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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Smt. P. Madhavi Devi & Shri A. Mohan Alankamony
IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad (Through Video Conferencing) Before Smt. P. Madhavi Devi, Judicial Member AND Shri A. Mohan Alankamony, Accountant Member 519 & 496/Hyd/2017 SA Nos.92 to 94/Hyd/2020 Assessment Years:2010-11, 2011-12 & 2012-13 Biogenex Life Sciences Vs. Dy. Commissioner of Private Ltd, Cherlapally Income Tax, Circle 1(2) PAN:AACCB6041P Hyderabad (Appellant) (Respondent) Assessee by: Sri P.Murali Mohana Rao Revenue by: Sri Y.V.S.T. Sai, CIT-DR Date of hearing: 21/10/2020 Date of pronouncement: 04/11/2020 ORDER Per Smt. P. Madhavi Devi, J.M. All the above are assessee’s appeals for the A.Ys 2010- 11, 2011-12 and 2012-13 respectively against the final assessment order passed by the AO u/s 143(3) r.w.s. 144C(13) of the I.T. Act for the respective A.Ys.
Brief facts of the case are that the assessee company, is engaged in the business of trading in reagents and assembly and sale of diagnostic instruments, and providing support services to its holding company. During the relevant A.Y, the assessee has entered into the following international transactions:
S. Nature of international Amount (Rs.) No. transaction 1. Import of engineering 10,62,90,235 instruments, components and spares. 2. Import of R&D material and 35,19,345 consumables 3. Sale of equipments and 26,90,21,458 components 4. Purchase of reagents for 1,08,26,474 trading 5. Purchase of fixed assets 1,44,569 6. Service charges received/ 7,71,94,579 receivable 7. Commission charges paid/ 5,53,71,853 payable The AO, therefore referred the issue of determination of ALP of the transactions to the TPO. The TPO, in the proceedings u/s 92CA of the Act, rejected the aggregation of the transactions and adoption of TNMM method by the assessee for arriving at the ALP of the international transactions. The TPO, however, held that many of these transactions are altogether different in nature and therefore, they have to be analysed separately. After analysing the transactions, the TPO divided the transactions into three segments – (i) Trading in reagents where the assessee purchases reagents from the AE and sells it in the local market, (ii) Assembly of diagnostic equipments where the AE provides the prototype, specifications etc. and also supplies the necessary spares, equipments etc. to the assessee who then assembles/manufactures the machines as per the AE’s specifications; (iii) Provision of R&D and support services where the assessee provides contract R&D services as well as business and administrative support services.
2.1 The TPO accepted following transactions to be at ALP: (i) Service charges received – Rs. 7,71,94,579/- (ii) Trading of reagents – Rs. 1,08,26,474/- (iii) Import of R&D material & consumables – Rs. 35.19 lakhs (iv) Purchase of fixed assets – Rs. 1.44 lakhs. As regards the commission payments to the AE, the TPO held that there is no principal agent relationship between the assessee and the receiver of the payment and therefore, the payments to the AE is nil. As regards the assembling/manufacturing of diagnostic machines is concerned, the TPO determined the shortfall at Rs. 3,12,00,673/-. In accordance with the TPO order, the draft assessment order was proposed against which the assessee preferred its objections before the DRP, but the DRP also confirmed the adjustment proposed by the TPO and accordingly, final assessment order was passed, against which, the assessee is in appeal before the Tribunal. The assessee has raised 4 grounds of appeal
. In addition thereto, the assessee has further raised additional grounds which are Grounds 5 to 16. The regular Grounds of appeal and the additional grounds of appeal raised by the assessee are as follows: “1. The Order of the learned TPO to reject the ALP computed by the eligible assessee by adopting the Transactional Net Margin Method [TNMM] for the commission paid by the eligible assessee to its AE for supply of equipment to Abbott Inc and adopt the ALP as NIL under the CUP method, is based on an erroneous appreciation of the facts of the case and requires to be cancelled.
2. The Order of the learned TPO providing for an alternate addition of Rs.3, 12,00,673/- being the alleged shortfall in remuneration received by the eligible assessee for the contract manufacturing activities carried out by the eligible assessee by estimating the operating profit at 50% is erroneous, and the same requires to be deleted.
3. The appellant craves leave of this Hon'ble Tribunal to add, alter, amend, delete or substitute such ground as may be necessary at the time of hearing.
4. Wherefore the Appellant prays that this Hon'ble Tribunal be pleased to allow the appeal and set-aside the orders passed by the authorities below to the extent they are against the appellant and pass such other order as this Hon'ble Tribunal deem fit and proper on the facts and circumstances of the case in the interest of justice and equity. ADDITIONAL GROUNDS OF APPEAL
5. Erred in making ALP adjustment of Rs.5,53,71,853/- towards commission payment to Biogenex Laboratories Inc. a. Ought to have appreciated the fact that the transaction of commission is intrinsically related to the transaction of sale of diagnostic equipment and should be aggregated under TNMM for the purpose of benchmarking. b. Erred in not appreciating the fact that the margin of assessee is 34.41 % which is much higher that the margin of Comparables of 11.37% hence no ALP adjustment is required to be made. c. Erred in rejecting the TNMM method and the search process adopted by the assessee without finding any defects. d. Erred in not following the procedure prescribed u/s 92C of the Act while determining the Arm's Length adjustment. e. Erred in not conducting any search process for determination of ALP. f. Erred in considering the transaction of commission paid as Nil while determining the arm's length price of the transaction. g. Erred in treating commission paid to the Biogenex Laboratories Inc as Nil without considering reasonability of the transaction.
6. Erred in making ALP adjustment of Rs.3,12,OO,673/- towards sale of diagnostic equipment to Biogenex Laboratories Inc. a. Erred in not ascribing any reason for rejection of search process and the comparables selected by the assessee. b. Erred in rejecting the TNMM method adopted by the assessee without finding any defect. c. Ought to have considered the segmental margin of Exports instruments while benchmarking the transaction of sale. d. Ought to have appreciated the fact that the segmental results are audited by a Qualified Chartered Accountant wherein no defects are identified. e. Erred in considering the Finance charges of Rs.38,45,185j - as operating expenditure while calculating the net margin of the Exports diagnostic segment which is not correct. f. Ought to have appreciated the fact that the margin of Exports diagnostic segment is 50.05% after excluding finance charges from operating cost which is higher than the margin selected by the TPO (Cost + 50%), no ALP adjustment is required.
7. Erred in not appreciating the fact that as per OECD Guidelines, CUP method is the most direct method which provides a reliable measure for determining arm's length result for the controlled transaction and is preferable over all other methods.
8. Ought to have appreciated the fact that the price charged by the assessee to associated enterprise is more than the price charged to uncontrolled entities.
9. Erred in rejecting the TP documentation without ascribing the cogent reasons.
10. Ought to have accepted the justification provided by the assessee for aggregation of the transaction of commission payment with the sale of diagnostic equipment. 11. Erred in not appreciating the fact that the operating margin of the assessee is 41.11 % which is much higher than average operating margin of the comparables i.e., 8.73%. 12. Ought to have conducted new search process under TNMM and have determined the PLI for the sale of diagnostic equipments. 13. Ought to have appreciated the fact that the new search process would be as under for benchmarking the transaction of sale of diagnostic equipment i. The companies which are functionally dissimilar to the assessee were rejected as comparables. ii. Companies for which data is not available for the FY 2009-10 were rejected as comparable. iii. Companies having total turnover more than 1 crore were selected as comparable. iv. Companies having export sales more than 75% of the total turnover were selected as comparable. v. Companies having negative net worth are rejected as comparable. vi. Companies having related party transactions less than 25% are selected as comparable. 14. Ought to have taken following companies as comparables for the year under consideration after applying the above filters. i. Opto Circuits (India) Limited ii. Narang Medical Limited. iii. Datt Mediproduct Limited 15. Ought to have appreciated the fact that the assessee company is having huge employee cost i.e., 14.39% of the total turnover of the assessee which is abnormal compared to average industry rate. 16. Ought to have allowed under utilisation of capacity adjustment as there is a difference in level of capacity utilization of assessee and level of capacity utilization of comparables. Accordingly, adjustment would be required to be made to profit margin of comparable on account of difference in capacity utilization in terms of rule 10-B (l)(e)(iii).
The learned Counsel for the assessee relied upon the decision of the Hon'ble Supreme Court in the case of National Thermal Power Ltd vs. CIT (229 ITR 383) for admission of additional grounds of appeal and pleaded that after admission the relevant issues may be remitted back to the file of AO/TPO for denovo consideration. He submitted that the TPO has not adopted any particular method as specified under the Act for computing the ALP and therefore, the whole exercise has to be done again after taking assessee’s objections also into consideration.
The learned DR was also heard who supported the orders of the authorities below.
Having regard to the rival contentions and the material on record, we find that the TPO has not adopted any particular method for proposing the adjustment to the ALP of commission payment and the manufacturing of diagnostic machines. The additional grounds of appeal
raised by the assessee are against the non-adoption of any method for computing the ALP. In view of the same, we deem it fit and proper to admit the additional grounds of appeal and remit the above two issues to the file of the AO/TPO for reconsideration of the issues denovo in accordance with the law. Needless to mention that the AO/TPO shall give the assessee a fair opportunity of hearing. SA Nos.92 to 94/Hyd/2020
6. Since the issues in the appeals have been remitted back to the file of the AO/TPO for denovo consideration, the Stay Applications filed by the assessee have become infructuous and are accordingly dismissed.
In the result, appeals filed by the assessee are treated as allowed for statistical purposes and S.As filed by the assessee are dismissed. Order pronounced in the Open Court on 04th November, 2020. Sd/- Sd/- (A. MOHAN ALANKAMONY) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, dated 04th November, 2020. Vinodan/sps Copy to: 1 M/s.Biogenex Life Science (P) Ltd C/o Shri Suresh Muthukrishnan, C.A. 305, Kalpak Arcade, No.19 Church Street, Bangalore 560001 2 Dy.CIT, Circle 1(2) Hyderabad 3 DRP, 2nd Floor, IT Towers, 10-2-3 AC Guards, Hyderabad 500004 4 TPO/Add.CIT, (TP) Hyderabad 500004 5 CIT (International Taxation) IT Towers, 10-2-3 AC Guards Hyderabad 6 CIT-1, Hyderabad 7 The DR, ITAT Hyderabad 8 Guard File By Order
27th October, 2020 1. Draft dictated on 2. Draft placed before author October, 2020 3 Draft proposed & placed before the second Member October, 2020 4 Draft discussed/approved by second Member October, 2020 5 Approved Draft comes to the Sr.P.S./PS October, 2020 6. Kept for pronouncement on October, 2020 7. File sent to the Bench Clerk October, 2020 8 Date on which file goes to the Head Clerk October, 2020 9 Date of Dispatch of order October, 2020