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Income Tax Appellate Tribunal, MUMBAI BENCH “K” MUMBAI
Before: SHRI OM PRAKASH KANT & MS KAVITHA RAJAGOPAL
PER OM PRAKASH KANT, AM
1. This appeal by the assessee is directed against order dated 26/12/2011 passed by the learned Commissioner of income-tax (Appeals)-15, Mumbai [in short the “(Ld. CIT(A)”] for assessment year 2007-08, raising following grounds:
“1:0Re: Addition u/s 145A Rs.25.10.910/- 1:1 The Commissioner of Income-tax (Appeals) has erred in upholding the action of the Assessing Officer of making an addition of Rs.25,10.910/- u/s 145A of the Income-tax Act, 1961 on account of CENVAT credit included by him in the valuation of closing stock.
1:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, the stand taken by the Assessing Officer in the matter is erroneous, misconceived and not in accordance with law and the Commissioner of Income-tax (Appeals) ought to have held as such.
1:3 The Appellant submits that the Assessing Officer be directed to delete the addition so made by him and to re-compute its total income accordingly.
Without prejudice to the foregoing 1:4 The Appellant submits that considering the facts and circumstances of its case and specifically in view of the fact that the addition has been made by the Assessing Officer to the closing stock of the year under consideration, the opening stock of the subsequent assessment year Le. A.Y 2008-09 should be increased by Rs.25,10,910/-.
2:0Re: Disallowance u/s.14A - Rs.9.59.000/- 2:1 The Commissioner of Income-tax (Appeals) has erred in upholding the action of the Assessing Officer of disallowing a sum of Rs.9,59,000/- u/s 14A rw. Rule 8D of the Income-tax Rules, 1962.
2:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, no disallowance u/s 14A of the Income- tax Act, 1961 is called for and the stand taken by the Assessing Officer in this regard is incorrect to say the least and the Commissioner of Income-tax (Appeals) ought to have held as such.
2:3 The Appellant submits that the Assessing Officer be directed to delete the disallowance so made by him and to re-compute its total income accordingly.
3:0 Re Transfer Pricing Addition - Rs.1.64.77.390/- 3:1 The learned Commissioner Of Income-Tax (Appeals) erred in law and considering the facts of the case in upholding the upward transfer pricing adjustment of Rs. 1,64,77,390/ made by the learned Assessing Officer while determining the arm's length price u/s.143(3) r.w.s. 144C of the Act, in respect of the international transaction of import of Active Pharmaceutical Ingredients (APIs) entered into by the appellant during the year ended 31 March 2007.
3:2 The learned Commissioner Of Income-Tax (Appeals) has grossly erred in rejecting the application of Transactional Net Margin Method (TNMM) as the most appropriate method used by the assessee for benchmarking the International transactions in respect of imports of APIs from its Associated Enterprise (AEs). Further learned Commissioner of Income-Tax (Appeals) also erred in not considering the submissions made by assessee to controvert the Transfer Pricing Officer's (TPO) observations in respect of the comparable companies.
3:3 The learned Commissioner Of Income-Tax (Appeals) has failed to appreciate that the operating margin earned by the assessee of 17 13% is significantly higher than the arithmetic mean of 6.57% of the comparable companies (as calculated by the Assessee), thereby proving the fact that the international transactions entered into by the Assessee are at arm's length.
3:4 The learned Commissioner Of Income-Tax (Appeals) erred in not appreciating that the Assessee during the relevant period had performed a scientific analysis for selection of the Most Appropriate method having regard to the provisions of the rule 108 of the Income Tax Rules, 1962 (Rules). The Commissioner of Income-Tax (Appeals) has further erred in considering CUP as the Most Appropriate method to benchmark the import of APIs disregarding the rules laid down in Rule 108 (2) and Rule 108 (3) of the Rules.
3:5 The learned Commissioner Of Income-Tax (Appeals) erred in upholding the CUP method and thereby not appreciating the facts and reasoning as to why TNMM should not be treated as the most appropriate method in light of the facts and circumstances of the case.
3:6 Further the Commissioner of Income-Tax (Appeals) has grossly erred in not considering the evidences (certificate of analysis, article on Betahistine published in the renowned Drug Safety Journal) submitted in relation to the superiority of the APIs imported by the assessee. Further the Commissioner of Income-Tax (Appeals) erred in merely comparing the rate per kilogram charged for the products Betahistine without considering the relevant factors affecting the comparability.
4:0 General 4:1 The Appellant craves leave to place further facts and evidences in support of its claims, contentions and the grounds of appeal at or before the hearing of the appeal.”
2. The assessee also filed following additional ground:
Deduction In respect of education cess:
On the facts and in the circumstances of the case and in law, the appellant prays that the Assessing Officer be directed to allow deduction in respect of education cess on income-tax and on dividend distribution tax paid during the year.
Refund of dividend distribution tax paid in respect of non-resident shareholders:
On the facts and in the circumstances of the case and in law, the appellant prays that the Assessing Officer be directed to grant refund in respect of the dividend distribution tax paid under section 115-0 in excess of the rates prescribed under the relevant tax treaties. The Appellant craves leave to add, alter omit or substitute any or all of the above grounds ofappeal, at any time before or at the time of the appeal.
We have heard rival submission of the parties on the issue of the admissibility of additional grounds. We find that the additional grounds raised by the assessee being purely of legal nature and no investigation of fresh facts is required, same are admitted for adjudication in view of the decision of the Hon’ble Supreme Court in the case of CIT Vs NTPC Ltd 220 ITR 383 (SC).
Briefly stated facts of the case at that the assessee i.e. Solvay Pharma India Ltd., now merged with Abott India Ltd, was engaged in the business of manufacturing Pharma products in India. The assessee filed return of income on 31/10/2007 declaring total income of ₹ 33, 96, 53, 950/-. The return of income filed by the assessee was selected for scrutiny any statutory notices under the Income-tax Act, 1961 (in short “the Act”) were issued and complied with. In view of international transactions, carried out by the assessee with its Associated Enterprises (AE), the Assessing Officer sent a reference to the learned Transfer Pricing Officer (TPO) for determination of arms’ length price of the international transactions. The learned TPO in his order dated 21/10/2010 proposed a transfer pricing adjustment of ₹ 1, 64, 77, 390/-on account of purchase of 970 kg of “Betahistine 2 HCL” from the AE. The learned Assessing Officer in assessment order dated 08/02/2011 made transfer pricing adjustment of ₹ 1, 64, 77, 390/- along with addition for adjustment under section 145A of the Act amounting to ₹ 25, 10, 910/-; disallowance under section 14A of ₹ 10, 64, 440/-. On further appeal, the learned CIT(A) allowed part relief. Aggrieved with the order of the Ld. CIT(A), the assessee is before the Income Tax Appellate Tribunal (ITAT or in short the Tribunal) by way of raising the grounds as reproduced above.
Before us, the assessee filed a paperbook in two volumes containing pages1713.
The ground No. one of the appeal relates to addition of ₹ 25, 10, 910/-under section 145A of the Act on account of CENVAT credit included in the valuation of closing stock.
Facts in brief qua the issue in dispute are that the assessee followed exclusive method of accounting for the purpose of excise duty whereas by way of Finance Act, 1998 it is prescribed that while valuing closing stock of the inputs, work in progress and finished goods must necessarily include the element for which MODVAT credit is available. The learned Assessing Officer rejected the contention of the assessee that there is no impact of this amendment on the taxable profit. The learned Assessing Officer referred to guidance note of Institute of Chartered Accountant of India (ICAI) and held that guidance note does not take into account set off of advance credit of CENVAT. The learned Assessing Officer referred that adjustment under section 145A of the Act was made in preceding year, therefore, following the same method so as to maintain the consistency, he made addition of ₹ 25, 10, 910/-, which was further, subjected to any changes in the amount of opening stock in further appellate proceeding. The computation of said addition reproduced by the Assessing Officer in the impugned order, is extracted as under:
Opening Stock (Profits decrease) Closing Stock (Profits increase)
Excise Component of 14,622,211 Excise Component of cost 16,895,253 cost in raw in raw material/Pkg mat. material/Pkg mat.
