Bio Merieux India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 3942/DEL/2010

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8794 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 24-03-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 23-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES STANDING
• Assessee Lawyers: DEEPALI AGARWAL
• Keywords: Depreciation; Transfer pricing; International transaction; Additional evidence
• Section: 143(3)

Judgement Text

ITA NO. 3942/ DEL/ 2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI J.S. REDDY, ACCOUNTANT MEMBER I.T.A. NO. 3942 /DEL/201 0 A.Y. : 200 6 - 0 7 M/S BIO MERIEU X INDIA PVT. LTD., A - 32, MOHAN COOPERATIVE INDL. AREA, MATHURA ROAD, NEW DELHI (PAN: AAACB4984F) VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SH. NEERAJ JAIN, ADV. & MS. DEEPALI AGARWAL, CA DEPARTMENT BY : SH. JUDY JAMES, S TANDING COUNSEL DATE OF HEARING : 2 4 - 3 - 201 5 DATE OF ORDER : 30 - 3 - 201 5 ORDER PER H.S. SIDHU : J M TH IS APPEAL BY THE ASSESSEE IS D IRECTED AGAINST THE ASSESSMENT ORDER DATED 22 . 6 .2010 OF THE ASSESSING OFFICER PASSED U/S. 143(3) R.W.S. 144C OF THE I.T. ACT, 1961 P ERTAINING TO ASSESSMENT YEAR 200 6 - 0 7 . 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IN ITS TRANSFER PRICING REPORT HAD CREATED SEGMENTAL ACCOUNTS AND BASED ON THAT AN INTERNAL TNMM ANALYSIS WAS CARRIED AND INTERNATIONAL TRANSACTIONS WERE CONSIDERED TO BE AT ARM S LENGTH. THE TRANSFER PRI CING OFFICER ITA NO. 3942/ DEL/ 2010 2 (TPO) REJECTED THE INTERNAL BENCH MARKING CARRIED OUT BY THE ASSESSEE SINCE THE SEGMENTATION OF ITS ACCOUNTS WAS ARTIFICIALLY CREATED BY THE ASSESSEE FOR THE PURPOSE OF TRANSFER PRICING. AS PER THE TPO ASSESSEE DOES NOT MAINTAIN ANY RELIABLE SEGMENTAL DATA. 2.1 THE TPO HAS TAKEN OP/SALES AS PROFIT LEVEL INDICATOR (PLI) AND SELECTED THREE COMPANIES, NAMELY MJS. CASIL HEALTH PRODUCTS LTD., ORGANON (INDIA) LTD. AND SPAN DIAGNOSTICS LTD., AS COMPARABLE COMPANIES. WHILE DOING SO THE TPO HAS TA KEN THE SEGMENTAL OF THE COMPARABLE COMPANIES WHEREVER IT WAS AVAILABLE. THE ASSESSEE HAS OBJECTED TO THE SELECTION OF THESE COMPARABLES ON THE GROUNDS OF THE FUNCTIONS PERFORMED BY THESE THREE COMPANIES AND ALSO ON THE SEGMENTAL ACCOUNTS. 3. THE TPO VI DE ORDER DATED 15.10.2009 HAS DETERMINED THE ARM S LENGTH PRICE W.R.T. THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE AND DIRECTED THE AO TO ADD A SUM OF RS. 1,67,41,313/ - TO THE TAXABLE INCOME OF THE ASSESSEE. THE ASSESSEE CHALLENGED THE DR AFT ASSESSMENT ORDER BEFORE THE DRP. THE DRP HAS PASSED A CRYPTIC ORDER ON 30.4.2010 AND CONSEQUENTLY THE FINAL ORDER HAS BEEN PASSED BY THE ASSESSING OFFICER. AGGRIEVED WITH THE AO S ORDER, THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS : - 1. THAT THE ASSESSMG OFFICER ERRED ON FACTS AND M LAW IN COMPLETING THE ASSESSMENT UNDER SECTION 144C READ WITH ITA NO. 3942/ DEL/ 2010 3 SECTIONI43(3) OF THE INCOME - TAX ACT (THE ACT) AT AN INCOME OF RS. 43,65,760 AS AGAINST THE RETURNED LOSS OF RS. 1,23,96,776. 2. THAT THE AS SESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS.1,67,41,313 TO THE INCOME OF THE APPELLANT, ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS UNDERTAKEN DURING THE PREVIOUS YEAR. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISREGARDING THE INTERNAL BENCHMARKING UNDERTAKEN BY THE ASSESSEE FOR DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS APPLYING TNMM ON THE GROUND THAT - (A) THE AUDITED FINANCIALS DO NOT MAINTAIN BIFURCATION OF AE AND NON AE BUSINESS; THE REPORTING OF FINANCIAL INFORMATION IN ANNUAL AUDITED ACCOUNT IS BASED AT ENTITY LEVEL; (B) THE AUDITED FINANCIALS OF THE ASSESSEE DO NOT CONTAIN INFORMATION ABOUT AE AND NON AE REVENUE SEPARATELY; (C) THE ALLOCATION OF EXPENDITURE TO THE AE AND NON AE SEGMENT IS NOT AVAILABLE IN AUDITED FINANCIALS OF THE ASSESSEE; (D) THE ALLOCATION OF EXPENDITURE ON THE BASIS OF TURNOVER CANNOT BE MADE BECAUSE AS PER TERMS AND CONDITIONS OF THE AGREEMENT BETWEEN TH E ASSESSEE AND THE AE, THE ASSESSEE ITA NO. 3942/ DEL/ 2010 4 WAS REQUIRED TO INCUR EXPENDITURE ON DISCOUNTS, MARKETING, MAINTENANCE AND AFTER SALE SERVICES AND WAS REQUIRED TO MAIN PRESCRIBED INFRASTRUCTURE FOR REPORTING AND SALES ADMINISTRATION. ACCORDINGLY, THESE AE SPECIFIC EXP ENDITURE CANNOT BE ALLOCATED ON THE BASIS OF TURNOVER. ( E) IN SUPPORT OF THE OTHER CLAIM OF THE ASSESSEE THAT REVENUE AND EXPENSE ALLOCATION TO AE AND NON AE SEGMENTS CAN BE ASCERTAINED CORRECTLY AS THE ASSESSEE HAS MAINTAINED ERP ACCOUNTS PACKAGE, THE ASSESSEE DID NOT FURNISH ANY RECORD IN SUPPORT THEREOF. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISREGARDING THE SEGMENTAL PROFITABILITY SUBMITTED BY THE APPELLANT ALLEGING THAT THE CORRECTNESS OF ALLOCATION OF EXPENSES AND REVENUE TO A E AND NON AE SEGMENT BY THE APPELLANT WERE NOT RELIABLE, WITHOUT POINTING OUT ANY SPECIFIC ERROR IN THE SEGMENTATION OF PROFITABILITY MADE BY THE APPELLANT. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN UNDERTAKING BENCH M ARKING ANALYSIS APPLY ING TNMM CONSIDERING CERTAIN EXTERNAL COMPARABLE COMPANIES DISREGARDING THE INTERNAL COMPARISON AVAILABLE ON RECORD. ITA NO. 3942/ DEL/ 2010 5 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT INTERNAL COMPARISON FOR APPLICATION OF TNMM UNDERTAKEN BY THE APPELLANT WAS ACCEPTED IN THE TRANSFER PRICING ASSESSMENT FOR THE PRECEDING PREVIOUS YEARS, I.E., ASSESSMENT YEARS 2 002 - 03,2003 - 04 AND 2004 - 05. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW BY COMPARING THE NET OPERATING PROFIT MARGIN OF THE APPELLANT WHICH IS ENGAGED IN 'PURE TRADING OF DIAGNOSTIC PRODUCTS' WITH THE NET OPERATING MARGINS OF COMPANIES AT ENTI TY LEVEL WHICH ARE INTO MANUFACTURING / MANUFACTURING OF DIFFERENT DRUGS, CAPSULES, CONTRACEPTIVES, INJECTABLES, CREAM, POWDER, HOSPITAL DISPOSABLES AND OTHER MULTIPLE ACTIVITIES. 7.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING CASIL HEALTH PRODUCTS LTD., ORGANON (INDIA) LTD AND SPAN DIAGNOSTICS LTD. AS COMPARABLE COMPANIES FOR UNDERTAKING THE BENCH MA RKING ANALYSIS APPLYING TNMM. 7.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN TAKING THE OPERATING PROFIT MARGIN OF 4 .26% OF CASIL HEALTH PRODUCTS LTD. AT ENTITY WIDE LEVEL DISREGARDING THE LOSS OF 13.31% FROM THE 'DIAGNOSTIC PRODUCT SEGMENT' AVAILABLE IN THE AUDITED FINANCIAL STATEMENTS OF THE CASIL HEALTH PRODUCTS LTD., ITA NO. 3942/ DEL/ 2010 6 MERELY ON THE GROUND THAT CERTAIN EXPENSES NET OF UNALLOCATED INCOME AGGREGATING TO RS.52,626 WERE NOT ALLOCATED. 7.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN CASE OF ORGANON (INDIA) LTD., SALES OF DIAGNOSTIC PRODUCTS CONSTITUTED ONLY 3.31 % OF THE GROSS SALES AND THE SAID COMPANY OUGHT TO HAVE BEEN EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. 7.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING ORGANON (INDIA) LIMITED AS PART OF THE SET OF COMPARABLE COMPANIES FOR APPLYING TNMM ON ENTITY - WID E BASIS WITHOUT APPRECIATING THAT SIGNIFICANT PART OF TURNOVER OF THE SAID COMPANY WAS FROM MANUFACTURING OPERATIONS OF DIFFERENT DRUGS, CAPSULES, CONTRACEPTIVES, INJECTABLES, CREAM, POWDER AND OTHER PRODUCTS AS OPPOSED TO TRADING OF 'DIAGNOSTIC PRODUCTS' UNDERTAKEN BY THE APPELLANT. 7.5 THAT THE ASSESSING OFFICER ALTERNATIVELY OUGHT TO HAVE CONSIDERED OPERATING PROFIT MARGIN OF ORGANON (INDIA) LTD. AT ( - ) 6.91% ATTRIBUTED TO TRADING SEGMENT INSTEAD OF THE ENTITY - WIDE MARGIN OF 15.38%, FOR UNDERTAKING THE BENCHMARKING ANALYSIS. 7.6 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING SPAN DIAGNOSTIC LIMITED AS PART OF COMPARABLE ITA NO. 3942/ DEL/ 2010 7 COMPANIES FOR APPLYING TNMM, NOT APPRECIATING THAT SAID COMPANY WAS PRIMARILY ENGAGED IN MANUFACTURING ACTIVITIE S, CONSIDERING THAT ONLY 38% OF THE TOTAL TURNOVER WAS FROM TRADING IN DIAGNOSTIC PRODUCTS. 7.7 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN ABSENCE OF DATA TO DETERMINE OPERATING PROFIT MARGIN FROM 'TRADING SEGMENT', SPAN DIAGNOSTIC COULD NOT BE RELIED UPON AS COMPARABLE COMPANY FOR UNDERTAKING THE BENCHM ARKING ANALYSIS APPLYING TNMM. 7.8 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING THE COMBINED NET OPERATING PROFIT MARGIN OF M/S. CASIL HEALTH PRODUCTS LIMITED FOR APPLYING TNMM INSTEAD OF CONSIDERING ONLY NET OPERATING PROFIT MARGIN OF THE DIAGNOSTIC PRODUCTS SEGMENT OF THE SAID COMPANY. 7.9 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRE CIATING THAT THE GROSS PROFIT MARGIN EARNED BY THE APPELLANT FROM THE INTERNATIONAL TRANSACTIONS OF TRADING / RESALE OF DIAGNOSTIC PRODUCTS AT 31.32% WAS HIGHER THAN THE AVERAGE GROSS PROFIT MARGIN OF 19.95% EARNED BY THE COMPARABLE COMPANIES IDENTIFIED BY THE TRANSFER PRICING OFFICER AND, THEREFORE, NO ADJUSTMENT ON ACCOUNT OF ARM'S ITA NO. 3942/ DEL/ 2010 8 LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WAS EVEN OTHERWISE CALLED FOR BEING MADE. 7.10 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERI NG THE OPERATING PROFIT MARGIN OF THE APPELLANT AT 3.46% AS AGAINST 4.29% AFTER TAKING INTO ACCOUNT RENTAL INCOME FROM EQUIPMENT AND AFTER SALE SERVICE INCOME. 8. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN RESTRICTING DEPRECIATION ON COMPUTER PERIPHERALS AND ACCESSORIES TO 15% AS AGAINST 60% CLAIMED BY THE APPELLANT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR VARY FROM THE AFORESAID GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING. 4. AFTER HEARING , SHRI NEERAJ JAIN, LD. COUNSE L OF THE ASSESSEE AND SHRI JUDY JAMES, LD. DEPARTMENTAL REPRESENTATIVE/STANDING COUNSEL FOR THE REVENUE, WE FIND THAT THE O RDER DATED 30.4.2010 PASSED BY THE DISPUTE RESOLUTION PANEL (DRP), NEW DELHI U/S. 144C OF THE I.T. ACT, 1961 IS A CRYPTIC AND NON S PEAKING ONE. NONE OF THE CONTENTIONS RAISED BY THE ASSESSEE, HAVE BEEN DEALT WITH BY THE DRP. UNDER THE CIRCUMSTANCES, WE HAVE NO OTHER ALTERNATIVE, BUT TO REMAND BACK THE MATTER TO THE FILE OF THE DRP FOR FRESH ADJUDICATION, ITA NO. 3942/ DEL/ 2010 9 IN ACCORDANCE WITH LAW. THE DRP SHALL PASS A SPEAKING ORDER AND ADDRES S ALL THE CONTENTIONS RAISED BY THE ASSESSEE. 4.1 WE ALSO FIND THAT B EFORE US THE ASSESSEE HAS FILED AN A PPLICATION UNDER RULE 29 OF THE INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963 FOR ADMISSION OF ADDITIONAL EVIDENCES. THE DRP SHALL CONSIDER THIS APPLICATION UNDER RULE 29 ON MERITS ALSO. 5 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE O PEN C OURT ON 30/ 3 /20 1 5 . SD/ - SD/ - [ J.S. REDDY ] [ H.S. SIDHU ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATE 30 / 3 /201 5 SRBHATNAGAR COPY FORWARDED TO: - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES