C MAKES IT CLE AR THAT THE DRP, BEFORE ISSUING ANY FINAL DIRECTIONS UNDER SUB-SECTI ON (5), MAY EITHER (A) MAKE SUCH FURTHER ENQUIRY, AS IT THINKS FIT; O R (B) CAUSE ANY FURTHER ENQUIRY TO BE MADE BY ANY INCOME-TAX AUTHOR ITY AND REPORT ITA NO.1399/DEL/2017 9 THE RESULT OF THE SAME TO IT. IN THE INSTANT CASE, THE DRP HAS IMPLIEDLY TAKEN RECOURSE TO CLAUSE (B) OF SUB-SECTI ON (7) BY CAUSING THE FURTHER ENQUIRY TO BE MADE BY THE TPO BEFORE IS SUING DIRECTION U/S 144C(5). IN VIEW OF THE FOREGOING DISCUSSION, IT IS CLEAR THAT NO EXCEPTION CAN BE TAKEN TO THE COURSE ADOPTED BY THE DRP IN MAKING THE ENHANCEMENT. 12. NOW, WE ESPOUSE THE OTHER CONTENTION OF THE LD. AR THAT IF THERE WAS SOME MISTAKE IN THE ORDER OF THE TPO OR T HE DRAFT ORDER, THEN THE REMEDY WAS WITH THE CIT TO REVISE THE ORD ER U/S 263 AND NOT IN MAKING THE ENHANCEMENT BY THE DRP. THIS CONT ENTION DESERVES TO BE REPELLED BECAUSE SECTION 263(1) CLEA RLY PROVIDES THAT THE CIT MAY CALL FOR AND EXAMINE THE RECORD OF ANY PROCEEDING UNDER THIS ACT, AND IF HE CONSIDERS THAT ANY `ORDER PASSED THEREIN BY THE ASSESSING OFFICER IS ERRONEOUS IN SO FAR AS IT IS PREJUDICIAL TO THE INTERESTS OF THE REVENUE, HE MAY, AFTER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD ETC., REVISE THE ORDER. WHAT IS THE SUBJECT MATTER OF REVISION IS AN ORDER OF THE AO AND THAT T OO, IF IT IS ITA NO.1399/DEL/2017 10 PREJUDICIAL TO THE INTEREST OF THE REVENUE. AN ORDE R CAN BE PREJUDICIAL TO THE INTEREST OF THE REVENUE ONLY WHEN IT CRYSTAL LIZES THE LIABILITY OF THE ASSESSEE TO PAY AND NOTICE OF DEMAND IS ISSUED, WHICH IN THE OPINION OF THE AUTHORITY IS PREJUDICIAL TO THE INTE REST OF THE REVENUE. IF NO FINAL LIABILITY, PURSUANT TO WHICH A DEMAND N OTICE CAN BE ISSUED, IS CAPABLE OF DETERMINATION AT THAT STAGE, SUCH A DRAFT ORDER CEASES TO BE CHARACTERIZED AS AN `ORDER CAPABLE OF REVISION U/S 263. A DRAFT ORDER PRECEDES THE ORDER. ONLY WHEN A DRAFT ORDER IS EITHER NOT OBJECTED TO BY THE ASSESSEE OR IS APPROVED BY T HE DRP, THAT THE FINAL ORDER IS PASSED DETERMINING THE LIABILITY OF THE ASSESSEE, POST WHICH, A NOTICE OF DEMAND IS ISSUED. 13. A DRAFT ORDER, AS SUCH, IS NOT APPEALABLE, EXCEPT TO BE CHALLENGED BY THE ASSESSEE BEFORE THE DRP, WHICH EX ERCISES THE POWER, INTER ALIA, TO MAKE ENHANCEMENT. THE VERY RATIONALE IN THE GIVING THE POWER OF ENHANCEMENT TO THE DRP IS TO CO RRECT THE DRAFT ORDER TO THE EXTENT IT IS PREJUDICIAL TO THE INTERE ST OF THE REVENUE. ONCE THIS POWER IS GIVEN TO THE DRP AND THE DRAFT O RDER CANNOT BE ITA NO.1399/DEL/2017 11 CHARACTERIZED AS AN ORDER, THERE CANNOT BE ANY QUES TION OF THE CIT EXERCISING A PARALLEL POWER U/S 263 TO REVISE SUCH A DRAFT ORDER. WE, THEREFORE, JETTISON THE ARGUMENTS RAISED BY THE LD. AR CHALLENGING THE POWER OF THE DRP TO DIRECT THE ADDITION ON ACCO UNT OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTRA GROUP SERVIC ES IN THE FACTS AND CIRCUMSTANCES OF THE EXTANT CASE. 14. NOW, WE TAKE UP THE ADDITION ON MERITS. HAVI NG HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT SIMILAR ISSUE WAS RAISED IN THE PRECEDING YEARS, ALBEIT, TH E ADDITION WAS MADE DIRECTLY BY THE AO AS A RESULT OF THE ORDER OF THE TPO AND THERE WAS NO ENHANCEMENT. THE ASSESEE CHALLENGED IT BEFORE THE A PPELLATE AUTHORITIES. THE HON'BLE HIGH COURT IN THE ASSESSEES OWN CASE F OR THE PRECEDING FIVE YEARS HAS DECIDED SUCH ISSUE IN FAVOUR OF THE ASSES SEE BY DELETING THE ADDITIONS. FOLLOWING THE VIEW OF THE HON'BLE HIGH C OURT, THE TRIBUNAL, FOR THE ASSESSMENT YEAR 2011-12 HAS DIRECTED THE DE LETION OF SIMILAR ADDITION. AS THE FACTS AND CIRCUMSTANCES OF THE IS SUE FOR THE YEAR UNDER CONSIDERATION ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF PRECEDING YEARS, ITA NO.1399/DEL/2017 12 RESPECTFULLY FOLLOWING THE PRECEDENTS, WE ORDER FOR THE DELETION OF ADDITION. 15. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 25.08.201 7. SD/- SD/- [SUCHITRA KAMBLE] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 25 TH AUGUST, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.