St. Jude Medical India Private Limited, Hyderabad V. DCIT., Circle-3(2), Hyderabad

ITA 1425/HYD/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2636 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 28-08-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: U MINICHANDRAN
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 234B; 10B

Judgement Text

ITA NO 1425 OF 2014 ST JUDE M EDICAL INDIA P LTD HYDERABAD. PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.1425/HYD/2014 (ASSESSMENT YEAR: 2006-07) ST. JUDE MEDICAL INDIA PVT. LTD, HYDERABAD PAN: AAICS 9821 J VS DY. COMMISSIONER OF INCOME TAX, CIRCLE 3 (2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI S.P. CHIDAMBARAM FOR REVENUE : SMT. U. MINICHANDRAN, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2006-07. IN T HIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ASSESSMENT ORDER DATED 30.06.2014 PASSED U/S 143(3) R.W.S. 144C AND 254 OF THE I.T. ACT. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF AP PEAL: 1. THAT THE TRANSFER PRICING OFFICER (TPO)/THE ASSESSING OFFICER (AO) ERRED IN NOT ACCEPTING THE PRICE OF INTERNATIONAL TRANSACTIONS OF PURCHASES OF MEDICAL DEVICES OF RS.27,22,69,532 SHOWN BY THE APPELLANT AND DETERMINING THE ARM'S LENGTH PRICE (HEREINAFTER REFERRED TO AS 'ALP') AT RS. 24,66,71,869 AND THEREBY MAKING A TRANSFER PRICE ADJUSTMENT OF RS.2,55,97,663 TO THE TOTAL INCOME OF THE APPELLANT. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DISPUTE RESOLUTION PANEL (DRP)/ THE TPO/THE AO ERRED IN NOT FOLLOWING THE DIRECTIONS OF THE HON'BLE TRIBUNAL VIDE ORDER DATED DATE OF HEARING: 11.12 . 2017 DATE OF PRONOUNCEMENT: 24.01.2018 ITA NO 1425 OF 2014 ST JUDE M EDICAL INDIA P LTD HYDERABAD. PAGE 2 OF 6 30 JUNE 2011 FOR DETERMINATION OF ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION IN THEIR ORDERS. 3. THAT THE DRPI TPO/AO SHOULD HAVE APPRECIATED THAT IN THE MATTER REMANDED BY THE HON'BLE TRIBUNAL, IT WAS INCUMBENT UPON THEM TO FOLLOW ONLY THE DIRECTIONS OF THE HON'BLE TRIBUNAL AND NOT TO DO THE ASSESSMENT AFRESH OR DE-NOVO. 4. THAT THE DRP ERRED IN REMITTING THE MATTER TO TH E TPO FOR VERIFICATION AND MAKING ADJUSTMENTS DISREGARDING THE PROVISIONS OF SECTION 144C(8) OF THE ACT. 5. THAT THE TPO/AO ERRED IN ISSUING FRESH NOTICE TO THE APPELLANT POST THE ORDER OF THE DRP FOR ADDITIONAL INFORMATION AND FURTHER ENQUIRY WHICH IS BEYOND THE POWERS GRANTED UNDER SECTION 144C (13) OF THE ACT. 6. THAT THE TPO/AO HAS ERRED IN CORRECTLY APPLYING THE RULE 10B(1)(B) OF THE FOR INCOME TAX RULES 1962, ('RULES') DETERMINATION OF ALP AS PER RESALE PRICE METHOD ('RPM'). 7. THAT THE BENEFIT OF ADJUSTMENT OF MARKETING EXPENSES ALLOWED BY THE TPO IN ITS ORIGINAL ORDER DATED 30 OCTOBER 2009 WHICH WAS CONFIRMED BY THE DRP AND HON'BLE TRIBUNAL SHOULD NOT HAVE BEEN IGNORED WHILE PASSING THE FINAL ORDER. 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP/TPO/AO ERRED IN REJECTING CENTRAL SCIENTIFIC SUPPLIERS LIMITED, ONE OF THE COMPARABLE SELECTED BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES. 9. THE LEARNED AO ERRED IN IMPOSITION OF INTEREST UNDER SECTION 234B AND SECTION 234D. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, A WHOLLY OWNED SUBSIDIARY OF ST. JUDE MEDICAL INC. IS ENGAGE D IN TRADING OF ITA NO 1425 OF 2014 ST JUDE M EDICAL INDIA P LTD HYDERABAD. PAGE 3 OF 6 CARDIAC RHYTHM MANAGEMENT, CARDIAC SURGERY AND CARD IOLOGY DEVICES MANUFACTURED BY ITS GROUP COMPANIES. THE AS SESSEE PURCHASES THE DEVICES FROM ITS AE AND MARKETS AND S ELLS ITS PRODUCTS TO HOSPITALS IN INDIA. THE TPO REJECTED TH E T.P STUDY CONDUCTED BY THE ASSESSEE AND CARRIED OUT FRESH ANA LYSIS USING RESALE PRICE METHOD AS THE MOST APPROPRIATE METHOD. HE ARRIVED AT THE MARGIN OF THE TAXPAYER AT 16.84% AND THAT OF THE FOUR COMPARABLES AT 38.45% AND PROPOSED AN ADJUSTMENT OF RS.9,09,84,839. HE ALSO CARRIED OUT SUPPLEMENTARY A NALYSIS USING TNMM AND ARRIVED AT THE ARITHMETIC MEAN MARGIN OF T HE COMPARABLES AT 15.85% AS AGAINST THAT OF THE TAXPAY ER -2%. ACCORDINGLY, DRAFT ASSESSMENT ORDER WAS PROPOSED AG AINST WHICH, THE ASSESSEE MADE A REFERENCE TO THE DRP. THE DRP V IDE ITS ORDER DATED 30.09.2010, UPHELD THE USE OF THE RESALE PRIC E METHOD (RPM) AND REJECTED TWO OF THE COMPARABLES AND THE M ARGIN WAS RECALCULATED AT 29.51%. CONSEQUENTLY, THE ADJUSTMEN T GOT REDUCED TO RS.6,50,05,340. 3. THE ASSESSEE FURTHER APPEALED TO THE ITAT AND TH E ITAT VIDE ORDERS DATED 30.06.2011 IN ITA NO.1626/HY D/2010 IN PARA 12 HELD AS UNDER: 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND FORCE IN THE ARGUMENTS OF THE ASSESSEE'S COUNSEL. THERE IS NO DI SPUTE HEREIN WITH REGARD TO THE FACT THAT THE ENTIRE PURC HASES WERE MADE FROM M/S ASSOCIATE ENTERPRISES AT RS.35.1 6 CRORES WAS NOT SOLD. THERE WERE UNSOLD GOODS. THE UNSOLD GOODS CANNOT BE CONSIDERED IN THE ASSESSMENT YEAR UNDER CONSIDERATION FOR DETERMINING THE ARM'S LENGTH PRICE. ONLY THE GOODS THAT WHICH WAS SOLD HA S TO BE CONSIDERED FOR DETERMINING THE ALP. AFTER CONSIDERING THE PURCHASE PRICE FROM THE AE IN RESPE CT OF THE GOODS SOLD, THE ADDITION HAS TO BE MADE TOWARDS NORMAL AVERAGE GP MARGIN ON SALES AND THEREAFTER DEDUCTION IS TO BE MADE TOWARDS MARKETING EXPENSES ITA NO 1425 OF 2014 ST JUDE M EDICAL INDIA P LTD HYDERABAD. PAGE 4 OF 6 AND OTHER ADJUSTMENTS I.E., TOWARDS FUNCTIONAL, ECONOMIC DIFFERENCES AND WORKING CAPITAL AT 3% OF T HE ALP AS DETERMINED BY THE DRP. ACCORDINGLY, WITH THE SE DIRECTIONS, WE SET ASIDE THE ORDER OF THE ASSESSING OFFICER AND REMIT BACK THE ENTIRE ISSUE TO THE FILE OF ASSE SSING OFFICER TO RE-DETERMINE THE ALP IN ACCORDANCE WITH RULE 10B(1)(B) OF THE IT RULES AND THEREAFTER COMPUTE TH E ADDITIONS IF ANY REQUIRED TO BE MADE U/S 92C(A) WIT H REGARD TO THE DIFFERENCE BETWEEN ALP AND PURCHASE PRICE OF INTERNATIONAL TRANSACTIONS AFTER GIVING AD EQUATE OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. IN ORDER TO PASS THE CONSEQUENTIAL ORDER, THE TP O ISSUED A SHOW-CAUSE NOTICE TO THE ASSESSEE TO EXPLA IN AS TO WHY THE ADJUSTMENT AT RS.5,27,44,552 SHOULD NOT BE MADE . THE ASSESSEE VIDE LETTER DATED 25.04.2013, CONTENDED TH AT THE ALP NEEDS TO BE APPLIED ALSO ON THE UNSOLD STOCK AND PR OVIDED ITS OWN WORKING OF THE ALP. THE TPO HOWEVER, OBSERVED THAT THE ITAT HAS REMITTED THE ENTIRE ISSUE TO THE TPO FOR RE-DETERMI NATION OF THE ALP IN ACCORDANCE WITH RULE 10B (1)(B) OF I.T. RULE S AND THEREFORE, THE PROPOSAL OF THE TPO IS CORRECT. HE THEREFORE, P ROPOSED AN ADJUSTMENT OF RS.5,27,44,552. ACCORDINGLY, THE DRAF T ASSESSMENT ORDER DATED 10.09.2013 WAS PROPOSED BY THE AO. AGAI NST THE SAID ORDER, THE ASSESSEE PREFERRED ITS OBJECTIONS TO THE DRP. THE DRP OBSERVED THAT THE COMPUTATION OF THE TPO APPEARS TO BE NOT IN LINE WITH THE DIRECTIONS OF THE HON'BLE ITAT WHO HA VE DIRECTED TO RE-DETERMINE THE ALP IN ACCORDANCE WITH RULE 10B (1 )(B) OF I.T. RULES AND