DCIT, Circle-17(2), Hyderabad, Hyderabad V. United States Pharmacopeia India Private Limited, Hyderabad, Hyderabad

ITA 1582/Hyd/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6079 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 14-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M H NAIK
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Transfer pricing; Business expenditure; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1582/HYD/2017 AND C.O. NO. 37/HYD/2017 A.Y.: 2012-13 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 M.H. NAIK ASSESSEE BY : SHRI R. VIJAYARAGHAVAN DATE OF HEARING 01-06-2017 DATE OF PRONOUNCEMENT 08-06-2017 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 27/07/2016 FOR AY 2012-13 AND THE ASSESSEE ALSO FIL ED C.O. AGAINST THE SAID ORDER OF CIT(A). 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 30/11/2 012 DECLARING AN INCOME OF RS. 2,87,95,190/-. THE AO MADE AN ADJUST MENT OF RS. 7,00,457/- U/S 92CA(3). HE ALSO DISALLOWED LEASE PR EMIUM PAID OF RS. 1,77,15,937/- TREATING THE SAME AS REVENUE EXPENDIT URE. THE TOTAL INCOME WAS ASSESSED AT RS. 4,72,11,584/-. 2 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A). 4. AS REGARDS ADJUSTMENT OF RS. 7,00,457/- U/S 92CA (3), THE CIT(A) UPHELD THE ACTION OF THE AO. AS REGARDS THE DISALLOWANCE OF AN AMOUNT OF RS. 1,77,15,937/- ON ACCOUNT OF LEASE PRE MIUM, 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. 1,77,15,937/- IS AL LOWABLE 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 ON RECORD. WE FIND THAT SIMILAR ISSUE CAME UP FOR CONS IDERATION BEFORE THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2011-12, WHEREIN THE COORDINATE BENCH HAS DISMISSED THE GROUNDS RAISED BY THE REVENUE BY OBSERVING AS UNDER: 3 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. 6. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. THE FACTS RELATING TO THI S GROUND ARE THAT DURING THE YEAR THE ASSESSEE COMPANY HAD ENTER ED INTO A LEASE AGREEMENT WITH IKP KNOWLEDGE PARK IKP. AS PER THE TERMS OF THE LEASE DEED, IKP HAD LEASED OUT VACANT LAND FOR A PERIOD OF 33 YEARS, FOR WHICH ONE TIME CONSIDERATIO N, WHICH WAS REFERRED TO AS LEASE PREMIUM, OF RS. 68,87,500/- WA S PAID BY THE COMPANY. FURTHER, AN ANNUAL LEASE RENTAL VARYIN G FROM RS. 10,985/- TO RS. 2,55,125/- HAD BEEN AGREED BETWEEN BOTH THE PARTIES. WHEN THE AO ASKED THE ASSESSEE AS TO WHY T HE SAID LEASE PREMIUM CANNOT BE TREATED AS CAPITAL EXPENDIT URE, THE AR OF THE ASSESSEE SUBMITTED THAT THE LEASE PREMIUM WA S PAID FOR ACQUIRING THE LAND ON LEASE AND THE LEASE OF LAND I S SOLELY FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY. FURTHER , HE SUBMITTED THAT THE LEASE PREMIUM WAS PAID AS AN ADV ANCE RENT WHICH IS NON-REFUNDABLE IN NATURE AND, THEREFORE, T HE LEASE PREMIUM IS ALLOWABLE AS BUSINESS EXPENDITURE IN THE YEAR OF PAYMENT. REJECTING THE SUBMISSIONS OF THE ASSESSEE, THE AO HELD THAT THE AMOUNT PAID BEING IN THE NATURE OF ON ETIME PAYMENT FOR ACQUIRING LEASE RIGHTS FOR 33 YEARS, I. E. RIGHTS OVER ASSET OF ENDURING NATURE, THE PAYMENT WAS CAPITAL I N NATURE. FOLLOWING HIS DECISION IN AY 2010-11, THE AO DISALL OWED THE SAID AMOUNT TREATING THE SAME AS CAPITAL IN NATURE. ON APPEAL, 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 PA ID IS HELD TO BE CAPITAL EXPENDITURE. IN THE ABOVE CASE, THE ASS ESSEE HAS RECEIVED PREMIUM TO THE EXTENT OF RS. 2,75,000/-. T HE SAME WAS PAYABLE AT THE TIME OF EXECUTION OF THE DEED RS. 45 ,000/- AND BALANCE OF RS. 1,80,000/- WAS PAYABLE IN 16 HALF YE ARLY INSTALMENTS. THE QUESTION WAS WHETHER SUCH INSTALM ENTS TOWARDS PREMIUM WAS A REVENUE OR CAPITAL RECEIPTS. IT WAS HELD, ON THOSE FACTS, THAT IT WAS CAPITAL RECEIPTS. THE H ONBLE COURT OBSERVED THAT THE REAL TEST OF A SALAMI OR PREMIUM IS WHETHER THE AMOUNT PAID, IN LUMPSUM OR IN INSTALMENTS, IS T HE CONSIDERATION PAID BY THE TENANT FOR BEING LET INTO POSSESSION. WHEN THE INTEREST OF THE LESSOR IS PARTED WITH FOR PRICE, THE PRICE PAID IS PREMIUM. FROM THE ABOVE, IT IS CLEAR THAT T HE RECEIPT OF PREMIUM WHETHER IN LUMPSUM OR INSTALMENTS IS IMMATE RIAL, IT IS THE INTENTION OF THE PARTY AND THE PRICE PAID FOR P ARTING OF THE POSSESSION. IN THE GIVEN CASE, THE ASSESSEE HAS PAI D THE ONE TIME PREMIUM. HENCE, THIS CASE IS MATERIALLY DISTIN GUISHABLE FROM THE PRESENT CASE, HENCE, CANNOT BE APPLIED. 6.2 FURTHER, REVENUE HAS RAISED IN GROUND NO. 3 THA T LD. CIT(A) HAS IGNORED ANOTHER DECISION OF APEX COURT I N THE CASE OF DURGA DAS KHANNA (SUPRA) IN WHICH LEASE PREMIUM RECEIVED IS A CAPITAL RECEIPT IN THE HANDS OF RECIPIENT AND CORRESPONDING 4 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. PAYMENT IS A CAPITAL EXPENDITURE IN THE HANDS OF TH E PAYER. ON CAREFUL READING OF THE ABOVE DECISION, THE LESSEES AGREED TO PAY UNDER LEASE RS. 55,200/- TO THE LESSOR TOWARDS THE COST OF ERECTING THE CINEMA HOUSE. THE LEASE DID NOT CONTAI N ANY CONDITION OR STIPULATION FROM WHICH IT COULD BE INF ERRED THAT THE SUM HAD BEEN PAID BY WAY OF ADVANCE RENT, NOR WAS T HERE PROVISION FOR ITS ADJUSTMENTS TOWARDS RENT OR ANY R EPAYMENT. 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 NATUR E OF A PREMIUM. IN THE GIVEN CASE, THE ASSESSEE HAS PAID THE PREMIUM BUT AS PER THE ABOVE RATIO, THE PAYMENT OF PREMIUM WAS TREATED AS CAPITAL RECEIPT IN THE HANDS OF LESS OR I.E. RECIPIENT. THE CONTENTION OF REVENUE THAT THE PREM IUM RECEIVED WAS TREATED AS CAPITAL, THE PAYMENT SHOULD ALSO BE TREATED AS CAPITAL IS NOT PROPER. IT DEPENDS UPON THE FACTS OF EACH CASE. IN THE GIVEN CASE, THE HONBLE GUJARAT HIGH COURT HAS CONSIDERED THE FACTS WHICH ARE SIMILAR TO THE FACTS OF THE ASS ESSEE AND ADJUDICATED IT AS REVENUE IN NATURE. WE RELIED ON T HE ABOVE RATIO AND ADJUDICATED IN THE ASSESSEES OWN CASE IN AY 2010- 11, WHICH IS EXTRACTED AS UNDER: 10. WITH REGARD TO GROUND NO. 3, CIT(A) HAD NOT FOLLOWED THE DECISION OF THE JURISDICTIONAL HIGH CO URT IN THE CASE OF MRS. G. SEETHA KAMRAJ VS. CIT, WE FIND FROM THE RECORD THAT IN THE PRESENT CASE, THE ASSESSEE H AD ENTERED INTO AN AGREEMENT WITH ICICI KNOWLEDGE PARK FOR LEASE OF VACANT LAND FOR 33 YEARS FOR AN ANNUAL LEA SE 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, TH E ASSESSEE HAD PAID THE ABOVE SUM AS LEASE PREMIUM AN D CLAIMING THE SAME AS REVENUE EXPENDITURE . WHEREAS IN THE CASE REFERRED BY THE REVENUE IN THE GROUND IS D ISTINCT FROM THE PRESENT CASE AS THE ASSESSEE (MRS. G. SEET HA KAMRAJ) TOOK ON LEASE FOR 99 YEARS A BUILDING FROM HER HUSBAND AND AS PER TERMS OF THE LEASE, ASSESSEE PAI D RS. 5000 AS PREMIUM FOR OBTAINING THE LEASE AND WAS TO PAY MONTHLY RENT OF RS. 300/-. THE LEASE HAD ALSO A RI GHT TO CREATE SUB-LEASE AND SHE CREATED A SUB-LEASE IN FAV OUR OF 3 RD PARTY. THE ASSESSEE RECEIVED A LUMPSUM OF RS. 4,30,000/- AS CONSIDERATION. IT WAS STATED TO ADJUS TABLE AGAINST MONTHLY RENT OF RS. 367.83. LD. AO ASSESSED THE SAME AS CAPITAL GAIN. THE SAME WAS UPHELD 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 GRANTING SUB-LEASE OF THE ASSESSE ES RIGHTS AND NOT A PAYMENT OF MONTHLY RENT IN ADVANCE AND AS SUCH WAS LIABLE TO TAX AS SHORT TERM CAPITAL GAI NS. IN THE PRESENT CASE, ASSESSEE HAD MADE THE PAYMENT AS 5 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. PREMIUM AND NOT RECEIVED TO CONSIDER THE G. SEETHA KAMRAJS CASE AS THEY ARE NOT SIMILAR. HENCE, WE CA NNOT CONSIDER G. SEETHA KAMRAJS CASE IN THE PRESENT CAS E AS THE SAME IS NOT SIMILAR. HOWEVER, THE AR HAD RELIED ON THE VARIOUS DECISIONS WHICH ARE PRESENTED BEFORE TH E CIT(A). THESE CASES ARE SIMILAR TO THE PRESENT CASE IN PARTICULAR, THE CASE OF DCIT VS. SUN PHARMACEUTICAL S INDIA LTD. (329 ITR 479 (GUJ.) ARE SIMILAR TO THE ASSESSEES CASE. IT WAS HELD BY THE HONBLE GUJARAT HIGH COURT, DISMISSING THE REVENUE APPEAL, THAT THE TRIB UNAL HAD FOUND THAT THE LAND IN QUESTION WAS NOT ACQUIR ED BY THE ASSESSEE. MERELY, BECAUSE THE DEED WAS REGISTER ED, THE TRANSACTION IN QUESTION WOULD NOT ASSUME A DIFF ERENT CHARACTER. THE LEASE RENT WAS VERY NOMINAL. BY OBTA INING THE LAND ON LEASE, THE CAPITAL STRUCTURE OF THE AS SESSEE DID NOT UNDERGO ANY CHANGE. THE ASSESSEE ONLY ACQUI RED A FACILITY TO CARRY ON BUSINESS PROFITABLY BY PAYIN G NOMINAL LEASE RENT. THE LEASE RENT PAID BY THE ASSESSEE TO GIDC WAS ALLOWABLE AS REVENUE EXPENDITURE. IN THE PRESE NT CASE, THE ASSESSEE ACQUIRED THE LAND ON LEASE FOR 3 3 YEARS, THE CAPITAL STRUCTURE DID NOT UNDERGO ANY CH ANGE. THE ASSESSEE HAS MERELY ACQUIRED THE FACILITY TO CA RRY ON BUSINESS PROFITABLY BY PAYING NOMINAL LEASE RENT. T HE 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 ACCORDIN GLY THE GROUNDS 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 T HIS REGARD, FOLLOWING THE DECISION OF COORDINATE BENCH IN AY 20 10-11, WE UPHOLD THE ORDER OF THE CIT(A) IN DELETING THE DISA LLOWANCE MADE BY THE AO TOWARDS LEASE PREMIUM PAID BY THE AS SESSEE FOLLOWING THE ORDER OF ITAT IN AY 2010-11 AND DISMI SS THE GROUNDS RAISED BY THE REVENUE. AS THE ISSUE UNDER CONSIDERATION IS MATERIALLY IDEN TICAL TO THAT OF AY 2011-12, FOLLOWING THE DECISION THEREIN, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUNDS RAISED BY THE REVENUE IN TH IS REGARD. 7. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. C.O. NO. 05/HYD/2017 8. 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 ') 6 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. 1. THAT ON THE FACTS AND CIRCUMSTANCE OF THE CASE A ND IN LAW, THE LEARNED COMMISSIONER OF INCOMETAX (APPEALS ) _ 5 ('CIT(A)'] ERRED, BOTH IN FACTS AND IN LAW, IN CONF IRMING THE TRANSFER PRICING ADJUSTMENT OF RS. 700,457 WITH RES PECT TO REIMBURSEMENTS RECEIVED FROM ITS 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 ADJUSTMEN T. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ERRONEOU S CONCLUSION DRAWN BY THE LEARNED AO / TPO THAT THE REIMBURSEMEN TS HAVE NOT BEEN ROUTED THROUGH THE BOOKS OF ACCOUNTS. 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. 9. 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 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. 9.1 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 7 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. 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. 70,04,568 ARMS LENGTH PRICE OF REIMBURSEMENT @10% RS. 77 ,05,025 ADJUSTMENT ON REIMBURSEMENT RS. 7,00,457 THE TPO, THUS, CONCLUDED THAT THE ARMS LENGTH PRIC E OF REIMBURSEMENTS RECEIVED WAS RS. 77,05,025/- AND THE SHORTFALL OF RS. 7,00,457- WAS TREATED AS ADJUSTMENT U/S 92CA OF THE ACT AND THE TOTAL INCOME OF THE ASSESSEE ENHANCED ACCORDINGLY U/S 92C A(3) OF THE ACT. 10. AGGRIEVED BY THE ORDER OF TPO/AO, THE ASSESSEE CARRIED 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 8 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. 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. 11. 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 7,00,457 AS THE ARM'S LENGTH PRICE OF REIMBURSEMENTS RECEIVED IS RS. 77,05,025/- AS DETER MINED BY THE TPO. THUS I HOLD THAT OF ADDITION OF RS.7,00,45 7/- IS JUSTIFIED. 12. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEF ORE THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR 2 011-12 VIDE C.O. NO. 05/HYD/2017 AND THE COORDINATE BENCH VIDE ITS O RDER DATED 27/10/2017 HELD AS FOLLOWS: 11. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL FACTS ON RECORD. DR. SRINI SRINIVASN, EMP LOYEE OF USP LLC WAS TRANSFERRED TO THE ROLLS OF USP INDIA IN JU NE 2010 AS A WHOLE TIME DIRECTOR. DR. SRINI HAD OVERSIGHT RESPON SIBILITY FOR SCIENTIFIC BUSINESS AND INFRASTRUCTURE OPERATIONS O F CERTAIN USP AFFILIATES (USP CHINA AND USP BRAZIL) WHILE HE WAS EMPLOYED IN USP INDIA, HIS RESPONSIBILITIES INCLUDE OVERSEEING THE CONSTRUCTION PROCESS, INVOLVEMENT IN STAFF RECRUITM ENT, CAPITAL PROCUREMENT, OVERSIGHT OF BUDGETING, ESTABLISHING A ND MAINTAINING RELATIONS WITH KEY STAKEHOLDERS ETC. US P INDIA RECHARGED THE APPORTIONED SALARY AND OTHER DIRECT E XPENSES OF 9 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. DR. SRINI INCURRED BY USP INDIA TO RESPECTIVE USP A FFILIATES 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 THROUG H BOOKS OF ACCOUNT. SINCE THE LD. CIT(A) HAS FOUND THAT THE TR ANSACTION WAS NOT ROUTED THROUGH THE BOOKS, WE ARE INCLINED TO RE MIT THIS CASE BACK TO THE FILE OF AO WITH A DIRECTION TO VERIFY T HE TRANSACTION. IN CASE, THE TRANSACTIONS ARE NOT ROUTED THROUGH TH E BOOKS, THE ACTION OF TPO MAY BE SUSTAINED. OTHERWISE, IT IS N ORMAL PRACTICE IN THE MULTINATIONAL COMPANIES TO UTILIZE THE EXPERTISE OF THE VARIOUS EXECUTIVES IN THE GROUP COMPANIES. I N 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 CH ARGED TO THE OTHER SISTER CONCERNS. THE CONCEPT OF UTILIZING THE EXPERTISE WITH OTHER INDEPENDENT COMPANIES ARE NOT HEARD OF IN THE MARKET NOR ENCOURAGED IN THE NORMAL BUSINESS. SINCE THERE ARE NO COMPARABLE CASES IN THE MARKET, AND ALSO IT IS THE BUSINESS DECISION OF THE ASSESSEE TO SHARE THE EMPLOYEE COST WITH OTHER SISTER CONCERNS ON COST TO COST BASIS. ACCORDINGLY , THE ADDITION OF MARKUP SHOULD BE DELETED. FOR THE LIMITED PURPOS E OF VERIFICATION OF TRANSACTION WHETHER THE TRANSACTION S ARE ROUTED THROUGH BOOKS, IT IS REMITTED TO THE AO. ACCORDINGL Y, GROUND RAISED IN C.O. IS ALLOWED FOR STATISTICAL PURPOSES. AS THE CROSS OBJECTIONS RAISED BY THE ASSESSEE IN T HIS AY ARE MATERIALLY IDENTICAL TO THAT OF AY 2011-12, FOLLOWI NG THE DECISION THEREIN, WE REMIT THE ISSUE TO THE FILE OF THE AO W ITH A DIRECTION TO DECIDE THE ISSUE IN LINE WITH THE DIRECTION OF ITAT IN AY 2011-12. ACCORDINGLY, CO IS ALLOWED FOR STATISTICAL PURPOSES . 13. 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 8 TH JUNE, 2018 SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAH MAN) JUDICIAL MEM BER ACCOUNTANT MEMBER HYDERABAD, DATED: 8 TH JUNE, 2018 10 ITA NO. 1582/HYD/17 & CO NO. 37/HYD/2017 UNITED STATES PHARMACOPEIA INDIA PVT LTD. 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.