ICON Clinical Research India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 753/CHNY/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4888 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 04-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 09-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIJAYAKUMAR PUNNA ST
• Keywords: Related party transaction; Depreciation; Transfer pricing; Principle of natural justice

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . , ' , % & BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER ./ ITA NO.753/MDS/2015 %' ' /ASSESSMENT YEAR: 2010-11 M/S.ICON CLINICAL RESEARCH INDIA- PVT. LTD., RMZ MILLENIA BUSINESS PARK, BUILDING 3A, 2 ND FLOOR, NO.143, DR.MGR ROAD, KANDANCHAVADY, CHENNAI 600 096. VS. THE DY. COMMISSIONER OF- INCOME TAX, COMPANY CIRCLE-II(3), ROOM NO.513, WANAPATHY BLOCK, 121, M.G.ROAD, CHENNAI. [PAN: AABCI 2834 E ] ( ( /APPELLANT) ( )*( /RESPONDENT) ( + / APPELLANT BY : MR.ASHIK SHAH, CA )*( + /RESPONDENT BY : MR.VIJAYAKUMAR PUNNA, ST. COUNSEL + /DATE OF HEARING : 31.01.2018 + /DATE OF PRONOUNCEMENT : 31.01.2018 / O R D E R PER GEORGE MATHAN , JUDICIAL MEMBER : ITA NO.753/MDS/2015 IS AN APPEAL FILED BY THE ASSE SSEE, ORDER PASSED U/S.92CA(3) IN F.NO.DRP/CHE/55/2014-15 DATED 19.12.2014 FOR THE AY 2010-11. 2. SHRI VIJAYAKUMAR PUNNA, ST. COUNSEL, REPRESENTED ON BEHALF OF THE REVENUE AND SHRI ASHIK SHAH, CA REPRESENTED ON BEHA LF OF THE ASSESSEE. ITA NO.753/MDS/2015 :- 2 -: 3. IN THE ASSESSEES APPEAL, THE ASSESSEE HAS RAISE D THE FOLLOWING GROUNDS: 1. THE LD. TPO AND LD. DRP HAS ERRED IN FINALIZING A N ORDER OF ASSESSMENT WHICH IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE, VIOLATIVE OF PRO VISIONS OF THE ACT, DEVOID OF MERITS, WITHOUT APPRECIATING THE FACT INVOLVED, WITHOUT APPRECIATIN G THE DOCUMENTS SUBMITTED IN PROPER LIGHT, WITHOUT CONDUCTING ADEQUATE INQUIRIES AND AS SUCH IS WITHOUT JURISDICTION. 2. THE LD. TPO HAS INCORRECTLY MADE TP ADJUSTMENT AN D HAS ERRED IN ADDING A SUM OF INR 3,34,86,637 TO THE RETURNED INCOME OF THE APPELLANT , WHICH WAS ERRONEOUSLY UPHELD BY THE LD. DRP. 3. THE LD. TPO HAS FINALIZED HIS ORDER WITH IMPROPER ADJUSTMENTS, AS A RESULT OF MISAPPLYING THE LAW PERTAINING TO TP AND BY ADOPTIN G FAULTY PROCESSES/METHODOLOGIES TO FINALIZE THE ADJUSTMENT, SUCH AS BUT NOT LIMITED TO , APPLYING FILTERS, FUNCTIONAL ANALYSIS, SELECTION OF COMPARABLE COMPANIES, COMPUTATION OF P ROFIT MARGINS OF APPELLANT AND COMPARABLE COMPANIES AND UNDERTAKING ECONOMIC ADJUS TMENTS. 4. THE LD. TPO AND DRP ERRED IN LAW AND FACTS BY UND ERTAKING A FRESH COMPARABILITY ANALYSIS WITHOUT REJECTING THE TP DOCUMENTATION, MA INTAINED BY THE APPELLANT, AS REQUIRED UNDER SECTION 92C(3) OF THE INCOME TAX ACT, 1961. 5. THE LD. TPO ERRED IN LAW AND FACTS BY FINALIZING THE SET OF COMPARABLE COMPANIES DESPITE CERTAIN COMPANIES FAILING THE COMPARABILITY PARAMET ERS SUCH AS FUNCTIONAL DISSIMILARITY, SIGNIFICANT RELATED PARTY TRANSACTIONS, NON-AVAILAB ILITY OF DATA AND SUCH OTHER FACTORS. 6. THE LD.TPO ERRED IN LAW AND FACTS BY REJECTING CE RTAIN COMPANIES, SELECTED BY THE APPELLANT IN ITS TP DOCUMENTATION, DUE TO NON-AVAIL ABILITY OF DATA WHICH ARE OTHERWISE COMPARABLE TO THE APPELLANT TO ARRIVE AT THE FINAL SET OF COMPARABLE COMPANIES. 7. THE LD. TPO HAVE ERRED IN COMPUTATION OF OPERATIN G PROFIT MARK-UP OF COMPARABLE COMPANIES AND THE ARMS LENGTH MARK-UP. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE APPELLANT PRAYS THAT THE APPEAL MAY BE ALLOWED. 4. THE ASSESSEE HAS ALSO RAISED THE FOLLOWING ADDIT IONAL GROUNDS: ICON CLINICAL RESEARCH INDIA PRIVATE LIMITED (THE APPELLANT OR THE COMPANY) HAD FILED AN APPEAL BEFORE THIS HONBLE BENCH ON AP RIL 09, 2015, WHICH IS FIXED FOR HEARING ON NOVEMBER 1, 2016. THE APPELLANT SUBMITS THE FOLLOWING GROUND OF APPEA L: THE LD. TPO / DRP OUGHT TO HAVE CONSIDERED THE CASH O PERATING PROFIT AS THE APPROPRIATE PROFIT LEVEL INDICATOR (PLI) FOR COMPUTING THE ALP IN THIS REGARD, THE APPELLANT WISHES TO BRING TO YO UR HONORS KIND ATTENTION THAT THIS BENCH HAS ADJUDICATED THE APPELLANTS OWN CASE FOR THE EARLIER ASSESSMENT YEAR 2009-10 BEARING APPEAL NO.ITA 1034/MDS/2014 RE CENTLY AND THE ORDER WAS PRONOUNCED ON SEPTEMBER 21, 2016. THE SAID ORDER DI RECTED THE TRANSFER PRICING OFFICER TO REWORK THE PLI OF THE APPELLANT AND THE COMPARABLE COMPANIES AFTER EXCLUDING THE DEPRECIATION COST, AS IT WOULD GIVE B ETTER RESULTS IN THE COMPARABILITY ANALYSIS AND THUS REMANDED THE MATTER BACK TO THE T RANSFER PRICING OFFICER/ASSESSING OFFICER. ITA NO.753/MDS/2015 :- 3 -: IN THE LIGHT OF THE ABOVEMENTIONED ORDER, THE APPEL LANT WOULD LIKE TO RAISE A SPECIFIC ADDITIONAL GROUND FOR THE DISPUTED ASSESSM ENT YEAR 2010-11. THE ADDITIONAL GROUND OF APPEAL IS ENCLOSED HEREWITH, I N TRIPLICATE. THE APPELLANT HUMBLY PLEADS THAT THE ADDITIONAL GRO UND RAISED IS A PRINCIPAL ISSUE WHICH WAS ALLOWED BY THIS HONBLE BENCH IN APPELLAN TS OWN CASE. THE PLEA IS PURELY A LEGAL GROUND WHICH DOES NOT REQUIRE INVEST IGATION OF ADDITIONAL FACTS. IT IS PRAYED THAT THIS ADDITIONAL GROUND MAY BE ADM ITTED AND DECIDED ON MERITS. THE APPELLANT RELIES ON THE FOLLOWING DECISIONS ON ADMISSIBILITY OF ADDITIONAL GROUNDS OF APPEAL: JUTE CORPORATION OF INDIA [1991] 187 ITR 688 (SC) NATIONAL THERMAL POWER CO LTD (229 ITR 383 (SC) PRUTHVI BROKERS & SHAREHOLDERS [TS-463-HC-2O12(BOM) ] 5. THE REVENUE HAS NOT RAISED ANY OBJECTION TO THE ADDITIONAL GROUNDS FILED BY THE ASSESSEE AND CONSEQUENTLY, STANDS ADMI TTED. AT THE TIME OF HEARING, IT WAS FAIRLY AGREED BY BOTH THE SIDES THA T THE ISSUE IN RESPECT OF THE ADDITIONAL GROUNDS WAS SQUARELY COVERED BY THE DECISION OF THE CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES O WN CASE IN ITA NO.1034/MDS/2014 DATED 21.09.2016 WHEREIN IT HAS BE EN HELD AS FOLLOWS: 17. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PE RUSED THE ORDERS OF THE AUTHORITIES BELOW. IT IS NOT DISPUTED THAT THREE OF THE COMPARA BLES SELECTED BY THE TPO VIZ. M/S COSMIC GLOBAL LTD, M/S INFORMED TECHNOLOGIES INDIA LTD AND M/S R SYSTEMS INTERNATIONAL LTD. HAD APPLIED DEPRECIATION RATE PRESCRIBED IN SCHEDULE XI V OF COMPANIES ACT WHILE ARRIVING ITS NET MARGIN. PLEADING OF THE ASSESSEE WAS THAT IT HAD AP PLIED HIGHER RATE OF DEPRECIATION WHILE ARRIVING AT THE NET PROFIT. GUIDANCE NOTE ISSUED BY THE ICAI (AUGUST 2013) SPECIFICALLY MENTIONS AT 6.30 (C) AS UNDER: (C) ASSETS EMPLOYED THERE MAY BE DIFFERENCE IN AS SETS EMPLOYED AND THE METHOD OF PROVIDING DEPRECIATION. IN ORDER THAT SUC H DIFFERENCE DOES NOT IMPACT THE NET PROFIT, THE OPERATING MARGIN ON OPERATING COST BEFORE DEPRECIATION IS TAKEN AS PROFIT LEVEL INDICATOR. 18. ONE OF THE PRIMARY REQUISITE OF THE COMPARATIVE STUDY IS THAT MARGIN ARRIVED AT FOR THE COMPARABLES AS WELL AS THAT OF THE ASSESSEE, SHALL ALWAYS BE ADJUSTED FOR DISSIMILARITIES IN TREATMENT OF VARIOUS EXPENDITURE INCLUDING NOTIONAL EXPENDITURE LIKE DEPRECIATION, WHEN SUCH DISSIMILARITIES CAN BE MEASURED AND QUANTIFIED . OTHERWISE, IT COULD ERODE THE COMPARABILITY. THE PANAJI BENCH OF THE TRIBUNAL IN THE CASE OF M/S PENTAIR WATER INDIA PVT. LTD (SUPRA) HAD HELD AS UNDER: THE COMMON CONTENTION IN RESPECT OF COMPUTATION OF TNMM I.E. OPERATING PROFIT TAKEN BY THE LD. AR IN RESPECT OF THE COMPARABLES I S THAT WHILE COMPUTING THE PROFIT RATIO, PROFIT PRIOR TO DEPRECIATION SHOULD BE COMPU TED AS IT WILL GIVE TRUE AND FAIR PROFIT RATIO WITHOUT BEING AFFECTED BY THE DEPRECIA TION CHARGED BY EACH OF THE COMPANIES. WE NOTED THAT DIFFERENT COMPANIES HAVE A DOPTED DIFFERENT METHOD OF DEPRECIATION. IN FACT, FOR CHARGING DEPRECIATION TO THE PROFIT& LOSS ACCOUNT THERE ARE DIFFERENT PREVALENT RECOGNIZED METHODS OF DEPRECIAT ION. SOME ASSESSEE OPT FOR ITA NO.753/MDS/2015 :- 4 -: STRAIGHT LINE METHOD, SOME OPT FOR WRITTEN DOWN MET HOD AND SOME OPT FOR SUM OF DIGIT METHOD OR EVEN REPLACEMENT COST METHOD. SELEC TION OF EACH METHOD WILL AFFECT THE RATE AND QUANTUM OF DEPRECIATION EVEN IF THE NATURE OF THE ASSET IS THE SAME AND ULTIMATELY, THE NET PROFIT DERIVED BY THE COMPANY WILL VARY. FOR DETERMINING THE FAIR AND TRUE PROFIT, IN OUR OPINIO N, IT IS APPROPRIATE THAT THE EFFECT OF THE DEPRECIATION MUST BE EXCLUDED OUT OF THE OPE RATING PROFIT FOR DETERMINING THE OPERATING PROFIT RATIO. THEREFORE, THE BEST WAY OF COMPUTING THE OPERATING PROFIT, IN OUR OPINION, WILL BE TO COMPUTE THE PROFIT BEFORE D EPRECIATION IN RESPECT OF EACH OF THE COMPANY. THIS WILL TAKE OUT THE INCONFORMITY OR THE VARIATION IN THE PROFIT LEVEL OF THE COMPARABLES ARISING DUE TO ADOPTION OF DIFFE RENT METHOD OF CHARGING DEPRECIATION. WE HAVE GONE THROUGH THE ORDER OF THE BOMBAY BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. REUTERS INDIA 24 ITR (TRIB) 231 (MUM) AS HAS BEEN RELIED ON BY THE LD. AR. WE NOTED THAT THE TRIBUNAL IN THI S CASE HAS ADOPTED THE CASH PROFIT/OPERATING COST AS THE CORRECT PROFIT LEVEL I NDICATOR UNDER THE TNMM METHOD. 19. WE ARE, THEREFORE, OF THE OPINION THAT THE PROF IT LEVEL INDICATOR CONSIDERING THE MARGINS PRIOR TO DEPRECIATION WOULD GIVE BETTER RESULTS IN THE COMPARABLE ANALYSIS AND BENCHMARKING OF THE TRANSACTIONS OF THE ASSESSEE IN THE GIVEN FACTS AND CIRCUMSTANCES. WE DIRECT THE ASSESSING OFFICER/TPO TO REWORK THE PLI OF THE COMPARABLES AFTER EXCLUDING THE DEPRECIATION COST AND BENCHMARK THE PLI OF THE ASSE SSEE ALSO EXCLUDING THE DEPRECIATION COST. ORDERED ACCORDINGLY. GROUND NOS. 6 AND 7 OF TH E ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 20. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. 6. IT WAS SUBMITTED BY THE LD.AR THAT THE ADDITIONA L GROUNDS RAISED, BEING A COVERED ISSUE, NONE OF THE OTHER ISSUES RAI SED IN THE ORIGINAL GROUNDS OF APPEAL WOULD SURVIVE. 7. IN REPLY, THE LD.DR VEHEMENTLY SUPPORTED THE ORD ER OF THE AO. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. 9. AS IT IS NOTICED THAT THE ISSUE RAISED IN THE AD DITIONAL GROUNDS IS SQUARELY COVERED BY THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE WHERE ONE OF US IS A PAR TY TO THE DECISION, RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AY 2009 -10 REFERRED TO SUPRA, THE ADDITIONAL GROUND STANDS ALLOWED AND THE ISSUES ARE RESTORED TO THE ITA NO.753/MDS/2015 :- 5 -: FILE OF THE AO ON IDENTICAL LINES AS HAS BEEN DIREC TED IN PARA NO.19 OF THE ORDER IN ITA NO.1034/MDS/2014 FOR THE AY 2009-10 DA TED 21.09.2016. 10. AS THE OTHER GROUNDS HAVE NOT BEEN ARGUED, THE SAME ARE DISMISSED. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON JANUARY 31, 2018, AT CHENNAI. SD/- SD/- ( . ) ( ABRAHAM P.GEORGE ) /ACCOUNTANT MEMBER ( ' ) (GEORGE MATHAN) % /JUDICIAL MEMBER /CHENNAI, 2 /DATED: JANUARY 31, 2018. TLN + )%34 54 /COPY TO: 1. ( /APPELLANT 4. 6 /CIT 2. )*( /RESPONDENT 5. 4 )%% /DR 3. 6 ( ) /CIT(A) 6. ' /GF