COOK INDIA MEDICAL DEVICES PRIVATE LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE 1(2), CHENNAI

आयकर अपील"य अ"धकरण, ’डी’ "यायपीठ, चे"नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI "ी जॉज" माथन, "या"यक सद!य एवं "ी एस जयरामन, लेखा सद!य के सम& BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.3137/Chny/2017 "नधा"रण वष" /Assessment Year: 2013-14

Vs. M/s.Cook India Medical Devices- The Dy. Commissioner of- Pvt. Ltd., Income Tax, 4/249A, Rasim Enclave, Poonamallee Corporate Circle-1(2), High Road, Near Savitha Dental Chennai. College, Goparasanallur, Kattupakkam, Chennai-600 034. [PAN: AACCC 7628 P] (अपीलाथ(/Appellant) ()*यथ(/Respondent)

: अपीलाथ( क+ ओर से/ Appellant by Mr.Vikram Vijayaraghavan, Adv. : )*यथ( क+ ओर से /Respondent by Mr.Vijayakumar Punna, Jr. Standing Counsel : सुनवाई क+ तार"ख/Date of Hearing 01.05.2018 घोषणा क+ तार"ख / : 01.05.2018 Date of Pronouncement आदेश / O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER:

ITA No.3137/Chny/2017 is an appeal filed by the assessee against

the Order of Dispute Resolution Panel-2, Bengaluru, in F. No.406/DRP-2-

BNG/2016-17 dated 15.09.2017 for the AY 2013-14. :- 2 -:

on behalf of the assessee.

grounds:

Based on the facts and circumstances of the case and in law, Cook India Medical Devices Private Limited (‘Cook India’ or “Appellant” or “the Company”) respectfully craves leave to prefer an appeal against the order passed by Ld. Deputy Commissioner of Income Tax, Corporate Circle-1(2), Chennai (“Ld. AO”), dated October 20, 2017, under section 143(3) read with section 144C (1) read with section 92CA of the Income Tax Act, 1961 (“Act”) in pursuance of the directions issued by Ld. Dispute Resolution Panel-2, Bangalore (“Ld. DRP”) dated September 15, 2017 under section 144C(5) of the Act (“impugned order”) inter-alia on the following grounds:

In the facts and circumstances of the case and in law:

Transfer pricing grounds

4.1. The Ld. AO/TPO/ DRP have erred, in law and in facts, by rejecting the foreign AEs as the tested party and selecting the Appellant as the tested party.

4.2. The Ld. AO/TPO/DRP has erred, in laws and facts, by rejecting transaction net margin method as the most appropriate method (“MAM”) for determination of the arm’s length price (“ALP”) for the impugned transaction. The Ld. AO/DRP has erred in upholding Ld. TPO’s application of Comparable Uncontrolled Price (“CUP”) :- 3 -:

as the MAM for the purposes of determination of the ALP of the impugned transaction.

4.3. The Ld. TPO and the Ld. AO have erred, in laws and in facts, by not considering” fact that the Appellant has included all the operating costs (i.e. even the costs pertaining to support services) in the cost base while determining the margins for distribution business. The Ld. TPO and Ld. AO have failed to appreciate the fact that the Appellant has earned net margin of 6.88 percent on revenue which is higher than comparables i.e. 3.69 percent (unadjusted) and (-) 0.81 percent (adjusted) and which has already been considered at arm’s length by the Ld. TPO.

4.4. The Ld. TPO and the Ld. AO have erred, in laws and facts, by not considering the corroborative analysis undertaken by the Appellant to justify the mark-up of 8 percent levied on internal costs charged by the AEs.

4.5. The Ld. AO/DRP has erred, in laws and facts, by considering the ALP of certain support services as NIL.

Corporate tax grounds

7.1. As per the order passed under section 92CA of the Act, the Ld. TPO has determined the ALP of the said transaction at Rs.1,24,66,321/- and subsequently has proposed an adjustment amounting to Rs.1,05,28,594/-. As the Ld. TPO, after examining the entire details, supporting evidences and methodology adopted by the Appellant, has passed a detailed order under section 92CA(3) of the Act, the same was binding on the Ld. AO in terms of the provisions of section 92CA(4) of the Act. Accordingly, the Ld. AO/DRP has erred, in laws and facts, by disallowing entirely the said expenditure under section 37 of the Act.

7.2. The Ld. AO/DRP has erred in laws and facts, by concluding that the expenditure incurred by the Appellant was a specious arrangement made by the Appellant to reduce its tax liability in the country and for shifting of the profits. The Ld. AO/DRP has erred in laws and facts, by ignoring the fact that the said transaction was already scrutinized by the Ld. TPO.

7.3. After considering the adjustment amount of Rs.1,05,28,594/- the Ld. AO/DRP has erred, in laws and facts, by disallowing the balance expenditure amounting to Rs.1,24,66,321/-.

8.1. The Ld. AO/DRP has erred, in laws and facts, by considering the conference expenses incurred by the Appellant are in nature of donations made to medical associations.

8.2. The Ld. AO/DRP has erred, in law and on facts, in applying the CBDT Circular No.5/2012 (“CBDT Circular”) dated 1 August, 2012 without considering the fact that there has been no violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (“IMC Regulations”) or the regulations issued by Medical Council of India.

8.3. Without prejudice to the objection no. 8.2, even if the CBDT circular is to be applied in the Appellant’s case, the Ld. AO/DRP has erred by not appreciating the fact that conference expenses are not covered within the ambit of the IMC Regulations or the CBDT Circular.

8.4. The Ld. AO/DRP has erred, in laws and on facts, by ignoring the fact that the Appellant had incurred Rs.1,63,50,744/-, towards conference expenses and issued a credit note amounting to Rs.1,11,32,940/- on its AE, to recover the certain conference meeting expenses. Hence, the amount of conference expenses claimed in the return of income filed for the AY 2013-14, was Rs.52,17,840/- only. Hence, the Ld. AO/DRP has erred, in laws and on facts, by not considering the said credit note amounting to Rs.1,11,32,940/- recovered from the AE against the expenditure incurred.

General Grounds

The Appellant submits that each of the above grounds is independent and without prejudice of each other.

The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.

in the assessee’s appeal. Ground Nos.4 to 6 were in respect of the transfer pricing. Ground No.7 was in respect of the disallowance of the expenditure incurred by the assessee as quantified by the TPO in respect

of the sales support expenditure and Ground No.8 was in respect of the disallowance of the conference expenses. :- 5 -:

of medical devices in the Indian Market in respect of the Cook Group

Incorporated USA, of which, the assessee is a wholly owned subsidiary. It was a submission that the TPO had done the transfer pricing study and had accepted the results in respect of the purchase of medical devices as also the reimbursement of the expenses. However, in respect of the issue

of management service charges which consisted of the services under the head human resources, marketing, IT, logistics support, finance and regional sales support out of the total expenditure claimed

Rs.2,29,94,915/-, the TPO had accepted the regional sales support

services to an extent of Rs.1,24,66,321/- and had made a downward

adjustment of Rs.1,05,28,594/- in respect of the management service fee

paid. It was submitted by the Ld.AR that the issue had come up for the AY 2012-13. It was a submission that the assessee had specifically

submitted that the management service was included in the purchase of medical devices and consequently, no specific downward adjustment was required. However, to re-consider the issue, the Co-ordinate Bench of this Tribunal had for the immediately preceding Assessment Year in ITA

No.2546/Mds/2016 dated 30.03.2017 held as follows:

appropriate method and certain filters were applied and the assessee has provided five comparables and their adjusted arithmetic mean PLI(OP/OI) which worked out to 0.09% as against the PLI of 3.49% and the Ld. TPO has dealt exclusively on the Support Service Fees, Choice of tested party and came to a conclusion that the most appropriate method to be applied is CUP method and made downward adjustment of Rs.2,65,83,539/- which was subsequently pegged down by the DRP on submission of evidence to the extent of Rs.2,26,95,052/-. The Ld. DR has submitted that the assessee company could not substantiate 85% of its expenditure and relied on the order of the DRP. The DRP find the Ld. TPO has examined the various documents, Agreements produced by the assessee to justify its claim for having received services from Associated Enterprises, whereas it was observed that many of the services were duplicative in nature as the assessee failed to explain how payments were made to its employees as well as its Associated Enterprises. The DRP emphasized that the assessee company has failed to produce any documents to substantiate the claims and the Ld. TPO has consider the information and observed that the assessee has not cooperated in submitting the correct data. The contention of the Ld.TPO that services availed, but actually not rendered and the payments were made by the assessee at ALP and the assessee has not utilized the opportunity provided before the Ld. TPO. Further the DRP substantiated that the assessee in the proceedings could not support their claims whether services are actually received or that the services were not in the nature of steward services and the contention of the assessee to substantiate the entire claim of expenditure will put the assessee undue in hardship. The Ld. DRP found that the assessee failed to substantiate its claim to the extent of Rs.2,26,95,052/- which being in relation to the Associated Enterprises services. We found that the assessee though submitted the details, agreements, written submissions the DRP was not satisfied with the evidence and made a categorical finding that the assessee has to maintain sufficient records to prove its claim before Income-Tax authorities. The submissions of the assessee that guidance was received through telephone calls and they were not documented, the Ld. DRP after considering the information technology regional sales support and project management services, which are in the arm length, directed the Ld.TPO to exclude this expenditure from the downward adjustment. The Ld.AR submitted that the documents are genuine and the services have been received by the assessee and therefore transactions are in the nature of business. The Ld.AR relied on the order of co-ordinate bench in the case of DCIT v. Flakt (India) Ltd., (supra) dealt at para No.9 as follows:

“The Transfer Pricing Officer has not taken any pain to identify uncontrolled transaction between two independent entities. In the absence of any comparison of the transaction with transaction carried out in a uncontrolled market, this Tribunal is of the considered opinion that the Transfer Pricing Officer cannot independently come to a conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The matter may be totally different if the Transfer Pricing Officer was able to identify the uncontrolled transaction between the enterprises entering into such transaction which would materially affect the price in the open market. In this case, such an exercise was not made by the Transfer Pricing Officer. The Dispute Resolution Panel has, therefore, rightly found that the method adopted by the Transfer Pricing Officer for disallowing the claim of the assessee was not justified. As rightly observed by the Dispute Resolution Panel, the Transfer Pricing Officer has not brought on record the base on which he estimated the Arm's Length Price at 25%, when Rule 10B(c) provides for method of determining the Arm's Length Price. This Tribunal is of the considered opinion that estimation of the services rendered and costs for such services may be outside the scope of transfer :- 7 -:

pricing adjustment. Without identifying the comparable cases, this Tribunal is of the considered opinion that estimation of the disallowance without any base is not called for. Therefore, the Dispute Resolution Panel has rightly upheld the transfer pricing study made by the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.”

5.1 Similarly, on the disputed issue in the case of M/s. AB Mauri India Pvt. Ltd. supra which has held at page 4 para 5 as under:

“We have considered the rival submissions on either side and perused the relevant material available on record. For making adjustment in transfer pricing matter, five methods prescribed under Rule 10B of Income-tax Rules, 1962 have to be followed. In the case before us, the Assessing Officer has not followed any method. Though the assessee claimed that the Transaction Net Margin Method is the most appropriate method, the Transfer Pricing Officer has not discussed in her order with regard to appropriate method and she simply found that since there was no improvement in the revenue, the payment of management fees is not justified. This Tribunal is of the considered opinion that when the assessee claims that management fee was paid in respect of the services provided by the Associate Enterprise outside the country, the payment made by the assessee has to be compared with similarly placed companies in India and whether the payment made by the assessee is at arm’s length. The Transfer Pricing Officer and the Dispute Resolution Panel are expected to compare the payment with that of the comparable companies in India on the basis of method prescribed under Rule 10B. Unfortunately, both the Transfer Pricing Officer and the Dispute Resolution Panel have not taken such pain in comparing the payment made by the assessee with that of the comparable companies in India by applying provisions of Rule 10B. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the issue of payment of management fee is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter to the Transfer Pricing Officer for reconsideration. The Transfer Pricing Officer shall compare the payment made by the assessee with that of payment made by comparable companies in India and point out whether the payment made by the assessee is really at arm’s length. The Transfer Pricing Officer shall examine the issue in the light of the method prescribed under Rule 10B for the purpose of determination of the Arm's Length Price.”

5.2 We are in consonance with the facts that the Associated Enterprises rendered services and the payments have been made by the assessee company though assessee could not substantiate it due to various reasons on the claim, we find strength in the arguments of the Ld. AR, that these expenditure being genuine and incurred wholly and exclusively for the purpose of business and we are of the opinion that if the assessee produced the details of expenditure for availing the services from the Associated Enterprises and prove the genuineness of transaction. We found similar issue dealt by the co-ordinate bench of this Tribunal in the case of M/s. Control Techniques India Pvt. Ltd. v. JCIT on 16.12.2016 at page 5, para 4 & 5. 4. We have heard both the parties and perused the material on record. The main plea of the assessee is that the TPO analyses the assessee’s profitability and arrived operation margins of the assessee at 13.96% as against the arithmetic :- 8 -:

mean of the operating margin of 13 comparables at 7.02%. After testing that the operating margin of the assessee is on higher side, he stepped into the bench marked the management services fee by applying the CUP method overwhelming that TNMM is not mot appropriate method. According to him, the TPO is not an Assessing Officer and he is concerned with only in respect of T.P adjustments and he cannot have jurisdiction to decide allowability of expenditure u/s.37 of the Act. Further, he relied on the judgement of Hyderabad Tribunal in the case of DCIT Vs. M/s.Air Liquid Engineering in ITANo.1040/Hyd./2011 & others vide order dated 13.02.2014 wherein held that:-

“33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 1 OA(d) of the ITAT Rules defines ‘transaction’ as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. ft cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cafinot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PU of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range.

payment by the assessee falls within these limits. ft also falls within the limits of payment of royalty in the auto mobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in ‘Ekia Appliances’ (supra) and in ‘Ericsson India Pvt. Ltd. vs. DCIT’, 2012-TII-48-ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm’s length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test, is unsustainable in law.

5.3 We having considered the factual aspects, judicial decisions and also the facts of claim of expenditure by the assessee and cannot be overlooked and an opportunity may be provided to substantiate the claim supporting the details of expenditure in the nature of management fees paid to the Associated Enterprises. In the interest of justice, we provide an opportunity to the assessee and remit the disputed issue to the file of the DRP which has considered these facts in its order and further direct the assessee to produce the claim of expenditure with :- 10 -:

supporting evidence and accordingly the assessee appeal is allowed for statistical purposes.

was restored to the file of the AO/TPO for re-adjudication on similar

directions.

fee have been restored to the file of the DRP in the immediately preceding

Assessment Year, we are of the view that for this Assessment Year also,

the issue must be restored to the file of the AO/TPO for re-adjudication in line with the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case referred to supra and we do so.

support services availed from foreign Associated Enterprise. It was a submission that the TPO had determined the support services reasonable :- 11 -:

to an extent of Rs. Rs.1,24,66,321/-. It was a submission that however

the AO had disallowed the same on the ground that the assessee had not produced any convincing proof at all for substantiating the necessity of such payments. It was a submission that the assessee is a wholly owned

subsidiary of the Associated Enterprise and the service charges have been paid as per the bills raised on the assessee. The requirement of the service is known to the assessee and the TPO has also found that the amount paid to an extent of Rs.1,24,66,321/- was reasonable. It was a submission that the AO was attempting to disallow the expenditure which is incurred by the assessee without understanding the nature of the business of the assessee. It was a submission that the expenditure

claimed was liable to be allowed and no disallowance was called for.

DRP. It was a submission that no proof showing the necessity of incurring

the expenditure had been produced. It was a submission that the agreement entered into by the assessee for the service charges payments

was only for shifting profits of the assessee to the Associated Enterprise.

It was a submission that the order of the DRP on this issue is liable to be sustained.

that the assessee has not furnished conclusive proof for the need benefit

evidences test that needs to be satisfied by the assessee for the tenable

claim of the service received. This is also the same stand taken by the DRP. This is found at Page No.8 of the TPO order. After taking the stand,

the TPO proceeded to quantify the ALP in respect of the various break ups

of the services and in respect of the reasonable sales support as against

the assessee claim of Rs.1,24,66,321/- as found at Page No.14 of his

order. A perusal of the Page No.11 of the order shows that copies of the e-mail exchange between the employee and the third party agencies,

services to repairs, etc., had been produced. Consequently, the TPO has held “In view of the above, the payment towards this service is acceptable”. After this, he has worked out the downward adjustment.

Thus, clearly the TPO has shown his satisfaction in regard to the requirement of the reasonable sales support expenditure. This is not dislodged by the AO or the DPR. The TPO having given, this finding it would now not be open for the AO to turn round and say that no evidence

had been produced to prove the requirement of such expenditure. This being so, we are of the view that disallowance of Rs.1,24,66,321/- as done by the AO and as upheld by the DRP is erroneous and unsustainable.

Consequently, the AO is directed to grant the assessee the benefit of the expenditure in relation to the reasonable sales support as quantified by the TPO. Consequently, Ground No.7 stands allowed. :- 13 -:

conference expenses. However, the AO/DRP had disallowed an amount of Rs.1,54,65,490/- under the head ‘conference expenses’ alleging that the said expenses were in nature of providing sponsorship or gift, etc., to Doctors. It was a submission that the assessee has not given any sponsorship or gift to any Doctors. The Ld.AR placed before us the details

of the expenses incurred in respect of various conferences along with bills

and vouchers. It was a submission that these evidences have not been considered by the AO. It was a submission that he had no objection if the issue is restored to the file of the AO for re-adjudication.

to show the details in respect of the expenditure incurred on the conference. It was, however, a submission that the stand of the AO that the expenditure has been incurred for providing gift and sponsorship to Doctors cannot be ruled out. It was a submission that the order of the AO/DRP was liable to be upheld.

stand that the expenditure claimed as conference expenditure are in fact

sponsorship and gift given to Doctors, this issue is restored to the file of the AO for re-adjudication after granting the assessee adequate

opportunity to substantiate its case. The assessee shall be at liberty to produce all evidences as required to prove that the expenditure incurred

were actually conference expenditure. The AO if he is of the view that the expenditure were in nature of sponsorship or gift to the Doctors then the AO shall identified the same specifically before making the disallowance.

Consequently, Ground No.8 of the assessee’s appeal is partly allowed for statistical purposes.

have been specifically argued. Consequently, such grounds are not adjudicated.

Order pronounced in the Open Court on May 01, 2018, at Chennai. (एस जयरामन) (जॉज" माथन) (S. JAYARAMAN) (GEORGE MATHAN) लेखा सद!य/ACCOUNTANT MEMBER "या"यक सद!य/JUDICIAL MEMBER :- 15 -:

चे"नई/Chennai, 2दनांक/Dated: May 01, 2018. TLN

आदेश क+ )"त3ल4प अ5े4षत/Copy to: 1. अपीलाथ(/Appellant 4. आयकर आयु6त/CIT 2. )*यथ(/Respondent 5. 4वभागीय )"त"न"ध/DR 3. आयकर आयु6त (अपील)/CIT(A) 6. गाड" फाईल/GF