TaxTMI 
TaxTMI 
2016 (3) TMI 1105
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....6,105 in respect of purchase of raw material, Bisoprolol- an active pharmaceutical ingredient (API) purchased from the assessee's associated enterprises, namely Merck & CIE KG, Switzerland. In a connected grievance for the assessment year 2010-11, which is raised in ground no. 2.1 in the appeal for that assessment year, the assessee is aggrieved that the Transfer Pricing Officer was in error in proposing an arm's length price adjustment of Rs. 1,03,05,503 in respect of the same active pharmaceutical ingredient, and the DRP was also in error in confirming this adjustment to the extent of Rs. 67,69,943 in respect of the same. Ground no. 1 taken by the Assessing Officer's appeal for the assessment year 2010-11 also raises a connected issue regarding DRP falling in error to direct adoption of simple arithmetic mean, rather than weighted average mean, for computation of average CUP price. In ground no. 2 of the same appeal, an issue is raised regarding DRP's directing to de facto restricting the arm's length price adjustment with respect to purchases of API to the adjustment with respect to consumption of API. All these grievances are interconnected and we will take up all these grievan....
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.... the quality difference be given. This was to be done in the light of the directions given by the CIT(A) for the assessment year 2004-05. However, the directions given by the CIT(A) for the assessment year 2004-05 were with respect to adoption of simple arithmetic mean rather than weighted average. The contention regarding the API imported by the assessee being of superior quality was categorically rejected by the CIT(A), in his order for the assessment year 2004-05, in paragraph 9.4.1 at page 22 (Page 139 of paper-book III filed before us). Be that it as may, the Assessing Officer, in response to these directions, computed a relief of Rs. 35,35,560 since the ALP based on the simple arithmetic mean was Rs. 47,079, as against the ALP based on weighted arithmetic mean which was Rs. 36,831, and this difference of Rs. 10,248 per kg, for 345 kgs. of imports worked out to Rs. 35,35,560. The balance ALP adjustment, i.e. Rs. 1,03,05,503 minus Rs. 35,35,560, of Rs. 67,69,943 was thus confirmed for the assessment year 2010-11. As regards the assessment year 2009-10, the ALP adjustment on the same line and in respect of the same API, of Rs. 69,76,105 was computed on the basis of simple arithm....
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....es for analysis were not independently obtained and that, even on these handpicked samples, there is a small variation only on two parameters. He submits that there are no reasons to proceed on the basis that the products manufactured in Indian facilities are any but inferior in quality. It is also submitted that there is no cogent basis for the claim of product superiority. As regards the higher sale price of the end products, according to the learned departmental representative, such higher prices per se cannot lead to the conclusion that the raw materials are of better quality. 10. We see merits in learned counsel's plea. Under 10B(1)(a)(ii), the price of the comparable uncontrolled transaction "is adjusted to account for differences, if any....... which could materially affect the price in the open market". It is thus not even necessary that the differences in the product involved in comparable uncontrolled transaction are very significant or even real, because as long as these differences, whether having intrinsic value or merely in perceptions, could "materially affect the price in the open market", these differences are required to be taken into account. Even though the gen....
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....poration, where much more in the international reputation is at stake, the quality of product is perceived to be much more reliable. Even in the case of Glaxo Smithkline Inc Vs Her Majesty the Queen [(2008) TCC 324], where the comparison was between the same generic drug manufactured by a local manufacturer in Canada vis-à-vis Glaxo's manufacturing facilities in Singapore, around 10% of quality adjustment was allowed. As the assessee has settled the matter with the tax authorities, upon the case having been restored to the file of the Tax Court of Canada by Canadian Supreme Court, this aspect has reached finality. In Indian context, the quality adjustment at around 40% has been allowed at the stage of transfer pricing scrutiny proceedings itself. In any event, it is an undisputed position that on two significant features, namely particle size (sieve analysis) and bulk density test, the product imported by the assessee is demonstrably superior to the locally manufactured drug. The fairness which has dawned on the Transfer Pricing Officer in 2011-12 is thus certainly in the right direction. The only issue is quantification of this adjustment. In the absence of any assistance t....
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....e commercial transactions in the regular course of business. We see no reasons to disturb this quantity filter of 20 kgs., nor any arguments in respect of the same have been addressed before us. The average of comparable uncontrolled prices will have to be recomputed in the light of these directions. 15. As regards the question of simple arithmetic mean versus weighted average, we find that proviso to Section 92C(2) categorically states that "where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices". There is no room for importing the concept of weighted average here. The law refers to arithmetical mean and the arithmetical mean is, in plain words, "a mathematical representation of the typical value of a series of numbers, computed as the sum of all the numbers in the series divided by the count of all numbers in the series". We are not, therefore, persuaded by the grievance raised by the Assessing Officer. In our considered view, it was only arithmetical mean which is relevant in this context. There is no infirmity in the stand of the DRP on this issue. 16. As regards other points....
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.... evidences, by way of emails, reports, manuals, brouchers and details of visit by AE's personnel, were rejected as too vague and as not pertaining to the relevant financial period. It was in this backdrop that the TPO proposed an ALP adjustment reducing the value of these services to 'nil' value. When assessee carried the matter before the Dispute Resolution Panel, the DRP also confirmed the stand of the Transfer Pricing Officer. The DRP was of the view that the agreement, by itself, could be not treated as conclusive about the worth of the services rendered. What is to be really seen is whether any significant intra group services were actually rendered. As regards the evidences in support of the services having been rendered, the DRP noted that these evidences have been rejected by the TPO on account of following reasons: * The services claimed to have been rendered to the assessee are the same as claimed to have been rendered to another group entity by the name of Merck Specialities India Pvt Ltd. This fact, according to the DRP, establishes that services were non- exclusive in nature. * Emails in support of engineering technology of production and quality control pertain to....
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....ked up with any reliable evidence. Moreover, the fact that the 'assessee is not an exclusive recipient of such services, which are also made available by the AE to other group companies, raises a valid question with regard to the justification and the quantum of such expenses being borne by the assessee. 4.13 The assessee is aggrieved that the TPO has not adopted any specific method to benchmark the ALP of the transaction. To this, we would like to state that the benchmarking of ALP of a transaction particularly in the nature of intra-group services is germane to the actual existence of the services concerned, which is found, to-be absent in this case, hence there was apparently no occasion for the TPO to take the next step of benchmarking the same by adopting a MAM. Our attention has been drawn to an extract from the OECD guidelines to justify the payment made to AE, but in our considered view, the extract cited by assessee does not help its cause since, the transaction under question does not resemble nor can it be compared to the retainer's fees paid by an independent/enterprise to a Lawyers' Firm for assured legal service. The assessee has referred to a few decis....
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....eam by having a check list for verification". He then posed a question by observing that "the moot question that needs to be asked is whether for rendering such auditing (services), the assessee will employ an outsider" and proceeded also to add "If at all the answer is yes, then the next question arises as to what would be consideration to a person in 3rd party scenario". His answer to the question that he thus posed was "there would hardly be any substantial payment". Summing up, the TPO concluded that no services are rendered on the facts of this case, and that "when no services are availed, there is no question of benchmarking the transactions, and, in such cases, determination of ALP at Rs NIL has been upheld by the Hon'ble ITAT in the following cases- Deloitte Consulting Pvt Ltd Vs DCIT [(2012) 137 ITD 21 (Mum)], Gemplus India Pvt Ltd Vs ACIT (ITA No. 352/Bang/2009; order dated 21st October 20100, and Knorr Bremse India Pvt Ltd Vs ACIT [(2013) 56 SOT 349 (Del)]". Aggrieved, assessee did raise an objection before the DRP but without any success. On the same line, as in the earlier years and broadly on the basis of the same reasoning, the DRP confirmed the action of the Transfe....
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....television channel. The example may seem to be so simplistic but it does hammer the massage, as we would like to, that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing is the benefit test. We do not think benefit test has too much relevance in the arm's length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. In case TPO can demonstrate that the consideration for similar services, under the CUP method, is NIL, he can very well do so. That's not, however, his case. He only states that these services are not worth the amount paid by the assessee. Such band statements and sweeping generalizations cannot help the case of the revenue authorities. The assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm's length price on the fact....
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....ement services'. On an analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head 'management services' was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP method because the value under CUP method will be best indicator of the value of these services. It was in this background that the TPO made certain adverse inferences against the assessee. The TPO was of the view that while the assessee has made a payment of Rs. 20,35,907 towards financial management and reporting services, "but the services rendered are negligible compared to the cost incurred". The TPO was also of the view that "a minor clarification or seeking of certain guidance on verify basic issue does not call for a payment of Rs. 20 lakhs. Therefore, the ALP of these services was taken as 'NIL'. He further noted that while the assessee has made a payment of Rs. 1,23,476 towards human resources services, the assessee has "not furnished any specific input on training and development of huma....
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....er a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT Vs EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are....
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....the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accord 28. Ground no. 2.2 of the assessee, for both the assessment years before us, is allowed. 29. In ground no. 3, the assessee is aggrieved of the disallowance of Rs. 4,72,86,219 being 70% of the expenses claimed on account of distribution of free samples. In the assessment year 2010-11, in a connected grievance i.e. ground no. 6, the assessee is aggrieved of a similar disallowance, on the basis i.e. 70% of claimed deduction, for an amount of Rs. 3,39,59,527. 30. We find that identical issue, for the assessment year 2007-08, has been set aside to the file of the Assessing Officer vide coordinate bench's order dated 2nd August 2013. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. Respectfully following the same, we uphold the grievance of the assessee to the limited extent that the matter is restored to the file of the Assessing Officer for adjudication de novo after giving yet another opportunity of hearing to the assessee, in accordance with the law and by way of a speaking order so. ....
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....ter being restored to the file of the Assessing Officer for adjudication de novo by way of a speaking order, in accordance with the law and after giving an opportunity of hearing to the assessee: "1. An addition of Rs. 1,36,67,817/- was made in the assessment order for the assessment year 2008-09 under Section 145A of the Act representing the balance of "Unutilized Modvat Credit" outstanding at the year end (31-03-2008). The Commissioner of Income Tax (Appeals) in his Order also has confirmed the said addition on the ground that in the assessment year 2007-08 the Hon'ble Dispute Resolution Panel also confirmed the same and also that there were no change in the facts. 2. The AO in the draft Order had disallowed an amount of Rs. 1,51,50,936/- representing difference between the Modvat credit balance at the close of the year Rs. 2,88,18,753/-and at the beginning of the year Rs. 1,36,67,817/-. 3. The Hon'ble DRP in their Order held that credit in the value of the opening stock of Rs. 1,36,67,817/- is allowable by way of adjustment in the value of the opening stock in assessment year 2009-10.(Para No. 7.11 and Para No. 7.19). It is therefore submitted that the same is....
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....come tax refund, amounting to Rs. 64,18,102. 45. Learned counsel, however, fairly accepts that the issue is covered against the assessee, by a special bench decision of this Tribunal in the case of Avada Trading Co Pvt Ltd Vs ACIT [(2006) 100 ITD SB 131 (Mum)]. 46. Ground no. 7 is accordingly dismissed. Ground no. 8 for the assessment year 2010-11 must also stand dismissed for the same reason. 47. No specific arguments were addressed in support of ground nos 8 and 9, and, accordingly, these grounds are dismissed. In any case, these grounds only seek consequential relief. 48. In the result, appeal of the assessee for the assessment year 2009-10 is partly allowed in the terms indicated above. 49. We now take up the assessee's appeal for the assessment year 2010-11, i.e. ITA No. 1222/Mum/2011. 50. Ground no. 1 is general in nature and does not call for any adjudication. 51. As a result of the discussions earlier in this order, ground no. 2.1 is partly allowed, ground no. 2.2 is allowed, ground no. 6 is allowed for statistical purposes, ground no. 8 is dismissed and ground no. 9 is allowed for statistical purposes 52. In ground no. 3, the assessee is aggrieved of the deduction ....
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....d, according to him, expenses were incurred for the buyback of the shares, which is directly related to the capital of the assessee. Therefore, he treated it as capital expenditure. 7. The Tribunal differed with the AO and CIT(A) holding that the expenditure in question was not in relation with the share capital of the assessee company. For coming to this conclusion, the Tribunal has relied upon the judgment of the Supreme Court in the case of CIT vs. General Insurance Corporation (2006) 205 CTR (SC) 280 : (2006) 286 ITR 232 (SC). In that case, the issue involved was regarding expenses by way of stamp duty and registration for issue of bonus shares. These expenses were also in connection with the capital base of the assessee company therein. Under these facts, the apex Court held that since there is no flow of funds or increase in the capital employed, it cannot be said that the company had acquired benefit or advantage of enduring nature. 8. We may also mention at this stage that to the same effect is the judgment of the Supreme Court in Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) wherein the following principle of law was enunciated : "In ....
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....res. Instead of increase in the share capital, it was going to result in the decrease in funds with the buyback of the shares. In these circumstances, the Tribunal rightly held that the assessee had not acquired the benefit or addition of enduring nature because after the buyback, benefit or addition of enduring nature would not arise as capital employed had, in fact, gone down. The expenditure incurred had not resulted into bringing into existence any asset. Therefore, it was rightly held to be an expense of revenue nature. 12. The contention of learned counsel for the Revenue that with lesser capital dividend in future payable shall be less and, therefore, it shall be treated as a benefit of enduring nature cannot be accepted. We further find that in these circumstances the Tribunal rightly held that such an expenditure was allowed under s. 37 of the Act as expense incurred for business purpose in the following manner : "15. Once we decide that the impugned expenditure is not capital in nature, we have to see its allowability under s. 37. In this regard, we find that the expenses were incurred by the assessee company for compliance of SEBI guidelines with regard to buyback ....
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....y such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action. 63. We have also noted that the disallowance is....
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....pra) and Smith vs. Incorporated Council of Law Reporting (1914) 6 Tax Cases 477 that a sum of money expended not with a necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate, carrying on of business may yet be expended wholly and exclusively for the purpose of the trade; and it appears to me that the findings of the CIT in the present case, bring the payment in question within that description. They found (in words which I have already quoted) that payment was made for the sound commercial purpose of enabling the company to retain the existing and future members of staff and for increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of Sterling Pound 31,784 was not money wholly and exclusively laid out for the purpose of the trade under the rule above referred to, they found deduction was admissible-thus in effect, though not in terms, negativing the Crowns contentions. I think that there was ample material to support the findings of the CIT, and accordingly hold that this prohibition does not apply." 71. It will, ther....