M/S. MERIT MEDICAL SYSTEMS INDIA PRIVATE LIMITED,BANGALORE V. DCIT, CIRCLE-4(1)(1), BANGALORE

SA 74/BANG/2024

AI Insights

Merit Medical Systems India Pvt. Ltd. appealed against the assessment order for the assessment year 2021-22, which involved a significant addition to their income based on the arm's length price (ALP) determined by the Transfer Pricing Officer (TPO). The TPO rejected the Resale Price Method (RPM) adopted by the assessee and applied the Transactional Net Margin Method (TNMM), leading to a revised assessment. The assessee contested the selection of TNMM as the Most Appropriate Method (MAM) and argued that RPM was more suitable as they were merely distributors of medical devices without any value addition. The ITAT found procedural lapses in the handling of the assessee's documents and the opportunity of hearing during the remand proceedings, leading to the decision to restore the matter for a fresh assessment.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 25094 (ITAT-BANGALORE)
• Appeal Type: Stay Application
• Pronouncement Date: 26-12-2024
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2021-2022
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: SRINIVAS KULKARNI
• Keywords: Transfer pricing; International transaction; Principle of natural justice
• Section: 143(3); 131; 92CA

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER SP 74/Bang/2024 & IT(TP)A No.2274/Bang/2024 Assessment year: 2021-22 Merit Medical Systems India Pvt. Ltd., 404 & 405, 4th Floor, H.M. Geneva House, 14, Cunningham Road, Bangalore – 560 052. PAN: AAICM 0505F Vs. The Deputy Commissioner of Income Tax, Circle 4(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri Srinivas Kulkarni, CA Respondent by : Ms. Vidhya K., Jt.CIT (DR)(ITAT), Bengaluru. Date of hearing : 13.12.2024 Date of Pronouncement : 26.12.2024 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by Merit Medical Systems India Pvt. Ltd. (the assessee/appellant) for the assessment year 2021-22 against the assessment order passed by the DCIT, Circle 4(1)(1), Bangalore [ld.AO] u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (the Act) dated 27.09.2024 wherein return of income filed by the assessee on 15.2.2022 at Rs.9,27,250 was assessed at Rs.1,15,62,947 making an addition of Rs.1,06,35,700 of arm’s length price [ALP] determined by the ld. TPO IT(TP)A No.2274/Bang/2024 Page 2 of 8 by passing an order u/s. 92CA(3) of the Act on 18.10.2023 covered in the draft assessment order dated 29.11.2023 and subjected to directions of the ld. DRP dated 27.8.2023. 2. Assessee aggrieved with the above assessment order has preferred appeal raising grounds of appeal challenging the wrong selection of Most Appropriate Method [MAM], principles of violation of natural justice as no proper opportunity of hearing was granted and erroneous selection of comparable using inconsistent data. 3. The brief facts of the case show that the assessee filed its return of income and Form 3CEB and therefore the case of the assessee was referred to the ld. TPO, being ACIT, TP-2(1)(1), Bangalore, to examine the ALP of the international transactions. 4. Assessee has entered into several international transactions mainly of purchase of disposal medical device and sale of the same. Assessee is carrying business of marketing, distribution, sale and offering of sale of medical devices. Assessee has also entered into an international transaction of Market Support Services [MSS] received. Therefore, the assessee has adopted Resale Price Method [RPM] for benchmarking the purchase of disposable medical devices of Rs.338 lakhs and sale of disposable medical device of Rs.28.52 lakhs. With respect to MSS received by the assessee amounting to Rs.1,79,18,040 assessee adopted Transactional Net Margin Method [TNMM] computing Operating Profit/Total Cost at 41.82%. IT(TP)A No.2274/Bang/2024 Page 3 of 8 5. The ld. TPO found that in MSS, the Profit Level Indicator [PLI] of the assessee is 41.82% and in the case of distribution activity which is (-) 8.85%. The ld. TPO further noted that assessee has not provided the TP Study Report [TPSR] for benchmarking the international transactions and has not furnished any contemporaneous document. He proceeded to carry out his own benchmarking. 6. The ld. TPO computed by using Prowess Database, selected medical equipment as keyword, selected 7 comparables whose margin was in the range of 4.17 to 5.28% and issued a show cause notice to the assessee on 06.10.2023. The taxpayer did not comply with the notices and therefore the ld. TPO rejected the RPM as the MAM selected by the assessee, applied TNMM as the MAM, selected PLI of Operating Profit/ Operating Revenue using 3 years data, computed the ALP selecting 7 comparables of the price paid as Operating Cost of Rs.7,91,26,377 taking the ALP of Rs.6,84,90,677, found shortfall of Rs.1,06,35,700 as per order u/s. 92CA(3) dated 18.10.2023. 7. The draft assessment order was passed on 29.11.2023 which was subjected to directions before the ld. DRP-2 at Bangalore. The assessee objected to the documents that were submitted to the ld. TPO on 6.9.2023. Further, TPSR along with various agreements were also submitted on;6.10.2023 in response to summons u/s. 131 of the Act dated 3.10.2023. 8. As the ld. TPO has denied that assessee submitted any documents such as TPSR etc., and assessee claimed to have submitted the same, based on this, the ld. DRP sought for remand report of the TPO. IT(TP)A No.2274/Bang/2024 Page 4 of 8 9. The ld. TPO submitted a remand report on 16.8.2024 wherein once again the RPM was rejected as the MAM and TNMM was held to be the MAM. The ld. DRP noted that the TPO has taken TNMM as the MAM as the assessee has been undertaking promotional activities, skill enhancement services. allied health staff and distribution, which enhanced the publicity of the product of the AEs and therefore the functions of sales and service such as advertising, marketing & promotion, RPM cannot be considered as the MAM. Accordingly, RPM was rejected and TNMM was upheld. Consequently, the final assessment order was also passed. 10. The ld. AR submitted that in the TP adjustment made in the distribution segment of the assessee, it has adopted RPM as the MAM because assessee is pure distributor of the product and does not engage in value addition of the product. The assessee is merely a trader of the product imported from the AE. Therefore, RPM is the MAM. It was further stated that the assessee company has incurred a net loss in the financial statement due to marketing expenses which are routine distribution expenditure and do not lead to any value addition to the products which are resold. It was further stated that in several decisions of the coordinate Benches, RPM is held to be the MAM in the case of assessee. It was further stated that in the TPSR submitted the assessee has selected 12 comparable companies whose median margin is 19.09%, whereas Operating Margin is 27.40% and therefore the transaction is at arm’s length. The contention was that TNMM cannot be applied in this case. It was further submitted that even in the remand report there is IT(TP)A No.2274/Bang/2024 Page 5 of 8 inconsistent statement by the ld. TPO about the availability of the TPSR. It was further stated that even the comparability study made by the ld. TPO does not show how these comparables selected by the TPO of 7 companies are comparable to the functions of the assessee. Accordingly, it was submitted that even in the remand report submitted by the ld. TPO, the TP study report of the assessee was not verified. 11. The ld. DR vehemently supported the order of ld. lower authorities. 12. We have carefully considered the rival contentions and perused the order of the ld. lower authorities. In this case on the international transactions entered into by the assessee, in the trading segment ALP is determined by the ld. TPO holding that assessee has not furnished any documentation including the TP study report before the ld. TPO. However, vide letter dated 6.9.2023 it is apparent that the assessee has submitted the complete set of audited accounts, Form 3CEB, tax audit report, segmental financial results reconciled with P&L account, details of transactions with the AE. Further it is apparent that the summons u/s. 131 was issued on 03.10.2023 wherein the necessary agreement copies were sought for by the ld. TPO which were submitted on 06.10.2023 wherein assessee submitted the distribution agreement, service agreement and TPSR. Therefore, the statement of the ld. TPO in the order u/s. 92CA (3) that the assessee has not produced the relevant documentation is not found to be correct. Therefore, the ld. DRP asked for the remand report from the TPO vide letter dated 15.7.2024. In the remand report, despite assessee making a specific observation in issue No.1 that all this information is available before the TPO, the TPO did IT(TP)A No.2274/Bang/2024 Page 6 of 8 not give any answer that how these were not considered by him. He proceeded to reject the RPM adopted by the assessee as MAM. More or less, the TPO has reproduced and repeated what was recorded by him in the order u/s. 92CA (3). Even in the remand report also, we do not find that assessee has been given any opportunity to examine and substantiate why RPM is the MAM. Even on the second issue of segmental financials, the assessee has categorically reported that there is a difference in taking the operating cost and consequent margin, which was also rejected by the ld. TPO in his remand report. Thus, it is apparent that the assessee has not been given any opportunity of hearing during remand proceedings. Further despite assessee submitting all the details during TP assessment, the ld. TPO overlooked all these documents. He further overlooked that in the summons issued u/s. 131, he has collected certain information, that information was not looked into by the ld. TPO. If the observation of the TPO is found to be correct that assessee has not submitted any information, it surprises us more that how the TPO could make the observation that assessee is performing more functions than a simple distributor. These themselves show that there is a serious violation of natural justice by the ld. TPO in determining the ALP of the international transaction. We do not make any comment on the selection of MAM, but for the same reason that the manner in which the TP assessment has been carried out by the ld. TPO is not correct, we restore the whole issue back to the file of the TPO/AO to consider the TP study report and peruse documents submitted by the assessee. These documents must be examined by the ld. TPO and IT(TP)A No.2274/Bang/2024 Page 7 of 8 thereafter the assessee may be issued notices, if required. The assessee must be granted reasonable opportunity of hearing and thereafter the ALP of the international transaction should be determined, after giving the complete analysis to the assessee of selection of method, computation of PLI, comparability analysis and annual accounts of the comparables selected by the TPO, if any and why ld. TPO disagrees with assessee’s TPSR. Thus, the assessment order and the TPO’s order are restored back to the file of the lower authorities wherein the TPO will determine the ALP of the transaction, the AO will pass draft assessment order and give opportunity to the assessee to file any objection before the ld. DRP. Accordingly, we restore the appeal back to the file of the ld. lower authorities as indicated above. 13. In view of our decision in the appeal itself, the Stay Petition filed by the assessee in SA No.74/Bang/2024 becomes infructuous and therefore the same is dismissed. 14. In the result, the appeal by the assessee is allowed for statistical purposes and the stay petition is dismissed. Pronounced in the open court on this 26th day of December 2024. Sd/- Sd/- (KESHAV DUBEY) (PRASHANT MAHARISHI) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 26th December 2024. /Desai S Murthy / IT(TP)A No.2274/Bang/2024 Page 8 of 8 Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. "