ST. JUDE MEDICAL (HONGKONG) LTD, MUMBAI V. ADIT (IT) 2(1), MUMBAI

ITA 2998/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100849 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 3 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 30-07-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 15-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAMAPRIYA RAGHAVAN
• Assessee Lawyers: J D MISTRY
• Keywords: Additional evidence; Wholly owned subsidiary

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 . 2998/MUM/2010 ( / ASSESSMENT YEAR : 2005 - 06 ST. JUDE MEDICAL (HONGKONG) LTD., 604, 605 & 606, THE AVENUE, INTERNATIONAL AIRPORT ROAD, OPP. THE LEELA HOTEL, J.B. NAGAR, ANDHERI KURLA ROAD, ANDHERI (E), MUMBAI - 400 059 / VS. THE ADIT, (INT. TAXATION) - 2(1), SCINDIA HOUSE, BALLARD PIER, MUMBAI - 400 038 ./ ./ PAN/GIR NO. : AAKCS 2848B ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY: SHRI J.D. MISTRY / RESPONDENT BY : SMT. RAMAPRIYA RAGHAVAN / DATE OF HEARING : 30 . 0 7 .2015 / DATE OF PRONOUNCEMENT : 14 .0 8 .2015 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST THE ORDER OF THE LD. CIT(A) - 11 , MUMBAI DT. 3 1.1.201 0 PERTAINING TO ASSESSMENT YEAR 200 5 - 0 6 . ITA. NO . 2998/M/2010 2 2. THE ASSESSEE HAS RAISED 5 SUBSTANTIVE GROUNDS OF APPEAL WHICH READ AS UNDER: 1 : 0 RE.: ATTRIBUTION OF PROFITS OUT OF THE SALES MADE BY THE HEAD OFFICE : 1 : 1 THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER OF ATTRIBUTING THE PROFIT ON THE DIRECT SALES MADE IN INDIA BY THE HEAD OFFICE OF THE APPELLANT AS THE PROFIT OF THE INDIAN BRANCH. 1 : 2 . THE AP PELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT, THE PROFIT ON THE DIRECT SALES MADE BY ITS HEAD OFFICE CANNOT BE ATTRIBUTED TO THE OPERATIONS CARRIED OUT BY THE INDIAN BRANCH AND HENCE NO AMOU NT IS INCLUDIBLE IN THE TOTAL INCOME AND THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. I : 3 . THE APPELLANT SUBMITS THAT THE ASSESSING OFFICER BE DIRECTED TO DELETE THE ADDITION SO MADE BY HIM AND TO RECOMPUTE ITS TOTAL INCOME ACCO RDINGLY. WITHOUT PREJUDICE TO THE FOREGOING: 2 : 0 RE.: ESTIMATION OF GROSS PROFIT: 2 : 1 . THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER OF ESTIMATING 20% OF THE DIRECT SALES MADE BY THE HEAD OFFICE IN INDIA AS PART OF THE TOTAL INCOME OF THE INDIAN BRANCH OF THE APPELLANT. 2 : 2 . THE APPE LLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT, THE STAND OF THE ASSESSING OFFICER IN CONSIDERING 20% OF THE DIRECT SALES MADE BY THE HEAD OFFICE AS ITS INCOME ATTRIBUTABLE TO THE OPERATIONS CAR RIED ON BY ITS INDIAN BRANCH IS INCORRECT, ERRONEOUS, EXORBITANT, EXCESSIVE AND MISCONCEIVED AND THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. WITHOUT PREJUDICE TO THE FOREGOING: 3 : 0 RE.: NON - REDUCTION OF THE MANAGEMENT FEES O FFERED TO TAX: ITA. NO . 2998/M/2010 3 3 : 1 . ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT DIRECTING THE ASSESSING OFFICER TO REDUCE THE MANAGEMENT FEE OFFERED TO TAX BY THE APPELLANT IN ITS RETURN OF INCOME IN RESPECT OF DIRECT SALES BY THE HEAD OFFICE. 3 : 2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT, IN CASE IT IS HELD THAT DIRECT SALES MADE IN INDIA BY THE HEAD OFFICE OF THE APPELLANT ARE ATTRIB UTABLE TO THE INDIAN BRANCH THE MANAGEMENT FEES OFFERED TO TAX BY THE APPELLANT OUGHT TO BE REDUCED AND THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. 3 : 3 . THE APPELLANT SUBMITS THAT THE ASSESSING OFFICER BE DIRECTED TO REDUCE T HE MANAGEMENT FEES OFFERED TO TAX WHILE COMPUTING ITS TOTAL INCOME FOR THE YEAR. 4: 0 . RE.: ADDITION MADE U/S.40(A) (IA) OF THE INCOME - TAX ACT, 1961: 4: 1 . THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING O FFICER OF DISALLOWING A SUM OF RS. 23,08,546/ U/S. 40(A)(IA) OF THE INCOME TAX ACT,1961. 4:2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT NO DISALLOWANCE WHATSOEVER IS CALLED FOR U/S . 40(A)(IA) OF THE INCOME TAX ACT, 1961 AND THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE HELD AS SUCH. 4.3. THE APPELLANT SUBMITS THAT THE ASSESSING OFFICER BE DIRECTED TO DELETE THE ADDITION SO MADE BY HIM AND TO RE COMPUTE ITS TOTAL INCOME ACCORDINGLY. 5.0. RE.: NON CONSIDERATION OF ADDITIONAL EVIDENCE ADMISSIBLE IN TERMS OF RULE 46A OF THE INCOME - TAX RULES, 1962~ 5.1. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT ADMITTING THE ADDITIONAL EVIDENCE FILED BY THE APPELLANT. ITA. NO . 2998/M/2010 4 5.2. THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCE OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT THE ADDITIONAL EVIDENCES WERE GERMANE TO THE ISSUE AT HAND AND W ERE ADMISSIBLE IN TERMS OF RULE 46A OF THE INCOME TAX RULES,1962 AND THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE CONSIDERED THE SAME WHILE DECIDING THE APPEAL. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MARKETING AND SELLING OF MEDICAL PRODUCTS. THE ASSESSEE IS 100% SUBSIDIARY OF ST. JUDE MEDICAL INC. OF UNITED STATES OF AMERICA (SJMI). SJMI WAS WAS EARLIER SELLING ITS PRODUCTS IN INDIA THROUGH AN INDEPENDENT THIRD PARTY DISTRIBUTOR LOCATED IN HONGKONG. THE HONGKONG DISTRIBUTOR HAD IN TURN APPOINTED CERTAIN SUB DISTRIBUTORS TO MARKET AND SELL PRODUCT S OF SJMI IN INDIA. SUBSEQUENTLY, SJMI SET UP A WHOLLY OWNED SUBSIDIARY IN HONGKONG VIZ., ST. JUDE MEDICAL (HONGKONG) LTD (SJMHK). SJMHK OPENED A BRANCH OFFICE ON 1 ST JANUARY 2000 WITH THE REQUISITE APPROVAL OF RESERVE BANK OF INDIA. 3.1. DURING THE YE AR UNDER CONSIDERATION ON THE SALES MADE BY THE HEAD OFFICE THROUGH THE INDIAN BRANCH , T HE PROFITS/LOSS ON SUCH SALES HAS BEEN SHOWN IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION IN RESPECT OF ITS INDIAN BRANCH. 3.2. AS P ER THE NOTES ON ACCOUNTS FORMING PART OF THE BALANCE SHEET OF THE INDIAN BRANCH, IT IS EXPLAINED THAT THE HEAD OFFICE HAD ENTERED INTO AN AGREEMENT WITH THE INDIAN BRANCH FOR PROVIDING MARKETING SUPPORT FOR THE SALES MADE BY THE HEAD OFFICE DIRECTLY IN IN DIA FOR WHICH THE BRANCH HAS RECEIVED A MANAGEMENT FEES OF RS. 37,80,857/ - IN RESPECT OF THE SALES. 3.3. THE HEAD OFFICE HAS SOLD THE SAME MEDICAL PRODUCTS DIRECTLY IN INDIA AMOUNTING TO USD 9,59,774/ - . THE ASSESSEE EXPLAINED THAT THE ITA. NO . 2998/M/2010 5 BRANCH HAS NO ROLE TO PLAY IN SUCH SALES AND THEREFORE THE PROFITS FROM SUCH SALES ARE NOT ATTRIBUTABLE TO THE INDIAN BRANCH. 3.4. ON THE BASIS OF THE ABOVE FACTUAL MATRIX, THE ASSESSING OFFICER ADOPTED THE FINDINGS OF HIS PREDECESSOR GIVEN IN A.Y. 2004 - 05 AND HELD THAT 2 0% OF THE DIRECT SALES MADE BY THE HEAD OFFICE SHOULD BE TREATED AS INCOME TAXABLE IN INDIA AND ACCORDINGLY MADE AN ADDITION OF RS. 86,37,962/ - . 4. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A). THE LD. CIT(A) WHILE DECIDING THE GRIEVANCE OF THE ASSESSEE HEAVILY RELIED UPON THE DECISION GIVEN BY HIS PREDECESSOR IN EARLIER ASSESSMENT YEARS AND CONFIRMED THE FINDINGS OF THE AO. 5. AGGRIEVED, THE ASSESSEE IS BEFORE US. 6. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YEARS IN ITA NOS. 2228/M/07, 1902/M/07, 4623/M/07, 4941/M/07, 6922/M/07 AND 7193/M/07 DATED 13.5.2014 READ WITH MISCELLANEOUS APPLICATION NO. 349 TO 351/M/14 DT14.10.2014. IT IS THE SAY OF THE LD. COUNSEL THAT THE ISSUES UNDER DISPUTE ARE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY ITS ORDER OF THE TRIBUNAL. 7. THE LD. DEPARTMENTAL REPRESENTATIVE FAIRLY CONCEDED TO THIS. 8. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE DECISION OF THE TRIBUNAL BROUGHT TO OUR NOTICE. AT PARA - 29 AND 30, THE TRIBUNAL HELD AS UNDER: ITA. NO . 2998/M/2010 6 29. WE HAVE HEARD THE ARGUMENTS AND HAVE PERUSED THE ORDER OF THE COORDINATE BENCH IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEARS 1999 2000 & 2000 01, WHEREIN THE COORDINATE BENCH HAD ACCEPTED THE ESTIMATE OF GROSS PROFIT ATTRIBUTION AT 10% IN PLACE OF 20%. WE HAVE ALSO PERUSED THE TP REPORT A ND 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 INBSPIRE CONFIDENCE. 30. WE, THEREFORE, ACCEPT THE GROSS PROFIT MARGIN DECLARED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. 8.1 . FURTHER AT PARA - 39 TO 42, THE TRIBUNAL HAS MADE THE FOLLOWING OBSERVATIONS: 39. BEFORE US, THE AR SUBMITTED THAT THE FACT THAT RECEIPT OF RS. 79,20,240/ PERTAINED TO MANAGEMENT FEE SJ MH AND SJMI IS EVIDENT FROM THE ACCOUNTS SUBMITTED BEFORE THE REVENUE AUTHORITIES. THE AR SUBMITTED THAT THE ISSUE HAS BEEN FROM TP REGIMEN AS WELL. IT WAS SUBMITTED THAT THE TRANSACTION WAS DECLARED IN TP REPORT SUBMITTED, WHEREIN IT WAS CATEGORICALLY ME NTIONED THAT TRANSACTION INVOLVED THE RECEIPT OF MANAGEMENT FEE FROM AE DURING THE YEAR ENDED 31.3.2002. THE AR POINTED OUT THAT THE ASSESSEE HAD DECLARED THE SAME IN THE TP REPORT IN IDENTIFICATION OF REVENUES, WHICH SHOWED THAT RS. 79,20,240/ PERTAINED ONLY TO SJMH AND SJMI. IT WAS ALSO POINTED OUT THAT IT WAS DECLARED AND THE SAME WAS ACCEPTED BY THE TPO VIDE ORDER U/S. 92CA(3) DATED 28.2.2005 AND FOUND THE SAME TO BE CORRECT, AND NO ADJUSTMENT WAS CALLED FOR. 40. THE AR, THEREFORE, SUBMITTED THAT MANAGEMENT FEE PERTAINED TO SJMH AND SJMI AND HENCE NO ADDITION WAS CALLED FOR. 41. THE DR SUBMITTED THAT THE ASSESSEE HAD NOT FILED ANY ANNUAL REPORT AND THE ORDERS OF THE REVENUE AUTHORITIES DOES NOT SPELL OUT WHETHER MANAGEMENT FEE IS FOR THE SALES OR THERE WAS SOMETHING MORE. THE DR, THEREFORE, SUBMITTED THAT ISSUE DESERVES TO BE RELOOKED BY THE AO. ITA. NO . 2998/M/2010 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 AUT HORITIES AND THE DR ARE THAT THE ASSESSEE IN THE YEAR UNDER 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 B RANCH FROM SJMH RELATED TO SERVICES PROVIDED 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) AS NO DISTINGUISHING DECISION HAS BEEN BROUGHT TO OUR NOTICE, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH (SUPRA), WE HOLD ACCORDINGLY. GROU ND NO. 2 &3 ARE ACCORDINGLY ALLOWED. WITH THIS DECISION GROUND NO. 1 NEED NO ADJUDICATION. 9. IN SO FAR AS THE ISSUES RAISED VIDE GROUND NO. 4 IS CONCERNED, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT IN VIEW OF THE SPECIFIC DIRECTION OF THE LD. CIT(A), GRIEVANCE RAISED VIDE GROUND NO. 4 ARE NOT PRESSED ACCORDINGLY IT IS DISMISSED AS NOT PRESSED. 10. SIMILARLY GROUND NO. 5 IS ALSO NOT PRESSED THEREFORE IT IS DISMISSED. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. OR DER PRONOUNCED IN THE OPEN COURT ON 14 TH AUGUST , 2015 SD/ - SD/ - ( SUSHMA CH O WLA ) (N.K. BILLAIYA) /JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED : 14 TH AUGUST , 2015 . . ./ RJ , SR. PS ITA. NO . 2998/M/2010 8 / 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