Excise component of 187,732 Excise component of cost 198,976 cost in physician in physician samples samples Excise component of 7,032,180 Excise component of cost 7,258,804 cost in finished in finished goods/WIP goods/WIP Total 21,842,123 24,353,033 Difference 2,510,910
On further appeal, the Ld. CIT(A) observed that the Assessing Officer has passed the order in conformity with the decision of the Hon’ble jurisdictional High Court in the case of CIT versus Mahalaxmi glassworks private limited (supra), therefore, see upheld the findings of the Assessing Officer. The relevant finding of the Ld. CIT(A) is reproduced as under:
4.4 I have considered the facts of the case, submission of the appellant vis-à-vis the observations/findings of the AO, in the order u/s 1433). The AO in his order following the provisions of Sec 145A, various decisions and he CBDT Circular, has stated that unutilized Modvat credit / Excise Duty is required to be included in the value of the closing stock The Hon'ble ITAT Mumbai has considered the inclusive and exclusive method of accounting as suggested in the guidance note of the ICAI in their decision in the case of Hawkins Cookers Ltd. Vs ITO in ITA 505/Mum/04 Order of the Hon'ble Mumbait Bench of ITAT in the case of Hawkins Cookers Ltd Vs TTO ITA 505/Mum/04 pertains to AY 1999-00 and has been passed on 11.08.2008 The decision of the Hon'ble Mumbai High Court in the case of CIT Vs The Mahalaxmi Glass Works P/L Ltd. reported in (2009) 318 ITR 116 (Bom) is dated 01.04.2009, which is ater in time and higher in priority accordingly, the observations in respect of the issue on hand would be guided and governed by the decision of the Hon'ble Mumbai High Court in the case of CIT Vs The Mahalaxmi Glass Works Pvt. Ltd. (Supra). In the sad decision, the Hon'ble High Court have held that if there is any change in the closing stuck at the end of the year then there must necessarily be corresponding adjustment made n the opering stock of that year to give effect to Sec 145A. The AO in his order has considered toe Modval/excise for the opening stock as on 01.04.2006 and also for the closing stock at on 31.03.2007 and only the difference has been considered and he has arrived at the figure of adjustment Rs. 25,10,910. The approach of AO is in conformity with the decision of the Hon'ble High Court Mumbai in the case of CIT Vs The Mahalaxmi 3lass Works Pvt. Ltd. Accordingly. no interference is called for and the action taken by the AO is upheld. The appellant has also submitted that direction may be given to the A3 to consider the enhanced closing stock of the year as opening stock in the A.Y 08-09. n this regard it is mentioned that as the present appeal is pertaining to AY 07-08, no cirection for the AY 08-09 can be given. However the appellant may make such claim Iefore the AO during the assessment proceedings for the A.Y 08-09, who would deal with the same as per law. Accordingly the Grounds No. 1 and 2 of appeal are dismissed.
9. Before us the learned Counsel of the assessee submitted that issue in dispute is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for assessment year 2006-07 in ITA No. 270/Mum/2011. The learned Counsel further submitted that in assessment year 2010-11 also the Tribunal in has restored the matter back to the file of the Assessing Officer for following the decision of the Hon’ble Bombay High Court in the case of CIT Vs Mahalakshmi glassworks private limited(supra).
The learned DR on the other hand, referred to the finding of the Ld. CIT(A) and submitted that the Assessing Officer has passed order in conformity with the decision of the Hon’ble High Court (supra), therefore there is no requirement of restoring the matter back to the Assessing Officer.
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The assessee followed exclusive method of accounting for the purpose of the excise duty on raw materials and finished goods. According to the Assessing Officer, the assessee is required to follow inclusive method of accounting for excise duty in view of the amendment in section 145A of the Act , however, according to the assesse, there is no impact of the amendment on the taxable profit of the assessee. The Hon’ble jurisdictional High Court in the case of Mahalaxmi glassworks private limited (318 ITR 116) has observed that if there is any change in the closing stock at the end of the year, then there must be necessarily a corresponding adjustment made in the opening stock of that year. The identical issue of adjustment under section 145A in the case of the assessee was before the Tribunal.
The tribunal in following the finding in the case of Mahalaxmi glassworks private limited (supra), restored the matter to the file of Assessing Officer observing as under:
“8. We have carefully gone through the orders of the authorities below. We find force in the contention of the Ld. Counsel. The facts In issues are squarely covered in favour of the assessee and against the Reynue by the decision of the Hon'ble Jurisdictional High Court in the case of Mahalaxmi Glass Works (supra) wherein the Hon'ble High Court has held as under:
Accounts-Valuation of stock Adjustment of unutilized Modvat credit to the opening stock to give effect to S. 145A, if there is any change in the closing stock at the end of the year then there must necessarily be a corresponding adjustment made in the opening stock of that year- This would not amount to giving double benefit to the assessee and would be necessary to compute the true and correct profit for the purpose of assessment Further, before the Tribunal, the departmental representative did not object to the assesse's plea that the value of stock of earlier year should be taken as opening stock-This also forfeits assessee's plea.
The Hon'ble High Court has followed the decision of the Hon'ble Delhi High Court in the case of CIT Vs Mahavir Aluminium Ltd. 297 ITR 77. A similar decision was taken by the Tribunal Mumbai Bench in the case of Rm Ratn Wires Ltd. in and 8503/M/2011 wherein the Tribunal has followed another decision of the Co-ordinate Bench in the case of R.R. Kabel Ltd 66 DTR (Trib)(Mum). The relevant part of the decision read as under We find that in the case of the sister concern of the assessee, R.R. Kabel (supra) of ITAT Mumbai has held as under:
In the absence of any feature brought on record by the Revenue, we respectfully following the consistent view of the Tribunal and keeping in view that the assessee is following consistent method of accounting and there is no change in accounting system followed by the assessee In the year under consideration, hold that the Ld CIT(A) was fully justified in deleting the addition of Rs. 11,08,904/ made by the AO u/s 145A of the Act. The grounds taken by the Revenue are therefore rejected
Respectfully following the decision of the Hon'ble High Court and the Tribunal (supra), we set aside the findings of the Ld. CIT(A) and restore the issue to the files of the AO to decide the issue afresh after giving effect to all the items of Trading Account In the light of the decision of the Hon'ble Bombay High Court Ground No. 1 is allowed for statistical purpose.”
In assessment year 2010-11, also the Tribunal has restored the matter to the file of the Assessing Officer observing as under:
15. So in view of the matter we are of the considered view that the order passed by the Ld CIT(A) is not sustainable and as such to decide the issue in entirety, is restored to the file of AO to decide afresh after providing opportunity of being heard to the assessee in the light of the decision rendered by Hon ble Bombay High Court in case of CIT vs. Mahalaxmi Glass Works (P) Ltd. (supra). So ground No.2 is decided in favour of the assessee for statistical purposes.
We find that the Ld. CIT(A) in the impugned order has mentioned that the Assessing Officer has passed the order in conformity with the decision of the Hon’ble High Court in the case of Mahalakshmi glassworks private limited (supra) and said finding has not been rebutted by the assessee before us. But due to any change in the amount of closing stock in assessment year 2006-07, consequent to the giving effect to the order of the Tribunal (supra), corresponding effect has to also be given in the year under consideration. Therefore, we feel it appropriate to restore the issue in dispute in the year under consideration also back to the file of the Assessing Officer for verification of following the finding of the Hon’ble Bombay High Court in the case of Mahalakshmi glassworks private limited (supra) and give necessary effect in the opening stock during the year under consideration due to any change in the closing stock of immediately preceding assessment year i.e. AY 2006-07. The ground No. one (1.1 to 1.4) of the appeal of the assessee are accordingly allowed for statistical purposes.
The ground No. two of the appeal of the assessee relates to disallowance of ₹ 9, 59,000/-under section 14A of the Act.
The brief facts qua the issue in dispute are that assessee had shown the dividend income of ₹ 29, 63, 225/-as exempted. No disallowance was made sou-moto by the assessee out of the expenses debited in profit and loss account for earning such exempted income. The Assessing Officer therefore invoking Rule 8D of Income Tax Rules, 1962 (in short “the rules”) computed the disallowance of ₹ 10, 64, 440/-. The Ld. CIT(A) refer to the decision of the Hon’ble Bombay High Court in the case of Godrej and Boyce manufacturing company limited(supra) wherein, it is held that Rule 8D is applicable from assessment year 2008-09 but for preceding assessment years the Assessing Officer is duty-bound to work the disallowance in terms of section 14A of the Act on the reasonable basis or method consistent with the facts of the case. Before the Ld. CIT(A) the assessee vide letter dated 15/12/2011 submitted working of disallowance of Rs .9,59,000/-. The Ld. CIT(A) accordingly upheld the disallowance of ₹ 9, 59,000/-and allowed relief of ₹ 1, 05, 440/-. Relevant finding of the Ld. CIT(A) is reproduced as under:
(v) In view of decision of Hon'ble court in the case of Godrej & Boyce Mfg. Co. Ltd. (Supra), the AO is duty bound to work out disallo var ce under section u/s 14A. Further in the facts of the case the principle of apportionn ent is applicable as it is not possible to determine the actual expenditure incurred in relation to tax free income. The quantum of disallowance has to be arrived at on reasonable bi sis or method consistent with the facts of the case. In the light of the decision of the Hon'ble 3ombay High Court in the case of Godrej and Boyce Manufacturing Limite (Supra), it is duty of the assessing officer to determine the quantum of disallowan e on a reasonable basis or method consistent with all the relevant facts and circumstances of the case. As Rule 8D is not applicable for the year under consideration, te method which is thought to be consistent with facts and circumstances of the cas was the one which was proposed to the appellant vide this office notice dated 12.12.2 11 and saine is followed. As per the same, the disallowance is worked out to Rs. 9,59,1 00.-
Before us the learned Counsel of the assessee referred to working of disallowance of ₹ 1, 64, 829/-considering proportionate salary of finance managers, and submitted that disallowance might be restricted to the amount of ₹ 1, 64, 829/-. The relevant working of disallowance available on page 1477 of the paperbook is reproduced as under:
SOLVAY PHARMA INDIA LIMITED Without prejudice working of disallowance u/s 14A for assessment year 2007-
08 Disallowance u/s 14A of the Income Tax Act, 1961 Sr. Name of Proportionate Time No. of Salary Sec.14A No. the person time spent spent per days Cost disallowance who per month in year spent devoted Hrs. per year his/her (8 hrs. time in per day) Investment activity (A) (B)=(A)*12 (C)=(B/8) (D) (E) = (D)/365*C Amount Amount (Rs.) (Rs.) 1. G. M. 4 48 6 885,000 14,548 Finance 2. Dy. 8 96 12 392,000 12,888 Manager finance 3. Asstt. 16 192 24 237,000 15,584 Manager finance 4. Junior 32 384 48 344,000 45,238 Officer Finance
(A) 88,258 Add: Proportionate Operating and other expenses (B) 76,572
(A)+(B) 164,829
SOLVAY PHARMA INDIA LIMITED Without prejudice working of disallowance u/s 14A for assessment year 2007- 08 Disallowance u/s 14A of the Income Tax Act, 1961 Sr. Operating Total Amount Remarks 0.5% No. and Other amount allocated Expenses charge to for P/L Account Investment for Sec.14A 1. Salary, Wages 144,782,000 Actual for 4 and Bonus employees considered for disallowance u/s.14A 2. Contribution 21,031,000 to Provident and other Funds 88,258 3. Staff Welfare 7,513,000 3,999 In the ratio 0.5% Expenses of (1) salaries, 4. Travelling 7,513,000 3,999 0.5% wages and Expenses bonus and (2) 5. Insurance 4,779,000 2,544 0.5% contribution 6. Electricity 2,783,000 1,481 0.5% to PF and other funds 7. Miscellaneous 65,714,000 34,978 0.5% of 5 Expenses employees to total cost debited under the salaries wages… PER PROFIT 306,671,000 76,572 AND LOSS ACCOUNT
The learned Counsel further submitted that working based on identical basis in assessment year 2011-12 has been accepted by the Tribunal in ITA No. 1536/Mum/2017.
18. The learned DR on the other hand, submitted that disallowance has been restricted by the Ld. CIT(A) on the basis of the working of disallowance submitted by the assessee before him and therefore now assessee cannot be allowed to submit further working of disallowance for getting further benefit, without substantiating that the current working given is better justified than the working of disallowance filed before the Ld. CIT(A).
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The learned Counsel has refer to the decision of the Tribunal (supra) in assessment year 2011-12. The relevant funding of the Tribunal is reproduced as under:
5. Having heard the rival submissions, we are of the view that there is merit in the contentions of the assessee. A perusal of the investment portfolio of the assessee would show that the assessee has invested in four schemes of mutual funds, out of which two items have been brought forward from earlier years. During the year under consideration, the assessee has made new investments in only two schemes. Since investment activity of the assessee is limited as stated above, in our view, the Assessing Officer was not justified in invoking provisions of Rule 8D of the IT Rules without recording dissatisfaction on the methodology adopted by the assessee. Considering low level of investment activity, we are of the view that the disallowance of 2 19 lakhs made by the assessee u/s. 14A of the Act would meet the requirements of section 14A of the Act. Accordingly, we set aside the order passed by the learned CIT(A) and direct the AO to accept the disallowance made by the assessee.
We find that Tribunal has merely referred to the methodology of the assessee considering the low level of the investment activity and found the disallowance of Rs. 2.19 lakh as sufficient. The decision of the Tribunal is in the peculiar facts of that assessment year and cannot be imported into the facts of the instant assessment year. In the instant assessment year, the assessee filed a working of disallowance of ₹ 9, 59,000/-under section 14A before the Ld. CIT(A), which was accepted by him and accordingly relief was allowed to the assessee. Now, assessee has before us filed another working of disallowance of ₹ 1, 64, 829/-, but the assessee has not explained as why the working of disallowance which was given before the Ld. CIT(A), is not correct. In the circumstances, the contention of the assessee for further reducing the disallowance to ₹ 1, 64, 829/-cannot be accepted. The ground No. two of the appeal of the assessee is accordingly dismissed.
The ground No. three of the appeal of the assessee is in relation to transfer pricing addition of ₹ 1, 64, 77, 390/-. The assessee in its grounds has challenged the rejection of Transactional Net Margin Method (TNMM) is the most appropriate method (MAM) for benchmarking international transactions in respect of the import of Active Pharmaceutical Ingredients (APIs) and applying Comparable Uncontrolled Price (CUP) method as most appropriate method. The assessee is also aggrieved for ignoring the operating margin earned by the assessee of 17.13%, which according to the assessee is significantly higher than the arithmetic mean of 6.57% of the comparable companies.
Facts in brief of the case are that the assessee reported following international transactions:
Sr. No Nature of Amt. in Rs. Method adopted transaction 1 Purchase of API 24,55,99,037 TNMM 2 Purchase of 63,43,848 TNMM finished goods 3 Software licence 2,13,497 TNMM/CPM maintenance cost 4 Reimbursement of 12,61,251 TNMM/CPM expenses Total 25,34,17,633/-
For benchmarking of the transactions, the assessee selected TNMM as the most appropriate method. The assessee took operating profit (OP)/sales as its profit level indicator (PLI) and worked out the PLI of assessee at 17.13%. The assessee selected seven comparables and their average margin i.e. PLI at 7.34, therefore the assessee contended that its margin was higher compared to the comparables, hence the international transactions might be considered to be at Arms’ length price(ALP). The learned TPO however observed that the comparable selected by the assessee were not strictly comparable with reference to their functions and risks borne by the assessee, therefore he rejected TNMM as most appropriate method observing as under:
“As it could be seen from the discussion here under, that the department could compare the purchase transactions with reference to third party prices, the CUP methodology is considered appropriate than the TNMM. Further the comparables selected by the assessee are not strictly comparable with reference to the functions and risks borne by the assessee. From the perusal of the TP study report it is seen that assessee imports raw materials, develops into formulation and sells them locally. In respect of this activities it is stated that development process was developed by Solvay group, the basic R&D was done by the AE, clinical trials done by the AE. The assessee merely performs R&D activities to suit Indian market. The trade marks are owned by the AE, the technical know how & patent are owned by the AE. The assessee owns marketing intangibles, and bears foreign exchange risk, inventory holding risk and product risk. The AE bears principally the R&D risk. However in respect of the comparables selected, the functions narrated to be performed by the AE are also performed by the selected comparable companies, and as a result there is functional incomparability.
Further, it is pertinent to note that the assessee is characterised a exposed to less than normal risks and does not own intangible other than marketing intangibles. Its marketing intangibles are worth Rs.20 35 crore which are also deployed for carrying out its marketing functions. It has claimed Rs.4.68 crore on account of depreciation and amortization of its assets deployed for its business. Its export earnings are almost nil. Its trading income is 35% of sales. It has not debited any amount toward R&D costs.
In the above background of functions performed and risks assumed by the assessee, the financials of the comparables were examined. It is seen that M/S Albert David Ltd does not own any intangibles for its functions. It has incurred 0.38 crores towards R&D. M/s Ankur Drugs & Pharmaciticals is principally a contract manufacturer. Its exports are nil, imports are negligible. It does not own any intangibles. M/s Arvind Remedies Ltd has taken lot of R&D initiatives. It does not own any intangibles, its exports and trading income is less than Rs.1 crore against its total sales of 179.73 crore. M/s Jaysonpal pharmaceuticals Lad owns R&D facilities. It's foreign exchange risks differs. It has incurred 0.83 crore towards R&D. M's Koporan Limised has persistently made losses.
M/s Themis Medicare Ltd has 42% exports against total sales of 173.69 crore. It has incurred 1.39 crores towards R&D. Ms Warburg Lad, owns intangibles worth 45.57 crores and has incurred 4.07 crore towards R&D. It has 49% export & 33% import.
From the above it could be seen that the functions and risks of the selected mpanies are at variance to the functions and risks bome by the assessee and hence cannot be considered to be comparable. The assessee has not made any adjustment for the functional and risk differences while computing the profit margins.
In view of the above discussion TNMM is not considered appropriate methodology in the facts of the case.
Thus, the learned TPO characterized the assessee as manufacturer, without any research and development (R&D), with risk less than normal and owner of marketing intangibles as against the comparables who did not own intangibles, lot of R&D initiatives, foreign exchange risk etc., hence, rejected the TNMM method of benchmarking.
The learned TPO chosen comparable uncontrolled Price(CUP) method for benchmarking. The learned TPO compared assessee purchase transaction with “TIPS software” import data base. The learned TPO observed that the average price of transactions of the assessee relating to purchase of dydrogastrorone granules, meberverine HCL, pancreatin (minimicrosheres) was within (+)/(-)
5% range of for comparable data available in TIPS database and therefore no adjustment was required however regarding the purchase of “betahistine 2HCL”, the import price of the assessee was found to be higher than the average transaction price in TIPS database. The observation of the learned TPO in this regard are reproduced as under:
“With reference to purchase of betahistine 2HCL it was seen that the assessee has imported 970 kgs at price of Rs.3,48,72 582/4 Thus the assessee's average price works out to Rs.35.951/- per kg. From the TIPS software data base it was seen that there were products, namely betahistine 2HCL and betahistine 2HCL (bulk drugs) and their average import price was Rs.24,607/- and Rs.12.162/- respectively. The assessee was provided with the data and was asked to explain why the ALP should not be determined with reference to average of those prices. It is seen from the database that it has reportedimports of 2,270kg of betahistine for Rs3,48,19 - and the average price comes to Rs.15,369.19 These imports were mainly from Italy and some from Netherlands The assessee gave a detailed reply vide leer dated 13.10.2010, in which it was clarified that betahistine HCL and betahistine 2HCL (buk drugs) refer to same products, which is an Active pharmaceutical Ingredient. Ms. Jyoti Saraf (Head Taxation) appeard and made her objections. Her objections regarding adopting the average price with reference to data base were as follows:
(a) Betahistine was the original research molecule of assessee's AE SolvayPharmaceuticals BV and is manufactured by Solvay Pharmaceuticals BV and ismanufactured by Solvay group world over in 105 countries.
(b) The purity level contained in the product manufacture by Solvay group is of the highest quality. The certificate of analysis was given as supporting evidence.
(c) A highly purified material is expensive as compared to an ordinary material andit gives higher product performance (d) The shelf life of API manufactured by assessee group was 3 years which is more than those manufactured by other comparable companies which are 2 years.
(e) The API betahistine was used in the manufacture of "vertin" which has marketshare of Rs.70.78/- which is much higher than other similar products. (1) The product vertin manufactured out of the API is sold at a higher price compared to other products because of the quality.
(g) To apply CUP the products are to be strictly comparable.
The learned TPO also emphasized in the pricing difference in the end product manufactured using “betahistine 2HCL” by the assessee and another company namely m/s Sun Pharmaceutical Ltd. The relevant observation of the learned TPO is reproduced as under:
The difference in the pricing of the end product PDF with reference to "Vertin manufactured by the assessee and Betavert, another well known product manufactured by M/s. Sun pharmaceuticals is as follows. (M/s. Sun pharmaceuticals is taken for comparison as it is also reputed firm with a brand value unlike other companies):
Sr. FDF Manufacturer Retail price excluding local tax No. (Rs.) 8mg 16mg 24mg 1 Vertin Solvay (A) 27.83 51.63 80.34 2 Betavert Sun 26.02 50.24 76.75 pharmaceutical (B) Difference (C) 1.85 1.39 3.59 (A-B) C/A% 6.63 2.6 4.96 C/B% 7.10 2.76 4.67 From the perusal of the above, it could be said that on an average the price difference varies from 2.6% to 6.63%. It would be reasonable to infer there could be 5- 10% difference on account of standards of purity. It is important to note that there cannot a wide variance as otherwise there would not be approval of the drug regulatory authorities to market the drugs, if the purity level is below standard.
Further, the TPO allowed 10% adjustment on account of difference in the standards/purity of the product and thereafter worked out adjustment to the purchase transaction of betahistine 2 HCL as under:
“Hence even if a 10% allowance is considered on account of these differences in standards/purities, an adjustment of Rs.3,595/- (10% of Rs.35.951/-) may be made to the average price of the comparable and as a result the average price would be Rs.18,964/- (Rs. 15,369%+ Rs 3.595/-) which may be considered as ALP Even on this adjusted price the transaction does not fall within 5% safe range. Hence an adjustment of Rs.16,987/- per kg is proposed to be made on the purchase of Betahistine 2HCL In respect of 970 kg of purchase the adjustment to be made would be Rs.1,64,77,390/-.
Conclusion: To conclude, an adjustment of Rs. 1,64,77,390/- may be made on account of the purchase of 970 Kg of Betahistine 2HCL from the Associated Enterprise.”
Before the Ld. CIT(A) the assessee challenged rejection of TNM and applying of CUP as most appropriate method. The assessee submitted that import transactions of the assessee of “betahistine 2HCL” cannot be compared with third parties under CUP method because of difference in purity standard of product, market share of the assessee, premium pricing of final product, self life of the product, research and development expenditure by the assessee group. The Ld. CIT(A) has summarised submission of the assessee challenging the Comparable Uncontrolled Price (CUP) adopted by the learned TPO. For ready reference, said summary is extracted as under:
⚫ Solvay Group's products: Under this the appellas t's submission are summarised as under: a.Solvay Group products are products of original retard. The API's imported by the appellant are a result of in-depth original research, whereas the API's considered by the TPO may not be considered as outcome of original research. b. A large number of clinical studies have been conduct den its products by Solvay Group to prove beyond doubt the efficacy of the products de ekped by it. These clinical studies prove that the Solvay Group products are that of a suprir quality. Such clinical studies may not be conducted in respect of products sold by che: marke: players and hence the efficacy of these products is not known. c. Accordingly, on account of the reasons indicat d above there exists significant differences between the API ie. Betahistine that SP1 imports from its associated enterprises and the APIs sold by other third parties co uidered by the TPO in his order. vii. Justification for not applying Comparable Uncontrollabl Price CUP Method in the case of Purchase of API's: Under this the appelle a's submission are summarized as under: a. The appellant has submitted that the application of the CUP method requires highest degree of comparability between the controlled an uncontrolled transactions and any difference between the two could materially affect he price comparison. Further Rule Rule 10B (1)(a) of the Indian Income tax Rules, 196! (the Rules) has been reproduced in the submission. b. Further, a reference has also been made to para 2, 3 & 2.14 the transfer pricing guidelines for multinational enterprises and theadministrations issued by the Organization for Economic Corporation and Develop next (OECD guidelines"). c. Based on the above, it has been contended that gi en the difference in the quality of API's imported by SPIL from AE's vis-à-vis the AT considered by the TPO will in turn have an impact on the price of FDF's sold in the market. d. Further, reference has been made to para 2.11 of the: GECD guidelines and it has beencontended that where differences in the products exist (between the products sold in controlled situations vis-à- vis products sold in uncontrolled situations), in order to applythe CUP method, it should be possible to make easonably accurate adjustments toeliminate the differences between the controlled and the uncon rolled transactions being compared. In case such adjustments are not possible, the CUP method would not be reliable.
The appellant has further relied upon decision in the case of UCB India Pvt Ltd Vs. ACT, ITAT (Mumbai) and has contended that is the appe.lant's case also the data regarding the quality of APT's used for comparisor by the TFO has not been furnished and hence application of CUP would not be feasible in the current case. f. Apart from the product differences, Solvay Group entities also provide SPIL with support in the following areas:
• Assistance in manufacturing formulations • Assistance in the form of marketing, promotional and technical inputs.
Typically, such support is not received in respec o the APIs sold by other parties indicated in your letter g.Accordingly on account of above mentioned differ me es, it would not be appropriate to compare the prices at which SPIL. imports API Be ah.atine from Solvay Group entities with the prices at which Betahistine is imported fro n ITALY Accordingly, it would not be possible to apply the CUP method, by comparing the prices at which SPIL imports the API from overseas Group companies, with the rates a which the APIs are imported by other third party entities from ITALY. viii. Without prejudice to the above, the appellant submitted the following: a) In respect to the calculation of adjustment of RL 1,64,77,390/- the TPO has erred in considering only the price of FDF of Sun phar nareutical for arriving at the rate of allowance of premium. The assessee had provi led the TPO with a list of final sales price of drugs manufactured by other competitc is, which the TPO has not considered for the purpose of this calculation. The below unable provides the working of premium allowance if the average sales price of all the competitors is taken into consideration: Formulation Manufacturer Retail price (Rs. excluding local taxes) 8mg 16mg 24mg SPIL (A) 27.87 51.63 80.34 Vertin
Sun 26.02 50.24 76.75 Betavert Pharmaceuticals Mankind Pharma 25.2 46.4 - Vertistar Geno 20.52 36.96 - Betahist Pharmaceuticals 23.91 44.53 76.75 Average Sales Price of competitors (B) 3.96 7.10 3.59 Premium Difference (A-B) 14.20% 13.75% 4.47% %Premium as compared to SPIL price
Thus it can be seen that the price difference varies from 14.47% to 14.20%. Therefore as per the process adopted by the TPO in his order, it can be considered that there could be 10%- 20% difference to the pricing on account of difference in he standards of purity, instead of 5%-10% as computed by the TPO in his order. ix. It was further submitted, that the appellant has used the TNIAM for the purposes of benchmarking the transactions in relation to import a API, which is based on a scientific basis and that the comparables selected are functional y comparable. The net margins are more tolerant to some functional differences between in the controlled and uncontrolled transactions and accordingly, the TNMM is the most appropriate method in the facts and circumstances of the case. The appellant also submitted the analysis of the comparable companies selected by the appellant.
After considering the submission of the assessee, the Ld. CIT(A) justified the Comparability under CUP method using TIPS software database observing as under:
The facts of the case have been considered together with the submissions of the appellant as against the observations of the AO/TPO, in their on er. The submissions of the appellant has not been found to acceptable for the following reasons:
The appellant manufactures and sells finished for nu stions in India. It carries out secondary manufacturing (Toll Manufacturing) of fir ishod formulations using basic raw material (called actives pharmaceutical ingredients, AF 1) imported from AE. ii. During the course of the proceedings before the TPO, the TPO collected data in respect of the import of API from the data base. The value of in port in respect of the API imported by the appellant along with quantity and amounts was allotted by the TPO as under:
S Active Unrelated Companies Appellant r. Ingredie N nt o Name of Quant Price Qual Price the ity Per ity Per company Kgs Kgs Kg Rs. 1 Betahist Italy and 2270 15,369. 970 35,9 ine Netherla 19 51 2HCL nds iii. It could be seen from the above details that there is he ge difference in the price of import by the appellant and those imported by the third par ies in India. The TPO accordingly confronting the details so collected and issued show ca se notice to the appellant proposing the corresponding adjustment to the value of internatis na transaction to arrive at the ALP of the transaction and proposed CUP as the most appropriate method instead of TNMM as adopted by the appellant.
The TPO has mentioned that the AE principally be rs 3 & D risks. Here one point is worthy that the API imported by the appellant fro n is AE is off patented and as such itsales in the open market are not restricted. Further a far as this API is concerned, therecariot be any question of any R & D spend now. All tse It & D spend in developing any API is supposed to have been recovered during the peric def its pat set.
The TPO on page 3 of his order has mentioned reason for the rejection of the TNMM as the most appropriate method Nothing has been suben the 1 by the appellant to controvert the factual findings given there in by the TPO le respec of the comparables. In view of the findings of the TPO and in the facts of the case when a better comparability is available on independent basis in respect of international transaction rel wing to import of API and when its separate benchmarking can be done on an independe at leais, thin that is what should be resorted to and not to TNMM, that too on aggregated asis. Accordingly the TPO's action in rejecting the TNMM as most appropriate method la considered justified in the facts of the case. vi. The appellant has contended that there is difference leneen or ginally researched APla and generic APIs. It has been stated that originally searched drugs imported from the AE's are unique in terms of their quality standards, e ficacy, stability, shelf-life, and that the drugs with similar chemical compositions may have very different use or effects and that the drugs imported by the appellant have been caufactured using state of the art manufacturing equipment, facilities and validated 1chnologies vis-à-vis the imported drug by the third parties. Accordingly, it has been com med that the comparability criteria using CUP as the most appropriate method are violate 1. In this regard it is stated that for the so called difference in the effects, stability, efficacy etc. bet for the mention of the same, nothing has been submitted, supported by det dls or further authenticated by any kind of documents/evidences. As far as quality of the imported API is concerned, it is mentioned that under any circumstances, the APIs either imported by the appellant or imported by the third parties do meet the norms and quality standards prescribed by the Drug Controller of India. Further it is seen that a epated pharma company viz. Sun Pharmaceutical also produces the same FDF and sales them into the domestic market, almost at the same rate. Further the TPO has in his analysis granted an adjustment of 10% based on the difference in the price of the FDF old by the appellant and the Sun Pharmaceutical towards the so called quality differences and other differences in the market place. Accordingly, the contention of the appe lart in respect of difference between originally researched APIs and generic APIs are not found to be acceptable, and action of the TPO is found to be justifiable. vii. It is seen that the key reason for import of API from se >oint of view of business are right to use the trademark and market share premium. In this regard, it is mentioned here that the appellant is a licensed manufacture of drugs for which it imports API from its AE. It is no where mentioned nor demonstrated that the price of his API imported by the appellant is inclusive of payment towards right to use the trade nak or any sort of market intangible owned by the AE of the appellant. If nuy ways the appellant is gainful by the usage oftrademark and market share premise then, it should hare beer specifically factored for either by way of brand/trade mark royalty or payments trademarket share permission for any marketing intangibles. There are no such factor existing as the same is not been evidenced or demonstrated by way of any documents he the price of the API imported is inclusive of any such consideration. viii. The appellant in its submission has contended that its iglar market share premium pricing of FDF render it Inappropriate to compare the API ported by the SPIL with the API imported by the third parties. In this regard it is a stol that the market share and the premium pricing of the FDFs is normally on account of the brand and the marketing intangibles that the company may enjoy: Such factoryways and factored into the pricing of the API imported by the appellant, is nowhere & me narrated by any facts, details or documents. It is further mentioned here that as far at the premium pricing of the FDF is concerned, the prices of the FDF produced by Sun P unnaceuticals are very close to the pricing of the FDF sold by the appellant in the Indian mediet. Accordingly it is arrived at that such factors of differentiation which the appellant taxmentioned are firstly not in respect of the international transaction relating to img ort of the API by the appellant and secondly such factors do have any impact on the imp at price of the API is not evidenced by any details or documents submitted by the appellant. Accordingly such contention of the appellant are not found to be acceptable. ix. The appellant has also mentioned about the group pro ile of the Solvay group, products of the Solvay group, are factors which also render the co operability proposed and undertaken by the TPO na unjustified. In this regard it is ment card that the import transaction is pertaining to import off patented API from the AE. Fr the reasons of the group profile of the Solvay Group or its product commanding any xenium on account of intangibles associated with the group or its product, higher price have been paid by the appellant for import of the API from the AE, is not demonstrated with any facts or documents. How such import from the Solvay Group necessitate impon at more than double the price of the API that is available from the third party has not been lessonstated to be justifiable on any of such factors which have been contended by the appellant. Such submission of the appellant appear to be technical in nature and are not issued to be affecting the price of the API imported by it from the AE. Under the facts of the case, this reasons of higher prices for the imported API clearly lead to the issue of tra fr price of the API and not such factors which have been submitted by the appellant.
The appellant has placed reliance on the judgement pissed by the Hon'ble ITAT Mumbai he case of UCB India Vs ACIT (2009-TIOL-181- ITAT Mun). In this regard it is sted that the decision of the Hon'ble ITAT Mumbai in the case of UCB India are in aspect of specific fact of the case and cannot begeneralized. However, the principles enunciated in the said decision of the Hon'ble ITAT Mumbai are in no way getting ignoredin the analysis conducted by the TPO. The aspect of product comparability of controlled and uncontrolled transactions, the quality of APT's imported by the appellant and the third parties, and other aspects of the terms and continues characteristics of transactions, volume, difference in geography, get duly considered as he imports are in India and also there is no significant difference in the volume of transaction. It is further the fact of the case that the API import by the A.E. is not the branded ons. It is off patented which would mean that the R&D expenses which could have beer thre in development of such API have been recovered during the period when such API was under patent. Accordingly, it cannot be said that the comparability undertaken by the TPO and the eventual analysis conducted is either vitiated or there is any justifications for the appellant to pay such significantly higher price for the same API imported from its AE.
In support of contention that determination of arms’ length price for CUP is one of the most appropriate method, the Ld. CIT(A) relied on the decision of the coordinate bench of the Tribunal in the case of Serdia pharmaceutical India Private Limited (supra), observing as under:
“As far as the appellant's argument in respect of rejection of most appropriate method adopted by the appellant, selection of CUP as most: appropriate method by the TPO, and other related arguments of the appellant are concerned me! it is mentioned here that the Hon'ble Mumbai Tribunal had occasion to deal with these issues in the case of Sentia Pharmaceuticals (1) Pvt. Ltd.(Supra) wherein these Isus have been decided holding as under:
(1) The argument that as 1.92C does not set out by hierarclay or order of preference amongst the various methods for computing the ALP, the assessee has the unfellered discretion to adopt the TNMM and the TPO is not entitled to reject that method without showing deficiencies/defects therein is not acceptable. S.92C rw Rule 10 C requires the 'most appropriate method to be cl on from amongst those specified. The exercise of selecting the mostappropriate" method implies that the appropriateness of method is to be ranked in so ne order. Accordingly, it is open to the TPO to reject the TNMM and adopt the CU method on the basis that the latter is "most appropriate" on the facts of the case:
(ii) Generally, the TNMM is a "method of last resor and should be adopted only when the standard method (CUP, Resale Price Meth d ad Cost Plus Method) cannot be reasonably applied. The standard (transaction) methods have an inherent edge over the profit method (TNMM) in most situations and wherever both methods can be applied in an equally reliable manner, the tran ac.ion methods should be preferred over TNMM (ACIT Vs. MSS India 32 SQT 13: (Num) followed OECD Guidelines 2010 considered); (ii) On merits, the CUP method is the most appropriate method to determine the arm's length price in the cases of generic drug manufacturers so long as comparables are available. As the API imported by the assessese was a generic drug and not patent protected, the CUP method could be used. The argument that the APIs are "unique" on the ground that they are better, of proven a Textiveness and manufactured using WHO-GMP practices is not acceptable because while the high quality standard does confer a certain degree of comfort, it does no affect the comparability of the API with the same API manufactured by competitors. (Principles laid down in Glaxo Smith Kline Inc vs Her Majesty (2008 TCC 124) approved on this point by the Canadian Court of appeal in 2010 FCA 201 (1ollowed - Noted that it was not the argument that the higher prices of API were warranted on account of commercial compulsions arising out of licensing agreement)
The facts also showed that the prices at which he generic drugs were purchased by the appellant from its AEs were not driven by market forces but on considerationswhich had no role to play in a typical arm's length transaction. The appellant's AE had reduced prices of the APIs to compensate its appellant for the low selling price of the drugs which would not have happened is an arm's length transaction. The price movements and demand sensitivity to the rics indicate that the APIs imported by the appellant were are not unique items ad hat such business models being adopted by pharmaceutical companies leave any le cope for them to manipulate AP! prices so as to regulate profitability of their co strolled entities in the end use Jurisdiction.
(v) The facts that another arm of the Government (Customs) co sidered the price paid by the appellant to be an arm's length price does 1 ot mean the appellant is relieved of the burden of establishing that it is an arm's length price for transfer pricingpurposes.
In view of the above, it is held that there is no fore in the arguments advanced by the appellant on aforesaid issues. Accordingly based on it: Sardia's case and the TPO's order, it can be said that valid CUP exits. Thus, taking into account all the facts and circumstances, I conclude that the CUP method should be taken as most appropriate method, as considered by the TPO/ A.O. instead of T MI4, as applied by the Appellant.
The Ld. CIT(A) also justified 10% price adjustment allowed by the learned TPO for difference in purity of product if any, observing as under: xiii. In respect of the issue regarding reliable accurate :djustments to be made as per rule 10B(3) of the Rules, it is stated that the appellant his rot given as to what could be the reliable adjustment in this case and further how such an adjustment, if at all existing, are justifiable in the facts of the case. Further in view of the decision of Hon'ble ITAT in the case Serdia Pharmaceutical (1) Pvt Ltd. (Supra), and in the faces of the case it is arrived that ordinarily no adjustments are required in the comparability reached by the TPO. However the TPO has granted an adjustment of 10% by comparing the price of the FDF sold by the appellant and those sold by another reputed pharma company viz. Sun Pharmaceuticals. Such adjustment which is based on the price of the FDF sold in the Indian market would in turn would take care of any liffrence in the quality that may be, the presence of market tangibles and also the so called of her assistances given by the AE to the appellant, though they are not related directly to the nternational transaction of import of API. Accordingly the argument of the appellar t. disregard the CUP as the most appropriate method is not found to be acceptable. xiv. The appellant has on without prejudice basis cont nded that the TPO has granted an adjustment of 10% on the prices based on considering only the prices of the FDF of Sun Pharmaceuticals which has been allowed in the computation as rate of allowance of premium. The appellant has contended that there are their two manufacturer’s viz. Mankind Pharma and Geno Pharmaceuticals, their prices for the DFs should also be considered to give the allowance for the premium. It has been submitted that the price difference varies from 4.47% to 14.20% and therefore as per the process adopted by the TPO, it could beconsidered that there is a difference between 10-2% on the pricing on account of difference in standards of purity etc. instead of 5-10% as computed by the TPO in his order. In this regard it is mentioned that the Sun Phar nac cuticals is a reputed company in the Indian market and their products compete with se PDF produced by the appellant. Their price are the closest to the prices of the FDFs & ld by the appellant. Accordingly for the purpose of comparability and adjustment, the TPC has rightly considered the prices of Sun Pharmaceuticals for granting the adjustment. The or putation done by the TPO comes within the bracket of 5-10% but still instead of takin; the average, the TPO has taken the maximum in the bracket i.e. 10% for granting the a ljutiment of the prices to take into account the differences in quality and other parar iets with the transactions being compared could have. It is seen from the submissica of the appellant which has been. mentioned at point vili at para 8.3 above that for worki 1g out the percentage of premium as compared to the price of the appellant, the average sile prices of competitors have been considered and premium in respect of the three variant i. 8mg. 16mg and 24mg has been arrived at 14.20%, 13.75% and 4.47%. If the average of these three percentages are taken, it only works out to 10.80%. The TPO has allowed the adjustment of 10% which is again justified even on this count. Accordingly, there could se any further adjustment warranted after considering the prices of the FDFs of the other competitors, is not found to be coming out in the facts of the case and accordingly such submission of the appellant is not found to be acceptable.
Before us the learned Counsel of the assessee submitted that in the “TIPS database” it is not known whether there are any Related Party Transactions (RPT) and if so same need to be excluded for the purpose of comparability under CUP method. He further submitted that no details are available in the database regarding the quality of the products. He further objected for taking average price of the transactions in the database, because according to him in such case it loses the exact comparability of transactions, country of transactions, quantum, quality etc. factors for the purpose of the true comparability under the CUP method. In support of contention, the learned Counsel of the assessee relied on following decisions:
1 UCB India ltd. (2016) 70 taxmann.com 164 (Mumbai-trib) 2 Gulbrandsen Chemicals Vs. CIT (2019) 104 taxmann.com 253 (Ahmedabad-trib) 3 DCIT Vs. Dishman Pharmaceuticals (2019) 103 taxmann.com 271 (Ahmedabad-trib) 4 DCIT Vs. Fresenius Kabi Oncology (2019) 106 taxmann.com 403 (Delhi-Trib0 5 Merck Ltd. Vs. DCIT (2013) 37 taxmann.com 433 (Mumbai-Trib) 6 PCIT Vs. Amphenol interconnect (2018) 91 taxmann.com 441 (Bombay) 7 Firmenich Aromatics Production India Vs. ITO (2018) 100 taxmann.com 279 (Mumbai) 8 Dishman Pharmaceuticals vs. DCIT (OSD) TS-958-ITAT-2018 (Ahd.) 9 DCIT Vs. Ecocat India (2017) 86 taxmann.com 117 (Delhi-Trib) 10 DCIT Vs. Schutz Dishman (2015) 60 taxmann.com 50 (Ahmedabad- Trib)
In view of the arguments he, prayed that CUP method applied by the learned TPO should be rejected and no adjustment is required to the value of the International Transactions in view of margin of the assessee being higher than the average margin of comparable under the TNMM method.
On the other hand, learned Departmental Representative submitted that use of the CUP is most appropriate method and which has been applied by the Coordinate Bench of Mumbai Tribunal in the case of Sardia pharmaceutical India Ltd (supra). Regarding the use of TIPS database for application of the CUP, the learned DR submitted that the main arguments of the assessee are regarding differences in product, geography and terms of contract. She submitted that issue of product/quality has been dealt by the TPO as well as by the Ld. CIT(A). She further submitted that as far as quality and purity is concerned, the learned TPO has already allowed price adjustment of 10% using a renowned company’s end product. According to her, when the same raw material is used for the end products both the product are in competing market, this adjustment take care for any product differences, as pointed out by the assessee. She submitted that the geographical differences are miniscule considering the fact that data from Italy and Netherland has been used by the TPO for comparison. The learned DR submitted that use of the “TIPS software bare data is a valid CUP has been upheld by the Coordinate Bench of the Delhi Tribunal in the case of Trl Riceland (ITA No. 441 and 5508/Del/2017).
The learned DR further submitted that none of the cases relied upon by the assessee had mention of or use of TIPS database for benchmarking. She submitted that when the use of this database has been upheld by the Tribunal (supra), the reliance of the assessee on those case laws is ill founded and should not be accepted. The learned departmental representative however submitted that assesses’s benchmarking using TNMM has been rejected by the learned TPO, however in case the application of the TIPS database is found faulty by the bench, the matter might be restored to the TPO for first benchmarking of the transaction by way of selecting appropriate set of the comparables.
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. Firstly, the assessee is aggrieved because of rejection of Transactional Net Margin Method (TNMM) as the most appropriate method used by the assessee for benchmarking of the international transactions. As far as methods for benchmarking is concerned, the Rule10B, introduced by way of IT (21st amendment) Rules, 2001 has provided five methods consisting of, comparable uncontrolled Price method (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), profit split method (PSM) Transactional Net Margin Method (TNMM). With effect from 01-04-2012 one more method i.e. any other method has been prescribed. However under the rules, no priority of most appropriate method for benchmarking has been prescribed, but various judicial decisions has held that wherever direct method is available, same should be given priority. On the issue of selection of most appropriate method. The findings of Tribunal in the case of Sardia pharmaceutical India Ltd (supra) has observed already been reproduced in earlier para.
Thus, Comparable Uncontrolled Price method has been given priority when the data is available for comparison at transaction level, because the transactions carried out by the assessee with its Associated Enterprise and transaction carried out between two independent enterprises, are compared directly on various parameters i.e. period of transaction, quantity of transaction, quality of products etc. and differences between two sets of the transactions can be minimized for achieving the object of arriving arm’s length price to larger extent, neutralizing the impact of relationship between the AEs for price determination. The success of the said method is subject to the condition that uncontrolled transactions has no orders difference with the control transactions that would affect the price and if at all there are differences, same should have reasonably ascertainable effects on price, so that appropriate adjustment can be made. Comparability under this method depends on close similarity of transactions with respect to various factors especially the quality of product, the contractual terms etc.
In the instant case, the learned TPO has made adjustment to the value of the import transactions of only one product namely Betahistine 2HCL. According to the learned TPO , the TIPS database provide list of transactions of import of Betahistine 2HCL by other parties during relevant period and prices of which can be compared with the transactions of the import of Betahidtine 2HCL by the assessee from its Associated Enterprises. The learned TPO vide letter dated 05/10/2010 intimated to the assessee data available in TIPS and asked why the average price of import of Betahistine 2 HCL at Rs. 24,607/- and Betahistine 2 HCL ( Bulk Drug) at ₹ 12, 162/may not be taken for comparison with the average price of a 35, 951/-shown by the assessee. The relevant part of the TIPS data confronted to the assessee, is reproduced as under:
On perusal of the above, we find that in this database product, country of import date of import, quantity of import, price of import have been specified, but the learned TPO has compared the average price of transactions for the year available in the TIPS database with the average price of the transactions of the assessee with its AE. In our opinion, this approach of the learned TPO is faulty. Under the CUP, individual AE transactions need to be compared with the independent transactions during relevant period as there might be fluctuations in the price due to market factors. The averaging of independent transaction is permitted where date of same product, quality of similar or same period of more than one transactions are available. Otherwise, averaging the total transactions may distort the price to be compared as arm’s-length transactions. Another defect in the approach of the learned TPO is non-consideration of Related Party Transactions in the TIPS database. We find that in the list of transactions under TIPS database supplied by the learned TPO there is no mention of the name of the party and therefore, it is not ascertainable whether there was any related party transactions in the said list or not. The learned DR has referred to the decision of the Tribunal in the case of Trl Riceland (supra) to support that transactions reported in TIPS database can validly be used for comparison under CUP method of comparability. The relevant finding of the Tribunal (supra) is reproduced as under:
“We have also seen that the information so furnished by the database used by the assessee is fairly comprehensive information, including description and prices as per invoices presented to customs- a fact noted by the TPO himself. which can be cross-checked and verified, in case of doubts The TPO has, at page 11 of the transfer pricing order himself stated that "the product data compiled in the TIPS database is taken from customs data relating to rice, but also specifies the variety and brand of basmati non basmati rice" In these circumstances, the vague doubts expressed by the TPO on the relevance of this database are clearly unfounded. His action is incorrect in law as indeed inappropriate to the facts of this case. Therefore, in our considered view, the Transfer Pricing Officer was clearly in error in rejecting the information inputs received from the Tips Software and the database made available by the said entity… ….Viewed thus, even if there he some minor variations in the quality even under the elaborate categorization of rice varieties, such variations, which do-not materially affect the prices of uncontrolled transactions due to large size of comparables and the same geographical consumption market being covered by the comparables, can be ignored… …Coming to the inherent edge that direct methods have over indirect methods of determining the arm's length principle, which justifies selection of CUP method as the most appropriate method, we may refer to the following observations made by a coordinate bench in the case of Serdia Pharmaceuticals (P) Lid"… Thus, it can be seen that the validity of use of TIPS database for application of CUP has been upheld in this case, Relying on the same, the ITAT, Mumbai, in the case of Rohm & Haas India Pvt Ltd (112 taxmann.com 90 (para 6 of the order has upheld the use of the database and restored the matter for adjudication.
We find that in the case of Trl Riceland (supra) the individual transactions with AE was compared with the average price of transactions in TIPS database and not average price of the transactions of the AE with the average of the transactions of the available in TIPS database. The relevant finding of the Tribunal (supra) in para 18 is reproduced as under:
The first thing we have noticed is that the assessee has determined arm's length price of its transactions with the AES by comparing average export price by the assessee to its AES with the average uncontrolled export price This approach is patently incorrect inasmuch as while under rule 10B (1)(a)(i), it is indeed open to compute ALP on the basis of price charged in a comparable controlled transaction or a number of such transactions, but the arm's length price so computed is, under rule 10B(1)(a)(iii), taken as arm's length price in respect of property transferred in the international transaction. The expression the international transaction referred to in rule 108(1)(a)(iii) is used in singular and does not permit taking into account, unlike rule 10B(1)(a)(i), a number of such transactions While averaging is thus permissible for the uncontrolled transactions, each international transaction is to be taken on standalone basis. In our humble understanding. it is not open to the assessee to compare the average price in his transactions with AES with average price in uncontrolled transactions. Dealing with a somewhat similar issue, though in the context of cost plus method of ascertaining the arm's length price, a coordinate bench of this Tribunal, in the case of Asstt. CIT v Tora Ultimo (P) Ltd. [2011] 47 SOT 401/13 taxmann.com 184 (Mum.), has explained this principle as follows:
……….The way this rule works, the benchmark gross profit is to be applied on each transaction with the Afs, while, for computing the benchmark, one could take into account a series of same or similar transactions. In other words, while setting the benchmark, one can take into account several transactions with unrelated enterprise on what can be termed as 'global basis essentially in respect of same or similar property or services though, the benchmark so arrived at cannot be applied on the global basis le the average of gross profit earned from same or similar transactions with AEs. The application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of CPM is also evident from the plain wordings of 108 as well. Any other view of the matter will result in incongruities. For example, if our average mark up to unrelated enterprises is 20 per cent, and we charge a mark up of 2 per cent in one transaction with AE and 38 per cent in another transaction with the AE both these transactions, by applying the mark up on global basis, will meet the test of ALP whereas in the first case, the mark up charged is certainly not a mark-up resulting in an ALP. In this particular case for example, the normal mark up in transactions with has been computed at 16.31 per cent, and the average of mark up on sales to AES having been taken at 17.08 per cent. entire sales to AEs has been taken at ALP but, the mark up in the many cases is clearly less than benchmark. To give one example, at p. 221 of the paper book, margin of 14.15 per cent (4 invoices), 13.95 per cent, 13.81 per cent, 14 per cent (4 invoices), 14.14 per cent (2 invoices), and 14.16 per cent is given by assessee's own computation, and, on the same page on one Invoice, the assessee has shown a margin as high as 27 per cent. The CPM, therefore, has not been correctly applied. In any case, one of the most important input. Le diamond, has been imported at a price for which no ALP documentation is available and the price of imports have been taken into account in computation of costs as well. The costs of inputs have not been verified either No efforts are made to show that the terms of sale to the AES and all other relevant factors are materially similar vis-a-vis the transactions with independent enterprises. The CPM is applied by comparing gross profit on sales, whereas the method requires comparison of mark up on costs on transactions with AEs vis-a- vis mark up on costs on transactions with non-AES. In view of these discussions, the CIT(A) was in error in upholding assessee's computation of ALP by CPM.
Further, in said case, issue of related party transactions in TIPS database was not discussed. In view of the above facts, the decision the case of Trl Riceland (supra) is distinguishable for application of CUP in the instant case.
In view of above facts and circumstances, we are of the opinion that the comparability under CUP carried out by the learned TPO does not satisfy the requirement of law for applicability of CUP method. In all circumstances there are two options before us. The first option is, if the learned TPO can segregate the related party transactions in the TIPS database considered for comparison and thereafter he undertake comparison of the price of the individual AE transactions with price of the individual or average of similar transactions carried out between independent parties available in TIPS data base. If such an exercise is not possible, then second option is to explore the compatibility under any other method including under TNMM by way of searching new set of comparables having similar FAR (function carried out, asserts employed and risk undertaken).
Accordingly, we feel it appropriate to restore the issue of transfer pricing adjustment to the file of the learned TPO for deciding in view of our directions above.
The ground of the appeal is accordingly allowed for statistical purposes.
The additional ground No. one relates to deduction in respect of education cess. This ground was not pressed by the assessee before us therefore same is dismissed as infructuous.
The additional ground No. two of the appeal relates to refund of dividend distribution tax paid in respect of non-resident shareholders. The learned Counsel of the assessee referred to the finding of the Tribunal in wherein identical issue has been restored to the file of the learned AO to be decided subsequent to the decision of the Special Bench constituted for adjudication of the issue. The relevant finding of the Tribunal (supra) is reproduced as under:
Additional Ground No 2 is qua the claim for refund of excess dividend distribution tax paid under section 115-0 in respect of dividend paid to non resident shareholders to the extent such tax paid exceed the tax rate prescribed under the relevant tax treaty The Ld. AR for the assessee in support of his argument contended that on this issue Special Bench has already been constituted by theTribunal in Total Oil" case and it may be sent back to AO to decide as per the decision of Special Bench. So we remit this issue back to the AO to decide as per the decision to be taken by the Special Bench. So additional ground No.2 is decided in favour of the assessee for statistical purposes.”
Accordingly, the issue in dispute in the year under consideration is also restored to file of the AO to be adjudicated after the finding of the Special Bench of ITAT on the issue in dispute. The additional ground No. two of the appeal is accordingly allowed for statistical purposes.
In the result, appeal filed by the assessee is allowed partly for statistical purposes.
Order pronounced in the open Court in 30/_11/2022 under Rule 34 (4) of the ITAT Rules, 1963.