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Facts
The assessee company, engaged in manufacturing and trading of pharmaceuticals, filed its return for AY 2011-12. The Assessing Officer made adjustments based on a transfer pricing officer's report, which were partly reduced by the CIT(A). The primary issues involve whether certain foreign entities were associated enterprises (AEs) and the transfer pricing adjustment for notional interest on receivables from AEs.
Held
The Tribunal held that for the purpose of determining if M/s Shreya Life LLC, Russia, was an AE, the matter needed to be restored to the AO/TPO for de-novo verification due to insufficient evidence. For the issue of notional interest on receivables, the Tribunal allowed the grounds based on a previous decision concerning the assessee's own case and the decision in Indo American Jewellery Ltd.
Key Issues
1. Whether foreign entities (M/s Shreya Life LLC, Russia; FE Shreya LayfSainsisFarmatsevtika, Uzbekistan; Shreya Life Sciences, Uzbekistan) are associated enterprises (AEs) of the assessee. 2. Whether transfer pricing adjustment for notional interest on amount receivable from AEs was correctly made.
Sections Cited
143(1), 143(3), 144C, 92A(2)(h), 92A(2)(i), 92A(2)(m)
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Income Tax Appellate Tribunal, MUMBAI BENCH “H(SMC
Before: SHRI OM PRAKASH KANT & SHRI RAHUL CHAUDHARY
This appeal has been instituted by the Registry before us consequent to the order of the Income Tax Appellate Tribunal [in short ‘the Tribunal’] passed in miscellaneous appeal No. 432/Mum/2023 dated 03.07.2024. This appeal having on 16.11.2022.
In the appeal of the assessee mainly two issues are involved. Firstly, the issue whether M/s Shreya Life LLC, Russia is an Associate Enterprise (AE) of the assessee. Secondly, whether transfer pricing adjustment made for the notional interest on amount receivable from AEs was liable in the hands of the assessee. In the appeal of the Revenue, the issue was raised as to whether two parties namely M/s. FE Shreya LayfSainsisFarmatsevtika, Uzbekistan and Shreya Life Science LLC, Uzbekistan were associated enterprise of the assessee. The Tribunal in its order dated 30.12.2022, which was heard ex-parte qua the assessee restored the ground raised in the appeal of the assessee as well as in the appeal of the Revenue to the file of the Ld.AO/TPO, but the assessee preferred MA for recalling its appeal invoking Rule 24 of the ITAT Rules, but no MA had been filed in the cross appeal of the revenue in ITA No. 2310/Mum/2019. Therefore, Tribunal vide its order dated 03.07.2024 passed in MA No. 432/Mum/2023 only recalled the appeal of the assessee, wherein two issues have been raised. Accordingly, this appeal of assessee has been fixed by the registry for adjudication. The relevant grounds of the appeal in are reproduced as under:
“1. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in treating M/s Shreya Life LLC, Russia a Non- Associated Enterprise as Enterprise Associated of the appellant without considering the TP study report wherein the Auditor reported it as non associated enterprises and the reasons assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under.
2.On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in upholding the addition made by Ld by adopting arithmetic mean of profit margin on proportionate basis to the international transactions instead of no adjustment for the reasons submitted before him and the reasons assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under.
On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ld AO to consider Libor rate plus mark up of 4% for the purposes of arriving at arms length interest instead of no interest chargeable on amount receivable from its AE and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under.
4. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ld AO to consider Libor rate plus mark up of 4% for the purposes of arriving at arms length interest instead of no interest chargeable from its AE & Non AE debtors on a/c of delay in realization of export proceeds for the reasons submitted before him and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under.
The Appellant craves leave to add to, amend, alter or delete any of the above grounds of appeal on or before the date of hearing.”
3. Briefly stated facts of the case are that the assessee company was engaged in the business of manufacturing and trading of Pharmaceuticals products. The assessee filed its return of income electronically on 30.11.2011 declaring total income at Rs. Nil, which was processed u/s 143(1) of the income tax Act, 1961(herein after will be referred as ‘The Act’). The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Act were issued and complied with. The Assessing Officer completed the assessment u/s 143(3) r.w.s. 144(C) of the Act, wherein he made total adjustment of Rs. 64,99,25,131/- based on the order of the ld. transfer pricing officer dated 21.01.2015. On further appeal, the Ld. CIT(A) allowed part relief to the assessee. Aggrieved with the addition sustained by the Ld. CIT(A), the assessee is in appeal before the ‘Tribunal’ raising the grounds as reproduced above.
We have heard rival submission of the parties and perused the relevant material on record.
4.1 Brief facts qua issue in dispute raised in ground Nos. 1 and 2 of the appeal are that the assessee company in its form no 3CEB shown transaction of export to Shreya Corporation, Russia as international transaction. But, the Ld. TPO considered the other three parties namely (i) FE Shreya LayfSainsisFarmatsevtika, Uzbekistan LLC (ii) Shreya Life Sciences, Russia LLC and (iii) Shreya Life Sciences, Uzbekistan as associated enterprises during the year under consideration and made a transfer pricing adjustment of Rs. 9,43,10,286/- in relation to international transaction of the export sales to those parties. The transfer pricing adjustment computed by the AO/TPO is reproduced as under:
Particulars Amount(Rs.) Exports to AEs 91,15,87,115 OP/OC of the assessee 15.41% Operating cost of assessee on 78,98,68,395 sales to AEs Arm’s Length Margin(OP/OC) 27.35% Arm’s Length Exports 100,58,97,401 Exports to AE 91,15,87,115 Adjustment/Difference 9,43,10,286 5. In relation to the transaction by Shreya Life LLC, Russia. The brief comment of TPO and assessee’s contention before us are reproduced as under:
Section TPO’s Comments Assessee’s Contention
92A(2)(h) ninety percent Labour charges have Your honour may or more of the raw been debited in the book appreciate the fact materials and of Shreya Life LLC, that this clause is consumables required Russia which shows that applicable only when for the manufacture or some value addition is the proposed AE's are processing of goods or done in are Russia and engaged articles carried out by thus the goods supplied manufacturing in one enterprise are from India are raw activities. Thus, this supplied by the other materials for the Russian clause is not enterprise, or by entity applicable as goods persons specified by the supplied by Shreya other enterprise and the Life India are finished prices and other goods only, requiring conditions relating to no further processing. the supply are Further the Ld AO influenced by such erred in not bringing other enterprise; or on record any cogent reason or valid evidence that m/s Shreya Life LLC has purchased raw material from appellant which needs further value addition. The Ld AO on presumption basis held the said company as its AE.
92A(2)(i) the goods or The very fact that almost In the case of the articles manufactured 100% of the assessee, prices and or processed by one requirements of the other conditions enterprise are sold to Russian entity is met by relating thereto are the other enterprise or the assessee, shows that solely decided by to persons specified by it is a tainted Shreya Life sciences the other enterprise and transaction. Moreover, India considering the prices and other out of all exports of prevalent market conditions relating ₹85.91 cr more than 82% condition and are thereto are influenced (₹70.92cr) is to LLC never influenced by by such other Shreya Life Russia the proposed AE. enterprise
92A(2)(m) there between The interdependence of No such relationship enterprises, any two these entities and of mutual interest has relationship of mutual the assessee clearly yet been prescribed interest, as may be reflects the mutual and accordingly this prescribed interest of these entities clause is not on one another. applicable.
Thus, the issue in dispute in respect of Shreya Life LLC, Russia is that according to the TPO/AO goods sold to Shreya Life LLC, Russia are in nature of raw material and further value addition has been done by the said party, therefore, said party falls in the category of the AE, being 90% of the raw material supplied by the assessee. The Ld. CIT(A) took a view that section 92A(2)(i) of the Act which provides for AE if the goods or article are manufactured or processed by one enterprises, and are sold to other enterprise or to persons specified by the other enterprise, and the process and other conditions relating thereto are influenced by such other enterprises, get satisfied in the case of Shreya Life LLC, Russia and said party was treated as AE of the assessee company.
On the contrary, the assessee submitted before the Ld. CIT(A) that sale transaction prices are not influenced by the Shreya Life LLC, Russia and such prices are solely decided by the assessee. We find that before us the assessee has not filed any documentary evidence as how the price of the goods sold to Shreya Life LLC, Russia were determined. Therefore, in absence of any such documentary evidence or correspondence in relation to the determination of the price between two parties, it cannot be established that AE has not influenced the pricing of the goods. We also note that in the subsequent year said party has been treated as AE by the assessee itself. Therefore, in the facts and circumstance of the case, we feel it appropriate to restore this matter back to the file of the assessing officer/transfer pricing officer for de-novo verification and thereafter if required so determine the issue of transfer pricing adjustment in relation to said party. Accordingly, the ground Nos. 1 and 2 of the appeal of the assessee are allowed for statistical purposes.
So far as the ground Nos. 3 and 4 of the appeal of the assessee relating to addition of Rs. 55,56,14,845/- on account of transfer pricing adjustment made for interest of receivable from associated enterprises is concerned, the brief fact are that the Ld. TPO/AO treated the three parties as AEs namely (i) FE Shreya LayfSainsisFarmatsevtika, Uzbekistan (ii) LLC Shreya Life Sciences, Russia and (iii) LLC Shreya Life Sciences, Uzbekistan and found their opening and debit balance in books of account of Rs. 273,44,69,745/- on which the transfer pricing adjustment for notional interest @16.5% P.A was computed. The Ld. CIT(A) followed his own order for the A.Y. 2010-11 when the notional interest to be levied was directed at ‘LIBOR’ plus 4% markup. Before us, the Ld. counsel for the assessee submitted that the issue in dispute is covered by the decision if the Tribunal in assessee’s own case for A.Y. 2010-11 in and 4372/Mum/2016, wherein the Tribunal has deleted the transfer pricing adjustment following the decision of the Hon’ble Bombay High Court in the case of Indo American Jewellery Ltd. (44 taxmann.com 310)(Bom.). The relevant extract of the said decision of ITAT(supra) is reproduced as under:
"23. We find that the assessee deserves to succeed firstly on the ground that the assessee is not charging interest on outstanding both with the A as well as non-AEs. In this regard issue is covered in favour of the assessee by the decision of Hon'ble Jurisdictional High Court in the case of Indo American Jewellery Ltd. (44 taxman.com 310). In this case, it was held that when there is complete uniformity in the act of the assessee in not charging interest from both the AEs and non-AEs debtors and the delay in realization of the export proceeds, deletion of addition of interest on outstanding amount of export proceeds was justified. We find that this case law is fully applicable on the facts of the present case. The Revenue has not disputed that the assessee is not uniform in its act of not charging interest from both AEs and non-AEs for delay in realization of export proceeds.
Apart from the above, assesses's other limb of submission is also germane. The Authorities below have erred in disregarding the fact that A had itself in problem in making realization from its debtors because fluctuating economic condition at that time prevailing Russia/CIS countri where AE is operating. No defect in the evidences submitted by the assessee this regard is noted by the authorities below. In these circumstance assessee's submission is quite cogent that when recovery of principal doubtful there is no point in charging notional interest on the outstanding Accordingly, we set aside the orders of the authorities below on this issue as delete the addition."
The Tribunal (supra) has observed that the assessee in AY 2010-11 was not charging interest on outstanding both with the AE as well as Non AEs, therefore in view of there being complete uniformity in the act of the assessee in not charging interest from both the AEs and non-AEs debtors, deletion of addition on outstanding amount of export proceeds from AE was justified. Before us, the Ld. counsel of the assessee referred to the impugned order of the AO and submitted that no interest has been charged to non-AE in the year under consideration. The ld Counsel also referred to observation of the AO/TPO that total business done with the AEs was miniscule as compared to the total outstanding balance with it. As facts and circumstances of the year under consideration being identical to AY 2010-11, the issue in dispute is covered in favour of the assessee by the decision of Tribunal (supra), thus, no transfer pricing adjustment on the account of the notional interest is sustainable in the year under consideration. Accordingly, ground Nos. 3 and 4 of the assessee stands allowed.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 29/04/2025.