Case Law Details
Mylan Pharmaceuticals Private Limited Vs ACIT (ITAT Mumbai)
The appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai, was filed by the assessee against the assessment order dated 23.01.2017, passed pursuant to the directions of the Dispute Resolution Panel (DRP) dated 28.11.2016. The principal dispute concerned a transfer pricing adjustment relating to the assessee’s Business Support Services segment and the rejection of its audited segmental results by the Transfer Pricing Officer (TPO) and the DRP.
Background of the case: During the relevant assessment year, the assessee carried on business in two distinct segments—Business Support Services and Trading in Finished Dosage Formulations (FDF). The Business Support Services segment provided services to its Associated Enterprise (AE) and was remunerated on a cost-plus 20% mark-up basis. The Trading in FDF segment was a new business activity commenced during the year and involved purchases from and sales to third parties.
The assessee submitted that its accounting system (SAP-ERP) maintained separate accounting codes for each segment, enabling direct allocation of segment-specific costs. Only common expenses amounting to Rs. 7,73,926 were apportioned between the two segments based on segmental costs. However, the TPO rejected the audited segmental results, re-cast the accounts by allocating the entire costs on the basis of the turnover of each segment, and adopted a 20% mark-up as the arm’s length margin instead of the comparable margin of 8.86%, resulting in a transfer pricing adjustment of Rs. 18.66 crore.
Proceedings before the DRP: On the assessee’s objections, the DRP noted that the assessee had furnished duly certified segmental results. While it accepted the assessee’s objection regarding the mark-up and directed that the margin should be 8.66% instead of 20%, it nevertheless upheld the TPO’s rejection of the segmental results.
Assessee’s challenge before the Tribunal: Before the ITAT, the assessee challenged the rejection of its segmental accounts and sought a direction that its audited segmental results be accepted for benchmarking the international transaction relating to Business Support Services.
Tribunal’s findings on lease rent: The DRP had held that lease rent of Rs. 2.42 crore, particularly Rs. 180.96 lakh relating to certain premises, could not be allocated to the Trading in FDF segment because, according to it, the premises could only be occupied by IT/IT-enabled or financial service companies. The Tribunal found that the DRP had provided no factual basis or supporting material for this conclusion. It held that the distinction drawn by the DRP rested merely on surmises and conjectures without any cogent evidence.
Tribunal’s findings on recruitment expenses: The DRP had treated recruitment expenses of Rs. 2.14 crore as capital expenditure on the ground that they related to the period before commencement of the FDF trading business and resulted in an enduring benefit. The Tribunal observed that the DRP had not explained the basis for treating these expenses as capital in nature. It held that recruitment is a normal day-to-day business activity and cannot, without supporting reasons, be regarded as capital expenditure.
Tribunal’s findings on legal and professional charges: The DRP had also held that legal and professional expenses of Rs. 2.47 crore, including consultancy fees relating to a branded generic strategy project and pharmaceutical industry audit, were capital in nature. The Tribunal found that the DRP had failed to explain what capital asset or project had come into existence as a result of such consultancy. It therefore held that these conclusions were also based on surmises without supporting reasons.
Decision of the Tribunal: The Tribunal held that there was no valid basis for the TPO to reject the assessee’s duly certified segmental results. It further held that the reasons relied upon by the DRP to uphold the rejection lacked cogent material and could not be sustained. The Tribunal also noted the assessee’s submission that its segmental results had been accepted in subsequent years, which supported its claim. Accordingly, the Tribunal set aside the rejection of the segmental results and directed the TPO and Assessing Officer to consider the audited segmental results furnished by the assessee for benchmarking the international transaction. The appeal was allowed to that extent.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against order of the Assessing Officer dated 23.01.2017 passed pursuant to the direction of the Dispute Resolution Panel (DRP) dated 28.11.2016. The grounds of appeal read as under :-
“1. On the facts and circumstances of the case and in law, Assessment Order passed by the Learned Assessing Officer (‘Ld. AO’) taking cognizance of the directions of the Hon’ble Dispute Resolution Panel (‘DRP’) proposing a transfer pricing adjustment of Rs.7,72,75,054 is bad in law.
The Appellant therefore prays that the transfer pricing adjustment be deleted.
2. On the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. AO/Ld. TPO erred in disregarding the audited segmental results on the alleged ground that the segmental results submitted by the assessee are not reliable.
The Appellant therefore prays that the Ld. AO/Ld. TPO be directed to consider the segmental results for benchmarking the international transaction of provision of business support services.
3. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in aggregating the segments of “Business Support Services” and “Trading of Finished Dosage Formulations” and thereby directing the Ld. AO/Ld. TPO to consider the “entity level profit level indicator” for benchmarking the international transactions of provision of business support services.
The Appellant therefore prays that direction of Hon’ble Panel of aggregating the segments of “Business Support Services” and “Trading of Finished Dosage Formulations” as well as to consider the “entity level profit level indicator” be quashed and the Ld. AO/Ld. TPO be directed to consider the segmental results for benchmarking the international transaction of provision of business support services.
4. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in confirming the action of the Ld. AO/Ld. TPO in selecting the Apitco Ltd. as a comparable company while benchmarking the international transactions of provision of business support services.
The Appellant therefore prays that the Apitco Ltd. be held as incomparable.
5. On the facts and circumstances of the case and in law, the Hon’ble DRP erred in confirming the action of the Ld. AO/Ld. TPO in selecting the Agricultural Finance Corporation Ltd. as a comparable company while benchmarking the international transactions of provision of business support services.”
2. Brief facts of the case are as under. During the year under consideration, the assessee has carried out its business activities in two Segments, viz. Business Support Services and Trading in FDF. The income in respect of Business Support Services is from the services provided to its AE, for which it is remunerated at cost plus mark up of 20%. The trading in FDF activity entails purchase and sales from/to third parties and this was a new activity, started during the year under consideration. It is submitted by the assessee that in its accounting software, i.e. SAP – ERP, there are various accounting codes and the direct costs related to the specific segment are directly accounted in the respective segment. It was further submitted that common costs, like bank charges, insurance of gratuity, audit fees, statutory fees, etc., aggregating to only Rs.7,73,926/- were apportioned to both the segments on the basis of Segmental costs. The TPO did not agree with the Segmental result submitted by the assessee and re-casted the segmental accounts after apportioning the entire costs on the basis of turnovers of each segment. Further, the TPO adopted 20% margin, i.e. the mark-up charged by the Assessee to its AE as ALP, as against 8.86% being the margin of comparables and made an adjustment of Rs.18,66,00,267/- to the Business Support Services segment.
3. Upon assessee’s objections, the DRP considered the issue. It noted that assessee has furnished duly certified segmental results. Hence, it upheld the action of the Transfer Pricing Officer (TPO) in rejecting the segmental results submitted by the assessee. However, it upheld the assessee’s objection in the TPO making a mark-up of 20%, and directed that the same should be 8.66%.
4. The assessee is in appeal before us regarding the rejection of the segmental results and prays that it may be directed that segmental results as furnished by the assessee should be considered. We note that the DRP has held that segmental results have been correctly found to be incorrect. For this, it referred to treatment of three major expenditure as under.
5. As regards lease rent of Rs. 2.42 crores, it observed that major portion consists of Rs.180.96 lakhs for the premises which, according to the DRP, can only be occupied by companies engaged in IT/IT enabled services and financial services. Hence, it held that this premises cannot be occupied by the segment of trading in FDF of the assessee. Hence, it held that apportionment of this expense to the segment of trading in FDF is not justified. In this regard, we find that the learned Dispute Resolution Panel has not given any basis of its wisdom that this premises cannot be used by the trading segment in FDF. In our considered opinion, this distinction brought about by the learned Dispute Relation Panel is based upon surmise and conjecture without any cogent material brought on record.
6. Furthermore, as regards recruitment expenses of Rs.2.14 crores, without giving any details whatsoever, the DRP observed that this expenditure clearly pertains to the period prior to the commencement of the new business of trading in FDF and it will lead to enduring benefit. Hence, the DRP held that this expenditure should be treated as capital expenditure and not claimed as fully deductible revenue expenditure. In this regard, we note that on what basis the DRP is of the opinion the recruitment expenses are capital in nature are also not spelt out. In our considered opinion, recruitment is normal business function and is a part of day-to-day activity. It cannot be held to be not falling in the realm of revenue expenditure.
7. Similarly, the DRP held that legal and professional charges of Rs.2.47 crores include consultancy fee towards “branded generic plan in India – crafting a winning strategy project” and pharma industry audit. The DRP opined that these are also capital expenditure and have been wrongly claimed at fully deductible expenditure. The DRP directed the AO/TPO to take appropriate action in respect of these capital expenses for the segment of trading in FDF. Here again, we find that professional consultancy charges paid have been booked to the revenue and DRP is quite incorrect in holding them to be capital expenditure, without bringing on record the reason for directing that these are capital expenditure. What project came into existence after the consultancy fee has not at all been referred. Hence, these observations are also based upon surmise.
8. Accordingly, in our considered opinion, firstly there is no basis for the Transfer Pricing Officer to reject the segmental results, which were submitted to him by the assessee duly certified. The DRP also has found fault in the segmental detail as mentioned above which are without any cogent basis and they are liable to be rejected. Furthermore, assessee’s submission that segmental results in subsequent years have been accepted also supports the case of the assessee. Accordingly, we set aside the rejection of segmental results by the TPO and direct that segmental results submitted by the assessee should be duly considered.
9. In the result, this appeal filed by the assessee stands allowed in as much as we direct that the segmental results furnished by the assessee should be considered.
Order pronounced in the open court on 20th day of March, 2020.
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