M/S. SAVA MEDICA LTD,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME TAX,, PUNE

PER R.S.SYAL, VP :

These three appeals by the assessee are directed against the

separate final assessment orders dated 25.01.2017 passed by the

Assessing Officer (AO) u/s 143(3) r.w.ss. 144C(13) and 153A of

the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) in

relation to the assessment years 2011-12, 2012-13 & 2013-14.

Since some common issues have been raised in these appeals, we

are, therefore, proceedings to dispose them off by this consolidated

for the sake of convenience.

2 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

A.Y. 2011-12 :

by the AO in the impugned order. Pithily put, the factual panorama

of the case is that the assessee is a part of the Sava group of

companies, which is engaged in the business of manufacturing,

importing and exporting pharmaceutical drugs etc. It filed a return

declaring loss of Rs.1,94,792 on 30.11.2011. A search action u/s

132 of the Act was taken up in Sava group of companies including

the assessee on 31.10.2012. Pursuant to such search, a notice u/s

153A was issued calling the assessee to file return for the year under

consideration. The assessee filed a letter stating that the return

originally filed for the year may be treated as a return in response to

notice u/s 153A of the Act. The assessee reported an international

transaction of “Sale of finished goods” amounting to Rs.3,20,24,659

to Sava Trading FZC, Dubai in Form 3CEB. After taking prior

approval of the Competent authority, the AO made a reference to

the Transfer Pricing Officer (TPO) for determining the Arm’s

Length Price (ALP) of the international transaction. The TPO in his

three page order passed u/s 92CA(3) of the Act observed that: “The

3 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

detailed order explaining the business model of the assessee, the

facts of the case and resultant adjustment under transfer pricing

having been discussed in the case of Anagha Pharma Ltd for the

Assessment Year 2007-08. As the facts of the case of this assessee

for this assessment year are same these are not reproduced here”.

In the next para, the TPO concluded by noting that: “In view of the

discussion made in the order of Anagha Pharma Ltd for the A.Y.

2007-08, the adjustment of Rs.94,92,109/- is made to the

international transaction and as a consequence of the adjustments,

income of the assessee shall be increased by Rs.94,92,109/-. The

draft order incorporating the transfer pricing adjustment of equal

amount was notified by the TPO on 29.02.2016. The assessee

assailed various facets of the transfer pricing addition before the

Dispute Resolution Panel (DRP), which gave certain directions on

30.11.2016. The AO passed the impugned order, giving effect to the

directions of the DRP, by making the transfer pricing addition at

Rs.37,78,910. Aggrieved thereby, the assessee has come up in

appeal before the Tribunal.

4 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

material on record. It can be seen from the TPO’s order that no

separate detailed discussion qua the ALP determination has been

made in the body of the order except following his own order

passed in the case of Anagha Pharma Ltd. now Sava Healthcare Ltd.

[hereinafter also called the `other Indian entity (OIE)’] for the A.Y.

2007-08, whose copy has been placed at page 99 onwards of paper

book. As such, it becomes imperative to go through this order for

deeply understanding the factual matrix of the case before us and

the nature of the transfer pricing addition. The TPO in that order

has recorded the background of the case by noting that Shri Vinod

Jadhav, main person of Anagha group of companies, initially started

trading of pharmaceutical drugs. In April, 2010, a diversification

was made by acquiring Pharma Division of some company and the

assessee group also started a manufacturing facility. Apart from

OIE, the group established another company in India, namely, Sava

Medica Ltd. (which is the assessee under consideration). In

addition, the group set up certain entities in Mauritius, UAE and

Singapore. The object behind creation of the entities abroad was

5 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

held to be tax avoidance on income in India. Though the

management and control of the entire global business of the group

was wholly in India, the TPO held that the business was shown to

have been carried out in Mauritius and Dubai where taxes were not

levied on income. He held that the Associated Enterprises (AEs)

ploughed back the income earned by them to India through

dividends and remuneration to Shri Vinod Jadhav, who, in turn,

claimed such income as exempt on the ground of his Non-resident

status. It was further noted that the Settlement Commission rejected

the non-resident status claim of Shri Vinod Jadhav and declared him

as a Resident. The TPO noted the findings of the Investigation team

in relation to the functions performed by the two Indian-based

companies of the group along with those situated in Mauritius,

Singapore and Dubai. He tabulated such functional analysis done by

various group companies in para 27.3 of his order and held that the

AEs performed no functions except receipt of sale proceeds and

sending the same to the Indian entities. Rejecting the OIE’s

benchmarking done under the Transaction net margin method

(TNMM), he proceeded to determine the ALP under the Profit Split

6 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

method (PSM). He allocated 3% of the aggregate group profits to

the AEs abroad for the services rendered by them and the balance

97% was divided between the two Indian entities. To be more

precise, he aggregated the year-wise profits shown by the five group

entities from the A.Ys. 2007-08 to 2013-14 and found out the total

combined profit of Rs.1,57,23,23,733 as per Table 28.1 of his order.

