9911796707
TMI Blog2015 (10) TMI 790X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 115JB of the Act. Since the assessee has transacted with its Associated Enterprises (in short "AE") as defined in section 92A of the Act, the Assessing Officer referred the international transactions to Transfer Pricing Officer (in short "TPO") for determining the arms length price (in short "ALP"). The TPO has issued order under section 92CA dated 28.10.2011 and the Assessing Officer formulated a draft assessment order on 28.12.2011 taking into account the above Transfer Pricing Order. In the draft assessment order the Assessing Officer determined the total income at Rs. 337,90,03,852/- under normal computation and at Rs. 140,86,17,801/- as book profits under section 115JB of the Act. 3. The assessee objected to the draft order. Vide its objections filed before the DRP on 30.12.2012 detailed submissions were filed relating to the facts and circumstances and the DRP considered the said objections vide its order dated 27.09.2012 and on some objections it accepted, on some objections it rejected and on some objections directed the TPO to modify. Consequent to the disposal of objections vide its order dated 27.09.2012, the Assessing Officer passed the final order under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1% on the issue. 9. The learned DR however, submitted that LIBOR + 2% is an accepted norm in international transactions. Therefore, the DRP order is reasonable. 10. We have considered the issue and examined the record. As far as the direction of the DRP that rate of corporate bond interest cannot be accepted is consistent with the stand taken by the DRP in some cases and by the ITAT in many cases that in principle, LIBOR + percentage points is to be accepted as ALP. However, the issue is about what percentage is to be applied over and above the LIBOR. There are many cases where assessee themselves are charging LIBOR + 2% / LIBOR + 3% depending on at what rate the funds are borrowed from various international institutions. In this case, there is nothing on record to show that assessee has borrowed funds at a higher rate of LIBOR + interest or USD LIBOR + interest. Since these are assessee's own funds, assessee has charged LIBOR + 1% on the loans. We do not find any reason not to accept the same as we noticed that DRP accepted +1% with reference to the guarantee fee charged by the assessee over and above the corporate guarantee fee charged by AMN Amro Bank. On similar transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income tax proceedings, the said amount was fully offered to tax on receipt basis during assessment year 2005-2006. However, in the books of account as the agreement for production of the said product was for a balance period of 44 months, the assessee spread-over the income in the books of account and accordingly, offered the amount of Rs. 26.91 crores in the P & L account of this financial year. While calculating the ratio of operating revenue by the cost for the purpose of transfer pricing study under section 92CA(3), the Assessing Officer excluded the above amount on the reason that it is not an operating revenue as the income does not pertain to the relevant financial year and the actual income was offered in earlier year. Similar issue was raised in assessment year 2007-08 also before the DRP as assessee offered the same amount in that year also in the books of account. It was the contention that this income being operational income of the assessee company, it should be considered while computing the ratios for transfer pricing determination and contested the same taking support from Rule 10B(1). It was further submitted that the assessee-company was prevented from selling th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much earlier i.e., much prior to assessment year 2005-2006. Therefore, there is no corresponding expenditure in the relevant assessment year. Even if there are costs/ liabilities for developing the product on which the assessee received patent infringement compensation, the costs and liabilities does not pertain to the year under consideration. 16. Assessee relied on the decision of Hon'ble Delhi High Court in the case of CIT vs. Desiccant Rotors s International Pvt. Ltd. (2012) 347 ITR 32 (Del.) (H.C.) wherein the issue was with reference to the claim of expenditure under section 37(1). In that context, the Hon'ble Delhi High Court has analyzed the principles relating to patent infringement rights and held that they are purely compensatory in nature and confirmed the liability of amount under section 37(1) of the Act and the ITAT order was accordingly confirmed by the Hon'ble Delhi High Court. But as seen from the judgment, the issue is not with reference to the Transfer Pricing adjustments but with reference to the claim of amount paid towards patent infringement as revenue expenditure, where the revenue treated it as capital expenditure. In that context, the decision was given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry events in any company also make it non-comparable while doing exercise of FAR analysis for comparability purpose. For the reasons stated above, we agree with the Assessing Officer/DRP that this income from settlement of patent infringement cannot be considered as operational income while working out the segmental profits or as total profits of the assessee for the purpose of comparison. At best, it can be considered as another segment of income for which no expenditure was charged, but the same cannot be included in either of the segmental operations of the assessee. This ground is accordingly rejected. 17. Grounds No. 4 to 8 pertain to the transfer pricing adjustment. The grounds 4 to 8 are as under : "4. The Dispute Resolution Panel erred in confirming that the operating margins (operating profit / operating costs) derived from segmental results duly certified by the Cost auditors of the tax payer are to be rejected and instead directing adoption of entity level operating margin for making adjustment for arms length price (ALP) in respect of Sales of Active Pharmaceutical Ingredients (API) and Product development services to the Associated Enterprises. 5. The Disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide para 6, under Head "FAR analysis". However, the difference arose with reference to the selection of comparables arrived at the profit margins and determination of ALP. In the T.P. Report, the assessee has selected 10 comparables for manufacturing of APIs wherein the average PLI (OP/TC) was arrived at 7.77% and for product development services it selected 8 comparables and average PLI OP/TC was arrived at 36.56%. Even though, assessee's total operating profit at the entity level was at 14.56%, assessee submitted segmental profits so as to compare the two different business segments and explained that the profit margins are comparable in the business. The TPO however, did not agree with segmental results furnished by the assessee on the reason that assessee has not maintained cost records, accounts maintained were defective and there was mismatch between the Revenue and costs in respect of product development services. During the proceedings the assessee furnished audited segmental results based on the cost audit as certified by M/s. Sagar Associates and copy of the cost audit certificate dated 18.05.2011 was submitted to the TPO. Thereafter, TPO went on to reject the segmental p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts were certified by the Cost Accountants and accepted by the panel with reference to the segmental accounts with reference to the AE and non-AE transactions, the same is also acceptable under the relevant determination of the segmental profits based on the same cost records. it was his submission that DRP has wrongly rejected the segmental profits. With reference to the acceptance of segmental profits, the learned Counsel relied on various case law of the ITAT (i) Diamond Dye Chem Ltd. vs. DCIT (2010-TII-20- ITAT-Mum. (ii) Sandoz Pvt. Ltd. ITA.No.6922/Mum/2012 (iii) Foursoft Ltd. ITAT, Hyd ITA.No.1495/Hyd/2010 (iv) Brigade Global Services, ITAT, Hyderabad, ITA.No.1494/Hyd/2010 (v) Green Land Exports Pvt. Ltd. ITA.No.2107/MDS/2011 21. With reference to selection of comparables, the learned Counsel has reiterated the objections raised before the authorities with reference to selection of various comparables and how they are not related to the assessee. First of all, the artificial turnover filter cited by the TPO was in fact not followed in selection of the comparables. With reference to Biocon, it was the submission of the learned Counsel that their business model its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 7(1), Mumbai vide ITA.No.6922/Mum/2012 dt.05.04.2013. (iv) Tecnimount ICB (P) Ltd. vs. ACIT 9(3), Mumbai (2011) 2 TMI 107 - ITAT, Mumbai. (v) Demag Cranes & Components (India) (P.) Ltd. vs. DCIT, Circle 1(2), ITAT, Pune (2012) 1 TMI 60. 24. Likewise, while objecting to the comparables, it was also submitted that on the basis of segmental profits the margin in product development service is more than the ALP fixed by the TPO. Further, it was submitted that PLI calculated by the TPO at 51.02% requires modification as the operating cost of product development service on proportionate basis was Rs. 128.73 crores on which the margin comes to 24.26%. The TPO considered only entity level margins in this segment also which was not correct. It was submitted that if the segmental finances were accepted and proper comparisons were made, no addition can be made. 25. The learned D.R. however, relied on the Orders of the TPO and DRP to submit that TPO has correctly arrived at the comparables of PLI and ALP. He supported the orders. 26. We have considered the issue and examined the details. We are of the opinion that the DRP's order on this issue is not fully based on the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis. Therefore, while accepting the assessee's objections in the grounds raised, we restore the issue to the file of the TPO for fresh determination based on the segmental profits and selection of comparables if required, after giving due opportunity to the assessee. Grounds are considered as allowed for statistical purposes. 28. Grounds No. 9 reads as under : "The DRP erred in confirming the order of the Transfer Pricing Officer by directing to include Rs. 3.05 crores being the reimbursement of expenses received by the tax payer as subject to Arms Length pricing under sec.92CA of the Act." 29. Facts relating to the above ground are that the assessee received an amount of Rs. 3.05 crores towards reimbursement of expenditure incurred by the assessee on behalf of its AEs. The TPO included the amount of reimbursement received as part of sales and considered the same for the purpose of making adjustment under section 92CA of the Act. It was the submission of the assessee that these expenses were incurred by the assessee on behalf of the AEs only for administrative convenience and do not include any service element. These expenses were recovered by the assessee on cost basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident J.V. Company of the assessee in the case of Astrix Laboratories Ltd. The DRP rejected the contention stating that the taxability or otherwise of an issue in another company would not determine the basis of taxation in the case of the assessee. 34. After considering the rival contentions we are not sure how this ground could arise. As seen from the objection before the DRP, it was stated that the assessee along with Astrix Pharma Care Holdings set-up a joint venture company called Astrix Laboratories Ltd. For the same assessment year, the TPO held that management fees as well as reimbursement of expenses aggregating to Rs. 2,17,69,943/- incurred/paid by Astrix to Matrix is to be treated as a transfer pricing adjustment and determined the ALP at NIL. It was further submitted that the issue is pending in the case of Astrix but since the amount of management fee of Rs. 1.12 crores and reimbursement of expenses at Rs. 1.05 crores were accounted by the assessee, these amounts should be excluded in the hands of the assessee as they are excluded in the hands of Astrix. This contention of the assessee cannot be accepted on the reason that there is no dispute with reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit 3.2 is said to be eligible for claiming deduction under section 10B of the I.T. Act. The Assessing Officer following the Orders under section 263 dated 13.10.2010 for the assessment year 2005-2006 held that the unit is not newly established undertaking andwas existing prior to the incorporation of provisions of section 10B and the conditions are not fulfilled and further that unit is not located in export process zone. Even though the Hon'ble A.P. High Court merely directed the CIT(A) to examine the approvals granted to the eligible units of the assessee in terms of the policy regulations laid down by Central Government, the CIT-IV, however, seems to have raised new ground for denying exemption and the same has been once again disputed by the assessee before the Hon'ble High Court in WP.No. 1398 of 2011. The Assessing Officer following the Orders in earlier years did not allow the claim of the assessee under section 10B. The DRP, however, noticed that the issue is subject to revisional proceedings by the CIT and the writ petition is pending before the Hon'ble High Court of A.P. Since the matter is contested at the Higher Forum legally, the DRP considered it fit not to interfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o subscribe for shares at the face value of Rs. 10. As the market price of each share was Rs. 919, the assessee claimed that it had given a discount of Rs. 909 which was allowable as a deduction as 'employee compensation. Though the options vested equally over four years, the assessee claimed a larger amount in the first year than was available under the SEBI guidelines. The AO & CIT(A) rejected the claim on the ground that there was no "expenditure". On appeal to the Tribunal, the issue was referred to the Special Bench. HELD by the Special Bench: (i) The difference (discount) between the market price of the shares and their issue price is "expenditure" in the hands of the assessee because it is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference between a case where the company issues shares to the public at market price and pays a part of the premium to the employees for their services and another where the shares are directly issued to employees at a reduced rate. In both situations, the employees stand compensated for their effort. By undertaking to issue shares at a discount, the company does not pay anythin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial bench in the above referred case, after giving an opportunity to assessee. Ground is allowed for statistical purposes. Therefore, considering the request, we restore this issue to the file of the Assessing Officer to examine the claim afresh in the light of decision of the Hon'ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon (supra). Ground No. 13 is allowed for statistical purposes. 42. Ground No.14 reads as under : "The Dispute Resolution Panel erred in confirming the Assessing Officer's order in rejecting the basis adopted by the tax payer for apportionment of common corporate overhead expense to all the units of the company including 100% Export Oriented undertakings eligible for deduction u/s.10B of the Act and in the process reducing the benefit u/s.10B by Rs. 42,91,369/- for Unit 3.2." 43. This ground is on the quantification of amount eligible for deduction under section 10B and is linked to ground No.12 where eligibility itself was disputed and the matter is subjudice. However, Assessing Officer also quantified the deduction to be allowed in case the unit was considered as eligible for deduction under section 10B. while quantifying the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein the Hon'ble High Court upheld the ITAT order and inturn of the learned CIT(A) order wherein the bifurcation of common expenses on the basis of ratio of employees head count was reasonable, conservative and justified. It was the contention that the rationale adopted by the assessee should be accepted. 45. We have considered the issue and examined the facts. Even though the issue was pending in earlier year, we are of the opinion that issue can be decided independently in this year. After considering the facts as stated in the objections before the DRP and also before us, we are of the opinion that assessee has allocated the corporate overheads on a rational basis based on the material cost of purchase and number of people worked for the unit and also on the basis of head account which is reasonable. Adopting sales turnover as the basis may result in skewed allocation. For example, if a particular unit is producing only high cost/ high price product, the effort and service cost for that unit will be less whereas, the profit margin will be more. If the unit is not producing much in the year and has lesser sales, allocation of amount on the basis of turnover may result in under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation is pending before the Hon'ble High Court and the issue has not been finalized. This cannot be a reason for denying the depreciation claimed. Since, ITAT has already ordered the depreciation to be allowed in assessment year 2002-2003, consequently, depreciation has to be allowed by the Assessing Officer in this year. He is empowered to take rectification proceedings in case that order was not upheld by the Hon'ble High Court. In view of this, to that extent of claim of depreciation amounting to Rs. 8,89,893/- on brought forward written down value, Assessing Officer is directed to allow the depreciation after verifying the WDV figures. Part of the ground (b) is accordingly allowed. 48. The next claim i.e., Ground No.15(a) is with reference to claim of depreciation at 25% amounting to Rs. 8,75,000/- on brought forward written down value of Rs. 35 lakhs in respect of non-compete fee of Rs. 40 lakhs paid in relation to Concord Biotech Limited during the previous year relevant to financial year 2006-2007. Even though the assessee claims the depreciation was on brought forward amount, in the submissions to the Assessing Officer and as extracted in the objections to the DRP at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions, we are of the opinion that the cases against the assessee are more in number and there is a consistent view of the ITAT in not allowing the depreciation on non-compete fee. This issue which was originally considered in the case of Tecumse India Pvt. Ltd. Addl. CIT 5 ITR TRIB 50 (Del.) wherein the proposition canvassed by the assessee that non-compete fee is revenue expenditure was rejected and held that non-compete fee for acquisition of business has been held as capital expenditure as the same was incurred for the initial outlay of the business. Following the above principles and the decision of the Hon'ble Delhi High Court in the case of Hidustan Coco Beverages Pvt. Ltd. 331 ITR 192 (Del), the ITAT, Chennai Bench 'A' in Arkema Peroxides India (P) Ltd. vs. ACIT vide ITA.No.2212/Mad/2006 dated 13.01.2012 has held, as under : "From the decision of the hon'ble Delhi High Court in the case of CIT v. Hindustan Coco Cola Beverages (P.) Ltd. [2011] 331 ITR 192 (Delhi) it is clear that 'business or commercial rights of similar nature' are not manufactured or produced over-night, but are brought into existence by experience and reputation. The non-compete fee is outc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on Rs. 49,94,14,696/- in respect of actual expenditure of Rs. 33,29,43,131/- ( @ 150% )of the amount eligible under section 35(2)(AB). The assessee however, filed Form 3CC duly approved by the Department on Scientific and Industrial Research dated 31.10.2011. wherein it has accepted the actual R & D expenditure at Rs. 32,73,07,418/-. Instead of allowing the claim at 150% on that amount at Rs. 49,09,61,127/- the Assessing Officer allowed the amount at the actual at Rs. 32,73,07,418/-. Before the DRP vide objection 18, the assessee contended that what is certified was only 100% of the expenditure, whereas, the assessee is entitled for weighted deduction at 150%. Therefore, 50% therein at Rs. 16,36,53,709/- should be allowed as the deduction. Inspite of clearly specifying the objection, for the reasons best known, the DRP had rejected the objection by observing that Order passed in assessment year 2006-2007 and 2007-2008 was also similar and there is no difference on facts. 56. After considering the submissions of the assessee, we agree with the assessee that it is entitled for 150% of the amount actually spent as weighted deduction under the provisions of sec.35(2AB). Since the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
