UCB INDIA P.LTD, MUMBAI V. ADDL CIT RG 7(3), MUMBAI

ITA 645/MUM/2015

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8453 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 30-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M C OMI NINGSHEN
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Bad and doubtful debts; Capital expenditure
• Section: 234B

Judgement Text

J IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER ./ I.T.A. NO.645/ MUM/2015 ( / ASSESSMENT YEAR : 2010 - 11) ./ I.T (TP).A NO.1785/ MUM/2016 ( / ASSESSMENT YEAR : 2011 - 12) ./ I.T.A. NO.2162/ MUM/2017 ( / ASSESSMENT YEAR : 2012 - 13) UCB INDIA PVT. LTD., 504, PENINSULA TOWERS, G.K. MARG, LOWER PAREL, MUMBAI 400013 / V. DCIT RANGE 8(3)(1), ROOM NO. 615, 6 TH FLOOR, AAYAKAR BHAVAN, M.K MARG, MUMBAI ./ PAN : AAACU1627L ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY: SHRI. RAJAN VORA, (AR) SHRI. PRANAY GANOHI, (AR) REVENUE BY: SHRI. M.C. OMI NINGSHEN (DR) / DATE OF HEARING : 22.01.2019 / DATE OF PRONOUNCEMENT : 11 .04 .2019 / O R D E R PER SHAMIM YAHYA , ACCOUNTANT MEMBER: THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST RESPECTIVE ORDERS OF ASSESSING OFFICER PASSED PURSUANT TO DIRECTION OF LD. DISPUTE RESOLUTION PANEL, U/S. 144C(5) OF THE ACT, FOR THE CONCERNED ASSESSMENT YEAR S . I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 2 2. ONE COMMON ISSUES RAISED IN THESE APPEALS RELATE TO TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF FINISHED DOSAGE FORM (FDFS) TO OVERSEAS ASSOCIATED ENTERPRISES . S INCE FACTS ARE SIMILAR WE ARE REFERRING TO FACTS AND FIGURES FROM ASSESSMENT YEAR 2010 - 11. 3. IN ASSESSMENT YEAR 2010 - 11, THE ASSESSEE RAISED A GROUND THAT AO ERRED IN PASSING THE FINAL ASSESSMENT ORDER WITHOUT PROVIDING SUFFICIENT OPPORTUNITY OF BEING HEARD. 4. AT THE OUTSET LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT B E SHALL NOT BE PRESSING T O THE GROUND. HENCE THIS GROUND RAISED IS DISMISSED AT NOT PRESSED. 5. BRIEF FACTS IN THIS REGARD ARE BEING DEALT WITH REFERENCE TO FACTS OF FI GURES FOR AY 2010 - 11 AS ISSUE IS , COMMON. THE ASSESSEE NEW UCB INDIA IS WHOLLY OWNED SUBSIDIARY OF UCB, SA, BELGI UM. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURER AND SALE OF PRESCRIPTION DRUGS. 6. DURING THE RELEVANT PERIOD, THE ASSESSEE INTER - ALIA ENTERED INTO THE INTERNATIONAL TRANSACTION OF EXPORT OF THE FDFS UCERAX AND ZYRTEC TO ITS AE. THE ASSESSEE IN ITS TRAN SFER PRICING STUDY REPORT HAD BENCHM ARKED THIS INTERNATIONAL TRANSACTION USING THE TN MM AT THE SEGMENTAL LEVEL AS THE MOST APPROPRIATE METHOD USING THE PROFIT LEVEL IND I CATOR (PLI ) OF OPERATING PROFITS ON OPERATING COST . 23 COMPARABLES HAD BEEN SE LECTED BY THE ASSESSEE AND THE ARITHMETIC MEAN OF THE PLI WAS COMPUTED AT 10.59% WHEREAS THE ASSESSEE'S OWN PLI WAS 49.60%. ITS PLI BEING HIGHER THAN THOSE OF THE COMPARABLES, THE CONCERNED INTERNATIONAL TRANSACTION OF EXPORT OF FDFS TO ITS AE WERE CLAIMED TO BE AT ARM'S LENGTH. 7. HOWEVER, THE TRANSFER PRICING OFFICER WAS NOT SATISFIED WITH THE ABOVE HE REJECTED THE BENCHMARK ING DONE BY THE ASSESSEE. THE TRANSFER PRICING OFFICER OBSERVED AS UNDER: - I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 3 5 .6 THE ASSESSEE HAS GIVEN THE WORKING OF PL1 OF THE ASSESSEE IN ANNEXURE 7 OF THE TPSR WHICH IS AS UNDER : REVENUE FROM OPERATIONS 333611788 OTHE OPERATING INCOME 160179 TOTAL OPERATING INCOME 33771967 COST OF SALE 5078412 ADMINISTRATIVE, SELLING & DISTRIBUTION EXPENSES 17488213 TOTAL OPERATING COST 22566625 OPERATING PROFIT 11205341 OP/OC 49.60% | 5.7 REJECTION OF TNMM AS MAM BY TPO : IT IS OBSERVED THAT THE ASSESSEE HAD CALCULATED OP/OC AT ENTITY LEVEL. THE TRANSACTION CANNOT BE COMPARED AT ENTITY LEVEL AS THE EXPORT OF FINISHED DRUGS TO AE IS ONLY RS.5,08,97,853/ - . WHEREAS, THE ASSESSEE HAS CALCULATED OP/OC FOR TOTAL EXPORT OF RS.33 CRORES. ALSO IN THE ANNUAL ACCOUNTS OF THE ASSESSEE THERE IS ARE NO SUCH SEGMENTAL ACCOUNTS. THUS IN THE ANNUAL AUDI TED ACCOUNTS THE BREAK UP OF THE EXPORT TO AE AND NON AE IS NOT AVAILABLE. IN THE: AUDITED ANNUAL ACCOUNTS THE SEGMENTAL RESULTS FOR EXPORT AND LOCAL SALE IS ALSO NOT AVAILABLE. THEREFORE, THE SO CALLED CALCULATION OF OP/OC TAKING INTO ACCOUNT THE ENTIRE E XPORT OF RS.33 CRORES IS ALSO NOT RELIABLE. THUS HERE THE IMPORTANT ISSUE IS THAT THE ASSESSEE IS TRYING TO CAMOUFLAGE THE OP/OC OF THE SMALL EXPORT TO AE USING OP/OC OF THE TOTAL EXPORT. THEREFORE, THIS METHOD OF BENCHMARKING IS NOT ACCEPTABLE AS IT IS NO T GIVING A TRUE PICTURE. ON PERUSAL OF THE TPSR IT WAS OBSERVED THAT THE ASSESSEE HAD BENCHMARKCD THE TRANSACTION OF IMPORT OF API AND EXPORT OF FINISHED DRUGS USING THE SAME SET OF I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 4 COMPARABLES. THIS METHOD OF BENCHMARKING TWO DIFFERENT ACTIVITIES USING TH E SAME SET OF COMPARABLES ITSELF IS INCORRECT. HOW CAN ONE COMPARE THE ACTIVITY OF IMPORT OF API WITH THAT OF EXPORT OF FINISHED PRODUCTS. THE TWO ACTIVITIES ARE ALTOGETHER DIFFERENT. IN THE TP5R THE DIFFERENCE BETWEEN THE TWO ACTIVITIES IS CLEARLY MENTION ED IN THE TPSR. THEREFORE, ASSESSEE'S THIS ACT OF BENCHMARKING, THE EXPORT OF FOP USING THE SAME SET OF COMPARABLES IS NOT ACCEPTABLE. 8. THE TRANSFER PRICING OFFICER, PROCEEDED TO COMPARE MARGIN EARNED BY THE UCB INDIA FROM SAL E OF THESE PRODUCTS IN INDIA. H E REJECTED THE ASSESSEE S SUBMISSION THAT GROSS MARGIN EARNED BY THE ASSESSEE FROM EXPORT TO AES IS HIGHER THAN GROSS MARGIN EARNED FROM LOCAL SALE. HE PROCEEDED TO HO LD AS UNDER: THE ASSESSEC'S SUBMISSION HAS BEEN CONSIDERED. IT HAS ALREADY BEEN MENTIONED ABOVE THAT THE FINISHED PRODUCTS EXPORTED TO AES ARE OF SU PERIOR QUALITY, THEY COMPLY US F DA REGULATIONS. IT IS TACT THAT THE US PDA REGULATIONS ARE THE TOUGHEST IN THE INDUSTRY. SO ANY DRUG WHICH QUALIFIES THE US PDA HAS TO BE OF EXTRA ORDINARY QUALITY. IT HAS BEEN SUBMITTED BY EMPLOYEE OF THE ASSESSEE THAT SPECIAL EXCIPIENTS ARE ADDED TO THE DRUGS WHICH ARE EXPORTED. THUS, THOUGH THE QUALITY OF THE DRUGS EXPORTED IS VERY HIGH AS COMPARED TO DRUGS SOLD IN INDIA, THE PRICE CHARGED TO AE IS LESS T HAN THE PRICE AT WHICH IT WAS SOLD TO DISTRIBUTOR IN INDIA. THEREFORE, THE CUP IS APPLIED, TAKING THE PRICE AT WHICH THE DRUGS ARE SOLD IN INDIA AS ALP. THEREFORE, THE TRANSACTION IS NOT AT ARM'S LENGTH. THE DIFFERENCE IN THE PRICE IS AS UNDER: NAME SALE PRICE TO AE ' ALP DIFFERENCE/ UNIT QUANTITY SOLD TO AE TOTAL DIFFERENCE UCERAX 10 RNG RS.L21/BOTTLE RS.327/BOTT!E 205/BOTTLE 164120 BOTTLES RS.3380S720 UCERAX25 MG RS.L64/BOTTLE RS.586BOTTLE 422/BOTTIE 7670 BOTTLES RS.3236740 ZYRTEC RS.203/BOTTLE RS.426/BOTTLE 223/BOTTLE 61850 BOTTLES RS.13792550 5,08,38,010/ - I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 5 THUS THE DIFFERENCE IN THE ARMS LENGTH PRICE AND THE PRICE AT WHICH IT WAS SOLD TO AE IS RS. RS. 5,08,38,010/ - THE SAID CALCULATION WAS DONE IN THE PRESENCE OF THE AR . THEREFORE, AN ADJUSTMENT OF RS. RS. 5,08,38,010/ - IS PROPOSED TO THE INTERNATIONAL TRANSACT ION OF SALE OF FINISHED PRODUCTS TO AE. 9. U PON ASSESSEE OBJECTION LD. DRP NOTED THAT AFTER REJECTING THE TNMM ANALYSIS UNDERTAKEN IN THE TRANSFER PRICING STUDY REPORT, THE AO NOTED THAT THE ACTIVE PHARMACEUTICAL INGREDIENTS (APIS) USED IN THE FDFS EXPORTED TO ITS AES WAS THE SAME AS USED FOR THE FDFS MANUFACTURED BY THE ASSESSEE AND SOLD LOCALLY TO THIRD PARTIES IN INDIA. ACCORDINGLY, THE TPO WAS O F THE - VIEW THAT THE P RICE OF BOTH THE FDFS EXPORTED A ND THE FDFS SOLD TO THIRD PARTIES I N INDIA COULD B E COMPARED UNDER THE CUP METHOD. THE SALE PRICE PER UNIT OF THE FDFS UCERAX (10MG), UCERAX (25 MG) AND ZYRTEC SOLD TO THE AE WAS COMPARED BY THE TPO TO THE SALE PRICE OF FDFS HAVING AN IDENTICAL PHARMACEUTICAL C OMPOSITION SOLD TO THE LOCAL PARTIES IN INDIA AND THE TOTAL DIFFERENCE BETWEEN THE TWO AMOUNTING TO RS. 5,08,38,010 WAS COMPUTED BY THE TPO AS THE TRANSFER PRICING ADJUSTMENT REQUIRED ON THIS INTERNATIONAL TRANSACTION . 10. THEREAFTER, LD. DRP NOTED THE OBJECTIONS OF THE ASSESSEE TO THE TPOS ACTION AND FOUND THAT T.P.O HAS COGENTLY REBUTTED THE DIFFERENCE IN FAR POINTED OUT BY THE ASSESSEE. BUT DRP ACCEPTED THE OBJECTION FOR ADJUSTMENT FOR EMPLOYMENT OF ADDITIONAL MARKETING PERSONAL. THEREAFTER THE DRP CONCLUDED AS UNDER : - 5.4 TO SUM UP, AS REGARD S THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF EXPORT OF FDFS TO THE AE, THE DRP NOTES THAT THE JURISDICTIONAL MUMBAI BENCH OF THE (TAT IN THE CASE OF SERDIA PHARMACEUTICATS (136 TTJ 129) HAS OBSERVED THAT AS LONG I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 6 AS APPROP RIATE COMPARABLE CAN BE FOUND, THE CUP METHOD WOULD INDEED BE THE MOST APPROPRIATE METHOD IN TRANSACTIONS INVOLVING PHARMACEUTICAL PRODUCTS. THE CUP METHOD AS A DIRECT METHOD IS FOUND BY THE DRP TO BE PREFERABLE FOR THE BENCHMARKING OF THE PRESENT TRANSACT IONS AS COMPARED TO THE TNMM USING EXTERNAL COMPARABLES AS DONE IN THE TRANSFER PRICING STUDY REPORT OR EVEN THE INTERNAL TNMM BENCHMARKING EXERCISE DONE BY THE ASSESSEE ON A WITHOUT PREJUDICE BASIS. THE TNMM ATTEMPTS TO BENCHMARK THE PROFITS EARNED BY THE CONCERNED ASSESSEE AGAINST SUITABLE COMPARABLES WHEREAS THE CUP METHOD CARRIES OUT THE BENCHMARKING EXERCISE KEEPING IN VIEW THE PRICES OF THE SPECIFIC INDIVIDUAL INTERNATIONAL TRANSACTIONS AS AGAINST COMPARABLE UNCONTROLLED PRICES OF SIMILAR PRODUCTS. HO WEVER, WHILE USING THE CUP METHOD THE AO/TPO ARE HEREBY DIRECTED TO GIVE APPROPRIATE DISCOUNT FOR THE ADDITIONAL MARKETING EXPENSES INCURRED BY THE ASSESSEE IN ITS BEAT SALES. THE ALP COMPUTED BY THE TPO IN HIS ORDER WOULD BE REQUIRED TO BE REDUCED BY THE PER UNIT SALARY COST OF THE EMPLOYEES ENGAGED IN THE MARKETING FUNCTIONS. SUBJECT TO SUCH MODIFICATIONS OF THE COMPUTATION, THE CUP METHOD ADOPTED BY THE ASSESSEE IS HEREBY UPHELD. WITH THESE DIRECTIONS THE GROUNDS OF APPEAL 1 TO 5 WITH REFERENCE TO THE TR ANSFER PRICING ADJUSTMENT ON EXPORT OF FDFS BY THE ASSESSEE TO THE AE STAND DISPOSED. 11. AGAINST THE ABOVE THE ASSESSEE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE TRA NSFER PRICING OFFICER HAS ERRED IN REJECTING TNMM AS THE MOST APPROPRIATE METHOD, THOUGH IT WAS CONSISTENTLY FOLLOWED EARLIER. HE ALSO SUBMITTED THAT THE TRANSFER PRICING OFFICER HAS ERRED IN ADOPTING CUP AS THE MOST APPROPRIATE METHOD . 12. HE REFERRED TO TRIBUNAL DECISIONS IN THIS REGARD FOR THE PROPOSITION THAT REGULARLY ACCEPTED TNMM METHOD CANNOT BE CHANGED WITHOUT ANY CHANGE IN FACTS AND CIRCUMSTANCES. HE FURTHER SUBMITTED THAT THE TRANSFER PRICING OFFICER HAS ERRED IN COMPARING EXPORT PRICE I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 7 WITH LOCAL SALES WITHOUT TAKING COGNIZANCE OF THE DIFFERENCES IN FUNCTION, ASSETS AND RISK ANALYSIS. (FAR) 13. UPON HEARING BOTH THE COUNSEL AND PERUSING THE RECORDS WE FIND THAT THE REASONING GIVEN BY THE TRANSFER PRICING OFFICER FOR CHANGE IN THE METHOD OF CHOOSIN G TH E MOST APPROPRIATE METHOD AS CUP INSTEAD OF THE TNMM METHOD ADOPTED BY THE ASSESSEE IS FIRSTLY REJECTION OF ASSESSES METHOD BY FOLLOWING REASONING. IT IS OBSERVED THAT THE ASSESSEE HAD CALCULATED OP/OC AT ENTITY LEVEL. THE TRANSACTION CANNOT BE COMP ARED AT ENTITY LEVEL AS THE EXPORT OF FINISHED DRUGS TO AE IS ONLY RS.5,08,97,858/ - . WHEREAS, THE ASSESSEE HAS CALCULATED OP/OC FOR TOTAL EXPORT OF RS.33 CRORES. ALSO IN. THE ANNUAL ACCOUNTS OF THE ASSESSEE THERE IS ARE NO SUCH SEGMENTAL ACCOUNTS. THUS IN THE ANNUAL AUDITED ACCOUNTS THE BREAK UP OF THE EXPORT TO AE AND NON AE IS NOT AVAILABLE. IN THE' AUDITED ANNUAL ACCOUNTS THE SEGMENTAL RESULTS FOR EXPORT AND LOCAL SALE IS ALSO NOT AVAILABLE. THEREFORE, THE SO CALLED CALCULATION OF OP/OC TAKING INTO ACCO UNT THE ENTIRE EXPORT OF RS33 CRORES IS ALSO NOT RELIABLE. THUS HERE THE IMPORTANT ISSUE IS THAT THE ASSESSEE IS TRYING TO CAMOUFLAGE THE OP/OC OF THE SMALL EXPORT TO AE USING OP/OC OF THE TOTAL EXPORT. THEREFORE/ THIS METHOD OF BENCHMARKING IS NOT ACCEPTA BLE AS IT IS NOT GIVING A TRUE PICTURE. ON PERUSAL OF THE TPSR IT WAS OBS ERVED THAT THE ASSESSEE HAD BENCHMARKE D THE TRANSACTION OF IMPORT OF API AND EXPORT OF FINISHED DRUGS USING THE SAME SET OF COMPARABLES . THIS METHOD OF BENCHMARKING TWO DIFFERENT ACTI VITIES USING THE SAME SET OF COMPARABLES ITSELF IS INCORRECT. HOW CAN ONE COMPARE THE ACTIVITY OF IMPORT OF API WITH THAT OF EXPORT OF FINISHED PRODUCTS. THE TWO ACTIVITIES ARE ALTOGETHER DIFFERENT. IN THE TPSR THE DIFFERENCE BETWEEN THE TWO ACTIVITIES IS CLEARLY MENTIONED IN THE TPSR. THEREFORE, ASSESSEE 'S THIS ACT OF B ENCHMARKING THE EXPORT OF FD F USING THE SAME SET OF CO MPARABLES IS NOT IT ACCEPTABLE. I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 8 14. FROM THE ABOVE IT IS CLEAR THAT TRANSFER PRICING OFFICER'S OBSERVATION THAT ASSESSEE IS TRYING TO CAMOUFLAGE THE OP/OC OF SMALL EXPORT ASSOCIATED ENTERPRISES (R S 5 CR) WITH THE OP/OC OF THE TOTAL EXPORT OF RS. 33 CRORE IS COGENT. FURTHER IN THE ANNUAL ACCOUNTS THERE ARE NO SEGMENTAL ACCOUNTS . T HE ANNUAL AUDITED ACCOUNTS DOES CONTAIN THE BREAKUP OF EXPORT TO ASSOCIATED ENTERPRISE AND NON - ASSOCIATE ENTERPRISE. FURTHER MORE IN THE AUDITED ANNUAL ACCOUNTS THE SEGMENTAL RESULTS FOR EXPORT AND LOCAL SALES IS ALSO NOT AVAILABLE. FURTHER THE TRANSFER PRICING OFFICER FOUND THAT ASSESSEE HAS BENCHMARKED THE T RANSACTION OF IMPORT OF API AND EXPORT OF FINISHED DRUGS WITH THE SAME SET OF COMPARABLE. THE TRANSFER PRICING OFFICER HAS RIGHTLY OBSERVED THAT ACTIVITY OF IMPORT OF API CANNOT BE COMPARED WITH THAT OF EXPORT OF FINISHED PRODUCTS. IN THESE CIRCUMSTANCES T HE TRANSFER PRICING OFFICER HAS REJECTED THE TNMM METHOD OF BENCHMARKING ADOPTED BY THE ASSESSEE. 15. IN OUR CONSIDERED OPINION THE REASONS GIVEN BY THE TRANSFER PRICING OFFICER FOR REJECTING THE TNMM METHOD ADOPTED BY THE ASSESSEE IS QUITE COGENT. THE ABO VE CLEARLY SHOW THAT IF ON THE SAME FACTS IN EARLIER PERIOD TNMM METHOD WAS ADOPTED IT WAS AN ERROR. IT IS SETTLED LAW THAT THERE IS NO USE OF PERPETUATING AN ERROR. THE CASE HERE IS NOT THAT THE TRANSFER PRICING OFFICER IS CHANGING THE METHOD TO THAT OF C UP BY CLAIMING THAT THIS METHOD IS A SUPERIOR METHOD TO TNMM . HENCE THE OBJECTION OF THE LEARNED COUNSEL OF THE ASSESSEE BY PLACING RELIANCE UPON CASE LAWS IN THIS REGARD IS LIABLE TO BE REJECTED AND THE SAME IS REJECTED AS SUCH . 16. AS RIGHTLY NOTED BY TH E TRANSFER PRICING OFFICER THERE IS READILY AVAILABLE INTERNAL CUP IN THE FORM OF LOCAL SALES OF THE SAME PRODUCTS. THE EXPORT SALES WITH THE ASSOCIATED ENTERPRISE OF FIXED DOSES FORM (FDF) VIZ. UCEREX 10MG, UCEREX 25MG & 2YRTEC WERE ALSO SOLD IN LOCAL MAR KET WITH IDENTICAL PHARMACEUTICAL CONTENTS CUP. THE ASSESSEE HAS OBJECTED THAT THERE ARE DIFFERENCES IN FUNCTION ASSETS RISK (FAR) ANALYSIS IN THIS REGARD. THE ASSESSING OBJECTION IN THIS REGARD I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 9 HAS BEEN COGENTLY DEALT WITH BY THE TRANSFER PRICING OFFICER AND HAS BEEN NOTED BY THE DISPUTE RESOLUTION PANEL AS UNDER : - 5. GROUNDS OF OBJEC TION THREE AND FOUR ARE AGAINST THE ADOPTION OF THE CUP MET HOD BY THE TPO TO BENCHMARK THE INTERNATIONAL TRANSACTIONS OF EXPORT OF FDFS. THE ASSESSEE HAS CONTENDED THAT THE FUNCTIONS PERFORMED IN THE EXPORT OF FDFS TO THE AE AND THE SALES OF SIMILAR FDFS TO THE LOCAL THIRD PARTIES IN INDIA ARE DIFFERENT. AMONG THE DIFFERENCES HIGHLIGHTED BY THE ASSESSEE ARE THAT IN RESPECT OF LOCAL SALES, THE ASSESSEE IS REQUIRED TO ESTIMATE THE DEMAND FOR FDFS IN THE MARKET FOR THE PURPOSES OF MANUFACTURE WHEREAS WHILE DEALING WITH THE AES, IT MANUFACTURES AND SUPPLIES THE FDFS IN ACCORDANCE WITH CONFIRMED ORDERS PLACED BY THE AES AND AS PER THEIR SPECIFICATIONS. THE TPO IN HIS ORDER AS WELL AS IN THE COURSE OF THE REMAND PROCEEDINGS FOUND SUCH CLAIM OF THE ASSESSEE TO BE WITHOUT ADEQUATE BASIS. THE AE PLACED THE ORDERS FOR PURCHASE THREE MONTHS IN ADVANCE AND NO FIXED QUANTUM OF PURCHASE WAS ASSURED IN THE FACTS OF THIS CASE BY THE CONCERNED AES. THE INDIAN STOCKISTS, IN A SIMILAR MANNER, ALSO HAVE TO PLACE ORDER AS PER THE FIXED FORMULA OF TWICE THE QUANTUM OF SALES MINUS THE CLOSING STOCK WITH THEM. THUS THE INDIAN STOCKISTS OF THE FDFS FOR WHOM SUPPLIES WERE MADE BY THE ASSESSEE ALSO PLACED CONFIRMED ORDERS WELL IN ADVANCE. THE ASSESSEE FURTHER CONTENTED THAT WHILE EXPORTING FDFS TO THE AES, THE FUNCTIONS WITH RESPECT TO SALES AND MARKETING WERE PERFORMED BY THE AES WHEREAS IN THE CASE OF SALES MADE TO THE LOCAL THIRD PARTIES, THE SAID SALES AND MARKETING FUNCTIONS HAD TO BE UNDERTAKEN BY THE ASSESSEE ITSELF. HERE ALSO, THE TPO ON AN ANALYSIS OF THE CLAUSES IN THE RELEVANT STOCKIST'S AGREEMENT OBSERVED THAT THE STOCKISTS HAD UNDERTAKEN TO PROMOTE ETHICAL BUSINESS PRACTICE ARID TO SECURE ORDER S FROM THE DOCTORS, HOSPITALS AND RETAILERS. THUS SUBSTANTIAL MARKETING FUNCTIONS WERE UNDERTAKEN BY THE STOCKISTS APPOINTED AND NOT THE ASSESSEE. 5.1 IN THE SAME CONTEXT OF DIFFERENCES BETWEEN THE EXPORT OF FDFS TO THE AE AND THEIR SALE IN THE LOCAL MARKE T, THE ASSESSEE HAD CONTENDED THAT WHEN DEALING WITH THE AES, THE CREDIT RISK BORNE BY THE ASSESSEE WAS NEGLIGIBLE WHEREAS IN THE LOCAL SALES, AS THERE IS A POSSIBILITY OF BAD DEBTS ARISING, IT IS THE ASSESSEE THAT BEARS THE CREDIT RISK. HERE AGAIN, THE TP O HAS NOTED THAT THE DELIVERY TO THE LOCAL STOCKISTS IS AGAINST POST DATED CHEQUES ISSUED BY THEM TO THE ASSESSEE AND TO THAT EXTENT THE CREDIT RISK OF THE ASSESSEE ON LOCAL SALES IS ALSO NEGLIGIBLE. IN ANY CASE, I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 10 THERE WAS A SPECIFIC CLAUSE FOR PAYMENT OF INTEREST @18% IF THE STOCKISTS DELAYED THE PAYMENTS, WHEREAS THE INVOICES OF, THE AE PERMITTED A CREDIT PERIOD OF 60 DAYS. THE ASSESSEE HAS ALSO CONTENDED THAT WITHOUT CONSIDERING THE MANUFACTURE FOR THE EXPORT TRANSACTIONS, THE PRODUCTION CAPACITY UTILIZA TION BY THE ASSESSEE WAS ONLY 58% AND THE EXPORT WAS AGAINST SUCH IDLE CAPACITY AND, THEREFORE, THE COST PARAMETERS OF THE TWO TRANSACTIONS COULD NOT BE COMPARED. SUCH CORRESPONDENCE BETWEEN THE IDLE CAPACITY AND THE PRODUCTION FOR EXPORTS, CLAIMED BY THE ASSESSEE, IS ARBITRARY AND WITHOUT ANY BASIS. FROM THE AFORESAID FACTS, THE DRP IS OF THE VIEW THAT THE ELEMENT OF FAR ANALYSIS DISCUSSED ABOVE DO NOT DEMONSTRATE ANY SIGNIFICANT ECONOMIC DIFFERENCES THAT WOULD AFFECT THE PRICE IN THE OPEN MARKET BETWEEN T HE TRANSACTION OF SALE OF FDFS TO THE AES AND THE SALE OF IDENTICAL FDFS TO THE LOCAL PARTIES. 5.2 IN ITS OBJECTIONS FILED BEFORE THE DRP ON THE ISSUE OF INAPPROPRIATENESS OF THE CUP METHOD TO ITS TRANSACTIONS, THE ASSESSEE HAS POINTED OUT THE DIFFERENCES ON THE GEOGRAPHICAL MARKETS WHEREIN THE TWO SETS OF TRANSACTIONS WERE UNDERTAKEN. THE TPO HAS ANALYSED THIS OBJECTION AND HAS OBSERVED THAT THE PRODUCT QUALITY OF THE FDFS EXPORTED APPEARS TO BE MARGINALLY SUPERIOR AND THE REGULATORY REGIME BEING MORE STRI NGENT IN THE GEOGRAPHICAL LOCATION OF THE AE, THE PRICE CHARGED TO THE AE SHOULD HAVE BEEN HIGHER TO THAT EXTENT. HOWEVER, IN THE CUP ANALYSIS, THE PRICE ACTUALLY CHARGED TO THE AE IS FOUND TO BE LOWER THAN THAT CHARGED IN THE LOCAL SALES MADE BY THE ASSES SEE. THE DRP ON SUCH FACTS FINDS ITSELF IN AGREEMENT WITH THE TPO THAT NO DISCOUNT WOULD BE AVAILABLE TO THE ASSESSEE ON ACCOUNT OF DIFFERENCES IN GEOGRAPHICAL LOCATION OF THE EXPORT PRICE OF FDFS SOLD TO ITS AE. 5.3 AMONG THE DIFFERENCES BETWEEN THE SALE OF FDFS TO THE AE AND THE SATE OF IDENTICAL FDFS IN THE LOCAL MARKET POINTED OUT BY THE ASSESSEE IS THE DIFFERENCE IN THE LEVEL OF MARKETING. IT IS A FACT OF THIS CASE THAT AS AGAINST THE SINGULAR AE TO WHOM EXPORT OF FDFS WERE MADE, THE STOCKISTS TO WHOM SUPPLIES ARE MADE BY THE ASSESSEE ARE MORE THAN 1500 IN NUMBER. IN ORDER TO CO - ORDINATE AND TO MANAGE ITS LOCAL SALES, THE ASSESSEE HAS EMPLOYED MARKETING STAFF OF AROUND 200 EMPLOYEES. THE DRP RECOGNISES THE ADDITIONAL EXPENDITURE ON ACCOUNT OF MARKETING EXPENSES THAT ARE AN ADDITIONAL FACTOR OF COST IN THE LOCAL SALES MADE BY THE ASSESSEE AS COMPARED TO THE SALES MADE TO THE AES. I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 11 17. THEREAFTER THE DISPUTE RESOLUTION PANEL HAD DIRECTED FOR APPROPRIATE DISCOUNT FOR THE ADDITIONAL MARKETING EXPENSE INCURRED BY THE ASSESSEE IN ITS LOCAL SALES . IT DIRECTED THAT THE ALP COMPUTED BY T.P.O. WOULD BE REDUCED BY PER UNIT SALARY COST OF EMPLOYEES ENGAGED IN MARKETING FIELD. 18. WE FIND THAT THE DIFFERENCE IN FAR AS SUBMITTED ASSESSEE HAS BEEN COGENTLY REBUTTED BY AS SESSEE BELOW. HENCE WE FIND NO INFIRMITY IN THE DIRECTION OF THE DISPUTE ADMISSION PANEL IN THIS REGARD . 19. W E FIND THAT THE LEARNED COUNSEL OF THE ASSESSEE HAS MADE A PROPOSITION BEFORE US THAT ASSESSEE HAS ONLY USED ITS SURPLUS/SPARE CAPACITY TO MAKE EXPORTS TO THE ASSOCIATED ENTERPRISE AND IT HAS ACTUALLY MADE A PROFIT OUT OF THE SAME. WE FIND THAT THIS LINE OF ARGUMENT WAS NEVER BEFORE THE AUTHORITIES BELOW. WE DO N OT FIND ANY COGENCY IN THE SAME FOR TAKING THIS INTERNATIONAL TRANSA CTION OUT OF THE A MBIT OF ALP DETERMINATION. AS A MATTER OF FACT IT IS IN FACT AN ADMISSION ON THE PART OF THE ASSESSEE THAT PRICES CHARGED FROM THE ASSOCIATED ENTERPRISE ARE COMPARATIVELY LOWER, WHICH IN TURN FURTHER FORTIFIES THE ACTION OF THE TRANSFER PRICING OFFICER . W E NOT E THAT IT IS THE CONTE NTION OF THE LEARNED COUNSEL OF THE ASSESSEE THAT THE ASSESSING OFFICER HAS NOT GIVEN EFFECT TO THE DIRECTION OF THE DRP REGARDING ADJUSTMENT IN ALP COMPUTED BY T.P.O. WE DIRECT THE ASSESSING OFFICER TO FOLLOW THE DIRECTION OF THE DISPUTE ADMISSIONS PANEL. IT WILL NOT BE OUT OF PLACE HERE TO REITERATE THAT T.P.O. FROM EXAMINATION OF ASSESSEES PERSONNEL HAS FOUND THAT FINISHED PRODUCTS EX PO RTED TO AE ARE SUPERIOR QUALITY THEY COMPLY WITH ST RICT U.S FDA REGULATION. 20. OUR ORDER AS ABOVE SHALL APPLY MUTATIS MUTANDIS FOR ASSESSMENT YEAR 2011 - 12 & AY 2012 - 13 . 21. OTHER GROUND RAISED IS WITH RESPECT TO CONNECTIVITY CHARGES BEING TREATED AS CAPITAL EXPENDITURE AND THE DEPRECATION THE ON. WE FIND THAT THESE HAVE BEEN DEALT WITH BY THE DISPUTE RESOLUTION PANEL AS UNDER: - I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 12 6. THE SIXTH GROUND OF OBJECTION IS WITH REFERENCE TO THE TREATMENT OF E - CONNECTIVITY CHARGES AS CAPITAL IN NATURE AND ACCORDINGLY THE DISALLOWANCE BY THE AO OF THE EXPENSES CLAIMED ON THAT ACCOUNT. THE RELEVANT FACTS ARE THAT THE ASSESSEE HAS BE EN ANNUALLY PAYING E - CONNECTIVITY CHARGES TO ITS PARENT COMPANY. THESE INVOLVE SAP SERVICES, DATA SECURITY, E - MAIL CAPACITY, WEB BROWSING CAPACITY, WORLDWIDE INFORMATION TECHNOLOGY SUPPORT ETC. THE PAYMENTS MADE DURING THE PERIOD UNDER CONSIDERATION WAS RS .3,66,95,941. THE AO FOLLOWING THE TREATMENT GIVEN TO THESE EXPENSES RIGHT FROM A.Y. 2004 - 05 ONWARDS TREATED THESE EXPENSES AS YIELDING AN ENDURING BENEFIT TO THE AS SESSEE AND, THEREFORE, CAPITAL I N NATURE. DEPRECIATION ALLOWANCE @60% WAS GRANTED IN THE DR AFT ASSESSMENT ORDER ON SUCH EXPENSES DISALLOWED AS CAPITAL EXPENDITURE. THE ASSESSEE BEFORE THE DRP HAS CONTENDED THAT THE CONCERNED EXPENSES FACILITATED EFFICIENT AND SMOOTH CONDUCT OF THE BUSINESS ACTIVITIES OF THE ASSESSEE AND THAT THE ASSESSEE THROUGH SUCH PAYMENT OF E - CONNECTIVITY CHARGES DID NOT GET ANY OWNERSHIP RIGHTS IN THE SOFTWARE, SERVER, PROCESSES ETC. THE EXPENSES WERE PERIODIC ANNUAL CHARGES AND NOT A ONE TIME COST AND, THEREFORE, THESE EXPENSES SHOULD NOT BE TREATED AS CAPITAL IN NATURE. TH E SPECIFIC NATURE OF THE SOFTWARE LICENCES, SERVER, PROCESSES, CONNECTIONS ETC. THAT WERE ACQUIRED THROUGH THESE EXPENSES HAVE NOT BEEN PROVIDED BY THE ASSESSEE. THE DRP ON THE FACTS AVAILABLE DOES NOT SEE ANY COMPELLING REASON TO CHANGE THE CONSISTENT TRE ATMENT GIVEN IN THE ASSESSMENT ORDERS FOR E - CONNECTIVITY CHARGES IN THE LAST SEVERAL YEARS. THIS GROUND OF OBJECTION IS ACCORDINGLY, REJECTED. 7. THE SEVENTH GROUND OF OBJECTION IS ON ACCOUNT OF NON GRANTING OF THE CONSEQUENTIAL DEPRECIATION ON WRITTEN DOWN VALUE OF THE E - CONNECTIVITY CHARGES BROUGHT FORWARD FROM THE EARLIER YEARS. THE ASSESSEE, CONSEQUENT TO THE TREATMENT OF THE E - CONNECTIVITY CHARGES OF EARLIER YEARS AS CAPITAL IN NATURE WOULD HAVE A BROUGHT FORWARD WRITTEN DOWN VALUE OF E - CONNECTIVITY ASSETS OF RS.2,07,69,309. IN ACCORDANCE WITH THE CONSISTENT TREATMENT GIVEN TO THESE PAYMENTS BY THE DEPARTMENT IN THE EARLIER YEARS, DEPRECIATION ALLOWANCE ON THE OPENING WRITTEN DOWN VALUE FOR THE PERIOD PRESENTLY UNDER CONSIDERATION OUGHT TO HAVE BEEN GRANTED TO THE ASSESSEE IN THE DRAFT ASSESSMENT ORDER. THE AO IS HEREBY DIRECTED TO DO SO AFTER VERIFICATION OF THE RELEVANT FACTS. I.T.A. NO.645/MUM/2015 I.T (TP).A NO.1785/MUM/2016 I.T.A. NO.2162/MUM/2017 13 22. I N ABSENCE OF ANY CONVINCING ARGUMENTS BY THE COUNSEL OF T HE ASSESSEE AGAINST THE ABOVE TREATMENT WE DISMISS THE GROUND RAISED BY THE ASSESSEE IN THIS REGARD. IT IS NEEDLESS TO ADD THAT ASSESSING OFFICER IS BOUND TO GIVE EFFECT TO THE DIRECTION OF THE DISPUTE RESOLUTION PANEL IN THIS REGARD 23. THE ISSUES RAISED WITH RESPECT TO LEVY OF INTEREST U/S. 234B & 234D ARE CONSEQU ENTIAL IN NATURE 24 ISSUE RAISED WITH RESPECT TO SHORT GRANT OF CREDIT OF ADVANCE TAX IS NOT A MATTER APPEALABLE BEFORE THE ITAT. H ENCE THE SAME IS DISMISSED. 23. IN THE RESULT APP EAL S FILED BY THE ASSESSEE STAND PARTLY ALLOWED AS ABOVE. ORDER PRONOUN CED IN THE OPEN COURT ON 1 1 .04.2019. 1 1 .04 .2019 S D / - S D / - ( RAM LAL NEGI ) ( SHAMIM YAHYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 1 1 .04 .2019 NISHANT VERMA SR. PRIVATE SECRETARY COPY TO 1 . THE APPELLANT 2 . THE RESPONDENT 3 . THE CIT(A) CONCERNED, MUMBAI 4 . THE CIT - CONCERNED, MUMBAI 5 . THE DR BENCH, 6 . MASTER FILE // TUE COPY// BY ORDER DY/ASST T. REGISTRAR ITAT, MUMBA I