Income Tax Appellate Tribunal - Delhi
Ge Healthcare Pvt. Ltd., Gurgaon vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'C' BENCH
BEFORE SHRI I.C. SUDHIR , JM & SHRI A.N. PAHUJA, AM
ITA no.5712/Del/2011
Assessment year : 2007-08
GE Healthcare Pvt. Ltd., Vipul V/s. Assistant CIT,
Tech Square, Block-C, First floor, Circle 12(1),
Golf Course Road, Sector New Delhi
43,Gurgaon
[PAN :AAECA 4311 P]
(Appellant) (Respondent)
Assessee by S/Shri N. Venkataraman, R. Satish Kumar &
Ms. Suveni Banerjee, ARs.
Revenue by Shri Piyush Jain, DR
Date of hearing 24-07-2012
Date of pronouncement 31-08-2012
ORDER
A.N.Pahuja:- This appeal filed on 21-12-2011 by the assessee against an order dated 25-10-2011 of the ld. ACIT, Circle 12(1), New Delhi read with order dated 8th August, 2011 of the DRP-I (DRP in short), raises the following grounds:-
1. "That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assessing Officer ("AO") is bad in law and void ab-initio.
2. The Ld. AO/Ld. Transfer Pricing Officer ("TPO") erred on facts and circumstances of the case in determining the arm's length adjustment to the Appellant's international transaction from Associated Enterprises ("AEs"), thereby resulting in the enhancement of returned income of the Appellant by `.35,499,029/-.
3. That the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. TPO for computation of the arm's
2 ITA no.5712/Del./2011 length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ("Act").
4. The Ld. AO/Ld.TPO erred on facts and in law in the assessment of the arm's length price of the Appellant's international transactions from associated enterprises in the distribution segment and in doing so grossly erred in the following manner-
4.1 The Ld. AO/TPO/DRP erred on facts and in law in only making general statements and specious reasoning, without providing any supporting evidence, regarding inapplicability of Resale Price Method ("RPM") for the distribution segment and not appreciating that these stated observations do not impair the applicability of RPM in light of the facts and methodology in case of the Appellant.
4.1.1 The Ld. AO/TPO/Ld. Dispute Resolution Panel ("DRP") erred on facts and in law in rejecting the arm's length price determined by the Appellant for the distribution segment under the TP documentation maintained by the Appellant under section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 and substituting the same with his own methodology without providing any cogent evidence or back up documentation in support of his statements used to reject the TP methodology adopted by the Appellant.
4.2 The Ld. AO/TPO/DRP erred on facts and in law by stating, without any cogent evidence, that the search process adopted by the Appellant, for the distribution segment, in the TP documentation for FY 2006-07, is defective.
4.2.1 The Ld. AO/TPO/DRP erred on facts and in law by not providing or following a detailed search methodology for the arm's length analysis, demonstrating cherry picking of companies in the TP Order, thus also reflecting a single minded intention of making an addition to the returned income of the Appellant.
4.2.2 The Ld. AO/TPO/DRP erred on facts and in law by rejecting the comparable companies adopted by the Appellant in the TP documentation for FY 2006-07 based on arbitrary and inconsistent reasons even though they are functionally comparable to the Appellant.
4.2.3 The Ld. AO/TPO/DRP grossly erred on facts and in law by selecting companies for the arm's length analysis which were not comparable to the Appellant in terms of functions performed, assets employed and risks assumed.
3 ITA no.5712/Del./2011 4.2.4 The Ld. AO/DRP erred on facts and in law by not considering B A & Brothers (Eastern) Ltd. as a comparable for the arm's length analysis.
5. That on the facts and circumstances of the case and in law, the Ld. AO/TPO/DRP erred on facts and in law in disregarding multiple year/prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2006-07) data for the comparable companies should have been used despite the fact that the same was not available to the Appellant at the time of preparation of its TP documentation.
6. That the Ld. AO/TPO/DRP was prejudiced in rejecting the methodology in the distribution segment for this financial year when the same was accepted in the prior years and there was no change in facts and circumstances over the two years (i.e. financial year 2004-05 and 2005-
06).
7. That the Ld. AO/TPO/DRP erred on facts and in law in applying the amended provision as per the Finance Act 2009 instead of the provision regarding the arm's length range applicable to the financial year 2006-07. The Ld. AO/ TPO/ DRP erred in failing to appreciate that even a price which varies 5% in either direction of the arithmetic mean margins of the comparables may be considered as an arm's length price as per the proviso 2 section 92 C (2) of the Act.
8. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(1){c) of the Act mechanically for furnishing inaccurate particulars without recording any adequate satisfaction for such initiation.
9. That the Ld. AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act.
The above grounds of appeal are mutually exclusive and without prejudice to each other.
The appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other."
2. At the outset, ground nos.1 & 2 in the appeal, being general in nature nor any separate submissions having been made before us on these grounds, do not require any separate adjudication and are, therefore, dismissed.
3. Adverting now to ground no. 3 in the appeal, facts, in brief, as per relevant orders are that return filed on 31.10.2007 and subsequently revised on 4 ITA no.5712/Del./2011 13.05.2008,declaring income of ``1,60,43,430/-, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the Act), issued on 16th September, 2008. On perusal of return, the Assessing Officer (A.O. in short) noticed, inter alia, that the assessee entered in to international transactions of more than ``15 crore with its A.E. Accordingly, a reference was made to the Transfer Pricing Officer (T.P.O.) u/s 92 CA of the Act for determining arm's length price[ALP] of the following international transactions:-
Nature of Method Total value
transaction selected of trans-
by the Action (In
'a' ``)
Import of RPM 288,269,643
finished goods
Payment of TNMM 5,307,240
royalty
Provision of TNMM 3,735,371
support
Services
Cost - 605,714
reimbursement
3.1 The assessee in ground no.3 questioned the validity of reference
to TPO on the ground that the AO did not record any reasons in the draft order as to why it was 'expedient and necessary' to refer the matter to TPO.A similar objection was raised before the DRP and the findings of the DRP read as under:
" The matter has been considered by us. The law is clear and unambiguous, that once there is a transaction as defined u/s 92(1),Arm' length price has to be determined. S/ 92C(3) provides that such a price can be determined by the AO himself in view of the circumstances so described, or he can make a reference to TPO u/s 92CA(1).CBDT instruction no. 3/2003 i.e. any international transaction over and above the specified limit must be referred to TPO, a specialist ,is binding on the AO. The issue has already been considered by Delhi High Court in case of Sony India Pvt. Ltd. vs. CBDT,2006-TIOL-01-HC-del-TP wherein it has been held that it is not necessary & expedient to come to a considered view, prima facie opinion the AO is enough to make a reference.Punjab & Haryana High Court in case of Coca Cola have also upheld 5 ITA no.5712/Del./2011 this view.In this case the AO has acted within the provisions of law and administrative instructions and in accordance with judicial decision, hence DRP does not find any infirmity in the action AO and rejects the objection."
4. The ld. ARs appearing on behalf of the assessee did not make any submissions before us on this ground. We find that Hon'ble Delhi High Court in Sony India Pvt. Ltd.(supra) while adjudicating an identical issue held that the instruction issued by the CBDT, prescribing monetary limits of the international transaction for making reference to TPO does not take away the discretion of the AO. It was observed that "A reading of the impugned instruction indicates that it acts as a guideline to the AO in the exercise of the discretion conferred under section 92CA(1). This instruction is in fact helpful in ensuring that the discretion of the AO will not be abused. It correctly interprets the law as requiring only a formation of a prima facie opinion by the Assessing Officer at the stage of the reference. Therefore, the question of the CBDT supplanting the judicial discretion of the Assessing Officer does not arise. It is perfectly possible that, independent of the Circular, the Assessing Officer might still "consider it necessary or expedient" to refer an international transaction of such value to the TPO for determination of the ALP. At the same time, it is not as if the transactions of the value of less than Rs. 5 crores cannot be referred to the TPO by the Assessing Officer. Ultimately, any exercise of discretion by the Assessing Officer is bound to be judicially reviewed by the statutory appellate authorities as well as by Courts. Therefore, it is not as if there is no check on the exercise of discretion by the Assessing Officer."Hon'ble Punjab & Haryana High Court in Coca Cola India Inc. vs. ACIT,177 Taxman 103(P&H)observed that ".....The very nature of transaction between associates could be a just and valid ground to scrutinize the transaction with a view to ensure that true value is declared in the transaction and there is no manipulation of the profit derived by a non-resident, particularly when non-resident is a multinational company which has capacity to manipulate financial transactions in its dealing with its own associates. It was only on realization that there may be possibility of true income not being disclosed in such a transaction that the arm's length price concept and transfer pricing provisions were incorporated in the light of global experience and such provisions are found not only in India but also elsewhere. The assessee suffers no injustice in arm's length price being determined, object of which is only to determine fair price of the transaction, which on account of close relationship between the parties may not be otherwise disclosed. In the light of view taken in these decisions, especially when the ld. ARs have not placed before us any material, controverting the aforesaid findings of the DRP nor brought to our notice any contrary decision, we are not inclined to interfere. Therefore, ground no.3 in the appeal is dismissed.
5. Adverting now to ground nos.4 to 7 in the appeal, admittedly ,the assessee is a distributor of medical diagnostic products i.e imaging products and followed 6 ITA no.5712/Del./2011 RPM to benchmark its international transactions in import of goods in their transfer pricing documentation. In the light of agreement with their AEs, providing inter alia ,royalty payment @1% of the net selling prices of products and services AEs, without compensating the assessee for most of the tangible efforts made by the assessee to promote and sell goods of the AEs in India while the assessee in their transfer pricing study used multiple years' data and considered companies dealing in 'photographic or cinematographic goods'; 'Control Instrumentation & industrial electronics' etc.and functional profile of these companies revealed that M/s Ankuran Chemical Enterprises Ltd.;KPL International Ltd.;Parry Chemicals; PH Trading Ltd. were trading in chemicals and thus, these companies, were apparently not functionally comparable ,the TPO, in the light of search conducted on the Prowess data base using 'drugs and formulations' category ,identifying five companies as mentioned on page 5 of his order, showcaused the assessee as to why RPM be not rejected and TNMM be followed ,using OP/sales as PLI in order to determine ALP of the aforesaid international transactions. After considering the reply of the assessee, the TPO summed up the contentions of the assessee on use of multiple year data as under:-
i) "The taxpayer has used multiple year data on the pretext that using single year data of comparable companies may not adequately capture the economic conditions and business cycles reflected in the industry.
ii) As per the tax payer, Rule 10B(4) permits use of earlier year data.
iii) The tax payer has quoted OECD guidelines and stated that these guidelines support the view of the taxpayer in using the multiple year data which is an internationally accepted practice.
iv) The transfer price policies are determined based on the historical data, the same has an influence on the transfer prices of the transactions being compared.
v) It is argued that current year data was not available while preparing the TP documentation.
