Kusum Healthcare Pvt.Ltd., New Delhi V. DCIT, New Delhi

ITA 1440/DEL/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4076 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 16-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NAMITA
• Keywords: Transfer pricing; International transaction; Question of law; Notional interest
• Section: 92B

Judgement Text

ITA NO.1440/DEL/2016 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI N.K.SAINI, ACCOUNTANT MEMBER & SHRI K. NARSIMHA CHARY, JUDICIAL MEMBER ITA NO.-1440/DEL/2016 ( ASSESSMENT YEAR: 2011-12) KUSUM HEALTHCARE PVT. LTD., D-158A, OKHLA INDL. AREA, PHASE-I NEW DELHI PAN: AABCK7043B VS DCIT CIRCLE 14(2), NEW DELHI ASSESSEE BY SH VISHAL KALRA, ADV., MS. REEMA MALIKA, CA REVENUE BY MISS NAMITA PANDAY , SR. DR ORDER PER K. NARSIMHA CHARY, J.M. CHALLENGING THE ASSESSMENT ORDER DATED 29.01.2014 P ASSED UNDER SECTION 143(3)/92CA OF THE INCOME TAX ACT, 19 61 (FOR SHORT HEREINAFTER CALLED THE ACT), FOR THE ASSESSMENT Y EAR 2011-12, ASSESSEE PREFERRED THIS APPEAL. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE IS MANUFAC TURING, MARKETING AND EXPORTING PHARMACEUTICAL PRODUCTS TO ITS OVERSEAS ASSOCIATED ENTERPRISE (AE) AS WELL AS NON-GROUP C OMPANIES. DURING THE ASSESSMENT YEAR 2011-12, THE ASSESSEE EX PORTED DATE OF HEARING 22.01.2018 DATE OF PRONOUNCEMENT .01.2018 ITA NO.1440/DEL/2016 2 FINISHED PHARMACEUTICAL PRODUCTS WORTH RS. 96,26,51 ,291/- TO ITS ASSOCIATED ENTERPRISES (AES) AND BENCHMARKED THE SA ID INTERNATIONAL TRANSACTION WITH TRANSACTIONAL NET MA RGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM). F OR THE PURPOSES OF UNDERTAKING ECONOMIC ANALYSIS, THE AE O F THE ASSESSEE I.E. GLAD PHARM LTD., UKRAINE (GLADPHARM ) WAS SELECTED AS THE TESTED PARTY. THE PROFITABILITY OF THE TESTED PARTY WAS COMPARED WITH MARGIN EARNED BY COMPARABLE COMPA NIES ENGAGED IN PERFORMING SIMILAR FUNCTIONS RESPECTIVEL Y AND THE RESULT OF THE BENCHMARKING ANALYSIS UNDERTAKEN BY T HE ASSESSEE IS AS FOLLOWS :- INTERNATONAL TRANSACTIONS PROFIT LEVEL INDICATOR GLADPHARMS MARGIN COMPARABLES MARGIN EXPORTOF MEDICINES OPERATING PROFIT/SALES (OP/SALES) 0.63% 4.15% 3. SINCE THE OPERATING PROFIT MARGIN OF THE TES TED PARTY (NAMELY GLADPHARM) WAS LOWER THAN THE COMPARABLE COMPANIES SELECTED FOR BENCHMARKING ANALYSIS, THE INTERNATIONAL TRANSA CTIONS WERE CONSIDERED TO BE UNDERTAKEN AT ALP. THE TPO ACCEPTE D THIS TRANSACTION OF THE ASSESSEE TO BE AT ARMS LENGTH. HOWEVER, DURING THE COURSE OF PROCEEDINGS THE TPO NOTICED CERTAIN T RADE RECEIVABLES WERE OUTSTANDING FOR MORE THAN 180 DAYS AND PROPOSED TO CHARGE NOTIONAL INTEREST ON THE TRADE R ECEIVABLES FOR THE PERIOD EXCEEDING 180 DAYS. TPO RE-CHARACTERIZED THE RECEIVABLES OUTSTANDING FOR THE PERIOD EXCEEDING 18 0 DAYS AS UNSECURED LOANS ADVANCED BY THE ASSESSEE TO ITS AE AND IMPUTED NOTIONAL INTEREST BASED ON SBI PRIME LENDING RATE + 300 BASIS ITA NO.1440/DEL/2016 3 POINTS (RESULTING IN INTEREST RATE OF 11.69%). THUS , THE TPO MADE A TP ADJUSTMENT OF RS. 3,38,19,514 IN THE TP ORDER DATED DECEMBER 10, 2014. THE TPO THEREBY PROPOSED AN ADJ USTMENT OF RS. 33,845,234 CONSISTING OF ADDITION OF RS. 33,819 ,514/- IN CONFORMITY WITH THE TP ORDER. 4. LD. DRP HAVING CONSIDERED THE OBJECTIONS OF THE ASSESSEE, BUT DECLINED TO INTERFERE WITH THE STAND TAKEN BY T HE TPO AND CONFIRMED THE SAME. HENCE, THE ASSESSEE IS IN APPEA L. 5. THOUGH MANY GROUNDS ARE ENUMERATED BY THE ASSESS EE IN APPEAL, LD. AR SUBMITTED THAT THE ISSUE COULD BE BO ILED DOWN TO THE QUESTION - WHETHER THE TPO IS JUSTIFIED IN TREA TING THE OUTSTANDING RECEIVABLES FROM THE OVERSEAS AES AS UN SECURED LOANS AND TO IMPUTE INTEREST THEREON. HE SUBMITTED THAT THE WORKING CAPITAL ADJUSTMENT UNDERTAKEN BY THEM TOOK INTO ACCOUNT THE TRADE RECEIVABLES OUTSTANDING AS SUCH N O ADDITIONAL IMPUTATION OF INTEREST ON THE OUTSTANDING RECEIVABL ES IS WARRANTED. NEXTLY, HE ALSO SUBMITTED THAT THE ASSE SSEE IS NOT CHARGING ANY INTEREST ON THE OUTSTANDING RECEIVABLE S FROM NON- AES ALSO AS SUCH IT IS AT ARMS LENGTH NOT TO IMPUT E SUCH INTEREST IN RESPECT OF RECEIVABLES FROM AES. HE FURTHER SUB MITTED THAT FOR AN EARLIER YEAR I.E. ASSESSMENT YEAR 2010-11 SUCH A N ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ITA NO. 6814/DEL/2014 AND BY ORDER DATED 31.5.2015, A COORDINATE BENCH OF THIS T RIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. HE FUR THER SUBMITTED THAT THE HONBLE JURISDICTIONAL HIGH COURT BY ORDER DATED 25.4.2017 IN ITA NO. 765/2016 REFUSED TO INTERFERE WITH THE ORDER OF THE ITAT HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW ARISES OUT OF THE ORDER OF THE ITAT FOR DETERMINATION BY HONB LE HIGH COURT. ITA NO.1440/DEL/2016 4 6. LD. DR RELIED UPON THE ASSESSMENT ORDER PURSUANT TO THE DIRECTIONS OF THE LD. DRP. SHE SUBMITTED THAT WHEN COMPARED TO THE VOLUME OF TRANSACTIONS WITH THE AES AT 88%, VOL UME TRANSACTIONS OF THE ASSESSEE WITH THE NON-AES IS MI NISCULE AT 12% ONLY, AS SUCH THE ARGUMENT THAT THE ASSESSEE DI D NOT CHARGE ANY INTEREST ON THE OUTSTANDING RECEIVABLE FROM THE NON-AES. INSOFAR AS THE CONTENTION OF THE ASSESSEE THAT IN T HE WORKING CAPITAL ADJUSTMENT, THE OUTSTANDING RECEIVABLES HAV E ALSO BEEN CONSIDERED, SHE SUBMITTED THAT THE ORDER OF THE LD. TPO DOES NOT REFLECT THE SAME AS SUCH THE AUTHORITIES BELOW ARE JUSTIFIED IN IMPUTING INTEREST ON THE TRADE RECEIVABLES OUTSTAND ING FOR MORE THAN 180 DAYS. 7. PERUSED THE MATERIAL AVAILABLE ON THE RECORD. WE FIND THAT THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 201 0-11 A CO- ORDINATE BENCH OF THIS TRIBUNAL REACHED A CONCLUSIO N THAT IF THE WORKING CAPITAL ADJUSTMENT TAKES INTO ACCOUNT THE O UTSTANDING RECEIVABLES, ADDITIONAL IMPUTATION OF INTEREST ON T HE OUTSTANDING RECEIVABLES IS NOT WARRANTED. THIS DECISION OF THE TRIBUNAL IS UPHELD BY THE HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE FOR THIS SAME ASSESSMENT YEAR BY HOLDING THAT NO ERROR WAS FOUND IN THE ORDER OF ITAT GIVING RISE TO ANY SUBST ANTIAL QUESTION OF LAW FOR A DETERMINATION. 