M/S SHREYA LIFE SCIENCES PVT LTD.,MUMBAI vs. DCIT CENTRAL CIRCLE-8(1), MUMBAI
Income Tax Appellate Tribunal, MUMBAI BENCH “H(SMC
Before: SHRI OM PRAKASH KANT () & SHRI RAHUL CHAUDHARY () Assessment Year: 2011-12
PER OM PRAKASH KANT, AM
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 ITA No.
1834/Mum/2019 was initially heard alongwith the cross appeal of the Revenue in ITA No. 2310/Mum/2019 on 16.11.2022. M/s. Shreya Life Science Pvt. Ltd.
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2. 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 ITA
No. 1834/Mum/2019 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
M/s. Shreya Life Science Pvt. Ltd.
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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 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. 3. 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. 5. 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 M/s. Shreya Life Science Pvt. Ltd. 4 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. 4. 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
M/s. Shreya Life Science Pvt. Ltd.
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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 sales to AEs
78,98,68,395
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 or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise are supplied by the other enterprise, or by persons specified by the other enterprise and the prices and other conditions relating to Labour charges have been debited in the book of Shreya
Life
LLC,
Russia which shows that some value addition is done in are Russia and thus the goods supplied from India are raw materials for the Russian entity
Your honour may appreciate the fact that this clause is applicable only when the proposed AE's are engaged manufacturing in activities. Thus, this clause is not applicable as goods supplied by Shreya
Life India are finished goods only, requiring no further processing.
M/s. Shreya Life Science Pvt. Ltd.
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the supply are influenced by such other enterprise; or Further the Ld AO erred in not bringing 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 articles manufactured or processed by one enterprise are sold to the other enterprise or to persons specified by the other enterprise and the prices and other conditions relating thereto are influenced by such other enterprise
The very fact that almost
100%
of the requirements of the Russian entity is met by the assessee, shows that it is a tainted transaction.
Moreover, out of all exports of ₹85.91 cr more than 82%
(₹70.92cr) is to LLC
Shreya Life Russia
In the case of the assessee, prices and other conditions relating thereto are solely decided by Shreya Life sciences
India considering prevalent market condition and are never influenced by the proposed AE.
92A(2)(m) there between The interdependence of No such relationship
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enterprises, any relationship of mutual interest, as may be prescribed two these entities and the assessee clearly reflects the mutual interest of these entities on one another.
of mutual interest has yet been prescribed and accordingly this clause is not applicable.
6. 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.
7. 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 M/s. Shreya Life Science Pvt. Ltd.
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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.
8. 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 ITA No. 3713 and 4372/Mum/2016,
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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 Juri ictional 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.
24. 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."
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9. 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.
10. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 29/04/2025. (RAHUL CHAUDHARY)
ACCOUNTANT MEMBER
M/s. Shreya Life Science Pvt. Ltd.
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Mumbai;
Dated: 29/04/2025
Disha Raut, Stenographer
Copy of the Order forwarded to :
The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file.
BY ORDER,
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