THE DY CIT CIR 8(1), MUMBAI v. M/S. CHIRON BEHRING VACCINES P. LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L MUMBAI BEFORE SHRI J SUDHAKAR REDDY ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA NO. 3557/MUM/2006 (ASSESSMENT YEAR 2002-03) M/S CHIRON BEHRING VACCINES PRIVATE LIMITED 501 SHRI AMBA SHANTI CHAMBERS ANDHERI-KURLA ROAD ADHERI (E) MUMBAI-400059 PAN: AAACC6494P APPELLANT VS ACIT CENT CIR 8(1) AAYAKAR BHAVAN M K ROAD MUMBAI-400020 .RESPONDENT ITA NO. 3647/MUM/2006 (ASSESSMENT YEAR 2002-03) ACIT CENT CIR 8(1) AAYAKAR BHAVAN M K ROAD MUMBAI-400020 APPELLANT VS CHIRON BEHRING VACCINES P LTD. 501 SHRI AMBA SHANTI CHAMBERS ANDHERI- KURLA ROAD (OPP. THE LEELA) ANDHERI (E) MUMBAI-400093. ..RESPONDENT ASSESSEE BY : SHRI ARVIND SON DE REVENUE BY : SHRI NARENDER SI NGH O R D E R PER VIJAY PAL RAO JM THESE CROSS-APPEALS ARE DIRECTED AGAINST THE ORDER DATED 31.03.2006 OF CIT(A) FOR THE ASSESSMENT YEAR 2002-03. 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 2 ITA NO. 3557/MUM/2006 (BY ASSESSEE) 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS OF APPEAL: 1. THE LD. CIT(A) ERRED IN CONFIRMING THE AOS ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT AND THEREBY DISALLOWING THE WHO CERTIFICATION CHARGES PAID BY THE APPELLANT ON THE CONTENTION THA T THE SAME ARE IN THE NATURE OF CAPITAL EXPENDITURE A ND THEREFORE NOT TO BE ALLOWED AS DEDUCTION 2. THE LD. CIT(A) ERRED IN COMPARING THE MARGINS EARNED BY THE APPELLANT FROM EXPORT OF VACCINES TO AN ASSOCIATED ENTERPRISE VIZ. CHIRON BEHRING GMBH AND CO KG WITH THE MARGINS EARNED FROM SALE OF VACCINES IN DOMESTIC MARKET TO ANOTHER ASSOCIATED ENTERPRISE VIZ AVENTIS PHARMA LTD AND NOT COMPARIN G THE SAME WITH THE MARGINS EARNED BY COMPARABLE UNCONTROLLED COMPANIES . 3. GROUNDS OF APPEAL NO.1 REGARDING EXPENSES OF RS.1 20 94 000/-. THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A 51:49 JOINT VENTURE COMPANY BETWEEN CHIRON COR PORATION USA AND AVENTIS PHARMA LIMITED ENGAGED IN THE PHARMACEUTICAL BUSINESS IN MANUFACTURING A VACCINE WHICH IS USED FOR THE CURE OF RABIES. THE ASSESSEE HAD PURC HASED THE EXISTING CELL CULTURE RABIES VACCINE MANUFACTURING FACILITY OF AVENTIS PHARMA LIMITED LOCATED IN ANKELESHWAR GUJ ARAT. THE VACCINE IS SOLD UNDER THE TRADEMARK RABIPUR WHICH IS OWNED BY CHIRON BEHRING GMBH AND CO .GERMANY. THE ASSE SSEE CLAIMED THE EXPENSES OF RS.1 20 94 000/- TOWARDS WHO 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 3 CERTIFICATION FEE. THE AO OBSERVED THAT THE PAYME NT WERE MADE TO THE ASSOCIATE COMPANY BY THE ASSESSEE FOR S OME SERVICES DONE BY THEM IN ORDER TO GET WHO CERTIFICA TION IN RESPECT OF THE PRODUCTS OF THE COMPANY. THE ASSESS EE SUBMITTED BEFORE THE AO THAT THE OBJECTIVE BEHIN D SEEKING THE CERTIFICATION FROM WHO WAS TO CATER TO THE DEM AND FOR THE VACCINES ARISING FROM OVERSEAS BUYERS FOREIGN GO VERNMENTS UNITED NATIONS AGENCIES SUCH AS UNICEF ETC. WHO CERTIFICATE GIVES A COMFORT TO THE OVERSEAS BUYERS VIZ-A-VIZ QUALITY AND MANUFACTURING STANDARD OBSERVED BY THE MANUFACTURER. FURTHER IT WAS LIKELY THAT THE WORL D HEALTH ASSEMBLY WOULD IDENTIFY ERADICATION OF RABIES AS PRIORITY PROJECT. THE ASSESSEE COULD FORESEE A POTENTIALLY LARGE DEMAND OF VACCINE DUE TO THE ABOVE AS COUNTRIES WI TH RABIES INCIDENTS. THE AO WAS OF THE VIEW THAT THE ACQUISI TION OF THE WHO CERTIFICATION GIVEN ENDURING BENEFIT TO THE ASS ESSEE COMPANY THEREFORE THE EXPENSES ARE OF CAPITAL I N NATURE. THE AO ACCORDINGLY DISALLOWED THE CLAIM OF THE ASSE SSEE AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE . 3.1 ON APPEAL THE CIT(A) UPHELD THE DISALLOWANCE M ADE BY THE AO AND AGREED WITH THE VIEW OF THE AO THAT THE EXPENDITURE IS CAPITAL IN NATURE. 