Srini Pharmaceuticals Limited, Hyderabad V. DCIT., Circle-3(2), Hyderabad, Hyderabad

ITA 102/HYD/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2671 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 28-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Assessee Lawyers: C S SUBRAMANYAM
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 102/HYD/2015 ASSESSMENT YEAR: 2010-11 SRINI PHARMACEUTICALS LTD., HYDERABAD. PAN AACCS 8456 P VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 3(2), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI C.S. SUBRAMANYAM REVENUE BY : SHRI J. SIRI KUMAR DATE OF HEARING 14-12-2017 DATE OF PRONOUNCEMENT 19-01-2018 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST T HE ORDER PASSED U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (IN SHORT ACT) DATED 29/11/2014 RELATING TO AY 2010-1 1. 2. THE ASSESSEE HAS FILED GROUNDS OF APPEAL, IN WHI CH, IT HAS RAISED 10 GROUNDS OF APPEAL. GROUND NOS. 1 & 2 ARE GENERAL IN NATURE AND GROUND NOS. 3 & 4 ARE RELATING TO NON-SELECTION OF INTERNAL TNMM AS THE MOST APPROPRIATE METHOD BY THE TPO/DRP, EVEN THOUGH, THERE IS ABSOLUTE FUNCTIONAL SIMILARITY BETWEEN AE SEGMEN TS AND NON-AE SEGMENTS. THE OTHER GROUNDS 5 TO 10 ARE ALTERNATE P LEAS OF THE ASSESSEE. 3. FIRST, WE INTEND TO ADJUDICATE ON THE MAIN ISSUE OF NON-ADOPTION OF INTERNAL TNMM. 2 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. 4. BRIEF FACTS OF THE CASE ARE, ASSESSEE COMPANY E NGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF BULK DRUGS AND INTERMEDIATES. FOR THE AY 2010-11, THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 25/09/2010 DECLARING AN INCOME OF RS. 16,61,857/ -. SINCE THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ITS AS SOCIATE ENTERPRISES WHICH NECESSITATED REFERENCE TO THE TRANSFER PRICIN G OFFICER (TPO) AS PER THE PROVISIONS OF SECTION 92CA FOR DETERMINATIO N OF ARMS LENGTH PRICE. ACCORDINGLY, THE CASE WAS REFERRED TO THE TP O FOR DETERMINATION OF ARMS LENGTH PRICE WITH THE PRIOR APPROVAL OF THE CIT-III, HYDERABAD. 4.1 ASSESSEES PROFILE: THE ASSESSEE, SRINI PHARMACEUTICALS LTD., WAS INCOR PORATED UNDER THE COMPANIES ACT, 1956, ON 24 TH FEBRUARY, 1995. ITS MAIN OBJECTIVES ARE TO MANUFACTURE VARIOUS DRUGS, TRADING IN CHEMICALS, IMPORT AND EXPORT AND GENERALLY DEALING WITH ALL TYPES OF PHARMACEUTI CALS, DRUGS AND INTERMEDIATES AND TO DEVELOP NEW PRODUCTS AND SUBST ITUTE FOR IMPORTED PRODUCTS AND TECHNICAL CONSULTATION IN DRU GS AND PHARMACEUTICALS. SRINI PHARMACEUTICALS LTD. HAS COM MENCED ITS COMMERCIAL PRODUCTION DURING THE FY 1998-99. THE FA CTORY IS SITUATED AT SURVEY NO. 247, CHOUTUPPAL MANDA & VILLAGE 508 2 52, NALGONDA DISTRICT, AP. 4.2 INTERNATIONAL TRANSACTIONS: AS PER 3CEB REPORT/TP DOCUMENT SUBMITTED, THE INTER NATIONAL TRANSACTIONS ARE AS UNDER: S. NO. CLASSIFICATION AE PAID/ RECEIVED AMOUNT (IN RS.) METHOD APPLIED 1 SALE OF INTERMEDIATES & APIS APOTEX PHARMACHEM INC., CANADA RECEIVED 531405608 TNMM 2 PURCHASE OF LAB MATERIALS -DO- PAID 84514 - 3 REIMBURSEME NT OF EXPENDITURE -DO- PAID 64963 3 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. 4.3 ANALYSIS OF THE TRANSACTION: AS PER THE AUDITED STATEMENT OF ACCOUNTS THE FINAN CIALS OF THE ASSESSEE ARE AS UNDER: DESCRIPTION AMOUNT (IN RS.) OPERATING REVENUE 597094012 OPERATING COST 607633729 OPERATING PROFIT (-)10539717 OP/OR (%) (-)1.73% OP/OC (-)1.76% 4.4 THE TPO EXAMINED THE TP STUDY FURNISHED BY THE ASSESSEE AND SUMMARIZED AS UNDER: A. BASED ON THE FAR ANALYSIS, THE ASSESSEE HAS BEEN CHARACTERIZED AS AN ENTREPRENEUR, EXPOSED TO NORMAL RISKS WHILE UNDERTAKING MANUFACTURING OF API ACTIVITIES. B. THE ASSESSEE IS SELECTED AS TESTED PARTY C. IN RESPECT OF THE SALE OF GOODS TO ITS AE VIZ., APOTEX PHARMACHEM INC., CANADA, TNMM IS TAKEN AS MOST APPR OPRIATE METHOD. D. THE ASSESSEE HAS SELECTED PBDIT ON COST AS PROFI T LEVEL INDICATOR (PLI) E. THE ASSESSEE HAS CONDUCTED SEARCH USING PROWESS DATABASE AND HAS SELECTED 7 COMPANIES AS FINAL COMPARABLES. THE ARITHMETIC MEAN PBDIT ON COST IS COMPUTED AS 14.51% WHEREAS THE SAME OF THE ASSESSEE IS 10.22% AND IT IS CLAIME D THAT THE ASSESSEE IS WITHIN THE PLUS/MINUS FIVE PER CENT RAN GE OF THE ALP. PROWESS DATA BASE WAS SEARCHED FOR SELECTING COMPARABLES. THE SEARCH STARTED WITH TOTAL UNIVERSE OF THE COMPANIES FROM WHICH COMPANIES WERE SELECTED UNDER THE FOLLOWING BROAD CATEGORIES: * DRUGS & PHARMACEUTICALS * DRUGS, MEDICAL AND ALLIED PRODUCTS * BULK DRUGS * PHARMACEUTICALS * FORMULATIONS * ACTIVE PHARMA INGREDIENTS * API 4 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. 4.5 COMPARABLES SELECTED BY THE ASSESSEE ARE AS UND ER: SL.NO. NAME OF THE COMPARABLE % OF PBDIT ON COST 1 BDH INDUSTRIES LTD. 9.62% 2 FERMENTAL BIOTECH LTD. 20.71% 3 HAB PHARMACEUTICALS & RESEARCH LTD. 12.30% 4 NOVODIGM LTD. (MERGED) 11.23% 5 SYNCOM FORMULATIONS (I) LTD. 11.58% 6 TONIRA PHARMA LTD. (MERGED) 21.60% 7 TYCHE INDUSTRIES LTD. 14.51% ARITHMETIC MEAN PBDIT/COST 14.51% 4.6 COMMENTS OF TPO ON COMPARABLES SELECTED BY THE ASSESSEE, WHICH ARE AS UNDER: 1. THE ASSESSEE HAS NOT USED ANY EXPLICIT RPT FILTE R. THE TPO CHECKED THE RELATED PARTY TRANSACTIONS OF THE COMPA RABLES SELECTED BY THE ASSESSEE AND FOUND THAT THE COMPANY NOVODIGM LTD. HAS SUBSTANTIAL RELATED PARTY TRANSAC TIONS AND IT CANNOT BE SELECTED AS COMPARABLE. 2. THE ASSESSEE HAS NOT APPLIED ITS FILTER OF COMP ANIES HAVING LINE OF ACTIVITY OTHER THAN BULK DRUGS ELIMINATED PROPERLY. THIS RESULTED IN SELECTION OF SOME COMPANIES WHICH ARE N OT FUNCTIONALLY SIMILAR. 4.7 THE TPO REJECTED THE SEGMENTAL DETAILS FURNISHE D BY THE ASSESSEE, BY OBSERVING AS UNDER: AT ANNEXURE NO-4 OF THE TP REPORT, THE TAXPAYER HA S APPORTIONED COSTS AMONG THE SALES MADE TO ITS AE AN D NON-AE IN EXPORTS MARKET AND SALES MADE IN DOMESTIC MARKET . THE ALLOCATION OF DIRECT & INDIRECT COST HAS BEEN DONE WITHOUT ANY BASIS. OUT OF THE TOTAL MISCELLANEOUS INCOME OF RS 13.72 LAKHS THE TAXPAYER HAS CONSIDERED RS 12.71 LAKHS IN AE SE GMENT, WHICH IS 92.63% OF MISCELLANEOUS INCOME. HOWEVER TH IS HAS BEEN DONE WITHOUT ANY BASIS. SIMILARLY OUT OF SCRAP SALE OF RS 5.19 LAKHS, AN AMOUNT OF RS 4.80 LAKHS HAS BEEN ATT RIBUTED TO AE SEGMENT. THIS IS AGAIN DONE WITHOUT ANY BASIS. T HEREFORE, THE CALCULATION OF PLI CANNOT BE ACCEPTED SINCE THE DIRECT & INDIRECT COST FOR AE AND NON-AE SALES HAS BEEN DETE RMINED WITHOUT ANY BASIS AND NO SUCH SEGMENTAL BREAK-UP IS GIVEN IN THE ANNUAL REPORT FOR FY 2009-10. 5 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. THE TAXPAYER HAS NOT FILED ANY SUPPORTING DOCUMENTA RY EVIDENCE IN SUPPORT OF THE ABOVE DISCUSSED AE AND N ON-AE PROFIT MARGIN CALCULATION. THEREFORE, THE PROFIT MA RGIN CALCULATION OF THE AE AND NON-AE SEGMENT AS GIVEN I N ANNEXURE 4 OF THE TP DOCUMENT IS HEREBY REJECTED. 4.8 IN VIEW OF THE ABOVE SHORTCOMINGS, THE TPO REEX AMINED 54 COMPANIES SHORTLISTED AT PAGE 4 OF ASSESSEES SEARC H PROCESS AFTER APPLYING THE TURNOVER FILTER OF SELECTING COMPANIES WITH TURNOVER BETWEEN RS. 30 CRORES TO RS. 90 CRORES. IT WAS FOUN D THAT THE FOLLOWING TWO COMPANIES ARE FUNCTIONALLY SIMILAR AN D QUALIFY ALL THE FILTERS APPLIED BY THE ASSESSEE: 1. VIVIMED LABS LTD. 2. EMBIO LTD. AFTER REEXAMINING THE COMPARABLES SELECTED BY THE A SSESSEE AND ALL THE COMPANIES REJECTED BY THE ASSESSEE ON FUNCTIONA L GROUNDS, THE TPO HAS SELECTED THE FOLLOWING COMPANIES AS COMPARA BLES: SL.NO. NAME OF THE COMPARABLE OP/SALES % OP/COST % 1. FERMENTA BIOTECH LTD. 12.99 14.93 2. HAB PHARMACEUTICALS & RESEARCH LTD. 8.45 9.23 3. TONIRA PHARMA LTD. (MERGED) 11.28 12.72 4. TYOHE INDUSTRIES LTD. 10.84 12.16 5. VIVIMED LABS LTD. (PHARMA SEG.) 28.24 39.35 6. EMBIO LTD. 14.92 17.54 TOTAL 86.72 105.93 AVERAGE 14.45 17.65 THE ARITHMETIC MEAN OF THE PLI (OP/OC) WHICH COMES TO 17.65% IS TAKEN AS ARMS LENGTH MARGIN. THE ARMS LENGTH PR ICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY AND BETW EEN THE ASSESSEE AND APOTEX CANADA COMPUTED AS UNDER: 6 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. PARTICULARS RS. TOTAL OPERATING COSTS 60,76,33,729 TOTAL OPERATING REVENUE 59,70,94,012 SALES TO AE 53,14,05,608 SALES TO AE AS PERCENTAGE OF TOTAL OPERATIONAL REVENUE 89.01% OPERATIONAL COST IN PROPORTION TO AE SALE TO TOTAL SALES 54,08,65,112 ARMS LENGTH MARGIN 17.65% ARMS LENGTH SALES @ 117.65% 63,63,27,804 PRICE RECEIVED FROM AE 53,14,05,608 SHORTFALL BEING THE ADJUSTMENT U/S 92CA(3) 10,49,22,196/-. ACCORDINGLY, THE TOTAL INCOME OF THE ASSESSEE WAS E NHANCED BY THE ADJUSTMENT OF RS. 10,49,22,196/- IN RESPECT OF SALE S MADE TO ITS AE, APOTEX CANADA U/S 92CA(3) OF THE ACT. 5. AGGRIEVED BY THE TPOS ORDER, THE ASSESSEE RAISE D OBJECTIONS BEFORE THE DRP AND THE DRP REJECTED THE OBJECTIONS OF THE ASSESSEE BY OBSERVING AS UNDER: 07.0 OBJECTION NO.3 & 4 : INTERNAL TNMM TO BE ADOPT ED & SEGMENTED RESULTS AS ONE OF COMPARABLES. SINCE BOTH THE OBJECTIONS ARE INTER-RELATED, THEY HAVE BEEN TAKEN UP TOGETHER. THE ASSESSEE SUBMITTED THAT THE PRODUCT SOLD TO BOT H THE SEGMENTS I.E., AE & NON-AE ARE IDENTICAL IN ALL RES PECTS, THE PRODUCTS ARE SIMILAR AND THE FUNCTIONS PERFORMED, A SSETS EMPLOYED AND RISKS ASSUMED ARE SIMILAR TO BOTH THE SEGMENTS. THE PRODUCTS SOLD TO AE & NON-AE ARE EITHER ACTIVE PHARMACEUTICAL INGREDIENTS OR INTERMEDIATES OF PHAR MACEUTICAL PRODUCTS. BOTH THE PRODUCTS ARE IDENTICAL IN THEIR USAGE AND APPLICATION AND ONLY THE CHEMICAL COMPOSITION MAY B E DIFFERENT FROM ONE PRODUCT TO THE OTHER. IT WAS ALSO SUBMITTE D THAT IN ORDER TO ELIMINATE THE DIFFERENCES ON ACCOUNT OF CA PACITY UNDER UTILIZATION AND SHIFT FROM LICENSE TO GENERIC, AN A LTERNATE APPROACH WOULD BE TO CONSIDER THE NON-AE SEGMENT AS INTERNAL COMPARABLE TO BENCH MARK THE AE TRANSACTIONS AND TN MM SINCE BOTH THE SEGMENTS ARE FUNCTIONALLY COMPARABLE. IT W AS ALSO SUBMITTED THAT THE EXTERNAL COMPARABLES ADOPTED BY THE TPO SUFFER FROM THE LIMITATION OF NON-ADJUSTMENT FOR LO WER CAPACITY UTILIZATION AND SHIFT FROM LICENSE TO GENERIC AS TH E SAME ARE NOT ESTIMATED AND NOT ADJUSTED WHILE ARRIVING AT ALP. 07.1 THE PANEL HAS CONSIDERED THE SUBMISSIONS OF TH E ASSESSEE. THE TPO NOTED THAT AS PER THE ANNEXURE, T HE TOTAL 7 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. SALES OF THE NON-AE EXPORTS SEGMENT ARE ONLY RS. 4. 22 CRORES WHICH IS ONLY 7.35% OF THE TOTAL EXPORTS WHEREAS TH E AE SALES ARE RS.53.14 CRORES THUS COMPRISES OF 93% AND HENCE THE NON- AE EXPORT IS COMPARATIVELY A MINISCULE SEGMENT OF T HE EXPORTS. IT IS ALSO IMPORTANT TO CONSIDER THE ITEMS PRODUCED AND SOLD IN THE NON-AE EXPORTS SEGMENT SINCE FOR ANY FRUITFUL C OMPARISON IT IS NECESSARY THAT BOTH THE AE AS WELL AS NON-AS EXP ORTS SEGMENT OPERATE IN SIMILAR PRODUCT LINE. SIMILARLY, IT IS NECESSARY THAT THE AE AND NON-AE EXPORTS SEGMENT AR E SELLING THE PRODUCTS IN SAME GEOGRAPHIC ZONE SINCE THE MARK ET CONDITIONS AND ECONOMIC AND LEGAL CIRCUMSTANCES VAR Y DIFFERENT GEOGRAPHIC ZONES. IN ABSENCE OF THESE DETAILS, THE COMPARISON OF THE PROFIT -8''RGIN OF THE AE SEGMENT AND NON-AE EXPORTS SEGMENT IS NOT VALID. HENCE, THE PANEL DOES NOT CON SIDER NECESSARY TO ADJUDICATE THIS OBJECTION AND THEREFOR E, THE OBJECTIONS ARE REJECTED. 8.0 OBJECTION NO.5: ADJUSTMENT FOR LOW CAPACITY UTI LIZATION. IT WAS SUBMITTED THAT THE ASSESSEE-COMPANY INVESTED HU GE CAPITA' MACHINERY WHICH INVESTMENT COULD NOT BE RET URNED ADEQUATELY DUE TO LOW CAPACITY UTILIZATION. THIS LO W CAPACITY UTILIZATION DUE TO LESSER DEMAND RESULTED IN SOME F IXED COSTS REMAINING NOT RECOVERED AND THE CUMULATIVE FACTORS LEAD TO LESSER PROFITABILITY AND RELIANCE WAS PLACED ON THE DECISION OF PUNE BENCH OF TRIBUNAL IN THE CASE OF MSS INDIA PVT . LTD. (2009) 32 SOT 132 (PUNE) WHERE IT HAS BEEN HELD THA T ADJUSTMENT FOR SUCH UNDER UTILIZATION OF CAPACITY N EEDS TO BE GIVEN. 08.1 DRP HAS DEALT THIS ISSUE IN ITS ORDER FOR ASST . YEAR 2008-09 IN PARAS- 5.5 TO 5.7 AND REJECTED THE OBJECTION RAI SED BY THE ASSESSEE WHICH HAS FURTHER BEEN FOLLOWED BY THE PAN EL IN ASST.YEAR 2009-10. FACTS REMAINING THE SAME, THE PA NEL DECLINE TO ENTERTAIN ANY ADJUSTMENT TO THE PROFIT MARGIN IN RESPECT OF CAPACITY UTILIZATION FOR THIS YEAR ALSO. 6. AGGRIEVED WITH THE ABOVE ORDER OF DRP, THE ASSES SEE IS IN APPEAL BEFORE US. 7. LD. AR SUBMITTED BEFORE US THAT ASSESSEE IS A SU BSIDIARY OF APOTEX PHARMACHME INC., CANADA AND DURING THIS YEAR , ASSESSEE HAS EXPORTED TO ITS AE TO THE EXTENT OF RS. 53.4 CRORES , WHICH IS 93% OF THE TOTAL SALES AND EXPORTED TO NON-AE TO THE EXTEN T OF RS. 4.25 CRORES, WHICH IS 7.35% OF THE TOTAL SALES. FURTHER, HE SUBMITTED THAT THE SALES RECORDED DURING THE YEAR IS ONLY 30% OF T HE UTILIZATION OF THE 8 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. TOTAL CAPACITY INSTALLED. HE SUBMITTED THAT DRP AND TPO HAS REFUSED TO CONSIDER INTERNAL TNMM CONSIDERING THE TURNOVER RECORDED WITH NON-AE EXPORTS COMPARATIVELY A MINISCULE SEGMENT O F THE EXPORTS. FOR THE AY, EVEN THOUGH, THE PROJECT SOLD TO BOTH T HE SEGMENTS I.E. AE AND NON-AE ARE IDENTICAL IN ALL RESPECTS, THE PR ODUCTS ARE SIMILAR AND THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RI SK ASSUMED ARE SIMILAR. THE PRODUCTS SOLD TO BOTH THE SEGMENTS ARE EITHER ACTIVE PHARMACEUTICAL INGREDIENTS OR INTERMEDIATES PHARMAC EUTICAL PRODUCTS. HE FURTHER SUBMITTED THAT IN ORDER TO ELIMINATE THE DIFFERENCES ON ACCOUNT OF CAPACITY UNDERUTILIZATION AND SHIFT FROM LICENSE TO GENERIC, AN ALTERNATE APPROACH WOULD BE TO CONSIDER THE NON- AE SEGMENT AS INTERNAL COMPARABLE TO BENCH MARK THE AE TRANSACTIO NS AND BOTH THE SEGMENTS ARE FUNCTIONALLY COMPARABLE IN TERMS OF TN MM. HE FURTHER SUBMITTED THAT THE EXTERNAL COMPARABLES ADOPTED BY THE TPO SUFFER FROM THE LIMITATION OF NON-ADJUSTMENT FOR LOWER CAP ACITY UTILIZATION AND SHIFT FROM LICENSE TO GENERIC AS THE SAME ARE NOT E STIMATED AND NOT ADJUSTED WHILE ARRIVING AT ALP. HE SUBMITTED THAT W ITH REGARD TO LOW CAPACITY OF UTILIZATION, ASSESSEE HAS INVESTED HUG E CAPITAL MACHINERY, FOR WHICH INVESTMENT COULD NOT BE RETURN ED ADEQUATELY DUE TO LOW CAPACITY UTILIZATION, WHICH IS DUE TO LE SS DEMAND RESULTED IN FIXED COST UNDER RECOVERY AND THE CUMULATIVE FAC TORS LEAD TO NEGATIVE PROFITABILITY. HE RELIED ON THE FOLLOWING CASES: 1. LUMMUS TECHNOLOGY HEAT TRANSFER BV VS. DCIT, [20 10] 42 TAXMANN.COM 342 (DELHI TRIB.) 2. NTT DTA GLOBAL DELIVERY SERVICES LTD., VS. DCIT, [2015] 63 TAXMANN.COM 92 (HYD. TRIB.) 3. ASSESSEES OWN CASE FOR EARLIER AY 7.1 RELYING ON THE ABOVE CASES, THE LD. AR SUBMITTE D THAT RATIO LAID DOWN BY THE DELHI BENCH OF THE TRIBUNAL WAS THAT IN TERNAL COMPARABLE CANNOT BE REJECTED EITHER FOR NON-AUDIT OF SEGMENTE D RESULTS OR FOR MERE REASON THAT TURNOVER OF NON-AE SEGMENT IS SMAL LER COMPARED TO AE TURNOVER. ACCORDINGLY, HE SUBMITTED THAT EVEN TH OUGH THE TURNOVER RECORDED BY THE ASSESSEE IS SIMILAR COMPARED TO ABO VE CASE, THE PLEA OF THE ASSESSEE SHOULD NOT BE REJECTED ON THE BASIS OF MERE 9 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. DIFFERENCE IN SIZE OF THE NON-AE TURNOVER DOES NOT RENDER THE TRANSACTION UNCOMPARABLE. 8. LD. DR ON THE OTHER HAND, OPPOSED THE CONTENTION OF THE LD. AR FOR CONSIDERING NON-AE AS INTERNAL TNMM AND SUBMITT ED THAT TPO HAS ALREADY BROUGHT ON RECORD THAT SEGMENTAL DETAILS FU RNISHED BY THE ASSESSE ARE NOT RELIABLE FOR THE REASON THAT ALLOCA TION OF DIRECT AND INDIRECT COST HAS BEEN DONE WITHOUT ANY BASIS. THER EFORE, THE PLI SUBMITTED BY THE ASSESSEE CANNOT BE ACCEPTED AS FAR AS THE DIRECT AND INDIRECT COST FOR AE AND NON-AE SALES HAS BEEN DETERMINED WITHOUT ANY BASIS AND NO SUCH SEGMENTAL BREAK UP IS GIVEN IN THE FINAL REPORT FOR THE CURRENT AY. HE FURTHER SUBMITTED THA T EVEN THOUGH ITAT HAS HELD A SUITABLE ADJUSTMENT SHOULD BE MADE ON AC COUNT OF IDLE CAPACITY , HOWEVER, FROM THE RECORDS SUBMITTED BY T HE ASSESSEE, IT IS NOT CLEAR TO WHAT EXTENT PROFIT MARGIN EFFECTED DUE TO IDLE CAPACITY. HE FURTHER BROUGHT TO OUR NOTICE THAT THE ASSESSEE IS CONTRACT MANUFACTURER AND AS PER THE PRODUCT COMPRISING CLAU SE OF THE SHAREHOLDER AGREEMENT, THE ASSESSEE HAS TO SELL THE GOODS TO ITS AE WITH A MARK UP OF 20% IN CASE DMF IS NOT REQUIRED A ND 50% IN CASE DMF IS REQUIRED ON THE COST FOR MANUFACTURING, BUT, THE ASSESSEE IS SHOWING PROFIT MARGIN ONLY (-) 1.73%. THEREFORE, AS SESSEE DOES NOT GET ANY SUPPORT FROM THE DIRECTIONS OF ITAT. HE REL IED ON THE FINDINGS OF THE DRP. 9. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD. WE HAVE NOTICED THAT ASSESSEE HAS MADE E XPORTS TO ITS AE FOR RS. 53.14 CRORES AND EXPORTED TO NON-AE FOR RS. 4.23 CRORES AS WELL AS MADE DOMESTIC SALE TO NON-AE TO THE EXTENT OF RS. 2.28 CRORES AND IT HAS ARRIVED THE PROFIT MARGIN OF 1.19%, (-) 31%, 58.89% TO SALES RELATING TO AE, EXPORT TO NON-AE AND DOMESTIC SALES TO NON-AE RESPECTIVELY. THE PROFIT MARGIN IS ARRIVED WITH TH E HELP OF A COST ACCOUNTANT AFTER OBSERVING THE TOTAL COST WITHOUT F ACTORING FOR IDLE CAPACITY. IN VARIOUS JUDICIAL PRONOUNCEMENTS AND I TAT, HYDERABAD 10 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. BENCHES HAVE ALWAYS DIRECTED THAT FOR CONSIDERATION OF COMPARABLES THERE HAS TO BE AN ADJUSTMENT FOR IDLE CAPACITY UTI LIZATION WHICH WILL HAVE A BEARING ON THE FINAL OUTCOME OF THE ALP. AT THE SAME TIME, THE BENCH HAS ALSO CONSIDERED THE OPTION OF ADOPTING IN TERNAL TNMM AS A COMPARABLE FOR DETERMINING ALP. IN THE GIVEN CASE, THE QUESTION IS WHETHER THE QUANTUM OF TURNOVER OF NON-AE I.E. UNCO NTROLLED TRANSACTIONS WITH TOTAL TURNOVER HAS TO BE CONSIDER ED FOR TREATING AS COMPARABLES. AS PER THE CASE LAW BROUGHT ON RECORD BEFORE US I.E. LUMMUS TECHNOLOGY HEAT TRANSFER BV (SUPRA), IN WHIC H, THE COORDINATE BENCH AT DELHI HAS ADJUDICATED THAT THE SIZE OF THE UNCONTROLLED TRANSACTIONS ARE BEING SMALLER BY ITSE LF, DOES NOT MAKE THE TRANSACTIONS UNCOMPARABLE WITH THE TRANSACTIONS IN CONTROLLED CONDITION. THE SIZE OF THE TURNOVER DOES NOT MATTER IN ENTITIES LEVEL COMPARISON BECAUSE OF SCALE OF OPERATIONS SUBSTANTI ALLY VARY AND SO DOES THE UNDERLYING PROFITABILITY FACTOR, BUT, IN A TRANSACTION LEVEL COMPARISON WITHIN THE SAME ENTITY MERE DIFFERENCE I N SIZE OF THE UNCONTROLLED TRANSACTION DOES NOT RENDER TRANSACTIO N UNCOMPARABLE. THEREFORE, WE ARE IN AGREEMENT WITH THE ABOVE DECIS ION AND ALSO WE NOTICED THAT IN THE ABOVE CASE, ASSESSEE HAS SUBMIT TED SEGMENTAL ACCOUNTS REFLECTING BUSINESS WITH AES, BUSINESS WI TH NON-AES AND IDLE CAPACITY SEPARATELY. HENCE, THE BENCH HAS PROP ERLY APPRECIATED THAT THERE IS NO BAR IN ADOPTING UNCONTROLLED TRANS ACTION FOR THE PURPOSE OF INTERNAL TNMM. WHEREAS, THE AR HAS SUBMI TTED THAT ASSESSEES CAPACITY UTILIZATION IS ONLY 30%, EVEN T HOUGH IT HAS NOT MAINTAINED RECORDS TO INDICATE THE UNABSORBED OVERH EAD, WHICH RELATES TO UNDERUTILIZATION OF THE CAPACITY. IN OUR VIEW, PROFITABILITY OF THE ORGANIZATION WILL HAVE AN IMPACT WHEN THERE IS HUGE UNDERUTILIZATION OF THE CAPACITY. THERE HAS TO BE A N ADJUSTMENT INTERNALLY WITHIN THE ORGANIZATION BY ALLOCATING OV ERHEAD TO THE SEGMENTS, FOR WHICH, CAPACITY WAS UTILIZED AND FOR IDLE CAPACITY. OTHERWISE, THERE HAS TO BE AN ADJUSTMENT OF IDLE CA PACITY WHEN COMPARED WITH OUTSIDE COMPARABLES. IN THE GIVEN CAS E, ASSESSEE HAS NOT PROPERLY MAINTAINED ALLOCATION OF OVERHEADS, EV EN THOUGH, 11 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. ASSESSEE HAS RELIED ON THE SERVICES OF COST ACCOUNT ANT, WHO HAS ALLOCATED THE OVERHEADS ONLY TO THE SEGMENTS, IN WH ICH, TURNOVERS WERE RECORDED AND FAILED TO ALLOCATE FOR THE IDLE C APACITY. THEREFORE, IN OUR CONSIDERED VIEW, ASSESSEE HAS TO SUBMIT THE SEGMENTAL RESULTS BASED ON THE ABSORPTION OF OVERHEAD ON CAPACITY UTI LIZATION AND IDLE CAPACITY. IN OUR VIEW, THE RESULT WILL BE DIFFERENT WHEN ASSESSEE SUBMITS THE REVISED PROFITABILITY REPORT BASED ON T HE CAPACITY UTILIZATION . AT PRESENT, ASSESSEE HAS DECLARED NEG ATIVE PROFITABILITY OF AE AND NON-AES AND AFTER REALLOCATION OF OVERHEADS ON THE BASIS CAPACITY UTILIZATION, IT WILL NOT BE A NEGATIVE PRO FIT. THIS IS IMPERATIVE THAT ASSESSEE ALLOCATES MANUFACTURING OVERHEAD, ADM INISTRATIVE OVERHEAD AND OTHER FIXED OVERHEADS ON THE BASIS OF CAPACITY UTILIZATION. IT IS ADVICEABLE FOR THE ASSESSEE TO SUBMIT SEGMENT-WISE REPORT I.E. EXPORT TO AE, EXPORT TO NON-AE, DOMESTI C SALES TO NON-AE AND IDLE CAPACITY. CONSIDERING THE ABOVE FACTUAL MA TRIX, WE DIRECT THE TPO/AO TO CONSIDER THE ABOVE REVISED SEGMENTAL PROF IT AND LOSS REPORTS OF THE ASSESSEE AND ARRIVE OF THE ALP ADJUS TMENT BY CONSIDERING NON-AE TRANSACTIONS AS ONE OF THE COMPA RABLE IN DETERMINING ALP BY FOLLOWING TNMM METHOD AFRESH. NE EDLESS TO SAY THAT AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE MAY BE PROVIDED. ACCORDINGLY, WE REMIT THIS FILE BACK TO THE FILE OF TPO/AO FOR DETERMINING THE ALP AFRESH. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATE D AS ALLOWED FOR STATISTICAL PURPOSES. 11. THE OTHER ALTERNATE GROUND NOS. 5 TO 10 RAISED BY THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 19 TH JANUARY, 2018. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 19 TH JANUARY, 2018 KV 12 ITA NO. 102 /HYD/2015 SRINI PHARMACEUTICALS LTD., HYD.. COPY TO:- 1) SRINI PHARMACEUTICALS LTD., PLOT NO. 10C, ROAD NO. 8, FILM NAGAR, JUBILEE HILLS, HYDERABAD 500 096 2) DCIT, CIRCLE 3(2), IT TOWERS, HYD. 3) DRP, HYDERABAD. 4) ADDL. CIT (TPO), HYDERABAD 4. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE