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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI JASON P. BOAZ
Per Asha Vijayaraghavan, Judicial Member
These are cross appeals by the Department and the assessee for the assessment year 2010-11.
IT(TP)A 214/B/2015 (Assessee’s appeal)
The assessee, Agila Specialties Private Limited, was incorporated on March 3, 2004 and is a subsidiary of Strides Arcolab Limited (SAL”). The company was formerly known as Strides Specialties Private Limited and changed its name to Agila Specialties Private Limited with effect from July 2, 2010. The assessee company is engaged in the business of manufacture and marketing of pharmaceutical products, besides product development and has a well-diversified portfolio of products across product group. This, inter-alia, includes penicillins, high potency drugs and general injectables. The sterile injectables / parental products are typically administered through intravenous and intramuscular routes.
During the Financial Year 2009-10, the manufacturing activity was carried out through the four facilities which are Cephalosporins division, Sterile Products Division I, Beta Lactum Division and Sterile Product Division II (i.e., Specialty Formulation Facility). The assessee earned revenue from the 3 segments as follows:-
IT(TP)A No.179 & 214/Bang/2015 Page 3 of 14
Particulars Amount (Rs.) Manufacture & sale of formulations 654,449,709 R & D 30,761,952 Trading 720,946 Total 685,932,607
For the AY 2010-11 the assessee filed its return of income on 14.10.2010 declaring a loss of Rs. 376,181,078, claiming a refund of Rs 1,025,499. During the course of assessment proceedings, the international transactions entered into by the Assessee were referred by the Assessing Officer to the Transfer Pricing Officer [TPO] for determination of arm’s length price [ALP] under section 92CA of the Income-tax Act, 1961 [“the Act”]. Simultaneously, the assessment proceedings were initiated under section 143(2) of the Act. The AO issued a draft assessment order dated 28.02.2014 u/s. 143(3) r.w.s. 144C(1) of the Act, wherein the total income of the assessee was proposed to be computed at a loss of Rs 256,046,157 under normal provisions of the Act, after making following additions /disallowances to the returned income:
IT(TP)A No.179 & 214/Bang/2015 Page 4 of 14
Aggrieved the assessee preferred appeal before the DRP. The DRP partially upheld the assessment of Rs.66,771,307 made by the AO to the income of the assessee. The DRP upheld the TPO’s action of rejecting segmental data/allocation keys pertaining to transactions related to AE/ non-AE treating it as unreliable, thereby rejecting the internal TNMM applied by the assessee. In appeal before us, it was submitted that the DRP did not notice that the rejection of the internal TNMM was done by the TPO merely on the ground that there was a huge variation in the operating margin for AE and non-AE segment, without providing opportunity to the assessee to submit its case.
The ld. counsel for the assessee took us through the TP report for the FY 2010-11 and at page 37 of the paperbook pointed out to us that the sale of formulations being one of the segments, the assessee has adopted internal TNMM and the arm’s length analysis is at 8.80% in the case of AE and 8.51% in the case of non-AE. It was submitted that assessee is engaged in the manufacturing and supply of generic products in the nature of sterile injectable for AEs as well as non-AEs. The primary pharmaceutical segment of the Assessee is the manufacturing segment wherein the functions involved in the manufacturing for both AEs as well as for non-AEs are the same. The total income earned by the Assessee from the sale of formulations to the AEs and non-AEs is Rs 654,419,099. The break-up of net revenue from AE and non-AE is as follows:-
IT(TP)A No.179 & 214/Bang/2015 Page 5 of 14
Particulars AEs Non-AEs Total Value of Transaction 341,551,315 312,867,784* 654,419,099 Ratio (in percent) 52.91 47.81 100 Operating Margin percentage 5.40 4.86 * Net of export commission of Rs.30,610.
The ld. counsel for the assessee relied on the Third Member decision in the case of M/s. Technimont ICB Pvt. Ltd. v. Addl. CIT in ITA No.4608/Mum/2010.
The ld. counsel for the assessee also brought to our notice that in the subsequent year i.e., AY 2011-12 the TPO has accepted internal comparability.
We have heard both the parties. Ground No.3 of the concise grounds of appeal reads as follows. The other grounds are not being considered by us as the same were not pressed.
“3. The Honorable DRP has erred in law and on facts in upholding the TPO’s/AO’s act of rejecting the segmental data/allocation keys pertaining to the transactions related to AE and non-AE treating it as unreliable, thereby rejecting internal TNMM applied by Appellant. This was done by the TPO merely on the ground that there was a huge variation in the operating margin for AE and non-AE segment without providing opportunity to the Appellant of being heard to submit its case.”
The TPO had applied external TNMM on entity level and on this issue, the Third Member decision of the Mumbai Bench of the Tribunal in the case of M/s. Technimont ICB Pvt. Ltd. v. Addl. CIT in ITA
IT(TP)A No.179 & 214/Bang/2015 Page 6 of 14 No.4608/Mum/2010 for AY 2005-06, order dated 17.7.2012 is relevant. In para 10 of the said order, the Tribunal held as under:-
“10. Clause (i) of Rule 1OB(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The ‘base’ of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to the net profit margin realised by the enterprise ………………… from a comparable uncontrolled transaction’ and the other part talks of the net profit margin realised ……………… by an uncontrolled enterprise from a comparable uncontrolled transaction’. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word ‘comparable’ may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-â-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is IT(TP)A No.179 & 214/Bang/2015 Page 7 of 14 available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output. assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-â-vis its counterpart i.e. external comparable.”
It has also been brought to our notice that in the subsequent year i.e. AY 2011-12, the TPO has accepted the internal comparability.
The ld. DR relied on the order of DRP.
We are in conformity and are inclined to follow the decision of the Third Member, ITAT Mumbai Bench in the case of M/s. Tecnimont ICB Private Ltd. (supra) wherein it is held that “…….. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. ………….”
Hence we are of the opinion that the TPO had erred in choosing an external comparable, when there was an internal comparable uncontrolled
IT(TP)A No.179 & 214/Bang/2015 Page 8 of 14 transaction which the assessee had taken in its TP study. The assessee’s appeal is allowed.
In the result, the assessee’s appeal is allowed.
IT(TP)A No.179/Bang/2015 (Revenue’s appeal)
The Department has raised the following grounds:-
“1. The order of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case.
2. The DRP erred in directing the AO to compute mean of working capital adjustment in respect of comparables retained as per the actual figures worked out by the assessee without putting any restrictions without appreciating the fact that the TPO had put a cap on the basis of the average cost of working capital of the comparables selected by the TPO and that the accurate details of debtors and creditors of the assessee and the comparables were not available.
3. The DRP erred in deleting the disallowance of Rs. 1,50,64,297/- u/s 40(a)(i) relating to the payments of “bio study expenses” following the decision of the Jurisdictional High Court in the case of De beer India Minerals Pvt Ltd (2012) 346 ITR 467 and the decision of the AAR in the case of M/s. Anapharma without appreciating the fact that the payment made for these services are of the nature of “fee for technical services” as envisaged in sec 9(1)(vii) of the Act and the AAR ruling relied upon by the DRP is binding only in that case and not on others.
4. The DRP erred in not appreciating the fact that the jurisdictional High Court’s decision in the case of De beer India Minerals Pvt Ltd (2012) 346 ITR 467 has not been accepted by the department and an appeal has been filed before the Hon’ble Supreme Court.
5. The DRP erred in allowing the claim of the assessee u/s 36(1)(va) amounting to Rs.7621/- without appreciating the fact that the assessee has not remitted the employees contribution
IT(TP)A No.179 & 214/Bang/2015 Page 9 of 14 towards the provident fund & ESI within the due date and as such these sums are an income in the hands of the assessee in terms of Section 2(24)(x) r.w.s. 36(1)(va).
6. The DRP failed to appreciate the fact that the employees’ contribution to PF/ESI is to be allowed u/s 36(1)(va), if such contributions are remitted within the due dates prescribed under the relevant Acts and the due date referred in Section 43B(b) are not applicable to the employees’ contribution.
7. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored.
8. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”
Ground Nos. 1, 7 & 8 are general in nature.
The second ground becomes infructuous, as we have already decided the same issue in ground No.3 of the assessee’s appeal in IT(TP)A No.214/Bang/2015.
Ground Nos. 3 & 4 merely state that the DRP erred in deleting the disallowance of Rs.1,50,64,297 u/s. 40(a)(i) relating to the payments of “bio-study expenses” following the decision of the Hon’ble jurisdictional High Court in the case of De beer India Minerals Pvt. Ltd. (2012) 346 ITR 467, which decision has not been accepted by the department and an appeal has been filed before the Hon’ble Supreme Court. We are bound to follow the decision of the Hon’ble jurisdictional High Court which is operative as of now and therefore respectfully following the aforesaid
IT(TP)A No.179 & 214/Bang/2015 Page 10 of 14 decision of the Hon’ble jurisdictional High Court, we dismiss the grounds No.3 & 4 raised by the department.
With respect to ground Nos.5 & 6 regarding the employees’ contribution to PF/ESI u/s. 36(1)(va), the assessee submitted before DRP as under:-
“3.2 It is submitted that for the FY 2009-10, there were certain instances of delay in remitting the employees contribution to ESI account amounting to Rs 7,621 within the due date prescribed under the relevant Act but deposited the same within the due date of filing of return of income under section 139(1) of the Act (i.e. within September 30, 2010). The details of delay and date of remittance of ESI payment is as under: Month Amount Due date of Actual date of Remittance remittance April 2009 1,290 May 21, 2009 May 23, 2009 May 2009 1,285 June 21, 2009 December 23, 2009 July 2009 1,468 August 21, 2009 August 22, 2009 August 2009 1,717 September 21, 2009 September 24, 2009 September 2009 1,861 October 21, 2009 October 22, 2009 Accordingly, the AO disallowed the said amount of Rs 7,621 under section 36(1)(va) of the Act read with section 2(24)(x) of the Act. It is submitted that on plain reading of the section 36(1)(va) of the Act, one may conclude that any sum received by the assessee from his employees shall be deductible in the hands of the assessee only when such sum is credited by the assessee to the employee’s account in the relevant fund or funds on or before the due date. For the said purpose, the due date means a date by which the assessee, as an employer, is required to, credit an employee’s contribution to the employee’s account in the relevant fund. The provisions of section 43B of the Act stipulate that certain expenses are deductible given only on actual payment. Clause (b) thereof talks about contribution by the assessee as employer to IT(TP)A No.179 & 214/Bang/2015 Page 11 of 14 any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees. It is further stated that on combined reading of provisions of section 36(1)(va) of the Act and section 43B of the Act, it can be concluded that: - There should be a contribution to the fund; - The contribution should be in the capacity of the employer - And such contribution should be on or before the due date under the Act In the instant case, the Company, in respect of employee’s contribution to ESI, has paid such sum after the due date prescribed under the ESI Act however, before the due date for filing of the return of income as provided under section 139(1) of the Act. Even in cases where the contribution has been made after the due date prescribed under section 36(1)(va) of the Act, such sum is still entitled for deduction, if the same has been contributed to the fund on or before due date for filing of the return of income as provided under section 139(1) of the Act. To support the objection, the assessee relied on the following judicial pronouncements • The Supreme Court in the case of CIT Vs Alom Extrusions Ltd (2010) (319 ITR 306) has held that payment of employees contribution to the respective account by the employer would be allowed as deduction on actual payment. • The Jurisdictional High Court of Karnataka in the case of CIT and Ors Vs Sabari Enterprises & Ors (298 ITR 141), wherein the assessee had made contributions toward PF and ESI after the close of the accounting year but before the due date for filling of the return under s.139(1) of the Income-tax Act, 1961, held that the payments made could not be disallowed even if made beyond the period prescribed under section 36(1)(va) of the Act. • In the case of Strides Arcolab Limited (2013) (ITA No. 2111 of 2012) (the holding company of the assessee) the Honourable Mumbai High Court, relying on the decision of IT(TP)A No.179 & 214/Bang/2015 Page 12 of 14
CIT vs. Alom Extrusions Ltd [20091 319 ITR 306 (SC) has ruled in favor of the assessee. • Further, in the following decision, the courts have held that if the employee’s contribution is deposited by the employer to PFI ESI account within the due date of filing return of income then deduction is allowable. - CIT vs. Gujarat State Road Transport Corporation (2014) (366 ITR 170) (Raja HC) - CIT .vs. State Bank of Beaker & Japer (2014) (363 ITR 70) (Raja HC) - CIT vs. Japer Idiot Veteran Enigma Ltd. (2014) (363 ITR 70) (Raja HC) - CIT vs. Rajasthan Raja Idiot Utahan Enigma Ltd. (2014) (363 ITR 307) - CIT vs. Animal Ltd. & Ors. (2010) 229 CTR 418 (Del HC) - CIT vs. Vine Cement Ltd. (2009) 313 ITR (St) 1 - CIT vs. Kasha Sugar Co. Ltd (2013) (356 ITR 351) (Uttarakhand HC) - CIT vs Spectrum Consultants India (P.) Ltd Vs CIT (2014) (266 CTR 241) (Kar HC) - CIT vs Nipso Polyfabriks Ltd (213 Taxman 376) (Himachal Pradesh HC) - CIT vs ANZ Information Technology (P.) Ltd (2010) (318 ITR 123) (Kar HC) - CIT vs. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. (2013) 35 taxmann.com 616 (Raj.)(HC) - Imerys Ceramics (India) (P.) Ltd. v. ACIT (2012) (54 SOT 84) (Hyd. Tribunal) Relying on the above decisions, it is submitted that the provision of section 43B encompasses in its ambit, employee’s contribution too. Therefore, considering the various judicial precedents and IT(TP)A No.179 & 214/Bang/2015 Page 13 of 14 going by the intention of the legislature, we respectfully submit that delayed payment of employee’s contribution to ESI fund should be allowed as deduction under section 36(1)(va) of the Act read with section 43B of the Act if the said payments are made on or before the due date for filing the return of Income.”
The DRP considering the judicial pronouncements relied upon by the assessee directed the AO to delete the addition in respect of this issue.
We are in conformity with the order of the ld. CIT(Appeals) as the issue is well settled by the decision of the Hon’ble jurisdictional High Court in the case of CIT v. ANZ Information Technology Pvt. Ltd., 318 ITR 123 (Karn). Therefore, the relevant grounds of appeal are allowed.
23. Ground Nos. 7 & 8 are general in nature requiring no adjudication.
Thus, the Revenue’s appeal is dismissed.
In the result, the appeal by the assessee is allowed and the Revenue’s appeal is dismissed.
Pronounced in the open court on this 9th day of October, 2015.