Zimmer India Pvt. Ltd., Gurgaon V. DCIT, Gurgaon

ITA 1625/DEL/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81788 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 11-09-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 19-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH VERMA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Additional evidence
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I NEW DELHI BEFORE SHRI J.SUDHAKAR REDDY, AM AND SHRI C.M.GARG, J.M. ITA NO: 1625/DEL/2014 AY : - 2009-10 ZIMMER INDIA P.LTD. VS. DCIT, CIRCLE 2 14 TH FLOOR, TOWER B GURGAON DLF BLDG. NO.5 CYBER TERRACES, DLF CYBER CITY PHASE III, GURGAON PAN: AAECS 7432 H (APPELLANT) (RESP ONDENT) APPELLANT BY :D R.RAKESH GUPTA, ADV. SHRI ASHWANI TANEJA, ADV. SH. RISHABH KAPOOR, ADV. RESPONDENT BY: SH. PEEYUSH JAIN, CIT, D.R. AND SH. YOGESH VERMA, CIT, DR O R D E R PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AG AINST THE ORDER OF THE AO PASSED U/S 143(3) R.W.S.144C OF THE ACT. 2. FACTS IN BRIEF: THE ASSESSEE IS A SUBSIDIARY OF ZIMMER HOLDINGS I NC. USA. THE COMPANY IS PRIMARILY ENGAGED IN BUSINESS OF IMPORTING, MARKETING AND DISTRIBUTING ORTHOPAEDIC IMPLANT AND INSTRUMENTS TO CUSTOMERS IN INDIA THROUGH DIRECT SALES AND ALSO TH ROUGH A DEALER NET WORK. THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE AS SESSEE COMPANY IN TRANSFER PRICING DOCUMENTATION FOR THE FY 2008-09 I S SUMMARISED BELOW. ITA 1625/DEL/2014 AY 2009-10 ZIMMER INDIA PVT.LTD. 2 TABLE1 : INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT S.NO. NATURE OF TRANSACTION AMOUNT (INR CRORES) METHOD APPLIED CLASS I TRANSACTIONS 1. PURCHASE OF HIP, KNEE, TRAUMA IMPLANTS 35.97 PRIMARY METHOD TRANSACTION NET MARGIN METHOD (TNMM) 2. PURCHASE OF INSTRUMENTS 10.86 3. PURCHASE OF CATALOGUES 0.07 4. PURCHASE RETURNS 0.32 CORROBORATIVE METHOD RESALE PRICE METHOD (RPM) CLASS II TRANSACTIONS 5. REIMBURSEMENT OF EXPENSES 0.55 6. REIMBURSEMENT OF EXPENSES RECEIVED 0.14 COMPARABLE UNCONTROLLED PRICE METHOD (CUP) TOTAL: 47.91 THE SUMMARY OF THE ECONOMIC ANALYSIS GIVEN BY THE A PPELLANT FOR ITS CLASS-I TRANSACTIONS IS GIVEN IN TABLE BELOW. TABLE 2: SUMMARY OF ECONOMIC ANALYSIS FOR CLASS I T RANSACTIONS AS PER TP STUDY PARTICULARS RPM APPROACH TNMM APPROACH NO. OF COMPARABLES 14 (10 FROM PROWESS AND 4 FROM C LINE) (REFER PAGE 54 OF THE PAPER BOOK) (10 FROM PROWESS AND 4 FROM C LINE) (REFER PAGE 51 OF THE PAPER BOOK) PROFIT LEVEL INDICATOR (PLI) GP/SALES OP/SA LES ZIMMER INDIAS MARGIN (A) 43% (REFER PAGE 71 OF THE PAPER BOOK) 22% (REFER PAGE 71 OF THE PAPER BOOK) COMPARABLES MARGIN (B) 27% (REFER PAGE 54 OF THE PAPER BOOK) 6% (REFER PAGE 51 OF THE PAPER BOOK) ITA 1625/DEL/2014 AY 2009-10 ZIMMER INDIA PVT.LTD. 3 TABLE 3: COMPUTATION OF AMP EXPENSES OF THE APPELLA NT BY THE TPO IN TPO ORDER PARTICULARS FY 2008-09 (AMOUNT IN INR) SPONSORSHIPS AND SALES PROMOTION EXPENSES 21,913,55 6 DISCOUNT ALLOWED 2,415,599 SALES COMMISSION 17,813,260 TOTAL AMP 42,142,415 SALES 665,284,265 TOTAL AMP/SALES 6.33% FURTHER IN ORDER TO ARRIVE AT BRIGHT LINE LIMIT, TH E TPO CONSIDERED SOME OF THE COMPARABLES SELECTED BY THE APPELLANT AND REJECTED THE OTHERS. THE COMPARABLES SELECTED BY THE APPELLANT IN THE TP STUDY HAVE BEEN DEALT DURING TH E TP ASSESSMENT PROCEEDINGS AS UNDER. TABLE 4: COMPARABLES SELECTED BY APPELLANT AND REJE CTED BY THE TOP S.NO. TP STUDY COMPARABLES SHOW CAUSE NOTICE (PAGE 200 AND 201 OF THE PAPER BOOK) APPELLANTS REPLY TO SHOW CAUSE NOTICE (PAGE 133 AND 134 OF THE PAPER BOOK) FINAL TP ORDER (PAGE 77 OF APPEAL MEMORANDUM) 1. ABOTT INDIA LTD. 3.1% 3.58% 3.58 % 2. ADITYA MEDISALES LTD. 0.80% 0.29% 0.29% 3. GENETIC LABORATORIES LTD. - REJECTED 4. HICKS THERMOMETERS (INDIA LTD) 1.68% 5. LIFELINE DRGUS & PHARMA LTD. 0.006% 0.01% 0.01% 6. PHARMA LTD. REJECTED BY TPO 18.2% REJECTED BY TPO 7. REMI SALES & ENGINEERING LTD. 0.68% 0.51% 0.51% 8. SERUM INTERNATIONAL LTD. REJECTED BY TPO 15.46% REJECTED BY TPO 9. SHARON BIO- MEDICINE LTD. REJECTED BY TPO 0.19% 0.19% 10. SOLUMIKS HERBACEUTICALS LTD. REJECTED BY TPO 10.77% REJECTED BY TPO 11. BA & BROTHERS (EASTERN) LTD. 0.00% 0.00% 0% 12. DUCHEM LABORATORIES LTD. REJECTED BY TPO 0.00% REJECTED BY TPO 13. ORTIN LABORATORIES LTD. 0.32% 0.33% 0.33% 14. SATYATEJ COMMERCIAL CO.LTD. 2.1% 0.01% 2.1% M E A N 1.0009% 3.91% 0.87% 3. THE DISPUTE RESOLUTION PANEL-III, NEW DELHI IN ITS ORDER NOTED THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF L.G.ELECTRONICS INDIA P.LTD. VS. ACIT (2013) REPORTED IN 29 TAXMANN .COM 300 ON THE ISSUE, BUT REJECTED ALL THE CONTENTIONS OF THE ASSESSEE. ITA 1625/DEL/2014 AY 2009-10 ZIMMER INDIA PVT.LTD. 4 4. AGGRIEVED, THE ASSESSEE FILED THIS APPEAL BEFORE U S ON THE FOLLOWING GROUNDS. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW: 1. THE LD. DISPUTE RESOLUTION PANEL ('LD. DRP') AND THE LD. DEPUTY COMMISSIONER OF INCOME-TAX ('LD. AO~) PURSUANT TO T HE DIRECTIONS OF THE LD. DRP, ERRED IN ENHANCING THE INCOME OF THE A PPELLANT BY RS. 4.10 CRORES BY HOLDING THAT THE APPELLANT SHOULD HA VE RECEIVED REIMBURSEMENT FOR 'ALLEGED EXCESSIVE' ADVERTISING, MARKETING AND PROMOTION (,AMP') EXPENSES FROM ITS ASSOCIATED ENTE RPRISES ('AES') AND IN DOING SO HAVE GROSSLY ERRED BY: 1.1 MISINTERPRETING OR PLACING INCORRECT RELIANCE ON THE INTERNATIONAL GUIDANCE IN RELATION TO THE 'MARKETIN G INTANGIBLES' AND 'BRIGHT LINE TEST' FROM ORGANISATION FOR ECONOMIC C O-OPERATION AND DEVELOPMENT ('OECD'), US TP REGULATIONS AND AUSTRAL IAN TAX OFFICE ('ATO') AND RELYING ON SEVERAL ERRONEOUS/FACTUALLY INCORRECT AND CONTRADICTORY STATEMENTS/ OBSERVATIONS IN THE TP OR DER, WHICH ARE NOT RELEVANT TO THE INSTANT CASE, ONLY IN ORDER TO JUSTIFY AN OTHERWISE INAPPROPRIATE AND UNWARRANTED TP ADJUSTMENT; 1.2 INCORRECTLY HOLDING THE AMP EXPENSES