ASST. COMMISSIONER OF INCOME TAX, VIJAYAWADA vs. FYSOLATE TECHNOLOGIES, VIJAYAWADA

PER S. BALAKRISHNAN, Accountant Member :

2 2. At the outset, it is noticed from the appeal record that there is a delay of 43 days in filing the appeal before the Tribunal. Explaining the reasons for belated filing of the appeal, the Ld. DR drew our attention to the affidavit filed by the Revenue along with a petition seeking for condonation of delay and read out the contents of the affidavit which is as under:

“ 1….. 2…... 3…… 4. The jurisdictional Range Head, who is holding regular charge of the JCIT, Range-1, Vijayawada has also been holding Additional charge of the JCIT, Range-2, Vijayawada from 02/11/2020 and also holding the Additional Charges of the JCIT, Range-1, Guntur and the JCIT, Range-2, Guntur from 21/04/2023.

5. As the only issue involved in appeal is relating to Transfer Pricing Adjustment and filing of appeal on that issue has to be decided by the Authority involved in passing of Transfer Pricing Order and the concerned Higher Authorities of Transfer Pricing. Hence, the comments of the Commissioner of Income Tax (IT & TP), Hyderabad on the order of the Ld. CIT(A)-10, Hyderabad have been requested and the same were received in this office on 9/6/2023 only.

4 approval from the Learned Principal Commissioner of Income Tax, Vijayawada. The Learned Transfer Pricing Officer [“Ld. TPO”] issued notices on various dates U/s. 92CA of the Act. In response, the assessee furnished the information as called for along with the T.P. Documentation. The assessee claimed deduction U/s. 10AA of the Act. The domestic transactions reflected in 3CEB/T.P. Study report are as follows: Description In Rs. Purchase of crude Herbal Extracts and oils 42,54,18,060 (Boswellia Serrata Crude Extract and Oil)

M/s. Laila Nutraceuticals (Laila Nutra), a partnership firm, being an Associated Enterprise [“AE”] of the assessee, is a manufacturer of Herbal extracts supplying natural products to the healthcare and nutritional industries. During the impugned assessment year, M/s. Laila Nutra supplied crude raw material (Boswellia Serrata Crude Extract and oil) to the assessee for use in the manufacture of herbal extracts for pharmaceutical, ayurvedic, cosmetic, food & beverage, nutritional and pet care industry. The assessee has carried out economic analysis and has adopted CUP / TNMM (“Comparable Uncontrolled Price / Transactional Net Margin Method”) as the Most Appropriate Method. The assessee compared the prices of the product from 5 various quotations received from third parties under CUP Method. The assessee compared the average rate of material sold by its Associated Enterprise [“AE”] to the assessee with quotation for similar products and concluded that the transactions are at Arm’s Length. The assessee also carried out the supplementary analysis under the TNMM. Under the TNMM the assessee has taken its AE, M/s. Laila Nutra as the tested party and carried out search process for purchase of raw material in Prowess and Capitoline database and arrived at 15 comparables. The assessee arrived at margin in the range of 8.08 to 10.08% as against the margin of tested party, being the AE (Laila Nutra) of the assessee at 30.09% and accordingly concluded that the transaction is at ALP. The Ld. TPO based on the audited statements of the financials of the assessee had arrived at PBDIT/OR as follows: Description Amount in Rs. Operating Revenue (OR) 109,41,08,135 Operating Cost (OC) Excl. 42,28,73,710 Depreciation PBDIT (OR-OC) 66,12,34,425 PBDIT / OR (%) 60.44 PBDIT / OC (%) 152.75

The Ld. TPO considered the above attributes of a Tested Party compared for selection of the appropriate Tested Party based on the financials of the AE. The Ld. TPO observed that from the comparison of assets employed and the expenditure debited in the Profit & Loss Account, AE M/s. Laila Nutra is more capital intensive and also performing more complex functions at the entity level in comparison to the assessee. The Ld. TPO also observed that the AE has sold the raw material to the assessee and if an AE has to be taken as Tested Party, appropriate comparables should be selected of those entities engaged in the sale of similar raw material. The Ld. TPO also observed that there are defects in the filters adopted by the assessee in selecting the comparables. Considering the above reasons, the Ld. TPO rejected the benchmarking analysis by the assessee. The Ld. TPO however did not dispute the TNM Method adopted by the assessee as the Most Appropriate Method. The Ld. TPO thereafter proceeded to determine the ALP by conducting an 7 independent search based on the assessee’s profile & functions, the assets employed and the risks taken and identified the following 13 comparables: S Company Name PBDIT/OR PBDIT/OC No 1. Nagarjuna Herbal Concentrates Ltd 2.05% 2.10% 2. ThikkattuMooss E T M 3.65% 3.79% Qushadhasala (India) Ltd 3. Unjha Formulations Ltd 4.85% 5.10% 4. Solumiks Herbaceuticals Ltd 4.96% 5.22% 5. Kerala Ayurveda Ltd 5.42% 5.73% 6. V L C C Personal Care Ltd 6.36% 6.80% 7. Jindal Drugs Pvt Ltd 8.93% 9.80% 8. Source Natural Foods & Herbal 10.48% 11.70% Supplements Ltd 9. Amrutanjan Health Care Ltd 10.96% 12.31% 10. Arjuna Natural Extracts Ltd 15.16% 17.86% 11. Ayurvet Ltd 16.01% 19.07% 12. Cian Healthcare Ltd 16.37% 19.58% 13. Emami Ltd 29.36% 41.57% 35 Percentile 5.42% 5.73% Median 8.93% 9.80% 65 Percentile 10.96% 12.31% The Ld. TPO has arrived at the Median of the PBDIT/OR at 8.93% and compared with the assessee’s PBDIT/OR which stood at 60.44%. The Ld. TPO also observed that the assessee is availing Tax Holiday benefit under section 10AA of the Act. Thereafter, the Ld. TPO issued a show cause notice dated 09/01/2021 requesting the assessee to show cause with necessary evidences as to why the above mentioned margin of 8.93% (PBDIT/OR)

8 should not be considered for benchmarking the specified domestic transaction and the TP adjustment should not be made accordingly. The assessee furnished its reply on 21/01/2021 by objecting to the proposed adjustment. The Ld. TPO rejected the assessee’s contention after examining the same, by observing that the assessee is purchasing almost finished products which are termed as customized products and hence CUP method followed by the assessee is not applicable to the facts of the case as the price of raw materials cannot be compared with those of customized / almost finished products. The Ld. TPO also rejected the assessee’s contention of the analysis made under TNM Method by considering the AE as a Tested Party. The Ld. TPO did not consider the objections raised by the assessee that the Department has accepted the AE as Tested Party for the AYs 2013-14 and 2014-15 and also the TNM Method and stated that the TP proceedings for each assessment year is independent. The Ld. TPO in his remarks also rejected the objections of the assessee in selection of comparables. The Ld. TPO also has not considered the segmental results of the AE furnished by the assessee because prima facie the Ld. TPO has rejected the assessee’s contention for choosing the AE as a Tested Party. The Ld. TPO therefore proceeded to enhance the income of the 9 assessee by Rs. 62,25,78,803/- based on the comparable profit margin of PBDIT/OR @ 8.93%, based on the fact that the assessee is availing tax exemption U/s. 10AA of the Act. The Ld. AO thereafter passed a Draft Assessment Order U/s. 144C of the Act dated 05/05/2021 asking the assessee to file objection / appeal against the order either before Dispute Resolution Panel [“DRP”] or before the Ld. CIT(A). In response, the assessee submitted that it wishes to file an appeal before the Ld. CIT(A). Thereafter, the Ld. AO passed the final assessment order U/s. 143(3) r.w.s 144C(3) r.w.s 144B of the Act, dated 11/6/2021 by making an addition of Rs. 62,25,78,803/- towards TP adjustment, determining the total income at Rs. 94,45,53,973/- Aggrieved by the final assessment order of the Ld. AO, the assessee filed an appeal before the Ld. CIT(A). On appeal, the Ld. CIT(A), considering various submissions made by the assessee, directed the Ld. TPO / AO to delete the addition towards TP adjustment of Rs. 62,25,78,803/- thereby allowing the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds of appeal:

10 “1. The Ld. CIT(A) erred in deleting the Transfer Pricing Adjustment of Rs. 62,25,78,803/- made by the AO as per the TPO order U/s. 92CA(3), dated 29/1/2021.

3. Whether on the given facts and circumstances of the case and in law, the Ld. CIT(A) is justified in adopting the same set comparables as finalized by the TPO in respect of the assessee, even after shifting the tested party to assessee’s AE ie., M/s. Laila Nutraceuticals and directing to delete entire adjustment of Rs. 62,25,78,803/-.

4. Any other ground that may be urged at the time of hearing.”

6. The Ld. Departmental Representative [“Ld. DR”] submitted that the assessee has furnished details of segmental revenue of the AE before the Ld. CIT(A) whereas the Ld. CIT(A) has not provided an opportunity to the Ld. AO under Rule 46A of the IT Rules, 1963. The Ld. DR contended that these details are not provided before the Ld.AO / Ld. TPO. The Ld. DR further submitted that the Ld. CIT(A) shifted the Tested Party to AE but has retained the same comparables selected by the Ld. TPO, wherein the assessee was considered as Tested Party. In response, the Ld. Authorized Representative [“Ld. AR”] submitted that the assessee has provided the consolidated financials before the Ld. CIT (A) and no additional evidence has been produced before the Ld. CIT(A). The Ld. AR further submitted that no 11 additional evidence was produced before the Ld CIT(A) but was only merely an extension of the details what was furnished before the Ld. TPO which were requested by the Ld. CIT(A). The Ld. AR further contended that as per section 250(4) of the Act the Ld. CIT(A) has co-terminus Powers with that of the Ld. AO and hence the Ld. CIT(A) need not call for a remand report unless otherwise there is any further examination required by the Ld. AO. On this ground, the Ld. AR relied on the following case laws:

1. Judgment of the Hon’ble Supreme Court in the case of CIT vs. Kanpur Coal Syndicate [1964] 53 ITR 225 (SC) 2. Jute Corporation of India Ld vs. CIT and Anr. Civil Appeal No. 1935 of 1981, dated 4/9/1990. 3. Income Tax Officer, TDS vs. Tata Teleservices Ltd [2022] 134 taxmann.com 323 (Delhi – Trib.) 4. DCIT vs. M/s. Flextronics Software Systems Ltd in dated 23/04/2021. 5. CIT vs. Suretech Hospital and Research Centre [2007] 293 ITR 53 (Bom.) 6. ITO vs. M/s. Raj Maitry & Eskon Developer in ITA No. 2117/Mum/2023, dated 29/01/2024. The Ld. AR also referred to the Ld. CIT(A) order wherein the Ld. TPO has erred in invoking the provisions of section 80IA(10) of the Act. In response to the arguments of the Ld. AR, the Ld. DR submitted that the principle of res judicata does not apply to the Income Tax proceedings and each assessment year has to be considered independently. The Ld. DR defending the order of the 12 Ld. TPO submitted that the Ld. TPO justified his reasons in his order that why he differed in the current assessment year. The Ld. DR further submitted that the decisions cited by the Ld. AR are of pre-specified domestic transaction regime (Pre-SDT). The Ld. DR further submitted that there may not be collusion between the assessee and the AE but however, the procedure was not followed by the Ld. CIT(A). Countering the arguments of the Ld. DR, the Ld. AR submitted that the assessee and its AE maintained consistent profits and there is no claim of extraordinary profits in the current assessment year due to the tax exemption claimed by the assessee U/s. 10AA of the Act. He reiterated that the Ld. TPO in the earlier assessment year has upheld the assessee’s stand. The Ld. AR submitted that even though the principle of res judicata does not apply to income tax proceedings, in the instant case, there is no change in the circumstances when compared to previous assessment years, necessitating shifting of Tested Party by the Ld. TPO. The Ld. AR also referred to its written submissions wherein in page 9, Keywords selected by the Ld. TPO in the impugned assessment year as well as in the previous assessment year remained the same, however the Ld. TPO resorted to choose the assessee as the Tested Party. Further, the Ld. AR also objected that the Ld. TPO

13 has taken significant exports as the criteria. He also submitted that during the AYs 2013-14, 2014-15 and 2020-21 the Department has consistently followed selection of AE (M/s. Laila Nutra) as a Tested Party. The Ld AR further submitted that the AE Laila Nutra has four manufacturing units, and the supplies made to the assessee are from Unit-1 only. In his submissions the Ld AR argued that Unit wise assets employed and the segmental unit wise Profits have been submitted before Ld.TPO. Countering the arguments of the Ld. AR, the Ld. DR submitted that Revenue has not accepted AE as the Tested Party and when the Tested Party was shifted by the Ld. CIT(A), the opinion of the Ld. TPO was not taken by the Ld. CIT(A) by calling for a remand report. The Ld. AR fully supported the order of the Ld. CIT(A) whereas the Ld. DR placed heavy reliance on the order of the Ld. AO / Ld. TPO.

Extraction of Boswellia Laila-extraction of Boswellia Serrata Crude oil and Serrata Crude process Row Bosewellia Serrata Crude extract. Boswellia Serrata Crude Oil Extraction Concentration Partition and Boswellia Serrata crude extract From the above process flow it can be observed that the AE performs less complex functions as compared to the assessee which performs the following complex processes in the manufacture of finished product for exports:

16 Conversion of Boswellia Fysolate - conversion of Boswellia Extract to finished product conversion of Boswellia Extract to finished product - process flow Serrata crude extract to final product Receipt of Sleving & Filteration Purification Mixing Drying Final packing Boswellia cruid / Selecting crude extract desired particle Size Encapsu Inspecti Dry Purified Filtered Sampling on Material lation of Flakes material Sampling / Testing crude changing Homogi Boswillia into Sampling nization Sampling / manufactur / extract ing vessel Testing with Testing Testing purified Sleving QC/ QA based on Boswillia inspecti Purified customer Oil og and material requireme release nt transfer into a transfer into a different manufacturing manufacturing vessel From the above analysis of the processes carried out by the From the above analysis of the processes carried out by the From the above analysis of the processes carried out by the assessee and its AE it can be seen that the assessee is engaged in assessee and its AE it can be seen that the assessee is engaged in assessee and its AE it can be seen that the assessee is engaged in specialized process for manufacturing unique and customized specialized process for manufacturing unique and customized specialized process for manufacturing unique and customized products for the purpose of exports. We also find from the order products for the purpose of exports. We also find from the order products for the purpose of exports. We also find from the order of the Ld. TPO that these customized products are not sold by he Ld. TPO that these customized products are not sold by he Ld. TPO that these customized products are not sold by anybody else in the market and therefore the Ld. TPO has not anybody else in the market and therefore the Ld. TPO has not anybody else in the market and therefore the Ld. TPO has not been able to find a suitable comparable with relation to the been able to find a suitable comparable with relation to the been able to find a suitable comparable with relation to the manufacture of the product by the assessee. manufacture of the product by the assessee. Further, t Further, the onus is on the Ld. TPO / Revenue to bring out the fact that both the TPO / Revenue to bring out the fact that both the TPO / Revenue to bring out the fact that both the assessee and the AE are acting in an arrangement to transfer assessee and the AE are acting in an arrangement to transfer assessee and the AE are acting in an arrangement to transfer abnormal profits to the assessee’s business. There is also merit the assessee’s business. There is also merit the assessee’s business. There is also merit in the argument of the Ld. AR that the transactions entered into in the argument of the Ld. AR that the transactions entered into in the argument of the Ld. AR that the transactions entered into between the assessee and its AE has been accepted as ALP in the ssessee and its AE has been accepted as ALP in the ssessee and its AE has been accepted as ALP in the earlier assessment year and it has been demonstrated by the Ld. earlier assessment year and it has been demonstrated by the Ld. earlier assessment year and it has been demonstrated by the Ld.

17 AR that the margins are being consistently followed by the assessee.

Trend analysis of selling price of M/s. Laila Nutraceuticals Financial Year: 2012-13 Particulars Total Sales Quantity Average (In Kgs) Unit Price M/s. Laila Nutraceuticals 31,24,69,643 93,650 3,336.57 sales to Fysolate To direct third party 86,43,000 1,50,043 1356.71 sales Total Sales 64,30,91,031 2,43,693 Financial Year 2013-14 Particulars Total Sales Quantity Average (In Kgs) Unit Price M/s. Laila Nutraceuticals 44,74,67,976 94,500 4,735.11 sales to Fysolate To direct third party 66,73,38,480 3,71,235 1432.87

18 sales Total Sales 1,11,48,06,456 4,65,735 Financial Year 2014-15 Particulars Total Sales Quantity Average (In Kgs) Unit Price M/s. Laila Nutraceuticals 18,98,43,438 35,500 5,347.70 sales to Fysolate To direct third party 78,37,99,565 2,89,322 2413.01 sales Total Sales 97,36,43,003 3,24,822 Financial Year 2015-16 Particulars Total Sales Quantity Average (In Kgs) Unit Price M/s. Laila Nutraceuticals 46,49,63,802 88,200 5,271.70 sales to Fysolate To direct third party 61,44,59,900 2,36,950 1889.77 sales Total Sales 1,07,94,23,702 3,25,150 Financial Year 2016-17 Particulars Total Sales Quantity Average (In Kgs) Unit Price M/s. Laila Nutraceuticals 42,54,15,060 70,500 6,034.30 sales to Fysolate To direct third party 24,95,46,406 60,806 1900.50 sales Total Sales 67,49,64,466 1,31,306 From the above table, the Assessee’s Representative has demonstrated that the AE has charged increased rates to the assessee and also has been consistent in maintenance of profit for the Fysolate segment. Further, the Ld. AR also has submitted the segmental financials wherein the OP/OC of the AE, M/s. Laila Nutra, to the assessee’s segment stood at 30%. Further, we also find merit in the argument of the Ld. AR that the Forex Filter has been wrongly applied by the Ld. TPO in the selection of comparables. It is also observed from the table submitted by the assessee which is extracted below for reference wherein the export income of the selected comparables are at an average of less than 10% when compared to the export activities carried out by the assessee which is more than 75% as the assessee is an export oriented unit.

S. Comparable Name Turnover (In Export Export Export No INR) Income (In income Filter INR) (%) (75%) 1. Nagarjuna Herbal Concentrates Ltd 58,43,49,898 84,66,859 1.45% Failed Failed 2. Thaikkattu Mooss E T M 6,10,33,029 Oushadhasala (India) Ltd Failed 3. Unjha Fomulations Ltd 12,24,09,847 2,30,86,543 18.86% Failed 4. Solumiks Herbaceuticals Ltd 13,04,83,790 49,96,210 3.83% Failed 5. Kerala Ayurveda Ltd 39,61,64,855 49,92,236 1.18% Failed 6. VLCC Personal Care Ltd 2,10,92,59,036 8,16,40,453 3.87% Failed 7. Jindal Drugs Pvt Ltd 3,23,79,27,893 2,89,20,000 0.89% Failed 8. Source Neutral Foods & Herbal 15,94,00,591 Supplements Ltd Failed 9. Amrutanjan Health Care Ltd 2,22,03,24,519 4,28,93,067 1.93% Failed 10. Arjuna Natural Extracts Ltd 1,99,79,31,482 Failed 11. Ayurvet Limited 1,09,82,62,000 Failed 12 Cian Healthcare Private Limited 53,00,97,000 7,18,36,000 13.55% Failed 13. Emami 23,40,74,60,00 73,06,23,000 3.12% 0 It was also submitted by the Ld. AR that the AE, M/s. Laila Nutra, is not only supplying raw materials to the assessee but also to other third parties having similar line of business.

Therefore, the comparables selected by the Ld. TPO would be more appropriate to compare with the AE M/s. Laila Nutra as all the comparables are performing the functions of domestic manufacturing and supplying raw materials to domestic

20 companies. We are also of the considered view that the fresh comparables selected by the TPO do not have export performance and whereas the assessee is a 100% export oriented unit and hence these comparables are fit to be compared with that of the AE M/s. Laila Nutra as a Tested Party. It is also found from the Ld. TPO’s order that the assessee has furnished segmental results before the Ld. TPO which was not considered by the Ld. TPO. The Ld. TPO has observed in Page No…… of hid order as follows: “According to the taxpayer the segmental results of the AE furnished by it should be considered under internal CUP method. In this connection it is to be pointed out that the TPO has rejected the taxpayer’s consideration of the AE as tested party. Hence, this contention is not valid as the taxpayer which is the tested party in the TPO’s analysis has not segmental results.” The Ld. TPO rejected the assessee’s segmental results of the AE since he has chosen to consider the assessee as a Tested Party. Therefore, it can be concluded that no additional evidence has been provided by the assessee before the Ld. CIT(A) in the form of segmental information which was not furnished before the Ld. AO. Therefore, we are unable to accept the contention raised in by the Revenue in its grounds of appeal. We also find that the Ld. CIT(A) has rightly excluded two companies which have exports while arriving at the Arm’s Length range. Further, we also concur

21 with the views of the Ld. CIT(A) that the Tested Party M/s. Laila Nutra which is the AE of the assessee can be compared only with the comparables selected by the Ld. TPO as they are functionally broadly similar to that of the AE as a Tested Party. We extract below the findings of the Ld. CIT(A) for reference:

“Therefore, the arguments of the appellant, is being the manufacturer and exporter of niche ayurvedic products is factually correct and finding reliable comparables having considerable exports in this category might be a challenge, whereas reliable comparables might be available for domestic manufacturers fo different ayurvedic products, when appellant’s AE is taken as tested party. It is observed that the AE of the Taxpayer is catering not only to the appellant but also to other third parties and dealing with several ayurvedic products. All the comparables selected by the TPO would actually be comparable to M/s. Laila Nutraceuticals, AE as all these companies are performing the function of domestic manufacturing company supplying finished or semi-finished goods (herbal extracts, ayurvedic and Pharma) and thus the following companies would be comparable to M/s. Laila Nutraceuticals. If at all a broad industry level TNMM analysis needs to be done for the specific domestic transaction, should be done for AE LN…….”

Further, the Ld. CIT(A) in his findings, held as follows:

“Ground No.2 is related to applying the inconsistency criteria for selection of tested party to determine arm’s length price by the TPO. In view of the above detailed discussion, it is seen that the appellant has been following consistency in selecting its AE M/s. Laila Nutraceuticals as the tested party since its incorporation and the TPO has also accepted the arm’s length price of transactions between the appellant and its AE under the same facts and circumstances in the assessments done for the AYs 2013-14 & 2014-15. Also there is consistency in PLI of the appellant from FY 2012-13 to 2016-17. The TPO in the order has not brought out any change in material facts and circumstances in the functionality, complexity of manufacturing process and the products dealt by the appellant with its AE

22 when compared to AYs 2013-14 and 2014-15. Thus, even on the rule of consistency the appellant has a case and therefore accordingly ground no.2 is allowed.

Ground No. 3 & 4 are related to selection of dissimilar comparables and cherry picking of comparables. In view of the above detailed discussion, it is seen that TPO has selected comparables with no export history for the appellant which is 100% export oriented and therefore, has not selected the right comparables to determine ALP. Rather, all the comparables selected by the TPO would actually be comparable to its AE M/s. Laila Nutraceuticals, which is performing the function of supplying herbal extracts in the domestic market. After removing the comparables with significant export history in the case of AE, either at entity wide level (7.32%) or even at relevant Fysolate Segment Level (30.09%), the same is held to be within and above arm’s length range respectively. Accordingly, grounds no. 3 & 4 of the appeal are allowed.

In ground No.6, the appellant contended that the TPO has erred in not considering the certified segmental data of AE and internal TNMM analysis provided by the appellant. In view of the above detailed discussion, it is seen that when the AE has maintained data at segmental level ie., Unit-1 is specific to Fysolate supplies and Units-2 to 4 are for other third parties, the segmental financials of the AE should have been compared with the appellant to determine arm’s length price and not financials at entity level. Accordingly, ground no.6 of the appeal is allowed.”

From the arguments placed by the Ld. AR, we find merit in the submissions of the Ld. AR which was considered by the Ld. CI(T(A) and hence we do not find any infirmity in the order of the Ld. CIT(A) thereby dismissing the grounds raised by the Revenue.

Pronounced in the open Court on 15th July, 2024.