7 ITA no.5712/Del./2011
vi) The taxpayer has referred to Rule 10D(4) which says that 'contemporaneous' data should be used.
5.1. However, the TPO did not accept the aforesaid submissions while observing that the assessee having selected TNMM method also, the operating margin of the assessee has to be compared with the operating margins of comparable companies. While referring to Rule 10B(4) of Rule 1962 and the assessee having not furnished any details as to how earlier year data had an impact of the profits of the current financial year or that of the comparables, the TPO concluded that it was mandatory to use current year data and the TPO is empowered to determine the ALP by using the current year data available at the time of transfer pricing proceedings and to conduct the comparability analysis by using such data. Inter alia, the TPO relied upon decisions in Mentor Graphics and Honeywell Automation India Ltd. Vs. DCIT, Customer Services (India) P. Ltd. Vs. ACIT (2009-TIOL-424-ITAT-DEL); CIT Vs. Denso Haryana Pvt. Ltd.,2009- TIOL-696-HC-DEL-IT; Schefenacker Motherson Ltd. Vs. Income-tax Officer,2009-TIOL-376-ITAT-DEL; Global Vantedge Pvt. LTd. Vs. DCIT,2010- TIOL-24-ITAT-DEL) and also referred to the OECD guidelines while rejecting the claim of the assessee for use of data of the FYs 2004-05 & 2005-06,.
6. The assessee in ground no. 5 has raised the issue of multiple year data on the ground that the data for current year was not available at the time of preparation of transfer pricing documentation. A similar objection was raised before the DRP. The objection of the assessee has been dealt with by the DRP in the following terms:
"In accordance with rules updated current year margins were used by TPO, hence there is no infirmity in his action."
7. The ld. ARs appearing on behalf of the assessee did not make any submissions before us on this ground. We find that TPO referred to a number of decisions in his support while concluding that it was mandatory to use current 8 ITA no.5712/Del./2011 year data while determining ALP of the aforesaid international transactions. In this connection, Hon'ble jurisdictional High Court in Denso Haryana Pvt. Ltd.(supra) held that "The approach of CIT (Appeals) is perfectly justified as the Assessing Officer had come to the conclusion that the price at which the goods were imported were higher by comparing the price with the price in the local market which prevailed in the subsequent years. The Assessing Officer was required to compare the said price which prevailed in the local market in the same year." The issue relating to use of current year data is well settled now in view of a number of decisions referred to by the TPO in his order, including the decision of Bangalore Bench in the case of Aztec Software & Technology Services Ltd. and approved by the Hon'ble Karnataka High Court in 23 taxmann.com413(Kar). In the light of view taken in the aforesaid decisions, especially when the ld. ARs have not placed before us any material, establishing as to how earlier years' data would have impact on the profitability of the assessee for the current financial year or that of the comparables nor even attempted to controvert the aforesaid findings of the DRP and nor brought to our notice any contrary decision, we are not inclined to interfere. Therefore, ground no.5 in the appeal is dismissed.
8. As regards RPM followed by the assessee, the TPO observed that the assessee did not give their specific comments in response to a showcause notice issued by him, proposing to reject RPM and apply TNMM. Since the expenses on account of GSA included selling, marketing, advertisement, promotion and product launch cost, were not captured at the gross level, the TPO was of the opinion that TNMM and not RPM was the most appropriate method. While explaining the RPM prescribed in rule 10B(1)(b) of the IT Rules 1962, the TPO observed that for applicability of this method ,one has to ascertain the functions performed by the tested party before it resold the property and also the cost incurred for performing these functions. In the light of various factors mentioned on page 18 to 20 of his report, TPO discarded the RPM and adopted the TNMM as the most appropriate method to determine ALP of the international transaction entered into with its A.Es. by the assessee. Consequently, following TNMM,. the TPO suggested adjustment u/s 92CA of the Act ,which formed the basis for addition in the draft order.
9 ITA no.5712/Del./2011
9. The assessee in ground nos. 4.1 & 4.1.1 questioned the rejection of RPM method. A similar objection was also taken before the DRP. The findings of the DRP read as under:
"4.1.1 The Ld AO/TPO erred on facts and in law in only making general statements, without providing any supporting evidences, regarding inapplicability of Resale Price Method (RPM) for the distribution segment and not appreciating that these stated observations do not impair the applicability of RPM in light of the facts and methodology in case of the assessee.
DRP's Observation We find that assessee had made following arguments. The TPO, to reject RPM, has also contended that there is no uniformity in regard to accounting methods of computing gross margins. In this regard, it is submitted that it is true that there exists a difficulty in computing gross margin. However, that is only in case of manufacturing entities, because therein it becomes difficult to extract information accurately on direct vs. Indirect costs of production of comparable companies, for example wages and salaries are not segregated as those for employees engaged in production and other employees. The difficulty arises because such information is not publicly available as it is not disclosed in the financial statements of companies.
It is emphatically submitted that this difficulty does not exist in case of distribution/trading entities wherein there is no value addition, and there is only purchase of finished goods and resale thereof. It may be recalled that the assessee is also a reseller that does not make any value addition to the products purchased and resold.
TPO stated that TNMM and not RPM should have been adopted for establishing the arm's length price adopted by GE Healthcare India for the distribution division. TPO in his order contended that:
a) The expenses that the assessee has incurred on account of general selling and administrative expenses will not be captured at the gross level.
b) While less comparability may be required in using RPM, it remains the case that closer comparability of products will produce a better result.
10 ITA no.5712/Del./2011
c) In application of RPM, levels of inventories and costs involved need to be adjusted which may not be possible based on information available in the public domain.
d) In application of RPM, level of activities and function including marketing, advertising, distribution, differences on account of management efficiency need to be adjusted for
e) The resale price margin should also be expected to vary based on whether the reseller has the exclusive right to resell the goods
f) If the tested party is dealing in branded goods, the comparable should also be dealing in branded goods
g) Accounting treatment of the taxpayer and comparable companies in respect of certain direct expenses like discounts may distort the gross margin
h) Accounting consistency is to be ensured while computing the gross margins.
DRP concurs with TPO's analysis and arguments."
10. The ld. ARs appearing on behalf of the assessee did not make any submissions before us on this ground nor referred before us any material, controverting the aforesaid findings of the DRP/TPO. In the absence of any basis, we are not inclined to interfere. Therefore, grounds relating to rejection of RPM including ground nos. 4.1 & 4.1.1 are dismissed
11. Now adverting to remaining grounds relating to applicability of TNMM and identification of comparables, we find that after rejection of method followed by the assessee, the TPO identified the comparables in the Provost data base, applied RPT[related party transaction] filter of 25% and excluded Gentech Laboratories Ltd. from the list of identified companies while referring to decision in M/s Aztech Software Software & Technology Services Ltd v. Asstt. CIT [2007] 107 ITD 141 (Bang.) &Sony India (P) Ltd. vs. DCIT,114 ITD 448(Del.) and observed that the assessee itself adopted TNMM with enterprise level profits to determine the ALP of the international transactions. The TPO further pointed out that the assessee objected to the inclusion of four companies viz. Mankind Pharma Ltd., Novartis India Ltd., TTK Healthcare Ltd. and Cosme Farma Laboratories Ltd. due to presence of brand and diversified product range. Finally, the TPO dealt with the issue as under:-
11 ITA no.5712/Del./2011 3.5 "Presence of brand/advertisement expenses/R&D expenses The assessee has raised the issue of presence of brand in the following cases
(i) Novartis India ltd.
(ii) Mankind Pharma Ltd.
(iii) TTK Healthcare ltd.
(iv) Cosme Farma Laboratories Ltd.
The assessee has objected to the use of these comparables on these grounds. The assessee seems to be unmindful of the fact that TNMM was chosen as the method over RPM because it was found from the documents submitted by it that the assessee was also involved in marketing, selling and brand building. The assessee is paying royalty of Rs.53 lakhs to its AE for use of the GE monograms and trademarks. Therefore it is not for the assessee to object to the use of comparables on this ground. The assessee must appreciate that all these comparables have passed the RPT filter discussed earlier in this order. Therefore, the grounds raised by the assessee do not have the force to compel one to abandon the use of these companies as comparables. The assessee is also enjoying the benefit of the GE brand. In fact, despite the presence of brand strength that the assessee claims for which it would justify the payment of royalty, the assessee's net margin is below that of the comparables chosen by it also.
Therefore, this leads to the conclusion that the payment of royalty is not providing any benefit to the assessee. If it is the assessee's claim that the comparables used by this office are able to command a higher market price because of the brand, marketing expense incurred or the R&D expenses incurred, the assessee should have been able to mimic their behaviour given the brand strength that it claims to have and the marketing expenses that it incurs. Hence, the way the assessee has structured its transactions with its AE is definitely not at arm's length.
Nevertheless an exercise was carried out to study the R&D, marketing and advertisement expenses made by these comparables. The figures have been taken from the details provided in the annexure to the reply made by the assessee to the show cause notice. The results are tabulated below.
(Amounts in INR)
12 ITA no.5712/Del./2011
{Except Novartis India where amount is in '000}
Name R&D/Advertising/Marketi Total Sales Mktg/sales OP/Sal
ng expenses (%) es(%)
R& Advertising Market
D ing
Mankind 0 309172757 0 309,172757 4913810971 6.29 14.25
Pharma
Ltd.
Novartis 0 485745 0 485,745 5,422,370 8.95 16.07
India Ltd.
TTK 0 190734265 0 190734265 2111389028 9.03 1.62
Healthcar (entity
e level)
Cosme 0 6110539 0 6110539 1252472171 0.48 3.32
Farma
Laboratori
es Ltd.
It can be seen that there is no correlation between the marketing expense, the sales made and the final margin earned by the company. Hence, the argument put forward by the assessee cannot be made a ground for rejecting any comparable."
11.1 As regards objections raised on behalf of the assessee in respect of diversified product range of Cosme Farma Laboratories Ltd., Navartis India Ltd., and TTK Healthcare Ltd., the TPO concluded as under:-
"3.6 Diversified product range The assessee has raised this ground in respect of the following comparables.
(i) Cosme Farma laboratories ltd.
(ii) Novartis India ltd.
(iii) TTK Healthcare ltd
In the case of TTK Healthcare ltd the assessee has claimed that the company has a diversified product range including medical devices and consumer products. After going through the annual report of the company, the objection of the assessee is attended to 13 ITA no.5712/Del./2011 by adopting the pharmaceutical division of this company as comparable. The OP/Sales margin of this segment is worked out below.
Segment Revenue : Rs.8608.15 Lakhs
Segment cost : Rs.7471.44 Lakhs
Add: unal1ocated exp. :
(in proportion of turnover-40%) : Rs.162.88 Lakhs
Total segment cost : Rs.7634.32 Lakhs
Segment result : Rs.973.83 Lakhs
OP/Sales (%) : 11.31%
In the case of Cosme Farma laboratories Ltd the assessee has stated that the company has different pharma products. The assessee must understand that these objections do not take this company out of the set of pharma companies.
In the case of Novartis India Ltd, the assessee has stated that the assessee has some expenses in the nature of manufacturing activities. However, the annual report shows that the company is trading in goods. There is no separate manufacturing segment reported. The assessee has also not been able to bring this out. Therefore, the company does not get disqualified on this ground.
4. The objections that the assessee has raised against the comparables sought to be finally used are tabulated below. This is as per the summary at Page 9 of the assessee's reply.
S.No. Name of Objections raised by assessee
comparables
1 Cosme Farma 1) Diversified product range
Laboratories 2) Advertisement expense
Ltd. 3) R&D expense
2 Mankind 1) Presence of brand
Pharma Ltd. 2) Diversified product range
3) TPT
3 Novartis India 1) Presence of brand
Ltd. 2) RPT
4 TTK 1) Presence of brand
14 ITA no.5712/Del./2011
Healthcare Ltd. 2) Diversified product range
3) RPT Filter
In the preceding paras of this order all these points have been met. Accordingly these four companies shall be used as comparables. In the case of TTK Healthcare Ltd segmental data shall be used as discussed earlier.
11.2. Accordingly, rejecting the contentions of the assessee regarding +/- 5% safe harbor and assesee's results having been accepted in earlier years, The TPO suggested adjustment of ``35,499,029/- as under:-
"7. Following the discussions in the preceding paras the comparables that shall be used are as below:-
S.No. Company Name OP/Sales(%)
1 Cosme Farma Laboratories Ltd. 3.32
3 Mankind Pharma Ltd. 14.25
4 Novartis India Ltd. 16.07
5. T.T.K. Healthcare Ltd. (Seg.) 11.31
Average 11.23
Calculation of arms Length price
Operating profit @11.23% : `47,660,547
Operating profit shown : `12,161,518
Arms length cost : `304,598,691
Cost of goods shown : `340,097,720
Adjustment u/s 92CA : `35,499,029
The arms length price of cost of goods is determined at `304,598,691/- as against `340,097,720/- determined by the assessee. The cost of goods must be reduced by `35,499,029/- bring it to arms length. The Assessing Officer shall accordingly enhance the income of the assessee by `35,499,029. The 15 ITA no.5712/Del./2011 assessee shall not get the benefit of the proviso of section 92C(2) as the difference determined is more than 5% of the value of international transaction."
11.3 On the basis of aforesaid adjustments suggested by TPO, the AO formulated a draft assessment order dated 24th December, 2010.However, the assessee did not accept the findings of the AO in the draft assessment order and raised a number of objections before the DRP.
12. As regards selection of most appropriate method and methodology adopted by the assessee and the TPO, the DRP dealt with these issues as under:-
"4.1 The AO/TPO erred on facts an in law in rejecting the methodology adopted by the assessee for the distribution segment and substituting the same with his own methodology without providing any evidence or back up documentation in support of his statements used to reject the TP methodology adopted by the assessee.
DRP's Observation The assessee has argued that the TPO has not provided any cogent reasons for not accepting the search strategy adopted by the assessee in the FY 2006-07 TP documentation. In fact, even for the comparable set adopted by the TPO, no search strategy detailing the quantitative filters applied or screening process adopted has been provide in the TP order. TPO has rejected companies that were engaged in trading of chemical as he has contended that they are not engaged in the exact same business of pharmaceuticals. However, for his analysis he has considered companies engaged in diversified business lines like Cosme Pharma Ltd that deals in nutritional products, creams, gels, etc. This issue has been considered with reference to objection No. 4.2.
................................................................................................
"In our view, the assessee has already accepted that it searched for broad comparables due to the nature of industry yet some product 16 ITA no.5712/Del./2011 comparability has to be there. The TPO has given very cogent reasons after analyzing the TP documentation.
After examining submissions made and considering the reasons given by the TPO, the Panel has come to a conclusion that though some defects may be curable but keeping the totality of comparability issue in mind there were flaws in the search process carried out by the assessee and the TPO has correctly carried out re-run of the search process. Based on above discussions DRP upholds the action of TPO.
4.2.1 The AO/TPO erred on facts and in law by not providing the detailed search methodology adopted for the arm's length analysis.
4.2.2 The AO/TPO erred on fact and in law by rejecting the comparable companies adopted by the assessee in the TP documentation for FY 2006-07.
4.2.3 The AO/TPO erred on .fact and in law by considering companies for the arm's length analysis which were not comparable to the assessee.
DRP's Observation Objection No. 4.2.1, 4.2.2 and 4.2.3 are being considered together. Assessee has given detailed reasons objecting to choice of comparables of TPO as broadly summarized in table:
S.No. Company Assessee's contentions
Name
1 Novartis a) Fails TPO's filter of diversified
India Ltd. product range
b) RPT Filter
2 Mankind c) Functional grounds presence of
Pharma Ltd. brand
d) Fails TPO's filter of diversified
product range
e) RPT filter
3 T.T.K. a) Functional grounds presence of
Healthcare brand
Ltd. b) Fails TPO's filter of diversified
product range
c) RPT filter
17 ITA no.5712/Del./2011
4 Cosme a) Fails TPO's filter of diversified
Farma product ragne
Laboratories b) Advertisement and marketing
Ltd. expenses to sales
c) R&D expenses
According to the assessee, in the TP order, the TPO has finally accepted companies engaged in trading of injection. Moreover, as mentioned in the FY 2006-07 TP documentation as well as submission above, the company is not engaged in trading of injection. It is engaged in trading of imaging agents that are often injected in the body. Thus, the comparables analysis for an arm's length analysis should focus on trading of imaging agents and not injections. Further, due to unavailability of companies engaged in trading of imaging agents in the public domain, if a broad set for comparability analysis is to be considered, companies engaged in trading of any chemicals should be accepted as well.
DRP finds that the TPO has accepted functional profile of the assessee as a distributor of imaging products and issued a detailed show cause on 18.10.2010. At the cost of repetition it must be stated that in Para 4, the TPO has pointed out the defects in the search process saying that assessee has used key words like photographic and cinematographic goods, control instrumentation and industrial electronics etc. Even DRP agrees with TPO that such a search will not yield correct functional comparables. TPO has concluded in the show-cause as follows "From the description of your activities, under no circumstances can you be compared to companies who deal in industrial chemicals, phenol, plastics and petroproducts. As per your own admission you deal in products that are classified as drugs. As per the discussion so far, the following points emerge
(a) You have used multiple year data in your TP report while the Rule l0B(4) primarily calls for the use of current year data. You have not provided any data that would aloe use of multiple year data.
(b) Your use of RPM as the most appropriate method is inappropriate.
(c) The comparables used by you are not functionally comparable.
18 ITA no.5712/Del./2011 Under these circumstances, I am left with no alternative but to reject your TP study and make a fresh search for comparables in your case. The method shall be TNMM and OP/sales shall be the PLI."
All this is mentioned in TP order hence the claim of assessee that it was not provided details of search methodology (refer Para 5 of show cause) etc is not correct. Even before DRP the assessee has not pointed out cogently why the TPO was incorrect in his assessment, rebutting arguments as provide in TP order. Most of the contentions of the assessee are general and theoretical in nature. We have perused assessee's reply to show cause which states in absence of adequate data in public domain, companies engaged in chemicals were taken, but we find even photographic film company were taken. If the basic process is flawed and apparently difficult to cure then a new process will have to be followed and before DRP no new argument has been put forth. So we do not find merit in the arguments of the assessee.
The argument of assessee about brand has been considered in Para 3.5 of the order as follows:
"The assessee has objected to the use of these comparables on these grounds. The assessee seems to be unmindful of the fact that TNMM was chosen as the method over RPM because it as found from the documents submitted by it that the assessee was also involved in marketing, selling and brand building. The assessee is paying royalty of Rs.53 lakhs to its AE for use of the GE monograms and trademarks. Therefore it is not for the assessee to object to the use of comparables on this ground. The assessee must appreciate that all these comparables have passed the RPT filter discussed earlier in this order. "
The DRP concurs with the TPO. The assessee is seeking to use last year's comparables with updated margins. We agree with the TPO that each year is different and find he has correctly relied on Delhi ITAT decision in the case of M/s Carraro India Ltd. We see no reason, based on facts and circumstances, to interfere with the order of the TPO.
4.3 That on facts and circumstances of the case and in law, the AO/TPO erred on facts and in law in selecting current year (i.e. FY 2006-07) data for comparability in the distribution segment despite 19 ITA no.5712/Del./2011 the fact that at the time of comparison done by the assessee, the complete data for FY 2006-07 was not available within the public domain.
DRP's Observation In accordance with rules updated current year margins were used by the TPO hence there is not infirmity in his action.
4.4 That the AO/TPO was prejudiced in rejecting the methodology in the distribution segment for this financial year when the same was accepted in the prior year and there was no change in facts and circumstances over the two years. (i.e. FY 2004-05 and 2005-
06).
DRP's Observations Every year is to be considered separately based on facts and circumstances and availability a data for transfer pricing audit. So there is no infirmity in the action of the TPO.
5. That the AO/TPO erred on facts and in law in applying the amended provision as per the Finance Act, 2009 instead of the provision regarding the arm's length range applicable to the financial year 2006-07. The TPO ought to appreciate that even a price which varies 5% in either direction of the arithmetic mean margins of the comparables may be considered as an arm's length price as per the proviso to section 92C(2).
DRP's Observations We have examined the issue'. The Memorandum explaining the Finance Bill, 2009 has clearly stated that the aforesaid amendment shall apply on all the cases pending with the TPO on or after 01.10.2009. as para 37.5 of circular number 5/2010, inadvertently stated that the aforesaid amendment shall apply from A Y 2009-10 onwards the CBDT issued a corrigendum vide F.No.142/13/2010- S0(TPL) dated 30.09.2010 reiterating the position as explained in Memorandum to the Finance Bill, 2009 i.e. the amended proviso shall apply to all the cases pending on or after 01.10.2009 with the 20 ITA no.5712/Del./2011 TPO. Since in this case the TPO has passed the order after 01.10.2009, the amended proviso shall apply.
It may also be mentioned that in the following decision the ITAT have held that even under pre amended proviso benefit of 5% is not available if the price is beyond that range as such benefit is not a standard deduction:
a) Global Vantedge Pvt. Ltd (201 0-TIOL-24-lT AT-DEL)
b) Ws Maruheni India Pvt. Ltd (2011-Tll-36-lT AT-DEL-TP)
c) M/s ST Micro Electronics (2011-TlI-63-IT AT-DEL-TP) It may also be mentioned that the amended proviso is only clarificatory in nature as the Memorandum explaining the Finance Bill has clarified that the same was brought as there were disputes about its interpretation/applicability. It is a settled position of law that an amendment which clarifies a provision has retrospective operation.
Thus, this ground of objection is also overruled. We decline to interfere with the order of the TPO on this ground. "
12.1. In terms of the aforesaid directions of the DRP, the AO completed the assessment accordingly and added the amount of `3,54,99,029/-.
13 The assessee is now in appeal before us against the aforesaid findings of the AO/DRP. At the outset, the ld. AR on behalf of the assessee while carrying us through the impugned order contended that the TPO/DRP did not consider turnover filter. On the other hand, the ld. DR pointed out that the assessee itself did not consider the turnover filter in its transfer pricing documentation nor raised such an issue before the TPO /DRP and therefore, is not entitled to raise the issue at this stage. In response ,the ld. AR relied upon decision in Sony India (P) Ltd. vs. DCIT,315 ITR(AT)150(Del.) wherein turnover of Videocon International, a comparable was found six times the turnover of the assessee and accordingly, the Bench while noticing several other distinctive features or differences which materially affected performance/price of the products apart from having advantage of R&D unit or valuable intangibles, 21 ITA no.5712/Del./2011 differences in the turnover, differences in the assets, differences in the functions performed and risk undertaken by the said taxpayer and the VIL, excluded Videocon International from the list of comparison. Likewise in Egain Communication Pvt. Ltd. Vs. Income-tax Officer in I.T.A. no.1685/PN/2007 dated10.6.2008,oversized companies were excluded. Similar was the situation in Agnity India Technologies Pvt. Ltd. Vs. Income-tax Officer in I.T.A. no.386/D/2010 dated 4.11.2010;; DCIT vs. Deloitte Consulting India Pvt. Ltd. in I.T.A. no.1082/Hyd/2010) dated 22.7.11. In decision dated 5.8.2011 in Genisys Integrating systems (India) Pvt. Ltd. vs. DCIT in ITA no.1231(Bang.)/2010 concluded that turnover filter is important. This decision was followed in Kodiak Networks (India) Pvt. Ltd. Vs. ACIT in I.T.A. no.970/Bang/2011 dated 27.1.2012; M/s Topspin Communication Technologies India Pvt. Ltd. Vs. Income-tax Officer in I.T.A. no.1280/Bang/2010 dated 10.2.2012 and Timken Engineering & Research India Pvt. Ltd. Vs. DCIT in I.T.A. no.974/Bang/2008 dated 24.2.2012; . A similar view was taken in ACIT Vs. Frost & Sullivan I Pvt. Ltd. in I.T.A. no.2073/Mum/2010 dated 24.2.2012 and Centillium India Pvt. Ltd. Vs. DCIT in I.T.A. no.1354/Bang/2010 dated 29.2.2012. While referring to OECD guidelines, guidance note on report on International Transactions u/s 92E issued by ICAI, the ld. AR added that turnover of the assessee company being only `42 crores and the assessee having no R&D facilities, comparables having large turnover need to be excluded.
14. On the other hand, the ld. DR while referring to decision dated 31.5.2011 in M/s Symantec Software Solutions Private Ltd. vs. ACIT in ITA no. 7894/MUM/2010 & dated 3.6.2011 in M/s ST Microelectronics Private Ltd. vs. DCIT,in ITA nos.1806& 1807,1598 & 1599/Del./2008 contended that turnover filter can not be applied as a general rule, especially when the assessee itself did not follow the same. Unless functional comparability is established, turn over filter can not be applied in isolation. Turnover filter has to be seen in the context of other factors affecting comparability; low turnover does not necessarily mean high margin in competitive market. Unless and until high turnover has undue 22 ITA no.5712/Del./2011 influence on margins, such companies could not be excluded. While referring to the paper book, the ld. DR argued that the A.E. of the assessee had brand equity as mentioned therein and extracted hereunder:-
"The A.E. has immense brand equity in the diagnostic drugs business, which gives the GE Healthcare Private Ltd. a great reference list that inspires confidence in potential customers. Accordingly, the A.E.'s brand equity supports GE Healthcare Private Ltd.'s marketing efforts to a great extent. GE Healthcare Pvt. Ltd. uses the GE Healthcare brand and the associated intellectual property."
As regards judgments relied upon by the ld. AR, the ld. DR vehemently argued that most of these judgments being rendered in the case of softwares/ITES, companies and were not relevant in the instant case. OECD guidelines issued in 2010 or ICAI guidelines are not binding, nor such OECD guidelines issued in 2010 could be applied in the AY 2007-08. As regards R&D and marketing expenses incurred by the comparables, identified by the TPO, the ld. DR pleaded that expenses having already been debited, their profitability to the extent had gone down, the ld. DR added..
15. In his rejoinder, the ld. AR argued that the decisions relied upon by the ld. DR were not applicable to the facts of the case. As regards OECD guidelines , the ld. AR pleaded that these have persuasive value. The TPO having not confronted the assessee any FAR analysis ,was not correct in identifying the comparables.
16. We have heard both the parties and gone through the facts of the case as also decisions relied upon by both the sides. As is apparent from the aforesaid facts, the DRP noticed that the assessee is engaged in trading of imaging agents that are often injected in the body and due to unavailability of companies, engaged in trading of imaging agents in the public domain, companies engaged in trading of any chemicals were accepted for comparability. While referring to defects noticed by the TPO in the search process adopted by the assessee viz use of key words like photographic and 23 ITA no.5712/Del./2011 cinematographic goods, control instrumentation and industrial electronics, industrial chemicals, phenol, plastics and petroproducts etc.. DRP agreed with the findings of the TPO that such a search will not yield correct functional comparables. The ld. ARs did not place any material before us, controverting these findings of the DRP/TPO nor any such material seems to have been placed before the DRP. Moreover, the facts and circumstances as also the comparables in each year vary. There is no presumption that if in one year, business with the associated concern is carried at arm's length, then it is carried at arm's length in all other assessment years. The facts and circumstances of each year are to be examined, as held in DCIT vs. Carraro India Ltd.,28 SOT 53(Del.),followed by the DRP. Even otherwise the ld. AR did not dispute these findings of the DRP nor brought to our notice any contrary decision in this regard. In these circumstances, we have no alternative but to reject ground nos.4.2 to 4.2.2 & 6 in the appeal.
17. The only substantive issue in this appeal raised by the ld. AR before us is that 'turnover filter' should be applied in identifying the comparables while applying the TNMM method. Indisputably, the issue of turnover filer was never raised before the TPO/AO or the ld. DRP. Even though the ld. AR did not make any submissions before us as to why BA & Brothers(Easter) Ltd should be considered as comparable and nor explained as to whether or not this issue was raised before DRP, it was argued that a new plea can always be raised before the Tribunal when the facts are undisputed. In this connection, Hon'ble Apex Court in Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232(SC) held that this Tribunal has the jurisdiction and power to entertain a fresh plea and direct the lower authorities for reconsideration of the matter in view of the new plea taken by the Department. The only restriction is that the plea entertained and the directions given by the Tribunal shall be in respect to the subject-matter of the appeal. In the case of J.S. Parkar v. vs. Palekar [1974] 94 ITR 616 (Bom.), it was held by the Hon'ble Bombay High Court that the Tribunal was under statutory 24 ITA no.5712/Del./2011 obligation to entertain a plea involving a pure question of law and decide the same, no matter at what stage it was taken. In the case of CIT v. Ice Suppliers Corpn. [1967] 64 ITR 195 (Punj.) the order of the Tribunal accepting an alternative case of the Department after giving leave to the assessee in that regard was upheld by Hon'ble High Court. A similar view was taken in N.P. Saraswathi Ammal & Ors. vs. CIT (1982) 138 ITR 19 (Mad), CIT vs. Indian Express (Madurai) (P) Ltd. (1983) 33 CTR (Mad) 314 , CIT vs. A.C. Paul (1983), 142 ITR 811 (Mad), CIT vs. Ice Suppliers Corporation (1967) 64 ITR 195 (Pune) and ACIT vs. Amarnath Reddy (Chennai) (TM) (2010) 132 TTJ (Chennai) (TM)
377. In view of the foregoing, especially when the ld. DRP and the TPO did not have any occasion to examine the 'turnover filter', we consider it fair and appropriate to set aside the order of the ld. DRP/AO and restore the matter to the file of the DRP/AO to recompute the ALP of international transactions in the light of our aforesaid observations after examining the comparables by applying the turnover filter, in accordance with law and of course after allowing sufficient opportunity to the assessee. Needless to say that while redeciding the appeal, the learned DRP/TPO shall pass a speaking order. With these observations, issues raised in ground nos. 4.2.3 ,4.2.4 & 7 in the appeal are disposed of .
18. Ground no.8 in the appeal relates to initiation of penalty proceedings u/s 271(1)(c) of the Act. Since mere initiation of penalty proceedings is not appealable, accordingly, this ground is dismissed
19. Ground no. 9 in the appeal of the assessee relates to levy of interest u/s 234 B & 234D of the Act.. Since the ld. AR on behalf of the assessee did not make any submissions before us on this ground while the levy of interest u/s 234B & 234D of the Act being mandatory [Commissioner Of Income Tax. vs Anjum M. H. Ghaswala And Others,252 ITR 1(SC), affirmed by Hon'ble Apex Court in the case of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449(SC) and in the 25 ITA no.5712/Del./2011 case of CIT v. Sant Ram Mangat Ram Jewellers [2003] 264 ITR 564(SC)], this ground is dismissed.
20. No additional ground having been raised before us in terms of residuary ground in the appeal, accordingly, this ground is dismissed.
21.No other plea or argument was made before us.
22. In the result, appeal is partly allowed but for statistical purposes.
Order pronounced in open Court
Sd/- Sd/-
(I.C. SUDHIR) (A.N. PAHUJA)
(Judicial Member) (Accountant Member)
Copy of the Order forwarded to:-
1 Assessee
2. Assistant CIT,Circle 12(1),New Delhi
3. CIT-III,New Delhi.
4. DRP-I, New Delhi
5. DR, ITAT,'C' Bench, New Delhi
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Delhi