AS PER CLAUSE (II) OF RULE 10 B (1)(B), T HE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE P URCHASE OF THE PROPERTY ARE TO BE REDUCED WHILE ARRIVING AT THE AL P. THE DRP DIRECTED THE AO TO VERIFY SUCH EXPENSES AND TO MAKE ADJUSTMENT ACCORDINGLY AND TO RE-COMPUTE THE ADJUSTED ALP U/S 92CA OF THE ACT. CONSEQUENTLY, THE TPO HAS PASSED A REVISED TP ORDER DATED 30.06.2014 PROPOSING AN ADJUSTMENT OF RS.2,55,97,66 3 AND IN ITA NO 1425 OF 2014 ST JUDE M EDICAL INDIA P LTD HYDERABAD. PAGE 5 OF 6 ACCORDANCE THEREWITH, A FINAL ASSESSMENT ORDER IS P ASSED AGAINST WHICH THE PRESENT APPEAL IS FILED BY THE ASSESSEE B EFORE US. 5. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE TPO, IN HIS ORIGINAL ORDER DATED 30.10.2009, HA D ADDED THE MARKETING EXPENSES OF RS.2,71,46,889 INCURRED BY TH E TAXPAYER TO THE PURCHASE PRICE OF THE GOODS AND REDUCED THE SAM E FROM RESALE PRICE TO ARRIVE AT THE MARGIN OF THE ASSESSEE AND T HAT THE SAME HAS NOT BEEN DISTURBED BY THE ITAT. HE SUBMITTED TH AT THE ITAT HAS ONLY DIRECTED THAT AFTER CONSIDERING PURCHASE P RICE IN RESPECT OF THE GOODS SOLD, THE ADDITION HAS TO BE MADE TOWA RDS NORMAL AVERAGE GP MARGIN ON SALE AND THEREAFTER, THE DEDUC TION IS TO BE MADE TOWARDS MARKETING EXPENSES AND OTHER ADJUSTMEN TS I.E. TOWARDS FUNCTIONAL, ECONOMIC DIFFERENCES AND WORKIN G CAPITAL AT 3% OF THE ALP AS DETERMINED BY THE DRP. THEREFORE, ACCORDING TO THE LEARNED AR, THE DRP HAS ERRED IN DIRECTING THE AO TO RE-VERIFY THE EXPENSES AND RECOMPUTE THE ALP AND THAT SUCH DI RECTIONS ARE BEYOND THE SCOPE OF THE DRP. HE SUBMITTED THAT THE AO/TPO HAD TO STRICTLY FOLLOW THE DIRECTIONS OF THE ITAT AND T O RE-COMPUTE THE ALP AFTER DEDUCTING THE MARKETING AND OTHER ADMINIS TRATIVE EXPENSES FROM THE RESALE PRICE ARRIVED AT AS PER DI RECTIONS OF ITAT. 6. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 7. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THE ISSUE BEFORE THE ITAT W AS THE AVERAGE MARGIN OF THE COMPARABLES AND IT HAD BEEN CONFIRMED AT 29.51%. THE TRIBUNAL HAS, THEREAFTER, DIRECTED ONLY FOR RE- COMPUTING THE ITA NO 1425 OF 2014 ST JUDE M EDICAL INDIA P LTD HYDERABAD. PAGE 6 OF 6 ALP AFTER ALLOWING THE MARKETING EXPENSES. THEREFOR E, THERE WAS NO DISCRETION LEFT TO THE AUTHORITIES BELOW FOR RE- COMPUTING THE ALP. THE REMAND WAS ONLY FOR THE CALCULATION OF THE ALP AND NOT FOR VERIFICATION OF THE EXPENSES WHICH HAVE ALREADY BEEN ACCEPTED AND QUANTIFIED BY THE TPO IN THE EARLIER PROCEEDING S. THEREFORE, THE AO/TPO ARE DIRECTED TO CALCULATE THE ALP EXACTL Y IN THE WAY DIRECTED BY THE ITAT. 8. IN THE RESULT, ASSESSEES GROUNDS OF APPEAL NO. 2 TO 7 ARE ALLOWED. 9. THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT ADV ANCE ANY ARGUMENTS ON GROUND OF APPEAL NO. 8 AND THEREFO RE, THE SAME IS NOT ADJUDICATED. GROUND OF APPEAL NO.9 BEING CON SEQUENTIAL IN NATURE ON THE LEVY OF INTEREST U/S 234B AND 234D, T HE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF, IF ANY, TO T HE ASSESSEE. 10. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH JANUARY, 2018. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 24 TH JANUARY 2018. VINODAN/SPS COPY TO: 1 M/S. ST. JUDE MEDICAL INDIA (P) LTD, A&B BRIJ TAR ANG, GREENLANDS, BEGUMPET, HYDERABAD 2 DCIT, CIRCLE 3(2), HYDERABAD 3 DRP, HYDERABAD 4 5 DIRECTOR OF INCOME TAX (I.T. & TP) HYDERABAD ADDL. DIRECTOR OF INCOME TAX (IT&TP) HYDERABAD 6 THE DR, ITAT HYDERA BAD 7 GUARD FILE BY ORDER