BECKMAN COLTER INDIA P.LTD,MUMBAI vs. ITO RG 8(1)(4), MUMBAI

The assessee an Indian Company is a fully owned subsidiary of Beckman Coulter Inc., U.S.A. Basically, assessee is engaged in the business of trading in clinical diagnostic and bio-medical research equipment, re-agents and spares, accessories and also provides installation and after sales services. From the audit report, the Transfer Pricing Officer found that in the relevant previous year, assessee has earned operating income of ` 34,91,16,732, and after adjusting the operating expenditure of ` 30,73,08,428, has shown net profit margin of 6.25%. From the transfer pricing study report, the Transfer Pricing Officer noticed that the assessee had bench marked the international transaction with A.E. by adopting Transactional Net Margin Method (TNMM) as the most appropriate method, it has selected five companies as comparables with arithmetic mean of 6.24% on multiple year data. As the margin shown by the assessee at 3 Beckman Coulter India Pvt. Ltd. 6.25% is more than the margin shown by the comparables, the price charged is claimed to be at arm’s length. The Transfer Pricing Officer after verifying the details found that the total income reported by the assessee includes commission income of ` 3,54,23,750. The Assessing Officer was of the view that the main activity of the assessee is reselling of product from its A.E. Therefore, earning of commission income is a separately identifiable activity. He further observed, none of the comparables chosen by the assessee have reported commission activity even in a minor significant way. He, therefore, called upon the assessee to explain why international transaction should not be bench marked after excluding the commission income. In response, it was submitted that it is acting as an intermediary between the A.E. and the direct customers in the bio-medical equipment segment and is rendering installation, commissioning and warranty services to the customers. The business is undertaken by the assessee as an integrated business and assessee employes common resources like employees, common facilities, common strategies and common management. Therefore, the business cannot be split into two different divisions as both sales and commission businesses are factually and inextricably linked and segmenting two artificially without any economic basis into trading and commission division would amount to fictionally re-inventing the business model of the assessee. It was submitted, the method adopted in aggregating similar transaction for 4 Beckman Coulter India Pvt. Ltd. bench marking is supported by OECD transfer pricing guidelines. The Assessing Officer after considering the submissions of the assessee, however, was not convinced with the same. He observed, the activities in commission business and trading business are absolutely different set of transactions as title to the goods and storage, sales and marketing, holding inventory, etc., are not present in the commission activity. He also observed that the comparables selected by the assessee did not have any significant commission earning activity. Accordingly, rejecting assessee’s contention, the Assessing Officer proceeded to segregate the commission income from the income earned from trading activities and bench marked the transaction relating to purchase of goods by using operating margin of 6.36% of the comparable companies on single year data as under:-

Grounds no.1 to 8 are on transfer pricing issues and grounds no.9 to 11 are on corporate issues.

Insofar as transfer pricing issues are concerned, ground no.1 being general in nature, no adjudication is needed.

In ground no.2, assessee has challenged segregation of commission income for bench marking the arm's length price of trading activity.

The learned Authorised Representative submitted, the impugned assessment year is the first year of operation. The medical diagnostic equipment industry has limited customers i.e., Medical Institutions and Hospitals. Therefore, there is a gestation phase until when the companies can start to earn good profit. It was submitted, the sale of equipments, re-agents, consumables and spares, therefore, has to be considered to be an integrated activity while analyzing profitability. Artificial segmenting in the Profit & Loss account by excluding commission income to put an onerous and absurd requirement on 7 Beckman Coulter India Pvt. Ltd. assessees having combined business proposition. She submitted, ‘transaction’ as defined in rule 10A(d) include a number of closely linked transactions. She submitted, the definition does not provide that the transactions should be identical or similar. Once the transactions are connected, they can be evaluated together. The learned Authorised Representative submitted, the assessee earns income from trading and commission activity. Its primary activity is purchase and re-sale to customers. However, in few instances, as per the desire of the customer, the A.E. supplies equipments to them directly from abroad. In such cases, the assessee earns commission. She submitted, commission income constitutes merely 10.21% of the total income. She submitted, assessee also renders installation, commissioning and warranty services for the equipment directly sold by the A.Es to the customers in India. Therefore, the commission income is not purely commission but also includes income from installation, warranty and after sale services which is linked to assessee’s over all business. That being the case, the entire business activity has to be looked as one business and cannot be split into two segments as common resources are employed including personnel, facilities, strategies and management. Both trading and commission activities are inextricably linked to each other. Hence, segmenting the business artificially without any economic basis into trading and commission divisions would tantamount to changing the business model of the assessee.

The learned Departmental Representative submitted, in Profit & Loss Statement, assessee itself has shown trading and commission income separately. Therefore, aggregating both will distort PLI. The learned Departmental Representative submitted, it is for the assessee to demonstrate that the trading and commission activities are closely linked. In this context, he relied upon the decision of the Tribunal, Mumbai Bench, Bayer Material Science (P) Ltd. v/s ACIT, [2012] 134 ITD 582 (Mum.).

We have considered the submissions of the parties and perused the material on record in the light of the decisions relied upon. The fundamental issue in dispute is, whether income earned from commission should be aggregated with the income earned from trading activities for bench marking the international transactions with the A.E. Undisputedly, assessee has aggregated the trading and commission income for bench–marking the arm's length price, Whereas, the Transfer Pricing Officer has segregated commission from the trading income for bench marking the revenue earned from trading activity. The reasoning of the Departmental Authorities for doing so is earning of commission income is a separate identifiable activity not 11 Beckman Coulter India Pvt. Ltd. connected with trading business. Secondly, none of the comparables selected by the assessee have commission earning activity. The first appellate authority went a step further in observing that commission earning activity is not an international transaction, hence, do not require bench marking. In our view, the aforesaid conclusion of the learned Commissioner (Appeals) cannot be sustained. Firstly, there cannot be any dispute that the assessee had earned commission from its overseas A.E. Therefore, it leaves no room for doubt that commission income earned is an international transaction in terms of section 92B as it relates to provision of services by the assessee to the A.E. Undisputedly, the assessee is re-selling medical equipments, spares and accessories manufactured by the A.E. in India after importing them from the A.E. In some cases, where the customers in India want to buy directly from the overseas A.E., the equipments were directly sold to such customers from abroad by the A.E. However, it is the contention of the assessee that consumables spares in respect of such direct supply of equipments are provided by the assessee. It is further necessary to mention as per the claim of the assessee the commission income also includes the income for installation, warranty and after-sales service relating to even the equipments directly supplied by the A.E. to its customers in India. In case the aforesaid claim of the assessee is factually correct, then, it cannot be denied that commission earning activity is inextricably

During the course of hearing, the learned Authorised Representative has submitted before us, in case, both trading and commission activities are aggregated for bench marking, the margin shown by the assessee would be within ±5% of the margin of the comparables. Considering the aforesaid submissions of the assessee, we are of the view that the issues raised in grounds no.3 to 7 seeking certain adjustments are not required to be adjudicated at this stage as it will depend upon the outcome of the decision to be taken by the Assessing Officer / Transfer Pricing Officer on the issue whether transactions relating to trading and commission activities have to be 14 Beckman Coulter India Pvt. Ltd. aggregated for bench marking the arm's length price. In the aforesaid view of the matter, we decline to adjudicate these issues at this stage. However, it is open for the assessee to raise these issues before the Assessing Officer / Transfer Pricing Officer in case the need arises.

In ground no.8, assessee has challenged the decision of the learned Commissioner (Appeals) in not excluding provision for slow moving stock and provision for warranty while calculating the PLI of the assessee.

Brief facts are, in the course of hearing before the first appellate authority this issue was raised by the assessee through an additional ground. It was submitted by the assessee that expenditure of ` 57,72,118, pertaining to slow moving stock and expenses of ` 27,51,100, pertaining to provision for warranty were not claimed in the return of income filed for the impugned assessment year. It was submitted, these expenses were also disallowed by the Assessing Officer while computing book profit under section 115JB. It was submitted by the assessee that these expenses should not be considered while calculating the PLI as the assessee had not claimed these expenditures and the Assessing Officer has also disallowed them while calculating the book profit under section 115JB. In support of its claim assessee submitted, by a revised computation of the profit margins of the comparables. It was submitted, provision for warranty

Learned Authorised Representative, reiterating the stand taken before the learned Commissioner (Appeals) submitted, the assessee while computing its income under the head “Profits & Gains of Business or Profession” had disallowed provisions for slow moving stock and warranty. The Assessing Officer while determining the book profit under section 115JB had added back the above provisions. It was submitted, since the assessee itself disallowed the provisions while computing business profit and the Assessing Officer had disallowed the same while computing book profit under section 115JB, these items have to be excluded while computing the PLI of the assessee, otherwise, it will result in double addition. In support of her contention, assessee relied upon the following decisions:-

The learned Departmental Representative on the other hand submitted, transfer pricing adjustment has to be made on the basis of transfer pricing provisions, hence, assessee’s contention cannot be accepted.

We have heard the rival contentions and perused the material on record in the light of the decisions relied upon. We are of the view, the issue raised in this ground will ultimately depend upon the outcome of the decision to be taken on the issue whether trading and commission activity are to be aggregated for bench marking the arm's length price of the international transaction with the A.E. Therefore, there is no need to adjudicate this issue at present. However, it is left open to the assessee to urge the issue before the Assessing Officer / Transfer Pricing Officer if required. This ground is allowed for statistical purposes.

Ground no.9, is in relation to the disallowance of provisions of leave encashment of ` 16,00,020, while computing book profit under section 115JB.

Brief facts are, in the course of assessment proceedings, the Assessing Officer noticing that the assessee had claimed provision for leave encashment amounting to ` 2,37,222 called upon the assessee

The learned Commissioner (Appeals) also confirmed such disallowance.

The learned Authorised Representative submitted, the company has policy of providing defined leave benefits to all its employees. As per the policy, all the employees of the company are entitled to leave of 20 days per annum. The employee can accumulate upto 10 days of unutilized leave per annum to their account subject to maximum of 180 days during the tenure of the employment. The employees are entitled to receive a compensation for un-availed leave to their account at the time of retirement or termination which is paid to them based on their basic salary. It was submitted, as per AS/15, every company needs to create provisions to meet its liability arising on account of accumulated leaves to the account of employees. It was submitted, company had made provision towards such leave encashment which is on the basis of balance leave to the credit of the employee at the basis salary prevailing at the year end. It was 19 Beckman Coulter India Pvt. Ltd. submitted, the assessee is consistently following this method of accounting and in no other assessment year this has been disallowed even in assessments completed under section 143(3) of the Act. She, therefore, submitted, no disallowance should be made in the impugned assessment year also. In support of this contention, the learned Authorised Representative relied upon to the decision of the Hon'ble Supreme Court in Bharat Earth Movers v/s CIT, 245 ITR 428 (SC).

The learned Departmental Representative relying upon the observations of the Assessing Officer and the learned Commissioner (Appeals) submitted, impugned assessment year being the first year of operation, it is for the assessee to demonstrate how it has ascertained the liability on account of leave encashment.

We have heard the rival contentions and perused the material on record. As could be seen from the orders of the Departmental Authorities, the claim of the assessee was disallowed primarily on the ground that assessee has failed to submit supporting evidences to establish that the provisions created is on account of ascertained liability. Before us, the assessee has not submitted the method / manner of computation of provision for leave encashment by submitting the details of employees, leave available to them, etc. Therefore, in our view assessee must provide the basis for creating the liability on account of provisions of leave encashment. In this context,

In ground no.10 assessee has challenged the addition of ` 6,88,063 to the book profit on account of provisions of gratuity.

Brief facts are, the Assessing Officer noticing that the assessee is in the first year of operation, whereas, gratuity is payable to the employees after completion of five years of service and further, alleging that the assessee had not furnished any supporting documentary evidence to justify its claim added back the amount of ` 6,88,063 under section 115JB of the Act.

The learned Commissioner (Appeals) also upheld the decision of the Assessing Officer by holding that it is an unascertained liability.

We have heard the rival contentions and perused the material on record. We find that this issue is similar to the issue raised in ground no.9. Following our decision given in Para-21, we restore the issue back to the file of the Assessing Officer for deciding afresh in terms of our directions contained therein.

Ground no.11, assessee has challenged the addition of ` 27,51,000 to the book profit on account of provisions of warranty.

The Assessing Officer had added back the amount of book profit by alleging that no supporting documentary evidence was submited with regard to provisions for warranty by the assessee. He observed, in the case of CIT v/s Rotork Controls India P. Ltd., [2009] 314 ITR 62 (SC), provision was allowed as it was on the basis of percentage of turnover on past experience.

The learned Commissioner (Appeals) also confirmed the addition by observing that this being the first year of operation by the assessee, it cannot be said that the provision created is on the basis of past experience.

Learned Authorised Representative submitted before us, the provision created was on the basis of percentage of sales and the company had policy to estimate the same based on technical

The learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).

We have heard the rival contentions and perused the material on record. The basic reasoning for disallowing assessee’s claim is assessee has failed to furnish any details for quantifying the liability. However, it is the contention of the learned Authorised Representative that the provision is created as a percentage of sales which is an estimate on the basis of technical evaluation and past experience of group companies. In our view, the assessee must furnish the details / working of quantifying the liability before the Departmental Authorities. It appears from the decisions relied upon by the learned

In the result, assessee’s appeal is allowed for statistical purposes. ./2013 – A.Y. 2008-09

Grounds no.1 to 5 raised by the assessee are identical to the grounds no.2, 3, 5, 6, and 7. The decision taken by us while deciding

In the result, assessee’s appeal is allowed for statistical purposes.

To sum up, both the appeals are allowed for statistical purposes. Order pronounced in the open Court on 16.12.2016