DEPUTY COMMISSIONER OF INCOME-TAX,, BANGALORE vs. M/S. WIPRO GE MEDICAL SYSTEMS PVT, LYTD, BANGALORE

IT(TP)A Nos.40/Bang/2011 & 1647/Bang/2013 Page 2

For the Assessment Year 2005-06, the revenue has raised the following grounds :

Ground No.1 is general in nature and does not require any specific adjudication.

Ground No.2 is regarding the allocation of expenses to the 10A unit by the Assessing Officer resulting reduction of deduction under Section 10A of the Income Tax Act, 1961 (in short 'the Act').

We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. At the outset, we note that an identical issue was considered by this Tribunal in assessee's own case for the Assessment Years 2002-03 to 2004-05 vide order dt.16.5.2008 in to 812/Bang/2007 in para 10(iii) as under :

Ground No.3 is regarding disallowance of commission expenses.

The Assessing Officer noted that the assessee has claimed the commission paid to the sales agents of Rs.2,85,57,375. The assessee was asked to furnish the details of the commission debited to the profit and loss account and details of the payment made during the F.Y. relevant to the assessment year under consideration. The Assessing Officer found from the details filed by the assessee that the assessee has not furnished the names of the customers amounting to Rs.2,42,33,641. Accordingly, the Assessing Officer has disallowed the said expenditure by holding that it has not been incurred wholly and exclusively for the purpose of business of the assessee. On appeal, the CIT (Appeals) has restricted the disallowance made by the Assessing Officer to 20% of Rs.2,42,33,641 amounting to Rs.48,46,728.

The learned Departmental Representative has contended that the Assessing Officer has disallowed the commission payment made to the extent the assessee failed to produce the details of the customers however the CIT (Appeals) has estimated the disallowance only to 20% of IT(TP)A Nos.40/Bang/2011 & 1647/Bang/2013 Page 6 the amount which was disallowed by the Assessing Officer. He has further contended that the CIT (Appeals) has not given any basis of estimation of disallowance.

On the other hand, the learned Authorised Representative of the assessee has submitted that when the payment in question was made through cheques and it relates to the sales of the assessee then expenditure cannot be disputed. Hence he has contended that when the claim of the assessee is not found to be excessive then the same cannot be disallowed.

We have considered the rival submissions as well as the relevant material on record. The Assessing Officer has disallowed the claim of commission payment to the extent of Rs.2,42,33,641 in respect of which the assessee did not furnish the details of the clients to whom the commission was paid. On appeal, the CIT (Appeals) has followed the orders of the CIT (Appeals) for the Assessment Year 2004-05 and then restricted the disallowance to Rs.48,46,728 being 20% of the disallowance made by the Assessing Officer. It is pertinent to note that for the Assessment Year 2004-05, the CIT (Appeals) has observed that the Assessing Officer to allow the claim of the assessee subject to the IT(TP)A Nos.40/Bang/2011 & 1647/Bang/2013 Page 7 verification of names or ascertain more details relating to these payments being furnished by the assessee. Thus the earlier year’s order does not give any guidance of restricting the disallowance to 20%. In view of the above facts and circumstances of the case when the assessee has not produced complete details and there is no basis of estimation of restricting the disallowance by the CIT (Appeals), we set aside this issue to the record of the Assessing Officer for reconsideration and adjudication after verification and examination of the complete details to be filed by the assessee.

Ground Nos.4 to 8 are regarding Transfer Pricing Adjustment.

There are various international transactions during the year under consideration as reported in the 3CB Report. The TPO accepted the other transactions at arm’s length except the trading segment and distribution segment which was mainly importing medical equipments such as CT Scanner, MRI Scanner, Cath Lab System, etc from its AE being GE Medical Systems Group. The Assessing Officer noted that the assessee imports some equipments from other manufacturers and some items are procured from domestic market. However the assessee has not made any separate analysis for the purpose of determining the ALP IT(TP)A Nos.40/Bang/2011 & 1647/Bang/2013 Page 8 for trading segment. The TPO was of the view that the MAM for arriving at ALP could be the Resale Price Method (RPM) for the trading segment.

Before us, the learned Departmental Representative has referred to the impugned order of the CIT (Appeals) and submitted that the CIT (Appeals) has conducted a fresh exercise of determining the arm’s length IT(TP)A Nos.40/Bang/2011 & 1647/Bang/2013 Page 9 as well as recomputation of the margins of the comparable companies and assessee company as well. She has forcefully contended that the CIT (Appeals) has taken this decision of reworking of margin of the assessee as well as comparable company by obtaining the records without giving an opportunity to the TPO/A.O. to submit their objections or comments on this issue. Thus the learned Departmental Representative has submitted that the entire exercise undertaken by the CIT (Appeals) is against the principle of natural justice and therefore it is a clear case of violation of Rule 46A of the I.T. rules.

On the other hand, the learned Authorised Representative of the assessee has contended that the powers of CIT (A) and Assessing Officer are co-terminus and therefore the CIT (Appeals) is fully empowered to enquire and do whatever the Assessing Officer could have done. He has further contended that the CIT (Appeals) has examined the record and then has given finding of fact. He has supported the order of the CIT (Appeals).

Having considered the rival submissions as well as the relevant material on record, we find that the TPO while computing the ALP has apparently taken the gross profit margin of the AMDL at entity level by IT(TP)A Nos.40/Bang/2011 & 1647/Bang/2013 Page 10 assuming that the entire activity of AMDL is only trading in the medical equipments. So far as the issue of considering the segmental details of the comparable companies, on principle we do not find any error on this point as the comparability of the assessee's trading segment in medical equipment has to be determined by considering the same segment of the comparable companies in the same activity. Therefore if the comparable company is having more than one segment as considered by the CIT (Appeals) then only the trading segment of the said company has to be compared with the assessee. Further the CIT (Appeals) has also recomputed the gross margin of the assessee and again held that the adjustment is required to be made only in respect of purchases made from the AE and not on the entire transaction in the trading segment.

Ground No.9 is regarding payment of royalty. The assessee has paid the royalty to its AE @ 2% on sale. The Assessing Officer / TPO held that none of the comparable company has paid royalty for trading segment. The TPO/A.O. has considered the case of AMDL and held that IT(TP)A Nos.40/Bang/2011 & 1647/Bang/2013 Page 12 when the comparable company has not paid the royalty then the payment of royalty is not justified and accordingly made adjustment of the entire amount. On appeal, the CIT (Appeals) has deleted the addition made by the Assessing Officer on account of royalty by following the decision of the Tribunal for the Assessment Year 2002-03.

We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. At the outset, we note that the Tribunal vide order dt.16.05.2008 in assessee's own case for the Assessment Years 2002-03 to 2004-05 has considered this issue whereby this issue was remanded to TPO/A.O. for considering the comparables and then determine the ALP.

Since the issue was already set aside to the file of Assessing Officer for choosing the proper comparable therefore in view of the earlier order of this Tribunal, we set aside this issue to the record of the TPO/A.O. for reconsideration of the same in the light of directions of the Tribunal for the Assessment Years 2002-03 to 2004-05 (supra). Further in case no comparable is found in respect of the royalty payment by the assessee then the TPO/A.O. may consider the royalty payment as part of the international transactions under trading segment and then determine the ALP by considering the royalty as part of the operating cost for the purpose of computing the margin in the trading segment.

For the Assessment Year 2006-07, the revenue has raised the following grounds :

Ground No.1 is general in nature and does not require any specific adjudication.

In the result, the appeals of revenue are partly allowed. Order pronounced in the open court on the 21st day of April, 2017.