Novo Nordisk India Private Limited, V. DCIT, Bangalore

ITA 146/BANG/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90064 (ITAT-BANGALORE)
• Duration Of Justice: 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 06-07-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 12-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R RAVICHANDRAN CITIII
• Keywords: Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Retrospective amendment; Additional evidence; Non-deduction of tax; Corroborative evidences
• Section: 92C; 92D; 92B; 92F; 92A; 92E; 201(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER IT(TP)A NO.146/BANG/2015 ASSESSMENT YEAR : 2010-11 M/S.NOVO NORDISK INDIA PVT. LTD. PLOT NO.32, 47-50, EPIP AREA, WHITEFIELD, BANGALORE 560 066. PAN: AAACN 7425M VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5(1)(2), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI NAGESHWAR RAO, ADVOCATE RESPONDENT BY : SHRI R. RAVICHANDRAN, CIT-III (DR) DATE OF HEARING : 06.07.2015 DATE OF PRONOUNCEMENT : 30.07.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER IT(TP)A NO.146/BANG/15 IS AN APPEAL BY THE ASSESS EE AGAINST THE ORDER DATED 9.01.2015 OF DCIT, 5(1)(2), BANGALORE, RELATING TO A.Y. 2008-09 PASSED U/S.143(3) READ WITH SEC.144C OF THE INCOME TAX ACT, 1961 (ACT). IT(TP)A NO.146/BANG/2015 PAGE 2 OF 52 2. THE ASSESSEE HAS RAISED AS MANY AS 50 GROUNDS O F APPEAL. IT SHALL BE CONVENIENT TO FIRST TAKE UP FOR CONSIDERATION GR OUNDS 39 TO 47 AND THE ADDITIONAL GROUND RAISED BY THE ASSESSEE. THE FACT S MATERIAL FOR ADJUDICATION OF THE AFORESAID GROUNDS OF APPEAL IS AS FOLLOWS. 3. NOVO NORDISK INDIA PRIVATE LIMITED, HEREINAFTER REFERRED TO AS THE ASSESSEE, IS A COMPANY INCORPORATED UNDER THE COMP ANIES ACT, 1956 IN APRIL, 1994. IT IS A SUBSIDIARY OF NOVO INVESTMEN TS PTE. LTD., SINGAPORE AND NOVO NORDISK REGION INTERNATIONAL OPERATIONS A /S DENMARK. NOVO NORDISK A/S. DENMARK, HEREINAFTER REFERRED TO AS NOVO NORDISK A/S IS HOLDING COMPANY OF THE HOLDING COMPANIES OF THE ASS ESSEE. THEREFORE THE ASSESSEE AND NOVO NORDISK A/S ARE ASSOCIATED ENTERP RISES (AE) AS DEFINED IN SEC.92A OF THE ACT. THE BUSINESS OF THE ASSESSEE IS TRADING IN HIGH PURITY INSULIN FORMULATION, INSULIN DELIVERY S YSTEM AND OTHER SPECIFIED PHARMACEUTICAL PRODUCTS. 4. THERE WERE SEVERAL INTERNATIONAL TRANSACTIONS B ETWEEN THE ASSESSEE AND NOVO NORDISK A/S. THESE TRANSACTIONS HAVE TO ADHERE TO THE ARMS LENGTH PRINCIPLE EMBODIED IN THE INDIAN T RANSFER PRICING REGULATIONS CONTAINED IN SECTIONS 92, 92CA TO 92F O F THE INCOME TAX ACT, 1961 (ACT) READ WITH RULES 10A TO 10E OF THE INCOME TAX RULES, 1961 (RULES). THE ASSESSEE REPORTED THE FOLLOWING INTER NATIONAL TRANSACTION WITH NOVO NORDISK A/S IN THE REPORT FILED U/S.92E OF THE ACT IN FORM NO. 3CEB:- IT(TP)A NO.146/BANG/2015 PAGE 3 OF 52 SL. NO. DESCRIPTION AMOUNT PAID RS. AMOUNT RECEIVED RS. 1. PURCHASE OF EXCIPIENTS 148,90,87,821 2. PURCHASE OF FINISHED GOODS 236,26,75,713 3. QUALITY TESTING FEE 28,76,448 4. RECEIPT FOR ADMIN SERVICES 22,11,19,930 5. RECEIPT FOR ITES 14,06,28,263 6. SUBVENTION FEE 70,00,00,000 7. REIMBURSEMENT OF EXPENSES 35,38,586 6,22,65,806 8. PAYMENT OF SOFTWARE LICENSE FEE. 1,72,68,647 9. PAYMENT TOWARDS CROSS CHARGE OF EMPLOYEE COMPENSATION. 41,43,087 10. PAYMENT OF EDP CHARGES 35,52,218 5. AS FAR AS GROUNDS NO.39 TO 47, THE SAME RELAT ES TO THE INTERNATIONAL TRANSACTION OF PURCHASE OF EXCIPIENTS OF RS.148,90,87,821AND PURCHASE OF FINISHED GOODS OF RS.148,90,87,821, PAY MENT OF SUBVENTION FEE OF RS.70,00,00,000 AND QUALITY TESTING FEE OF R S.28,76,448/-. THE TRANSACTION IN RESPECT OF PURCHASE OF EXCIPIENTS WA S ENTERED INTO BETWEEN NOVO NORDISK A/S. AND TORRENT PHARMACEUTICALS LTD. (TPL). THE TRANSACTION OF PURCHASE OF FINISHED GOODS IS BETWEE N THE ASSESSEE AND TPL. SUBVENTION FEE WAS RECEIVED BY THE ASSESSEE F ROM NOVO NORDISK A/S. TESTING FEE WAS PAID BY THE ASSESSEE TO NOVO NORDISK. THERE IS NO DISPUTE THAT THE ASSESSEE AND NOVO NORDISK A/S ARE ASSOCIATED ENTERPRISES WITHIN THE MEANING OF THE SAID TERM AS DEFINED IN SEC.92A OF THE ACT. 6. THE ASSESSEE SUBMITTED A TRANSFER PRICING STUDY (TP STUDY) ALONG WITH THE REPORT REQUIRED TO BE FILED IN TERMS OF SE C.92E OF THE ACT IN FORM IT(TP)A NO.146/BANG/2015 PAGE 4 OF 52 NO. 3CEB. IN THE TP STUDY THE ASSESSEE TOOK THE ST AND THAT THE TRANSACTION OF PURCHASE OF EXCIPIENTS, PURCHASE OF FINISHED GOODS, PAYMENT FOR QUALITY TESTING AND RECEIPT OF SUBVENTION FEE B ETWEEN THE ASSESSEE AND NOVO NORDISK A/S ARE CLOSELY LINKED TO THE DISTRIBU TION FUNCTION (PURCHASE OF FINISHED PRODUCTS) AND HENCE WAS BEING EVALUATED BY ADOPTING A COMBINED TRANSACTION APPROACH UNDER THE NOMENCLATURE DISTRI BUTION SEGMENT. ACCORDING TO THE ASSESSEE IN ORDER TO ASSESS, WHETH ER INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH, A TRANSFER PRICIN G METHOD MAY BE APPLIED TO EACH OF THE TRANSACTIONS SEPARATELY OR TO ALL SU CH TRANSACTIONS A SINGLE GROUP OF TRANSACTIONS. ACCORDING TO THE ASSESSEE IN ITS CASE, GIVEN THE RANGE OF TRANSACTIONS INVOLVED IT WOULD NOT BE APPR OPRIATE TO APPLY THE ARMS LENGTH METHOD ON A TRANSACTION-BY-TRANSACTION BASIS. HENCE INTERNATIONAL TRANSACTIONS WERE AGGREGATED FOR BENC HMARKING. ACCORDING TO THE ASSESSEE, THE RULES [RULE 10A(D) OF THE RULES] PROVIDES THAT CLOSELY LINKED TRANSACTIONS CAN BE BENCHMARKED ON AN AGGREG ATED BASIS. THE ASSESSEE HAD CHOSEN TRANSACTION NET MARGIN METHOD ( TNMM) AS THE MOST APPROPRIATE METHOD (MAM) FOR DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF THE COMBINED TRANSACTIONS REFER RED TO ABOVE WHICH WAS TERMED AS DISTRIBUTION SEGMENT BY THE ASSESSEE. 7. THE DISTRIBUTION SEGMENT IN THE PRESENT AY 2010 -11 IS SIMILAR TO THE DISTRIBUTION SEGMENT AS EXPLAINED BY THE ASSESSEE I N ITS TP STUDY FOR AY 2009-10. THE DISTRIBUTION SEGMENT WAS DIVIDED INTO TWO CATEGORIES :- (1) SALE OF PRODUCTS PURCHASED LOCALLY: IT(TP)A NO.146/BANG/2015 PAGE 5 OF 52 (2) DIRECT IMPORT AND SALE PF PRODUCTS FROM NOVO NORDIS K A/S AND NOVO NORDISK HEALTHCARE AG. 8. THE TWO CATEGORIES AS EXPLAINED BY THE ASSESSEE IN ITS TP STUDY FOR AY 2009-10 WAS AS FOLLOWS:- 4.3.26 SALE OF PRODUCTS PURCHASED LOCALLY : NOVO NORDISK INDIA SELLS HUMAN MONOCOMPONENT AND PURIFIED INSULI N IN 40 IU VIALS PURCHASED FROM TORRENT PHARMACEUTICALS LIMITE D, A COMPANY FORMED AND REGISTERED UNDER THE LAWS OF IND IA. THESE INSULIN PRODUCTS HAVE BEEN MANUFACTURED BY TORRENT FROM CRYSTALS IMPORTED FROM NOVO NORDISK A/S. THIS ARRANGEMENT MAKES ALL THE THREE PARTIES NAMELY NOVO NORDISK A/S , NOVO NORDISK INDIA AND TORRENT, AS ASSOCIATED ENTERPRISE S AND SINCE ONE OF THE PARTIES [I.E. NOVO NORDISK A/S] IS A NON- RESIDENT, IT WOULD AMOUNT TO AN INTERNATIONAL TRANS ACTION THAT NEEDS TO COMPLY WITH THE INDIAN TRANSFER PRICING REGULATIONS. 