INCURRED BY THE APPELLANT TO BE 'EXCESSIVE' ON THE BASIS OF A 'BRIG HT LINE LIMIT' ARRIVED AT BY DERIVING A AD-HOC SET OF 8 COMPARABLES FROM T HE SET OF 13 ORIGINALLY PRODUCED BY THE APPELLANT IN ITS TP DOCU MENTATION; 1.3 IN UPHOLDING THAT THE APPELLANT HAS RENDERED S ERVICES TO ITS AES BY INCURRING THE AMP EXPENSES AND BY HOLDING TH AT A MARK-UP OF 12.75% HAS TO BE EARNED BY THE APPELLANT IN RESP ECT OF THE 'ALLEGED EXCESSIVE' AMP EXPENSES, WITHOUT ANY BASIS FOR THE SAME WHATSOEVER; CASE OF A DISTRIBUTOR NAMELY BMW INDIA PRIVATE LIMITED FOR AY 2008-09 WHICH WAS SUBMITTED BEFORE THE LD. D RP DURING THE HEARING ON NOVEMBER 28, 2013 WHEREIN HON'BLE ITAT H AD ADJUDGED IF A DISTRIBUTOR IS SUFFICIENTLY COMPENSATED BY THE AE THROUGH THE PRICING OF PRODUCTS, I.E. THROUGH HIGHER MARGINS, T HE SAME WOULD HAVE CATERED TO EXTRA AMP EXPENSES SPENT BY THE DIS TRIBUTOR AS COMPARED TO THE COMPARABLES. ACCORDINGLY, NO SEPARA TE COMPENSATION IN THE FORM OF REIMBURSEMENT OF EXCESS AMP EXPENSES WAS REQUIRED FROM THE AES. 1.5 WITHOUT PREJUDICE TO ITS ABOVE CONTENTIONS, IN CORRECTLY COMPUTING AMP/EXPENSES RATIO OF THE APPELLANT BY TA KING INTO ACCOUNT THE ITEMS LIKE DISCOUNT ALLOWED OF RS. 0.24 CRORES AND SALES COMMISSION OF RS 1.78 CRORES WHICH ARE PURELY LINKE D WITH ACTUAL SALES MADE BY THE APPELLANT DURING ASSESSMENT YEAR ('AY') 2009-10 AND THUS CONTRADICTING THE PRINCIPLES LAID DOWN BY SPECIAL BENCH OF THE HON'BLE INCOME-TAX APPELLATE TRIBUNAL ('ITAT') IN THE CASE OF LG ELECTRONICS INDIA PRIVATE LIMITED REGARDING THE EXC LUSION OF SELLING EXPENSES. ITA 1625/DEL/2014 AY 2009-10 ZIMMER INDIA PVT.LTD. 5 1.6 NOT CONTROVERTING OR EVEN TAKING COGNIZANCE OF ITEMIZED DETAILS OF EXPENSES AMOUNTING TO RS. 2.19 CRORES BO OKED UNDER THE HEAD SPONSORSHIP AND SALES PROMOTION EXPENSES PRESE NTED BEFORE THE LD. DRP AS ADDITIONAL EVIDENCE WHICH CLEARLY SE T FORTH THAT THESE EXPENSES WERE INCURRED BY APPELLANT ON VARIOUS EVEN TS ORGANIZED I.E. CONFERENCES, CADAVER WORKSHOPS, CAMPS FOR CREA TING AWARENESS ON ORTHOPAEDIC PROBLEMS, EDUCATING SURGEONS AND COM MUNITY AT LARGE ON THE USAGE OF IMPLANTS AND THUS HAD NO NEXU S WITH BRAND PROMOTION. 1.7 IGNORING THAT THE FACTS AND CIRCUMSTANCES OF T HE APPELLANT'S CASE DURING THE YEAR UNDER CONSIDERATION REMAIN UNC HANGED FROM THOSE DURING THE EARLIER YEARS, FOR WHICH THE APPEL LANT'S INTERNATIONAL TRANSACTIONS WERE FOUND TO BE AT ARM' S LENGTH . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDE R SECTION 271(1)(C) READ WITH SECTION 274 OF THE ACT. THAT THE ABOVE GROUNDS OF APPEAL ARE WITHOUT PREJUD ICE TO EACH OTHER. 5. WE HAVE HEARD DR.RAKESH GUPTA, THE LD.COUNSEL FOR THE ASSESSEE AND SHRI PEEYUSH JAIN, THE LD.CIT, D.R. ON BEHALF OF TH E REVENUE. 6. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMS TANCES OF THE CASE, ON PERUSAL OF MATERIAL ON RECORD, ORDERS OF THE AU THORITIES BELOW, CASE LAWS CITED, WE HOLD AS FOLLOWS. 7. THE SOLE ISSUE THAT ARISES FOR OUR CONSIDERATION IS THE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ADVERTISING, MARKETING AND PROMOTIONAL EXPENSES. THE CONTENTION OF THE ASSESSEE ARE SUMMARISED AS FO LLOWS. THE ADJUSTMENT MADE BY TPO/DRP IS ERRONEOUS BECAUSE : A) COMPUTATION OF THE AMP EXPENSES OF THE APPELLANT : SALES COMMISSION AND DISCOUNT ALLOWED MAY BE EXCLUDED (PAGE 113 TO 1 32 OF THE ASSESSEES PAPER BOOK GROUND 1 READ WITH SUB GROU ND 1.5) B) SPONSORSHIP AND SALES PROMOTION HAS NOT BEEN APPROP RIATELY CONSIDERED THESE DO NOT LEAD TO BRAND PROMOTION A ND MAY BE ITA 1625/DEL/2014 AY 2009-10 ZIMMER INDIA PVT.LTD. 6 EXCLUDED (GROUND 1 READ WITH SUB GROUND 1.6 ASSES SEES PAPER BOOK 115, 119 TO 125) C) AMP EXPENSES INCURRED BY ZIMMER INDIA FOR ITS OWN B ENEFITS AND PROFITS EARNED BY ZIMMER INDIA FROM ITS DISTRIBUTIO N FUNCTION TAKES INTO ACCOUNT ANY ALLEGED EXCESSIVE AMP (GROUND 1 RE AD WITH SUB GROUND 1.4 PAPER BOOK PAGES 115 AND 132) D) AMP IS NOT AN INTERNATIONAL TRANSACTION : E) MISINTERPRETATION OR PLACING INCORRECT RELIANCE ON THE INTERNATIONAL GUIDANCE ON MARKETING INTANGIBLES OECD TRANSFER P RICING GUIDELINES 2010 UN MANUAL AND THE AUSTRALIAN TAX OFFICE (ATO) GUIDELINES (GROUND 1 READ WITH SUB GROUND 1.1) (REFER PAGE 140 OF PAPE R BOOK) F) NO ADVERSE INFERENCE IN PREVIOUS YEARS (GROUND 1 READ WITH SUB GROUND 1.7) G) ERRONEOUS ADHOC MARK UP OF 12.75% ON ALLEGED EXC ESSIVE AMP EXPENDITURE (GROUND 1 READ WITH SUB GROUND 1.3) H) BRIGHT LINE IS A TOOL NOT A METHOD (GROUND 1 REA D WITH SUB GROUND 1.5). 7.1 . BOTH THE PARTIES ADMIT THAT THE DRP HAS IN A VER Y CURSORY MANNER PASSED ITS ORDER. WHILE NOTING THAT THE FACTS IN T HIS CASE ARE SIMILAR TO THE CASE OF L.G.ELECTRONICS INDIA PRIVATE LTD. VS. ACI T (2013) REPORTED IN 29 TAXMANN.COM 300 DELHI (SB), IT HAD NOT APPLIED ANY OF THE PROPOSITIONS LAID DOWN BY THE SPECIAL BENCH. MANY CONTENTIONS RAISED BY THE ASSESSEE HAVE NOT BEEN CONSIDERED. WE FIND FORCE IN THE ARGUMENT S RAISED BY THE ASSESSEE. IN ANY EVENT AS THE CLAIMS OF THE ASSESSEE HAVE TO BE EXAMINED BASED ON THE FACTS OF THE CASE, WE DEEM IT PROPER TO RESTORE THE ISSUE TO THE FILE OF THE TPO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW, AFTER AFFORDING THE ASSESSEE OPPORTUNITY OF BEING HEARD. WE DIRECT THE TPO TO APPLY THE RATIO ITA 1625/DEL/2014 AY 2009-10 ZIMMER INDIA PVT.LTD. 7 LAID DOWN BY THE DELHI SPECIAL BENCH OF THE TRIBUNA L IN THE CASE OF L.G.ELECTRONICS INDIA PVT.LTD. (SUPRA) AND TO ADJUD ICATE EACH AND EVERY ARGUMENT RAISED BY THE ASSESSEE. 8 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH SEPTEMBER,2014. SD/- SD/- (C.M. GARG) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 30 TH SEPTEMBER, ,2014 *MANGA COPY OF THE ORDER FORWARDED TO: 1.APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT(A); 5.DR; 6.GUARD FILE BY ORDER ASST. REGISTRAR