VARIAN INDIA P.LTD, MUMBAI V. ADDL DIT (IT) RG 2, MUMBAI

ITA 160/MUM/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8136 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 22-09-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 04-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA P YAD EV
• Assessee Lawyers: ARPIT AGRAWAL
• Keywords: Depreciation; Transfer pricing; Double taxation relief; International transaction; Permanent establishment
• Section: 234B

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI N.K. BILLAIYA, AM AND SHRI AMIT SHUKLA, JM . . , , ! ' #./ I.T.A. NO.160 /MUM/2013 ( / ASSESSMENT YEAR : 2008-09 VARIAN INDIA PRIVATE LIMITED INDIA BRANCH, G 01, PRIME CORPORATE PARK, 230-231 OPPOSITE BLUE DART CENTRE, SAHAR ROAD, ANDHERI (EAST), MUMBAI 400 099. / VS. ADDL. DIRECT OR OF INCOME TAX (INTERNATIONAL TAXATION),RANGE 2, MUMBAI. % # ./ PAN : AAACV3294Q ( ' %& / APPELLANT ) .. ( '(%& / RESPONDENT ) A PPELLANT BY SHRI KANCHUN KAUSHAL , SHRI DHANESH BAFNA & SHRI ARPIT AGRAWAL DEPARTMENT BY SHRI AKHILENDRA P. YADEV )* + !, / DATE OF HEARING : 22-09-2014 -./0 + !, / DATE OF PRONOUNCEMENT : 26-09-2014 [ / O R D E R PER N.K. BILLAIYA, A.M . : . . , THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ORDER OF TPO DATED 31-03-2011 IN PURSUANCE TO THE DIRECTIONS OF THE DI SPUTE RESOLUTION PANEL I (DRP), MUMBAI DATED 21-09-2012. ITA 160/M/13 2 2. THE ASSESSEE HAS RAISED FOUR SUBSTANTIVE GROUNDS OF APPEAL. GROUND NO. 1 RELATES TO THE ADDITION OF RS. 44,22,168/- ON ACCOUNT OF INCLUSION OF REIMBURSEMENT OF EXPENSES FOR THE PURPOSE OF COMPUT ING COMMISSION INCOME. 3. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSE SSEE STATED THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEE S CASE FOR A.Y. 2007-08 IN ITA NO. 8950/MUM/2010 DTD. 28-02-2014. THE LD. D. R. FAIRLY CONCEDED TO THIS. 4. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTH ORITIES BELOW AND THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 8950/MUM/2010. THE TRIBUNAL HAS CONSIDERED THIS ISSUE AT PARA 11 O N PAGE 7 OF ITS ORDER WHICH READ AS UNDER:- 11. IF THE AFORESAID SCHEDULE A CATEGORICALLY PR OVIDES THAT COMMISSION IS NOT TO BE COMPUTED ON THE SALE ORDERS WHICH REQUIRES THE PROCUREMENT OF LOCAL CONTENT BY THE ASSESSEE, T HEN ON SUCH PROCUREMENT OF EQUIPMENTS BY THE ASSESSEE, COMMISSI ON CANNOT BE IMPUTED, BECAUSE IT IS THE REIMBURSEMENT OF THE COS T OF LOCAL EQUIPMENTS PROCURED. FURTHER, IT APPEARS THAT THIS RELEVANT PIECE OF DOCUMENT WHICH IS ALSO A PART OF DISTRIBUTION AND REPRESENTATION AGREEMENT, HAS NOT BEEN EXAMINED BY THE ASSESSING OFFICER. THEREFORE, FOR THE PURPOSE OF VERIFICATION AND EXAMINING OF TH E CONTENT OF THIS SCHEDULE, WE RESTORE THE MATTER BACK TO THE FILE OF AO, TO ADJUDICATE THIS ISSUE AFRESH IN LIGHT OF THE AFORESAID DOCUMEN T, BECAUSE IT CHANGES THE ENTIRE COLOUR OF THE CONCLUSION DRAWN BY THE AO . THE AO WILL ALSO EXAMINE THE FACT, WHETHER THE COMMISSION IS ON SALE OF VARIATION PRODUCTS ONLY OR NOT. THE QUANTUM OF COMMISSION IS A QUESTION OF FACT AND CANNOT BE IMPUTED OR PRESUMED. IN CASE OF REIMB URSEMENT OF EXPENSES FROM VARIAN GERMANY ALSO, THE MATTER IS SE T-ASIDE FOR EXAMINING, WHETHER THE COMMISSION IS ON GROSS SALES OR ON THE NET OF SALES OF THE EQUIPMENTS DIRECTLY PROCURED BY THE AS SOCIATE ENTERPRISES. IF THE ARRANGEMENT WITH THIS AE IS ALSO THE SAME, T HEN THE SAME CONCLUSION SHOULD BE DRAWN IN THIS CASE ALSO. IN TH E RESULT, GROUND NO.1 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 5. FACTS AND ISSUES BEING IDENTICAL, RESPECTFULLY F OLLOWING THE FINDINGS OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL, WE RESTORE THE MATTER BACK TO THE FILE OF THE A.O. TO ADJUDICATE THIS ISSUE AFRESH IN THE LIGHT OF THE DIRECTION GIVEN BY ITA 160/M/13 3 THE TRIBUNAL IN A.Y. 2007-08. GROUND NO. 1 IS TREAT ED AS ALLOWED FOR STATISTICAL PURPOSE. 6. GROUND NO. 2 RELATES TO THE ADDITION OF RS. 24,4 6,542/- ON ACCOUNT OF ATTRIBUTION OF PROFITS TO PERMANENT ESTABLISHMENT. 7. ONCEAGAIN THE LD. COUNSEL FOR THE ASSESSEE STATE D THAT THE ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y. 2007-08 VIDE ITA NO. 8950/MUM/2010. THE LD. D.R. FAIRLY CONCEDED TO THIS. 8. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTH ORITIES BELOW AND THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 8950/MUM/2010. WE FIND THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL VIDE PARA 13 ON PAGE NO. 8 OF ITS ORDER WHICH READ AS UNDER:- 13. ON PERUSAL OF THE ASSESSMENT ORDER, IT IS SEEN THAT THE ASSESSING OFFICER WHILE ADJUDICATING THE ISSUE WHETHER, THE V ARIAN GROUP OF COMPANIES HAVE PE IN INDIA IN THE FORM OF THE BRANC H OF THE ASSESSEE COMPANY, HAS FOLLOWED THE REASONING GIVEN IN THE AS SESSMENT ORDER FOR THE A.Y.2002-03. THE DETAIL REASONING OF THE ASSESS ING OFFICER WHICH IN TURN IS BASED ON THE FINDING GIVEN IN ASSESSMENT YE AR 2002-03 HAS BEEN DEALT BY THE ASSESSING OFFICER FROM PARAS 6.1 TO PARA 13. THIS ISSUE, WHETHER THE ASSESSEE IS A PE OF VARIOUS VARI AN GROUP OF COMPANIES OR NOT, HAS BEEN DISCUSSED IN DETAIL BY T HE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.4672 TO 4676/MUM/2011 FOR THE ASSESSMENT YEARS 2002-03 TO 2006-07 VIDE ORDER DATE D 27/02/2013. AFTER DETAIL ANALYSIS, THE TRIBUNAL HAS FINALLY HEL D THAT, THE INDIAN BRANCH OF THE VIPL IS NOT DEPENDENT AGENT OF VGCS A ND THEREFORE, IT DOES NOT CONSTITUTE PE FOR VARIOUS VARIAN COMPANIES IN INDIA, AS PER ARTICLE 5(4) 5(5), RESPECTIVE DTAAS. THE RELEVANT F INDING OF THE TRIBUNAL HAS GIVEN FROM PARA 25 TO PARA 43 OF THE ORDER. THU S, IN VIEW OF THE FINDINGS GIVEN THEREIN AND AS A MATTER OF JUDICIAL PRECEDENCE, WE HOLD THAT THE ASSESSEE BRANCH, DOES NOT CONSTITUTE PE OF VARIAN-ITALY AND, THEREFORE, THE ADDITION OF RS.10,80,117/-, BEING 10 % OF GROSS MADE BY VARIAN ITALY TO ITS CUSTOMER IN INDIA, CANNOT BE TA XED IN THE HANDS OF THE ASSESSEE. THUS GROUND NO.2 AS RAISED BY THE ASS ESSEE IS TREATED AS ALLOWED. ITA 160/M/13 4 9. AS NO DISTINGUISHING FACTS HAVE BEEN BROUGHT ON RECORD BEFORE US, RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-ORDIN ATE BENCH, WE HOLD THAT THE ASSESSEE BRANCH DOES NOT CONSTITUTE PE OF VARIAN-IT ALY AND THEREFORE THE ADDITION OF RS. 24,46,542/- CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE. GROUND NO. 2 IS ACCORDINGLY ALLOWED. 10. GROUND NO. 3 RELATES TO THE TRANSFER PRICING A DJUSTMENT OF RS. 87,34,979/-. 11. FOLLOWING HEADS OF EXPENDITURE WERE CONSIDERED FOR ALLOCATION:- SR. NO. PARTICULARS AMT (IN RS.) 1 RENT 94,79,508 2 DEPRECIATION 33,52,935 3 STAFF WELFARE 19,91,869 4 TRAVELLING AND CONVEYANCE EXPENSES 3,45,14,589 5 COMMUNICATION EXPENSES 35,77,100 6 ELECTRICITY 7,54,401 7 OFFICE MAINTENANCE 5,20,524 8 INSURANCE CHARGES 19,61,101 9 OTHER MISC. EXPENSES 10,08,491 12. THE TPO OBSERVED THAT FOR THE ALLOCATION OF EX PENSES, THE ASSESSEE HAS ADOPTED THE RATIO OF EMPLOYEE FOR THE EXPENSES MENT IONED HEREINABOVE. IT WAS THE CLAIM OF THE ASSESSEE THAT SINCE THESE EXPENSES ARE DIRECTLY ATTRIBUTABLE COSTS WHICH CAN BE CLEARLY ASCRIBED TO AND ARE CAU SED BY A PARTICULAR ACTIVITY I.E. EMPLOYEES ACTIVITIES, THEREFORE, IT IS AN APPR OPRIATE MECHANISM TO USE EMPLOYEE HEADCOUNT RATIO TO ALLOCATE SUCH EXPENSES. THE TPO WAS OF THE FIRM BELIEF THAT GROSS PROFIT RATIO WILL BE APPROPRIATE TO ALLOCATE VARIOUS EXPENSES. IT WAS EXPLAINED BY THE ASSESSEE THAT GROSS PROFIT RATIO HAS BEEN APPLIED TO ALLOCATE COST WHICH ARE NOT ATTRIBUTABLE IN NATURE AND WHICH REQUIRES AN APPROACH THAT SOMEHOW SPREAD THE COSTS ACROSS THE V ARIOUS BUSINESS ACTIVITIES. THEREFORE, GROSS PROFIT RATIO CANNOT BE APPLIED TO THOSE COSTS WHICH ARE DIRECTLY ATTRIBUTABLE TO THE ACTIVITIES AND THE REFORE MANPOWER RATIO HAS BEEN IDENTIFIED AS A MORE APPROPRIATE ALLOCATION KE Y TO ALLOCATE THE COSTS. THE ITA 160/M/13 5 EXPLANATIONS/SUBMISSIONS MADE BY THE ASSESSEE DID N OT FIND FAVOUR WITH THE TPO. THE TPO WAS OF THE OPINION THAT THE EXPENSES HAVE NO DIRECT RELATION TO THE NUMBER OF EMPLOYEES EMPLOYED. THE TPO FURTHER O BSERVED THAT IT IS A PREREQUISITE UNDER THE AGREEMENT THAT THE INDIAN BR ANCH MAINTAINED A SALES AND SERVICE ORGANIZATION FOR RENDERING THE MARKETIN G SERVICES TO BE PROVIDED UNDER THE AGREEMENT. HENCE, IT IS APPROPRIATE THAT THESE EXPENSES ARE APPORTIONED IN PROPORTION TO THE GROSS PROFIT TURNO VER. THE TPO PROCEED BY MAKING AN ADJUSTMENT OF RS. 87,34,979/-. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. 13. THE LD. COUNSEL FOR THE ASSESSEE REITERATED WH AT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. PER CONTRA, THE LD. D.R. ST RONGLY SUPPORTED THE FINDINGS OF THE TPO. 14. WE HAVE CAREFULLY PERUSED THE ORDERS OF AUTHOR ITIES BELOW. THE ASSESSEE HAS USED ALLOCATION KEY OF EMPLOYEE HEAD ACCOUNT. T HE EXPENSES LIKE RENT, DEPRECIATION, ELECTRICITY, INSURANCE CHARGES, OFFIC E MAINTENANCE AND OTHER MISCELLANEOUS EXPENSES HAVE NO CO-RELATION WITH THE NUMBER OF EMPLOYEES. ON THE CONTRARY, THESE EXPENSES HAVE A DIRECT BEARI NG TO THE REVENUE GENERATION. AS PER RULE 10-B(1) OF THE ACT, DETERM INATION OF ALP U/S 92CA(2) OF THE ACT, THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION HAS TO BE DETERMINED BY THE MOST APPROPRIATE METHOD. IN OUR CONSIDERED OPINION, THE METHOD ADOPTED BY THE TPO IS SLIGHTLY BETTER THAN T HE METHOD ADOPTED BY THE ASSESSEE. MORE SO WHEN THE ALLOCATION BY THE ASSESS EE IS NOT SUPPORTED BY ANY CERTIFICATE FROM THE MANAGEMENT. CONSIDERING TH E NATURE OF EXPENSES IN TOTALITY, WE DO NOT FIND ANY MERIT IN THE CASE OF T HE ASSESSEE. ADJUSTMENT OF RS. 87,34,979/- IS ACCORDINGLY CONFIRMED. GROUND N O. 3 OF THE ASSESSEES APPEAL IS ACCORDINGLY DISMISSED. 15. GROUND NO. 4 RELATES TO SHORT CREDIT OF TDS TO THE EXTENT OF RS. 2,95,335/-. WE RESTORE THIS MATTER TO THE FILE OF THE A.O. THE A.O. IS DIRECTED ITA 160/M/13 6 TO VERIFY THE DETAIL AND ALLOW PROPER CREDIT OF TDS TO THE ASSESSEE. GROUND NO. 4 IS ALLOWED FOR STATISTICAL PURPOSE. 16. GROUND NO. 5 RELATES TO LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. LEVY OF INTEREST IS MANDATORY THOUGH CONSEQUENTIAL. THE A.O. IS DIRECTED TO LEVY INTEREST AS PER THE PROVISIONS OF THE LAW. 17. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH SEPTEMBER, 2014. + -./0 1 2#3 26-9-2014 . + 4* SD/- SD/- (AMIT SHUKLA) (N.K. BILLAIYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER #* MUMBAI ; 2# DATED 26-09-2014. [ ).../ R.K. , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. ' %& / THE APPELLANT 2. '(%& / THE RESPONDENT. 3. ! (' ) / THE DRP I, MUMBAI 4. ! / ADDL. DIRECTOR OF INCOME TAX (IT)- 2(2), MUMBAI 5. I)J4 'KL , ! ' , KL!0 , #* / DR, ITAT, MUMBAI K BENCH 6. 4MN O* / GUARD FILE. ! ( / BY ORDER, (I' ' //TRUE COPY// )/(* + ( DY./ASSTT. REGISTRAR) , #* / ITAT, MUMBAI