4.3.27 NOVO NORDISK A/S HAS, VIDE THE KNOW-HOW LICE NSE AGREEMENT DATED OCTOBER 04, 1999 AND AS AMENDED FRO M TIME TO TIME AND EXTENDED VIDE THE EXTENSION AGREEMENT, GRA NTED NOVO NORDISK INDIA THE RIGHT AND LICENSE TO USE AND OR S UB-LICENSE THE USE OF ITS KNOW-HOW TO MANUFACTURE THE PRODUCTS AT NOVO NORDISK INDIAS FACILITIES OR THOSE OF THE SUB-LICE NSEE WHERE THE SAID KNOW-HOW IS USED FOR THE MANUFACTURE OF THE SA ID PRODUCTS. SIMILARLY, NOVO NORDISK A/S HAS, VIDE THE TRADE MAR K MASTER LICENSE AGREEMENT AND EXTENSIONS THEREAFTER, GRANTE D TO NOVO NORDISK INDIA THE MASTER LICENSE TO USE AND OR SUB- LICENSE THE USE OF THE TRADE MARKS. THESE TRADE MARKS MAY BE USED O NLY TO THOSE INSULIN FORMULATIONS, WHICH ARE MANUFACTURED FROM T HE INSULIN CRYSTALS, AND USING THE KNOW-HOW SUPPLIED BY NOVO N ORDISK A/S. THE KNOW-HOW AND TRADEMARKS HAVE BEEN LICENSED BY N OVO NORDISK A/S TO NOVO NORDISK INDIA FREE OF CHARGE. 4.3.28 NOVO NORDISK A/S HAS ENTERED INTO A INS ULIN CRYSTALS AND EXCEPIENTS BULK SUPPLY AGREEMENT DATED JANUARY 04, 2000, WHICH WERE AMENDED FROM TIME TO TIME VIDE EXTENSION AGREEMENT WITH TORRENT. AS PER THE ABOVE-MENTIONED INSULIN CR YSTALS AND EXCEPIENTS BULK SUPPLY AGREEMENT, TORRENT SHALL PUR CHASE THE AGREED QUANTITY OF INSULIN CRYSTALS AND EXCEPIENTS ONLY FROM NOVO IT(TP)A NO.146/BANG/2015 PAGE 6 OF 52 NORDISK A/S. FURTHER THE CRYSTALS AND EXCEPIENTS SH ALL BE USED SOLELY FOR THE MANUFACTURE OF HUMAN MONOCOMPONENT A ND HIGHLY PURIFIED INSULIN IN 40 IU VIALS WITH THE KNOW-HOW A ND TRADE MARK SUB-LICENSED BY NOVO NORDISK INDIA. ADDITIONALLY, T HE INSULIN SHALL BE SOLD ONLY TO NOVO NORDISK INDIA. 4.3.29 IN THE LIGHT OF THE ABOVE, NOVO NORDISK INDIA HAS ENTERED INTO A INSULIN FORMULATIONS SUPPLY AGREEMEN T DATED JANUARY 04, 2000, WHICH WERE AMENDED FROM TIME TO T IME VIDE EXTENSION AGREEMENT WITH TORRENT, WHEREBY IT AGREES TO BUY THE CONFIRMED QUANTITY OF INSULIN, PROVIDED THE FORMULA TIONS ARE MANUFACTURED STRICTLY IN ACCORDANCE WITH THE KNOW-H OW AND MANUFACTURING STANDARD. IN ORDER TO ENSURE THAT THE INSULIN PRODUCED BY TORRENT MEETS WITH THE QUALITY STANDARD S, NOVO NORDISK INDIA HAS ENTERED INTO AN AGREEMENT FOR QUA LITY CONTROL TESTING DATED JANUARY 01, 1998 WITH NOVO NORDISK A/ S. 4.3.30 NOVO NORDISK A/S HAS ITS OWN SET OF STAND ARD OPERATING PROCEDURES AND MEASURES TO CONTROL QUALITY. REPRESE NTATIVES OF NOVO NORDISK INDIA AND NOVO NORDISK A/S, JOINTLY OR SEVERALLY UNDERTAKE QUALITY CHECKS ON THE MANUFACTURING PROCE SS BY TORRENT. THESE CHECKS ARE UNDERTAKEN ALMOST QUARTER LY. QUALITY AUDITS ARE UNDERTAKEN ONCE IN TWO YEARS. THE DRUGS NEED TO BE MAINTAINED AT PRESCRIBED CONDITIONS OF TEMPERATURE (COLD STORAGE). NOVO NORDISK INDIA UNDERTAKES QUALITY INSPECTIONS O F THE DISTRIBUTORS, STOCKISTS, WHOLESALERS, ETC. THE