TAVAPHARM INDIA P.LTD,MUMBAI vs. DCIT CIR 15(3)(1), NEW DELHI

On the facts and in the circumstances of the case and in law, the Ld. Dispute Resolution Panel ('DRP') erred in upholding the action of the Ld. Assessing Officer ('AO') / Ld. Transfer Pricing Officer ('TPO') in confirming the addition of Rs.2,05,87,179 /- to the income of the Appellant by holding that its international transactions pertaining to the provision of Contract Manufacturing services do not satisfy the arm's length principle envisaged under the Income Tax Act,1961 ('the Act').

The sole dispute which has been raised before us by the ld. Counsel is with regard to exclusion of one comparable, by the TPO, M/s Flimango F. Ltd which was selected by assessee in its TP Study Report.

Brief facts qua the issue involved are that, Teva Group of company are engaged in the business of Contract Research and Testing Services, manufacturing and distribution of generic pharmaceutical products. The assessee is an indirect subsidiary of Teva Group and is a captive service provider mainly engaged in the business of providing contract research services, testing services, business development and procurement services, contract manufacturing services and Pharmacovigilance and related Support Services to its AEs. For the relevant assessment year, the assessee has reported following international transactions:- S.No. Nature of transaction Amount(Rs.) Method 1 Contract Manufacturing 32,80,96,955 TNMM 2 Business Development and Procure- TNMM ment Support Services 1,98,63,489 3 Contract Research and related Support TNMM Services 36,95,39,063 4 Pharmacovigilance and related Support Services 41,38,942 TNMM 5 Payment of interest on ECB Loan 77,21,059 CUP 6 Reimbursement of expenses (received) 76,51,140 CUP 4 तेवाफ़ामा� इं�डया �ाइवेट �ल�मटेड M/s Tevapharma Pvt Ltd ITA 1034/Mum/2016 As per the TP Study report, the segmental financial information in respect of its international transactions was given as under:- Particulars Contract Business Contract Pharmaco Manufact- Development research & vigilance uring & testing related Procurement services(Rs) support services (Rs) services(Rs)) Sales/Operating income 32,80,96,955 1,98,63,489 36,95,39,063 41,38,942 Less: Operating 28,69,35,594 1,75,64,794 31,59,18,443 36,42,019 Cost Operating Profit 4,11,61,361 22,98,695 5,36,20,620 4,96,923 OP/OC 14.35% 13.09% 16.97% 13.64% As TPO analyzed and benchmarked the direct manufacturing segment which was reported by the assessee at Rs.32,80,96,955/-, as against this, the TPO has determined ALP at Rs. 34,86,84,134/- and thereby has made the adjustment of Rs.205,87,179/-. So far as the most appropriate method (MAM) for benchmarking the transaction, TNMM adopted by the assessee has been accepted by the TPO also alongwith the PLI which is operating profit/ operating cost. The assessee in its TP Study report had identified 7 companies as comparables with the arithmetic mean of 15.85%, which were as under:- Sr. Name of company OP/OC (%) No. 1 Ankur Drugs & Pharma Ltd 9.05 2 Granules India Ltd 9.66 3 Flamingo Pharmaceutical Ltd. 10.56 4 Sharon Bio-Medicine Ltd. 11.47 5 Smruthi Organics Ltd. 11.50 6 Elder Projects Ltd 45.36 7 Natural Capsules Ltd. 13.21 Arithmetic Mean 15.83% Since assessee’s OP/OC was 14.35%, therefore, it was reported by the assessee that vis-à-vis the comparables the transaction under this segment were at Arm’s Length.

Before us, the Ld. Counsel Mr. Dhanesh Bafna, after explaining the entire facts, gave his submissions with regard to exclusion of all the three comparables by the TPO as well as inclusion of one comparable company, that is, M/s Hikal Ltd. However stressing on the Flamingo Pharmaceutical Ltd, he submitted that the TPO has rejected same on the ground that the assessee was failed to submit the annual report of the said company. He pointed out that the annual report of FPL was very well submitted before the TPO and this aspect was specifically objected before the DRP. It was also submitted that this company was engaged into the contract manufacturing and functionally it was a very good comparable. The DRP has upheld the rejection merely on the ground that the year under consideration was not the routine operation for the company and such observation is based on the Annual report of the company which mentions that: “On the domestic business front, the progress was stunted due to abnormal attrition of field and management staff." In this regard, he submited that, if year-on-year profitability analysis of this company is taken into consideration it will indicate that the company has been consistently growing in terms of turnover as well as the profit margins. The earnings before the interest and depreciation, Profit before tax and Profit after tax have improved during the current year vis-à- vis the earlier years. In fact during the year under consideration, the company has continued to earn a robust 7 तेवाफ़ामा� इं�डया �ाइवेट �ल�मटेड M/s Tevapharma Pvt Ltd ITA 1034/Mum/2016 margin (PBT) at 6.81% as compared to 5.27% in the immediately preceding year. Further, the staff expenses have only marginally decreased from 8.45% to 8.14% of the total cost as compared to the earlier year, therefore this cannot be the factor for treating it abnormal phenomenon. Also, the key management personnel continue to remain with their due term in the year under consideration. If all these aspects are taken into consideration, then the company has continued to perform and maintain its profitability over the years. Accordingly, he submitted that, Flamingo Pharmaceuticals which is a company engaged in contract manufacturing of pharmaceutical products should be included as a comparable company to the assessee. Lastly, he submitted that, if FPL is considered to be a comparable then its arithmetic mean would fall within ± 5% and other comparables may not be required to be adjudicated.

On this aspect, we have heard the Ld. CIT DR also who strongly relied upon the order of the DRP and submitted that for better appreciation of the entire matter qua this comparable, matter should be restored back to the file of the TPO who can examine its accounts and see whether there was any reasons or factors during the year leading to low margin.

We have considered the relevant facts of the case as well as arguments placed by the parties before us. Without going into the other comparables, we find that so far as inclusion of Flamingo Pharmaceuticals Ltd. is concerned, the reason given by the TPO was that, the assessee has failed to submit the annual report of the said company, whereas the DRP has 8 तेवाफ़ामा� इं�डया �ाइवेट �ल�मटेड M/s Tevapharma Pvt Ltd ITA 1034/Mum/2016 upheld the said exclusion on the ground it was not a routine year of the company as the progress of the company was shunted due to abnormal attrition of the field and management staff. However, so far as profitability during the year is concerned, same has not commented upon by the DRP. As submitted by the Ld. Counsel which is also corroborated by the relevant documents placed at paper book at pages 396 and 397, we find the margin of the said company was higher as compared to the earlier year and staff expenses has decreased marginally from 8.45% to 8.14% of the total cost as compared to the earlier year, hence this cannot be the factor to hold as abnormal reason. Further, the key management personnel continued to remain their term for the year under consideration. Thus, picking up one line from the Annual report cannot be the ground for rejecting the comparable. It has not been disputed that so far as functionality comparability is concerned and other FAR analysis, there is no dispute that it is a good comparable. This company is also into manufacturing of pharmaceutical products only, therefore, we hold that this company was wrongly excluded by TPO as well as by the DRP. Accordingly, we direct the TPO to accept this comparable in the comparability analysis.

As submitted by the Ld. Counsel, if this comparable is included then its margin will fall within ± 5% of arms length price range and, therefore, there would be no requirement for adjudicating the other comparables. Accordingly, we are not adjudicating other comparables and are kept open. We direct the TPO/AO to compute the ALP after considering the final list of comparables. With these observations, the grounds 9 तेवाफ़ामा� इं�डया �ाइवेट �ल�मटेड M/s Tevapharma Pvt Ltd ITA 1034/Mum/2016 raised by the assessee are treated as allowed in the manner indicated above. Order pronounced in the open court on 30th August, 2016.