Appeal details
Counselvise Citation
495619914 RSA 2012
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 9 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-05-2015
Appeal Filed By
Assessee
Bench Allotted
K
Next Hearing Date
23-04-2015
Assessment Year
2007-2008
Appeal Filed On
01-08-2012
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , , BEFORE SHRI G. S. PANNU , A M AND SHRI VIJAY PAL RAO, J M ./ I. T.A. NO. 4 956 /MUM/2012 ( / ASSESSMENT YEAR: 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED 501, SHRI AMBA SHANTI CHAMBERS, ANDHERI - KURLA ROAD, ANDHERI (E), MUMBAI - 400 059 / VS. ADDL. CIT - CIRCLE - 8(1), MUMBAI ./ ./ PAN/GIR NO. AAACC 6494 P ( /ASSESSEE) : ( /REVENUE) & ./ I.T.A. NO S . 4894/MUM/2012 ( / ASSESSMENT YEAR: 2007 - 08) ADDL. CIT - CIRCLE - 8(1), MUMBAI / VS. CHIRON BEHRING VACCINES PRIVATE LIMITED 5 01, SHRI AMBA SHANTI CHAMBERS, ANDHERI - KURLA ROAD, ANDHERI (E), MUMBAI - 400 059 ./ ./ PAN/GIR NO. AAACC 6494 P ( /REVENUE) : ( /ASSESSEE) / A SSESSEE BY : MS. KARISHMA PHATARPHEKAR & SHRI HARSH R. SHAH / R EVENUE BY : SHRI N. K. CHAND / DATE OF HEARING : 23.04.2015 / DATE OF PRONOUNCEMENT : 08 .0 5 .2015 2 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED / O R D E R PER G. S. PANNU , A. M.: T HESE ARE CROSS APPEALS, I.E., BY THE AS SESSEE AND THE REVENUE, DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 15, MUMBAI ( HEREINAFTER REFERRED TO AS THE CIT(A) ) DATED 11.05.2012, WHICH IN TURN HAS ARISEN FROM THE ORDER PASSED BY THE ASSESSING OFFICER U/S. 144C(3) R.W.S . 143(3) OF THE INCOME TAX ACT, 1961 ( HEREINAFTER REFERRED TO AS THE ACT ) DATED 10.01.2011 PERTAINING TO THE ASSESSMENT YEAR 2007 - 08. SINCE THE CAPTIONED APPEALS RELATE TO THE SAME ASSESSEE, THEY HAVE BEEN CLUBBED AND HEARD TOGETHER AND A COMMON ORDER IS BEING PASSED F OR THE SAKE OF CONVENIENCE AND BREVITY . IN T HE APPEAL OF THE ASSESSEE, THE G R OUNDS OF THE APPEAL RAISED, READ AS UNDER: GROUND NO. 1: DISALLOWANCE OF RS.11,37,558 BY TREATING THE PAYMENT OF ADDITIONAL INCOME TAX ON OVERSEAS ROYALTY PAYMEN TS AS PRIOR PERIOD EXPENSES ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) - XV, MUMBAI [LEARNED CIT (A)] ERRED IN HOLDING AND CONFIRMING THE DISALLOWANCE OF RS.1 1,37,558 MADE BY THE ASSESSING OFFICER ('AO') BY TREATING IT AS PRIOR PERIOD IN NATURE. THE LEARNED CIT - ( A) FAILED TO APPRECIATE THAT THE ADDITIONAL/DIFFERENTIAL TAX LIABILITY HAS ACTUALLY CRYSTALLISED IN THE FINANCIAL YEAR 2006 - 07 THOUGH THE SAME PERTAINS TO THE EARLIER YEARS AND THE DIFFERENTIAL T AX HAS BEEN VOLUNTARILY PAID IN THE SUBJECT ASSESSMENT Y EAR TO ENSURE THAT THE APPELLANT IS IN COMPLIANCE WITH THE ACT. THE LEARNED CIT - (A) ERRED IN NOT APPRECIATING THE FACT THAT THE SAID PAYMENT IS COVERED WITHIN THE MEANING OF 'TAX'/ EXPENSE AS DEFINED UNDER SECTION 3B OF THE ACT AND FURTHER ERRED IN HOLDING THAT ONLY THOSE EXPENDITURE WHICH ARE PR OV IDED IN THE BOOKS IN THE RELEVANT YEAR AND ARE DISALLOWED IN SUCH YEAR FOR THE REASON OF NON PAYMENT SHOULD BE ALLOWED. THE APPELLANT PRAYS THAT THE DISAL LOWANCE MADE BY THE AO FOR THE SAID ADDITIONAL INCOME TAX PAID ON OVE RSEAS PAYMENT SHOULD BE DELETED . 2 GROUND NO. 2: - ADDITIONS UNDER SECTION 92CA(3) OF THE ACT BY RE - DETERMINING THE ARM'S LENGTH PRICE OF EXPORT OF VACCINES RS.5 7,932,805 3 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED THE LEARNE D CI T (A) ERRED IN COMPARING THE MARGINS EARNED BY THE APPELLANT FROM EXPORT OF VACCINES TO AN ASSOCIATED ENTERPRISE VIZ. CHIRON BEHRING GMBH & CO WITH THE MARGINS EARNED FROM SALE OF VACCINES IN DOMESTIC MARKET TO ANOTHER ASSOCIATED ENTERPRISE VIZ. AVENTI S PHARMA LTD. AND NOT COMPARING THE SAME WITH THE MARGINS EARNED BY COMPARABLE UNCONTROLLED COMPANIES THE LEARNED. CIT(A) FAILED TO APPRECIATE, CONSIDERING THE SUBMISSIONS MADE, FACTS AND CIRCUMSTANCES OF THE CASE, EXPORT SALE TO CHIRON GMBH WITH DOMESTI C SALE TO AVENTIS TANTAMOUNT TO COMPARING SALES EARNED FROM ONE CONTROLLED TRANSACTION WITH ANOTHER CONTROLLED TRANSAC TION, IS IN VIOLATION OF RULE 10 B. THE LEAMED.CIT(A) ERRED IN NOT ACCEPTING THE COST PLUS APPROACH ADOPTED BY THE APPELLANT FOR ARRIVING AT THE EXPORT SALE PRICE. THE LEARNED CIT(A) FAILED TO APPRECIATE, CONSIDERING THE SUBMISSIONS MADE, FACTS AND CIRCUMSTANCES OF THE CASE, THE APPELLANT'S CLAIM THAT THE EXPORT SALES WERE MADE ON A BONA FIDE BASIS AT AN AGREED PERCENTAGE OVER ITS COST WI TH A GOOD COMMERCIAL REASON TO UTILISE SURPLUS MANUFACTURING CAPACITY. THE APPELLANT PRAYS THAT THE APPROACH OF DETERMINING EXPORT PRICE ON THE BASIS OF COST PLUS MARGIN FOLLOWED BY THE APPELLANT BE CONSIDERED CONSISTENT WITH THE ARM'S LENGTH STANDARD FR OM AN INDIA N TRANSFER PRICING PERSPECTIVE. 2. T HE ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISION OF THE COMPANIES ACT, 1956 AND IS , INTER ALIA , ENGAGED IN THE BUSINESS OF MANUFACTURING OF RABIPUR VACCINE AND F OR THE ASSESSMENT YEAR 2007 - 08, ASSES SEE FILED A RETURN OF INCOME DECLARING TOTAL INCOME OF RS.44,27,11,917/ - , WHICH WAS SUBJECT TO A SCRUTINY ASSESSMENT. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD ENTERED INTO CERTAIN INTERNATIONAL TRANSACTIONS WITHIN THE MEANING OF SECTI O N 92B OF TH E ACT, WITH ITS A SSOCIATED E NTERPRISE S AND, ACCORDINGLY, A REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER ( IN SHORT THE TPO) TO COMPUTE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE TPO PASSED AN ORDER U/S.92CA(3) OF THE ACT DATED 27.09 .2010, WHEREBY THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION WAS DETERMINED AT A FIGURE HIGHER THAN THE STATED VALUE OF SUCH 4 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED INTERNATIONAL TRANSACTIO NS BY A SUM OF RS.9,76,92,251/ - (I.E. RS. 3,97,59,446/ - + RS 3,79,32,805/ - ) PERTINENTLY, THE ASSESS EE HAD CARRIED OUT T WO TYPES OF INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES NAMELY P AYMENT OF R OYALTY OF RS.3,97,59,446/ - , AND , EXPORT OF VACCINES FOR A STATED CONSIDERATION OF RS.15,38,00,006/ - . THE A SSESSING O FFICER COMPUTED THE INCOME ARI SING FROM SUCH INTERNATIONAL TRANSACTIONS IN CONFORMITY WITH ARMS LENGTH PRICE DETERMINED BY THE TPO HAVING REGARD TO THE PROVISIONS OF SECTION 92CA(4) OF THE ACT. AS A CONSEQUENCE, IN THE ASSESSMENT ORDER PASSED U/S.. 144C(3) R.W.S. 143(3) DATED 10.01.20 11 , AN ADDITION OF RS.9,76,97,211/ - WAS MADE ON THIS SCORE. 3. THE ASSESSEE - COMPANY CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). INSOFAR AS THE ISSUE RELATING TO THE DETERMINATION OF ARMS LENGTH PRICE OF THE ROYALTY PAYMENT OF RS.,97,51,446/ - IS CONC ERNED, ASSESSEE SUBMITTED THAT THE DETERMINATION OF ARMS LENGTH PRICE AS NIL BY THE TPO/A SSESSING O FFICER WAS NOT JUSTIFIED. SIMILARLY, THE ADDITION OF RS.5,79,32,805/ - MADE ON ACCOUNT OF DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRA NSACTION OF THE EXPORT OF VACCINES WAS ALSO ASS AIL ED. BEFORE THE CIT(A), ASSESSEE ALSO PRESSED INTO THE SERVICE, THE ORDER OF THE TRIBUNAL IN ITS OWN CASE FOR ASSESSMENT YEAR 2002 - 03 VIDE ITA NOS. 3557 AND 3647/MUM/2006 DATED 25.02.2011. I NSOFAR AS THE IS SUE RELATING TO THE DETERMINATION OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF P AYMENT OF ROYALTY WAS CONCERNED, THE CIT(A) NOTED THAT THE MATTER WAS RESTORED BACK TO THE FILE OF THE A SSESSING O FFICER/TPO BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002 - 03 (SUPRA). HAVING NOTED SO, HE SET ASIDE THE ACTION OF THE ASSESSING OFFICER /TPO IN DETERMINING THE ARMS LENGTH PRICE OF THE TRANSACTION AT N IL AND, ACCORDINGLY, HE DELETED THE ADDITION AND ALLOWED THE G ROUND OF APPEAL R AISED BY THE ASSESSEE. THIS ASPECT OF THE MATTER IS CHALLENGED BY THE REVENUE IN ITS A PPEAL BEFORE US. FURTHER, WITH RESPECT TO THE OTHER LIMB OF THE ADDITION OF RS. 5,79,32,805/ - , RELATING TO THE INTERNATIONAL TRANSACTION OF EXPORT OF VACCINES , THE CIT(A) DISMISSED THE STAND OF THE ASSESSEE, AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US BY WAY OF G ROUND OF A PPEAL N O. 2 , REPRODUCED ABOVE. 5 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED 4 . SINCE THE AFORESAID TWO CROSS G ROUNDS RELATE TO THE SAME ISSUE OF DETERMINATION OF ARMS LENGTH PRICE OF THE INT ERNATIONAL TRANSACTION ENTERED BY THE ASSESSE E WITH ITS ASSOCIATED E NTERPRISE S , THE SAME ARE TAKEN UP TOGETHER. AT THE TIME OF HEARING, IT WAS A COMMON GROUND BETWEEN THE PARTIES THAT THE DECISION OF THE T RIBUNAL IN THE ASSESSEES OWN CASE VIDE ORDER DATED 25.02.2011 (SUPRA) , SQUARELY COVERS THE CONTROVERSY ON BOTH THE ISSUES. IN FACT, INSOFAR AS THE G ROUND OF A PPEAL N O. 2 RAISED BY THE ASSESSEE RELATING TO THE DETERMINATION OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF EXPORT OF VACCINES IS CON CERNED, THE T RIBUNAL DEEMED IT FIT TO RESTORE THE MATTER BACK TO THE FILE OF THE A SSESSING O FFICER FOR FRESH ADJUDICATION, AND IN THIS CONTEXT THE FOLLOWING DISCUSSION IN THE ORDER IS RELEVANT: - 4.9 AFTER CONSIDERING THE RIVAL CONTENTIONS AND RELEVANT R ECORD, WE FIND THAT AS PER THE PROVISIONS OF SECTION 92B, THE INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NONRESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTAN GIBLE PROPERTY, OR PROVISION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES. THE ARMS LENGTH PRICE, AS PER SECTION 92C. (1) IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE METHODS PRESCRIBED IN THE SAID SECTION BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION. SECTION 92F(II) DEFINES ARMS LENGTH PRICE MEANS A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISES, IN UNCONTROLLED CONDITIONS; RULE 10B(1) OF THEINCOME TAX RULES PRESCRIBE THE MANNER IN WHICH ALP IN RELATION TO INTERNATIONAL TRANSACTIONS HAS TO BE DETER MINED BY APPLYING THE MOST PROPER METHOD MEANS METHOD PRESCRIBED U/S 92C. RULE 10B(1)(E) SPECIFICALLY PRESCRIBES THE MANNER FOR DETERMINATION OF THE ARMS LENGTH PRICE BY TRANSACTIONAL NET MARGIN METHOD FOR READY REFERENCE WE QUOTE RULE 10B(1)(IE): DETER MINATION OF ARMS LENGTH PRICE UNDER SECTION 92C. 10B. (1) FOR THE PURPOSES OF SUB - SECTION (2) OF SECTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOSTAPPROPRIAT E METHOD, IN THE FOLLOWING MANNER, NAMELY : 6 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED (A). (I). (II).. (III).. (B), (I) (II) (III).. (IV) (V) (C). (I). (II) (III).. (IV).; (V) (D) (I). (II) (III) (IV)/ (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE EN TERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BA SE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS ADJUSTED TO T AKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; 7 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED (IV) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE AND REFERRED TO IN SUB - CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. 4.10 THE ASSESSEE HAS ADOPTED ALP BY COMPAR ING THE EXPORT OPERATING PROFITS OF THE ASSESSEE COMPANY WITH THE VALUATION OF OPERATING PROFITS OF THE OTHER COMPANIES WHICH ARE TAKEN AS COMPARABLE COMPANIES SELECTED BY IT. WE FURTHER NOTE THAT THE OTHER COMPARABLE ARE NOT MANUFACTURING VACCINES AND THE OPERATING PROFITS OF THE COMPARABLE ARE TAKEN AT ENTERPRISES LEVEL INSTEAD OF EXPORT /INTERNATIONAL TRANSACTION S LEVEL. THE ASSESSEE HAS NOT TAKEN THE SAME CLASS OF TRANSACTIONS FOR COMPARING THE PROFIT WITH THE COMPARABLES. WHEN THE COMPARABLES ARE NOT LICENSEE MANUFACTURERS OF THE SIMILAR COMMODITY THEN IT WOULD NOT SATISFY THE REQUIREMENT OF THE LAW AS WELL AS THE RULES PRESCRIBED UNDER THE STATUTE. THE PROVISIONS OF LAW REQUIRES THE COMPARISON BETWEEN THE NET MARGIN REALIZED FROM THE OPERATION OF THE UNCONTROLLED PARTIES TRANSACTIONS AND THE NET MARGIN DERIVED BY THE ASSOCIATE ENTERPRISES ON SIMILAR TRANSACTIONS/OPERATION. THE AO HAS ALSO NOT FOLLOWED THE CORRECT METHOD AND PROCEDURE WHILE MAKING THE ADJUSTMENTS IN THE ARMS LENGTH PRICE THE AO HAS APP LIED THE ADJUSTMENT MADE BY THE TPO WHO HAS TAKEN THE COMPARISON BETWEEN THE ASSESSEES INTERNATIONAL TRANSACTION WITH ITS DOMESTIC TRANSACTIONS WHICH IS ALSO AGAINST STATUTORY REQUIREMENT. THUS, IT IS CLEAR THAT THE PROVISIONS OF ACT AND RULES HAVE NOT BE EN FOLLOWED EITHER BY THE ASSESSEE OR BY THE AO. IN THE CASES CITED BY THE LEARNED DR(SUPRA), THIS TRIBUNAL HAS CONSISTENTLY HELD THAT (TNMM) REQUIRES THE COMPARISON OF NET MARGIN REALIZED BY THE ENTERPRISES FROM INTERNATIONAL TRANSACTIONS OR AGGREGATE OF INTERNATIONAL TRANSACTIONS AND NOT COMPARISON OF OPERATING THE MARGIN OF THE ENTERPRISE WITH THE OPERATING MARGIN OF THE COMPARABLES OF ENTERPRISE LEVEL. THEREFORE, THE COMPARISON OF NET PROFITS MARGIN REALIZED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSA CTIONS SHOULD BE COMPARED WITH THE NET PROFIT MARGIN OF THE UNCONTROLLED PARTIES TRANSACTIONS REALIZED BY ENTERPRISE WHICH IS UNRELATED AND FROM THE COMPARABLE UNCONTROLLED TRANSACTIONS. 4.11 IN VIEW OF THE ABOVE DISCUSSIONS, AS WELL AS, THE DECISIONS OF THIS TRIBUNAL AS RELIED UPON BY THE LEARNED DR, WE HOLD THAT THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO ARE NOT AS PER THE PROVISIONS OF LAW. AT THE SAME TIME, THE ASSESSEE HAS ALSO NOT ADOPTED THE CORRECT METHOD OF DETERMINATION OF TNMM. THEREF ORE, THE ISSUE IS SET ASIDE TO 8 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED THE FILE OF THE AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. 4.12 GROUNDS OF APPE AL NO.2 IS ALLOWED FOR STATISTI CAL PURPOSE. 5 . FOLLOWING THE AFORESAID PRECEDENT , AS THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE INS TANT ASSESSMENT YEAR ARE SIMILAR TO THOSE IN THE ASSESSMENT YEAR 2002 - 03, WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE MATTER BACK TO THE FILE OF THE A SSESSING O FFICER TO ADJUDICATE AFRESH IN THE LIGHT OF THE DIRECTION S OF THE TRIBUNAL DATED 25.02. 2011 (SUPRA). THUS, INSOFAR AS THE G ROUND OF A PPEAL N O. 2 OF THE ASSESSEE IS CONCERNED, THE SAME IS ALLOWED FOR STATISTICAL PURPOSES. 6 . INSOFAR AS THE APPEAL OF THE REVENUE IS CONCERNED, WE FIND THAT THE TRIBUNAL WHILE DISAGREEING WITH THE STAND OF THE A SSESSING O FFICER OF DETERMINING THE ARMS LENGTH PRICE OF THE ROYALTY PAYMENT AT NIL, RESTORE D THE MATTER BACK TO THE FILE OF THE A SSESSING O FFICER FOR DETERMINATION OF APPROPRIATE ARMS LENGTH PRICE IN TERMS OF THE PROVISIONS OF THE ACT. THE FOLLOWING DIS CUSSION IN THE ORDER OF THE TRIBUNAL DATED 2 5 .02.2011 (SUPRA) IS WORTHY OF NOTICE IN THIS REGARD: - 6.9. W E HAVE HEARD THE LEARNED DR AS WELL AS THE LEARNED AR AND PERUSED THE RELEVANT RECORD. SO FAR AS THE QUESTION OF NECESSITY OF PAYMENT OF THE ROYALTY I S CONCERNED, THE TPO WAS OF THE VIEW THAT THE PRICE OF SEED VIRUS INCLUDES COMPENSATION TOWARDS USE OF TECHNOLOGY. WHEN THE ASSESSEE PAID THE CONSIDERATION FOR ACQUISITION OF THE MANUFACTURING FACILITIES, THEN THE SEPARATE PAYMENT FOR ROYALTY IS UNWARRANTE D. AFTER CONSIDERING THE RELEVANT RECORD, FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS RIVAL CONTENTIONS, WE NOTE THAT THE VACCINE BUSINESS OF HOECHST AG WAS PURCHASED BY CHIRON CORPORATION, USA AND THE ASSESSEE IS A JOINT VENTURE BETWEEN THE CHIRON CORP ORATION, USA AND AVENTIS PHARMA LIMITED, AND WAS FORMED AS A RESULT OF PURCHASE OF THE SAID VACCINE BUSINESS OF HOECHST AG BY THE CHIRON CORPORATION, USA. IN THE YEAR, 1996, THE JOINT VENTURE COMPANY WAS FORMED BETWEEN CHIRON CORPORATION, U.S.A. AND CHIRON BEHRING GMBH AND CO, KG FOR ACQUIRING THE VACCINE BUSINESS OF BEHRING GMBH KG. AS A RESULT OF THIS CHIRON BEHRING GMBH AND CO BECAME THE OWNER OF ALL TRADE M ARK, PATENT AND TECHNICAL KNOW FOR MANUFACTURING OF THE VACCINE AVENTIS INDIA HAD TO PAY ROYALTY AT 5% OF THE LOCAL SALE FOR THE USE OF IMPORTED TECHNICAL KNOWHOW. FOR THIS PURPOSE THE RBI GRANTED 9 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED APPROVAL VIDE LETTER DATED 19.4.1997 FOR PAYMENT OF ROYALTY BY AVENTIS PHARMA LIMITED TO CHIRON BEHRING GMBH AND CO AT THE RATE OF 5% OF THE LOCAL SALE. I N THE YEAR 1998, THE ASSESSEE JOINT VENTURE WAS FORMED BY THE AVENTIS PHARMA LIMITED AND CHIRON CORPORATION, USA. THE ASSESSEE JOINT VENTURE PURCHASED THE VACCINE BUSINESS OF TH E AVENTIS PHARMA LIMITED. ACCORDING TO THE EXISTING CONTRACT/AGREEMENT BETWEEN THE AVENTIS PHARMA LIMITED AND CHIRON BEHRING GMBH ITS CELL CULTURE RABIES VACCINE BUSINESS STOOD TRANSFER IN THE NAME OF THE ASSESSEE JOINT VENTURE. CONSEQUENTLY, THE PAYMENT OF ROYALTY BY THE ASSESSEE TO CHIRON BEHRING GMBH CONTINUED AFTER TAKING THE NEC ESSARY APPROVAL FROM THE RBI. THUS, IT IS CLEAR THAT THE PURCHASING OF THE BUSINESS OF THE AVENTIS PHARMA LIMITED BY THE JOINT VENTURE AS PER THE TERMS AND CONDITIONS BETWEEN THE PARTIES DOES NOT ACQUIRE THE TECHNOLOGY FOR MANUFACTURING OF THE VACCINE WHIC H WAS IN THE POSSESSION OF CHIRON BEHRING GMBH. THEREFORE, AS PER THE AGREEMENT THE PAYMENT OF ROYALTY IS REQUIRED FOR THE USE OF TECHNICAL KNOW - HOW BY THE ASSESSEE. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE L EARNED CIT(A) TO THE EXTENT THAT THE ROYALTY FOR USE OF TECHNICAL KNOW - HOW IS REQUIRED TO BE PAID BY THE ASSESSEE. HOWEVER, ON THE ISSUE OF ALP, SINCE WE HAVE ALREADY REMITTED THE ISSUE OF ALP OF EXPORT TO THE AO, ACCORDINGLY, THE ALP OF ROYALTY IS ALSO REQUIRED TO BE D ETERMINED AFTER DUE CONSIDERATION AND AS PER THE PROVISIONS OF LAW. HENCE, THE ISSUE OF ALP IN RESPECT OF ROYALTY IS SET ASIDE TO THE FILE OF THE AO IN TERMS OF THE ABOVE ORDER IN RESPECT ETC TO THE AE. 7 . IN VIEW OF THE AFORESAID PRECEDENT, IT IS EVIDE NT THAT THE CIT(A) ERRED IN STRAIGHTAWAY DELETING THE ADDITION WITHOUT REQUIRING THE A SSESSING O FFICER TO ADJUDICATE THE MATTER AFRESH IN THE LIGHT OF THE DIRECTION S OF THE T RIBUNAL DATED 25.02.2011 (SUPRA). THEREFORE, HAVING REGARD TO THE PRECEDENT BY WAY OF THE ORDER OF THE T RIBUNAL DATED 25.02.2011 (SUPRA), ON THIS ASPECT ALSO THE MATTER IS LIABLE TO BE RESTORED BACK TO THE FILE OF THE A SSESSING OFFICER . , WHO SHALL ADJUDICATE THE MATTER AFRESH IN THE LIGHT OF THE DIRECTION S OF THE TRIBUNAL DATED 25.02.20 11 (SUPRA) AND AS PER LAW. THUS ON THIS ASPECT THE STAND OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. THUS, THE APPEAL OF THE REVENUE IS TREATED AS PARTLY ALLOWED. 8 . THE ONLY OTHER ISSUE REMAINING IS BY WAY OF G ROUND OF APPEAL NO. 1 IN THE APPEAL OF THE ASSESSEE. IN THIS CONTEXT, THE RELEVANT FACTS ARE THAT IN THE P ROFIT AND L OSS ACCOUNT, THE ASSESSEE WAS FOUND TO HAVE DEBITED AN AMOUNT OF RS.4,75,24,046/ - AS ROYALTY 10 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED EXPENSES , WHICH INTER ALIA INCLUDE D A SUM OF RS.11,37,558/ - , WHICH REPRESENTED ADDITIONAL INCOME TAX PAID IN THE INSTANT YEAR WITH RESPECT TO THE ROYALTY P ERTAINING TO THE EARLIER YEARS. THE A.O. WAS OF THE VIEW THAT SUCH EXPENDITURE WAS A PRIOR PERIOD EXPENSE AND, THEREFORE, REQUIRE D THE ASSESSEE TO EXPLAIN AS TO WHY THE SAME NOT B E DISALLOWED. 9 . T HE ASSESSEE EXPLAINED THAT IT HAD ENTERED INTO A FOREIGN TECHNICAL COLLABORATION AGREEMENT WITH CHIRON BEHRING GMBH & CO. KG, A GERMAN ENTITY (CHRON GMBH) FOR THE TRANSFER OF TECHNOLOGY REQUIRED FOR MANUFACTURE OF VACCINES IN INDIA. AS PER THE TERMS OF THE AGREEMENT, THE ASSESSEE WAS TO MAKE THE PAYMENT OF ROYALTY TO CHRON GMBH. IT WAS ALSO ASSERTED BY THE ASSESSEE THAT IN TERMS OF THE A GREEMENT, THE I NCOME T AX PAYABLE O N SUCH ROYALTY WAS ALSO TO BE BORNE BY THE ASSESSEE. IN THE EARLI ER YEARS, WHEN THE ASSESSEE CALCULATED AND PAID THE TAX LIABILITY ON SUCH ROYALTY IT CONSIDERED THAT CHRON GMBH, THE FOREIGN ENTITY , WAS ELIGIBLE FOR THE BENEFIT PROVIDED IN SECTION 10(6A) OF THE AC T AND ACCORDINGLY THE TAX BORNE BY THE ASSESSEE WAS CLAIM ED AS EXEMP T IN THE HAND S OF THE RECIPIENT . SUBSEQUENTLY, IT CAME TO THE NOTICE OF THE ASSESSEE THAT THE BENEFIT PROVIDED IN SECTION 10(6A) OF THE ACT WAS NOT AVAILABLE FOR CHRON GMBH, AS IT WAS NOT A COMPANY UNDER THE RELEVANT GERMAN LAWS. THEREFORE, THE ASSESSEE WAS OBLIGATED TO PAY A DDITIONAL I NCOME T AX , AND SUCH LIABILITY WAS REPRESENTED BY THE IMPUGNED SUM OF RS.11,37,558/ - . THE ASSESSEE EXPLAINED THAT SUCH ADDITIONAL TAX LIABILITY WITH RESPECT TO THE ROYALTY PAYMENTS REMITTED EARLIER, AROSE AND CRYSTA LLIZED DURING THE YEAR UNDER CONSIDERATION AND , THE REFORE, IT WAS LIABLE TO BE DEDUCTED IN COMPUTING THE BUSINESS INCOME OF THE CURRENT YEAR . FURTHER ASSESSEE ALSO SUBMITTED THAT SUCH TAX PAYMENT WAS ALLOWABLE AS A DEDUCTION ON PAYMENT BASIS ALSO FOLLOWING THE PROVISION S OF SECTION 43B O F THE ACT. THE ASSESSING O FFICER DISAGREED WITH THE ASSESSEE , AS ACCORDING TO HIM , SUCH ADDITIONAL TAX LIABILITY PERTAIN ED TO ROYALTY PAID IN THE EARLIER P ERIOD AND, THEREFORE, IT WAS A P RIOR PERIOD EXPENSE AND IS NOT ALLOWA BLE IN COMPUTING THE BUSINESS INCOME FOR THE YEAR UNDER CONSIDERATION. SIMILAR STAND HAS BEEN TAKEN BY THE CIT(A) ALSO AND, ACCORDINGLY, THE ASSESSEE IS IN APPEAL BEFORE US. 11 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED 1 0 . BEFORE US, THE LD. REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT IT CAME TO THE KNOWLEDGE OF THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION THAT THE ADDITIONAL TAX AGGREGATING TO RS.11,37,558/ - WAS PAYABLE FOR THE ROYALTY PAYMENTS MADE TO THE FOREIGN COLLABORATION IN THE PAST YEAR S AND S INCE AS PER THE TERMS OF THE AGREEMENT, ASSESSEE COMPANY WAS TO BEAR THE TAX LIABILITY IN RELATION TO THE ROYALTY PAYMENTS, THE IMPUGNED SUM WAS CLAIMED AS A DEDUCTION. THE LD. REPRESENTATIVE POINTED OUT THAT NONE OF THE AUTHORITIES BELOW HAVE D OUBTED THE FACT THAT THE CAUSE REQUIRING DEPOSIT OF ADDITIONAL TAX IN QUESTION , HAS ARISEN DURING THE YEAR UNDER CONSIDERATION AND, THEREFORE, IT WAS JUSTIFIABLY CLAIMED AS A DEDUCTION DURING THE YEAR UNDER CONSIDERATION. 1 1 . ON THE OTHER HAND, THE L D. DR APPEARING FOR THE REVENUE HAS SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW ON THE REASONING TAKEN BY THE A.O. , WHICH WE HAVE ALREADY NOTED IN EARLIER PARAS, AND THE SAME IS NOT BEING REPEATED SAKE OF BREVITY . 1 2 . WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S. FACTUALLY SPEAKING, IN TERMS OF THE AGREEMENT WITH NOVARTIS GMBH , THE ASSESSEE COMPANY WAS REQUIRED TO MAKE PAYMENT OF ROYALTY FOR THE TRANSFER OF THE TECHNOLOGY AND I T IS ALSO NOT DISPUTED BY THE I NCOME T AX A UTHORITIES THAT THE TAX PAYABLE WITH RESPECT TO SUCH R OYALTY PAYMENT WAS ALSO TO BE BORNE BY THE ASSESSEE. IN THE PAST YEARS, THE TAX PAYABLE ON ROYALTY PAYMENTS WAS BORNE BY THE ASSESSEE AND CLAIMED AS DEDUCTION. THE TAX SO PAID WAS CLAIMED EXEMPT INCOME IN THE HANDS OF THE F OREIGN COLLABORATION IN TERMS OF SECTION 10(6A) OF THE ACT. HOWEVER, DURING THE YEAR UNDER CONSIDERATION IT CAME TO THE NOTICE OF THE ASSESSEE THAT THE RECIPIENT OF RO YALTY WAS A P ARTNERSHIP F IRM AND NOT A C OMPANY AS PER THE LAWS OF ITS COUNTRY OF RESIDENCE NAMELY GERMANY. THERE FORE, THE TAX ON SUCH GROSS ED - UP ROYALTY PAYMENT WAS FURTHER REQUIRED TO BE DEPOSITED IN THE ACCOUNT OF THE GOVERNMENT AND, ACCORDINGLY, THE SAME WAS PAID BY THE ASSESSEE IN THIS YEAR AND CLAIMED AS DEDUCTION WHILE COMPUTING ITS TOTAL INCOME. THE AMOUNT OF SUCH DIFFERENTIAL/ADDITIONAL TAX AGGREGAT ED TO RS.11,37,558/ - , WHICH HAS BEEN DISALLOWED BY THE I NCOME T AX A UTHORITIES ON 12 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED THE GROUND THAT IT WAS A PRIOR PERIOD EXPENDITURE . I N OUR CONSIDERED OPINION, THOUGH THE SAID AMOUNT PERTAINS TO THE ROYALTY PAYMENTS MADE IN THE EARLIER YEARS, YET THE SAID FACTOR IS NOT DETERMINATIVE . IN ORDER TO DISALLOW AN EXPENDITURE OF BEING IN THE NATURE OF PRIOR PERIOD EXPENSE, IT WOULD HAVE TO BE ESTABLISHED THAT LIABILITY FOR SUCH EXPENSE WAS INCURRED OR CRYSTALLIZED IN THE PA ST. IN THIS CONTEXT, IT IS NOTEWORTHY THAT THE IMPUGNED ADDITIONAL LIABILITY OF TAX H AS CRYSTALLIZED DURING THE YEAR , A S THE CORRECT STATUS OF THE RECIPIENT, CAME TO THE KNOWLEDGE OF THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UND ER CONSIDERATION. IT IS ALSO NOTABLE THAT BOTH THE AUTHORITIES BELOW HAVE NOT DISPUTED THE FACT THAT SUCH INFORMATION CAME TO THE KNOWLEDGE OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION, THEREFORE, THE ASSESSEE HAS RIGHTLY CANVASSED THAT SUCH ADDITIO NAL TAX LIABILITY HAS CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION AND, ACCORDINGLY , IT IS ENTITLED TO CLAIM IT AS A DEDUCTION WHILE COMPUTING ITS BUSINESS INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. 1 3 . AS A CONSEQUENCE, WE SET ASIDE THE ORD ER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS 11,37,558/ - . THUS, ASSESSED SUCCEEDS ON GROUND OF APPEAL NO. 1. 1 4 . RESULTANTLY, THE APPEAL OF THE ASSESSEE AS WELL AS THAT OF THE REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON MAY 8TH , 201 5 SD/ - SD/ - ( VIJAY PAL RAO ) ( G. S. PANNU ) / J UDICIAL MEMBER / A CCOUNTANT MEMBER MUMBAI ; DATED : 8 . 0 5 .201 5 SKS , SR. PS 13 ITA NO S . 4956 & 4894/MUM/2012 (A.Y. 2007 - 08) CHIRON BEHRING VACCINES PRIVATE LIMITED / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F ILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI
