MMC Healthcare Limited, CHENNAI V. DCIT Corporate Ward 4(1), CHENNAI

ITA 2978/CHNY/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2305 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2013-2014
• Appeal Filed On: 05-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR M SRINIVASA RAO
• Assessee Lawyers: SHRIY SRIDHARCA
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 142(1); 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D BENCH, CHENNAI . . . , . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBERAND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.2978/CHNY/2017 ( / ASSESSMENT YEAR:2013-14) M/S. MMC HEALTHCARE LIMITED, C/O. M/S. RAMESH AND RAMACHANDRAN, CHARTERED ACCOUNTANTS, NEW NO.39, OLD NO.29/3, VISWANATHAPURAM MAIN ROAD, KODAMBAKKAM, CHENNAI 24. VS THE DCIT, CORPORATE WARD 4(1), CHENNAI. PAN: AACCM5814D ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRIY. SRIDHAR,CA / RESPONDENT BY : DR.M. SRINIVASARAO, CIT /DATE OF HEARING : 09.08.2018 /DATE OF PRONOUNCEMENT : 30.08.2018 / O R D E R PER A.MOHAN ALANKAMONY, AM:- THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF THE DIRECTIONS OF THE LD.DRP DATED 13.09.2017 IN FILE NO.376/DRP-2/BANG/2016-17 AND THE ASSESSMENT ORDER PASSED BY THE LEARNED DCIT DATED 06.10.2017 PASSED U/S. 143(3) R.W.S. 144C(13) OF THE ACT FOR THE ASSESSMENT YEAR 2013-14. 2 ITA NO.2978/CHNY/2017 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS APPEAL AND THEY ARE EXTRACTED HEREIN BELOW:- 1) THE BRIEF FACTS OF THE CASE ARE THAT THE APPELLANT IS A COMPANY ENGAGED IN MANUFACTURE AND DISTRIBUTION OF PHARMACEUTICAL PRODUCTS. THE ASSESSEE FILED ITS RETURN OF INCOME ON 27.11.2013 DECLARING A TOTAL INCOME OF RS.44, 14,980/- THE CASE WAS SELECTED FOR SCRUTINY BY THE ASSESSING OFFICER AND NOTICE U/S 143(2) OF THE ACT WAS ISSUED ON 08.09.2014. SINCE THE APPELLANT COMPANY HAD ENTERED INTO SPECIFIED DOMESTIC TRANSACTION, THE ASSESSING OFFICER MADE REFERENCE TO TRANSFER PRICING OFFICER WHO PASSED HIS ORDER ON 18.10.2016. SUBSEQUENTLY, THE ASSESSING OFFICER PASSED THE DRAFT ASSESSMENT ORDER ON 31.12.2016. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER THE APPELLANT COMPANY FILED ITS OBJECTION IN FORM 35A BEFORE THE HONBLE DISPUTE RESOLUTION PANEL U/S 144C. THE DISPUTE RESOLUTION PANEL-2, BANGALORE VIDE ITS PROCEEDINGS IN F.NO.376/DRP-2/BNO/20L6-17 DATED 13.09.2017 HAS REJECTED THE OBJECTION OF THE APPELLANT COMPANY. THE LD. ASSESSING OFFICER COMPLETED THE ASSESSMENT U/S 143(3) R.W.S 144C(13) OF THE ACT AS BELOW A) DOWNWARD ADJUSTMENT OF TPO RS.14,86,479/- (AS PER DRPS PROCEEDINGS) B) DISALLOWANCE U/S 40A(3A)- RS.4,68,172/- C) DISALLOWANCE OF OTHER EXPENSES- RS.27,3 1,537/- 2) THE APPELLANT COMPANY FILES THE PRESENT APPEAL FOR THE ADDITIONS MENTIONED (A) & (C) ABOVE. 3) THE APPELLANT SUBMITS AS UNDER: A) DOWNWARD ADJUSTMENT OF TPO RS.14,86,479/- THE LD. TRANSFER PRICING OFFICER (TPO) ERRED IN MAKING THE DOWNWARD ADJUSTMENT IN PURCHASE OF RS.L4,86,479/-. FURTHER, THE LD. TPO HAS ERRONEOUSLY INCLUDED SALES RETURN OF RS. 1,15,58,232/- BY THE SELLING AGENT AND TREATED THE SAME AS PURCHASE TRANSACTION ASSOCIATE ENTERPRISE. THE LD. TPO ERRED IN NOT CONSIDERING THE COMPARABLE GROSS PROFIT MADE BY THE APPELLANT COMPANY FROM THE PURCHASES MADE FROM ASSOCIATED ENTERPRISE(AE) AND THE GROSS PROFIT MADE BY THE ASSESSEE FROM THIRD PARTY MANUFACTURERS FOR OTHER PRODUCTS. IN THE APPELLANTS CASE, THE PRICE THAT TESTED PARTY HAS PAID/CHARGED IN A CONTROLLED TRANSACTION IS COMPARED TO THE PRICE PAID/CHARGED IN A COMPARABLE UNCONTROLLED TRANSACTION WITH A THIRD PARTY. 3 ITA NO.2978/CHNY/2017 IN THE PRESENT CASE, INTERNAL COMPARABLE UNCONTROLLED PRICE(CUP) IS PREFERRED SINCE IT IS MORE RELIABLE AND ACCURATE AS COMPARED TO EXTERNAL DATA. THE MUMBAI TRIBUNAL IN THE CASE OF GHARDA CHEMICALS LTD VS DC!T [20101 35 SOT 406 HAS HELD THAT ORDINARILY THE INTERNAL CUP METHOD SHOULD BE PREFERRED OVER EXTERNAL CUP METHOD AS IT NEUTRALIZES SEVERAL DISTINGUISHING FACTORS, SUCH AS THE LOCAL FACTORS AND THE ECONOMIES AVAILABLE OR UNAVAILABLE TO THE ASSESSEE IN PARTICULAR, HAVING BEARING OVER THE COMPARISON OF PRICE CHARGED FROM UNRELATED PARTIES AND AE THE INTERNAL CUP SHOULD BE PREFERRED TO THE EXTERNAL CUP THE APPELLANT IN ITS OBJECTION FILED BEFORE THE DRP IN FORM 35A HAD PRODUCED A TABLE SHOWING PURCHASE/SALE OF VARIOUS PRODUCTS AND THE GROSS PROFIT MADE FROM SALE OF PRODUCTS PURCHASED FROM AE AND THIRD PARTY. IT WAS EVIDENT FROM THE SAME THAT GROSS PROFIT ON PURCHASES MADE FROM AE WAS 68.39% HIGHER THAN THE AVERAGE GROSS PROFIT FROM OTHER MANUFACTURERS. HENCE, IN VIEW OF THE ABOVE REFERRED JUDICIAL PRONOUNCEMENT, THE APPELLANT HUMBLY SUBMITS THAT CUP METHOD PROVIDES THE MOST DIRECT COMPARISON FOR THE PURPOSE OF DETERMINING ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS AND IS TO BE PREFERRED OVER OTHER PROFIT BASED METHODS. THEREFORE, THE LD. TPO IS ERRED IN REJECTING THE CUP METHOD ADOPTED BY THE APPELLANT. FURTHERMORE, THE LD. TPO ERRED IN MAKING THE DOWNWARD ADJUSTMENT BY REJECTING THE CUP METHOD AND BY ADOPTING THE TNMM METHOD. IN HIS ORDER, HE IDENTIFIED EXTERNAL COMPARABLE COMPANIES AND THEIR OPERATING MARGINS. HOWEVER, HE FAILED TO NOTE THAT THESE ARE COMPANIES WHICH HAVE TURNOVER OF MORE THAN 65% TO 600% HIGHER TURNOVER THAN THAT OF THE APPELLANT COMPANY AND ACCORDINGLY CANNOT BE USED AS A BENCHMARK FOR THE PURPOSE OF COMPUTING THE ARMS LENGTH PRICE. THUS, THE APPELLANT PRAYS THAT THE SAID DISALLOWANCE MAY KINDLY BE QUASHED. B) DISALLOWANCE OF FIELD STAFF EXPENSES- RS.27,31,537/- THE ASSESSING OFFICER ERRED IN DISALLOWING THE SAME WITHOUT CONSIDERING THE NATURE OF BUSINESS OF THE APPELLANT COMPANY. THE APPELLANT COMPANY BEING ENGAGED IN THE BUSINESS OF MANUFACTURE OF DISTRIBUTION OF PHARMACEUTICAL PRODUCTS OUGHT TO SPEND ON TRAVELLING AND CONVEYANCE OF FIELD STAFF WHO ACT AS SALES REPRESENTATIVES. 4 ITA NO.2978/CHNY/2017 THE SAID EXPENDITURE IS GENUINE AND WAS MADE OUT OF INCOME WHICH WERE DULY REFLECTED IN THE PROFIT AND LOSS ACCOUNT AND THEREFORE FROM DISCLOSED SOURCES. THE ASSESSING OFFICER HAD NOWHERE IN HIS ORDER DISPUTED THE GENUINENESS OF THE SAID EXPENDITURE. THE APPELLANT WISHES TO STATE THAT BUSINESS EXPEDIENCY AND OTHER FACTORS ARE ALSO TO BE CONSIDERED BEFORE MAKING THE SAID DISALLOWANCE. IT IS CLEAR FROM THE PERUSAL OF THE LEDGER COPIES THAT THE SAID EXPENDITURE IS MADE TO INDIVIDUAL PARTIES TOWARDS SELLING EXPENSES. THE APPELLANT WISHES TO STATE THAT THE SAME OUGHT TO BE ALLOWED AS DEDUCTION U/S 37 OF THE ACT CONSIDERING THE NATURE OF EXPENSES. THUS, THE DISALLOWANCE IN THIS REGARD IS TO BE QUASHED. 4) FOR THE ABOVE REASONS AND OTHER REASONS THAT MAY BE ADDUCED AT THE TIME OF HEARING, THE SUBMISSION OF THE APPELLANT MAY KINDLY BE CONSIDERED BY THE HONORABLE TRIBUNAL FAVORABLY AND JUSTICE BE RENDERED. 5) THE APPELLANT CRAVES LEAVE TO AMEND, ALTER OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN BUSINESS OF MANUFACTURING DRUGS AND PHARMACEUTICALS,FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2013-14 ON 27.11.2013 ADMITTING TOTAL INCOME OF RS.44,14,980/-. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S.143(2) & 142(1) OF THE ACT WAS ISSUED ON 08.09.2014 &11.06.2015 RESPECTIVELY. THEREAFTER THE CASE WAS REFERRED TO THE LD.TPO WHO PASSED ORDER U/S. 92CA(3) OF THE ACT ON 18.10.2016 FOLLOWED BY DRAFT ASSESSMENT ORDER ON 31.12.2016. SUBSEQUENTLY THE LD.MEMBERS OF THE DRP ISSUED DIRECTIONS ON 13.09.2017 WHEREIN THEY CONFIRMED THE ORDER OF THE 5 ITA NO.2978/CHNY/2017 LD.TPO WHO HAD MADE UPWARD ADJUSTMENT IN THE CASE OF THE ASSESSEE. THEREAFTER ASSESSMENT WAS COMPLETED ON 06/10/2017. 4. AT THE OUTSET THE LD.AR SUBMITTED THAT THE LD.MEMBERS OF THE DRP HAD PASSED AN EX-PARTE ORDER BECAUSE THE LD.COUNSEL OF THE ASSESSEE COULD NOT APPEAR BEFORE THEM AT THE TIME OF HEARING DUE TO UNAVOIDABLE CIRCUMSTANCE. HENCE IT WAS PLEADED THAT AN OPPORTUNITY MAY BE GIVEN TO THE ASSESSEE TO PRESENT ITS CASE BEFORE THE LD.MEMBERS OF THE DRP. THE LD.DR ON THE OTHER HAND VEHEMENTLY OPPOSED TO THE SUBMISSION OF THE LD.AR AND PLEADED FOR CONFIRMING THE ORDERS OF THE LD.REVENUE AUTHORITIES. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIALS ON RECORD. WE DO NOT FIND ANY MERIT IN THE SUBMISSIONS OF THE LD.AR. HOWEVER IN THE INTEREST OF JUSTICE, WE HEREBY REMIT BACK THE MATTER TO THE FILE OF LD.MEMBERS OF DRP FOR DE-NOVA CONSIDERATION THEREBY PROVIDING ONE MORE OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS CASE BEFORE THE LD.MEMBERS OF THE DRP. THE ASSESSEE AND ITS COUNSEL ARE ALSO HEREBY DIRECTED TO PROMPTLY APPEAR BEFORE THE LD.REVENUE AUTHORITIES AND CO-OPERATE WITH THEM IN THEIR PROCEEDINGS, FAILING WHICH THE LD.REVENUE AUTHORITIES SHALL BE AT LIBERTY TO PASS 6 ITA NO.2978/CHNY/2017 APPROPRIATE ORDERS BASED ON THE MATERIALS ON RECORD AND IN ACCORDANCE WITH MERIT AND LAW. 6. IN THE RESULT APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE AS INDICATED HEREIN ABOVE. ORDER PRONOUNCED ON THE 30 TH AUGUST, 2018 AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( . ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER /CHENNAI, /DATED 30 TH AUGUST, 2018 RSR /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ( )/CIT(A) 4. /CIT 5. /DR 6. /GF