The ACIT.,Cir-3(2), Hyderabad V. M/s St.Jude Medical India Private Limited, Hyderabad

ITA 914/HYD/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82343 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 30-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KIRAN KATTA
• Assessee Lawyers: H SRINIVASULU
• Keywords: Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.914/HYD/13 : ASSESSMENT YEAR 2008 - 09 DY. COMMISSIO NER OF INCOME - TAX, CIRCLE 1(1), HYDERABAD V/S. M/S. ST. JUDE MEDICAL INDIA PRIVATE LIMITED, HYDERABAD (PAN - AAICS 9821 J) (APPELLANT) (RESPONDENT) APPELLANT BY : S HRI KIRAN KATTA, DR RESPONDENT BY : SHRI H.SRINIVASULU DATE OF HEARING 17 .0 9 .2014 DATE OF PRONOUNCEMENT 19.09.2014 O R D E R PER P.M.JAGTAP, ACCOUNTANT MEMBER : THIS APPEAL IS PREFE R RE D BY THE REVENUE AGAINST THE O R DER OF THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) IV, HYDERABAD DATED 20.3.2013 AND IN TH E SOLITARY SUBSTANTIVE GROUND RAISED THEREIN ( A S REV I SED), THE REVENUE HAS CHALLENGED TH E AC T ION OF TH E LEARNED CIT(A) IN DELETING THE TP ADJUSTMENT MADE BY THE AO/TPO BY ACCEPTING THE P ROFIT L E VEL INDICATOR(PLI) TAKEN BY TH E ASSESSEE AS O PERATING PROFIT T O O PERATING REVENUE INSTEAD OF OPERATING P ROFIT TO OPERATING CO S T, AS TAKEN BY THE ASSESSING OFFICER/ TPO . 2. WE HAVE H E ARD THE ARGUM E N T S OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT I S OBSERVED THAT THE TP ADJUSTMENT TO BE MA DE TO THE TOTAL INCOM E O F TH E ASSESSEE WAS WORKED OUT BY THE ASSESSING OFFICER/ TPO BY TAKING THE OP E RATING PROFIT TO OPERATING COST AS PLI INSTEAD OF OP E RATING PROFIT TO OPERATING R E VENUE TAKEN BY TH E ASSESSEE AS PLI. O N APPEAL, THE LEARNED CIT(A), HOWEV ER , ACCEPTED THE O PERATING PROFIT TO I TA NO . 914 /H YD/20 13 M/S. ST. JUDE MEDICAL INDIA P RIVATE LIMITED, HYDERABAD 2 O PERATING REVENUE AS PLI AS TAKEN BY THE ASSESSEE FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH 6.2 AND 6.3 OF HIS IMPUGN E D ORD E R - 6,2 I HAVE CON S IDERED THE SUBMI S SION S O F TH E TPO AND THE APPELLANT IN THI S REGARD. THE PU R PO S E OF IDENTIFYING THE PLI IS TO ENSURE THAT THE COMPARABILITY ANALYSIS OF THE CONT R OLL E D TRANSACTIONS IS OBJECTIVE. R E FERENC E MAY BE MADE TO THE OECD TRAN S FER P RICING GUIDELINES, 2010 IN THIS REGARD, WHICH ARE SELF - EXPLA N A T ORY. 2.88 THE DENOMINATO R SHOULD B E REASONABLY INDEPENDENT FROM CONTROLLED TRAN S ACTION S , OTHERWISE THERE WOULD BE NO OBJECTIVE STARTING POINT. FOR INSTANCE, WHEN ANALYZING A TRANSACTION CONSI S TING IN THE PURCHASE O F GOODS BY A DISTRIBUTOR FROM AN ASSOCIATED ENTERPRISE FOR RESALE TO INDEPENDENT CUSTOMERS, ONE SHOULD NOT WEIGHT THE NET PROFIT IN D I C ATOR AGAINS T THE COST OF GOODS SOLD B E CAU S E TH E SE COSTS ARE THE CON T ROLL E D COSTS FOR WHICH CONSISTENCY WITH THE ARMS LEN GT H PRINCIPLE IS BEING TESTED. SIMILARLY, FOR A CONTROLL E D TRANSAC T ION CONSI S TING IN THE PROVISION OF SER V ICES TO AN ASSOCIATED ENTERPRISE, ON E S H OUL D NO T WEIGHT THE NET PROFIT INDICATOR AGAINST THE REVENUE FROM THE SALE OF SERIES B E CAU S E THESE ARE THE CONTROLLED SALES F OR WHICH CONSI S TENCY WITH THE ARMS LENGTH PRINCIP L E IS BEIN G TESTED. WH E RE THE DENOMINATOR IS MATERIALLY AFFECTED BY CONTROLLED TRANSACTIO N COSTS THAT ARE NO T THE OBJECT OF THE TESTING (SUCH AS HEAD OFFICE CHARGES, RENTAL FEES OR ROYALTIES PAID TO AN AS S O C I A TED ENTERPRISE, CAUTION SHOU L D BE EXER C ISED TO EN S U R E THAT SAID CON T ROLL E D TRANSACTION COSTS DO NO T MATERIALLY DISTORT THE ANALYSIS AND IN PARTICUL A R THAT THEY ARE IN ACCO R DANCE WITH THE ARMS LENGTH PRINCIPLE. 2.89 THE DENOMINATOR SHOULD BE ONE THAT IS C APABLE O F B EIN G MEASURED IN A RELIABLE AND CON SI S TENT MANNER AT THE L E VEL OF THE TAX - PAYERS CONTROLLED TRANSACTIONS. IN ADDIT I O N , THE APP R O PRI ATE BASE SHOULD BE ONE THAT IS CAPABLE O F B E IN G M EA SURED IN A RELIABLE AND CON S I S TENT MANNER AT THE L E V E L OF THE COMPARABLE UNCON T ROLL E D TRANSACTIONS. THIS I S PRACTICE LIMITS THE ABILITY TO USE CERTAIN IN DIC ATORS, AS DISCUSSED AT PARAGRAPH 2.99 BELOW. FURTHER, THE TAXPAYERS I TA NO . 914 /H YD/20 13 M/S. ST. JUDE MEDICAL INDIA P RIVATE LIMITED, HYDERABAD 3 ALLOCATION OF INDIRECT EXPENSES TO TH E TRANSACTION UNDER REVIEW SHO U LD BE APPRO PR IATE AND CON SI STENT OVER TIME. 6.3 IN TH E APP E LL A NTS CA S E THE CONTROLLED TR A N S AC T ION I S THE PURCHASE O F GOODS FROM THE AE WHICH ARE L A TER SOLD TO UNRELATED PARTIES. ADOPTION OF C O S T AS THE DENOMINATOR WOULD LEAD TO A SITUATION WHERE THERE IS NO OBJ E CTIVE STARTING P OINT FOR THE COMPARABILITY ANALYSIS. THE AS SESSING OFFICER IS TH E R E FORE DIRE C TED TO ADOPT OPERATING PROFIT TO OP E RATING REVENUE RATIO AS THE PLI AND THE THIRD GR O UN D O F APPEAL IS ALLOWED. 3. AS NO T ED BY THE LEARNED CIT(A), THE PU R POSE OF IDENTIFYING THE PLI IS TO ENSURE THAT THE COMPARABILITY OF THE CONTROLLED TRANS A CTION S IS OBJECTIVE AND REFEREN C E IN THIS REGARD WAS MADE BY H I M TO THE O EC D TRAN S FER P RICING GUIDELINES 2010, WHEREIN I T WAS EXPLAINED THAT THE DENOMINATOR SHOULD BE REASONABLY INDEPENDENT FROM CONTROLLED TRANSACTIONS, AS OTHERWI SE, TH E RE WOULD BE NO OBJECTIVE STARTING POINT. EXPLAINING FURTHER, IT WAS OBSERVED IN THE OECD TRAN S FER PRICING GUIDELINES THAT WHEN ANALYISING A TRANSACTION CONSISTING IN THE PURCHASE OF GOODS BY A DISTRIBUTOR FROM AN A SS OCIATED ENTERPRISE FOR RESALE TO INDEPENDENT CUSTOM E RS, ONE COULD NO T WEIGH THE NET PROFIT IN D I C ATOR AGAINST THE COST OF GOODS SOLD BECAU S E TH E SE COSTS AR E THE CON T ROLL E D COSTS FOR WHICH CONSISTENCY WITH THE ARMS LENGTH PRINCIPLE IS BEING T E STED. IN TH E PRESENT CASE, THE ISSUE INVOLVE D WAS RELATING TO DETERMINATION OF ARMS LENGTH PRICE OF THE INTERNATIONAL TR A N S ACTION S O F THE ASSESSEE COMPANY WITH ITS AE INVOLV ING PURCHASE OF MEDICAL DEVICES , AND THIS B E ING SO, WE ARE O F THE VIEW THAT THE CIT(A) WAS FULLY JUSTIFIED IN ACCEPTING THE O PERATING P R OFIT TO OPERATING REVENUE AS THE PLI , AS CLAIMED BY THE ASSESSEE FOR TRAN S FER PRICING ANALYSIS, AND NO T O PERATING PROFIT TO OPERATING CO S T AS TAKEN B Y THE ASSESSING OFFICER/TPO, R ELYING ON THE RELEVANT OECD TRAN S FER P RICING GUIDELINES, 20 10 . A T THE TIME OF H E ARING BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO NOT BEEN ABLE TO I TA NO . 914 /H YD/20 13 M/S. ST. JUDE MEDICAL INDIA P RIVATE LIMITED, HYDERABAD 4 RAISE ANY MATERIAL CONTENTION TO DISPUTE OR CONTROVERT THIS POSITION. WE, TH E R E FORE, UPHOLD THE IMPUGNED ORDER OF THE LEARNED CIT(A) ON THIS ISSUE AND DISMISS THE APPEAL OF THE REVENUE. 6. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 19 TH SEPTEMBER, 2014 SD/ - SD/ - ( SAKTIJIT DEY ) ( P.M.JAGTAP ) JUDICIAL MEMBER ACCO UNTANT MEMBER DT/ - 19 TH SEPTEMBER, 2014 COPY FORWARDED TO: 1. M/S. ST. JUDE MEDICAL INDIA PRIVATE LIMITED, 1 - 11 - 250/A, MATARANI SENSATION. LANE BEHIND SYNDICATE BANK, BEGUMPET, HYDERABAD 2 . DY. COMMISSIONER OF INCOME - TAX CIRCLE 3(3), HYDE RABAD 3. 4. COMMISSIONER OF INCOME - TAX(APPEALS) 9, MUMBAI COMMISSIONER OF INCOME - TAX III, HYDERABAD 5. DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S