8. RELEVANT FINDINGS HAVE BEEN GIVEN BY THE HONBLE HIGH COURT IN THE AFORESAID ORDER DATED 25/04/2017 IN PARA NO. 10 AND 11 READ AS UNDER:- 10.THE COURT IS UNABLE TO AGREE WITH THE ABOVE SUB MISSIONS. THE CONCLUSION IN THE EXPLANATION TO SECTION 92B OF THE ACT OF THE EXPIRATION RECEIVABLES DOES NOT MEAN THAT DE HORS T HE CONTEXT EVERY ITEM OF RECEIVABLES APPEARING IN THE ACCOUNTS OF AN ENTITY, ITA NO.1440/DEL/2016 5 WHICH MAY HAVE DEALINGS WITH THE FOREIGN AES WOULD BE CHARACTERISED AS AN INTERNATIONAL TRANSACTION. THER E MAY BE A DELAY IN COLLECTION OF MONIES FOR SUPPLIES MADE, EV EN BEYOND THE AGREED LIMIT, DUE TO A VARIETY OF FACTS WHICH WILL HAVE TO BE INVESTIGATED ON A CASE TO CASE BASIS. IMPORTANTLY, THE IMPACT THIS WOULD HAVE ON THE WORKING CAPITAL OF THE ASSESSEE W ILL HAVE TO BE STUDIED. IN OTHER WORDS, THERE HAS TO BE A PROPER E NQUIRY BY THE TPO BY ANALYSING THE STATISTICS OVER A PERIOD OF TI ME TO DISCERN A PATTERN WHICH WOULD INDICATE THAT VIS-A-VIS THE REC EIVABLES FOR THE SUPPLIES MADE TO AN 80AE, THE ARRANGEMENT REFLECTS AN INTERNATIONAL TRANSACTION INTENDED TO BENEFIT THE A E IN SOME WAY. 11.THE COURT FINDS THAT THE ENTIRE FOCUS OF THE AO WAS ON JUST ONE AY AND THE FIGURES OF RECEIVABLES IN RELATION TO AY CAN HARDLY REFLECT A PATTERN THAT WOULD JUSTIFY A TPO CONCLUDI NG THAT THE FIGURES OF RECEIVABLES BEYOND 180 DAYS CONSTITUTES AN INTERNATIONAL TRANSACTION BY ITSELF. WITH THE ASSES SEE HAVING ALREADY FACTORED IN THE IMPACT OF THE RECEIVABLES I N THE WORKING CAPITAL AND THEREBY ON ITS PRICING/PROFITABILITY VI S-A-VIS THAT OF ITS COMPARABLES, ANY FURTHER ADJUSTMENT ONLY ON THE BAS IS OF THE OUTSTANDING RECEIVABLES WOULD HAVE DISTORTED THE PI CTURE AND RE- CHARACTERISED THE TRANSACTION. THIS WAS CLEARLY IMP ERMISSIBLE IN LAW AS EXPLAINED BY THIS COURT IN CIT V. EKL APPLIA NCES LTD. (2012) 345 ITR 241 (DELHI). WE, THEREFORE, HOLD THAT IN CASE THE WORKING CAPITA L ADJUSTMENT PROPERLY TAKES INTO ACCOUNT THE OUTSTANDING RECEIVA BLES, NO ADDITIONAL IMPUTATION OF INTEREST ON THE SAME IS WA RRANTED. 9. LD. AR SUBMITTED THAT THE WORKING CAPITAL ADJUST MENT IS WORKED OUT BY PROPERLY TAKING INTO ACCOUNT THE OUTS TANDING RECEIVABLES. HOWEVER FROM THE ORDER OF THE TPO, WE DO NOT FIND ANY MENTION OF THE LD. TPO CONSIDERING THE SAME. WE ARE, THEREFORE, OF THE OPINION THAT THIS FACT NEEDS VERI FICATION AT THE END OF THE TPO. WITH THIS VIEW OF THE MATTER, WE SE T ASIDE THE ISSUE TO THE FILE OF TPO FOR VERIFICATION OF THE FA CT, WHETHER WHILE MAKING THE WORKING CAPITAL ADJUSTMENT THE OUTSTANDI NG RECEIVABLES ARE TAKEN INTO ACCOUNT OR NOT. ISSUE IS ANSWERED ACCORDINGLY. ITA NO.1440/DEL/2016 6 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD JANUARY, 2018. SD/- SD/- (N.K.SAINI) (K. NARSIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23.01.2018 *BINITA* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT TRUE COPY ASSISTANT REGISTRAR ITAT, NEW DELHI DRAFT DICTATED ON 22.01.2018 DRAFT PLACED BEFORE AUTHOR 23.01.2018 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. APPROVED DRAFT COMES TO THE SR.PS/PS .01.2018 KEPT FOR PRONOUNCEMENT ON .01.2018 FILE SENT TO THE BENCH CLERK DATE ON WHICH FILE GOES TO THE AR DATE ON WHICH FILE GOES TO THE HEAD CLERK. DATE OF DISPATCH OF ORDER.