Biogenex Life Sciences Private Limited, Hyderabad, Hyderabad V. DCIT, Circle-1(2), Hyderabad, Hyderabad

ITA 519/HYD/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 1142 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 21-10-2020
• Assessment Year: 2011-2012
• Appeal Filed On: 20-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Assessee Lawyers: P MURALI MOHANA RAO
• Keywords: Related party transaction; Transfer pricing; International transaction; Application of stay
• Section: 92C; 143(3); 13; 92CA; 2

Judgement Text

ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 1 OF 10 IN THE INCOME TAX APPELLATE TRIBUNAL H YDERABAD B B ENCH, HYDERABAD (THROUGH V IDEO CONFERENCING) BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY , ACCOUNTANT MEMBER ITA NO S . 229 / HYD/201 5 AND 5 19 & 496/HYD/2017 SA NOS.92 T O 94/HYD/2020 A SSESSMENT YEAR S : 2010 - 11, 2011 - 12 & 2012 - 13 BIOGENEX LIFE SCIENCES PRIVATE LTD, CHERLAPALLY PAN:AACCB6041P VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2) HYDERABAD ( APPELLAN T) (RESPONDENT) A S S ES SEE BY: SRI P.MURALI MOHANA RAO RE VENUE BY : SRI Y.V.S.T. SAI, CIT - DR DATE OF HEARING: 21 / 10 / 2020 DATE OF PRONOUNCEMENT: 04 / 1 1 /20 20 O R D E R PER SMT. P. MADHAVI DEVI, J.M. A LL THE ABOVE ARE ASSESSEE S APPEALS FOR THE A.Y S 2010 - 11, 2011 - 12 AND 2012 - 13 RESPECTI VE LY AGAINST THE FINAL ASSESSMENT ORDER PASSED BY THE AO U/S 143(3) R.W.S. 144C(1 3 ) O F THE I.T. ACT FOR THE RESPECTIVE A.Y S . 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY, IS ENGAGED IN THE BUSINESS OF TRA DI NG IN REAGENTS AND ASSEMBLY AND SALE O F DIAGNOSTIC INSTRU MENTS , AND PROVIDING SUPPORT SERVICES TO I TS HOLDING COMPANY. DURING THE RELEVANT A.Y , THE ASSESSEE HAS ENTERED INTO THE FOLLOWING INTER NATIONAL TRANSACTIONS : ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 2 OF 10 S. NO. NATURE OF INTERNATIONAL TRANSACTION AMOUNT (RS.) 1. IMPORT OF ENGI NE ERING INSTRUMENTS, COMPONENTS AND SPARES. 10,62,90, 2 35 2. IMPORT O F R&D MATERIAL AND CONSUMABLES 35,19, 345 3. SALE OF EQUIPMENTS AND COMPONENTS 26,90,21,458 4. PU R CHASE OF REAGENTS FOR TRADING 1,08,26,474 5. PURCHASE OF FIXED ASSETS 1,44,569 6. SER VI CE CHARGES RECEIVED/ RECEIVABLE 7,71,94,579 7. COMMISSION CHARGES PAID/ PAYABLE 5,53,71,853 THE AO , THEREFORE REFERRED THE ISSUE OF DETERMINATION OF ALP OF THE TRANSACTION S TO THE TPO. THE TPO, IN THE PROCEEDINGS U/S 92CA OF THE ACT, REJECTED THE AG GR EGATION OF THE TRAN SACTION S AND ADOPTION OF TNMM METHOD BY THE ASSESSEE FOR ARRIVING AT THE ALP OF THE I NTER NATIONAL TRANSACTIONS. THE TPO , HOWEVER, HELD THAT MANY OF THESE TRANSACTIONS ARE ALTOGETHER DIFFERENT IN NATURE AND THEREFORE, THEY HAVE TO BE A NA LYSED SEPARATELY . A FTER ANALYSING THE TRANSACTIONS , THE TPO DIVIDED THE TRANSACTIONS INTO THREE SEGMENTS (I) TRADING IN REA GE NTS WHERE THE ASSESSEE PURCHASES REAGENTS FROM THE AE AND SELLS IT IN THE LOCA L MARKET, (II) A SSEMB LY OF DIAGNOSTIC EQUIPMENTS WH ERE THE AE PROVIDES THE PROTOTYPE, SPE C IFICATIONS ETC. AND ALSO SUPPLIES THE NECESSARY SPARES, EQUIPMENTS ETC. TO THE ASSESSEE WHO THEN ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 3 OF 10 ASSEMBLES /MANUFACTURES THE MACHINES AS PER THE AE S SPECIFICATIONS; (III) PROVISION OF R&D AND SUPPORT SERVICES WHERE TH E ASSESSEE PROVIDES CONTRAC T R&D SERVI CES AS WELL AS BUSINESS AND ADMINISTRATIVE SUPPORT SERVICES. 2.1 THE TPO ACCEPTED FOLLOWING TRANSACTIONS TO BE AT ALP: (I) SERVICE CHARGES RECEIVED RS. 7,71,94,579/ - (II) TRADING OF REAGENTS RS. 1,08,26,474/ - ( III) IMPORT OF R&D MATE RIAL & CONSUMAB LES RS. 35.19 LAKHS (IV) PURCHASE OF FIXED ASSETS RS. 1.44 LAKHS. AS REGA RD S THE COMMISSION PAYMENTS TO THE AE, THE TPO HEL D THAT THERE IS NO PRINCIPAL AGENT RELATI ON SHIP BETWEEN THE ASSESSEE A ND THE RECEIVER OF THE PAYMENT AND THEREFOR E, THE PAYMENTS TO THE AE IS NIL . AS REGARDS THE ASSEMBLING/MANUFACTURING OF DIAGNOSTIC MACHINES IS CONCERNED, THE TPO DETERMINED THE SHORTFALL AT RS. 3,12,00,673/ - . IN ACCORDANCE W IT H THE TPO ORDER, THE DRAFT ASSESSMEN T ORDER WAS P ROPOSED AGAINST WHICH THE ASSESSEE PREFERR ED ITS OBJECTIONS BEFORE THE DRP, B UT THE DRP ALSO CONFIRMED THE ADJUSTMENT PROPOSED BY THE TPO AND ACCORDINGLY, FINAL ASSESSMENT ORDER WAS PASSED , AGAINST WHICH , TH E ASSESSEE IS IN APPEAL BE FORE THE T RIBUNAL. THE ASSESSEE HAS RAISED 4 GROUNDS OF APP EAL . I N ADDITION THE RETO, THE ASSESSEE HAS FURTHER RAISED ADDITIONAL GROUNDS WHICH ARE G ROUNDS 5 TO 16 . THE REGULAR ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 4 OF 10 GROUNDS OF APPEAL AND THE ADDITIONAL GROUNDS OF AP PEAL RAISED BY THE ASSESSEE ARE AS FOLLOWS: 1. THE ORDER OF THE LEARNED TPO TO REJECT THE ALP COMPUTE D BY THE ELIGIBLE ASSESSEE BY ADOPTING THE TRANSACTIONAL NET MARGIN METHOD [TNMM] FOR THE COMMISSION PAID BY THE ELIGIBLE ASSESSEE TO ITS AE FOR SUPPLY OF EQUIPMENT TO ABBOTT INC AND ADOPT THE ALP A S NIL UN DER THE CUP METHOD, IS BASED ON AN ERRONEOUS APPRE CIATION OF THE FACTS OF THE CASE AND REQUIRES TO BE CANCELLED. 2. THE ORDER OF THE LEARNED TPO PROVIDING FOR AN ALTERNATE ADDITION OF RS.3, 12,00,673/ - BEING THE ALLEGED SHORTFALL IN REMUNERATION RECEIVED BY THE ELIGIBLE ASSESSEE FOR THE CONTRACT MANUFAC TURING ACTIVITIES CARRIED OUT BY THE ELIGIBLE ASSESSEE BY ESTIMAT ING THE OPERATING PROFIT AT 50% IS ERRONEOUS, AND THE SAME REQUIRES TO BE DELETED. 