ST. JUDE MEDICAL INC., MUMBAI V. DDIT (IT) 2(1), MUMBAI

ITA 1978/MUM/2011

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0840 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 21-01-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 10-03-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: J D MISTRY
• Assessee Lawyers: RAMAPRIYA RAGHAVAN
• Keywords: Transfer pricing; Permanent establishment
• Section: 148

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI , , BEFORE MS. SUSHMA CH O WLA , JUDICIAL MEMBER AND SHRI N.K . BILLAIYA, A CCOUNTANT M EMBER / I .T.A. NO S . 1978 TO 1980/MUM/2011 ( / ASSESSMENT YEAR S : 2002 - 03 TO 2004 - 05 ST. JUDE MEDICAL INC. C/O DELOITTE HASKINS & SELLS, 264 - 265VASWANI CHAMBERS, 3 RD FLOOR, DR. ANNIE BESANT ROAD, WORLI, MUMBAI - 400 030 / VS. THE DY. DIRECTOR OF INCOME - TAX (INT. TAXATION) - 2(1), SCINDIA HOUSE, BALLARD PIER, MUMBAI - 400 038 ./ ./ PAN/GIR NO. : AALFS 0469A ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI J.D. MISTRY / RESPONDENT BY : SMT. RAMAPRIYA RAGHAVAN / DATE OF HEARING : 27 . 0 7 .2015 / DATE OF PRONOUNCEMENT : 31 .0 7 .2015 / O R D E R PER BENCH: TH ESE THREE APPEAL S BY THE ASSESSEE ARE DIRECTED AGAINST THREE SEPARATE ORDER S OF THE LD. CIT(A) - 11 , PERTAINING TO ASSESSMENT YEAR S 200 2 - 0 3 TO 2004 - 05 . 2. THE GROUNDS RAISED BY THE ASSESSEE READ AS UNDER: ITA. NO S . 1978 TO 1980/M/2011 2 1:0 RE.: VALIDITY OF RE - ASSESSMENT PROCEEDINGS : 1 : 1 THE COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER OF RE - OPENING THE ASSESSMENT U/S. 148 OF THE INCOME - TAX ACT, 1961. 1 : 2 THE APPELLANT SUBMITS THAT CONSI DERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT THE IMPUGNED RE - OPENING U/S. 148 IS BAD IN LAW AND THE COMMISSIONER OF INCOME - TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. 1 : 3 THE APPELLANT SUBMITS THAT THE IMPUGNED RE - ASSESSMENT PROCEEDINGS U/S. 148 AND THE ORDER PASSED IN PURSUANCE THEREOF WAS NOT IN ACCORDANCE WITH LAW AND CONSEQUENTLY OUGHT TO BE STRUCK DOWN AS VOID AB - INITIO. WITHOUT PREJUDICE TO THE FOREGOING: 2: 0 RE.: EX - PARTE ASSESSMENT: 2 : 1 THE COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF PASSING AN EX - PARTE ASSESSMENT ORDER. 2 : 2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT THE APPELLANT HAD DULY COMPLIED WITH ALL STATUTORY NOTICES ISSUED BY THE ASSESSING OFFICER AND HENCE THERE WAS NO CAUSE FOR PASSING AN EX - PARTE ASSESSMENT ORDER AND THE COMMISSIONER OF INCOME - TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. 2: 3 THE APPELLANT SUBMITS THAT THE IMPUGNED EX - PARTE ASSESSMENT AND THE ORDER PASSED PURSUANT THERETO IS BAD IN LAW AND SHOULD BE STRUCK DOWN. 3 : 0 RE.: PRESENCE OF A PERMANENT ESTABLISHMENT IN INDIA: ITA. NO S . 1978 TO 1980/M/2011 3 3 : 1 THE COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN HOLDING THAT THE APPELLANT HAS A PERMANENT ESTABLISHMENT ('PE') IN INDIA. 3 : 2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJE CT THE APPELLANT HAS NO PE IN INDIA AND THE STAND TAKEN BY THE ASSESSING OFFICER IN THIS REGARD IS ERRONEOUS, MISCONCEIVED AND NOT IN ACCORDANCE WITH LAW AND THE COMMISSIONER OF INCOME - TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. 3 : 3 THE APPELLANT SUBMIT S THAT THE ASSESSING OFFICER BE DIRECTED TO RECOMPUTE ITS TOTAL INCOME ACCORDINGLY. WITHOUT PREJUDICE TO THE FOREGOING: 4 : 0 RE.: ESTIMATION OF GROSS PROFIT: 4: 1 THE COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF THE ASSE SSING OFFICER IN HOLDING THAT 20% OF THE SALES MADE IN INDIA WERE ITS PROFITS TAXABLE IN INDIA. 4 : 2. THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT 20% OF SALES MADE IN INDIA CANNOT BE SAID TO BE ITS PROFITS TAXABLE IN INDIA AND THE STAND TAKEN BY THE ASSESSING OFFICER IN RESPECT THEREOF IS ERRONEOUS, MISCONCEIVED AND ILLEGAL AND THE COMMISSIONER OF INCOME - TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. 2 .1 . AT THE VERY OUTSET , THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE ISSUES INVOLVED IN ALL THESE APPEALS QUA THE FACTS ARE IDENTICAL, THEREFORE ALL THESE APPEALS WERE HEARD TOGETHER AND DISPOSED OF BY THIS COMMON ORDER. FOR THE SAKE OF CONVENIENCE, WE ARE CONSIDERING THE FACTS OF A .Y. 2002 - 03 IN ITA NO. 1978/MUM/2011. 3. TH E APPELLANT [VIZ., ST. JUDE MEDICAL INC. ('SJMI')] IS A COMPANY INCORPORATED IN THE 'UNITED STATES OF AMERICA' AND IS ENGAGED IN THE ITA. NO S . 1978 TO 1980/M/2011 4 BUSINESS OF MARKETING AND SELLING OF MEDICAL EQUIPMENTS MAINLY HEART VALVES. IT HAS A WHOLLY - OWNED SUBSIDIARY IN HONG KONG (VIZ., ST. JUDE MEDICAL (HONG KONG) LTD. ('SJMHK')), WHICH IS ALSO ENGAGED IN THE SAME BUSINESS. FOR MANY YEARS, BOTH SJMHK AND SJMI WERE MAKING DIRECT SALES TO CUSTOMERS IN INDIA FROM THEIR RESPECTIVE COUNTRIES . THEREAFTER, THE SAID SJMHK SET - UP A LIAISON OFFICE IN INDIA WHICH WAS CONVERTED INTO A BRANCH OFFICE WITH EFFECT FROM 01 JANUARY 2000. 3.1. EVEN AFTER SETTING UP OF THE SAID BRANCH OFFICE IN INDIA BY SJMHK, BOTH SJMI AND SJMHK WERE MAKING DIRECT SALES IN INDIA TO SOME DISTRIBUTORS / HOSPITALS WHO INSISTED ON DEALING DIRECTLY WITH THEM IN VIEW OF INTER ALIA THEIR LONG STANDING RELATIONSHIP. F U RTHER THE INDIAN BRANCH OFFICE OF S JMHK RECEIVED MA NAG EMENT FEES WHICH WERE OFFERED FOR TAX IN THE ACCOUNTS OF T HE INDI AN BR ANCH OF SJMHK. THESE MANAGEMENT FEES WERE RECEIVE D AS ARM'S LENGTH COMPENSATION IN THE EVENT THAT IT WAS HELD THAT THE BRANCH HAD DONE WORK / PERFORMED SERVICES IN RESPECT OF THE DIRECT SALES MADE BY BOTH THE APPELLANT AND SJMHK IN INDIA. THE QUANTUM OF THE MANAGEMENT FEES W AS CALCULATED BASED ON THE DIRECT SALES QUANTUM OF BOTH THE A PP ELLANT AND SJMHK IN INDIA. F U R THER AS THE RECEIPT OF MANAGEMENT FEES FELL WITHIN THE TRANSFER PRICING PR OVISIONS THE MATTER WAS S CRUTINIZED BY THE TRANSFER PRICING OFFICER ('TPO') WHO BY HIS ORDER DATED 28 FEBRUARY 2 00 5 (PG. NO. 103 OF THE PAPERBOOK) HELD THAT THE MANAGEMENT FEES RECEIVED OF RS. 79,20,240 / - F OR A.Y. 2 002 - 03 FOR SALES MADE BY SJMI AND SJMHK W AS AT ARM'S LENGTH AND NO ADDITION WAS CALLED FO R. 3.2 . BEFORE PROCEEDING FURTHER, IT WOULD BE PERTINENT TO UNDERSTAND THE FACTS AND THE FATE OF SJMHK. IN THE ASSESSMENT ORDERS IN THE CASE OF SJMHK FOR ASSESSMENT YEARS 2002 - 03, 2003 - 04 AND 2004 - 05, THE ITA. NO S . 1978 TO 1980/M/2011 5 ASSESSING OFFICER HELD THAT THE INDIAN BRANCH OF SJMHK WAS A PERMANENT ESTABLISHMENT IN INDIA OF THE ASSESSEE AND A BUSINESS CONNECTION IN INDIA OF SJMHK. THE AO ACCORDINGLY HELD THAT A PART OF THE DIRECT SALES MADE IN INDIA BY SJMHK AND THE ASSESSEE WAS ATTRIBUTABLE TO THE INDIAN BRANCH OF SJMHK AND ACCORDINGLY TAXABLE IN INDIA. THE AO MADE AN ADHOC ESTIMATE OF 20% OF THE DIRECT SALES MADE IN INDIA BY SJMHK AND THE ASSESSEE AND THE SAME WAS ATTRIBUTED TO THE PE/BUSINESS CONNECTION AND TAXED ACCORDINGLY. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) AND THE CIT(A) VIDE HIS ORDER DT. 31.12.2010 HELD THAT TWO ASSESSMENTS I.E. OF SJMHK AND THE ASSESSEE CANNOT BE MADE IN A SINGLE ASSESSMENT ORDER AND HENCE DELETED THE ADDITION MADE BY THE AO TO T HE EXTENT IT RELATED TO THE PROFIT OF SJMI ATTRIBUTABLE TO THE INDIAN PE. HOWEVER, THE ADDITION TO THE EXTENT IT RELATED TO THE PROFITS ATTRIBUTABLE TO THE DIRECT SALES MADE IN INDIA BY SJMHK WAS CONFIRMED. 5. THE REVENUE AND SJMHK PREFERRED AN APPEAL B EFORE THE TRIBUNAL. SJMHK CHALLENGED THE ACTION OF THE AO OF ATTRIBUTING PROFITS ON ACCOUNT OF DIRECT SALES MADE WHEREAS THE DEPARTMENT CHALLENGES THE ORDER OF THE LD. CIT(A) TO THE EXTENT IT HELD THAT PROFITS ATTRIBUTABLE TO DIRECT SALES MADE BY SJMI CAN NOT BE TAXES IN THE HANDS OF THE SJMHK. 5.1. THE AO ISSUED NOTICE U/S. 148 OF THE ACT TO THE ASSESSEE IN RESPECT OF THE AMOUNTS DELETED BY THE LD. CIT(A). THE PRESENT APPEALS BEFORE US ARE IN PURSUANCE TO THIS ACTION OF THE AO. COMING BACK TO THE FATE O F SJMHK, IN ITS CASE THE APPEALS WERE DECIDED BY THE TRIBUNAL BY A CONSOLIDATE ORDER DT. 13.5.2014 WHEREIN THE TRIBUNAL HAS HELD THAT THE TPO HAS ACCEPTED THE GROSS PROFIT RATE OF 8.81% DECLARED BY SJMHK, THEREFORE PROFIT OF 20% ATTRIBUTED BY THE AO CANNOT BE SUSTAINED. THE ITA. NO S . 1978 TO 1980/M/2011 6 TRIBUNAL FURTHER HELD THAT THE MANAGEMENT FEE RECEIVED BY THE INDIAN BRNACH OF SJMHK WERE RELATED TO THE SERVICE PROFIT BY THE BRANCH TO BOTH SJMI & SJMHK AND IS AT ARM S LENGTH AND HAS BEEN ACCEPTED BY THE TPO. ACCORDINGLY, THE TRIBUN AL DIRECTED THE AO TO DELETE THE ADDITION MADE ON THIS COUNT. THE APPEAL PREFERRED BY THE REVENUE WAS DISMISSED FOLLOWING THE ORDER D ATED . 5.6.2013 FOR ASSESSMENT YEARS 1999 - 2000 AND 2000 - 01. 6. WITH THE ABOVE FACTUAL MATRIX IN THE PRESENT APPEAL THE ASS ESSEE HAS PRAYED TO FOLLOW THE ORDER OF THE TRIBUNAL DT. 13.5.2014 READ WITH MISCELLANEOUS APPLICATION ORDER DT. 14.10.2014. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AT LENGTH AND HAVE CAREFULLY PERUSED THE ORDERS OF THE TRIBUNAL PLACED BEFORE US. WE FIN D FORCE IN THE CONTENTION OF THE LD. SENIOR COUNSEL. THE ISSUE RELATING TO THE ESTIMATION OF GROSS PROFIT STANDS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE ORDER OF THE TRIBUNAL IN ITA NOS. 2228/M/07, 1920/M/07, 4941/M/07, 6922/M/07 & 7193/M/07 DT. 13.5.2014 WHEREIN AT PARA - 29 ON PAGE - 7 OF ITS ORDER, THE TRIBUNAL HELD AS UNDER: WE HAVE HEARD THE ARGUMENTS AND HAVE PERUSED THE ORDER OF THE CO - ORDINATE BENCH IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEARS 1999 - 2000 & 2000 - 01, WHEREIN THE CO - ORDINATE BENCH HAD ACCEPTED THE ESTIMATE OF GROSS PROFIT ATTRIBUTION AT 10% IN PLACE OF 20%. WE HAVE ALSO PERUSED THE TP REPORT AND THE COMPUTATION, WHEREIN, THE TPO HAS ACCEPTED THE GROSS PROFIT RATE DECLARED AT 8.81%. IN SUCH A SITUATION, ACCEPTANCE OF GROSS PROFIT ATTRIBUTION OF INDIA BRANCH @ 20% DOES NOT INSPIRE CONFIDENCE. 8. T HE MANAGEMENT FEE IS INCLUDED IN THE RECEIPTS SHOWN IN THE PROFIT AND LOSS ACCOUNT IS ACCEPTED BY THE TRIBUNAL AT PARA - 42 TO 44 VIDE ITS ORDER DATED 13 TH MAY, 2014 WHICH READ AS UNDER: ITA. NO S . 1978 TO 1980/M/2011 7 42. WE HAVE HEARD THE ARGUMENTS OF EITHER SIDE AND HAVE PERUSED THE MATERIAL PLACED BEFORE US. THE FACT WHICH REMAINS UNCONTROVERTED BY THE REVENUE AUTHORITIES AND THE DR ARE THAT THE ASSESSEE IN THE YEAR UNDE R CONSIDERATION WAS COVERED UNDER THE TP REGULATIONS AND IN THOSE PROCEEDINGS, THE FACTUM OF MANAGEMENT FEE HAS DEALT WITH EXTENSIVELY AND IN THE PROCESS, THE TPO FOUND THE RECEIPT OF MANAGEMENT FEE BY THE INDIA BRANCH FROM SJMH RELATED TO SERVICES PROVIDE D TO BOTH SJMI & SJMH. IT IS EVIDENT FROM THE ACCOUNTS SUBMITTED BEFORE THE AO, BECAUSE IN THE PROFIT & LOSS ACCOUNT SUBMITTED, IT SHOWED THE RECEIPT OF RS. 9,60,57,310/ - WHICH INCLUDED RS. 79,20,240/ - UNDER THE HEAD MANAGEMENT FEE FOR MARKETING SUPPORT AT RS. 79,20,240/ - (APB 7 & 12). 43. THE AR FURTHER POINTED OUT THAT THE LOSS AS DETERMINED AND TAKEN TO THE COMPUTATION WAS RETURNED IN THE RETURN OF INCOME FILED BY THE ASSESSEE (APB 7, 22 & 21) 44. WE, THEREFORE, ARE OF THE OPINION, THAT ALL THE REQUI SITE DETAILS WERE PLACED BEFORE THE AO, ALONG WITH THE RETURN ON INCOME, WHICH BASED THE COMPUTATION OF RETURNED INCOME ON RECEIPTS RELATED TO SERVICES PROVIDED TO BOTH SJMH AND SJMI. 8.1. FURTHER TRIBUNAL VIDE M.A NOS. 349 TO 350/M/2014 DT. 14 TH OCTOBE R, 2014 , AMENDED PARA - 44 WHICH READS AS UNDER: 44. WE, THEREFORE, ARE OF THE OPINION, THAT ALL THE REQUISITE DETAILS WERE PLACED BEFORE THE AO, ALONG WITH THE RETURN OF INCOME, WHICH BASED THE COMPUTATION OF RETURNED INCOME ON RECEIPTS RELATED TO SER VICES PROVIDED TO BOTH SJMH AND S J - MI. 8.2. THE TRIBUNAL ALSO CONFIRMS THE OBSERVATIONS OF THE LD. CIT(A) INCORPORATED BY THE TRIBUNAL IN ITS ORDER AT PARA - 37 ON PAGE - 9. THE RELEVANT PART OF THE CIT(A)S OBSERVATION READ S AS UNDER: I HASTEN TO ADD TH AT THE AMOUNT MENTIONED IN THE GROUNDS OF APPEAL AT RS. 79,20,240/ - INCLUDES MANAGEMENT FEE FOR WORK DONE FOR THE HONGKONG COMPANY AS WELL AS FOR THE US COMPANY. ITA. NO S . 1978 TO 1980/M/2011 8 8. 3 THUS IN VIEW OF THE ABOVE MENTIONED FINDING IT IS HELD THAT EVEN IF ANY AMOUNT IS TO BE TAXED IN THE HANDS OF SJMI (THE APPELLANT) BY VIRTUE OF HAVING A PERMANENT ESTABLISHMENT IN INDIA OR OTHERWISE, THE AMOUNT THAT CAN BE TAXED IS RS. NIL, AS THE PERMANENT ESTABLISHMENT HAS BEEN COMPENSATED AT ARMS LENGTH AND HAS OFFERED THE SAID COMPEN SATION FOR TAX IN INDIA WHICH SATISFIES ANY CHARGE IN VIEW OF INTER ALIA THE DECISION OF THE SUPREME COURT IN THE CASE OF DIT VS MORGAN STANLEY & CO. (2007) 292 ITR 416 (SC) AND THE ORDER OF THE TPO. GROUND NO. 4 IS THUS ALLOWED. 9. THE GROUND OF APPEAL NO. 2 AGAINST EX PARTE ASSESSMENT IS NOT PRESSED. HENCE DISMISSED. 10 . SINCE WE HAVE DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE, GROUNDS OF APPEAL NO. 1 & 3 ARE HELD AS INFRUCTUOUS AND NEED NO SEPARATE ADJUDICATION. 10. THE ADDITIONAL GROUND RELAT ES TO LEVY OF INTEREST. THE AO IS DIRECTED TO LEVY THE INTEREST AS PER THE PROVISIONS OF LAW. 11. AS STATED ELSEWHERE, THE FACTS AND THE ISSUES IN A.Y. 2003 - 04 IN ITA NO. 1979/M/11 AND FOR A.Y. 2004 - 05 IN ITA NO. 1980/M/11 ARE IDENTICAL THEREFORE FOR SI MILAR REASONS WE HOLD ACCORDINGLY. 12. IN THE RESULT, ALL THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. OR DER PRONOUNCED IN THE OPEN COURT ON 31 ST JULY 2015. SD/ - SD/ - SD/ - ( SUSHMA CH O WLA ) (N.K. BILLAIYA) /JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED : 31 ST JU LY , 2015 . . ./ RJ , SR. PS ITA. NO S . 1978 TO 1980/M/2011 9 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI