AURONEXT PHARMA PRIVATE LIMITED,HYDERABAD vs. DCIT, CIRCLE-1(1), HYDERABAD

Before Shri Rama Kanta Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member ITA-TP No. 486/Hyd/2022 Assessment Year: 2018-19 Auronext Pharma Vs. The Deputy Commissioner Private Limited, of Income Tax, Hyderabad Circle-1(2), PAN : AAHCA7988H Hyderabad (Appellant) (Respondent) Assessee by: Shri B.G.Reddy, Revenue by: Shri Rajendra Kumar, CIT-DR Date of hearing: 29.05.2023 Date of pronouncement: 30.05.2023 O R D E R

Per Shri Laliet Kumar, JM.

ITA-TP No. 486/Hyd/2022 transactions under the CUP method merely because of the similarity in names of the parties involved in the transactions and holding them as transactions between related parties and hence not comparable. ii) Without prejudice to the above the Honourable DRP/ the Learned TPO ought to have appreciated that the information as regards the comparable transactions was obtained from an external database - "Seaair" over which the assessee has no control is not a privy to the information in the external database and hence there is no way for the assessee to know whether the parties involved are related parties. 3) Without prejudice to the Ground No 2 above, the Honourable DRP erred in law and on facts and circumstances of the case by not considering the other comparable transactions under the CUP Method where the names of the parties involved in the external transactions are not similar. 4) Without prejudice to the above, under the TNMM Method, the Learned DRP/TPO ought to have considered the capacity utilization adjustment considering that the assessee was still in the initial stages of its operations and without appreciating the business dynamics of the industry in which the assessee operates. Interest on Receivables from Associated Enterprises: 5) The Learned DRP/AO/TPO erred in law and on facts and circumstances of the case in treating Interest on Receivables as a separate International Transactions in terms of Sec 92B of the Income Tax Act, 1961. 6) The Learned TPO/AO, in pursuance of the directions of the DRP, erred in making an addition of Rs. 21,58,372/- in respect of notional interest on delayed receipt of trade receivables from Associated Enterprises. 7) The Learned DRP/AO/TPO ought to have appreciated that trade receivables arise in the normal course of business and are not to be treated as unsecured loans for the levy of interest. 8) The Learned DRP/AO/TPO ought to have appreciated that the Assessee has not received any amount in the form of interest on delayed receipt of receivables from either Associated enterprises or third parties including

ITA-TP No. 486/Hyd/2022 indigenous parties and that not charging any interest from AEs on the trade receivables is consistent with the Arm's length principle. 9) The Learned DRP/AO/TPO erred in not appreciating the fact that all the trade receivables are received within the time permissible as per the RBI norms or, in a few rare cases, within the extended time as permitted by RBI.”

4.1. In this regard, the ld.AR had submitted that the brought forward losses claimed by the assessee in the return of income were Rs. 91,88,80,212/- whereas the Assessing Officer while passing the final assessment order, had merely allowed the set-off of brought forward losses to the extent of Rs. 2,68,03,509/-. In this regard, the ld.AR submitted that the assessee had filed the rectification application before the Assessing Officer and the result is awaited. He had submitted

ITA-TP No. 486/Hyd/2022 that the appropriate direction be issued for earlier disposal of the rectification application.

4.2. Per contra, the ld.DR has no objection for issuing the appropriate direction in this regard.

4.3. We have heard the rival contentions of the parties and perused the material available on record. Admittedly the assessee has filed the rectification application before the assessing officer so that the brought forward losses be setoff, as claimed in the return of income. As the issue is pending for adjudication before the Assessing Officer, it will be appropriate for the Assessing Officer to pass the order at the earliest. In the light of the above the issue is allowed for statistical purposes with the direction to the assessing officer to examine the record and pass appropriate order of the rectification application filed by the assessee.

ITA-TP No. 486/Hyd/2022 external Comparable Un-Controlled Price (CUP) method to determine the ALP of the transactions.

“6.0. The TPO's observation on the economic analysis done by the assessee: From the information furnished, it is seen that the taxpayer has not sold the products to any other 3rd party in those respective countries. Therefore, the taxpayer has ruled out the internal CUP mechanism and relied on external CUP method. For this, the taxpayer has furnished data wherein it has compared the value of the same product exported by a 3rd party to its AEs or otherwise and held that the transaction entered into by the taxpayer with its AE is within arms' length. On examination, it is noticed that the information furnished by the taxpayer pertains mostly to the transactions between other taxpayers with their AEs. Since the comparable transactions were with related parties those transactions cannot be considered under CUP method for the purpose of benchmarking the taxpayers transactions. As per Rule 10(8) the price charged in a comparable uncontrolled transactions after adjusting to account for differences if any between the international transaction and the comparable uncontrolled transaction are between the enterprises entering into such transactions can only be considered as Arm's Length price. In the instant case the taxpayer adopted the price charged in the transaction entered into between related parties as external CUP which has no sanctity as per Rule 10(8). Also considering the volatile nature of market, unless comparisons are done on any particular date, there is a likely chance that the price may vary in the international market. For adopting CUP as MAM, strict comparability is necessary with regard to the product - which includes date as well. Also, CUP method is appropriate when the price of any product under controlled environment is compared with the price of the same product under uncontrolled environment keeping all other things constant. In the present case, the taxpayer has not done so. Therefore, application and methodology adopted by the taxpayer in ITA-TP No. 486/Hyd/2022 adopting external CUP for benchmarking its transactions with its AEs is incorrect and therefore liable for rejection. In view of the above and also as per section 92C(3)(c), it is relevant to hold that the data used in computation of the arm's length price is not reliable or correct. Based on the above grounds, the TP document is proposed to be rejected and the TPO proceeds to determine arm's length price. Since strict comparison under external CUP method is proven to be a failure as discussed in the preceding paragraphs, the TPO proceed to determine the ALP in relation to this transaction on the basis of material or information or documents available with this office by invoking S. 92C(3) of the Income Tax Act, 1961. Hence, the TPO proposes TNMM as MAM and conducted an independent search for com parables considering the functions of the assessee, the assets employed and the risks taken and the results of the search is given in the following paras:”

ITA-TP No. 486/Hyd/2022

ITA-TP No. 486/Hyd/2022 2.2.2 Objection of the assessee is therefore rejected.” 11. On the last date of hearing, we have directed the ld.DR to file the comments on the above said issue. The ld.DR, had filed the submissions, which are to the following effect:

“Sub: Comments of Transfer Pricing Officer, on the submissions made on behalf of the assessee in case of M/s Auronext Pharma Private Limited (PAN- AAHCA7988H) for the AY 2018- 19 Ref: Mail from the office of CIT(DR-1), ITAT A Bench Hyderabad, dated 20-04-23 ***** Kind reference is invited to the above subject. 2.0 Vide the letter dated 16-03-2023 from the Office of the CIT (DR), ITAT the comments of TPO were asked on the submissions made before Hon'ble bench in case of MIs Auronext Pharma Pvt. Ltd. For the AY 2018-19. The directed report was submitted on 03-04-23 and subsequently another communication was received from the office of the CIT (DR), in which the TPO was again asked to provide his comments on the submissions made on behalf of the assessee. Accordingly the comments of TPO on the issues raised in the submissions are as discussed in subsequent paragraphs. 3.0 It has been argued on behalf of the assessee that the TPO arrived at the conclusion that the comparable transaction are with Associated Enterprises only by making a comparison of the names of the comparable companies without carrying out a detailed inquiry. It was further submitted that the TPO has failed to appreciate the fact that the assessee is not privy to the information of the relationship that the claimed comparable might have with their customers. It was argued that the assessee has obtained information from an external database source and the relevant information was not available on the same. The assessee also argued that without prejudice to the above stand of the assessee, even if the comparable parties are Associated Enterprises, the relationship between the parties does not by itself necessarily make the transaction incomparable and that such entities are two separate and ITA-TP No. 486/Hyd/2022 independent legal entities which operate on commercial terms and conditions between them. 4.0 In this respect it is being pointed out that the essence of Transfer Pricing proceedings is determination of the Arm's Length Price (which may be determined by any of the methods prescribed under Section 92 of the Income Tax Act including Comparable Uncontrolled Price method and more than one ALPs may result from the bench-markinq process in which case either mean or range concept is applied). In this respect it is important to point out that by its very definition the Arm's Length Price is a price charged or paid between unrelated parties or uncontrolled transaction and relevant extract from clause (ii) of the Section 92F of the Income Tax Act is reproduced below- "(il) "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;” 5.0 It is clear from the above excerpt that the prices charged in transactions between parties which are Associated Enterprises can not be taken as Arm's Length Price. Further, specifically in respect of the Comparable Uncontrolled Transaction method, it is being pointed out that the use of the word 'uncontrolled' in the very name of the method indicates that the purported transaction must be uncontrolled or between independent parties. Further, relevant extract in para 2.14 of the OECD Transfer Pricing Guidelines, July 2017 is reproduced below- "The CUP method compares the prices charged for property or services transferred in a controlled transaction to the prices charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances.” 6.0 Further para 2.16 of the same part mentions that it may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transaction such that no differences have a material effect on the price and that even minor differences could materially affect the price, thereby pointing towards the practical difficulties in adoption of CUP. The important point to note is that the guidelines clearly say that the uncontrolled transaction has to be between independent entities. Further para 3.24 of the guidelines.

ITA-TP No. 486/Hyd/2022 clearly lays down that the comparable uncontrolled transaction is a transaction between two independent parties that is comparable to the controlled transaction under examination. Thus the comparable transaction has to be uncontrolled i.e. between two independent parties. 7.0 In this respect, attention is being drawn to the judgment of In this respect the attention is further being drawn to the order of Hon'ble Hyderabad bench of ITAT in case of Corteva Agriscience Services India Private Limited vs ACIT, in of 2017. Hon'ble bench in para 4 of the order noted as below- "Faced with this situation, we quote Tecnimont Icb Pvt Ltd., Mumbai Vs. ACIT (2012) 138 ITO 23 (Mumbai) and Sabic Innovative Plastic India Pvt Ltd Vs. DCIT (2013) 59 SOT 138 (Ahmedabad) holding that an associate enterprise itself would not to be taken as a comparable since lacking the independent nature of an uncontrolled transaction in forming hallmark of Chapter X of the Act. We thus delete the impugned arms length price adjustment on receivables for this precise reason alone.” 8.0 Hence Hon'ble jurisdictional bench has held that an Associated Enterprise can not be taken as a comparable. In this respect reliance is further being placed on the judgment of Hon'ble Mumbai Bench of ITAT in case of Technimont ICB (P.) Ltd vs, Addl. CIT in ITA No. 4608 & 5085 .of 2010 of 2010 with CO No 78 of 2011 (reported in [2012] taxmann.com 28 (Mumbai)), and the relevant part, from para 10 of the order is reproduced below- "As Rule 10 A clearly states,' the expression 'uncontrolled transaction', for the purpose of Rule 10 B to 10 E, means "a transaction between enterprises other than associated enterprises, whether resident or non-resident", it is thus free from doubt that so far as transactions between the associated enterprises are concerned, the same are outside the ambit of 'uncontrolled transactions'. The transactions between ICBC and JTSC are clearly such transactions, and these transactions constitute as much as 59% of total revenues. Rule 10B(1){e), which sets out the mechanism to compute the arm's length price under the TNMM, provides that the profits earned by the enterprise taken as comparable, from comparable uncontrolled transactions, is to be taken into account. In other' words, profits from controlled transactions, which in turn refers to intra

ITA-TP No. 486/Hyd/2022 associated enterprise transactions, cannot be taken into account in computing arm's length price under the TNMM. However, when we take Icac as a comparable in the present case, this is precisely what we end up doing -taking into account the profits earned by the Icac from its associated enterprise i.e. ITS Contracting Co. In our humble understanding, this is not permissible under the scheme of the Indian transfer pricing legislation. When the profits derived by an enterprises arise out 0" significantly or predominantly, intra AE transactions, the same cannot be taken into account for computation of arm's length price under the transactional net margin methods." 9.0 While the above observation of Hon'ble bench has been made in a case where TNMM was used, the definition of the 'uncontrolled transaction' as provided under Rule 10A is applicable on all methods provided in Rule 10B (including Comparable Uncontrolled Price) and the same has been pointed out by Hon'ble bench also. 10.0 Attentions is further being invited to the judgment of Hon'ble Ahmadabad bench of ITAT in case of Gemstone Glass Pvt ltd vs JCIT in of 2012. The relevant part of the order from para 6 is reproduced below- "We have noted that so far as assessment year 2007-08 is concerned, the TPO has applied internal CUP method to ascertain the arm's length price. It is only elementary that comparable uncontrolled price at which the entity has sold the same product to an independent enterprises is a sine qua non for application of internal CUP. It is so for the reason that Rule 10 8(1){a) provides that under comparable uncontrolled price method, as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. Rule 10A(a), on the other hand, defines 'uncontrolled transaction' "e transaction between enterprises other than associated enterprises, whether resident or non- resident". Therefore, the first essential input for application of CUP method is the price charged or paid for similar product in a transaction between two enterprises, whether resident or non-resident, which are not associated enterprises. In the present case, the comparable price adopted for determining the arm's length price is the price at which the assessee has sold the same product to other group entities, which are thus 'associated enterprises', residents in India. It has been defended by the DRP on the ground that ITA-TP No. 486/Hyd/2022 there cannot be any tax avoidance motive in selling the products at an artificial price. In our considered view, however, this aspect of the matter is irrelevant inasmuch as the very definition of 'uncontrolled transaction' under rule 10A excludes the transactions with associated enterprises "whether resident or non-resident". Once it is not in dispute that "uncontrolled transaction" is a statutorily defined term, there is no room for discarding or questioning this definition on the basis of superior logic in an alternative definition. Such heroics are not called for in the process of judicial interpretation. Learned DRP ought to have followed the law as it exists rather than pondering over what the law ought to be, as is inherent in their justification for inclusion of uncontrolled transactions with associated enterprises resident in India. We disapprove the fine of reasoning adopted by the authorities below. In our considered view, whether the transactions are with associated enterprises resident in India or with associated enterprises resident outside India, the prices at which such transactions are entered into with such enterprises cannot be taken as "comparable uncontrolled price" for the purpose of determining the arm's length price." 11.0 Thus it is obvious that the price claimed to be the Arm's Length Price must be the one that has been charged in a comparable transaction between independent or unrelated entities. Hence, it has to be ascertained that the price proposed to be applied as Arm's Length Price is a price charged in respect of a transaction between independent entities and in a given case if this fact can not be ascertained, then the comparability can not be ascertained. Accordingly, it is humbly being prayed before Hon'ble bench that the argument that even if the parties to a transaction are Associated Enterprises, such a transaction may still be considered for comparability; may be rejected. 12.0 It has also been argued on behalf of the assessee that the TPO has failed to appreciate the fact that the relevant information to decide the relation between the claimed comparable and their customers is not available with the assessee and in light of the same the assessee can not decide whether the involved parties are Associated Enterprises or not. In this respect it is being pointed out that the Comparability Analysis and establishment of adequately acceptable comparability between the tested transaction and transaction claimed to be comparable are positive acts of having to prove existence of something. In these cases the comparability can not be assumed if the 'non-comparability' can not be proven. In ITA-TP No. 486/Hyd/2022 other words it has to be established that the claimed uncontrolled transaction is adequately comparable under all the parameters mandated under the Act. In this respect it is also being submitted that since proceedings under the Income Tax Act are akin to the proceedings of a civil court, in civil proceedings the onus to prove the existence of a disputed fact is on the party making the claim of its existence. Hon'ble Apex Court in case of Union of India and Ibrahim Uddin & Anr in Civil Appeal Number 1374 of 2008, observed that court can not lose sight of the fact that burden of proof is on the party which makes a factual averment. Accordingly, if the assessee is making the claim of comparability, then assessee has to prove with relevant evidences (i.e. the Annual Reports) that the involved parties satisfy all the criteria of comparability 'ac down under the Income Tax Act. The admission on behalf of the assessee that it is not in possession of the relevant information shows that the comparability can not be established in these case and accordingly the concerned prices can not be accepted as Arm’s Length Prices.

13. It has also been argued on behalf of the assessee that the TPO rejected comparable simply on the basis of the similarity of names is incorrect and in this respect it is being pointed out that as has been admitted on behalf of the assessee also that the information to ascertain comparability in cases of the comparable selected on behalf of the assessee is not available in public domain (in fact in many cases even the names of the comparable are not clear as incomplete names or short forms have been used). Accordingly the facts essential for ascertaining comparability are not available, however in respect of certain comparable e.g. Hospira Healthcare India Private Limited, the SEC filings of its customer for the transaction under examination (named Hospira Inc.) were available on USA SEC website. On perusal of the Form 10-K, which is equivalent of an Annual Report, it was noted that the entity Aspira Healthcare India Private Limited has been declared to be a wholly owned subsidiary. Since Aspira India Healthcare Private Limited is one of the comparable suggested om behalf of the assessee and it sold its products to Hospira Inc. i.e. its Holding Company, the argument that TPO rejected comparables on the basis of similarity of names is not correct and it is prayed that the same may be rejected. 14.0 It has also been argued on behalf of the assessee that in cases of some of the comparables selected on behalf of the assessee, the names are not similar and these comparables may be adopted for comparison. In this respect it is being

ITA-TP No. 486/Hyd/2022 submitted that TPO has pointed out in his order that the CUP method involves a very strict comparability and the same has not been established by the assessee. In this respect the attention is being drawn to Para 2.16 of the OECD Transfer Pricing Guidelines, June 2017, wherein it has been mentioned that under CUP even the minor differences between the properties transferred in the controlled and uncontrolled transactions could materially affect the prices. Further para 2.20 of the same part mentions that under CUP the economically relevant characteristics of the controlled and uncontrolled transaction must be comparable and these characteristics include the contractual terms of transaction, such as volume traded, period of arrangements, the timing and terms of delivery, transportation, insurance and foreign currency terms. The guidelines further point out that for some commodities certain economically relevant characteristics (e.g. prompt delivery) might lead to a premium or a discount. In para 2.22 it has further been pointed out that a particularly relevant factor is the pricing date, since prices of goods may be different in different time periods. Thus it is obvious that the requirements of comparability in CUP are very strict and it was pointed out by TPO that the same have not been established by the assessee. 15.0 In this respect reliance is being placed on the judgment of Hon'ble Hyderabad bench of ITAT in case of M/s Bharathi Cement Corporation Private Limited vs DCIT in of 2022. In para 20 of the order Hon'ble bench noted that the application of CUP requires high degree of comparability not only in the products sold and services. provided but also in the economic circumstances in which the transaction takes place. Accordingly the application of CUP was rejected when the conditions surrounding the transaction were not comparable. Attention is further being drawn to the judgment of Hon'ble Mumbai bench of ITAT in case of G S Caltex India Pvt Ltd vs DCIT in ITA No. 228 of 2016. The relevant part from para 7 of the order is reproduced below- "The AO adopted Transactional Net Margin method (TNMM) as in the opinion of the AO internal CUP method adopted by the assessee is not reliable keeping in view geographical differences prevailing in different countries wherein the subsidiaries/associated companies were situated to whom supplies were also made by its AE, different qualities of lubricating oil supplied by its AE in different geographies/countries as also the difference in quantity dealt in these different geographical markets rendering CUP method as unreliable. We are of the view that the authorities

ITA-TP No. 486/Hyd/2022 below have rightly adopted TNMM method due to these differences noted by the authorities below as CUP method requires high degree of comparison in the product/services, geographies and other attributes such as scale of operations, type of market etc .. The comparative chart submitted by the assessee reflecting supplies made by its AE in other geographies(countries) clearly reveals that there are product quality differential and other differences such as scale of operations as the assessee is admittedly buying in larger quantities from its AE etc, than quantities sold by its AE in other graphical(Countries) areas making CUP unreliable. " 16.0 Hence it is obvious that under CUP not only should there be a strict comparability in respect of the properties of the goods being transferred but even the surrounding economically relevant circumstances must be matched. In the present case the information in respect of these economically relevant circumstances is not even available as per assessee's own admission hence a comparability for the same is not possible. Accordingly the CUP must be rejected in the case and the same has been brought out by TPO in his order by pointing towards strict comparability under CUP. 17.0 In this respect while there is no information available in respect of the surrounding economically relevant circumstances (thereby making the comparability analysis impossible), even the specific formulations of the compounds being sold and their quantities are different in some cases, as are the currencies and geographies in which such compounds are being sold. Thus, even the characteristics of the products being sold are different, making them incomparable under CUP. 18.0 Thus it is humbly being urged that the observations of TPO that some of the transactions claimed as comparable on behalf of the assessee were between related parties and that the conditions of comparability under CUP are very strict are correct only. In case of the assessee, it has been admitted on behalf of the assessee only that the information on economically relevant circumstances of the transaction are not available and accordingly the comparability can not be established. In fact in assessee's case in respect of the properties of the product being transferred also adequate matching is not there in the sense that different formulations and quantities of the product are being compared. Accordingly it is being urged before Hon'ble bench that adoption of Comparable Uncontrolled Price as Most Appropriate Method, as urged on behalf of the assessee, may be rejected for non- availability of data or adequate information.

ITA-TP No. 486/Hyd/2022 The report in case of M/s Auronext Pharma Private Limited, for the A Y 2018-19, on the submissions made on behalf of the assessee is being submitted to JCIT (Transfer Pricing), Hyderabad for his kind perusal and forwarding to CIT (DR)-1, A Bench, ITAT, Hyderabad.”

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ITA-TP No. 486/Hyd/2022 between the related parties. It was submitted by the TPO that, for benchmarking the ALP for CUP method, it is essential to examine the price charged or paid for the property transferred in a comparable uncontrolled transaction. The sole basis of rejecting the method adopted by the assessee was the transactions were between the related parties and were not un- controlled transactions. A similar view was also expressed by the DRP while passing the impugned order in paragraph 2.2.1. and also in the report filed by the TPO before us dt. 01.05.2023 (supra).

ITA-TP No. 486/Hyd/2022 while doing so, the TPO, may not restrict to the comparables suggested by the assessee, who are unrelated parties and the TPO may be at liberty to find out any other suitable comparables having similar profile, functions and fulfil the other criteria laid down under rule 10B for CUP method.