3. THE APPELLANT CRAVES LEAVE OF THIS HON'BLE TR IBUNAL T O ADD, ALTER, AMEND, DELETE OR SUBSTITUTE SUCH GRO UND AS MAY BE NECESSARY AT THE TIME OF HEARING. 4. WHEREFORE THE APPELLANT PRAYS THAT THIS HON'BLE TRIBUNAL BE PLEASED TO ALLOW THE APPEAL AND SET - ASIDE THE ORDERS PASSED BY THE AUTHORITIES BELOW TO THE E XTENT THEY ARE AGAINST THE APPELLANT AND PASS SUCH OTHER ORDER AS THIS HON'BLE TRIBUNAL DEEM FIT AND PROPER ON TH E FACTS AND CIRCUMSTANCES OF THE CASE IN THE INTEREST OF JUSTICE AND EQUITY. ADDITIONAL GROUNDS OF APPEAL 5. ERRED IN MAKING ALP ADJUSTMEN T OF RS.5,53,71,853 / - TOWARDS COMMISSION PAYMENT T O BIOGENEX LABORATORIES INC. A. OUGHT TO HAVE APPRECIATED TH E FACT THAT THE TRANSACTION OF COMMISSION IS INTRINSICALLY RELATED TO THE TRANS ACTION OF SALE OF DIAGNOSTIC EQUIPMENT AND SHOULD BE AGGREGATED U NDER TNMM FOR THE PURPOSE OF BENCHMARKING. B. ER RED IN NOT APPRECIATING THE FACT THAT THE MARGIN OF ASSESSEE I S 34.41 % WHICH IS MUCH HIGHER THAT THE MARGIN OF COMPARABLES OF 11.37% HENCE N O ALP ADJUSTMENT IS REQUIRED TO BE MADE. C. ERRED IN REJECTING THE TNMM METHOD AND THE SEARCH PROCESS ADOPTED BY THE ASSESSEE WITHOUT FINDING ANY DEFECTS. ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 5 OF 10 D. ERRED IN NOT FO LLOWING THE PROCEDURE PRESCRIBED U / S 92C OF THE ACT WHILE DETERMINING THE ARM'S LENGTH ADJUSTMENT. E. ERRED IN NOT CONDUCTING ANY SEARCH PROCE SS FOR DETERMINATION OF ALP. F. ERRED IN CONSIDE RING THE TRANSACTION OF COMMISSION PAID AS NIL WHILE DETERMIN ING THE ARM'S LENGTH PRICE OF THE TRANSACTION. G. ERRED IN TREATING COMMISSION PAID TO THE BIOGENEX LABORATORIES INC AS NIL WITHOUT CONSIDERING REASONABILITY OF THE TRANSACTION. 6. ERRED IN M AKING ALP ADJUSTMENT OF RS.3,12,OO,673 / - TOWARDS SALE OF DIAGNOSTIC EQUIPMENT TO BIOGENEX LABORATORIES INC. A. ERRED IN NOT ASCRIBING ANY R EASON FOR REJECTION OF SEARCH PROCESS AND THE COMPARABLES SELECTE D BY THE ASSESSEE. B. ERRED IN REJ ECTING THE TNM M METHOD ADOPTED BY THE ASSESSEE WITHOUT FINDING ANY DEFECT. C. OUGHT TO HAVE CONSIDERED THE SEGMENTAL MARGIN OF EXPORTS INSTRUMENTS WHILE BENCHMARKING THE TRANSACTION OF SALE. D. OUGHT TO HAVE APPRECIATED THE FACT THAT THE SEGMENTAL RESULTS ARE AUDITED BY A QUALIFIED CHARTERED ACCOUNTANT WHEREIN NO DEFECTS ARE I DENTIFIED. E. ERRED IN CONSIDERING THE FINANCE CHARGES OF RS.38,45,185J - AS OPERATING EXPENDITURE WHILE CALCULATING THE NET MARGIN OF THE EXPORTS DIAGNOSTIC SEGMENT WHICH I S NOT CORRECT. F . OUGHT TO HAVE APPRECIATED THE FACT THAT THE MARGIN OF EXPORTS DIAGNOSTIC SEGMENT IS 50.05% AFTER EXCLUDING FINANCE CHARGES FROM OPERATING C OST WHICH IS HIGHER THAN THE MARGIN SELECTED BY THE TPO (COST + 50%), NO ALP ADJUSTMENT IS REQUIR ED. 7. ERRED IN NOT APPRECIATING THE FACT THAT AS PER OECD GUIDELINES, CUP METH OD IS THE MOST DIRECT METHOD WHICH PROVIDES A RELIABLE MEASURE FOR DETERMINING ARM'S LENGTH RESULT FOR THE CONTROLLED TRANSACTION AND IS PREFERABLE OVER ALL OTHER METHODS. 8 . OUGHT TO HAVE APPRECIATED THE FACT THAT THE PRICE CHARGED BY THE ASSESSEE TO AS SOCIATED ENTERPRISE IS MORE THAN THE PRICE CHARGED TO UNCONTROLLED ENTITIES. ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 6 OF 10 9. ERRED IN REJECTING THE TP DOCUMENTATION WITHOUT ASCRIBING THE COGENT REASONS. 10. OUGHT TO HAVE ACCEPTED THE JUSTIFICATION PROVIDED BY THE ASSESSEE FOR AGGREGATION OF THE TRANSACTION OF COMMISSION PAYMENT WITH THE SALE OF DIAGNOSTIC EQUIPMENT. 11. E RRED IN NOT APPRECIATING THE FACT THAT THE OPERATING MARGIN OF THE ASSESSEE IS 41.11 % WHICH IS MUCH HIGHER THAN AVERAGE OPERATING MARGIN OF THE COMPARABLES I.E., 8.73%. 12. OUGHT TO HAVE CONDUCTED NEW SEARCH PROCESS UNDER TNMM AND HAVE DETERMINED THE P LI FOR THE SALE OF DIAGNOSTIC EQUIPMENTS. 13. OUGHT TO HAVE APPRECIATED THE FACT THAT THE NEW SEARCH PROCESS WOULD BE AS UNDER FOR BENCHMARKING THE TRANSACTION OF SALE O F DIAGNOSTIC EQUIPMENT I. THE COMPANIES WHICH ARE FUNCTIONALLY DISSIMILAR TO THE AS SESSEE WERE REJECTED AS COMPARABLES. II. COMPANIES FOR WHICH DATA IS NOT AVAILABLE FOR THE FY 2009 - 10 WERE REJECTED AS COMPARABLE. III. COMPANIES HAVING TOTAL TURN OVER MORE THAN 1 CRORE WERE SELECTED AS COMPARABLE. IV. COMPANIES HAVING EXPORT SALES M ORE THAN 75% OF THE TOTAL TURNOVER WERE SELECTED AS COMPARABLE. V. COMPANIES HAVING NEGATIVE NET WORTH ARE REJECTED AS COMPARABLE. VI. COMPANIES HAVING RELATED PARTY TRANSACTIONS LESS THAN 25% ARE SELECTED AS COMPARABLE. 14. OUGHT TO HAVE TAKEN FOLLO WING COMPANIES AS COMPARABLES FOR THE YEAR UNDER CONSIDERATION AFTER APPLYING THE ABOVE FILTERS . I. OPTO CIRCUITS (INDIA) LIMITED II. NARANG MEDICAL LIMITED. III. DATT MEDIPRODUCT LIMITED 15. OUGHT TO HAVE APPRECIATED THE FACT THAT THE ASSESSEE COMPA NY IS HAVING HUGE EMPLOYEE COST I.E., 14.39% OF THE TOTAL TUR NOVER OF THE ASSESSEE WHICH IS ABNORMAL COMPARED TO AVERAGE INDUSTRY RATE. 16. OUGHT TO HAVE ALLOWED UNDER UTILISATION OF CAPACITY ADJUSTMENT AS THERE IS A DIFFERENCE IN LEVEL OF CAPACITY UTILI ZATION OF ASSESSEE AND LEVEL OF CAPACITY UTILIZATION OF ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 7 OF 10 COMPARABLES. ACCORDINGLY, ADJUSTMENT WOULD BE REQUIRED TO BE MADE TO PROFIT MARGIN OF COMPARABLE ON ACCOUNT OF DIFFERENCE IN CAPACITY UTILIZATION IN TERMS OF RULE 10 - B (L)(E)(III) . 3. THE LEARNED CO UNSEL FOR THE ASSESSEE RELIED UPON THE D ECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF NAT IONAL THERMAL POWER LTD VS. CIT (229 ITR 383) FOR ADMISSION OF ADDITIONAL GROUNDS OF APPEAL AND PLEADED THAT AFT E R ADMISSION THE RELEVANT ISSUES MAY BE REMITTED BACK TO THE F ILE OF AO / TPO FO R DENOVO CONSIDERATION . HE SUBMITTED THAT THE TPO HA S NOT ADOPTED ANY PARTICULAR METHOD AS SPECIFIED UNDER THE ACT FOR COMPUTING THE ALP AND THEREFORE, THE WHOLE EXERCISE HAS TO BE DONE AGAIN AFTER TAKING ASSESSEE S OBJECTIO NS AL SO INTO CONSIDERATION. 4. THE LEARNED DR WAS ALSO HEARD WHO SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE TPO HAS NOT ADOPTED ANY PARTICULAR METHOD FOR PROPOSING THE ADJUSTMENT TO THE ALP OF COMMISSION PAYMENT AND THE MANUFACTURING OF DIAGNOSTIC M ACHINES . THE ADDITIONAL GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AGAINST THE NON - ADOPTION OF ANY METHOD FOR COMPUTING THE ALP. IN VIEW OF ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 8 OF 10 THE SAME, WE DEE M IT FIT AND PROP ER TO ADMIT THE ADDITIONAL GROUNDS OF APPEAL AND REMIT THE ABOVE TWO ISSUES TO THE FILE OF T HE AO / T PO FOR RECONSIDERATION OF THE ISSUES DENOVO IN ACCORDANCE WITH THE LAW. N E EDLESS TO MENTION THAT THE AO / TPO SHALL GIVE THE ASSESSEE A FAIR OPPORTUNITY OF H EARING. SA NOS.92 TO 94/HYD/2020 6. SINCE THE ISSUE S IN THE APPEALS HAVE BEEN REMITTED BACK TO THE FI LE OF THE AO / TPO FOR DENOVO CONSIDERATION , THE STAY APPLICATIONS FILED BY THE ASSESSEE HA VE BECOME INFRUCTUOUS AND ARE ACCORDINGLY DISMISSED. 7. IN THE RESULT, APPEALS FILED BY THE ASSESSEE ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES AND S.A S FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH NOVEMBER , 2020 . SD/ - SD/ - (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER ( P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 04 TH NOVEMBER , 2020 . VINODAN/SPS ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 9 OF 10 COPY TO: 1 M/S.B IOGENEX LIFE SC IENCE (P) LTD C/O SHRI SURESH MUTHUKRISHNAN , C. A. 305, KALPAK ARCADE, NO.19 CHURCH STREET, BANGALORE 560001 2 DY.CIT, CIRCLE 1( 2 ) HYDER ABAD 3 DRP, 2 ND FLOOR, IT TOWERS, 10 - 2 - 3 AC GUARDS, HYDERABAD 500004 4 5 6 TPO/ADD.CIT, (TP) HYDERABAD 500004 CIT (INTERNATIONAL TAXA TION) IT TOWERS, 10 - 2 - 3 AC GUAR DS HYDERABAD CIT - 1, HYDERABAD 7 THE DR, ITAT HYDERABAD 8 GUARD FILE BY ORDER ITA NOS 229 OF 20 15 519 & 496 OF 2017 AND SAS BIOGENEX LI F E SCIENCES P LTD PA GE 10 OF 10 1. DRAFT DICTATED ON 2 7 TH OCTOBER, 2020 2. DRAFT PLACED BEFORE AUTHOR OCTOBER, 2020 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER OCTOBER, 2020 4 DRAFT DISCU SSED/A PPR OV ED BY SE COND MEM BER OCTOBER, 2020 5 APP ROVED DRAFT COMES TO THE SR.P.S./PS OC TOBER, 2020 6. KEPT FOR PRONOUNCEMENT ON OCTOBER, 2020 7. FILE SENT TO THE BENCH CLERK OCTOBER, 2020 8 DATE ON WHICH FILE GOES TO T HE H EAD CLERK OCTOBER, 2020 9 DATE O F DISPATC H OF O RDE R OCTOBER, 2020