Then he proceeded to split the combined profit through Table 28.2

as under:-

A.Y. Combined % of Profit AE's Share Residual Profit Anagha’s Total Profit of Profit Attributabl 3% allocated to Profit Anagha and earned e to the Anagha AE's by the Anagha Pharma Ltd Compar which is ables. equal to the As per comparable assessee’ ’s profit % s T.P. Report A B C D (B*C%) E (B*3%) F (B-D-E) G (D+F) 2007-08 2,28,44,905 2.77 6,32,804 6,85,347 2,15,26,754 2,21,59,558 2008-09 17,69,90,270 0.31 5,48,670 53,09,708 17,11,31,892 17,16,80,562 2009-10 32,69,96,892 2.42 79,13,325 98,09,907 30,92,73,660 31,71,86,985 2010-11 8,81,15,771 4.35 38,33,036 26,43,473 8,16,39,262 8,54,72,298 2011-12 48,58,35,923 6.49 3,15,30,751 1,45,75,078 43,97,30,094 47,12,60,845 2012-13 13,32,70,295 5.71 76,09,734 39,98,109 12,16,62,452 12,92,72,186 2013-14 33,82,69,677 5.16 1,74,54,715 1,01,48,090 31,06,66,871 32,81,21,587

TOTAL 1,57,23,23,733 6,95,23,035 4,71,69,712 1,45,56,30,986 1,52,51,54,021

rate of its comparables at 6.49% for the A.Y. 2011-12 which was

reflected by him under column C. The TPO first determined the

arm’s length profit from the transaction of export by OIE in the

7 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

column D at Rs.3.15 crore. After reducing the share of AEs at 3%

under Column E amounting to Rs.1.45 crore, he computed the

Residual profit under Column F at Rs.43.97 crore and then totaled

up the arm’s length profit of OIE and the assessee under Column G

at Rs.47.12 crore. Thus it is manifest, that though the TPO initially

talked of piercing the corporate veil and taking all the entities as

one, but ended up in attributing separate compensation for the

activities done by the foreign AEs at 3% of total profit, thereby

maintaining separate independent status of them as distinct from the

two Indian entities. It goes without saying that the order needs to be

read as a whole. If some observations are made in the body of the

order, which are eventually not acted upon, one cannot claim any

decision based on such observations.

adjustment in the hands of OIE, through para 28.3, as under:-

A.Y. Anagha’s Less O.P. Total Less Net Adjt in Total Profit shown by Adjustment Adjusted the hands the in the of OIE Assessee hands of Sava Medica Ltd. (As mentioned below) A B C D E F

8 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

2007-08 2,21,59,558 1,30,38,449 91,21,109 0 91,21,109 2008-09 17,16,80,562 1,69,42,134 15,47,38,428 0 15,47,38,428 2009-10 31,71,86,985 4,55,81,486 27,16,05,499 0 27,16,05,499 2010-11 8,54,72,298 73,95,355 7,80,76,943 0 7,80,76,943 47,12,60,845 1,66,56,860 45,46,03,985 94,92,109 44,51,11,876 2011-12 2012-13 12,92,72,186 5,99,91,658 6,92,80,528 54,08,126 6,38,72,402 2013-14 32,81,21,587 4,78,94,987 28,02,26,600 4,66,98,148 23,35,28,452 TOTAL 1,52,51,54,021 20,75,00,929 1,31,76,53,092 6,15,98,483 1,25,60,54,609

transfer pricing adjustment in the hands of the two Indian entities,

namely, OIE and the assessee. Firstly, he computed the total

adjustment under Column D collectively in the hands of both the

Indian entities at Rs.45,46,03,985 and then he reduced the amount

of transfer pricing adjustment made in the hands of the assessee

under Column E at Rs.94,92,109 to work out the amount of total

adjustment in the hands of OIE at Rs.44,51,11,876 for the A.Y.

2011-12 under Column F. It is this amount of the transfer pricing

adjustment of Rs.95,92,109 which has been adopted by the TPO in

his order passed in the hands of the assessee for the year under

consideration. The working of transfer pricing adjustment in the

hands of the assessee at Rs.94,92,109 has come from the Table

given on the last page of the TPO’s order in OIE. This has been

done by taking the value of international transaction of exports

9 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

made by the assessee to its AEs at Rs.3.20 crore on which the profit

rate of 29.64% (OP/OR of AEs taken as arm’s length profit rate) has

been applied. The figures of the AE’s operating profit at Rs.46.93

crore and operating revenue of Rs. 158.31 crore have been taken

from the Table 5.1 on page 2 of the TPO’s order in the hands of the

assessee.

passed in the case of the assessee read in conjunction with the order

in the case of OIE, it can be seen that he rejected the adoption of the

TNMM and instead chose the PSM as the most appropriate method

for determining the ALP. Insofar as the assessee is concerned, the

TPO has simply taken the value of the international transaction of

exports to the AEs and then applied the profit rate of the AE for

determining the ALP. As the assessee reported only one

international transaction of `Sale of finished goods’ with transacted

valued of Rs.3.20 crore, the TPO determined the ALP of such a

transaction leading to the transfer pricing adjustment of

Rs.94,92,109.

10 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

issues. The DRP called for comments/reports from the TPO/AO on

certain aspects and also the comments of the assessee. After

entertaining the entire gamut of the material, the DRP inter alia

came to hold that:

- The TPO was not justified in holding that the control and

management of the affairs of the Sava group was situated

wholly in India and the entities abroad were sham.

- The assessee had undertaken only the activities of sale of

finished goods as reported in Form No.3CEB.

- The TPO wrongly applied Profit Split Method in the case of

assessee by considering OP/OR of the AE's

- The assessee also wrongly applied the TNMM for

benchmarking its transactions.

- Both the methods applied by the assessee as well as the TPO

were wrong. As the assessee was only into trading exports for

the year under consideration, the correct method to be applied

was the Resale Price Method (RPM).

11 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

analysis of its international transaction by applying the RPM. The

assessee submitted the same which has been reproduced at page 83

of the DRP’s directions. As per this exercise, the assessee computed

its GP/Sales margin at 25.22%. The DRP made alterations to

certain figures and hence re-worked out the amended GP/Sales at

16.52%. The assessee had identified 33 companies as comparables.

The DRP removed 13 companies from such list and computed the

average GP/Sales of the remaining 20 comparables at 28.32%. This

is how, the differential profit rate of 11.80% (28.32% of the

comparables and 16.52% of the assessee) was applied to the value

of international transaction of exports made by the assessee at

Rs.3.20 crores for determining the transfer pricing adjustment at

Rs.37,78,910. It is this amount of transfer pricing adjustment which

has been made by the AO in the final assessment order, against

which the assessee has come up in appeal before the Tribunal.

the assessee applied the TNMM for determining the ALP of the

international transaction of `Sale of finished goods’ worth Rs.3.20

12 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

crores. The TPO rejected such a method and applied the PSM. The

DRP has finally held that the RPM is the most appropriate method.

Now the assessee is in appeal challenging the correctness of the

RPM as the most appropriate method. There is no cross appeal by

the Department. Thus the view of the TPO in applying the PSM no

more stands. Even otherwise, there are certain flaws in the

application of the PSM by the TPO, which we will touch very

briefly.

called `the rules’) deals with the determination of the ALP as per

section 92C under different methods. The modus operandi for

determining the ALP under the `Profit Split method’ has been set

out in rule 10B(1)(d) reading as under:-

“(d) profit split method, which may be applicable mainly in international transactions or specified domestic transactions involving transfer of unique intangibles or in multiple international transactions or specified domestic transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm’s length price of any one transaction, by which— (i) the combined net profit of the associated enterprises arising from the international transaction or the specified domestic transaction in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable

13 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm’s length price in relation to the international transaction or the specified domestic transaction: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction or specified domestic transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction or the specified domestic transaction;”

Profit split method can be applied, inter alia, `in multiple

international transactions or specified domestic transactions which

are so interrelated that they cannot be evaluated separately for the

purpose of determining the arm’s length price of any one

transaction’. At this juncture, it is relevant to note that the

application of the PSM pre-supposes existence of separate character

of the entities performing interlinked parts of one overall

14 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

transaction. It is only because of the inherent difficulty in evaluating

the arm’s length price of the separate parts of the large transaction

undertaken by different entities that the individual profit earned by

each entity from the overall transaction is aggregated, which is then

split between them in proportion of their relative contributions for

finding out the ALP.

overt that it requires determination of the arm’s length profit in two

stages, which is then aggregated as per the latter part of the proviso

providing for aggregating basic return with the residual net profit

remaining after such allocation. The first stage is enshrined in the

opening part of the proviso expressly providing for computation of

the basic return corresponding to the efforts put in by a particular

entity. The second stage is set out in various sub-clauses of rule

10B(1)(d). Sub-clause (i) provides for aggregating net profit earned

by the concerned associated enterprises. The TPO on Table 28.1 of

his order in OIA has aggregated operating profits of five entities

from A.Ys.2007-08 to 2013-14 and the combined net profit has

been determined at Rs.157.23 crores as under:-

15 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

28.1 Determination of Combined Profits of the Assessee and AE's

Anagha Anam Sava Sava Goldwing Combined Pharma - Trading Co. Trading Co. Trading FZE Trading FZE Profit of India Mauritiu (Sava (Sharjah) Anagha and Pharma Ltd) (Westside AE's Mauritiu FZE) A.Y Op. Profit Op. Profit Op. Profit Op. Profit Op. Profit A B C D E F G 2007-08 1,30,38,449 -23,39,606 1,21,46,062 0 0 2,28,44,905 2008-09 1,65,77,014 20,73,403 12,10,74,256 3,72,65,597 0 17,69,90,270 2009-10 4,55,01,112 0 1,05,89,783 27,09,05,997 0 32,69,96,892 2010-11 65,46,516 0 0 8,15,69,255 0 8,81,15,771 2011-12 1,65,14,476 0 0 46,93,21,447 0 48,58,35,923 2012-13 5,98,94,492 0 0 - 38,64,21,501 13,32,70,295 31,30,45,698 2013-14 4,72,85,077 0 0 0 29,09,84,600 33,82,69,677

TOTAL 20,53,57,136 -2,66,203 14,38,10,101 54,60,16,598 67,74,06,101 1,57,23,23,733

(iii), which provide that the relative contribution by each of the

associated enterprises to the earning of such combined net profit is

to be evaluated and then the combined net profit is to be split

amongst the enterprises in proportionate to their relative

contribution. However, before undertaking this exercise, the basic

return particular to the concerned entity is to be determined as per

first part of the proviso, which is to be reduced from the aggregate

profit. The TPO in the extant case determined the basic return for

OIE (Column D) and the overseas entities (Column E) in Table 28.2

and then worked out the entire Residual profit (Column F). In

finding out the figures under certain columns of Table 28.2, the

16 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

TPO made some infirmities. Firstly, for calculating the basic return

of OIE under column D, the TPO applied percentages of profit

earned by the comparables as per the TP report of OIE on the

combined operating profit of all the five entities taken together.

Instead of that, he should have determined the basic return of OIE

by applying the comparables’ net profit rate to the amount of sales

made by OIE for such years. Similar mistake was committed in

computing the amount of basic return appropriate for overseas

entities by applying 3% of the combined profit of all the five

entities. He mentioned in para 28 that: `The roles of the AEs have

been narrated above…. for which not more than 2% to 3% would be

charged as commission’. Commission is computed with reference

to the amount of sales and not the overall profit of all the entities

taken together.

to split the residual profit between the entities who contribute to the

overall transaction. In the instant case, the TPO under Column F of

Table 28.2 attributed the entire Residual profit to OIE, which he

then aggregated with the basic return of OIE as per Column D to

17 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

find out the total arm’s length profit of OIE as per Column G of

Table 28.2. From 100% allocation of Residual profit to OIE, it is

vivid that the TPO attributed all the combined functions only to OIE

and none to any other entity including the assessee under

consideration or overseas AEs.

that he took the figure of OIE’s total profit under Column B, which

is the same figure as Column G in Table 28.2. After reducing the

amount of operating profit shown by OIE under Column C, he

determined the total amount of transfer pricing adjustment as per

Column D of Table 28.3. From this, he reduced the arm’s length

profit of the assessee as calculated on the last page of the order in

OIE, to find out the amount of transfer pricing adjustment in the

hands of OIE Though he reduced the amount of arm’s length profit

of the assessee in Table 28.3, but forgot to add the amount of

profit/loss of the assessee in his Table on 28.1 while calculating the

Combined profit of the group entities, for further processing under

the PSM.

18 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

PSM, we leave this issue here only because the ALP determination

under the PSM has become academic as the DRP has directed to

apply the RPM and the assessee is not seeking the application of the

PSM. The only thing which we want to accentuate is that the TPO

attributed the entire Residual profit (after excluding the arm’s length

profits of the assessee and OIE from their respective international

transactions of sale; and 3% to overseas entities) only to OIE by

opining that all other activities were done by it alone.

ground taken by the assessee :

“19. The learned AO erred in law and on facts in referring the alleged international transaction of “Control & Management of Sava Group” to the learned TPO, without complying with the provisions of section 92CA(1) r.w.s. 92C(3) and 92B of ITA, 1961.”

Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC) has observed that

“the purpose of the assessment proceedings before the taxing

authorities is to assess correctly the tax liability of an assessee in

accordance with law. If, for example, as a result of a judicial

19 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

decision given while the appeal is pending before the Tribunal, it is

found that a non-taxable item is taxed or a permissible deduction is

denied, we do not see any reason why the assessee should be

prevented from raising that question before the tribunal for the first

time, so long as the relevant facts are on record in respect of that

item”. Answering the question posed before it in affirmative, their

Lordships held that on the facts found by the authorities below, if a

question of law arises (though not raised before the authorities)

which has bearing on the tax liability of the assessee, the Tribunal

has jurisdiction to examine the same. Having gone through the

subject matter of the additional ground espoused by the assessee, it

is discernible that the same raises a pure question of law. We,

therefore, admit the same and take it up for disposal on merits.

the same mistake as was done in the case of OIE by making a

reference to the TPO for determining the ALP of a transaction

which was not reported by the assessee in Form No. 3CEB, without

granting opportunity of hearing. He relied on the order passed by

the Tribunal in the case of OIE for the assessment years 2007-08 to

20 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

2013-14 in which the assessment has been held to be vitiated on this

count. Another submission was made to the effect that the TPO

held the entire network of Sava group companies as sham that did

not lie in his domain, which, if warranted, could have been done

only by the AO. This point also, in his opinion, vitiated the

assessment as has been held by the Tribunal in the case in OIE.

These contentions were countered by the ld. DR who submitted that

there was no illegality in the action of the AO in making a reference

to the TPO nor did the TPO commit any mistake in exercising his

jurisdiction in the facts and circumstances of the case.

relevant material on record. The Tribunal in its order dated 27-06-

2019 (ITA Nos. 1062 to 1068/PUN/2017) passed in OIE, has

observed in para no. 84: “That the AO made a reference to the

TPO on two aspects, i.e. sale of medicines and drugs by the assessee

group which not only included the assessee but various other

companies and the second transaction which was reported was the

one declared by the assessee in audit report, i.e. export trading of

medicines on wholesale basis’. Then allowing the plea of the

21 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

assessee vide para 99 of its order, the Tribunal held: “that where

the AO while making reference of an independent to/ and non

existing international transactions (as alleged by the ld. AR) had to

come to a finding that income arising from the said international

transactions needs to be benchmarked, in order to determine its

arm’s length price and before such reference to the TPO, show

cause notice should have been given to the assessee. In the absence

of any such show cause notice being given to the assessee, the same

is irregularity (as held by the Hon’ble Bombay High Court) and the

said irregularity cannot be made good by restoring back the same

to the file of AO…….It is the case of violation of principles of

natural justice and such an order passed in the hands of the

assessee cannot stand and the same is invalid and bad in law”. It

can be seen from the order of the Tribunal in the case of OIE that

the AO made a reference to the TPO in respect of two transactions

viz., the first of sale to the AEs which was declared by the assessee

in its Form No.3CEB and the second of worldwide sale by the

assessee group, which was not declared. We have reproduced Table

28.2 from the order of the TPO in the case of OIE in which Column

22 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

No. D represents profit attributable to OIE for the reported

international transactions and then Column No. F with the “Residual

profit allocated to OIE”. These two transactions determined by the

TPO under the Profit split method were clubbed and in table

No.28.3 he proposed the transfer pricing addition for them after

excluding the arm’s length profit in the hands of the assessee under

consideration for the assessment years 2011-12, 2012-13 and 2013-

14, which amount was, in turn, computed by applying the profit

rate of AEs to the exports made by the assessee. Thus, it can be seen

that the two transactions were benchmarked in the hands of OIE

collectively under the PSM, viz., one being the export made by OIE

directly and the other being the allocation of residual profit to it as

relatable to the worldwide operations. To put it simply, the TPO

combined profit of all the entities for the A.Y. 2011-12 under

consideration at Rs.48.58 crore (Table 28.2 column B), from which

he reduced 3% profit as allocable to the entities abroad at Rs.1.45

crore (Table 28.2 Column E); then the arm’s length profit of the

assessee’s only transaction of sale made to the AEs at Rs.94,92,109

(Table 28.3 column E); and then the arm’s length profit of the

23 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

reported transaction of the sales made by OIE at Rs.3.15 crore

(Table 28.2 column D); and the remainder amount of total profits

was taken as the arm’s length profit of the second unreported

international transaction of OIE, being, the profit allocation for the

worldwide operations of the Sava group at Rs.41.36 crore (Total

transfer pricing adjustment of OIE of Rs.44.51 crore as per Table

28.3 column E minus Rs.3.15 crore towards the first reported

international transaction of OIE). From the above discussion, it is

graphically clear that the declared transaction of exports of OIE

with arm’s length profit of Rs.315 crore lies at the same pedestal as

the only transaction of the assessee with the arm’s length profit of

Rs.94,92,109 and that no international transaction parallel to the

second transaction of OIE with transfer pricing adjustment of

Rs.41.36 crore is there in the hands of the assessee. To sum up, the

TPO proceeded with two distinct transactions in the case of OIE,

which were albeit processed jointly under the PSM. The Tribunal in

its order in OIE, after observing that there were two transactions,

came to hold that the reference made by the TPO in respect of the

second transaction, without giving opportunity of hearing to the

24 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

assessee, vitiated the assessment order. As against that, the assessee

has only one international transaction of export made to its AE with

transacted value of Rs.3.02 crore and the arm’s length profit of

Rs.94,92,109/- It is only this transaction which was referred by the

AO to the TPO and whose ALP has been determined. As neither

any second international exists in the case of the assessee nor has

been referred to the TPO, the ratio laid down by the Tribunal in the

case of OIE has no application here. Had the factual position

prevailing in the case of the assessee been similar, following the

rule of stare decisis, we would have gone with the order passed in

OIE. The fact that there is only one international transaction in the

case of the assessee which was referred by the AO to the TPO and

whose ALP has been determined, there can be no question of

declaring the assessment order to be bad in law on this score.

order in OIE, is that the assessment order is bad in law because the

TPO had no power to conclude that the control and management of

affairs was situated wholly in India, which could have been done

only by the AO. Again here, we find this argument as not

25 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

applicable to the facts of the assessee before us. The contention put

forth before the Tribunal in OIE, which got accepted, has to be seen

in the background of the facts in which that case was placed. We

have noted above that the TPO determined the ALP in the case of

OIE of the international transactions of direct exports made to the

AEs and also of the remaining worldwide profit from the sales on

the premise that the control and management of the group affairs

was wholly in India with OIE It was the second transaction, with

reference to which the Tribunal declared the assessment order bad

in law by holding that only the AO and not the TPO could hold that

control and management of affairs was situated wholly in India. As

no transfer pricing addition has been made in the hands of the

assessee under consideration qua the transaction similar to the

second transaction in OIE of the profit on the worldwide sales, that

part of the decision has no relevance to the instant case. There is no

whisper much less any reference in the order of the TPO passed in

the case of the assessee holding that the control and management of

affairs was situated wholly in India. The contention is, therefore,

repelled.

26 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

the international transaction of the assessee was only worth Rs.3.20

crores. While referring to the certain documents, it was submitted

that the AO applied to the CIT u/s 92CA(1) of the Act for seeking

permission for making a reference to the TPO for the ALP

determination. The CIT, in turn, took note of the fact that the

amount of international transaction in the case was less than Rs.5

crores and called upon the AO to assign specific reasons for making

such a reference. Thereafter, the AO adduced the reasons vide his

letter dated 14.10.2014 as to why the international transaction of

less than Rs.5 crores needed to be referred to the TPO. Such

reasons were stated to be that the assessee group was subjected to

search u/s 132(4) which transpired that it was routing the business

to the foreign companies with an intention to evade taxes in India.

Since the ALP determination in the case of the assessee for the year

under consideration would have bearing on the ALP determination

of other entities of Sava group and other years of assessee also in

which the amount of international transactions was more than

Rs.5.00 crores, it was requested that the reference should be made to

27 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

the TPO so as to maintain consistency and a uniform ALP

determination. The CIT got convinced with the AO's reasons and

accorded his sanction. It was thereafter that the AO made a

reference to the TPO for determining the arm's length price of

international transaction of Rs.3.20 crores vide his letter dated

19.11.2014, a copy of which has been placed at page 1009 of the

paper book. The ld. AR contented that Circular No.3/2003 dated

20.05.2003 expressly provides that reference to the TPO can be

made by the AO only when the value of international transaction

exceeds Rs.5 crores. It was submitted that since the value of

international transaction in the instant case was less than such a

threshold, it was incumbent upon the AO himself to determine the

ALP. As the AO made a reference to the TPO, and the latter

determined the ALP, all the proceedings were vitiated.

making reference to the TPO only where the value of international

transaction exceeds Rs.5 crores. In other words, if the aggregate

value of international transaction in a case is less than that, then the

AO is supposed to benchmark the international transaction at his

28 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

own level without making a reference to the TPO. To this extent,

the argument of ld. AR is correct. However, the consequence of

such a wrong doing, as claimed by the ld. AR to be fatal and

vitiating the final assessment order, in our considered opinion is not

correct. If some irregularity, which is not a legal infirmity, takes

place in the process of assessment, such an irregularity needs to be

cured by restoring the matter to the stage at which such an

irregularity occurred. The outcome of such an irregularity cannot be

to quash the assessment. The Hon'ble Supreme Court in Pr.CIT vs.

S.G. Asia Holdings (India) Pvt. Ltd. (2019) 310 CTR 1 (SC) came

across a situation in which the same the CBDT’s Circular

No.3/2003 was not followed but in the converse directions, namely,

the AO suo motu determined the ALP of international transaction

with the value exceeding Rs.5 crores. The Tribunal approved the

contention of the assessee that the AO failed in following the

mandate of the Circular and quashed the assessment order. When

the matter reached before the Hon'ble Supreme Court, it approved

the view of the Tribunal to the extent that the AO was bound to

make a reference to the TPO when the aggregate value of

29 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

international transaction exceeded Rs.5 crores in terms of

Instruction No.3/2003. However, it reversed the Tribunal order on

the other issue by holding that “the Tribunal ought to have accepted

the submissions made by the Departmental Representative …. and

the matter ought to have been restored to the file of AO so that

appropriate reference could be made to the TPO”. Thus, it is

evident from the judgment of the Hon'ble Summit Court that if the

prescription of Circular No.3/2003 is not followed, the proper

course of action is to restore the matter to the stage where

irregularity occurred rather than quashing the entire proceedings and

the consequential assessment order. We, therefore, respectfully

following the Hon'ble Apex Court judgment in Pr.CIT vs. S.G. Asia

Holdings (India) Pvt. Ltd. (supra), set aside the impugned order and

remit the matter to the file of the AO for determining himself the

ALP of the international transaction of ‘Sale of finished goods’ after

allowing a reasonable opportunity of hearing to the assessee.

directed by the DRP through which, it computed the amount of

transfer pricing adjustment at Rs.37,78,910. At this stage, it is

30 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

pertinent to note the nature of the international transaction, which is

`Sale of Finished goods’ to its AE. The DRP held in para 66 that:

“Since the assessee is into trading exports of pharma products,

Resale Price Method will be the most appropriate method”. In

order to evaluate if the RPM was properly directed to be applied, we

need to refer to the relevant part of rule 10B(1)(b), which reads as

under:

“10B(1)….. (b) resale price method, by which— (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) to (v) ….” 26. Sub-clause (i) of the rule emphatically provides that: `the

price at which property purchased … by the enterprise from an

associated enterprise is resold … to an unrelated enterprise, is

identified’. Thus, it is glaring that this method applies where an

Indian entity purchases goods from its foreign/AE and then resells

the same. The entire mechanism in the subsequent sub-clauses of

rule 10B(1)(b) is a consequence of this foundational fact. If the

international transaction is not that of purchase by an Indian entity,

31 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

then the RPM cannot be applied. Here is a case in which the

assessee sold goods to its AE in the international transaction rather

than purchasing the same. In fact, the purchases for such a resale

were made from non-AEs. In such a scenario, we cannot

countenance the DRP’s direction to apply the RPM for the ALP

determination of the international transaction of `Sale of finished

goods’ to the AEs.

DRP and rightly so and further we have held hereinabove that the

RPM is not the correct method to be applied, then there can be no

hitch in accepting the assessee’s contention of applying the TNMM

as the most appropriate method in the facts and circumstances of the

case. In fact, the DRP also directed to apply the TNMM for the

next two years, which are part of this batch of appeals, in which the

international transactions are sale of manufactured goods to the

AEs.

TNMM is to be applied, then its original ALP determination in the

Transfer pricing study report should be accepted without remitting

32 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

the matter to the AO. We cannot concur with this contention

because the working done by the assessee in this regard has not

been vetted either by the TPO or the DRP. The TPO rejected such a

method and went ahead with the PSM and the DRP suggested the

RPM. Hence veracity of the calculations made by the assessee

under TNMM has yet to pass through the eyes of the authorities

below. Under these circumstances, we set aside the impugned order

and remit the matter to the file of the AO for a fresh determination

of the ALP of international transaction of ‘Sale of finished goods’

under the TNMM as per law after allowing reasonable opportunity

of hearing to the assessee.

A.Ys. 2012-13 & 2013-14

pricing additions of Rs.4,34,17,316 and Rs.7,76,19,272 made by the

AO for the A.Ys. 2012-13 and 2013-14 respectively in his final

orders dated 25.01.2017

filed return declaring loss of Rs.7,36,50,537. International

transactions of `Sale of finished goods’ amounting to Rs.9.55 crores

33 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

and odd were declared in Form No.3CEB. The AO made a

reference to the TPO for determining their ALP. The TPO, vide his

concise order dated 29.01.2016, determined the amount of transfer

pricing adjustment at Rs.54,08,226. He did not separately discuss

the merits of the transfer pricing addition but, as done for the

preceding year, relied on the discussion made by him in his order

passed in the case of OIE for the A.Y. 2007-08. Similarly, for the

A.Y. 2013-14, the assessee filed return declaring loss of

Rs.20,82,40,706. The assessee reported international transaction of

`Sale of finished goods’ at Rs.13,25,91,855. The AO made a

reference to the TPO for determining the ALP of international

transaction. The latter vide his order dated 29.01.2016, passed in

the same way as for the preceding two years, determined the amount

of transfer pricing adjustment at Rs.4,66,98,148 by mainly relying

on his order in the case of OIE for the A.Y. 2007-08. For both the

years, the assessee had applied Transactional Net Margin Method

(TNMM). The TPO rejected this method and resorted to the PSM.

The assessee assailed the drafts orders containing such transfer

pricing adjustments before the DRP, which did not countenance the

34 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

approach of the TPO in applying the PSM. It directed to apply the

TNMM for both the years and required the assessee to furnish

benchmarking under the TNMM. For the A.Y. 2012-13, the

assessee identified three comparables with mean PLI (OP/OC) at

7.63% and its own OP/TC at 49.44%. The DRP observed that the

assessee excluded Employee cost and Operating & administrative

costs of Rs.10.94 crores in computing its own operating cost base,

for which no justifiable reasons were assigned. The assessee tried to

support such exclusion by putting forth that: `major expenses for

market and brand creation were undertaken in keeping with the long

drawn strategy to manufacture Pharma products. Massive efforts of

creating domestic market for the SAVA branded products were

undertaken. These efforts were from a futuristic perspective. Result

of these efforts were not reaped in the current year’. Rejecting such

a contention and including such costs within the operating cost base,

the DRP determined operating loss of the assessee at Rs.7,45,42,027

and the PLI of OP/OC at (-) 39.82%. This is how, the DRP

computed transfer pricing adjustment of Rs.4,34,17,316 which was

made by the AO in the final assessment order for the A.Y. 2012-13.

35 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

Similarly, for the A.Y. 2013-14, the assessee furnished

benchmarking under the TNMM by identifying five comparables

with mean PLI (OP/OC) at 5.26%. The assessee computed its own

OP/TC at 16.61%. In the calculation of its own operating cost base,

the assessee again excluded Employee cost and Operating &

administrative cost of Rs.23.89 crores with the similar explanation

as given for the preceding year. The DRP did not approve the

exclusions and re-determined the PLI of the assessee at (-) 52.11%

and accordingly computed the transfer pricing adjustment of

Rs.7,76,19,272. The AO in his final order made the above referred

transfer pricing additions. Aggrieved thereby, the assessee has

come up in appeal before the Tribunal.

material on record, it is observed that the assessee in the initial

transfer pricing study report applied the TNMM, which was rejected

by the TPO thereby treating the PSM as most appropriate method.

The DRP overturned the TPO’s action and restored the TNMM as

most appropriate method. The assessee is not aggrieved by the

TNMM application. The only dispute is about the calculation of its

36 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

own PLI. We have noted above that while calculating its PLI for

the A.Y. 2012-13, the assessee treated Rs.10.94 crores as non-

operating costs on the premise that such expenses were incurred for

the purpose of brand building, which efforts were from a futuristic

perspective and results of these efforts were not reaped in the

current year. The assessee has demonstrated its PLI working on

this basis on pages 761 and 762 of paper book. Whereas the above

extracted note has been given on page 761, it has been mentioned

on page 762 that: “The cost with respect to employees hired for the

purpose of brand creation, promotion and marketing in domestic

market which has no relevance with the sales of manufactured

products sold to AEs, hence the same is carved out to determine

operating cost’. The ld. AR attempted to justify the exclusion of

sum of Rs.10.94 crores by contending that the assessee incurred

these expenses considering the futuristic impact of the market

creation made in this year. He elaborated by stating that such costs

resulted into the brand building of the assessee, whose benefit was

to be reaped in future years. Thus, it can be seen that the assessee

adduced two reasons for the carve-out, viz., first that such costs

37 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

resulted into benefits in future years and second that the exports

made to the AEs were neutral to these costs.

it is sine qua non to consider the nature of expenses considered as

`Brand building’ and hence excluded. Break-up of this amount for

the A.Y. 2012-13 has been given on page 762 of the paper book,

which consists of Employee cost of Rs.3.69 crore (out of total

employee cost of Rs.4.77 crore) and Operating and administration

expenses of Rs.7.28 crores (out of total Operating and

administration expenses of Rs.8.25 crore). Thus it can be seen that

Employees cost and Operating and administration expenses have

been treated as `Brand building expenses’ . What is the link between

these expenses and brand building is difficult to comprehend. It can

be seen with naked eyes that roughly 84% of total Employee costs

and Operating and administration expenses have been sliced away

and given an imaginary nomenclature of `Brand building expenses’

for transfer pricing purpose only with an avowed object of shrinking

the operating costs and resultantly boosting the operating profits so

as to present a rosy picture for benchmarking. Thus we hold that the

38 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

expenses carved out by the assessee by claiming them to be

towards brand building are ordinary operating expenses connected

with the running of business and have no element of brand building.

No authentic reasoning for such allocation or correlation has been

established before us. The irony is that por una parte the assessee is

claiming such huge expenses as deductions and filing the returns

with spiraling losses of Rs.7.36 crore for the A.Y. 2012-13 and

Rs.20.82 crores the A.Y. 2012-13; por otra parte, when it comes to

the benchmarking, it is showing handsome operating profit rates of

49.44% and 16.61% by slicing away a major component of the

operating costs incurred.

such expenses were brand building costs qualifying for exclusion.

The first reason given is of futuristic perspective. Otherwise, there is

no dispute as to the otherwise operating nature of the Employee cost

and Operating & administrative expenses carved out by the

assessee. On a specific query, it was admitted that the assessee

started manufacturing operations from this year onwards and out of

total sales of Rs.11.26 crores, domestic sales amounted to Rs.1.71

39 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

crores. It, therefore, transpires that the assessee incurred Employee

cost and Operating & administrative expenses in relation to its

manufactured products, which were sold in the year under

consideration both in the domestic market to non-AEs and in the

foreign market to the AEs. In such a situation, the assessee cannot

justify the exclusion by correlating the same with its impact in the

years to come. On a pertinent query, the ld. AR admitted that these

costs were not capitalized in the books of account but were taken as

revenue expenses for the year under consideration. Once these costs

are incurred for the year in question and claimed as deduction in

entirety in this year alone, we fail to understand as to how these can

be correlated with the sales to be made in future years without

capitalizing them for accounting or tax purpose.

operating in nature, relate to the future years, then naturally such

expenses should have formed part of the operating costs base for the

future years. On a clarification in this regard, the ld. AR candidly

admitted that such costs for both the years were not included in the

operating cost base of any of the future years. This shows that albeit

40 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

the assessee claims to have incurred Rs.10.94 crores for the A.Y.

2012-13 and Rs.23.89 crores for the A.Y. 2013-14 as operating cost

for the future years, but neither capitalized them in the accounts for

the years under consideration nor included them in the operating

costs base for any of the future years. If we accept the contention of

assessee to exclude such expenses, then they will neither form part

of operating cost base for the years under consideration nor in the

future years though these have actually been granted deduction in

the computation of total income for the years in question. As the so-

called brand building exercise done by the assessee facilitated

making of the sales in the years under consideration, we are in full

agreement with the DRP that the expenses so carved out and

excluded from the operating cost base were liable to be included

back.

building expenses have no relation with the sale of finished goods to

the AEs and hence should be excluded. We again fail to appreciate

as to how brand building exercise does not help in facilitating profit

from sales to related parties. Every sale to the AEs has a

41 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

corresponding manufacturing also. A good brand not only helps in

accelerating revenue side by pushing sales across the board to the

related and unrelated parties but also reins in economies and

efficiencies on the cost side – economies in terms of relatively cost-

effective purchases of quality raw material and efficiencies in terms

of having good and satisfied work force preferring to stick with an

established and reputed brand thereby adding the value. Thus we do

not countenance the contention that brand building exercise has no

impact on the profitability from sales made to related parties.

PLI under the TNMM for the A.Y. 2012-13, provided at the

instance of the DRP, has been given on page 761 of the paper book.

The starting point is total revenue from sale made to AEs and non-

AEs in domestic market. In such a scenario all the operating costs –

both for AE and non-AE transactions – need to be considered for

determining the rate of Operating profit to Total cost. The transfer

pricing addition will result only by applying the differential PLI rate

(PLI of the assessee and PLI of the comparables) only on sales

made to the AEs and not the entity level transactions.

42 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

Employee Cost and Operating and administration expenses have

any relation with the `brand building’ nor even genuine brand

building expenses can be excluded from the operating cost base on

the facts and in the circumstances of the case. Thus the contention

of the ld. AR for reducing the operating cost base with the expenses

of Rs.10.94 for the A.Y. 2012-13 and Rs.23.89 crores for the A.Y.

2013-14 is repelled. To sum up, we hold that the DRP rightly

ordered the inclusion of such costs in the operating cost base for

computing the assessee’s PLI for both the years under

consideration.

of its own ALP determination presented before the DRP. We,

therefore, accord our imprimatur to the final assessment orders

making the above additions.

raised additional ground contending that the reference made by the

AO to the TPO for the second international transaction, without

granting opportunity of hearing to the assessee, was contrary to law

43 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

and hence the assessment orders be declared as null and void. We

have discussed this issue in extenso while disposing of the appeal

for the A.Y. 2011-12 above. For the two years instantly before us,

again the ALP determination by the TPO is confined to the only

reported international transaction of sale made to the AEs. Unlike in

the case of OIE, there is no second transaction referred by the AO to

the TPO. Following the raison d`etre given for the preceding year,

the additional grounds for these two years are also dismissed.

for statistical purposes and the appeals for the A.Ys. 2012-13 and

2013-14 are dismissed.

Order pronounced in the Open Court on 30th August, 2021.

Sd/- Sd/- (S.S. VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 30th August, 2021 GCVSR/Satish

44 ITA Nos.738 to 740/PUN/2017 M/s. Sava Medica Ltd.

आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The Respondent; 2. 3. The DRP-3 (WZ), Mumbai 4. The concerned CIT, Pune 5. DR, ITAT, ‘C’ Bench, Pune गाड� फाईल / Guard file. 6.

आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 25.8.2021 Sr.PS 2. Draft placed before author 30.8.2021 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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