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

ITA 1034/MUM/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3326 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2011-2012
• Appeal Filed On: 01-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RUPINDER BARAR
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 92D

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K , MUMBAI , , BEFORE SHRI R C SHARMA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBER ITA NO. : 1034 /MUM/20 16 (ASSESSMENT YEAR: 20 11 - 12 ) T E VAPHARM A INDIA PVT LTD , B D SAWANT MARG, CHAKALA, ANDHERI (EAST), MUMBAI - 400 099 PAN: AABCR 7561 F VS D CIT - CIRCLE - 1 5 ( 3 ) (1) , R. NO. 193, 1 ST FLOOR, CENTRAL REVENUE BLDG., I P ESTATE, NEW DELHI - 110 002 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI DHANESH BAFNA RESPONDENT BY : SHRI RUPINDER BARAR /DATE OF HEARING : 22 - 06 - 201 6 / DATE OF PRONOUNCEMENT : 30 - 0 8 - 2016 ORDER , : PER AMIT SHUKLA , J M: THE AFORESAID APPEAL HA S BEEN FILED AGAINST FINAL ASSESSMENT ORDER, DATED 25.01.2016 PASSED UNDER SECT ION 143(3) R.W.S. 153C(13) IN PURSUANCE OF DIRECTION GIVEN BY THE DISPUTE RESOLUTION PANEL - II (DRP), MUMBAI UNDER SECTION 144C(5) , VIDE ORDER DATED 14.12.2015. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS RAISED FOLLOWING GROUNDS: - 2 M/S TEVAPHARM A PVT LTD ITA 1034 /MUM/ 2016 EACH OF THE GROUNDS AND / OR SUB - GROUNDS OF THE APPEAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO THE OTHERS. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. DISPUTE RESOLUTION PANEL ('DRP') ERRED IN UPHOLDING THE ACTION OF THE LD. ASSESSING OFFICER ('AO') / LD. TRANSFER PRICING OFFICER ('TPO') IN CONFIRMING THE ADDITION OF RS.2,05,87,179 / - TO THE INCOME OF THE APPELLANT BY HOLDING THAT ITS INTERNATIONAL TRANSACTIONS PERTAINING TO THE PROVISION OF CONTRACT MANUFACTURING SERVICES DO NOT SATISFY THE ARM'S LEN GTH PRINCIPLE ENVISAGED UNDER THE INCOME TAX ACT,1961 ('THE ACT'). 2. IN DOING SO, THE HON'BLE DRP/ LD. AO/TPO GROSSLY ERRED IN: 2.1. DISREGARDING THE ARM'S LENGTH PRICE ('ALP') AND THE METHODICAL BENCHMARKING PROCESS CARRIED OUT BY THE APPELLANT IN THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME - TAX RULES, 1962 ('THE RULES'); 2.2. NOT INCLUDING TWO COMPARABLES / SEGMENTS I.E. SMRUTHI ORGANICS LIMITED AND NATURAL CAPSULES LIMI TED - FORMULATION SEGMENT SELECTED BY THE APPELLANT IN ITS TP STUDY ON THE GROUND THAT THEY ARE FUNCTIONALLY NOT COMPARABLE TO THE FUNCTIONS PERFORMED BY THE APPELLANT; 2.3. NOT INCLUDING FLAMINGO PHARMACEUTICAL LIMITED SELECTED BY THE APPELLANT IN ITS TP STUDY ON THE GROUND THAT, THE YEAR UNDER CONSIDERATION WAS NOT ROUTINE YEAR FOR THE COMPANY AND HENCE CANNOT BE TAKEN AS A COMPARABLE COMPANY; AND 2.4. INCLUDING HIKAL LIMITED MERELY ON THE GROUND THAT THE SAID COMPANY WAS SELECTED BY THE APPELLANT IN IT S TP STUDY IN THE EARLIER YEAR WITHOUT UNDERTAKING FAR ANALYSIS OF THE COMPANY; 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO TPO ERRED IN INCORRECTLY COMPUTING THE MARGIN OF THREE COMPARABLE COMPANIES I.E. ANKUR DRUGS & PHARMA LIMITED, GRANULES INDIA LIMITED AND HIKAL LIMITED. 4 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP ERRED IN NOT GRANTING APPROPRIATE ADJUSTMENT TOWARDS WORKING CAPITAL WHILE DETERMINING THE ALP OF THE SAID 3 M/S TEVAPHARM A PVT LTD ITA 1034 /MUM/ 2016 INTERNATIONAL TRANSACTIONS. THE APPE LLANT THEREFORE PRAYS THAT THE AFORESAID ADJUSTMENT BE DELETED. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR WITHDRAW ALL OR ANY OF THE GROUNDS OF APPEAL HEREIN AND TO SUBMIT SUCH STATEMENTS, DOCUMENTS AND PAPERS AS MAY BE CONSIDERED NECESSARY EITHE R AT OR BEFORE THE APPEAL HEARING . 2 . THE SOLE DISPUTE WHICH HAS BEEN RAISED BEFORE US BY THE LD. COUNSEL IS WITH REGARD TO EXCLUSION OF ONE COMPARABLE , BY THE TPO, M/S FLIMANGO F. LTD WHICH WAS SELECTED BY ASSESSEE IN ITS TP STUDY REPORT . 3. B RIEF FACT S QUA THE ISSUE INVOLVED ARE THAT, TEVA GROUP OF COMPANY ARE ENGAGED IN THE BUSINESS OF CONTRACT RESEARCH AND TESTING SERVICES, MANUFACTURING AND DISTRIBUTION OF GENERIC PHARMACEUTICAL PRODUCTS. THE ASSESSEE IS AN INDIRECT SUBSIDIARY OF TEV A GROUP AND IS A CAPTIVE SERVICE PROVIDER MAINLY ENGAGED IN THE BUSINESS OF PROVIDING CONTRACT RESEARCH SERVICES, TESTING SERVICES, BUSINESS DEVELOPMENT AND PROCUREMENT SERVICES, CONTRACT MANUFACTURING SERVICES AND PHARMACOVIGILANCE AND RELATED SUPPORT SERVICES TO ITS AE S. FOR THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAS REPORTED FOLLOWING INTERNATIONAL TRANSACTIONS: - S.NO. NATURE OF TRANSACTION AMOUNT(RS.) METHOD 1 CONTRACT MANUFACTURING 32,80,96,955 TNMM 2 BUSINESS DEVELOPMENT AND PROCURE - M ENT SUPPORT SERVICES 1,98,63,489 TNMM 3 CONTRACT RESEARCH AND RELATED SUPPORT SERVICES 36,95,39,063 TNMM 4 PHARMACOVIGILANCE AND RELATED SUPPORT SERVICES 41,38,942 TNMM 5 PAYMENT OF INTEREST ON ECB LOAN 77,21,059 CUP 6 REIMBURSEMENT OF EXPENSES (RECEIVED) 76,51,140 CUP 4 M/S TEVAPHARM A PVT LTD ITA 1034 /MUM/ 2016 AS PER THE TP STUDY REPORT, THE SEGMENTAL FINANCIAL INFORMATION IN RESPECT OF ITS INTERNATIONAL TRANSACTIONS WAS GIVEN AS UNDER: - PARTICULARS CONTRACT MANUFACT - URING BUSINESS DEVELOPMENT & PROCUREMENT SERVICES (RS) CONTRACT RESEA RCH & TESTING SERVICES(RS) PHARMACO VIGILANCE RELATED SUPPORT SERVICES(RS ) ) SALES/OPERATING INCOME 32,80,96,955 1,98,63,489 36,95,39,063 41,38,942 LESS: OPERATING COST 28,69,35,594 1,75,64,794 31,59,18,443 36,42,019 OPERATING PROFIT 4,11 ,61,361 22,98,695 5,36,20,620 4,96,923 OP/OC 14.35% 13.09% 16.97% 13.64% AS TP O ANALYZED AND BENCHMARKED THE DIRECT MANUFACTURING SEGMENT WHICH WAS REPORTED BY THE ASSESSEE AT RS.32,80,96,955/ - , AS AGAINST THIS, THE TPO HAS DETERMINED ALP AT RS. 34,86,8 4,134/ - AND THEREBY HAS MADE THE ADJUSTMENT OF RS.205,87,179/ - . SO FAR AS THE MOST APPROPRIATE METHOD ( MAM ) FOR BENCHMARKING THE TRANSACTION, TNMM ADOPTED BY THE ASSESSEE HAS BEEN ACCEPTED BY THE TPO ALSO ALONGWITH THE PLI WHICH IS OPERATING PROFIT/ OPERAT ING COST. THE ASSESSEE IN ITS TP STUDY REPORT HAD IDENTIFIED 7 COMPANIES AS COMPARABLES WITH THE ARITHMETIC MEAN OF 15.85% , WHICH WERE AS UNDER: - SR. NO. NAME OF COMPANY OP/OC (%) 1 ANKUR DRUGS & PHARMA LTD 9.05 2 GRANULES INDIA LTD 9.66 3 FLAMINGO PHAR MACEUTICAL LTD. 10.56 4 SHARON BIO - MEDICINE LTD. 11.47 5 SMRUTHI ORGANICS LTD. 11.50 6 ELDER PROJECTS LTD 45.36 7 NATURAL CAPSULES LTD. 13.21 ARITHMETIC MEAN 15.83% S INCE ASSESSEE S OP/OC WAS 14.35%, THEREFORE, IT WAS REPORTED BY THE ASSESSEE THAT V IS - - VIS THE COMPARABLES THE TRANSACTION UNDER THIS SEGMENT WERE AT ARMS LENGTH. 5 M/S TEVAPHARM A PVT LTD ITA 1034 /MUM/ 2016 4. THE TPO HOWEVER DID NOT ACCEPT THE ENTIRE BENCHMARKING ANALYSIS UNDERTAKEN BY THE ASSESSEE AND PROPOSED TO REJECT THE THREE COMPARABLES NAMELY: - SHARON BIO - MEDICINE LTD ; SMRUTHI ORGANICS LTD ; NATURAL CAPSULES LTD . IN THE PROCEEDINGS BEFORE THE DRP, TWO COMPARABLE SOUGHT TO BE EXCLUDE BY THE TPO WERE UPHELD, THAT IS, SMRUTHI ORGANICS LTD. AND NATURAL CAPSULES LTD. , H OWEVER, DRP ACCEPTED THE ASSESSEES PLEA FOR INCLUSION O F SHARON BIO - MEDICINE LTD AND REJECTED THE TPOS VERSION . THE TPO FURTHER NOTED THAT, THE ASSESSEE HAD ADDED ANOTHER COMPARABLE COMPANY, THAT IS, FLAMINGO PHARMACEUTICAL LTD. (F P L) BUT IN SUPPORT HAS NOT SUBMITTED ANY ANNUAL REPORT OF THIS COMPANY FOR TEST ING AND ANALYZING THE COMPARABILITY OF THE SAID COMPANY. ACCORDINGLY, HE EXCLUDED THE SAID COMPARABLE. THUS, IN NUTSHELL, THE REASONS FOR EXCLUSION OF THE THREE COMPARABLES AS MADE BY THE TPO AS WELL AS BY THE DRP ARE AS UNDER: 6 M/S TEVAPHARM A PVT LTD ITA 1034 /MUM/ 2016 BESIDES THIS, THE TPO HAS ALSO INTRODUCED ONE MORE COMPANY , NAMELY, HIKAL LTD. HAVING PROFIT MARGIN OF 30.55% ON THE GROUND THAT ASSESSEE HAS ACCEPTED IT AS COMPARABLE IN THE AY 2010 - 11 . 5. BEFORE US, THE LD. COUNSEL MR. DHANESH BAFNA, AFTER EXPLAINING THE ENTIRE FACTS, GAVE HIS S UBMISSIONS WITH REGARD TO EXCLUSION OF ALL THE THREE COMPARABLES BY THE TPO AS WELL AS INCLUSION OF ONE COMPARABLE COMPANY, THAT IS, M/S HIKAL LTD. HOWEVER STRESSING ON THE FLAMINGO PHARMACEUTICAL LTD , HE SUBMITTED THAT THE TPO HAS REJECTED SAME ON THE GRO UND THAT THE ASSESSEE WAS FAILED TO SUBMIT THE ANNUAL REPORT OF THE SAID COMPANY. HE POINTED OUT THAT THE ANNUAL REPORT OF F P L WAS VERY WELL SUBMITTED BEFORE THE TPO AND THIS ASPECT WAS SPECIFICALLY OBJECTED BEFOR E THE DRP . IT WAS ALSO SUBMITTED THAT THIS COMPANY WAS ENGAGED INTO THE CONTRACT MANUFACTURING AND FUNCTIONALLY IT WAS A VERY GOOD COMPARABLE. THE DRP HAS UPHELD THE REJECTION MERELY ON THE GROUND THAT THE YEAR UNDER CONSIDERATION WAS NOT THE ROUTINE OPERATION FOR THE COMPANY AND SUCH OBSERVATION I S BASED ON THE A NNUAL REPORT OF THE COMPAN Y WHICH MENTIONS THAT : O N THE DOMESTIC BUSINESS FRONT, THE PROGRESS WAS STUNTED DUE TO ABNORMAL ATTRITION OF FIELD AND MANAGEMENT STAFF.' IN THIS REGARD, HE SUBMIT ED THAT, IF YEAR - ON - YEAR PROFITABILITY ANALYSIS OF TH IS COMPANY IS TAKEN INTO CONSIDERATION IT WILL INDICATE THAT THE COMPANY HAS BEEN CONSISTENTLY GROWING IN TERMS OF TURNOVER AS WELL AS THE PROFIT MARGINS. THE E ARNINGS B EFORE THE I NTEREST AND D EPRECIATION, PROFIT BEFORE T AX AND PROFIT A FTER T AX HAVE I MPROVED DURING THE CURRENT YEAR VIS - - VIS THE EARLIER YEARS. IN FACT D URING THE YEAR UNDER CONSIDERATION, THE COMPANY HAS CONTINUED TO EARN A ROBUST 7 M/S TEVAPHARM A PVT LTD ITA 1034 /MUM/ 2016 MARGIN ( P BT) AT 6.81% AS COMPARED TO 5.27% IN THE IMMEDIATELY PRECEDING YEAR. F URTHER, THE STAFF EXPENSES H AVE ONLY MARGINALLY DECREASED FROM 8.45% TO 8.14% OF THE TOTAL COST AS COMPARED TO THE EARLIER YEAR , THEREFORE THIS CANNOT BE THE FACTOR FOR TREATING IT ABNORMAL PHENOMENON . ALSO, THE KEY MANAGEMENT PERSONNEL CONTINUE TO REMAIN WITH THEIR DUE TERM IN THE Y EAR UNDER CONSIDERATION. IF ALL THESE ASPECTS ARE TAKEN INTO CONSIDERATION , THE N THE COMPANY HAS CONTINUED TO PERFORM AND MAINTAIN ITS PROFITABILITY OVER THE YEARS . ACCORDINGLY, HE SUBMITTED THAT, FLAMINGO PHARMACEUTICALS WHICH IS A COMPANY ENGAGED IN CONT RACT MANUFACTURING OF PHARMACEUTICAL PRODUCTS SHOULD BE INCLUDED AS A COMPARABLE COMPANY TO THE ASSESSEE. LASTLY , HE SUBMITTED THAT, IF F P L IS CONSIDERED TO BE A COMPARABLE THEN ITS ARITHMETIC MEAN WOULD FALL WITH IN 5% AND OTHER COMPARABLES MAY NOT BE RE QUIRED TO BE ADJUDICATED. 6. ON THIS ASPECT, WE HAVE HEARD THE LD. CIT DR ALSO WHO STRONGLY RELIED UPON THE ORDER OF THE DRP AND SUBMITTED THAT FOR BETTER APPRECIATION OF THE ENTIRE MATTER QUA THIS COMPARABLE , MATTER SHOULD BE RESTORED BACK TO THE FI LE OF THE TPO WHO CAN EXAMINE ITS ACCOUNTS AND SEE WHETHER THERE WAS ANY REASONS OR FACTORS DURING THE YEAR LEADING TO LO W MARGIN. 7 . WE HAVE CONSIDERED THE RELEVANT FACTS OF THE CASE AS WELL AS ARGUMENTS PLACED BY THE PARTIES BEFORE US. WITHOUT GOING IN TO THE OTHER COMPARABLES, WE FIND THAT SO FAR AS INCLUSION OF FLAMINGO PHARMACEUTICALS LTD. IS CONCERNED, THE REASON GIVEN BY THE TPO WAS THAT, THE ASSESSEE HAS FAILED TO SUBMIT THE ANNUAL REPORT OF THE SAID COMPANY, WHEREAS THE DRP HAS 8 M/S TEVAPHARM A PVT LTD ITA 1034 /MUM/ 2016 UPHELD THE SAID EX C LUSION ON THE GROUND IT WAS NOT A ROUTINE YEAR OF THE COMPANY AS THE PROGRESS OF THE COMPANY WAS SHUNTED DUE TO ABNORMAL ATTRITION OF THE FIELD AND MANAGEMENT STAFF. HOWEVER, SO FAR AS PROFITABILITY DURING THE YEAR IS CONCERNED, SAME HAS NOT COMMENTED UPON BY THE DRP. AS SUBMITTED BY THE LD. COUNSEL WHICH IS ALSO CORROBORATED BY THE RELEVANT DOCUMENTS PLACED AT PAPER BOOK AT PAGES 396 AND 397, WE FIND THE MARGIN OF THE SAID COMPANY WAS HIGHER AS COMPARED TO THE EARLIER YEAR AND STAFF EXPENSES H AS DECREASED MARGINALLY FROM 8.45% TO 8.14% OF THE TOTAL COST AS COMPARED TO THE EARLIER YEAR , HENCE THIS CANNOT BE THE FACTOR TO HOLD AS ABNORMAL REASON . FURTHER, THE KEY MANAGEMENT PERSONNEL CONTINUED TO REMAIN THEIR TERM FOR THE YEAR UNDER CONSIDERATION. THUS, PICKI NG UP ONE LINE FROM THE ANNUAL REPORT CANNOT BE THE GROUND FOR REJECTING THE COMPARABLE. IT HAS NOT BEEN DISPUTED THAT SO FAR AS FUNCTIONALITY COMPARABILITY IS CONCERNED AND OTHER FAR ANALYSIS, THERE IS NO DISPUTE THAT IT IS A GOOD COMPARABLE . THIS COMPANY IS ALSO INTO MANUFACTUR ING OF PHARMACEUTICAL PRODUCTS ONLY, THEREFORE, WE HOLD THAT THIS COMPANY W AS WRONGLY EXCLUDED BY TPO AS WELL AS BY THE DRP . ACCORDINGLY, WE DIRECT THE TPO TO ACCEPT THIS COMPARABLE IN THE COMPARABILITY ANALYSIS. 8 . AS SUBMITTED BY THE LD. COUNSEL, IF THIS COMPARABLE IS INCLUDED THEN ITS MARGIN WILL FALL WITHIN 5% OF ARMS LENGTH PRICE RANGE AND, THEREFORE, THERE WOULD BE NO REQUIREMENT FOR ADJUDICATING THE OTHER COMPARABLES . ACCORDINGLY, WE ARE NOT ADJUDICATING OTHER COMPARABLES A ND ARE KEPT OPEN. WE DIRECT THE TPO/AO TO COMPUTE THE ALP AFTER CONSIDERING THE FINAL LIST OF COMPARABLES. WITH THESE OBSERVATIONS, THE GROUNDS 9 M/S TEVAPHARM A PVT LTD ITA 1034 /MUM/ 2016 RAISED BY THE ASSESSEE ARE TREATED AS ALLOWED IN THE MANNER INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN CO URT ON 30 TH AUGUST, 2016 . SD/ - SD/ - ( ) ( ) ( R C SHARMA ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DA TE: 30 TH AUGUST, 2016. / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3 ) THE DRP - 2 / CIT CONCERNED___ , MUMBAI. 4 ) THE CIT - 15/ CONCERNED___ , MUMBAI 5 ) , , / THE D.R. K BENCH, MUMBAI. 6 ) \ COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS