ACIT, CHENNAI V. Cook India Medical Devices P. Ltd., CHENNAI

ITA 862/CHNY/2014

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9922 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2015
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 30-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 04-04-2014
• Court: TRIBUNAL
• Department Lawyers: P B SEKARAN
• Assessee Lawyers: MANUEL THOMAS
• Section: 143(3); 12; 10; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , ! ' , # $% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./ ITA NO. 862/MDS/2014 / ASSESSMENT YEAR : 2009-10 THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-I(3), CHENNAI - 34. APPELLANT) V. M/S. COOK INDIA MEDICAL DEVICES P. LTD., NO.4/249, RASIM ENCLAVE, GOPARASANALLUR, NEAR SAVITHA DENTAL COLLEGE, POONAMALLEE HIGH ROAD, KATTUPAKKAM, CHENNAI 600 056. PAN AACCC7628P RESPONDENT) / APPELLANT BY : SHRI P.B.SEKARAN, CIT / RESPONDENT BY : SHRI MANUEL THOMAS, CA ! / DATE OF HEARING :.30.06.2015 '# ! / DATE OF PRONOUNCEMENT : 09.07.2015 & / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST T HE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL DATED 20 .12.2013. - - ITA 862/14 2 2. THE MAIN GRIEVANCE OF THE REVENUE IN THIS APPEAL IS THAT THE DRP HAS FAILED TO CONSIDER THAT AN EXTRA ORDINA RY EVENT SUCH AS MERGER OF M/S. NIULAB EQUIPMENT COMPANY PVT. LTD . WITH M/S. ASHCO NIULAB INDUSTRIES LTD. (IN SHORT ASHCO NIULA B) DURING F.Y. 2008-09 HAD TAKEN PLACE AND DUE TO THIS EXTRA ORDIN ARY EVENT, THE SAME SHOULD NOT BE CONSIDERED AS COMPARABLE COM PANY. 3. THE FACTS OF THE CASE ARE THAT THE ORD E R P ASSED B Y DRP CH E NNAI IN RE S PON S E TO THE REFERENCE WHICH M/ S. COOK INDI A M E DICAL DEVIC ES P V T. L TD . , (HER E IN AF TE R R E FERRED TO AS THE 'ASSES S EE') HA S FILED B EF OR E DR P UNDER SECTION 1 44C (2 )(B) OF INCOM E TA X ACT 1961(IN BRIEF THE ACT). THE REFER E N CE F I L ED BEFORE THE DRP I S D I REC TED A GA IN S T THE DRAFT ORDER WHICH THE ASSISTANT COMMIS S ION E R OF INCOME TA X, CIR C L E 1( 3 ) CHENNAI (THE ASSESSING OFFICER OR THE ' AO) HAS PA S SED FOR TH E A SS E S SM E NT Y EAR 2 009- 10 UNDER SE CTION 143(3) R.W.S 144C OF THE ACT AND SE RV E D UPON TH E A SSESSEE O N 1 8 .03.2 01 3. 3.1 REL E V A NT F A C TS AS PER DRP ORDER ARE THAT THE ASSES S EE- COMPANY I S A WHOLLY OWNED S UB S IDI ARY OF COOK GROUP IN C . U S A. DURIN G THE YEAR UNDER CON S IDERATION, THE A SS E SS EE-COMPANY H A D IMPORT E D M E DI C A L DE VI CES FROM IT S ASS OCIATED ENTERPRI S E S FOR - - ITA 862/14 3 RESALE IN INDIA . IN TH E TP DOCUMENTATION IN R ES P E CT TO INT E RN A TIONAL TRAN S ACTION S THE AS S E SSE E HA S CON S I DE R ED RE S ALE PRIC E M E THO D (IN SHORT RPM) A S THE MOST APPROPRIATE ME T HOD. TH E ASSESSEE HAS CON S ID E RED GRO SS PRO FIT OVE R THE REVENUE A S RELEVANT PROFIT LEVEL INDICATOR (IN S HO R T PL I) IN THI S CA S E. TH E ASSESS EE HAD IDENTIFIED SIX (6) UNCONTROLLED COMPARABLE S AND CO M P UTED THE PLI A T 18. 82 PE RC E NT . A S THE ASSESSEE' S GROSS MARGIN HAD BEEN 15 . 54 P E RC E NT, IT WAS FOUND WITHIN 5 PE RCENT OF TH E ARITHMETIC MEAN OF THE COMPAR A BL E COMPANI ES AND THEREFORE, THE ASSESSEE CONSIDERED THE INTERNATIONAL TRANSACTI ON OF PURCHASE FROM AES TO BE AT ARMS LENGTH. THOUGH TH E TPO, TO WHOM THE MATTER WAS REFERRED BY THE AO TO D E TERMINE TH E ARM' S L E N G TH P R ICE OF INT E RNATIONAL TR A N S ACTIONS , A C CEPT E D RPM A S TH E MO S T APPROPRI AT E M E THOD BUT HE E XC LUDED ONE OF THE UNCONTROLL E D C OMP A R AB L E IDE NTI F IED BY TH E A SSES SEE HOLDING THE VIEW THAT IT IS FUNCTIONALLY DIFF E RENT FROM THE ASSESS EE AND ON TH E BA S I S O F OTHER FIV E UNCON T ROLLED COMPARABL ES ID E NTIFI E D BY TH E A SSE SSEE REVI S E D T H E ALP AT 2 2 .70 P E RCENT. FOLLOWING THI S CHANGE THE TPO P A SS ED AN O R DER D A T E D 28 D ECE MBER 20 1 2 UNDER S ECTION 92CA D E TE R MINING THE ALP OF IN TER NA T I ONA L - - ITA 862/14 4 TRANSACTION S AT ` 1 6, 0 4 ,00 ,000/- A ND PROPOSED TP ADJU S TMENT OF ` 1 , 4 7 , 00 , 000/- I N T H E TP ORD E R. 3.2 THE AO I N C ORP OR ATE D IN TH E A SS ESS M E NT ORDER THE ADJU S TMENT PROPO S E D BY TH E T P O. T H E AO HA S A L S O M A D E C E R T A IN OTH E R A DJU ST M E NT O N CORPORATE IS S UES IN THE R E TURN E D IN C O M E AND PASSED THE D RAFT ORD E R. A GA IN ST T H E DRAFT O RD E R, TH E A SSESSEE H AS RA I S ED G RO U NDS OF OBJ E C T I O N S BEFORE DRP AS FOLLOWS: GROUND OF O BJ EC TIO N 1 - T HE L E ARN E D TP O AND TH E L EA RN E D AO HAVE E RR E D , IN L A W AN D IN FACT S , B Y R E J ECT IN G COMPANY B AS E D ON UNR E A S ON A BL E C OMPARABILITY CRIT ER I A . GROUND O F OBJ ECT I ON 2 - T H E L E ARN E D TPO A ND TH E L EA RNED AO HAVE E RR E D , IN L AW AND FACTS , IN COM PUTIN G TH E A LP WITHOUT G IVING B E NEFIT OF +/- 5 P E RC E NT U ND ER T H E P R OVI S O TO SECTION 9 2 C O F T HE A CT . 3 .3 IT WAS SUBMITTED BY THE A SSESS E E BEFORE DRP T H AT TH E TPO HAS EXC L UDED ASHCO NIU L A B ON T HE G R OU N D TH A T TH I S CO MP AN Y I S EN GAGE D IN MAN U FACTU R IN G B U S I N E SS A L S O A ND S INC E TH E ASSES SEE-C O MP A NY I S E N GAG ED IN TRADI N G BU S INESS ON L Y , A S H C O NIU L A B I S N OT A V A L ID COMPARAB L E . TH E AS SE S SEE H AS S U BMI T TED T H AT IT IS NOT T H E R I G H T - - ITA 862/14 5 CO N C L U S I ON A ND I N SUPPORT OF ITS ARGUMENT THAT ASHCO NIULAB IS A VALID UNCONTROLLED COMPARABLE THE ASSESSEE HAS GIVE N A NUMBER OF EVIDENCES CULLED OUT FROM THE ANNUAL REPORT OF A SHCO NIULAB FOR FINANCIAL YEAR 2008-09. 4 . THE DRP OBSERVED THAT A S H CO NIULAB IN THIS YEA R I S NOT ENGAGED IN MANUFACTURING ACTIVITY. THE ASSESSEE HA S POINTED OUT I N T HE ANNUAL REPOR T OF ASHCO NIULAB THAT MANY RELEVANT FACTS CONSIDERED BY THIS PANEL A R E SUFFICIENT TO CONCLU DE T HAT A S HCO NIULAB IS NOT ENGAGED IN MANUFACTURING ACTIVITY. TH ERE I S NO DIFFERENCE IN TH E VA LUE OF OPENING AND CLOSING BALANCE OF RAW MATERIAL IN THE RELEVAN T PR E VIOU S YEAR. TH ERE I S NO PURCHA S E OF R AW MATERIAL DURING THE YEAR. THERE IS NO OTH E R MANUFACTURING OV E RH EA D S UCH A S EXPENDITURE ON LABOR, ELECTRICITY ETC. IN ABSENCE OF R A W MATERIAL CONSUMPTI O N A ND OTHER OVERHEADS CONSIDERED NECESSARY TO CARRY ON MANUFA C TURIN G ACTIVITY, IT CAN BE SA I D THAT ASCHO NIULAB IS ENGAGED IN MANUFACTURING ACTIV ITY AL S O. TH E T P O HAS NOT GIVEN ANY CO N V INCING REASONS TO IGNORE THE STRONG EVIDENCE AVAILABLE IN THIS RE GARD. THOUGH THE TPO WRI TE S T HAT NON - PAYMENT OF EXCISE DUTY IS NOT A DECISIVE FACTOR TO CONCLUD E AS TO WHETHER A S H CO NIULAB I S - - ITA 862/14 6 ENGAGED , IN MANUFACTURING ACTIVITY OR NOT BUT AT THE SA ME TIME THE TPO WRIT ES TH A T ASCHO NIULAB . HAS NOT SOLD ANY MANUFACTURED GOODS AND ALL TH E PRODUCTION PROC ESS IS IN WORK-IN- PROGRE S S. THIS PANEL FINDS THAT IN DETERMINATION OF PLI S AL E IS IMPORTANT BECAU SE IN PLI S ALE AND GRO S S PROFIT ARE TAKEN INTO CONSIDERATION. IN S O F A R AS WORK - IN-PROGRE S S I S C ONCERNED IT DOES NOT HAVE SIGNIFICANT IMPACT ON PROFIT PLI. EVEN IF FOR A MOMENT IT I S ACC E PT E D THAT WORK-IN-PRO G RESS HAS AN IMPACT ON PLI, CLOSING BALANCE BEIN G MORE THAN THE OPENI NG BALANCE, IT CANNOT A D VERSELY IMPACT THE PLI OF ASCHO NIULAB. THOU GH TH E TPO HAS HEL D TH AT AN EXTRAORDINARY EVENT HAS TAKEN PLACE IN THE CASE OF M/S . A S HC O NIULAB INDUSTRIE S L IMI TE D AS M/S. A S HC O NIULABS EQUIPMENT PVT. LIMITED HAS BEEN MER GE D DURING THE FINANCI A L YEA R 2 008-09 BUT TPO HAS NOT EXPLAINED AS TO WHAT EXTRAORDINARY IM P AC T MERGER CAUSED TH AT A S HCO NIULAB AS AN INVALID COMPARABLE. THEREFORE THIS P AN E L CON S IDERS M/S. A S H C O NIULAB AS PROPER UNCONTROLLED COMPARABLE . TH ERE I S NO CHANGE IN THE ACTI V IT IES OF ASHCO NIULAB IN THIS YEAR AS COMPARED TO LAST YEAR WHEN IT W AS CONSIDERED A VALID UN C ONTROLLED COMPARABLE BY THE TPO. THEREFORE, THIS PANEL DIRECTED TH E TPO TO CONSIDER - - ITA 862/14 7 ASHCO NIULAB AS UNCONTROLLED COMPARABLE AND COMPUTE TH E P LI TAKING ASHCO NIULAB ALSO INTO CON S IDERATION. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 5. THE LD. DR SUBMITTED THAT THE DRP HAS FAI LED TO CONSIDER THAT AN EXTRA ORDINARY EVENT SUCH AS MERGER OF M/S. NIULAB EQUIPMENT COMPANY PVT. LTD. WITH M/S. ASHCO NIULAB INDUSTRIES LTD. DURING F.Y. 2008-09 HAD TAKEN PLACE AND DUE TO THIS EXTRA ORDINARY EVENT, THE SAME SHOULD NOT BE CONSIDERED A S COMPARABLE COMPANY. FURTHER, HE SUBMITTED THAT T HE DRP HAS ERRED BY STATING THAT THE TPO HAS NOT EXPLAINED AS TO WHAT EXTRA ORDINARY IMPACT - MERGER CAUSED THAT M/S. ASHCO NIU LAB, AS AN INVALID COMPARABLE. THE TPO VIDE ORDER DATED 28.12. 2012 HAS CLEARLY MENTIONED THAT THE INCREASE IN THE WORK IN PROGRESS IS ONLY DUE TO THE MERGER, WHICH ULTIMATELY AFFECTS TH E MARG I N OF M/S. ASHCO NIULAB INDUSTRIES LTD. THE LD. DR FURTH ER SUBMITTED THAT THE DRP HAS ERRED BY NOT CONSIDERING THE PRINC IPLES LAID DOWN BY THE ITAT THAT IF THERE IS ANY EXTRAORDINARY EVENT IN THE CASE OF COMPARABLE THE SAME SHOULD NOT BE CONSIDERE D AS COMPARABLE COMPANY WHICH IS UPHELD IN THE CASES OF M/S . ZAVATA INDIA PVT . LTD , M/S. CAPITAL IQ INFORMATION SYSTEM (INDIA) - - ITA 862/14 8 PVT. LTD , A ND M/S. MARKET TOOLS RESEARCH PVT. LTD . 6 . ON THE OTHER HAND, THE LD. AR SUBMITTED WITH REGA RD TO THE QUESTION, WHETHER THE MERGER IN THE COMPARABLE COMP ANY, VIZ., ASHCO NIULAB MAKES A SIGNIFICANT CHANGE OR NOT, THA T IT DOES NOT AND TO SUPPORT HIS ARGUMENTS, HE DREW OUR ATTENTION TO THE FOLLOWING : 1 . ANNUAL REPORTS OF ASHCO NIULAB FOR FY 2007-08 AN D FY 2008-09 2 . ANALYSIS OF GROSS PROFIT RATIO OF ASHCO NIULAB F OR FY 2007-08 AND FY 2008-09 HE FURTHER SUBMITTED THAT THERE IS NO SIGNIFICANT C HANGE IN THE GROSS PROFIT RATIO BECAUSE OF THE MERGER ACTIVITY A ND IN THE ANNUAL REPORTS BOTH BEFORE MERGER AND IN THE YEAR OF MERGE R IT HAS BEEN CLEARLY MENTIONED UNDER THE NOTES TO ACCOUNTS THAT THE COMPANY OPERATES IN A SINGLE SEGMENT AND THAT THOUGH THE CO MPANY HAS VENTURED INTO ANOTHER SEGMENT I.E. ENTERTAINMENT IN DUSTRY THE TRANSACTIONS ARE NOT MATERIAL IN NATURE. THE LD. AR REQUESTED TO CONSIDER THE ABOVE CONTENTION AND GIVE DIRECTION TO THE AO GIVE EFFECT TO THE DIRECTIONS OF THE DRP. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IN OUR OPINION, THERE IS A MERGER IN TH E CASE OF ASHCO - - ITA 862/14 9 NIULAB INDUSTRIES LTD., AND BY THIS MERGER, ASHCO N IULAB EQUIPMENT PVT. LTD. MERGED WITH ASHCO NIULAB INDUST RIES LTD. BEING IT IS AN EXTRA EVENT AND CONSEQUENT TO THE ME RGER, THERE IS A CHANGE IN THE NET PROFIT RATIO AS WELL AS GROSS P ROFIT RATE, WHICH CAN BE SEEN FROM THE FOLLOWING TABLE: STATEMENT SHOWING COMPARATIVE GP RATIO PARTICULARS F.Y.2007-08 F.Y.2008-09 SALES 17.50 51.70 CHANGE IN STOCK 1.94 -3.38 GROSS SALES 19.44 48.32 PURCHASE 18.10 45.89 GROSS PROFIT 1.34 2.43 GP/SALE 6.89 4.70 AS HELD BY THE TRIBUNAL, HYDERABAD BENCH IN THE CAS E OF CAPITAL IQ INFORMATION SYSTEM INDIA PVT. LTD. IN ITA NO.196 1/HYD/2011 DATED 23.11.2012, WHEN THERE IS AMALGAMATION, WHICH IS IMPACTED FINANCIAL RESULT, IT CANNOT BE CONSIDERED AS COMPARABLE SO AS TO DETERMINE ALP, WHEREIN ONE OF US IS A PART Y. 8. IN THE PRESENT CASE, IT IS FOUND FROM SUCH VERIF ICATION THAT MERGER HAS TAKEN PLACE BETWEEN THESE TWO COMPANIES, THEN THERE IS CHANGE IN THE FINANCIAL RESULTS, AS COMPAR ED BEFORE THE MERGER. IN OUR OPINION, DATA OF ASHCO NIULAB CANNO T BE - - ITA 862/14 10 CONSIDERED AS COMPARABLE IN THIS CASE. ACCORDINGLY , WE REVERSE THE ORDER OF THE DRP ON THIS ISSUE. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLO WED. ORDER PRONOUNCED ON THURSDAY, THE 9 TH OF JULY, 2015 AT CHENNAI. SD/- SD/- ( $% &'( ) ) ( $ ( * + ) ,-.//.0.12345.65.7.48 ,-.345.699:.5 ;8 ' )< /JUDICIAL MEMBER ! )<=>>9?3@.3@A2BC25 $' /CHENNAI, D) /DATED, THE 9 TH JULY, 2015. MPO* )E FGHG /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. I8 /CIT(A) 4. I /CIT 5. GJ& K /DR 6. &LM /GF.