Capsugel Healthcare Ltd., Rewari V. ACIT, Haryana

ITA 6435/DEL/2012

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 4528 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Opportunity of cross examination; International transaction; Additional evidence; Valuation report
• Section: 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2, NEW DELHI BEFORE SH. N. K. BILLAIYA, ACCOUNTANT MEMBER AND SH. SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.6435/DEL/2012 ASSESSMENT YEARS: 2008-09 M/S. CAPSUGEL HEALTHCARE (FORMERLY BHARTI HEALTHCARE LIMITED), 21, JONIAWAS, DHARUHERA (DISTT.), REWARI, HARYANA- 122100 VS ACIT CIRCLE REWARI HARYANA (APPELLANT) (RESPONDENT) APPELLANT BY SH. NAGESHWAR RAO, ADVOCATE RESPONDENT BY SH. H. K. CHOUDHARY, CIT DR DATE OF HEARING: 08/08/2019 DATE OF PRONOUNCEMENT: 26/08/2019 ORDER PER N. K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ORDER DATED 25.10.2012 FRAMED U/S. 143 (3) R.W.S 144 C OF THE ACT. 2 2. THE ASSESSEE IS AGGRIEVED BY THE FOLLOWING TRANS FER PRICING ADJUSTMENTS:- 1. ADJUSTMENT TO ALP OF TRANSACTION RELATED TO SALE OF FURNISHED GOODS TO ASSOCIATED ENTERPRISES (AES) 2. ADJUSTMENT RELATED TO ARMS LENGTH PRICE OF TRANSACT ION OF PURCHASE OF FIXED ASSETS FROM ASSOCIATED ENTERPRISE S. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE A SSESSEE IS A PFIZER GROUP COMPANY. PFIZER PROCURED BHARTI HEALT H CARE LIMITED FROM BHARTI ENTERPRISES. BHARTI HEALTHCARE LIMITED WAS IN THE BUSINESS OF MANUFACTURING AND MARKETING OF E MPTY HEAD GELATIN CAPSULES. BHARTI HEALTH CARE ACQUIRED BY P FIZER THROUGH PFZIER PHARMACEUTICALS INDIA PRIVATE LIMITED HOLDS 94.68% OF EQUITY SHARES OF THE COMPANY. ASSESSEE HAS A PLANT LOCATED AT DHARUHERA, HARYANA. THE INTERNATIONAL TRANSACTIONS UNDER TAKEN DURING THE YEAR ARE SUMMARIZED AS UNDER :- S. NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1 SALE OF CONSUMABLES NOT BENCHMARKED 111,318 2 SALE OF FINISHED GOODS (HARD GELATINE CAPSULE SHELLS) CUP 44,800,172 3 PURCHASE OF FIXED ASSETS NOT BENCHMARKED 79,111,841 3 4 EXPENSES REIMBURSED NOT BENCHMARKED (COST TO COST RECHARGE) 53,21,991 4. THE DISPUTE UNDER CONSIDERATION BEFORE US RELATE TO TRANSACTION MENTIONED AT SR. NO.2 AND 3 ABOVE. 5. SALE OF FINISHED GOODS HARD GELATIN CAPSULES SHEL LS : IN ITS TRANSFER PRICING STUDY REPORT THE ASSESSEE HAS STATED THAT IN REGARD TO INTERNATIONAL TRANSACTION OF SALE OF CONS UMABLES IT HAD PURCHASED CERTAIN CONSUMABLES FROM DOMESTIC MARKET FOR ITS INTERNAL USE. BUT AFTER PURCHASING THE CONSUMABLES THE COMPANY REALIZED THAT THESE CONSUMABLES ARE NOT OF ANY USE OF THE COMPANY. SO IT SOLD THESE CONSUMABLES TO ITS AES WHO WERE IN NEED OF THESE CONSUMABLES. SINCE THIS TRANSACTION W AS NOT THE PRINCIPLE BUSINESS ACTIVITIES AND SINCE THE VALUE O F THIS TRANSACTION WAS NOT SIGNIFICANT NO BENCH MARKING WA S REQUIRED AND THE TRANSACTION IS CONSIDERED AT ARMS LENGTH. 6. SO FAR AS THE INTERNATIONAL TRANSACTION OF SALE OF FINISHED GOODS IS CONCERNED THE ASSESSEE SELECTED THE COMPAR ABLE UNCONTROLLED PRICE [CUP] METHOD AS THE MOST APPROPR IATE METHOD. IT WAS SUBMITTED THAT EMPTY HARD GELATIN CAPSULES W ERE SOLD TO AES AS WELL AS NON AES AND SINCE AVERAGE RATE CHA RGED FROM NON AES DURING THE YEAR UNDER CONSIDERATION FOR THE SA ME PRODUCT IS 4 LESS THAN THE RATE CHARGED FROM AES, THE TRANSACTI ON WAS TAKEN AT ARMS LENGTH PRICE. 7. DURING THE TRANSFER PRICING ASSESSMENT PROCEEDIN GS THE TPO OBSERVED THAT THIS IS NOT A FAIR COMPARISON. THE T PO WAS OF THE FIRM BELIEF THAT FOR FAIR COMPARABILITY NOT ONLY CO NTRACTUAL TERMS SHOULD BE SAME BUT THE DATE OF THE TRANSACTION SHOU LD ALSO BE SAME AND IF NOT POSSIBLE AT LEAST NEARBY DATES SHOU LD BE ATTEMPTED. 8. A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE T O EXPLAIN WHY THE CUP METHOD USED BY IT SHOULD NOT BE DISCARD ED AND REPLACED BY TNMM AS THE MOST APPROPRIATE METHOD. T HE ASSESSEE FILED A DETAILED REPLY JUSTIFYING ITS CLAI M THAT CUP IS THE MOST APPROPRIATE METHOD (MAM). THE ASSESSEE EMPHAS IZED THAT SINCE INTERNAL CUP IS AVAILABLE THE SAME SHOULD BE ACCEPTED AS THE MAM FOR BENCH MARKING THE INTERNATIONAL TRANSAC TION RELATING TO SALE OF FINISHED GOODS AND SINCE THE TRANSACTION IS AT ARMS LENGTH PRICE NO ADJUSTMENT NEED TO BE MADE. 9. THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND ANY FAVOUR WITH THE TPO WHO WAS OF THE OPINION THAT THERE WAS NO DIRECT CO- RELATION IN THE DATES OF SALE TO RELATED AND UNRELA TED PARTIES AND THE NATURE OF INVOICING WAS DIFFERENT. THE TPO FUR THER OBSERVED THAT THE QUANTUM OF VARIETY OF GELATIN CAPSULES SHE LLS SOLD VARIED BETWEEN RELATED AND UNRELATED PARTIES. 5 10. NOT CONVINCED WITH THE CUP METHOD AS THE MAM. T HE TPO PROCEEDED TO APPLY TNMM AND USED THREE COMPARABLES NAMELY MEDICAPS, SUNIL HEALTH CARE AND ASSOCIATED CAPSULES AND COMPUTED THE TRANSFER PRICING ADJUSTMENT AS UNDER : - CAPSUGLE MEDICAPS SUNIL HEALTHCARE ASSOCIATED CAPSULES INCOME (IN THOUSANDS) NET SALES 115033 18,06,64,971/- 25750023 2,8048874 10 STOCK 632 -38006671 6546952 -9804400 OTHER OP INCOME 2981 179442 0 0 TOTAL 117382 177037742/- 264047184/- 2795083010 EXPENSES COST OF MATERIALS 57077 53247093 85333234 1486341343 MFG EXPENSES 81901 36935938 80433626 1486341343 PERSONNEL EXP 51995 27349098 26066301 462322842 ADMN. EXP 40391 21670118 0 342910519 SALES & MKTG 6828 0 13762584 0 DEPRECIATION 24667 8273212 20453273 66592853 TOTAL COST (TC) 262859 147475459 226049018 2351867557 OPERATING PROFIT (OP) -145477 29562283 37998166 436915453 OP/TC (%) -55.345 20.05% 16.81% 18.53% MEAN OP/TC OF COMPARABLES 18.46% THUS IT IS SEEN THAT THE ASSESSEE HAS BOOKED AN OP /TC MARGIN OF (55.34%) AS COMPARED TO 18.46% OF THE COM PARABLES. CALCULATION OF ALP OF SALES OF HARD GELATIN CAPSULE S 6 THE ASSESSEE HAS SOLD THE HARD GELATIN CAPSULES TO ITS AES AT A PRICE OF RS.44,800,172. IN THE PROPORTION OF R EVENUE AND EXPENSES AT ENTITY LEVEL THE COST OF THE TRANSACTIO N TRANSLATES TO RS.100,323,119. ON THIS COST THE ASSESSEE SHOULD H AVE CHARGED TO MARKUP OF 18.46% AND THE CORRESPONDING ARMS LEN GTH PRICE OF SALES SHOULD HAVE BEEN RS.11,88,42,767/-. SINCE TH E PRICE CHARGED IS RS.44,800,172 THE DIFFERENCE ON THIS ACC OUNT IS RS.7,40,42,595/-. THE ASSESSING OFFICER SHALL, ACCO RDINGLY INCREASE THE TAXABLE INCOME BY RS.7,40,42,595/-. 11. OBJECTIONS WERE RAISED BEFORE THE DRP BUT THE D RP CONFIRMED THE TRANSFER PRICING ADJUSTMENT MADE BY T HE TPO. 12. BEFORE US THE COUNSEL FOR THE ASSESSEE VEHEMENT LY REITERATED THAT CUP IS THE MAM AND, THEREFORE, THE TNMM METHOD ADOPTED BY THE TPO IS UNCALLED FOR AND THE TRANSFER PRICING ADJUSTMENT SHOULD BE DELETED. IT IS THE SAY OF THE COUNSEL TH AT THE TPO HAS USED THREE COMPARABLES OUT OF WHICH ONLY THE FINANC IALS OF MEDICAP IS AVAILABLE IN THE PUBLIC DOMAIN AND THE F INANCIALS OF SUNIL HEALTHCARE AND ASSOCIATED CAPSULES WERE OBTAI NED BY THE TPO AFTER ISSUING NOTICE U/S. 133 (6) OF THE ACT. T HE COUNSEL STATED THAT THE ASSESSEE COULD NOT BE EXPECTED TO C OMPLY WITH THESE TWO COMPARABLES AS THE FINANCIALS DATA ARE NO T AVAILABLE IN THE PUBLIC DOMAIN BUT ARE AVAILABLE WITH THE TPO. THE COUNSEL STATED THAT NO OPPORTUNITY OF CROSS EXAMINATION WAS MADE AVAILABLE WHICH IS AGAINST THE DECISION OF THE HON BLE HIGH COURT OF DELHI IN THE CASE OF CASH EDGE INDIA PRIVATE LIM ITED IN WP 7 3628/2016 COUNSEL CONTINUED BY STATING THAT THE TPO HAS NOT GRANTED THE ADJUSTMENT OVER DIFFERENCE IN EXCLUDING THE WORKING CAPITAL OF THE ASSESSEE VIZ-A-VIZ THE COMPARABLE CO MPANIES NOR HE HAS GRANTED THE ADJUSTMENT FOR DIFFERENCE IN THE CA PACITY UTILIZATION OF THE ASSESSEE VIZ-A-VIZ THE COMPARABL E COMPANIES. THE COUNSEL URGED ON ACCEPTING THE INTERNAL TNMM PR OPOSED BY HIM STATING THAT THE INTERNAL TNMM IS ALSO GOOD COM PARABLE. THE COUNSEL FURTHER STATED THAT THE TPO SHOULD BE DIREC TED TO EXAMINE INTERNAL TNMM AS PROPOSED BY THE ASSESSEE. 13. PER CONTRA THE DR STRONGLY SUPPORTED THE FINDIN GS OF THE TPO. 14. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW. THE QUARREL IS IN RESPECT OF THE MOST APPROP RIATE METHOD. THE ASSESSEE CLAIMS THAT CUP IS THE MAM IN THE GIVE N CIRCUMSTANCES AND THE REVENUE STATES THAT TNMM IS T HE MAM METHOD AS THE CUP METHOD ADOPTED BY THE ASSESSEE IS FULL OF FLAWS. 15. WE FIND THAT THE ASSESSEE HAS ADOPTED AVERAGE R ATE OF SALE TO UNRELATED PARTIES FOR THE WHOLE YEAR AND COMPARED W ITH THE RATE OF SALE BOOKED TO RELATED PARTIES. WE, FURTHER FIN D THAT FROM FOB VALUE OF INVOICE OF RELATED PARTIES, AMOUNT OF COMM ISSION ALLOWED HAS BEEN DEDUCTED. IN CASE OF SALES TO AE FREIGHT P AID HAS BEEN ADDED. 8 16. IN OUR CONSIDERED VIEW THIS IS NOT A FAIR COMPA RISON. IN OUR UNDERSTANDING, NOT ONLY CONTRACTUAL TERMS SHOULD BE SAME BUT DATE OF THE TRANSACTION SHOULD ALSO BE SAME. WE ARE OF THE CONSIDERED VIEW THAT THE APPLICATION OF AVERAGE RAT ES LEADS TO HIGHLY SKEWED RESULTS. IN DIRECT METHODS OF COMPAR ISON 1 TO 1 COMPARABILITY SHOULD BE MADE, TRANSACTION BY TRANSA CTION INVOICES NEED TO BE ANALYZED ON SAME OR CLOSEST AVA ILABLE DATES. WE FIND THAT THE ASSESSEE HAS DRASTICALLY INCREASED THE PRICE IN A FEW UNCONTROLLED TRANSACTIONS IN COMPARISON TO SALE OF PRODUCTS TO ASSOCIATE ENTERPRISES AT LOWER PRICES THAN UNCON TROLLED RATES, THEREFORE, WE ARE OF THE OPINION THAT THE CUP METHO D USED BY THE ASSESSEE CANNOT BE ACCEPTED AS THE MAM. 17. HOWEVER, AT THE SAME TIME WE FIND THAT THE TNMM METHOD USED BY THE TPO THOUGH IS THE MAM BUT THE WORKING C APITAL ADJUSTMENT AND THE CAPACITY UTILIZATION HAS TO BE C ONSIDERED IN THE LIGHT OF THE FACT THAT THE FINANCIALS OF TWO OF THE COMPARABLES ARE NOT AVAILABLE IN THE PUBLIC DOMAIN AND THE TPO HAS USED THE SAME BY CALLING THE FINANCIAL DATA U/S. 133 (6) OF THE ACT WITHOUT GIVING ANY OPPORTUNITY TO THE ASSESSEE. 18. CONSIDERING THE FACTS OF THE CASE IN TOTALITY W E HOLD THAT TNMM IS THE MAM ON THE GIVEN FACTS AND DIRECT THE T PO TO ALLOW WORKING CAPITAL ADJUSTMENT AND CAPACITY UTILIZATION ADJUSTMENT IN RESPECT OF THE COMPARABLES USED BY HIM AFTER AFFORD ING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND NO.2 TO 6 ARE ALLOWED FOR STATISTICAL PURPOSES WITH THE ABOVE DIR ECTIONS WHICH 9 WILL ALSO ADJUDICATE GROUND NO.10 RAISED, THROUGH, THE APPLICATION FOR RAISING THE ADDITIONAL GROUND OF APPEAL. 19. COMING TO THE SECOND TRANSFER PRICING ADJUSTMEN T RELATING TO PURCHASE OF FIXED ASSET FROM ASSOCIATED ENTERPRISES , THE FACTS ON RECORD SHOW THAT IN ORDER TO IMPROVE PRODUCT FACILI TY THE ASSESSEE HAD PURCHASED FIXED ASSETS FROM ITS AE. SINCE THE FIXED ASSETS WERE PROPRIETARY ITEMS OF THE AE NO PRACTICAL METHO D IS AVAILABLE TO ESTABLISH THAT THE PRICES PAID FOR ASSET ACQUISI TION IS AT ARMS LENGTH. AS THE ASSETS ACQUIRED HAVE BEEN CAPITALIZ ED AND NOT EXPENSED OF THE DEPRECIATION ON THESE ASSETS ONLY A FFECT THE TAXABLE PROFITS. 20. THERE IS NO DISPUTE THAT ASSETS ACQUISITION IS BEING MADE FOR UP-GRADATION OF TECHNOLOGY THAT WILL IMPROVE THE OV ERALL FINANCIAL ASPECT OF ASSESSEES BUSINESS AND REDUCE THE COST O F GOODS PROCURED. 21. THE TPO HAS TREATED THE ALP AT NIL AS AGAINST B OOK VALUE OF RS.79,11,841/- WHICH AGAIN WAS CONFIRMED BY THE DRP . 22. BEFORE US THE COUNSEL FOR THE ASSESSEE VEHEMENT LY STATED THAT NO THIRD PARTY INVOICE CAN BE PRODUCED SINCE T HE VALUE ADDITION WAS MADE AT THE END OF THE AE. THE COUNSE L FURTHER STATED THAT THE TRANSACTION VALUE DETERMINED BY CUS TOM AUTHORITIES IN CUSTOM VALUATION REPORT SHOULD NOT H AVE BE 10 DISCARDED BY THE TPO AND PRAYED FOR ACCEPTING THE C USTOM AUTHORITIES VALUATION. 23. PER CONTRA DR STRONGLY SUPPORTED THE FINDINGS O F THE TPO. IT IS THE SAY OF THE DR THAT THE PURPOSE AND PROCESS O F DETERMINATION OF VALUE BY THE CUSTOM AUTHORITIES AR E DIFFERENT AND THERE IS NO LINK BETWEEN CUSTOM VALUATION AND VALUA TION OF GOODS FOR PURPOSE OF TRANSFER PRICING IN INCOME TAX. 24. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW AND HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL CONTENTIONS. THERE IS NO DISPUTE THAT THE ASSET PU RCHASED BY THE ASSESSEE FROM ITS AE ARE PROPRIETARY DESIGN ITEMS O F THE AE, THEREFORE, INVOICES FROM UNRELATED PARTIES CANNOT B E AVAILABLE TO THIS EXTENT. WE AGREE WITH THE COUNSEL THAT THE AL P CANNOT BE TAKEN AS NIL. THIS WOULD AMOUNT TO HOLD THAT THE F IXED ASSETS PURCHASED BY THE ASSESSEE FROM ITS AE HAVE NO COST OR ARE PURCHASED AT NIL COST. THIS WOULD GIVE ABSURD RESU LTS. IN OUR CONSIDERED OPINION THE QUARREL CAN BE SETTLED IF TH E AE IS TREATED AS THE TESTED PARITY. WE FIND THAT THROUGH APPLICA TION FOR THE ADMISSION OF ADDITIONAL EVIDENCES, THE ASSESSEE HAS PROVIDED CERTAIN ADDITIONAL INFORMATION RELATING TO THE TRAN SACTION OF FIXED ASSETS BY TREATING THE AE AS THE TESTED PARTY. 25. WE RESTORE THIS ISSUE TO THE FILE OF THE TPO AN D DIRECT THE TPO TO TREAT THE AE AS THE TESTED PARTY AND DIRECT THE ASSESSEE TO FURNISH NECESSARY DETAILS/ DOCUMENTS FOR THE DETERM INATION OF THE 11 ALP BY TREATING THE AE AS THE TESTED PARTY. GROUND NO.7 AND 9 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 26. THIS WILL ALSO COVER THE ADDITIONAL GROUNDS RAI SED IN RELATION TO THIS TRANSFER PRICING ADJUSTMENT. 27. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 26.08.2019. SD/- SD/- (SUDHANSHU SRIVASTAVA) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNT ANT MEMBER *NEHA* DATE:-26.08.2019 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGI STRAR ITAT NEW DELHI 12 DATE OF DICTATION 16.08.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 19.08.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 26.08.2019 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS 26.08.2019 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 26.08.2019 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 26.08.2019 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 26.08.2019 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 26.0 8.2019 DATE ON WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGIST RAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER