DCIT 8(2), MUMBAI V. NYCOMED PHARMAP.LTD, MUMBAI

ITA 6775/MUM/2014

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 2007 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 16-08-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 07-11-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R S SAMARIA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; TDS; Liquidation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH J, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.6775/M/2014 ASSESSMENT YEAR: 2009-10 ITA NO.1950/M/2015 ASSESSMENT YEAR: 2010-11 ITA NO.4284/M/2016 ASSESSMENT YEAR: 2011-12 ACIT-10(3)(1), ROOM NO.212, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400020 VS. M/S. NYCOMED PHARMA PVT. LTD., (IN LIQUIDATION), 2/E, COURT CHAMBERS, 35, NEW MARINE LINES, MUMBAI 400 020 PAN: AAECA5696H (APPELLANT) (RE SPONDENT) PRESENT FOR: ASSESSEE BY : SHRI R.S. SAMARIA, A.R. REVENUE BY : SHRI MANOJ KUMAR SINGH, D.R. DATE OF HEARING : 27.09.2019 DATE OF PRONOUNCEMENT : 29.11.2019 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THE ABOVE TILED THREE APPEALS HAVE BEEN PREFERRED BY THE REVENUE AGAINST THE ORDER DATED 28.08.2014, 15.01.2 015 & 29.12.2015 OF THE COMMISSIONER OF INCOME TAX (APPEA LS) [HEREINAFTER REFERRED TO AS THE CIT(A)] RELEVANT TO ASSESSMENT YEARS 2009-10, 2010-11 AND 2011-12 RESPECTIVELY. A LL THESE APPEALS HAVE COMMON ISSUE AND THEREFORE ARE BEING A DJUDICATED BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIE NCE. FIRST WE WILL TAKE UP ITA NO.6775/MUM/2014 FOR ASSESSMENT YE AR 2009- 10. ITA NO.6775/M/2014 & ORS. M/S. NYCOMED PHARMA PVT. LTD. 2 2. THE GROUNDS RAISED BY THE REVENUE IN ASSESSMENT YEAR 2009-10 ARE EXTRACTED BELOW: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN ALLOWING THE APPEAL AND ACC EPTING THE PROPOSED PAYMENT OF RS.7,27,75,078/- AS AN ALP AND IGNORING THE FACT TH AT THERE WAS NO CONTRACTUAL OBLIGATION ON THAT PART OF THE ASSESSEE COMPANY TO MAKE SUCH PAYMENTS AND ALSO THAT NO PAYMENTS WERE MADE DURING THE RELEVANT YEAR ? 3. THE BRIEF FACTS ARE THAT THE ASSESSEE COMPANY, A WHOLLY OWNED SUBSIDIARY COMPANY OF NYCOMED GMBH GERMANY, I S ENGAGED IN THE BUSINESS OF RUNNING A RESEARCH AND D EVELOPMENT CENTRE FOR SYNTHESIZING OF TEST COMPOUNDS THAT ARE POTENTIAL DRUG DEVELOPMENT CANDIDATES AND IN PRELIMINARY TESTING A ND IS AN EXPORT ORIENTED UNIT. THE COMPANY IS ALSO ENGAGED IN LICENSING/SUB LICENSING OF DRUG PANTOPRAZOLE, DESIG N AND MAINTENANCE IT INFRASTRUCTURE. THE ASSESSEE COMPAN YS AE (NYCOMED GMBH GERMANY) HAD DEVELOPED THIS PROPRIETA RY COMPOUND PANTOPRAZOLE FOR WHICH IT HAD OBTAINED PAT ENTS IN VARIOUS COUNTRIES. FOR COMMERCIALIZING THIS COMPOUN D IN INDIA, BANGLADESH, BHUTAN, NEPAL, SRI LANKA, NIZERIA AND S UDAN, THE AE HAD GRANTED A LICENSE TO THE ASSESSEE COMPANY AL ONG WITH A RIGHT TO SUB LICENSE THE SAME. DURING THE YEAR THE ASSESSEE HAS SUB LICENSED THE MANUFACTURING AND SALE OF PANTOPRA ZOLE TO CADILA HEALTH CARE AND ZYDUS HEALTH CARE AND EARNED FROM THE SAID SUB LICENSING THE ROYALTY OF RS.7,67,08,905/- AND IN TURN PAID ROYALTY OF RS.7,27,75,078/- TO ITS AE WHO HAS GRANTED LICENSE TO THE ASSESSEE. THE ASSESSEE REMITTED ROY ALTY TO THE AE WHICH WAS CALCULATED BY RETAINING 1% OF THE TOTAL S ALE CONSIDERATION RECEIVED FROM THIS SUB LICENSING BUSI NESS. 4. THE ENTIRE ROYALTY PAYMENT OF RS.7,27,75,078/- W AS RECOMMENDED BY THE TPO AS A TRANSFER PRICING ADJUST MENT MAINLY FOR THE REASON THAT THERE WAS NO AGREEMENT B ETWEEN THE ITA NO.6775/M/2014 & ORS. M/S. NYCOMED PHARMA PVT. LTD. 3 ASSESSEE COMPANY AND THE AE FOR MAKING ANY SUCH PAY MENT AND THEREFORE NO ENFORCEABLE LEGAL LIABILITY CAST O N THE ASSESSEE COMPANY FOR MAKING ANY SUCH PAYMENT OF ROYALTY TO I TS AE. IN THE RESULT, THE ALP OF ROYALTY PAYMENT BY THE ASSES SEE COMPANY TO ITS AE WAS QUANTIFIED BY THE TPO AT NIL AND THE ENTIRE PAYMENT WAS RECOMMENDED AS A TRANSFER PRICING ADJUS TMENT TO THE RETURNED INCOME VIDE ORDER DATED 13.10.2012 PAS SED UNDER SECTION 92CA(III) OF THE ACT. THEREAFTER, THE AO F RAMED THE ASSESSMENT ORDER UNDER SECTION 143(3) READ WITH 144 C(3) OF THE ACT DATED 07.12.2012 GIVING EFFECT TO THE DIRECTION OF THE LD. TPO. 5. IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) ALL OWED THE APPEAL OF THE ASSESSEE AFTER TAKING INTO CONSIDERAT ION THE SUBMISSION AND CONTENTION OF THE ASSESSEE BY OBSERV ING AND HOLDING AS UNDER: IN THIS REGARD IT IS SEEN THAT CLAUSE (C) TO RULE IOB(2) OF THE INCOME TAX RULES SPEAKS OF THE CONTRACTUAL TERMS (WHETHER OR NOT SUC H TERMS ARE FORMAL OR IN WRITING) OF THE INTERNATIONAL TRANSACTION UNDER CON SIDERATION FOR THE PURPOSES OF ESTABLISHING THE COMPARABILITY OF THE TESTED INTERN ATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION. THEREFORE, WHAT IS REQUIR ED TO BE ESTABLISHED IS WHETHER THE ROYALTY PAYMENT WAS MADE BY THE ASSESSEE COMPAN Y TO ITS AE UNDER CONTRACTUAL TERMS AS UNDERSTOOD, ACCEPTED AND ACTED UPON BY BOTH THE PARTIES, OR NOT. IT IS SEEN FROM THE FACTS OF THE PRESENT CASE THAT THE COMPOUND PANTOPRAZOLE HAD BEEN SUB LICENSED BY THE AE TO CADILA RIGHT FRO M 1998. AFTER THE ASSESSEE COMPANY WAS INCORPORATED, ANOTHER JOINT VENTURE AGR EEMENT WAS ENTERED INTO IN 2007 AND, AS A PART OF THIS NEW JOINT VENTURE AGREE MENT, A LICENSE TO COMMERCIALLY EXPLOIT THE COMPOUND PANTOPRAZOLE WAS GRANTED BY TH E AE TO THE ASSESSEE COMPANY. FURTHER, A SUB-LICENSING AGREEMENT FOR THE SAME COMPOUND WAS ENTERED INTO BETWEEN THE ASSESSEE COMPANY AND CADILA WITH T HE AE AS A CONSENTING PARTY. THE RATE OF ROYALTY PAYABLE BY CADILA WAS RETAINED AT THE SAME LEVEL AS EARLIER AND ONLY THE RECIPIENT WAS CHANGED FROM THE AE TO THE A SSESSEE COMPANY IN THIS NEW AGREEMENT. HOWEVER, ANY OBLIGATION ON THE ASSESSEE COMPANY TO PAY ROYALTY TO ITS AE WAS NOT MENTIONED IN THE LICENSING AGREEMENT OF THE ASSESSE E WITH CADILA. FROM THE COPIES OF THE BOARD RESOLUTIONS OF THE ASSESSEE COMPANY AN D ITS AE, IT IS SEEN THAT THE LICENSING AGREEMENT BETWEEN THEM WERE AT THE DRAFT STAGE AWAITING NECESSARY CLEARANCES FROM GERMANY AUTHORITIES. IT WAS ONLY I N OCTOBER 2010 THAT THE ITA NO.6775/M/2014 & ORS. M/S. NYCOMED PHARMA PVT. LTD. 4 AGREEMENT FOR PAYMENT OF ROYALTY BETWEEN THE ASSESS EE COMPANY AND ITS AE WAS FINALIZED, THOUGH THE AGREEMENT WAS MADE RETROSPECT IVE AND BECAME OPERATIONAL WITH EFFECT FROM 1.4.2008. IN THE INTERVENING PERIO D;' INCLUDING THE PERIOD PRESENTLY UNDER CONSIDERATION, THE ASSESSEE HAD RAISED CREDIT NOTES FOR THE ROYALTY PAYABLE BY IT TO ITS AE AFTER DEDUCTION OF TDS ON SUCH CREDI TS WHICH WERE ALSO SUBJECTED TO THE PROVISIONS OF SERVICE TAX . THE ENTIRE TRANSACTION S WERE DULY STATED IN THE NOTES TO ACCOUNTS APPENDED TO THE BALANCE SHEET PREPARED FOR THE PERIOD UNDER CONSIDERATION BY THE AUDITORS OF THE COMPANY. THE A CTUAL TRANSMISSION OF PAYMENTS TOOK PLACE IN 2010 AND 2011. THE AGREEMENT FOR PAYM ENT OF ROYALTY BY THE ASSESSEE COMPANY TO ITS AE THOUGH EXECUTED IN OCTOBER, 2010 WAS MADE SPECIFICALLY APPLICABLE TO THE PERIOD PRESENTLY UNDER CONSIDERAT ION. AS PER THE TPO/AO, IT WAS NOT BEYOND THE LEGAL COMPETENCE OF THE TWO PARTIES TO DO SO. THIS AGREEMENT HAS TO BE SEEN ALONG WITH THE COPIES OF THE BOARD RESOL UTIONS, E-MAIL CORRESPONDENCES EXCHANGED, CREDIT NOTES RAISED TOWARDS ROYALTY PAYM ENTS , NOTES TO THE AUDITED ACCOUNTS, DEDUCTION OF TDS AND PROVISIONING FOR SER VICE TAX LIABILITY WOULD TOGETHER GO TO ESTABLISH THAT THE ASSESSEE AND ITS AE WERE B OTH WORKING ON A COMMON UNDERSTANDING THAT THE ASSESSEE COMPANY WOULD PAY R OYALTY TO ITS AE AFTER RETAINING ITS SHARE OF ONE PERCENT OUT OF THE ROYAL TY COLLECTED FROM CADILA THOUGH THE ACTUAL PAYMENTS BEING MADE ON A SUBSEQUENT DATE S AFTER THE END OF THE RELEVANT FINANCIAL YEAR. ACCORDING TO THE ASSESSEE IT CAN NOT BE A GROUND TO NEGATE AN ACCRUED LIABILITY UNDER THE MERCANTILE SYSTEM OF ACCOUNTING IN PURSUANCE OF WHICH THE ASSESSEE WAS PREPARING ITS ANNUAL ACCOUN TS. THE TPO HAD ALSO NOTICED IN THE COURSE OF THE PROCE EDINGS BEFORE HIM THAT THE ASSESSEE COULD NOT PRODUCE ANY APPROVAL FROM THE MI NISTRY OF COMMERCE OR THE RBI FOR PAYMENT OF ROYALTY TO ITS AE. IT WAS FURTHER NO TED BY THE TPO THAT DURING THE RELEVANT PERIOD, IN TERMS OF THE RBI CIRCULAR DATED 21 JULY, 2003 THERE WAS A STATUTORY REQUIREMENT TO GET THE APPROVAL OF THE MI NISTRY OF COMMERCE AND RBI FOR PAYMENT OF ROYALTY EXCEEDING 8% OF EXPORT SALES AND 5% OF DOMESTIC SALES. THEREFORE, NO PAYMENT OF ROYALTY BY THE ASSESSEE CO MPANY TO ITS AE UNDER THE AUTOMATIC ROUTE WAS POSSIBLE IN EXCESS OF SUCH RATE S. AS HAS BEEN EMPHASIZED BY THE ASSESSEE IN THE PRESENT APPELLATE PROCEEDINGS, THE RBI/ MINISTRY CLEARANCE IS REQUIRED FOR THE REMITTANCE OF FOREIGN EXCHANGE ALO NE. .. THE ASSESSEE COMPANY, IN THE PROCEEDINGS BEFORE THE TPO HAD ARGUED THAT THE ASSESSEE COMPANY HAS CHARGED ROYALTY FROM CADILA HE ALTH CARE AND IN TURN PAYS ROYALTY TO ITS AE AFTER RETAINING A MARGIN OF 1% FO R ITSELF. THE ASSESSEE COMPANY, IN THIS ARRANGEMENT, HAD NOT UNDERTAKEN ANY SIGNIFICAN T FUNCTION OR UTILIZED ANY ASSETS OR ASSUMED ANY SIGNIFICANT RISK. ACCORDINGLY, NO EC ONOMIC ANALYSIS WAS REQUIRED TO DETERMINE THE APPROPRIATENESS OF THE AMOUNTS PAID T O ITS AE. HOWEVER, A SECONDARY ANALYSIS HAD BEEN UNDERTAKEN TO COMPARE T HE MARGINS EARNED BY THE ASSESSEE COMPANY WITH THOSE OF COMPANIES ENGAGED IN TRADING IN SOFTWARE. SUCH SECONDARY ANALYSIS WAS FOUND BY THE TPO TO BE INAPP ROPRIATE BECAUSE THE SIX COMPARABLES SELECTED WERE FOUND TO BE NOT COMPARABL E ON ACCOUNT OF THE SIGNIFICANT INVENTORY RISK BORNE BY THE COMPARABLES WHILE THE ASSESSEE HAD NO SUCH RISK. EVEN DURING THE PRESENT APPELLATE PROCEEDING S, THE ASSESSEES REPRESENTATIVE COULD NOT ADDRESS THIS ISSUE OF INVENTORY RISK ASSU MED BEING DIFFERENT FROM THE COMPARABLE SELECTED. THE OBJECTION OF THE TPO IS F OUND TO BE LEGITIMATE AND THE SECOND ANALYSIS CARRIED OUT IN THE TRANSFER PRICING STUDY REPORT IS FOUND TO BE NOT ITA NO.6775/M/2014 & ORS. M/S. NYCOMED PHARMA PVT. LTD. 5 CORRECT. HOWEVER, IT IS NECESSARY TO CONSIDER THE PRIMARY ANALYSIS PUT FORWARD BY THE ASSESSEE COMPANY. THE ASSESSEE HAD OBTAINED THE LICENSE TO COMMERCIAL EXPLOITATION OF PANTOPRAZOLE FROM ITS AE. THE APPROPRIATE ALP OF T HE ROYALTY PAYMENT BEING MADE BY THE ASSESSEE TO ITS AE IS PRE SENTLY UNDER CONSIDERATION. THE VERY SAME LICENSE FOR COMMERCIA L EXPLOITATION OF PANTOPRAZOLE WAS GRANTED BY THE ASSESSEE COMPANY TO CADILA DURING THE SAME PERIOD. THE ASSESSEE COMPANY AND CADILA A RE UNRELATED PARTIES. CONSIDERING THAT THE ASSESSEE COMPANY HAD NOT UNDERTAKEN ANY MAJOR FUNCTIONS WITH REFERENCE TO THE RECEIPT A ND PAYMENT OF ROYALTY, THE TERMS OF THE AGREEMENT BETWEEN THE ASS ESSEE COMPANY AND CADILA WOULD CONSTITUTE AN INTERNAL CUP FOR BEN CHMARKING THE ROYALTY PAYMENTS MADE BY THE ASSESSEE COMPANY TO IT S AE. TO THE EXTENT THAT THE ASSESSEE COMPANY RETAINED A SMALL P ORTION OF THE ROYALTY COLLECTED BY IT WHILE REMITTING THE BALANCE TO ITS AE, THE ACTUAL PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAD TA KEN PLACE WOULD BE BELOW THE ALP DETERMINED BY THE GROSS AMOUNT OF THE ROYALTY COLLECTED BY THE ASSESSEE FROM CADILA. HENCE NO FU RTHER TRANSFER PRICING ADJUSTMENT WOULD BE CALLED FOR ON THE FACTS OF THIS CASE. THE AO / TPO ARE HEREBY DIRECTED TO DELETE THE TRANSFER PRICING ADJUSTMENT MADE IN THE ASSESSMENT ORDER. APPEAL FI LED BY THE ASSESSEE COMPANY FOR AY 2009-10, FOR STATISTICAL PU RPOSES, MAY BE TREATED AS ALLOWED. 6. AFTER HEARING THE RIVAL PARTIES AND PERUSING THE RECORDS AS PLACED BEFORE US, THE UNDISPUTED POSITION IS THAT T HE ASSESSEE HAD OBTAINED THE LICENSE FOR COMMERCIAL EXPLOITATIO N OF PANTOPRAZOLE FROM ITS AE. THE ONLY ISSUE BEFORE US IS WITH REGARDS TO ALP OF THE ROYALTY PAYMENT MADE BY THE ASSESSEE TO ITS AE IN CONSIDERATION OF EXPLOITATION OF PANTOPRA ZOLE. THE VERY SAME LICENSE FOR COMMERCIAL EXPLOITATION OF PANTOPR AZOLE WAS GRANTED BY THE ASSESSEE COMPANY TO CADILA HEALTH CA RE DURING THE SAME PERIOD AND RECEIVED ROYALTY IN CONSIDERATI ON THEREOF. THIS IS ALSO UNDISPUTED THAT THE ASSESSEE COMPANY A ND CADILA HEALTH CARE ARE UNRELATED PARTIES. THE LD CIT(A) RE CORDED A CLEARCUT FINDING THAT THE ASSESSEE COMPANY HAD NOT UNDERTAKEN ANY MAJOR ACTIVITIES/FUNCTIONS WITH REFERENCE TO T HE RECEIPT AND PAYMENT OF ROYALTY, THE TERMS OF THE AGREEMENT BETW EEN THE ASSESSEE COMPANY AND CADILA HEALTH CARE WOULD CONST ITUTE AN ITA NO.6775/M/2014 & ORS. M/S. NYCOMED PHARMA PVT. LTD. 6 INTERNAL CUP FOR BENCHMARKING THE ROYALTY PAYMENTS MADE BY THE ASSESSEE COMPANY TO ITS AE. IN VIEW OF THAT TH E ASSESSEE COMPANY RETAINED A SMALL PORTION OF THE ROYALTY COL LECTED BY IT WHICH WAS CALCULATED AT 1% OF THE TOTAL CONSIDERATI ON RECEIVED WHILE REMITTING THE BALANCE OF 99% TO ITS AE. FURTH ER THE MAIN REASONS FOR COMPUTING ALP AT NIL WAS ON THE BASIS T HAT THERE WAS NO AGREEMENT FOR PAYMENT OF ROYALTY WHICH WAS O NLY ENTERED INTO IN THE SUBSEQUENT YEARS THOUGH EFFECTIVE FROM BACK DATE. BUT ON THIS ISSUE ALSO WE FIND MERITS IN THE CONTEN TIONS OF THE ASSESSEE THAT RULE 10B(2)(C) DOES NOT REQUIRE THE AGREEMENT TO BE IN WRITING. CONSIDERING ALL THESE FACTS, WE DO N OT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) TO TAKE A CONTRARY VIEW AND ACCORDINGLY THE APPEAL OF THE REVENUE IS DISMISSED BY UPHOLDING THE ORDER OF LD CIT(A). THE APPEAL OF THE REVENUE IS DISMISSED. 7. THE ISSUE RAISED IN ITA NO. 1950/M/2015 ASSESSME NT YEAR: 2010-11 AND ITA NO.4284/M/2016 ASSESSMENT YEA R: 2011-12 BY THE REVENUE IS IDENTICAL TO ONE AS DECID ED BY US IN ITA NO.6775/M/2014 ASSESSMENT YEAR: 2009-10. THEREF ORE OUR DECISION IN ITA NO. ITA NO.6775/M/2014 WOULD, MUTAT IS MUTANDIS, APPLY TO THESE APPEALS AS WELL AND CONSEQ UENTLY THE APPEALS OF THE REVENUE ARE DISMISSED. 8. IN RESULT, ALL THE THREE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29.11.2019. SD/- SD/- (SAKTIJIT DEY) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 29.11.2019. * KISHORE, SR. P.S. ITA NO.6775/M/2014 & ORS. M/S. NYCOMED PHARMA PVT. LTD. 7 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY /ASSTT. REGISTRAR, ITAT, MUMBAI.