MERCK LTD, MUMBAI V. ASST CIT 6(3), MUMBAI

ITA 3459/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75411 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2004-2005
• Appeal Filed On: 03-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 92C

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , / , ! ' # BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER . / ITA NO. 3459/MUM/2013 % % % % / ASSESSMENT YEAR 2004-05 MERCK LIMITED, A BLOCK, SHIV SAGAR ESTATE, DR.ANNIE BESANT ROAD, WORLI, MUMBAI 400 018. / VS. THE ASSTT. COMMISSIONER OF INCOME TAX 6(3), MUMBAI. & ! ./ '( ./ PAN/GIR NO. : AAACE 2616F ( &) / APPELLANT ) .. ( *+&) / RESPONDENT ) ASSESSEE BY : MS. AARTI VISANJI & SHRI AJIT SHAH RESPONDENT BY : SHRI AJEET KUMAR JAIN , -.! / DATE OF HEARING : 06/02/2014 /0% , -.! / DATE OF PRONOUNCEMENT : 06/02/2014 1 / O R D E R PER I.P.BANSAL, J.M: THIS IS AN APPEAL FILED BY THE ASSESSEE. IT IS DI RECTED AGAINST THE ORDER PASSED BY LD. CIT(A)-12, MUMBAI DATED 8/2/2013 FOR THE ASSESSMENT YEAR 2004-05. THE GROUNDS OF APPEAL READ AS UNDER: THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) I N THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLANT AND IN L AW ERRED IN- (A) CONFIRMING THE PENALTY ORDER AS THE PROCEEDING S UNDER THE ACT HAD NOT BEEN COMPLETED IN VIEW OF THE PENDENCY OF THE APPEAL BEF ORE THE HON. INCOME TAX APPELLATE TRIBUNAL; . / ITA NO. 3459/MUM/2013 % % % % / ASSESSMENT YEAR 2004-05 2 (B) PASSING THE IMPUGNED PENALTY ORDER U/S.271(1)(C ) OF THE ACT AND LEVYING PENALTY IN RESPECT OF TRANSFER PRICING ADJUSTMENT W ITHOUT INVOKING EXPLANATION 7 WHICH STIPULATES THE CONDITIONS AND CIRCUMSTANCES U NDER WHICH PENALTY IS LEVIABLE THEREFORE; (C) UPHOLDING THE ORDER PASSED BY THE ASSESSING OFF ICER U/S.271(1)(C) OF THE ACT IN RESPECT OF TRANSFER PRICING ADDITIONS, THOUGH HOWEV ER, HE HAD NOT RECORDED THE SATISFACTION OF CONCEALMENT OF INCOME OR FURNISHI NG OF INACCURATE PARTICULARS OF INCOME AS CONTEMPLATED U/S.271(L)(C) OF THE ACT; (D) CONFIRMING THE PENALTY OF RS.2,51,13,470/- ON A CCOUNT OF TRANSFER PRICING ADJUSTMENTS THOUGH HOWEVER, THE APPELLANT HAD NOT CONCEALED THE PARTICULARS OF INCOME NOR HAD IT FURNISHED ANY INACCURATE PARTICUL ARS OF INCOME AS CONTEMPLATED UNDER THE SAID PROVISIONS OF THE ACT; (E) CONFIRMING THE PENALTY ON TRANSFER PRICING ADJU STMENTS, THOUGH HOWEVER, THE EXPLANATION/S OFFERED BY THE APPELLANT WERE NOT FOU ND TO BE FALSE BUT EXPLANATIONS OFFERED BY THE APPELLANT WERE SUBSTANT IATED AND PROVED TO BE BONAFIDE AND THE FACTS RELATING TO THE SAME AND MAT ERIALS TO THE COMPUTATION OF TOTAL INCOME WERE DISCLOSED BY THE APPELLANT; (F) CONFIRMING LEVY OF PENALTY FOR ALLEGED CONCEALM ENT OF PARTICULARS OF INCOME IN RESPECT OF TRANSFER PRICING ADJUSTMENTS ON THE BASI S OF ASSUMPTION, SURMISES AND IN RESPECT OF MATTERS WHERE TWO VIEWS WERE POSSIBLE AND THE APPELLANT HAD ADOPTED ONE OF THEM; (G) CONFIRMING THE PENALTY ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS THOUGH THE APPELLANT HAD FURNISHED ALL THE PARTICULARS IN RESP ECT OF THE INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES AND SU CH PARTICULARS FURNISHED WERE NOT INACCURATE AND FURTHER, THE PRICES CHARGED OR P AID IN RESPECT OF SUCH TRANSACTIONS WERE COMPUTED IN ACCORDANCE WITH THE P ROVISIONS CONTAINED IN SECTION 92C OF THE ACT AND IN THE MANNER PRESCRIBED IN THAT SECTION IN GOOD FAITH AND WITH DUE DILIGENCE. 2.THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IN THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLANT AND IN L AW OUGHT TO HAVE- (A) NOT CONFIRMED THE PENALTY ORDER AS THE PROCEED INGS UNDER THE ACT HAD NOT BEEN COMPLETED IN VIEW OF THE PENDENCY OF THE APPEA L BEFORE THE HON. INCOME TAX APPELLATE TRIBUNAL; (B) NOT CONFIRMED LEVY OF PENALTY U/S.271(1)(C) IN RESPECT OF TRANSFER PRICING ADJUSTMENT WITHOUT INVOKING OF EXPLANATION 7 BY THE LEARNED AO, WHICH STIPULATES THE CONDITIONS AND CIRCUMSTANCES UNDER W HICH PENALTY IS LEVIABLE THEREFOR; (C) NOT CONFIRMED THE PENALTY ORDER, AS THERE WERE NO SATISFACTION RECORDED IN THE ORDER THAT THE APPELLANT HAD CONCEALED THE PART ICULARS OF INCOME OR HAD SUBMITTED INACCURATE PARTICULARS OF INCOME AS CONTE MPLATED THEREIN; (D) NOT CONFIRMED THE PENALTY ORDER OF RS.2,51,13,4 70/- IN RESPECT OF TRANSFER PRICING ADJUSTMENTS AS THE APPELLANT HAD NOT CONCE ALED ANY PARTICULARS OF . / ITA NO. 3459/MUM/2013 % % % % / ASSESSMENT YEAR 2004-05 3 INCOME NOR HAD SUBMITTED ANY INACCURATE PARTICULARS OF INCOME AS CONTEMPLATED UNDER THE SAID PROVISIONS OF THE ACT; (E) ACCEPTED THE EXPLANATIONS OFFERED BY THE APPELL ANT WITH REGARD TO THE TRANSFER PRICING ADJUSTMENTS MADE BY THE LEARNED AO, AS TRUE AND CORRECT AND HELD THAT THE FACTS RELATING TO THE SAME AND MATERIAL TO THE COMPUTATION OF TOTAL INCOME WERE DISCLOSED BY THE APPELLANT; (F) NOT CONFIRMED LEVY OF PENALTY IN RESPECT OF TR ANSFER PRICING ADJUSTMENTS ON THE BASIS OF ASSUMPTIONS, SURMISES AND IN RESPECT OF TH E MATTERS WHERE TWO VIEWS WERE POSSIBLE AND THE APPELLANT HAD ADOPTED ONE OF THEM; (G) NOT LEVIED PENALTY ON ACCOUNT OF TRANSFER PRIC ING ADJUSTMENTS, AS THE APPELLANT HAD NOT CONCEALED ANY PARTICULARS OF INCO ME OR HAD NOT FURNISHED ANY INACCURATE PARTICULARS OF INCOME AND THE APPELLANT HAD CHARGED / PAID PRICES IN RESPECT OF INTERNATIONAL TRANSACTIONS WITH THE ASS OCIATED ENTERPRISES IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 92C OF THE ACT AND IN THE MANNER PRESCRIBED THERE UNDER IN GOOD FAITH AND WIT H DUE DILIGENCE. 3. THE ABOVE GROUNDS OF APPEAL ARE DISTINCT AND SEP ARATE AND WITHOUT PREJUDICE TO EACH OTHER. 2. IT MAY BE MENTIONED HERE THAT THE ASSESSEE IN TH E PRESENT CASE IS CONTESTING LEVY OF CONCEALMENT PENALTY AMOUNTING TO RS.91,74,715/-, WHICH IS LEVIED ON TOTAL ADDITION OF RS.2,51,13,470/- MADE ON ACCOUNT OF T.P. ADJUSTMENT. IT MAY ALSO BE MENTIONED HERE THAT IN THE GROUND OF APPEAL THE ASSESSEE HAS WRITTEN THE AMOUNT OF ADDITION, WHEREA S THE PENALTY IS INVOLVED ONLY A SUM OF RS.91,74,715/-. 3. DURING THE COURSE OF HEARING IT WAS POINTED OUT BY LD. AR THAT THE QUANTUM HAVE BEEN DECIDED BY THE TRIBUNAL VIDE ITS ORDER DATED 21/8/2013 IN ITA NO.2393/MUM/2009 AND 3098/M/2009. THE AFOREMEN TIONED AMOUNT OF RS.2,51,13,470/-, COMPRISES OF FOLLOWING TWO COMP ONENTS: (1) T.P. ADJUSTMENT ON ACCOUNT OF IMPORT OF RAW MATERIA L AMOUNTING TO RS.1,49,27,106/-. (2) T.P. ADJUSTMENT ON ACCOUNT OF PAYMENT OF TECHNICAL CONSULTANCY FEE AMOUNTING TO RS.1,01,86,364/-. . / ITA NO. 3459/MUM/2013 % % % % / ASSESSMENT YEAR 2004-05 4 3.1 WITH REGARD TO COMPONENT OF RS.1,49,27,106/- TH E ISSUE HAS BEEN RESTORED BACK TO THE FILE OF LD. CIT(A) WITH THE FO LLOWING OBSERVATIONS: 14. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LO WER AUTHORITIES AND THE ORDER OF THE TRIBUNAL IN ITA NO. 925/M/07. WE FIND THAT THE DISPUTE RELATING TO TRANSFER PRICING ADJUSTMENTS HAVE BEEN CONSIDERED B Y THE TRIBUNAL AT PARA-22 PAGE 39 OF ITS ORDER. WE FIND THAT THE ASSESSEE HA S SUBMITTED AN INDEPENDENT THIRD PARTY CERTIFICATE REGARDING THE SUPERIOR QUAL ITY OF THE MATERIAL IMPORTED BY THE ASSESSEE. WE ALSO FIND THAT THE ASSESSEE HAS O BTAINED THE COMPARATIVE RATE OF SALE IN THE SIMILAR PRODUCT MANUFACTURED BY TORR ENT PHARMA AND UNICHEM LABORATORIES LTD., WHICH SHOWS THAT THE ASSESSEE WA S IMPORTING AT HIGHER RATE. RELIANCE WAS PLACED ON THE DECISION OF THE JAIPUR B ENCH OF THE TRIBUNAL IN THE CASE OF ELECTRA (JAIPUR)(P). LTD. VS INSPECTING AS STT. COMMISSIONER 26 ITD 236 WHEREIN THE TRIBUNAL ADMITTED THE ADDITIONAL EVIDEN CE. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF ELECTRA (JA IPUR)(P). LTD. (SUPRA), WE RESTORE THIS ISSUE BACK TO THE FILES OF THE AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF THE OBSERVATIONS MADE B Y THE TRIBUNAL. WE FIND THAT THE ISSUE RELATING TO THE IMPORT OF RAW MATERIALS I S IDENTICAL ON FACTS AS DECIDED BY THE TRIBUNAL IN EARLIER YEAR. RESPECTFULLY FOLL OWING THE DECISION OF THE TRIBUNAL IN ITA NO. 925/M/07 (SUPRA), WE RESTORE THIS ISSUE BACK TO THE FILES OF THE LD. CIT(A) TO DECIDE AFRESH IN THE LIGHT OF THE DECISI ON IN EARLIER YEAR AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 3.2 WITH REGARD TO OTHER COMPONENT OF RS.1,01,86,3 64/-, THE ADDITION HAS BEEN DELETED WITH THE FOLLOWING OBSERVATION: 17. WE HAVE CAREFULLY PERUSED THE ORDER OF THE TRI BUNAL. THE ISSUE FINDS PLACE AT PARA-24, PAGE 62 OF THE ORDER OF THE TRIBUNAL. THE FINDINGS OF THE TRIBUNAL ARE FOUND AT PARA 24.6 AND 24.7 AT PAGE 68 TO 70 OF THE ORDER. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, THE TRIBUNAL THUS HELD A S UNDER: WE FIND SUBSTANCE IN THE ARGUMENT ADVANCED. THE L AW IS QUITE CLEAR ON THE SUBJECT THAT TP ADJUSTMENT IS REQUIRED TO BE MADE BY APPLYING ONE OF THE PRESCRIBED METHODS. THE TPO HAS NOT APPL IED ANY PRESCRIBED METHOD AND HAS ONLY DISALLOWED PART OF THE EXPENSES AS DONE IN THE NORMAL ASSESSMENT, WHICH IS NOT PERMITTED UNDER TRA NSFER PRICING REGULATION AS PER WHICH ADJUSTMENT ON ACCOUNT OF AN Y INTERNATIONAL TRANSACTION IS REQUIRED TO BE MADE AS PER THE METHO D PRESCRIBED. THE LEARNED CIT (DR) POINTED OUT THAT THE TPO IN RESPEC T OF THE NINE SERVICES NOT AVAILED BY THE ASSESSEE HAS TREATED THE PAYMENT AS NIL SINCE NO INDEPENDENT PARTY WOULD MAKE ANY PAYMENT FOR SERVIC ES NOT PROVIDED. THE TPO THUS HAD APPLIED THE CUP METHOD AND MADE AD JUSTMENT ON ACCOUNT OF NINE SERVICES ON AVERAGE BASIS. 24.7 SUCH ARGUMENT IN OUR VIEW IS NOT CONVINCING. T HE ARGUMENT WOULD HAVE BEEN VALID IF FEES WAS FIXED IN RESPECT OF EAC H SERVICE, WHICH WAS COMPULSORILY REQUIRED TO BE PROVIDED TO THE ASSESSE E, BUT IT IS NOT SO IN THE . / ITA NO. 3459/MUM/2013 % % % % / ASSESSMENT YEAR 2004-05 5 PRESENT CASE. THE AGREEMENT LISTED CERTAIN SERVICES ON WHICH THE ASSESSEE REQUIRES GUIDANCE/ASSISTANCE FROM TIME TO TIME. THE ASSESSEE WAS THUS ENTITLED TO ANY OF THE SERVICES AS AND WHEN REQUIRE D. THEREFORE, APPLYING CUP METHOD TO THE SERVICE NOT AVAILED BY THE ASSESS EE DURING THE YEAR IS NOT JUSTIFIED. IT WOULD HAVE BEEN APPROPRIATE IF TH E AO HAD APPLIED CUP METHOD TO THE PAYMENT MADE DURING THE YEAR BY THE A SSESSEE FOR THE THREE SERVICES AND COMPARED WITH SIMILAR PAYMENT FOR SUCH SERVICES BY AN INDEPENDENT PARTY. NO EFFORTS HAVE BEEN MADE BY TPO /AO TO DETERMINE THE MARKET VALUE OF SERVICES RECEIVED BY THE ASSESS EE DURING THE YEAR RELATING TO SAP IMPLEMENTATION AND QUALITY CONTROL TO SHOW THAT THE ASSESSEE HAD PAID MORE COMPARED TO ANY INDEPENDENT PARTY FOR THE SAME SERVICES. THE ASSESSEE HAD SUBMITTED THAT IN CASE T HE ASSESSEE HAD PAID TO THE AE AT MAN HOUR RATE FOR THE TECHNICAL SERVIC ES PROVIDED DURING THE YEAR IN RELATION TO SAP IMPLEMENTATION, THE FEES PA YABLE WOULD HAVE BEEN SIGNIFICANTLY HIGHER. THERE IS NOTHING PRODUCED BEF ORE US TO CONTROVERT THE SAID CLAIM. THE ASSESSEE HAS APPLIED TNMM WHICH SHO WS THAT THE MARGIN SHOWN BY THE ASSESSEE WAS HIGHER THAN THE COMPARABL E COMPANIES. THE CASE OF THE ASSESSEE IS ALSO SUPPORTED BY THE DECIS ION OF TRIBUNAL IN CASE OF MC CAN ERRICSON INDIA PVT. LTD. (SUPRA) IN WHICH THE DECISION OF TPO TO TAKE THE VALUE OF CERTAIN SERVICES AT NIL HAS NOT B EEN UPHELD. CONSIDERING THE ENTIRETY OF FACTS AND CIRCUMSTANCES, THE ADJUST MENT MADE BY TPO WHICH IS NOTHING BUT DISALLOWANCE OF EXPENSES CANNO T BE UPHELD. WE, THEREFORE, SET ASIDE THE ORDER OF CIT (A) ON THIS P OINT AND DELETE THE ADDITION MADE. RESPECTFULLY FOLLOWING THE ABOVE FINDINGS OF THE T RIBUNAL, WE SET ASIDE THE ORDER OF THE LD. CIT(A) ON THIS POINT AND DELETE TH E ADDITION OF RS. 1,01,86,364/-. GROUND NO. 1.2 IS PARTLY ALLOWED FOR STATISTICAL PU RPOSE. COPY OF THE AFOREMENTIONED ORDER OF THE TRIBUNAL H AS BEEN FILED IN THE PAPER BOOK AT PAGES 1 TO 35. IN THIS VIEW OF THE SITUATI ON AND AFTER HEARING BOTH THE PARTIES, SO FAR AS IT RELATES TO CONCEALMENT PENALT Y LEVY IN RESPECT OF ADDITION OF RS.1,49,27,106/-, WE RESTORE THIS ISSUE TO THE FI LE OF AO WITH A DIRECTION TO RE- ADJUDICATE THE SAME AS PER LAW AFTER RECEIVING THE ORDER OF LD. CIT(A) IN THE RESTORED PROCEEDINGS AND AFTER GIVING THE ASSESSE E A REASONABLE OPPORTUNITY OF HEARING. 3.3 SO FAR AS IT RELATES TO OTHER COMPONENT OF ADDI TION I.E. A SUM OF RS.1,01,86,364/-, SINCE THE ADDITION ITSELF HAS BEE N DELETED, CONCEALMENT PENALTY TO THIS EXTENT IS DELETED. . / ITA NO. 3459/MUM/2013 % % % % / ASSESSMENT YEAR 2004-05 6 4. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER AFORESAID. ORDER PRONOUNCED IN THE OPEN COURT ON 06/02/2014 1 , /0% ! 2 34 06/02/2014 0 , 5 # SD/- SD/- ( / N.K.BILLAIYA ) ( . . / I.P. BANSAL ) ! / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 3 DATED 06/02/2014 1 1 1 1 , ,, , *- *- *- *- 6%- 6%- 6%- 6%- / COPY OF THE ORDER FORWARDED TO : 1. &) / THE APPELLANT 2. *+&) / THE RESPONDENT. 3. 7 ( ) / THE CIT(A)- 4. 7 / CIT 5. 85 *- , , / DR, ITAT, MUMBAI 6. 59 : / GUARD FILE. 1 1 1 1 / BY ORDER, +- *- //TRUE COPY// ; ;; ; / < < < < ' ' ' ' (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS . / ITA NO. 3459/MUM/2013 % % % % / ASSESSMENT YEAR 2004-05 7 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 06/02/2014 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 06/02/2014 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER