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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI C.N. PRASAD
सुनवाई क" तार"ख / Date of Hearing :20. 04.2016 घोषणा क" तार"ख /Date of Pronouncement : 24.06.2016 आदेश / O R D E R PER C.N. PRASAD, JM: These appeals are by the assessee and the Revenue against the direction of the DRP-III dated 30.12.2013 for Assessment Year 2009-
10. As both appeals were heard together, they are disposed of by this common order for the sake of convenience.
ITA No. 2241/M/2014- Assessee’s appeal
Ground No. 1 to 7 of the grounds of appeal are relating to Transfer Pricing adjustment of about 8.27 crores made by the Assessing Officer on account of allocation of location savings in respect of provision of Clinical Study Management and Monitoring support (CSMM) services.
3. At the outset, the Ld. Counsel for the assessee submits that the issue in appeal is squarely covered by the decision of the Co-ordinate Bench in the case of M/s. Watson Pharma Pvt. Ltd Vs DCIT in dated 9.1.2015 for the very same Assessment Year 2009-10. The Ld. Counsel for the assessee submits that the facts in the case of the assessee and M/s. Watson Pharma Pvt. Ltd are almost identical. The Ld. Counsel for the assessee further submits that the Co-ordinate Bench of the Tribunal in the case of M/s. Watson Pharma Pvt. Ltd., set aside the order of the DRP and directed the Assessing Officer to delete the addition made in respect of adjustment of location savings on contract manufacturing. The Ld. Counsel for the assessee before us filed a detailed chart indicating the similarity of facts in the case of the assessee and M/s. Watson Pharma Pvt. Ltd and submits that in view of similarity of facts the decision may be followed. The Ld. Counsel for the assessee submits that since the decision in the case of M/s. Watson Pharma Pvt. Ltd squarely applies to the facts of the case, the same may be followed.
The Ld. Departmental Representative could not controvert the submissions of the Ld. Counsel for the assessee that the decision of the Co-ordinate Bench in the case of M/s. Watson Pharma Pvt. Ltd applies to the facts of the case. However, he submits that the matter may be restored to the file of the Assessing Officer for examination of the Assessing Officer.
We have heard the rival contentions and perused the orders of the authorities below. It is the submission of the Ld. Counsel for the assessee that on identical facts and circumstances, the Co-ordinate Bench deleted the adjustment made in respect of Transfer Pricing adjustment made for allocation of location savings. On reading from the decision of the Co-ordinate Bench in the case of M/s. Watson Pharma Pvt. Ltd, we find that the Co-ordinate Bench had set aside the order of the DRP and direct the Assessing Officer to delete the addition made in respect of adjustment of location savings on contract manufacturing. The Ld. Counsel for the assessee filed a chart indicating the similarity of facts of the assessee and in the case of M/s. Watson Pharma Pvt. Ltd., which is as under:
Particulars Pfizer Ltd (Appellant) M/s. Watson Pharma Pvt. Ltd. A. Business Profile Industry Pharmaceutical Industry Pharmaceutical Industry Business of the Manufacture and trading Manufactures and Appellant of drugs, pharmaceuticals marketing chemicals and and consumer health generic pharmaceutical products products. Business of the Discovery, development, Development, Associated manufacture and manufacture and sale Enterprise marketing of leading and distribution and of ("AE") prescription medicines for proprietary and off humans and animals patent generic pharmaceutical products Services Clinical Study Contract manufacturing provided by Management and and Contract R & D Assessee to its Monitoring support services (on a cost plus AE services (on a cost plus basis) basis) re-characterized as Page no. 2; Para 2 of the Contract Research & ITAT order) Development services (R&D) services. The Appellant has not disputed the characterization in the relevant AY as the transaction was treated to be arm’s length (page No. 3-5 of the TPO order)
B. Adjustments made by the Transfer Pricing Officer ('TPO') a. Provision of The TPO accepted the The TPO accepted the contract R&D method adopted by the method adopted by the services to the AE Appellant, i.e. TNMM and Appellant, i.e. TNMM; also accepted the however, arrived at an international transaction arm's length margin of of the Appellant to be at 23.61 % as against arm's length. (Page No. 5 17.43% earned by the of the TPO order) Assessee thereby making and adjustment of Rs. 1.93 crore (Page No. 3 Para 8 of the ITAT order) b. Adjustment on account of Location Savings Decisions/Material Decisions of US Tax Decisions of US Tax relied by TPO to Court on Location Court on Location presume the Savings in the case of Savings in the case existence of Sundstrand Corporation of Sundstrand Location Savings and Subsidiaries vs. Corporation and advantage Commissioner (Fiscal Subsidiaries vs. Year 1977-78) & Comissioner (Fiscal Compaq Computer Year 1977-78) & Corporation and Compaq Computer subsidiaries vs Coirporation and Commissioner (Fiscal subsidiaries vs Year 1986-92) Page No. Commissioner 13 of the TPO order) (Fiscal Year 1986- 92) and others (Page No. 18, para 35 of the ITAT order) Position taken by India Position taken by Tax Administration in India Tax UNTP Manual Chapter Administration in 10 (Page No. 13 of the UN TP Manual TPO order) Chapter 10 (Page No. 18 para 36 of the ITAT order) 2.Data/Report used Article “Clincal Trial Article “Clincal Trial for computing Magnifier Vol 1, issue 6 Magnifier Vol 1, location savings June 2008 written by issue 6 June 2008 Hohan PE Karlberg, MD, written by Hohan Phd (Page No. 16 to 18 PE Karlberg, MD, of the TPO order) Phd (Page No. 6 & 7 para 14 of the ITAT order) 3.Benchmark used Cost per trial to conduct 50% savings of for deriving location a clinical trial in UK conducting clinical savings (approx. 32% savings) trials in India and other emerging economies based on analysis of the above stated article (Page No. 7, para-15 of the ITAT order) 4.Most appropriate Profit Split Method Profit Split Method method used for benchmarking the location savings adjustment 5.Profit Split Ratio 80:20 (Page No. 20 of 50:50 (Page No. 8, arrived between the TPO order) (On the para 15 of the ITAT assessee and its AE basis of Delhi Tribunal order) (On an adhoc decision in the case of Li basis) & Fung) 6. Adjustment Rs. 8.27 crore Rs. 9.04 crore amount
On a perusal of the chart, we are of the considered view that the TPO should examine all these facts and also to examine the decision of the Co-ordinate Bench in the case of M/s. Watson Pharma Pvt. Ltd., and decide the issue following the said order. Thus, we restore this issue to the file of the Assessing Officer who shall examine the ratio of decision and also the facts as contended by the Ld. Counsel that the facts in the case of M/s. Watson Pharma Pvt. Ltd are identical to the facts of the assessee and the decision is therefore squarely applicable. The TPO may provide adequate opportunity of being heard to the assessee. This ground of the assessee is allowed for statistical purpose.
7. Ground No. 8 of grounds of appeal is relating to the disallowance of clinical trial expenditure u/s. 40(a)(ia) of the Act for non deduction of tax at source. The Ld. Counsel for the assessee submits that this ground is not pressed and hence it is dismissed as not pressed.
8. Ground No. 9 and additional ground filed by the assessee are relating to the disallowance made in respect of unreconciled transactions with American Express Banking Corporation.
The Ld. Counsel for the assessee at the outset submits that addition was made in respect of un-reconciled transaction reported in the annual information report (AIR). The assessee has reconciled majority of the entries reported in the AIR aggregating to Rs. 1,84,57,171/- and only an amount of Rs. 7,41,307/- has remained un- reconciled. He submits that the assessee has written letters to the respective parties to seek confirmation to enable the assessee to reconcile the entries appearing in the AIR and the letters are placed in compilation at page Nos. 313 to 332 and 340 to 345. The Ld. Counsel for the assessee also submits that copy of letter dated 3.7.2015 issued by the Asstt. Director’s office ESI Scheme, Rajkot along with copy of Form No. 16A and invoices are placed at Page- 333 to 339. Further copy of letter submitted on 4.8.2015 issued by Jammu & Kashmir Bank, New Delhi confirming that they do not have any account of the assessee either existing or closed is placed at page-346 of the compilation. Therefore, the Ld. Counsel for the assessee submits that addition cannot be made solely on the basis of information reported in AIR. The Ld. Counsel for the assessee in the alternative submits that additional grounds may send back to the Assessing Officer for further examination.
The Ld. Departmental Representative has no serious objection in remitting the additional ground to the file of the Assessing Officer for further examination and adjudication afresh.
On hearing both the parties, we restored this ground No. 9 and additional grounds of appeal to the file of the Assessing Officer for fresh examination and adjudication in accordance with law as expeditiously as possible after providing adequate opportunity of being heard to the assessee. These grounds are allowed for statistical purpose.
12. Ground No. 10 has been raised by the assessee contending that Assessing Officer failed to grant credit for TDS of Rs. 99,051/- as directed by the DRP.
The Ld. Counsel for the assessee submits that the assessee had furnished complete party-wise details of TDS of Rs. 16,19,91,324/- in Schedule TDS2 of Form ITR6 of the return of income. He submits that in the final assessment order, credit has been granted only for Rs. 16,19,02,949/- thereby resulting in short granting of credit of TDS of Rs. 88,051/-. The Ld. Counsel for the assessee submits that assessee had filed an application dated 28th February 2014 against the final assessment order for rectification for the said issue. The Ld. Counsel for the assessee also submitted that Tax Deducted at source as per updated Form 26AS for Assessment Year 209-10 amounts to Rs. 16,22,49,135/-. The Ld. Counsel for the assessee submits that directions may be issued to grant credit in respect of tax deducted at source as per Form 26AS.
The Ld. Departmental Representative has no serious objection in examining the issue afresh as per the direction of the DRP.
On hearing both the parties, we direct the Assessing Officer to examine the contention of the assessee and grant credit for TDS as per Form No. 26AS as expeditiously as possible.
Ground Nos. 11 to 13 are not pressed by the assessee and hence they are dismissed as not pressed.
In the result, the appeal filed by the assessee is partly allowed for statistical purpose.
ITA No. 2069/M/2014 – Revenue’s appeal
In Revenue’s appeal the DRP order is challenged in directing the Assessing Officer to delete disallowance made u/s. 40(a)(ia) of the Act on account of non-deduction of tax on purchase of finished goods and on packing materials without appreciating the fact that in Assessment Years 2007-08 and 2008-09 the DRP had upheld the Assessing Officer’s action in disallowing the same.
At the outset, the Ld. Counsel for the assessee submits that the Co-ordinate Bench had decided this issue in favour of the assessee in & 583/M/2013 for Assessment Years 2007- 08 & 2008-09. The Ld. Counsel for the assessee submits that the Hon’ble Jurisdictional High Court in assessee’s own case by order dated 1.4.2015 dismissed the appeal of the Revenue and affirmed the order of the Tribunal for Assessment Year 2007-08 in holding that the contracts entered into by the assessee for purchase of traded goods and packing materials are not works contract therefore provisions of Sec. 194C/194J are not attracted and thereby no disallowance u/s. 40(a)(ia) is warranted. The Ld. Counsel for the assessee submits that the DRP following the decision of the Bombay High Court in the case of Glenmark Pharmaceuticals Ltd., (324 ITR 199) and taking note of the fact of assessee’s case held that there would not be TDS liability on purchase of finished goods and packing materials by the assessee and therefore deleted the disallowance u/s. 40(a)(ia) of the Act.
The Ld. Departmental Representative placed reliance on the order of the Assessing Officer.
We have heard the rival contentions and perused the orders of the lower authorities and the decision relied on. The Assessing Officer made disallowance u/s. 40(a)(ia) in respect of purchase of finished goods and packing materials holding that no TDS was made on these contracts. The Assessing Officer was of the view that these contracts for procurement of finished goods and packing materials are nothing but works contract and not a contract of sales and therefore liable for TDS in terms of provisions of Sec. 194C of the Act. Thus he made disallowance u/s. 40(a)(ia) for non deduction of TDS. This issue has come up before the Tribunal and also before the Hon’ble Jurisdictional High Court in assessee’s own case for the Assessment Year 2007-08. The Revenue has raised the following questions before the Honb’ble High Court:
"(A) Whether on the facts and circumstances of the case and in law, the Hon'ble Tribunal is justified in accepting the assessee's contention that the amount covered by 'Provision for Expenses' were not credited to the account of any of the payee but was credited to 'Provision for Expenses' and therefore TDS provisions were not applicable without appreciating the provisions of sub- section (2) of section 194C, Explanation (iv) to Sec. 194H and Explanation (ii) to section 194-I ?
