TaxTMI 
TaxTMI 
2019 (5) TMI 1543
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....r Government. The return of income for the year under consideration was filed by it on 31.10.2005 declaring total income of Rs. 24,50,77,530/-. As noted by the Assessing Officer during the course of assessment proceedings, the assessee had paid an amount of Rs. 41,20,200/- to its Associated Enterprise at Netherland namely M/s. Organon NV and the same was claimed to be towards reimbursement of expenses. It was claimed on behalf of the assessee-company in this regard that its Netherlands based Associated Enterprise had purchased Software on licence from Microsoft for use by all its Group entities and the licence fees paid by M/s. Organon NV for the software to Microsoft was apportioned at actuals to all the Group entities on the basis of number of employees. It was submitted that the share of the assessee worked out to Rs. 41,20,200/-, which was reimbursed to M/s. Organon NV on the basis of actuals. It was contended that the said amount thus represented purely reimbursement of expenses to M/s. Organon NV and since it did not include any income element, the assessee was not liable to deduct tax at source from the payment of the same. The Assessing Officer did not find merit in this co....
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....common order dated September 20, 2017 passed in ITA Nos. 863/KOL/2008 and 978/KOL/2009. He also invited our attention to the relevant portion of the order of the Tribunal as contained in paragraph no. 14 to 18 and submitted that a similar amount paid by the assessee-company to its Netherlands based Associated Enterprise for its share of the expenditure incurred on purchase of Software on licence from Microsoft USA was held to be not liable for deduction of tax at source by the Tribunal and the disallowance made under section 40(a)(i) was deleted. 6. The ld. D.R., on the other hand, submitted that even though the Tribunal has decided a similar issue in favour of the assessee for A.Ys 2003-04 and 2004-05 vide its order dated September 20, 2017 (supra), the decision of Hon'ble Calcutta High Court in the case of CIT -vs.- Andaman Sea Food Pvt. Limited (ITAT No. 19 of 2013 dated 23.07.2014) supports the stand of the Revenue taken on this issue. 7. In the rejoinder, the ld. Counsel for the assessee submitted that the decision of the Hon'ble Calcutta High Court in the case of CIT -vs.- Andaman Sea Food Pvt. Limited (supra) cited by the ld. D.R. is distinguishable on facts. He submit....
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....004-05. He, however, has relied on the decision of the Hon'ble Calcutta High Court in the case of CIT -vs.- Andaman Sea Food Pvt. Limited (ITAT No. 19 of 2013 dated 23.07.2014) which, according to him, supports the revenue's stand on this issue. However, as rightly contended by the ld. Counsel for the assessee, the said case decided by the Hon'ble Calcutta High Court is distinguishable on facts, inasmuch as, the transactions under consideration in the said case were not covered by the relevant DTAA, whereas the amount in question paid by the assessee in the present case to its Netherland based Associated Enterprise is not taxable in the hands of the Associated Enterprise in India as per the relevant clause of the DTAA as found by the Tribunal in the assessee's own case for A.Ys. 2003-04 and 2004-05. Moreover, as held by the Tribunal in its order for A.Ys 2003-04 and 2004-05, the assessee was entitled for relief on this issue even as per the benefit conferred under non-discrimination clause of the DTAA. We, therefore, respectfully follow the decision of the Tribunal rendered in assessee's own case for A.Ys. 2003-04 and 2004-05 vide its order dated September 20, 2017 (supra) and dele....
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....at the assessee was not entitled to make any fresh claim, which was not made either in the return of income originally filed or by way of filing a revised return. 12. The ld. Counsel for the assessee submitted that the assessee was liable to make good any short-fall in the minimum conversion charges payable as per the agreement entered into with a contract manufacturer. He submitted that such short-fall pertaining to the year under consideration i.e. A.Y. 2005-06 as well as for A.Y. 2006-07 was settled and finalized in the previous year relevant to A.Y. 2007-08. He submitted that the amount of such short fall accordingly was debited by the assessee to the Profit & Loss account for A.Y. 2007-08 and in the computation of total income for A.Y. 2007-08, the amount so debited was offered to tax being prior period expenses. He invited our attention to the Audit Note given on this issue placed at page no. 380 of the paper book and pointed out that the amount to the extent of Rs. 35,87,451/- being pertaining to the year under consideration, i.e. A.Y. 2005-06 was claimed by the assessee as deduction during the course of assessment proceedings He contended that since the said amount undis....
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....dispute was finally settled in the financial year 2006-07 relevant to assessment year 2007-08 and accordingly the amount of difference payable by the assessee to M/s. ASG Bio Chem Limited was debited to the Profit & Loss Account for the F.Y. 2006-07. It is thus clear that the amount in question payable by the assessee on account of difference between the actual conversion charges and minimum conversion charges for the year under consideration representing contractual liability was in dispute and the same was settled and crystallized only in the F.Y. 2006-07 relevant to A.Y. 2007-08. As rightly contended by the ld. D.R., the assessee, therefore, was not entitled for deduction on account of this contractual liability pertaining to the year under consideration as the same represented disputed liability and since this dispute was settled and the liability was crystallized only in the F.Y. 2006-07, the assessee was entitled for the deduction of the same only in A.Y. 2007-08. We, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on this issue and upholding the same, we dismiss Grounds No. 6 to 8 of the ass....
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....8 Non-operating incomes NIL NIL Non-operating expenses NIL NIL Profit before tax(as per accounts) NIL NIL Gross margin to sales (0%) NIL NIL Operating margin to sales (0%) 11.36% 31.51% Gross margin to VAE (0%) NIL NIL GP/OICOP NIL NIL 17. From the above segmental Profit & Loss Account, the Transfer Pricing Officer found that administrative and other allocable expenses had not been allocated by the assessee to the segment, wherein sales were made to the Associated Enterprises and the same were entirely allocated to the segments where sales were made to the unrelated parties. He also found that operating margin to sales in case of sale made to unrelated parties was 31.51% as compared to 11.36% in case of sales made to Associated Enterprises. As noted by the Transfer Pricing Officer, if the administrative and other expenses had been allocated to the segment involving sales made to the Associated Enterprise, profit of the said segment would have further gone down. He accordingly required the assessee to explain as to why the transactions of the segment involving sales made to Associated Enterprise should not be consider....
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....rences, between these segments as stated in paragraph 4.2.21 (page 25) of the Transfer Pricing Study for FY 2004-05 already submitted before your goodself. Such functional difference explain the reason for not allocating administrative expenses to segment 2. To elaborate on such differences, the functions performed by OIL with respect to the above mentioned international transactions has been summarised as under:- OIL imports raw materials from group companies as well as non group companies, which are used in the manufacturing of the final products, the nature of the pharmaceutical industry is such that the quality of inputs (specially the active ingredients) is of paramount importance in determining the quality of the end product. Before a raw material can be used in the production process, the quality parameters need to be set. Once the raw materials pass the quality control procedure, they can be used for the production process. In the case of OIL, such quality testing is generally done by the associate enterprise from whom the raw materials are purchased. In the case of imports from non group entities (i.e. third parties) quality testing is done by OIL. The ot....
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....-company by using its own facility or somebody else's facilities. He also held that there was nothing to show that any risk involved in the transactions was transferred by the assessee-company to the sub-contractors/loan manufacturers. He accordingly rejected the assessee's contention that two segments could not be functionally compared and applying the operating profit margin to sales of 31.51% of the segment involving export of goods to unrelated parties after allowing the adjustment of 1.51% on account of commission/charges paid to the loan manufacturer in lieu of the services, he determined the arm's length operating margin of the assessee-company of the segment involving export to Associated Enterprise at Rs. 2,25,38,783/- as against the operating margin of Rs. 85,34,686/- shown by the assessee. Accordingly Transfer Pricing Adjustment of Rs. 1,40,04,097/- (Rs. 2,25,38,783/- minus 85,34,686/-), was worked out by the Transfer Pricing Officer in respect of these international transactions of the assessee-company with its Associated Enterprise and in the assessment completed under section 143(3) vide an order dated 22.12.2008, an addition to that extent was made by the Assessing O....
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....resent year the same was done under the provisions relating to Transfer Pricing, but in both the years the disallowance was mode following the same principle that there was no apparent purpose or utility of such audit to the assessee. Therefore, I find no merit in the decisions of the TPO in this respect and hence, the AO. is directed to allow the claim .... " Based on the judgment of the CIT (Appeals), the appellant humbly submits before your goodself, that, the adjustment of Rs. 1,400,719 made by the TPO and as accepted by AO is erroneous and bad in law since the same is in contradiction of the provisions of the Act and against the decision of various Tribunal." D. Variance of 5% from the arithmetical mean as provided under the Act has not been allowed by the TPO and the Assessing Officer. Further, the Ld. A.R. made submissions vide his letter dt. 2409-2009 as under: "Adhoc allowance by the Transfer Pricing Officer ("TPO") and the Assessing Officer ("AO") of 1.51 % as commission charges payable to the loan manufacturer 1.0 The appellant would like to reiterate from the submission dated 5th June dated 2009 (Copy of the same is attached ....
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....respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties o the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. The TPO' and accordingly the AO while comparing the two segments and also computing the adjustment did not take cognizance to the parameters laid down in Rule 10B of the Rules. 2.1 Further, the Rules also provides that an uncontrolled transaction would be comparable to an international transaction if 1. None of the differences between the transactions being compared or between the enterprises entering into such transactions materially affect the price of the international transaction, or 2. A. reasonable adjustment could be made to eliminate the effects of such differences. In this regard, reference, can be drawn from Rules 10B (3) of the Rules, 10B (3) An uncontrolled transaction shall be comparable to an international transaction if - i) no....
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....lant the relevant clause u/s 92C(3) of the Act which triggered the application of provisions of the transfer pricing. But this objection of the appellant has no substance at all as the reference to TPO was made by A.O u/s 92CA(1) and not u/s 92C(3). Hence appellant's objection raised vide ground no. 5 is rejected. 5.3.2. The appellant's other objections to adjustment are on the ground of non-comparability of both segments on account of FAR differences, involvement of related party transactions in both segments etc. In this connection my observations are as under: (i) The appellant has imported raw materials from its AE and in turn exported goods after manufacturing to its AE's and non AE's both. The goods exported to AE's have been manufactured by- the appellant through the loan licensee (contract manufacturer) and this segment is hereinafter called 'segment 2' and the goods exported to non AE's have been manufactured by the appellant itself and this segment is hereinafter called 'segment 3'. The A/O has compared these two segments and has observed that the appellant has derived operating margin to sale of 11.36% from 's....
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.... (iv) Moreover, the manufacturing cost in case of 'segment 2' represents cost of job charges paid to loan licensee. It is observed that the ratios of manufacturing costs to raw materials consumed are 42.86% in case of segment 2 being contract manufacturing and 45.98% in case of segment 3 being own manufacturing, It means the outsourcing of manufacturing facility is beneficial in the case of the appellant also. But the ratios of gross margin to sales are 31.55% in case of 'segment 2' and 73.26% in case of 'segment 3' which shows that in spite of the fact that the contract manufacturing is beneficial the gross margin to sales in case of 'segment 2' is very low as compared to 'segment 3'. This proves that the appellant sell goods to its AE's at prices lower than the market price, so that on resale most of the profits would be reported in AE's jurisdiction. (v) Reliance is placed on Ranbaxy Laboratories Ltd. Vs. ACIT (2008) 110 ITD 428 (Delhi) wherein the Hon'ble Tribunal has dismissed the assessee's contention that internal uncontrolled transactions carried out by the taxpayer were not comparable with transaction....
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....the related parties, the products manufactured from one segment and sold by the assessee to Associated Enterprises was classified as active pharmaceutical ingredients or bulk drugs while the products of the other segment manufactured and sold to unrelated parties were formulations. He also invited our attention to the list of such products manufactured in both the segments and submitted that the active pharmaceutical ingredients/bulk drugs produced by the assessee in one segment were in the nature of intermediates which were required to be further processed by the Associated Enterprises to produce the final products for sale to their customers. He submitted that the formulations produced in the other segment by the assessee-company and supplied to the unrelated parties, on the other hand, were final products. By relying on the decision of Ahmedabad Bench of ITAT in the case of Inducother (India) Pvt. Limited -vs.- DCIT, he contended that these two segments, therefore, were not comparable and the Transfer Pricing Officer as well as the ld. CIT(Appeals) failed to appreciate and understand the difference in the functional profile pointed out by the assessee in these two segments. The ....
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....el for the assessee, the same is not relevant when the method adopted is TNMM. As regards the difference in risk undertaken in two segments as pointed out by the ld. Counsel for the assessee, he contended that such difference is only marginal and not substantial. He contended that when these two segments are found to be the functionally comparable, some adjustments can be made for the marginal difference in risk undertaken while determining the transfer pricing adjustment. 23. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the segment in which sales were made by the assessee to its Associated Enterprises, the products were in the nature of active pharmaceutical ingredients/bulk drugs, which were intermediates and the said intermediates were required to be further processed by the Associated Enterprises for producing the final products for sale of its customers. In the other segment where sales made by the assessee were to the unrelated parties, products manufactured were in the nature of formulation which constituted final products manufactured and sold by the assessee company under its own name. It is thu....
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....to be taken as comparables by the Transfer Pricing Officer in A.Y. 2007-08 and when specific query was raised by him, the difference in business profile of both these segments was explained by the assessee by pointing out that the final products exported to Associated Enterprises were active pharmaceutical ingredients, which were active chemicals with medicinal properties used in the further manufacturing of drugs (formulations), whereas the goods exported to unrelated parties were formulations being the finished products (Drugs). It was also pointed out by the assessee that the nature of risk borne by the assessee in these two segments was different, inasmuch as, the risk undertaken in the manufacturing and export of goods to Associated Enterprises was low while the risk undertaken in manufacturing and export of final products to unrelated parties was high. As pointed out by the ld. Counsel for the assessee from the Transfer Pricing Officer's order dated 28.10.2010 passed for A.Y. 2007-08, this distinction or dissimilarity brought to his notice by the assessee was accepted by the Transfer Pricing Officer and these two segments were not taken by him as comparables inspite of the fa....
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....ppeals), it was submitted on behalf of the assessee-company that it did not have any internal audit department in its organisation and hence internal audit services were availed from external agencies in order to have an internal audit system commensurate with its size and nature of business. The benefits received from such internal audit services were also explained by the assessee before the ld. CIT(Appeals). The ld. CIT(Appeals), however, did not find merit in the case of the assessee on this issue and confirmed the addition made by the Assessing Officer on account of transfer pricing adjustment for the same reasons as given by the Assessing Officer. 29. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. Although the ld. D.R. has strongly relied on the orders of the authorities below in support of the revenue's case on this issue, it is observed that a similar issue was involved in the assessee's own case for the immediately preceding year i.e. A.Y. 2004-05 and the similar addition made by the Assessing Officer on account of transfer pricing adjustment made in respect of the international transactions of the....
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....ransfer Pricing Officer's conclusions that no tangible benefit had accrued to the assessee-company directly or indirectly by such internal audit was held to be incorrect by the ld. CIT(Appeals) in A.Y. 2004-05. Even in his impugned order passed for the year under consideration, the ld. CIT(Appeals) accepted the fact that the internal audit conducted by the parent company was to ensure that the affairs of the assessee company are carried out as per the global practices of the group. He, however, held that the parent company was not willingly appointed by the assesese-company to conduct the audit and, therefore, there was no additional benefit that had accrued to the assessee directly or indirectly from such audit. Keeping in view all the facts of the case as well as the decision of the ld. CIT(Appeals) in assessee's own case for the immediately preceding year i.e. A.Y. 2004-05, we are unable to subscribe to the view taken by the ld. CIT(Appeals) in the year under consideration. 31. As already noted, the relevant details of the internal audit services rendered from its Associated Enterprise were furnished by the assessee including the internal audit report which contained findings....