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 4 3.2 BEFORE US THE LEARNED AR OF THE ASSESSEE HAS S UBMITTED THAT THE ASSESSEE IS A JOINT VENTURE COMPANY HAVIN G A JOINT VENTURE 51:49 BETWEEN CHIRON CORPORATION USA AND AVENTIS PHARMA LIMITED AND ENGAGED IN THE PHARMACEUTICAL B USINESS. THE ASSESSEE IS MANUFACTURING VACCINE WHICH IS USE D FOR RABIES AND THUS THE EXPENDITURE FOR OBTAINING THE CERTIFICATION FROM WHO IS IN THE NORMAL COURSE OF B USINESS OF THE ASSESSEE. THE PROCESS FOR OBTAINING THE CERTI FICATE INVOLVES EXAMINATION BY THE WHO OFFICIAL OF THE MANUFACTURING FACILITIES OF THE ASSESSEE RESPOND ING QUERIES ETC RAISED BY THE WHO FOR GRANTING THE CERTIFICATE . THE ASSESSEE SOUGHT THE ASSISTANCE OF SERVICES OF CH IRON BEHRING GMBH AND CO .GERMANY A ASSOCIATE COMPANY WHICH IS A HOLDING COMPANY PARTICULARLY IN THE AREAS O F REGULATORY SUPPORT IN ANSWERING THE QUESTION ARISING OUT OF T HE WHO INSPECTION. THUS FOR THIS PROCESS THE CHIRON BEHR ING GMBH AND CO .GERMANY. AGREED TO RENDER THE HELP TO THE E ND OF OBTAINING THE CERTIFICATE FOR THE ASSESSEE AND TH E EXPENSES INCURRED BY THEM IS IN THE COURSE OF THIS PROCESS W ERE MADE OVER BY THE ASSESSEE COMPANY. HE HAS ALSO REITERA TED THE CONTENTIONS RAISED BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AND SUBMITTED THAT THE CERTIFICATION B Y WHO IS GIVEN IN RELATION TO QUALITY MANUFACTURING STANDARD OBSERVED BY THE ASSESSEE WHILE MANUFACTURING THE RABBIS VACC INE 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 5 THEREFORE THE ASSESSEE WOULD BE IN A PROPER POSITI ON TO CATER THE DEMANDS FOR THE VACCINE FROM OVERSEAS BUYERS A ND OTHER UNO AGENCIES. HE HAS REFERRED THE CERTIFICATE GRAN TED BY THE WHO AND SUBMITTED THAT THE CERTIFICATE IS ONLY THE CERTIFICATION OF THE MANUFACTURING FACILITIES OF THE ASSESSEE FOR RABIES VACCINE AND STANDARD OBSERVED BY THE ASSESSEE IN MANUFACTURING PROCESS AS WELL AS QUALITY OF THE VAC CINE. THEREFORE THE LEARNED AR OF THE ASSESSEE HAS SUBMI TTED THAT THE EXPENDITURE IS NOT IN THE NATURE OF THE CAPITAL AND SHALL BE ALLOWED. IN THE ALTERNATIVE THE LEARNED AR HAS SU BMITTED THAT IF THE EXPENDITURE IS TREATED AS CAPITAL IN NATURE THEN THE ASSESSEE IS ENTITLED FOR DEPRECIATION. 3.3. ON THE OTHER HAND THE LEARNED DR HAS SUBMITTE D THAT OBTAINING A CERTIFICATE FROM WHO HAS ENLARGED THE M ARKET AND DEMAND OF THE PRODUCT OF THE ASSESSEE LIKE ACQUISIT ION OF BRAND OR TRADE MARK. WITHOUT THE CERTIFICATE THE ASSESSEE COULD NOT SALE ITS PRODUCT IN THE OVERSEAS MARKET AND THEREFORE THE EXPENDITURE INCURRED ON OBTAINING TH E CERTIFICATE FROM WHO ASCERTAINING THE ASSESSEES PRODUCT ADVAN TAGEOUS POSITION IN COMPARISON TO THE PRODUCT MANUFACTURED BY THE OTHER NON-CERTIFIED COMPANIES. THEREFORE THE EXPE NDITURE HAS GIVEN AN ENDURING BENEFIT TO THE ASSESSEE AND IS IN THE NATURE OF CAPITAL. HE HAS RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES. 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 6 3.4 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND RE LEVANT RECORD. UNDISPUTEDLY THE ASSESSEE HAS INCURRED AN EXPENDITURE FOR OBTAINING THE CERTIFICATION OF THE WHO REGARDING MAINTAINING STANDARD AND MANUFACTURING F ACILITIES AS WELL AS QUALITY OF THE VACCINE. IT IS THE CASE OF THE ASSESSEE THAT AFTER GETTING THE CERTIFICATE THE A SSESSEE WOULD BE ABLE TO CATER DEMAND OF OVERSEAS MARKET FOR THIS VACCINE. THEREFORE THE CERTIFICATE OF WHO WAS NECESSARY FO R SALE OF THE VACCINE TO OVERSEAS MARKET AND GOVERNMENT AGEN CIES. FROM THE CERTIFICATE WHICH IS PLACED AT PAGE NO.1 O F THE PAPER BOOK IT IS CLEAR THAT THE CERTIFICATE GRANTED FO R SAFE EFFECTIVE AND ACCEPTABLE VACCINE FOR SUPPLY TO THE UN PURCHAS ING AGENCIES WHICH IS THE BENEFIT OF ENDURING NATURE AN D FOR A LONG PERIOD ALSO. THUS IN THESE FACTS AND CIRCUMSTANCES OF THE CASE IT IS CLEAR THAT THE EXPENDITURE WAS NOT FOR ANY BETTER WORKING CONDITIONS OR CONVENIENT MANUFACTURING PROC ESS BUT IT WAS FOR RECOGNITION OF THE MANUFACTURING FACILITIES AND QUALITY OF THE PRODUCT WHICH IS NECESSARY FOR SUPPLY TO THE WHO AS WELL AS OVERSEAS MARKET. ACCORDINGLY WE DO NOT FI ND ANY ERROR OR ILLEGALITY IN THE ORDER OF THE CIT(A) QUA THIS ISSUE. AS FAR AS THE ALTERNATIVE GROUND OF THE ASSESSEE IS CO NCERNED THAT THE CIT(A) HAS ALREADY DIRECTED IN THE IMPUGNED OR DER THAT THE AO SHOULD ALLOW ADMISSIBLE DEPRECIATION ON THI S AMOUNT. 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 7 3.5 IN THE RESULT GROUNDS OF APPEAL NO.1 IS DISMIS SED. 4. GROUNDS OF APPEAL NO.2 IS REGARDING ARMS LENGTH PRICE (ALP) OF THE EXPORT OF VACCINE U/S 92CA(3). DURIN G THE YEAR THE ASSESSEE HAD VARIOUS INTERNATIONAL TRANSACTIO NS AS PER SECTION 92B OF THE ACT. THE DETAILS ARE GIVEN IN THE TRANSFER PRICING ORDER AT PARAGRAPHS 4 WHICH ARE AS UNDER : S.NO. NAME AND ADDRESS OF AS SOCIATED ENTERPRISES (AES) COUNTRY OF TAX RESIDENCE OF AES NATURE OF RELATIONSHIP DESCRIPTION OF TRANSACTION WITH AES AMOUNT PAID/PAYABLE /RECEIVED/RECEIVA BLE AS PER BOOKS OF ACCOUNT (RS.) 1 CHIRON BEHRING GMBH AND CO.POBOX 1630 D- 35006 MARBURG GERMANY GERMANY 91A(2)(B) (I) PURCHASE OF SEED VIRUS 74 370 400 II)SALE OF VACCINES 87 762 334 III)PAYMENT OF ROYALTY 22 676 378 IV) PAYMENT OF TECHNICAL SERVICES FEES 10 102 247 PURCHASE OF MISCELLANEOUS ITEMS 1 270 038 4.1 THE AMOUNT INVOLVED IN THE ABOVE SAID INTERNA TIONAL TRANSACTIONS WITH THE ASSOCIATE ENTERPRISES (AE) HA VE BEEN COMPUTED BY THE ASSESSEE FOR ARMS LENGTH PRICE (A LV) AND RECORDED IN THE BOOKS OF ACCOUNTS BY USING TRANSACT IONAL NET MARGIN METHOD (TNMM) BY ADOPTING THE NET COST + (PLUS) MARGIN AS THE PROFIT LEVEL INDICATOR. IN THE TRAN SFER PRICING REPORT THE ASSESSEE HAS TAKEN EXTERNAL COMPARABLE AND 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 8 SHOWN THAT THE WEIGHTED NET COST + (PLUS) COMPAR ABLE COST AT 9.46%. THE AO REFERRED THE TRANSFER PRICING (TP ) REPORT MATTER U/S 92CA(1) OF THE ACT TO THE TP OFFICER. THE TRANSFER PRICING OFFICER VIDE HIS ORDER DATED 22.3.2005 PASS ED U/S 92CA(3) COMPUTED THE ALP OF EXPORT OF VACCINE AS UN DER : 6. TO SUM UP THE TOTAL ADJUSTMENTS TO THE INCOME OF THE ASSESSEE BY CONSIDERING THE PROVISIONS OF CHAPTER 10 OF THE IT ACT ARE WORKED OUT AS BELOW: (I) THE ARMS LENGTH PRICE OF ROYALTY OF RS.22 676 376 IS COMPUTED AT NIL II) ON ACCOUNT OF ARMS LENGTH PRICE OF EXPORT OF VACCINE IS COMPUTED AT RS.114 352 614/- AS AGAINST TRANSACTIONAL VALUE OF RS.87 762 334/-. 4.2 THE TPO HAS HELD THAT THE PAYMENT OF ROYALTY I S UNWARRANTED PAYMENT IN DEFIANCE OF THE AGREEMENT B ETWEEN CHIRON CORPORATION USA AND HOECHT MARION ROUSSEL L TD (HMR). THE TPO WAS OF THE VIEW THAT WHEN THE ASSE SSEE WAS INCURRING THE EXPENSES FOR UNDERTAKING CLINICAL TRI ALS AND ALSO PAYING TO THE CHIRON GERMANY FOR OBTAINING THE P RE- QUALIFICATION SUPPORT THEN A SEPARATE PAYMENT FO R ROYALTY HAS BEEN HELD AS UNWARRANTED. 4.3 AS REGARDS THE ADJUSTMENT ON ACCOUNT OF ARMS LENGTH PRICE OF EXPORT OF VACCINE THE TPO WAS OF THE VIE W THAT THE PRICE REALIZATION ON THE VACCINE SOLD OUTSIDE INDIA WOULD BE GENERALLY HIGHER THAN THE PRICE REALIZED LOCALLY AN D CONSIDERING THE FACTS THAT THE ASSESSEE HAS BEEN UNABLE TO SUBS TANTIATE 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 9 THE ELEMENT OF REALIZATION FROM END CUSTOMERS. HE DID NOT ACCEPT THE COST PLUS APPROACH ADOPTED BY THE ASSE SSEE FOR DETERMINATION OF THE EXPORT PRICE. HE HAS ALSO GI VEN THE REASON THAT THE PRICE IS AGREED BY THE ASSESSEE WITH THE AE ARE LOWER THAN THE PRICE ON WHICH THE AE WAS IMPOR TING THE VACCINE FROM HMR. THE TPO HAS COMPARED THE PROFITA BILITY MARGIN OF THE EXPORT WITH THE MARGIN EARNED BY THE ASSESSEE IN THE DOMESTIC MARKET ON ACCOUNT OF THE SALE OF THE SAME PRODUCT. HE TOOK THE NET COST + (PLUS) MARGIN EA RNED BY HE ASSESSEE FROM DOMESTIC SALE AT 65% AS AGAINST 29% IN THE CASE OF EXPORT. ACCORDINGLY THE TPO TOOK THE NET COST + (PLUS) MARGIN EARNED IN DOMESTIC SALE OF 65% TO BE THE PROFIT LEVEL INDICATOR FOR COMPUTING THE ALV OF THE INTERNATIONAL TRANSACTION RELATING TO EXPORT. 4.4 ON APPEAL THE CIT(A) HAS ALLOWED THE CLAIM OF ROYALTY PAYMENT AND ACCORDINGLY DELETED THE DISALLOWANCE O N ACCOUNT OF ROYALTY PAYMENT U/S 92C(4). 4.5 AS REGARDS THE ALP ON EXPORT OF VACCINE THE C IT(A) HAS UPHELD THE ORDER OF THE AO BASED ON THE ADJUSTMEN T MADE BY THE TPO ORDER U/S 92CA(3). THUS THE ASSESSEE A GGRIEVED BY THE ORDER OF THE CIT(A) CHALLENGED THE CONFIR MATION MADE BY THE CIT(A) ON THE ADDITION ON ACCOUNT OF ALP O F EXPORT OF VACCINE TO THE AE. THE REVENUE IS IN APPEAL AGAIN ST THE 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 10 DELETION OF THE ADDITION ON ACCOUNT OF ROYALTY PAYM ENT. THE REVENUE HAS ALSO CHALLENGED THE DEPRECIATION ALLOWE D ON MOTOR CAR SCODA-AUDI 202/2007 DATED 12.3.2009 PUNE TO HIS ACCOUNT IN THE ARMS LENGTH PRICE COMPUTED BY THE ASSESSEE. 4.6 BEFORE US THE LEARNED AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS TOOK THE THREE COM PARABLE FOR TAKING OUT THE NET PROFIT MARGIN PERCENTAGE. THE DETAILS WHICH ARE GIVEN IN ANNEXURE 4 OF THE PAPER BOOK AT PAGE 470 WHICH ARE AS UNDER : COMPANY TOTAL SALES SALES FROM VACCINES OPERATING COST EBIT NPM NCP BHARAT IMMUNOLOGICALS AND BIOLOGICALS CORPORATION LIMITED 465 994 465 994 402 648 63 346 13.59 15.73 PANACEA BIOTECH LIMITED 2 797 832 1 948 321 1 373 180 575 141 29.52 41.88 HAFFKINE BIOPHARMACEUTICAL CORPORATION LTD 904 537 845 720 748 756 96 964 11.47 12.95 ARITHMETICAL MEAN 18.19 23.52 4.7 THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT IN THE TP STUDY THE ARITHMETICAL MEAN OF ALL THE COMPARAB LE IN NET PROFIT MARGIN IS AT 18.19% AND NET COST +(PLUS) 23 .52 % WHEREAS THE ASSESSEES NET MARGIN FROM THE EXPORT TRANSACTIONS IS 29.% WHICH SUBSTANTIALLY HIGHER TH AN THE COMPARABLE THEREFORE NO ADJUSTMENT IS REQUIRED U NDER THE 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 11 ALP. HE HAS REFERRED THE TPO ORDER AND SUBMITTE D THAT THE TPO HAS WRONGLY COMPARED THE DOMESTIC MARGIN ON DOMESTIC SALE WITH MARGIN ON EXPORT SALE WHILE P ASSING THE ORDER U/S 92C(3) WHICH IS AGAINST THE LAW AND STATU TE THEREFORE NO ADJUSTMENT IS REQUIRED . 4.8 ON THE OTHER HAND THE LEARNED DR HAS SUBMITTED THAT IN THIS CASE BOTH THE TPO AS WELL AS THE ASSESSEE HAV E ERRED IN NOT PROPERLY APPRECIATING THE PROVISIONS OF LAW AND RULES MADE THERE UNDER WHILE COMPUTING THE TNMM. HE SUB MITTED THAT THE TPO HAS COMPARED THE OPERATING MARGINS AT THE ENTRY LEVEL AND SUGGESTED ADJUSTMENTS TO THE ALP ADMITTED BY THE ASSESSEE. HE VEHEMENTLY CONTENDED THAT SUCH METHOD OLOGY IS NOT CONTEMPLATED UNDER THE INCOME TAX ACT. HE SUBM ITTED THAT UNDER THE LAW IN TRANSFER PRICING STUDY WHIL E APPLYING TRANSACTION NET MARGIN METHOD (TNMM) WHAT IS TO BE COMPARED IS THE MARGIN OF AN INTERNATIONAL TRANSACT ION WITH THE MARGIN OF A COMPARABLE INTERNATIONAL TRANSACTION OR A COMPARISON BETWEEN THE MARGIN OF A CLASS OF INTERN ATIONAL TRANSACTION WITH THE NET MARGIN OF A SIMILAR CLASS OF ANOTHER INTERNATIONAL TRANSACTION. HE SUBMITTED THAT IT W OULD BE ILLEGAL AND AGAINST LAW TO APPLY GROSS MARGIN OR NET MARGIN OF ENTERPRISES AS A WHOLE AND SUGGEST ADDITIONS ON BA SED ON THE VARIATIONS IN THE GROSS PROFIT EARNED BY VARIOUS EN TERPRISES OF THE SAME CAPACITY. HE POINTED OUT THAT THE INDUSTR Y AVERAGE 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 12 HAVE NOTHING TO DO AND HAVE NO APPLICATION WHILE CO MPUTING THE ALP OR UNDER TNMM. HE SUBMITTED THAT THE ISS UE HAS BEEN CONSIDERED BY VARIOUS BENCHES OF THE TRIBUNA L AND THE BENCHES HAVE CONSISTENTLY SET ASIDE THE MATTER T O THE FILE OF AO FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW. IN SUPPORT OF HIS CONTENTIONS HE HAS RELIED ON THE FOLLOWING JUDGMENTS:- (I) ITA NO.5033/MUM/2007 DATED 30 TH APRIL 2010-ACIT V/S TWINKLE DIAMOND. (II) ITA NO.5034/MUM/2007 DATED 15 TH JANUARY 2010-ADDL CIT V/S M/S TEJ DIAM. REPORTED IN 130 TTJ-570 (MUM) ; (III) ITA NO.2279/MUM/2006 DATED 20 TH APRIL 2010-DCIT V/S M/S STARLITE-REPORTED IN 133 TTJ 425(MUM) (IV) ITA NO.6194/MUM/2008 DATED 31 ST MAY 2010-DCIT V/S M/S INDO AMERICAL JEWELLERY LTD (V) ITA NO.6437/MUM/2005 IN DCIT V/S M/S ANKIT DIAM ONDS ORDER DATED 26.11.2010 HE SUBMITTED THAT THE FACTS OF THE PRESENT APPEAL SHOULD FOLLOW THE PROPOSITION LAID DOWN IN THE AFORESAID DECISIONS OF THE CO-ORDINATE BENCHES OF THE TRIBUNAL AND SET AS IDE THE MATT3R TO THE FILE OF THE AO FOR FRESH ADJUDICATIO N. 4.9 AFTER CONSIDERING THE RIVAL CONTENTIONS AND RE LEVANT RECORD WE FIND THAT AS PER THE PROVISIONS OF SECTI ON 92B THE INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 13 MORE ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON- RESIDENTS IN THE NATURE OF PURCHASE SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY OR PROVISION OF SERVICES O R LENDING OR BORROWING MONEY OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS INCOME LOSSES OR ASSETS OF SUCH ENTER PRISES. THE ARMS LENGTH PRICE AS PER SECTION 92C. (1) IN RELA TION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE METHODS PRESCRIBED IN THE SAID SECTION BEING THE M OST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION. SECTION 92F(II) DEFINES ARMS LENGTH PRICE MEANS A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIA TED ENTERPRISES IN UNCONTROLLED CONDITIONS; RULE 10B(1 ) OF THE INCOME TAX RULES PRESCRIBE THE MANNER IN WHICH A LP IN RELATION TO INTERNATIONAL TRANSACTIONS HAS TO BE D ETERMINED BY APPLYING THE MOST PROPER METHOD MEANS METHOD PRESC RIBED U/S 92C. RULE 10B(1)(E) SPECIFICALLY PRESCRIBES TH E MANNER FOR DETERMINATION OF THE ARMS LENGTH PRICE BY TRANS ACTIONAL NET MARGIN METHOD FOR READY REFERENCE WE QUOTE RULE 10B (1)(IE): DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS BEING THE MOST 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 14 APPROPRIATE METHOD IN THE FOLLOWING MANNER NAMELY : (A) . (I) . (II) .. (III) .. (B) (I) (II) (III) .. (IV) (V) (C) . (I) . (II) (III) .. (IV) .; (V) (D) (I) . (II) (III) (IV) / (E) TRANSACTIONAL NET MARGIN METHOD BY WHICH (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPR ISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLA USE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTION S 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 15 IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES I F ANY BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALIZED BY THE ENTERPR ISE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. 4.10 THE ASSESSEE HAS ADOPTED ALP BY COMPARING THE EXPORT OPERATING PROFITS OF THE ASSESSEE COMPANY WITH T HE VALUATION OF OPERATING PROFITS OF THE OTHER COMPANIES WHICH A RE TAKEN AS COMPARABLE COMPANIES SELECTED BY IT. WE FURTHER NO TE THAT THE OTHER COMPARABLE ARE NOT MANUFACTURING VACCINES AND THE OPERATING PROFITS OF THE COMPARABLE ARE TAKEN AT E NTERPRISES LEVEL INSTEAD OF EXPORT /INTERNATIONAL TRANSACTION S LEVEL. THE ASSESSEE HAS NOT TAKEN THE SAME CLASS OF TRANSACT IONS FOR COMPARING THE PROFIT WITH THE COMPARABLES. WHEN THE COMPARABLES ARE NOT LICENSEE MANUFACTURERS OF THE SIMILAR COMMODITY THEN IT WOULD NOT SATISFY THE REQUIREME NT OF THE LAW AS WELL AS THE RULES PRESCRIBED UNDER THE STA TUTE. THE PROVISIONS OF LAW REQUIRES THE COMPARISON BETWEEN T HE NET MARGIN REALIZED FROM THE OPERATION OF THE UNCONTROL LED PARTIES TRANSACTIONS AND THE NET MARGIN DERIVED BY THE ASSO CIATE 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 16 ENTERPRISES ON SIMILAR TRANSACTIONS/OPERATION. THE AO HAS ALSO NOT FOLLOWED THE CORRECT METHOD AND PROCEDURE WHILE MAKING THE ADJUSTMENTS IN THE ARMS LENGTH PRICE THE AO HAS APPLIED THE ADJUSTMENT MADE BY THE TPO WHO HAS TAKE N THE COMPARISON BETWEEN THE ASSESSEES INTERNATIONAL TRA NSACTION WITH ITS DOMESTIC TRANSACTIONS WHICH IS ALSO AGAINS T STATUTORY REQUIREMENT. THUS IT IS CLEAR THAT THE PROVISIONS OF ACT AND RULES HAVE NOT BEEN FOLLOWED EITHER BY THE ASSESSEE OR BY THE AO. IN THE CASES CITED BY THE LEARNED DR(SUPRA) TH IS TRIBUNAL HAS CONSISTENTLY HELD THAT (TNMM) REQUIRES THE COMP ARISON OF NET MARGIN REALIZED BY THE ENTERPRISES FROM INTER NATIONAL TRANSACTIONS OR AGGREGATE OF INTERNATIONAL TRANSAC TIONS AND NOT COMPARISON OF OPERATING THE MARGIN OF THE ENTER PRISE WITH THE OPERATING MARGIN OF THE COMPARABLES OF ENTERPRI SE LEVEL. THEREFORE THE COMPARISON OF NET PROFITS MARGIN REA LIZED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS SHOULD BE COMPARED WITH THE NET PROFIT MARGIN OF THE UNCONTRO LLED PARTIES TRANSACTIONS REALIZED BY ENTERPRISE WHICH IS UNRELA TED AND FROM THE COMPARABLE UNCONTROLLED TRANSACTIONS. 4.11 IN VIEW OF THE ABOVE DISCUSSIONS AS WELL AS THE DECISIONS OF THIS TRIBUNAL AS RELIED UPON BY THE LE ARNED DR WE HOLD THAT THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO ARE NOT AS PER THE PROVISIONS OF LAW. AT THE S AME TIME THE ASSESSEE HAS ALSO NOT ADOPTED THE CORRECT METHO D OF 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 17 DETERMINATION OF TNMM. THEREFORE THE ISSUE IS SE T ASIDE TO THE FILE OF THE AO FOR FRESH ADJUDICATION IN ACCOR DANCE WITH LAW. 4.12 GROUNDS OF APPEAL NO.2 IS ALLOWED FOR STATISTI CAL PURPOSE. ITA NO. 3647/MUM/2006 (BY REVENUE) 5. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN THIS APPEAL WHICH ARE AS UNDER : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF DEPRECIATION ON MOTOR CARS WITHOUT APPRECIATING THE FACTS OF THE CASE; 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN ALSO THE CIT(A) ERRED IN NO9T FULLY UPHOLDING THE DISALLOWANCE MADE U/S 92CA(4) OF THE INCOME TAX ACT WITHOUT APPRECIATING THE FACTS OF THE CASE; 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.2 26 76 378/- ON ACCOUNT OF ROYALTY PAYMENT U/S 92CA(4) WITHOUT APPRECIATING T HE FACTS OF THE CASE ; 6.. GROUNDS OF APPEAL NO.1 REGARDING DISALLOWANCE OF DEPRECIATION ON MOTOR CAR. DURING THE COURSE OF ASS ESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE HAS C LAIMED DEPRECIATION AT THE RATE OF 50% ON THE MOTOR CAR V EHICLE. FROM THE AUDIT REPORT THE AO OBSERVED THAT THE OP ENING 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 18 FIGURES OF WDV WAS NIL AND THE ADDITION WERE RS.19 04 640/- WERE MADE AND USED THE MOTOR FOR M ORE THAN 180 DAYS. THEREFORE THE DEPRECIATION FOR THE FUL L YEAR AMOUNTING TO RS.9 52 320/- WAS CLAIMED BY THE ASS ESSEE. IT WAS SEEN THAT THE ASSESSEE IS NOT IN THE BUSINESS O F LETTING ON HIRE THE COMMERCIAL VEHICLES. THE AO WAS OF THE V IEW THAT THE ASSESSEE HAS WRONGLY CLAIMED THE DEPRECIATION A T THE RATE OF 50%. ACCORDINGLY THE AO ALLOWED THE DEPRECIAT ION AT THE RATE OF 20% ON MOTORCAR. 6.1. ON APPEAL THE LEARNED CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE. 6.2 BEFORE US WE HAVE HEARD THE LEARNED DR AS WELL AS THE LEARNED AR AND CONSIDERED THE RELEVANT RECORD. T HE AO HAS NOT DISPUTED THAT THE VEHICLES WERE PURCHASED AFTER APRIL 2001 AND PUT TO USE BEFORE THE 1 ST DAY OF APRIL 2002. THE CIT(A) HAS DECIDED THE ISSUE IN PARAGRAPHS 26 TO 28 OF HIS ORDER AS UNDER : 26. THE SUBMISSIONS MADE BY THE APPELLANTS REPRESENTATIVE HAS BEEN CONSIDERED. IN THIS RESPEC T IT IS TO BE SAID THAT IN THE APPENDIX-I TO THE I NCOME TAX RULES AS APPLICABLE TO THE RELEVANT ASSESSMEN T YEAR ITEMS (III)(2)(IID) PROVIDES THE RATE OF DEPRECIATION ON NEW COMMERCIAL VEHICLES WHICH IS ACQUIRED ON OR AFTER 1 ST DAY OF APRIL 2001 BUT BEFORE 1 ST DAY OF APRIL 2002 AND IS PUT TO USE BEFORE THE 1 ST DAY OF APRIL 2002 FOR THE PURPOSE OF BUSINESS OR PROFESSION AT 50% 27. FURTHER THE MEANING OF COMMERCIAL VEHICLE FOR THIS PURPOSE HAS BEEN PROVIDED IN ITEMS (3A) OF TH E 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 19 NOTES BELOW THE TABLE. IF THAT ITEM IS READ ALONG WITH CLAUSE (21) OF SECTION 2 OF THE MOTOR VEHICLE ACT 1988 MOTOR CARS OWNED BY THE APPELLANT AND USED FO R THE PURPOSES OF BUSINESS HAVE TO BE RECKONED AS COMMERCIAL VEHICLES. THEREFORE IF SUCH MOTOR CAR IS ACQUIRED WITHIN THE PRESCRIBED PERIOD INDICATED IN THE ITEMS AS IN THE INSTANT CASE THEN DEPRECIATION AT THE RATE OF 50% IS TO BE ALLOWED TO THE COST OR WRITTE N DOWN VALUE OF THE CAR; 28. THE FINDINGS OF THE AO IS THEREFORE NOT CORREC T AND NOT IN ACCORDANCE WITH THE PROVISIONS OF RULE AND THE NOTE GIVEN THEREIN ITSELF. THE DISALLOWANCE MA DE BY THE AO ON THIS ACCOUNT IS THEREFORE LIABLE TO B E DELETED. THE AMOUNT DISALLOWED IS HENCE DELETED. APPEAL IN RESPECT OF GROUND NO.2 IS THUS DISPOSED OFF AS ALLOWED 6.3 THERE IS NO DOUBT IF THE VEHICLE ON WHICH THE DEPRECIATION IS CLAIMED BY THE ASSESSEE ARE FALLING UNDER COMMERCIAL VEHICLE THEN IN VIEW OF THE PROVISIONS APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION REGARDI NG THE RATES OF DEPRECIATION THE DEPRECIATION ON COMMER CIAL VEHICLE AS DEFINED IN THE MOTOR VEHICLE ACT IS ALSO REFERRE D IN THE NOTE 3A BELOW THE TABLE OF APPENDIX-I. THEREFORE IT I S NOT CLEAR FROM THE RECORD WHETHER THIS MOTOR VEHICLE ARE FALL ING UNDER THE COMMERCIAL VEHICLE AS PRESCRIBED IN THE NOTE 3A BELOW TABLE 3 OF APPENDIX-I. THE CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY ACCEPTING THE STATEMENT OF THE ASSE SSEE THAT THESE VEHICLE IS FALLING UNDER THE CATEGORY OF COM MERCIAL VEHICLE. ACCORDINGLY WE SET ASIDE THIS ISSUE TO T HE RECORD OF THE AO FOR LIMITED PURPOSES OR ASCERTAINING WHETHE R THE MOTOR 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 20 VEHICLE COMES UNDER THE COMMERCIAL VEHICLE OR INDIV IDUAL VEHICLE AND THEN ALLOW DEPRECIATION AS PER LAW. 6.4 GROUNDS OF APPEAL NO.1 OF REVENUES APPEAL IS A LLOWED FOR STATISTICAL PURPOSES. 6.5. GROUNDS OF APPEAL NO..2 IS GENERAL IN NATURE AND DOES NOT EMANATES FROM THE IMPUGNED ORDER OF THE CIT(A ). THE CIT(A) UPHELD THE ADDITION WITH REGARD TO ALP ON E XPORT OF VACCINE THEREFORE THE REVENUE HAS NO GRIEVANCE O N THIS ISSUE. ACCORDINGLY THE GROUND NO.2 IS DISMISSED. 6.6 GROUNDS OF APPEAL NO.2 IS DISMISSED. 6.7. GROUNDS OF APPEAL NO.3 IS REGARDING DISALLOWA NCE OF ROYALTY PAYMENT U/S 92CA(4). THE AO HAS DISALLOWE D THE ROYALTY ON THE BASIS OF TPOS ORDER DATED 8.12.2003 HOLDING THAT THE ROYALTY PAYMENT IS UNWARRANTED AND IS AGAI NST THE AGREEMENT BETWEEN THE CHIRON CORPORATION USA AND AVENTIS PHARMA LIMITED . 6.8. ON APPEAL THE CIT(A) HAS ALLOWED THE CLAIM O F THE ASSESSEE AFTER ACCEPTING ASSESSEES ALP OF ROYALTY . 6.9. WE HAVE HEARD THE LEARNED DR AS WELL AS THE LE ARNED AR AND PERUSED THE RELEVANT RECORD. SO FAR AS THE QUESTION OF NECESSITY OF PAYMENT OF THE ROYALTY IS CONCERNED THE TPO 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 21 WAS OF THE VIEW THAT THE PRICE OF SEED VIRUS INCLUD ES COMPENSATION TOWARDS USE OF TECHNOLOGY. WHEN THE A SSESSEE PAID THE CONSIDERATION FOR ACQUISITION OF THE MANUF ACTURING FACILITIES THEN THE SEPARATE PAYMENT FOR ROYALTY I S UNWARRANTED. AFTER CONSIDERING THE RELEVANT RECOR D FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS RIVAL CONTENTI ONS WE NOTE THAT THE VACCINE BUSINESS OF HOECHST AG WAS P URCHASED BY CHIRON CORPORATION USA AND THE ASSESSEE IS A J OINT VENTURE BETWEEN THE CHIRON CORPORATION USA AND A VENTIS PHARMA LIMITED AND WAS FORMED AS A RESULT OF PURC HASE OF THE SAID VACCINE BUSINESS OF HOECHST AG BY THE CHIRON CORPORATION USA. IN THE YEAR 1996 THE JOINT VEN TURE COMPANY WAS FORMED BETWEEN CHIRON CORPORATION U.S .A. AND CHIRON BEHRING GMBH AND CO KG FOR ACQUIRING THE V ACCINE BUSINESS OF BEHRING GMBH KG. AS A RESULT OF THIS CHIRON BEHRING GMBH AND CO BECAME THE OWNER OF ALL TRADE M ARK PATENT AND TECHNICAL KNOW FOR MANUFACTURING OF THE VACCINE AVENTIS INDIA HAD TO PAY ROYALTY AT 5% OF THE LOC AL SALE FOR THE USE OF IMPORTED TECHNICAL KNOW HOW. FOR THIS P URPOSE THE RBI GRANTED APPROVAL VIDE LETTER DATED 19.4.1997 FOR PAYMENT OF ROYALTY BY AVENTIS PHARMA LIMITED TO CHIRON B EHRING GMBH AND CO AT THE RATE OF 5% OF THE LOCAL SALE. I N THE YEAR 1998 THE ASSESSEE JOINT VENTURE WAS FORMED BY THE AVENTIS PHARMA LIMITED AND CHIRON CORPORATION USA. THE AS SESSEE 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 22 JOINT VENTURE PURCHASED THE VACCINE BUSINESS OF TH E AVENTIS PHARMA LIMITED. ACCORDING TO THE EXISTING CONTRACT /AGREEMENT BETWEEN THE AVENTIS PHARMA LIMITED AND CHIRON BE HRING GMBH ITS CELL CULTURE RABIES VACCINE BUSINESS STOOD TRANSFER IN THE NAME OF THE ASSESSEE JOINT VENTURE. CONSEQU ENTLY THE PAYMENT OF ROYALTY BY THE ASSESSEE TO CHIRON BEHRIN G GMBH CONTINUED AFTER TAKING THE NECESSARY APPROVAL FROM THE RBI. THUS IT IS CLEAR THAT THE PURCHASING OF THE BUSINE SS OF THE AVENTIS PHARMA LIMITED BY THE JOINT VENTURE AS PE R THE TERMS AND CONDITIONS BETWEEN THE PARTIES DOES NOT ACQUIRE THE TECHNOLOGY FOR MANUFACTURING OF THE VACCINE WHICH W AS IN THE POSSESSION OF CHIRON BEHRING GMBH. THEREFORE AS PER THE AGREEMENT THE PAYMENT OF ROYALTY IS REQUIRED FOR T HE USE OF TECHNICAL KNOW-HOW BY THE ASSESSEE. ACCORDINGLY WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF THE L EARNED CIT(A) TO THE EXTENT THAT THE ROYALTY FOR USE OF TECHNICAL KNOW-HOW IS REQUIRED TO BE PAID BY THE ASSESSEE. HOWEVER ON T HE ISSUE OF ALP SINCE WE HAVE ALREADY REMITTED THE ISSUE O F ALP OF EXPORT TO THE AO ACCORDINGLY THE ALP OF ROYALTY IS ALSO REQUIRED TO BE DETERMINED AFTER DUE CONSIDERATION A ND AS PER THE PROVISIONS OF LAW. HENCE THE ISSUE OF ALP IN RESPECT OF ROYALTY IS SET ASIDE TO THE FILE OF THE AO IN TER MS OF THE ABOVE ORDER IN RESPECT ETC TO THE AE. 3557/MUM/2006 . 3657/MUM/2006 (ASSESSMENT YEAR 2002-03) 23 6.10 GROUNDS OF APPEAL NO.3 IS PARTLY ALLOWED FOR S TATISTICAL PURPOSES. 7. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AS ALSO THE APPEAL OF THE REVE NUE STANDS ALLOWED FOR STATISTICAL PURSUERS. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH FEB 2011 SD SD (J.SUDHAKAR REDDY) (V IJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ON THIS 25 TH DAY OF FEB 2011 SRL:20111 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI