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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri Joginder Singh, & Shri Ramit Kochar
आदेश / O R D E R Per Joginder Singh (Judicial Member) The Revenue is aggrieved by the impugned order dated 03/12/2010 of the Ld. First Appellate Authority, Mumbai.
The only ground raised in this appeal pertains to deleting the penalty of Rs.1,82,52,644/- imposed u/s 271(1)(c) of the Income Tax Act, 1961 (hereinafter the Act).
During hearing of this appeal, Shri Dhanesh Bafna along with Ms. Forum Mehta, ld. counsel for the assessee, contended that the quantum addition on the basis of which penalty was imposed was deleted by the Tribunal with respect to transfer pricing adjustment and depreciation on Ankleshwar Plant. So far as, the issue of import of finished direct formulation for resale in India is concerned, the matter was restored to the file of the TPO with a detailed finding. The ld. counsel invited our attention to para 26 to 33 (pages 19 to 27 of the order of the Tribunal). This factual assertion was not controverted by Shri M. Dayasagar, Ld. CIT-DR.
2.1. We have considered the rival submissions and perused the material available on record. We find that so far as, the addition of Rs.2,01,87,000/- on account of provision of clinical study management and monitoring support services is concerned, the Tribunal vide order dated 06/11/2015 (ITA No.3729 and 3424/Mum/2008), while adjudicating the quantum appeal of the assessee, deliberated upon the issue and deleted the addition. The relevant para 17 to 19 of the aforesaid order is reproduced hereunder:-
“17. Thus, keeping in view the principle laid down by the Hon'ble Delhi High Court as above, in our view, SIRO Clinpharm Pvt. Ltd. cannot be considered as a comparable to the assessee as the business model of this company is not only different but it is not functionally similar to the assessee in all respect as this company renders the services on its own without outsourcing, unlike the assessee. Though, it may be a fact that Tribunal in the preceding assessment year has accepted this company as comparable to the assessee, but the Tribunal did not had the benefit of principle laid down by the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra). In view of the aforesaid, respectfully following the decision of the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra), we direct exclusion of this company as a comparable.
As far as Choksi Ltd. is concerned, it is seen that this company is also doing clinical research trial activity without outsourcing to others. Therefore, the business model of the assessee is different. On a perusal of the judgment of the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra), it is seen that the Hon'ble Delhi High Court held M/s. Vishal Enterprise not comparable to the assessee as it was out sourcing its activities. Hence, the business model is different. Reverse is the case with the assessee. While the assessee is out sourcing its clinical research trial activities, the comparable company is doing the activity itself. Thus, the business model of the assessee and comparable company are not same. Though, learned Departmental Representative has raised serious objection with regard to exclusion of this company by submitting that assessee itself in its transfer pricing study has selected this company, but, in our view that cannot be the sole criteria to retain this company as a comparable if it is ultimately found that the company is not at all a comparable. We find merit in the submissions of the assessee that on the basis of limited data available in public domain when the transfer pricing study was prepared the assessee has selected this company as a comparable. However, when complete data relating to this company subsequently came to the public domain, it was found that this company is not a comparable. In our view, the aforesaid explanation of the assessee deserves to be accepted. We, therefore, direct the Assessing Officer to exclude this company as comparable.
As far as Vimta Lab Ltd. is concerned, apart from the fact that business model of this company is different from assessee as demonstrated by the learned Counsel for the assessee, from the material on record it is also seen that the Transfer Pricing Officer himself in assessment year 2005-06, has rejected this company as comparable by observing that not only it is engaged in diversified activity but the business model is different. We, therefore, hold that this company cannot be considered as comparable.”
2.2. So far as, the addition of Rs.32,87,058/- with respect to depreciation on Ankleshwar Plant is concerned, the Tribunal in the aforesaid order (para 35 to 40) dated 06/11/2015 held as under:-
“35. In ground no.7, the assessee has challenged disallowance of depreciation claimed on assets of Ankleshwar plant.
Briefly stated the facts are, in the course of assessment proceedings, the Assessing Officer noticed that assessee has claimed depreciation on assets of Ankleshwar plant which has closed down its operation. He, therefore, called upon the assessee to explain why the claim of depreciation should not be disallowed. Though, the assessee submitted that once the assets form part of the block, it losses its individual character, hence, depreciation on such individual asset cannot be disallowed but the Assessing Officer mentioning that similar disallowance was made in assessment year 2000–01 disallowed depreciation relating to Ankleshwar plant at ` 32,87,058. The assessee challenged the disallowance before the first appellate authority.
The learned Commissioner (Appeals) also sustained the disallowance.
The learned Counsel for the assessee submitted before us, the issue in dispute is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the assessment year 2002–03 and of the Hon'ble Jurisdictional High Court in assessee’s own case for the assessment year 2001–02. Respective orders were also placed before the Bench.
The learned Departmental Representative has not controverted the aforesaid factual position.
We have considered the submissions of the parties and perused the material available on record. As far as the factual aspect of the issue is concerned, there is no dispute that assessee has claimed depreciation on block of asset which also includes assets of Ankleshwar plants. It is observed, when identical issue of disallowance of depreciation on the assets of Ankleshwar plants came up for consideration before the Tribunal, Mumbai Bench, in assessee’s own case for the assessment year 2002–03, the Tribunal in order dated 8th March 2013, in ITA no.3098/Mum./2006, allowed assessee’s claim by following its own order for the assessment year 2001–02 in ITA no.8821/Mum./2004. It is also relevant to observe, the Hon'ble Jurisdictional High Court dismissed Revenue’s appeal on the issue of claim of depreciation on plant and machinery of Ankleshwar Unit in ITA no.6776/2010
for the assessment year 2000–01. In view of the aforesaid, we allow assessee’s claim of depreciation by deleting the addition made by the Assessing Officer.”
2.3. The third addition of Rs.2,61,93,000/- with respect to import of finished direct formulation for sale in India, the Tribunal deliberated upon the issue (para 26 to 33) pages 19 to 27 of the aforesaid order dated 06/11/2015. The relevant portion of the same is reproduced hereunder for ready reference:
“26. The next issue on transfer pricing adjustment which arise for consideration is with regard to adjustment made to the arm's length price of international transaction involving import of finished direct formulation (FDF) for re–sale in India, which is raised in grounds no.4 and 5 of concise ground. However, subsequently, the assessee on 20th April 2010, has sought permission to raise following additional grounds related to this issue.
“Without prejudice to ground no.4 to 6 of the concise ground filed on May 18, 2010, appellant submits that resale price method be considered as most appropriate method for determining the arm’s length price. The appellant prays that the international transaction of import of FDFs for resale of India be considered at arm's length and the addition of ` 2,61,93,000 be deleted.” 27. At the outset, we propose to deal with the issue whether additional ground can be entertained at this stage.
The learned Counsel for the assessee submitted before us, under an agreement with A.E. assessee imports FDFs from its A.E. and sells them to customers in India without making any value addition. It was submitted, the assessee simply acts as a distributor / trader of theFDFs hence, the most appropriate method for computing the arm's length price is re–sale price method (RSPM). He submitted, though, the assessee in transfer pricing study has adopted TNMM as the most appropriate method but that will not preclude the assessee from raising the plea that the most appropriate method for computing the arm's length price is re–sale price method, if otherwise it is applicable to the particular international transaction and is in conformity with the relevant statutory provisions. The learned Counsel for the assessee drawing a parallel between the assessee’s case and the case of Mattel Toys India Pvt. Ltd. v/s CIT, ITA no.2476/Mum./2008, dated 12th June 2013, submitted, in the referred case also though the assessee had selected TNMM as the most appropriate method but considering the nature of transaction between the assessee and its A.E., the Tribunal allowed assessee’s claim with regard to adoption of re–sale price method as the most appropriate method even at the second appellate stage. He submitted, as per the relevant provisions contained under the Income Tax Act, and the rules, the most appropriate method in case of this particular transaction between the assessee and its A.E. is re–sale price method as the assessee simply imports the goods from its A.E. and sells them to customers in India. For the aforesaid proposition, he relied upon a number of decisions of the Tribunal as well as Hon'ble Jurisdictional High Court which are as under:–
i) CÏT v/s LÓreal India Pvt. Ltd., of 2012 (Bom.) ii) ITO v/s LÓreal India Pvt. Ltd., 53 SOT 0263 (URO) (2012) (Mum.); iii) Luxottica India Eyewear Pvt. Ltd. v/s DCIT, ITA no.1115/ Del./2014 (Del.) 29. As far as the issue whether the additional ground can be admitted at this stage, the learned Counsel for the assessee relying upon the decision of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. v/s CIT, [1997] 229 ITR 383 (SC), submitted when all the basic facts relating to assessee’s transaction with the A.E. in respect of import of FDFs are available on record, and the issue raised can be decided on the basis of such available material the additional ground can be entertained.
The learned Departmental Representative strongly opposing the contention of admitted that reliable data is not available relating to comparables for applying RSPM in public domain, how, at the second appeal stage, additional ground can be entertained when basic facts relating to comparability analysis are not available. Referring to the decision of the Hon'ble Supreme Court in National Thermal Power Co. Pvt. Ltd. (supra), the learned Departmental Representative submitted, only when the basic facts relating to the issue raised in the additional ground are available on record before the Assessing Officer,
then only it can be entertained. He submitted, as per the principle laid down by Hon'ble Supreme Court only pure question of law can be admitted as additional ground. He submitted, when the basic facts relating to comparables are not available on record, the additional ground raised by the assessee for selecting RSPM as the most appropriate method cannot be entertained as it requires examination of fresh facts relating to comparables.
The learned Departmental Representative further submitted that the assessee in relation to import of FDFs has also received advertisement and market expenses which suggest that it is creating marketing intangible by incurring substantial expenses on marketing. Referring to certain OECD guidelines, the learned Departmental Representative submitted, as enquiry into marketing functions is a factual enquiry this issue cannot be entertained at this stage. He the assessee’s counsel submitted, while preparing the transfer pricing study, the assessee itself has rejected re–sale price method by giving certain reasons which are specifically mentioned in the transfer pricing study. In this context, he referred to the transfer pricing study submitted in the paper book. He submitted, the assessee while rejecting RSPM as most appropriate method has stated that reliable data is not available in public domain and it is difficult to find comparable. He, therefore, submitted, when the assessee itself hassubmitted, though the Transfer Pricing Officer has not dealt with the issue of advertisement and marketing expenses incurred by the assessee separately but still this has to be kept in mind while taking a decision as to whether or not the assessee has made
value addition to the products imported for re–sale / distribution. He, therefore, submitted, the additional ground should not be entertained.
In the rejoinder, the learned Counsel for the assessee submitted though the assessee in its transfer pricing study might have rejected RSPM as the most appropriate method keeping in view the data available in public domain at the relevant time, but, if subsequently enough data have come into the public domain to consider RSPM as the most appropriate method, the assessee cannot be precluded from raising its plea for considering RSPM as most appropriate method. It was submitted, as per the transfer pricing provisions, arm's length price has to be determined by applying the most appropriate method. Considering the nature of transaction, if it is found that RSPM is the most appropriate method even if the assessee had selected some other method the Assessing Officer / Transfer Pricing Officer is entitled to apply the correct method. In this context, he relied upon a decision of the Tribunal, Mumbai Bench, in ACIT v/s Chemtech Global Engineers Pvt. Ltd., ITA no.3590/Mum./ 2010, order dated 12th June 2013. He submitted, all basic and primary facts relating to the nature oftransaction involving import of FDFs between the assessee and its A.E. is already available on record before the Assessing Officer / Transfer Pricing Officer, therefore, the issue relating to selection of most appropriate method which is a purely legal issue can be entertained by way of additional ground. He submitted only after applicability of most appropriate method is decided, issue of selection of comparable will come which can be examined by the Transfer Pricing Officer by verifying the data available in public domain.
We have considered the submissions of the parties, perused the orders of the departmental authorities as well as the material available on record. We have also carefully applied our mind to the decisions relied upon by both the parties. At the outset, we propose to deal with the preliminary objection raised by the learned Departmental Representative opposing admission of additional grounds. It is the contention of the learned Departmental Representative that as the issue raised by the assessee in the additional ground is a mixed question of fact and law and not purely a question of law arising from the facts already on record it cannot be entertained. However, we are unable to accept the objection of the learned Departmental Representative. On a perusal of the order passed by the Transfer Pricing Officer under section 92CA, as well as other material on record, it is very much evident that the assessee has produced all relevantdocuments such as agreement, invoices and all other relevant details in relation to its transactions with A.E. for import of FDFs for re–sale / distribution in India. On a perusal of the provisions contained under section 92C r/w rule 10B, it is clear that the arm's length price in relation to a particular international transaction has to be determined by following any one of the most appropriate methods prescribed therein. Therefore, the first stage is selection of most appropriate method. For doing so all relevant details relating to a particular
transaction between the assessee and its A.E. are required to be gone into. In the present case, there is no dispute to the fact that all relevant details including documentary evidence pertaining to import of FDFs from the A.E. are available on record of the Departmental Authorities. Therefore, as far as selection of most appropriate method is concerned, the primary facts are available on record. Therefore, the issue as to what is the most appropriate method is a purely legal issue which can be decided by analyzing the nature of transaction on the basis of primary facts available on record before the Assessing Officer / Transfer Pricing Officer. As far as selection of comparables and comparability analysis is concerned, it is at the secondary stage after selection of most appropriate method. Therefore, in our view, as far as selection of most appropriate method is concerned, it is a purely legal issue and can be entertained at this stage in the form of additionalground. Having held so, it is required to be seen whether re–sale price method is the most appropriate method as claimed by the assessee. On a perusal of the order of the Departmental Authorities as well as other material on record, it is observed that the assessee claimed that it re–sells / distributes the FDFs imported from its A.E. without making any value addition. Therefore, it simply acts like a trader. If the assessee can prove this fact with supporting documentary evidence, then in our view re–sale price method can be considered to be the most appropriate method as assessee is supposed to be engaged in a purely trading activity. The decision relied upon by the learned Counsel for the assessee overwhelmingly support this view. Only because the assessee, at the initial stage, while preparing transfer pricing study, has rejected RSPM and selected TNMM for insufficient data in the public domain, it cannot be precluded from making a plea at a later stage before the appellate authorities that RSPM is the most appropriate method for determining the arm's length price of transaction relating to import and sale of FDFs. In our view, the whole intent and purpose of transfer pricing provisions is to determine the correct arm's length price by applying the most appropriate method. However, considering the fact that the assessee has not raised this issue either before the Transfer Pricing Officer or before the first appellate authority, and has raised if for the first time before the Tribunal by way of additional ground, to give a far opportunity to the department, we are inclined to restore the issue raised in the addition ground to the file of the Assessing Officer / Transfer Pricing Officer for examining afresh after considering all materials on record and in the light of the relevant statutory provisions and judicial precedent relied upon by the assessee. Only after the Assessing Officer / Transfer Pricing Officer decides the issue relating to selection of most appropriate method, then he can undertake the comparability analysis by calling for information from the assessee as well as making his own enquiry in the data bases or otherwise. However, it is made clear, the Assessing Officer / Transfer Pricing Officer must afford reasonable opportunity of being heard to the assessee in the matter. With the aforesaid observations, we allow the additional ground for statistical purposes.”
2.4. It is noticed that in the concluding para no. 33, the Tribunal has mentioned that the material was very much produced by the assessee before the TPO along with documents such agreement, invoices and all other relevant details. So far as the selection of most appropriate method is concerned, the primary facts were available on record with the TPO. So far as, deciding the most appropriate method is concerned, it is purely a legal issue which could be decided by analyzing the nature of transaction on the basis of primary facts available on record. In view of this finding, we are of the view, neither there was any concealment nor furnishing of inaccurate particulars of income. In such a situation, from Hon’ble Apex Court in CIT vs Reliance Petro Products Pvt. Ltd. 322 ITR 158 (SC) clearly comes to the rescue of the assessee. However, since the matter was restored by the Tribunal to the file of the TPO, in all fairness, we are restoring this issue to the file of the TPO.
2.5. To sum up, so far as, the addition with respect to provision of clinical study management and monitoring support services and depreciation on Ankleshwar Plant was deleted by the Tribunal, therefore, on both these issues, penalty u/s 271(1)(c) will not survive, therefore, deleted.
2.6. So far as, the addition of import of finished direct formulation for resale in India is concerned, we restore the issue of penalty on this count to the file of the ld. TPO, who shall decide the issue on the basis of the outcome of the quantum addition, which was restored to his file by the Tribunal vide order 06/11/2015. The assessee be given opportunity of being heard with further liberty to furnish evidence, if any, in support of its claim, thus, on this count, this issue is allowed for statistical purposes only.
Finally, the appeal of the Revenue is partly allowed for statistical purposes.
This order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 12/05/2016.