(B) Whether on the facts and in the circumstances of the case and in law, in the context of 'Provisions for expenses', the Hon'ble Tribunal has erred in deleting the short/ non deduction of tax by holding that in view of disallowances u/s 40(a)(i)/40(a)(ia), no demand can be raised u/s. 201(1) r.w.s. 194C/194J of the Act?
(c) Whether on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal has erred in holding with reference to the purchase of finished goods (Traded goods) that the decision of the Hon’ble Bombay High Court in the case of M/s. Glenmark Pharmaceuticals Ltd 324 ITR 199 was applicable to the case of the assessee as the same was clearly distinguishable on facts.
(D) Whether on the facts and in the circumstances of the case and in law, the Hon’ble Tribunal has erred in holding with reference to packing material that the facts and circumstances of the assessee’s case are comparable to the facts and circumstances in the case of M/s. BDA Ltd Vs ITO (TDS) 281 ITR 99(Bombay) without appreciating that the facts in the instant case are distinguishable?
The Hon’ble High Court in its order dated 1.4.2015 in IT Appeal No. 1390 of 20913 admitted the questions of law mentioned in S. No. A & B and dismissed questions of law mentioned in Sl. Nos. C & D as under: “3. Mr. Malhotra, however, would urge that even questions (C) and (D) are substantial questions of law. In that he would urge that there is a distinction on facts from the cases followed and applied by the Tribunal. He would submit that this Court’s decision in the case of M/s. Glenmark pharmaceuticals Limited and to be precise Commissioner of Income Tax vs. Glenmark Pharmaceuticals Limited, (2010) 324 ITR 199, was distinguishable. In that a question of patent being allowed to be used and exploited never arose. If that authority or right is retained then this would be a clear case of a works contract and not that of a safe sale.
4. We are not in agreement with Mr. Malhotra inasmuch as in paragraph 14 of the Tribunal’s order, it discussed this issue. The demand was raised by the Assessing Officer on purchase of traded goods, purchase of packing material and clinical trials. The stand of the Revenue was that these are all works contract and there is a requirement of deduction of tax at source. Therefore, section 194C of the Income Tax Act, 1961, was applicable.
5. Precisely this question was considered in Glenmark by the Division Bench. It dealt with the ambit and scope of this section. The argument and question was dealt with in somewhat similar facts. This was also a case of a Pharma company wherein it had an agreement with a third party for manufacture of certain pharmaceutical products. The Pharma company provides the formulation and specifications. The third party then manufactures the product or goods and affixes thereon the trademark of the assessee. The raw materials for manufacturing these products are procured not by the assessee or supplied by the assessee but independently by the third party. The property in the goods does not pass on to the assessee till delivery. This is termed as a contract of sale. We do not see how this situation and in the case of Glenmark is inapplicable to the present assessee. Merely because the patent is not in any way dealt with and or rights therein are retained by the assessee does not make any difference. The formulations and specifications are provided for manufacture of the goods and which are eventually sold to the assessee. In these circumstances, we do not see that the transactions partake the character of works contract in any manner. Therefore, the issue or question is covered by Commissioner of Income Tax vs Glenmark.
6. Equally, question D is not a substantial question of law inasmuch as there as well the same issue was dealt with and it was held that the transaction was of the sale and the assessee was not required to deduct tax at source on payments. (BDA Ltd. vs. Income Tax Officer (TDS) (2006) 281 ITR 99).
To our mind, therefore, the appeal cannot be entertained on Question (C) and (D). It is dismissed. However, it is admitted on Question (A) and (B).
Respectfully following the decision of the Jurisdictional High Court, we dismiss the ground raised by the Revenue.
In the result, the appeal filed by the assessee is partly allowed for statistical purpose and the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 24th June, 2016. (RAJENDRA) (C.N. PRASAD ) लेखा सद"य / ACCOUNTANT MEMBER "या"यक सद"य/JUDICIAL MEMBER मुंबई Mumbai; "दनांक Dated 24th June, 2016 व."न.स./ Rj , Sr. PS