ABOV E ARRANGEMENT IS ILLUSTRATED IN FIGURE 3 BELOW. IT(TP)A NO.146/BANG/2015 PAGE 7 OF 52 4.3.31 DIRECT IMPORT AND SALE OF PRODUCTS (BUY-SELL ARRANGEMENT): NOVO NORDISK INDIA SELLS VARIOUS INSULIN FORMULATIONS, GROWTH HORMONES, OTHER DIABETES THERA PY PRODUCTS AND RELATED DEVICES INCLUDING PENFILLS, PENS, NEEDL ES, NORDITROPIN, GLUCAGEN HYPOKIT, NOVOLET, NOVONORM AND ANALOGUES WHICH ARE IMPORTED DIRECTLY FROM NOVO NOR DISK A/S AND NOVO NORDISK HEALTHCARE AG. SOME OF THESE PRODU CTS ARE COVERED UNDER THE DPCO. FOR THIS PURPOSE, NOVO NORD ISK INDIA AND NOVO NORDISK A/S AND NOVO NORDISK HEALTHCARE AG HAVE ENTERED INTO A PRODUCT SUPPLY AGREEMENT DATED OCTOB ER 4, 1999 AND AUGUST 17, 2004 RESPECTIVELY. THE TERM OF THESE DISTRIBUTION AGREEMENTS SHALL CONTINUE UNTIL TERMINATED WITH MUT UAL CONSENT. IN ORDER TO SELL THE ABOVE MENTIONED PRODUCTS IN IN DIA, NOVO NORDISK INDIA HAS ENTERED INTO DISTRIBUTION AGREEME NTS WITH ABBOTT AND MED INDIA. NOVO NORDISK INDIA ALSO INVOI CES THE CUSTOMERS AND BEARS THE CREDIT RISK. 4.3.32 NOVO NORDISK INDIA HAS A TEAM OF MEDICAL REPRESENTATIVES AND OTHER FIELD STAFF WHO MARKET TH E PRODUCTS. NOVO NORDISK INDIA UNDERTAKES VARIOUS PROGRAMS AIME D AT BOTH CUSTOMER SERVICE AND PRODUCT PROMOTION. THESE INITI ATIVES INCLUDE RELATIONSHIP PROGRAMS FOR DOCTORS AND PATIE NTS, EDUCATIONAL MAILERS SPECIFIC TO SUITE THE CUSTOMERS THROUGH A DATABASE MANAGEMENT PROGRAM FOR PATIENTS, ORGANISIN G CLINIC CAMPS, EDUCATIONAL PROGRAMS ETC. NOVO NORDISK INDIA ALSO IT(TP)A NO.146/BANG/2015 PAGE 8 OF 52 COMMISSIONS VARIOUS AGENCIES TO UNDERTAKE MARKET RE SEARCH TO ASSESS THE POTENTIAL BUSINESS DEVELOPMENT OPPORTUNI TIES AND COMPETITORS. TARGET MARKET SEGMENTS ARE IDENTIFIED FOR FURTHER SALES PROMOTION. PRODUCT PROMOTIONS INCLUDE PROVIDI NG VALUE ADDED SERVICES LIKE TECHNICAL UPDATES, CONTINUOUS M EDICAL EDUCATIONAL PROGRAMS, GLOBAL SPONSORSHIP PROGRAMS F OR DOCTORS ETC. 4.3.33 THE MARKETING EXECUTIVES ARE TRAINED AND S CIENTIFICALLY EQUIPPED WITH REGARD TO THE PRODUCT AND DISEASE THR OUGH THE MEDICAL TEAM TO ENABLE THEM TO PROMOTE THE PRODUCT WITH DOCTORS AND PATIENTS. THE TRAINING INCLUDES IMPARTING INFOR MATION ABOUT THE DISEASE AND ITS CONTROL, DRUG THERAPY ETC. THE MEDICAL TEAM HANDLES CUSTOMER COMPLAINT AND UNDERTAKES MARKET RE SEARCH SO AS TO COLLATE DATA AND TO PROVIDE ASSISTANCE TO CUS TOMERS IN COPING WITH THE DISEASE AND ADMINISTERING THE DRUG. THIS D ATA IS USED AS A DATABASE AND FEEDBACK GENERATED ALLOWS TO UNDERSTAN D THE ACCEPTABILITY OF THE PRODUCT AND ITS EFFECTS ON THE PATIENTS. NECESSARY CORRECTIVE ACTIONS ARE TAKEN ESPECIALLY I F SUCH COMPLAINTS ARE RELATED TO QUALITY CONTROL REASONS A ND AMPLE MONITORING IS DONE BOTH BY NOVO NORDISK INDIA AND N OVO NORDISK A/S. THE CUSTOMER COMPLAINTS ARE SENT TO A CENTRAL DATABASE IN DENMARK WHERE AN INTERNATIONAL PRODUCT SAFETY SECTION ANALYSIS THE NATURE OF SUCH COMPLAINTS. (EMPHASIS SUPPLIED) 9. THE ASSESSEES OPERATING PROFIT TO SALES IN THE DISTRIBUTION SEGMENT WAS ARRIVED AT BY THE ASSESSEE AT 2% AFTER TAKING INTO CONSIDERATION THE SALE VALUE OF BOTH THE PRODUCTS IMPORTED FROM NOVO NORDISK A/S. AS WELL AS THE SALE OF INSULIN VIALS IN 40 IU VIALS PURCHASED FROM TPL AND AFTER TAKING INTO ACCOUNT TESTING FEE PAID TO NOVO NORDISK A/S A S COST OF SALES AND CONSIDERING THE SUBVENTION FEE RECEIVED AS INCOME. IT(TP)A NO.146/BANG/2015 PAGE 9 OF 52 10. AS WE HAVE ALREADY SEEN HUMAN MONO COMPONENT A ND HIGHLY PURIFIED INSULIN IN 40 IU VIALS ARE PURCHASED BY TH E ASSESSEE FROM TORRENT PHARMACEUTICALS LIMITED A COMPANY WHICH IS NOT AN A SSOCIATED ENTERPRISE OF THE ASSESSEE. TORRENT PHARMACEUTICALS LIMITED G ETS INSULIN IN CRYSTAL FORM WHICH IS RAW MATERIAL REQUIRED FOR MANUFACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIAL S, WHICH IS IMPORTED FROM NOVO NORDISK A/S. THE ASSESSEE IN ITS TP STUDY ACC EPTS THE FACT THAT THERE IS AN ARRANGEMENT BETWEEN THE ASSESSEE, NOVO NORDIS K A/S AND TORRENT PHARMACEUTICALS LIMITED (TPL) WHEREBY INSULIN IN CR YSTAL FORM WILL BE SUPPLIED BY NOVO NORDISK A/S TO TPL. NOVO NORDISK A/S WILL ALSO GRANT LIMITED LICENSE WITH RIGHT TO SUB-LICENSE TO TPL, K NOW-HOW, TRADE-MARK TO MANUFACTURE AND MARKET WITH NOVO NORDISK A/SS NAME TO THE ASSESSEE TO ENABLE MANUFACTURE OF PURIFIED INSULIN IN 40 IU VIA LS, FOR ULTIMATE SALE BY THE ASSESSEE IN INDIA. 11. THE ASSESSEE IN ITS TP STUDY HAD IDENTIFIED 4 COMPARABLE COMPANIES WHICH WERE IN THE BUSINESS OF DISTRIBUTIO N. THE ARITHMETIC MEAN OF THE OPERATING PROFIT TO SALES OF THE 4 COMPARABL E COMPANIES CHOSEN BY THE ASSESSEE WAS -7.56%. THE TRANSACTION NET MARGI N METHOD (TNMM) WAS CHOSEN AS THE MOST APPROPRIATE METHOD FOR DETER MINING THE ARMS LENGTH PRICE (ALP). THE ASSESSEE THEREFORE CLAIMED THAT ITS MARGIN OF 2% OPERATING PROFIT TO SALES WAS BETTER AND THEREFORE THE INTERNATIONAL TRANSACTION IN THE DISTRIBUTION SEGMENT WAS AT ARM S LENGTH. IT(TP)A NO.146/BANG/2015 PAGE 10 OF 52 12. THE TRANSFER PRICING OFFICER (TPO), TO WHOM TH E QUESTION OF DETERMINATION OF ALP WAS REFERRED TO BY THE AO U/S. 92CA OF THE ACT, EXAMINED THE TRANSACTIONS CLAIMED BY THE ASSESSEE T O BE OF THE NATURE OF DISTRIBUTION SERVICE RENDERED BY THE ASSESSEE TO NO VO NORDISK A/S. THE TPO TOOK NOTE OF THE VARIOUS AGREEMENTS BETWEEN THE ASSESSEE, NOVO NORDISK A/S AND TPL. 13. WE HAVE ALREADY SEEN THAT THE ASSESSEE CATEGOR ISED ITS DISTRIBUTION SEGMENT INTO TWO VIZ., (1) SELLING P RODUCTS PURCHASED LOCALLY AND (2)DIRECT IMPORT AND SALE OF PRODUCTS FROM NOVO NORDISK A/S AND NOVO NORDISK HEALTHCARE AG. THE PRODUCTS PURCHASED LOC ALLY ARE PROCURED BY THE ASSESSEE FROM TPL. THE AGREEMENT BETWEEN THE ASSESSEE AND TPL ON THE ONE HAND AND THE AGREEMENTS BETWEEN TPL AND NOVO NORDISK A/S AND AGREEMENT BETWEEN THE ASSESSEE AND NOVO NORDISK A/S ARE AS FOLLOWS: 1. KNOW-HOW LICENSE AGREEMENT DATED 28.2.1994: NOVO N ORDISK A/S OWNS THE KNOW HOW I.E., FORMULAE, PROCESSES, RECIPE S, PRODUCT SPECIFICATIONS, TECHNICAL AND MANUFACTURING DATA, I NFORMATION, EQUIPMENT, SPECIFICATION, SPECIFICATIONS OF RAW MAT ERIALS AND UTILITIES AND ALL OTHER TECHNICAL INFORMATION AND DATA, WHETH ER PATENTED OR NOT, ACCUMULATED TECHNIQUES, EXPERIENCE AND SKILL OWNED OR POSSESSED OR ACQUIRED (REFERRED TO AS NOVO NORDISK KNOW-HOW) TO PRODUCE NOVO NORDISK PRODUCTS I.E., PRODUCTS LISTED IN APPENDIX- 1 TO THE AGREEMENT, WHICH INCLUDES HUMAN MONOCOMPONENET INSULIN FORMULA TIONS (40 IU/ML IN 10ML VIALS) AND HIGHLY PURIFIED PORCINE IN SULIN FORMULATIONS (40IU/ML IN 10ML VIALS) (REFERRED TO AS NOVO NORDIS K PRODUCTS). UNDER CLAUSE 2.01 OF THE KNOW-HOW LICENSE AGREEMENT DATED 28.2.1994, NOVO NORDISK A/S GRANTS TO THE ASSESSEE THE EXCLUSI VE RIGHT AND LICENSE TO USE OR SUB-LICENSE THE USE OF THE NOVO N ORDISK KNOW-HOW TO MANUFACTURE NOVO NORDISK PRODUCTS AT THE PLANT. PL ANT MEANS THE IT(TP)A NO.146/BANG/2015 PAGE 11 OF 52 MANUFACTURING FACILITIES OF THE ASSESSEE OR THOSE O F ITS SUB-LICENSEE AND OR CONTRACTOR MANUFACTURER(S) AS THE CASE MAY BE WH ERE NOVO NORDISK A/S KNOW HOW IS USED FOR PRODUCTION OF ANY OF NOVO NORDISK PRODUCTS. 2. TRADE MARK MASTER LICENSE AGREMENT-1 DATED 28.2.199 4: NOVO NORDISK A/S OWNS TRADE MARKS ACTRAPID, LENTARD, MON OTARD, INSULATARD, MIXTARD, NOVOPEN, NOVOFINE, GLUCAGON NO VO. BY THE AGREEMENT DATED 28.2.1994, THE ASSESSEE IS GIVEN TH E MASTER LICENSE TO EXCLUSIVELY USE AND OR SUB-LICENSE THE USE OF THE T RADE MARKS OF THE AFORESAID PRODUCTS WHICH ARE LISTED IN APPENDIX-1 T O THE AGREEMENT. 3. INSULIN FORMULATION SUPPLY AGREEMENT DATED 1-3-1994 : BY THIS AGREEMENT TPL UNDERTAKES TO MANUFACTURE AND SUPPLY 40IU INSULIN TO THE ASSESSEE. THERE IS ALSO AN ARRANGEMENT WHEREBY TPL IS GIVEN SUB- LICENSE TO USE NOVO NORDISK A/S KNOW HOW TO MANUFAC TURE NOVO NORDISK PRODUCTS. 4. FACILITY ESTABLISHMENT AGREEMENT DATED 6.8.2005: WH EREBY THE ASSESSEE AND TPL AGREE ABOUT THE FACILITY TO BE CRE ATED BY TPL EXCLUSIVELY FOR INSULIN PRODUCTION IN TERMS OF AGRE EMENT OF ASSESSEE AND TPL FOR INSULIN FORMULATION SUPPLY. 5. AGREEMENT FOR QUALITY CONTROL TESTING DATED 1-4-199 7: THIS AGREEMENT IS BETWEEN NOVO NORDISK A/S AND THE ASSESSEE. NOVO NORDISK A/S UNDER THIS AGREEMENT UNDERTAKES TO DO QUALITY CONTR OL TESTING FOR 40 IU INSULIN MANUFACTURED BY TPL PURSUANT TO FORMULATION S SUPPLY AGREEMENT DATED 1-3-1994. 6. SUBVENTION AGREEMENT DATED 1-1-2003: THIS AGREEMEN T IS BETWEEN NOVO NORDISK A/S AND THE ASSESSEE. THIS AGREEMENT EXPLAINS IN ITS PREAMBLE THAT THE ASSESSEE IS PRIMARILY A DISTRIBUT OR AND MARKETER OF INSULIN AND PHARMACEUTICAL PRODUCTS IN INDIA. NOVO NORDISK A/S WANTS TO SUPPORT THE OPERATIONS OF THE ASSESSEE AS ITS HOLDING COMPANY AND HENCE THE PAYMENT OF SUBVENTION FEE IS BEING MA DE BY THEM TO THE ASSESSEE. THE AGREEMENT PROVIDES THAT THERE IS NO SPECIFIC SERVICES TO BE RENDERED BY THE ASSESSEE FOR THE PAYMENT OF SUBV ENTION FEE. 7. INSULIN CRYSTALS AND EXCIPIENTS BULK SUPPLY AGREEMENT DATED 15-2-1994: THIS AGREEMENT IS BETWE EN NOVO NORDISK A/S AND TPL. THIS AGREEMENT IN ITS PREAMBL E REFERS TO THE FACT THAT TPL WANTS TO ENTER INTO A LONG TERM PURCH ASE AGREEMENT WITH NOVO NORDISK FOR PURCHASE OF HUMAN MONO COMPONENT A ND HIGHLY PURIFIED PORCINE INSULIN CRYSTALS AND EXCEPIENTS, W HICH ARE USED AS RAW IT(TP)A NO.146/BANG/2015 PAGE 12 OF 52 MATERIAL IN MANUFACTURE OF 40 IU INSULIN VIALS. TH E AGREEMENT ALSO REFERS TO THE KNOW-HOW LICENSE AND TRADE MARK LICEN SE BETWEEN THE ASSESSEE AND NOVO NORDISK A/S AND FURTHER REFERS TO INSULATION FORMULATIONS SUPPLY AGREEMENT BETWEEN TPL AND THE A SSESSEE. THESE ARE THE AGREEMENTS SET OUT IN SL.NO.1 TO 3 OF THE V ARIOUS AGREEMENTS. THESE ARE REFERRED TO IN APPENDIX 5 TO THIS AGREEME NT. CLAUSE 2.5 OF THE AGREEMENT PROVIDES THAT APPENDICES TO THE AGREEMENT FORM PART OF THIS AGREEMENT, I.E., INSULIN CRYSTALS AND EXCEPIENTS BU LK SUPPLY AGREEMENT DATED 15.2.1994. THE AGREEMENT PROVIDES FOR SEVERAL RESTRICTIONS WITH REGARD TO MAINTENANCE OF INVENTOR Y BY TPL OF THE RAW MATERIAL IMPORTED. CLAUSE 5.3 OF THE AGREEMENT IS VERY MATERIAL FOR THE PRESENT CASE AND IT READS THUS: 5.3. THE PURCHASER SHALL USE THE INSULIN CRYSTALS AND EXCEPIENTS ONLY FOR THE PURPOSE OF MANUFACTURING HU MAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS (FORMULATIONS) MORE PARTICULARLY SPECIFIED IN APPENDIX4M WITH THE KNOW-HOW TO BE SUPPLIED BY THE SELLER UNDER A SEPARATE TECHNOLOGY AND KNOW-HOW AGREEMENT TO BE ENTERED INTO BETWEEN THE PURCHASER AND NOVO NORDISK (INDIA) PVT. LTD., A COMPANY INCORPORA TED IN ACCORDANCE WITH THE LAWS OF INDIA, HERETO, AND THE FINISHED FORMULATIONS SHALL BE SUPPLIED EXCLUSIVELY TO NOVO NORDISK (INDIA) PVT. LTD. UNDER ANOTHER SEPARA TE PRODUCT SUPPLY AGREEMENT. 14. THE TPO AFTER ANALYZING THE AFORESAID AGREEMENT S AND THE CLAIM OF THE ASSESSEE FOR CHARACTERIZATION OF THE ACTIVITIES IN RELATION TO MANUFACTURE OF HIGHLY PURIFIED INSULIN IN 40 IU VIALS THROUGH T PL AND DISTRIBUTION OF PRODUCTS DIRECTLY IMPORTED FROM NOVO NORDISK A/S AS DISTRIBUTION FUNCTION, WAS OF THE VIEW THAT THE ARRANGEMENTS BETWEEN THE A SSESSEE, NOVO NORDISK A/S AND TORRENT WAS IN FACT A MANUFACTURING ACTIVITY AND CANNOT BE CHARACTERIZED AS DISTRIBUTION OPERATIONS. THE TPO I N HIS TP ORDER CONDUCTED A FRESH COMPARABILITY ANALYSIS BASED ON T HE APPLICATION OF TNMM AND ARRIVED AT A SET OF 15 PURPORTED COMPARABL E COMPANIES WITH A IT(TP)A NO.146/BANG/2015 PAGE 13 OF 52 MEAN OPERATING MARGIN OF 8.26%. ACCORDINGLY, THE T PO, CONSIDERED THE WHOLE DISTRIBUTION SEGMENT OF THE ASSESSEE FOR THE PURPOSE OF COMPUTING THE ARMS LENGTH PRICE (ALP) ADJUSTMENT, WITHOUT CO NSIDERING THE FACT THAT THE ENTIRE SALES ARE OF PURCHASED PRODUCTS (MORE TH AN 61% OF THE TOTAL PURCHASES BEING PRODUCTS IMPORTED FROM GROUP COMPAN IES) AND MADE AN ADJUSTMENT OF INR 352,638,074 [INCLUDING ADDITIONAL ADJUSTMENT COMPUTED ON ACCOUNT OF APPLICATION OF PROFIT SPLIT METHOD ( PSM) AS DISCUSSED BELOW]. 15. THE TPO ALSO APPLIED PROFIT SPLIT METHOD(PSM) OF DETERMINING ALP AS AGAINST TNMM APPLIED BY THE ASSESSEE IN RESPECT OF THE ARRANGEMENT WITH THE TORRENT FOR PURCHASE OF INSULIN. THE TPO ADDITIONALLY ANALYZED PURCHASE OF INSULIN FROM TORRENT SEPARATELY BY APPL YING RESIDUAL PSM BASED ON THE FAR ANALYSIS FOLLOWING THE APPROACH OF THE TPO AND THE LEARNED PANEL IN THE PREVIOUS YEARS ASSESSMENT PRO CEEDINGS/PANELS PROCEEDINGS. THE TPO APPLIED RESIDUAL PSM IN THE RA TIO OF 50:50 BETWEEN NOVO NORDISK A/S AND NOVO NORDISK INDIA AFTER REDUC ING THE MARGINS OF TORRENT OF 9.85% FROM THE VALUE OF INSULIN PRODUCTS . THE TPO COMPUTED THE TOTAL MARGIN IN THE ENTIRE TRANSACTION TO BE 31 % ALLEGING THAT ON AN OVERALL BASIS NOVO NORDISK AS EARNS A MARGIN OF 29% AND NOVO NORDISK INDIAS MARGIN FOR FY 2009-10 IS 2% IN THE TRANSACT ION RELATING TO PURCHASE OF INSULIN PRODUCTS FROM TORRENT AND SOLD BY NOVO N ORDISK INDIA. THEREAFTER, THE TPO, HELD THAT BOTH NOVO NORDISK A/ S AND THE ASSESSEE HAVE AN EQUAL SHARE IN THE OVERALL TRANSACTION, ARR IVED AT AN OPERATING IT(TP)A NO.146/BANG/2015 PAGE 14 OF 52 MARGIN OF 15.5% (50% OF 31%) TO BE EARNED BY THE AS SESSEE BASED ON APPLICATION OF PSM, THEREBY ENHANCED THE OVERALL AD JUSTMENT IN DISTRIBUTION SEGMENT BY INR 58,831,508. 16. THE DRP CONFIRMED THE ORDER OF THE AO. HENCE G ROUNDS NO. 39 TO 47 BY THE ASSESSEE BEFORE THE TRIBUNAL. 17. AT THE TIME OF HEARING IT WAS AGREED BY THE PAR TIES BEFORE US THAT THE FACTS AND CIRCUMSTANCES AND THE BASIS ON WHICH THE ADDITION WAS MADE IN THE PRESENT ASSESSMENT YEAR IS IDENTICAL TO THE FAC TS AND CIRCUMSTANCES AND THE BASIS ON WHICH ADDITION WAS MADE IN AY 09-1 0 AND THIS TRIBUNAL HAS ALREADY CONSIDERED THE SAID ADDITION MADE IN AY 09-10 IN IT(TP) A. NO.122/BANG/2014 ORDER DATED 8.5.2015. THE TRIBUNA L FRAMED THE FOLLOWING ISSUES FOR CONSIDERATION IN THAT YEAR:- 1. WHETHER TRANSACTION BY WHICH INCIPIENT (RAW MAT ERIAL FOR MANUFACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURI FIED INSULIN IN 40 IU VIALS) IS SUPPLIED BY NOVO NORDIS K A/S TO TPL AND THE TRANSACTION BY WHICH THE ASSESSEE ENGAGES T HE SERVICES OF TPL TO CONVERT THE INCIPIENT INTO HUMAN MONO COMPON ENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS AND ULTIMATE LY SELLS THE SAME IN INDIAN MARKET ON BEHALF OF NOVO NORDISK A/S . CAN BE CONSIDERED AS AN INTERNATIONAL TRANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES ATTRACTING THE PROVISIONS OF SEC.92(1) OF THE ACT? 2. IF THE ANSWER TO THE ABOVE QUESTION IS IN THE AF FIRMATIVE, WHETHER THE SAID TRANSACTION CAN BE BENCHMARKED FOR THE PURPOSE OF DETERMINING ALP TOGETHER WITH THE INTERNATIONAL TRANSACTION OF IMPORT OF PRODUCTS DIRECTLY FROM NOVO NORDISK A/S A ND SELLING THE SAME IN INDIA (WHICH IS PURELY DISTRIBUTION FUN CTION PERFORMED BY THE ASSESSEE ON BEHALF OF NOVO NORDISK A/S) ON IT(TP)A NO.146/BANG/2015 PAGE 15 OF 52 THE PLEA THAT BOTH THE TRANSACTIONS ARE INTERLINKED AND THEREFORE HAVE TO BE BENCHMARKED TOGETHER? 3. IF THE ANSWER TO THE ABOVE QUESTION IS IN THE NE GATIVE, HOW THE ALP OF THE TRANSACTIONS HAS TO BE DETERMINED? 4. WHETHER THE DETERMINATION OF ALP AS DIRECTED BY THE DRP IS CORRECT? 18. THE TRIBUNAL DECIDED THE AFORESAID ISSUES AS FO LLOWS: ISSUE NO.1 : WHETHER TRANSACTION BY WHICH INCIPIENT (RAW MATERIA L FOR MANUFACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURI FIED INSULIN IN 40 IU VIALS) IS SUPPLIED BY NOVO NORDIS K A/S TO TPL AND THE TRANSACTION BY WHICH THE ASSESSEE ENGAGES T HE SERVICES OF TPL TO CONVERT THE INCIPIENT INTO HUMAN MONO COMPON ENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS AND ULTIMATE LY SELLS THE SAME IN INDIAN MARKET ON BEHALF OF NOVO NORDISK A/S . CAN BE CONSIDERED AS AN INTERNATIONAL TRANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES ATTRACTING THE PROVISIONS OF SEC.92(1) OF THE ACT? 49. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO SEC.92(1) OF THE ACT WHICH PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAV ING REGARD TO THE ARMS LENGTH PRICE CONTEMPLATES EXISTENCE OF AN INTERNATIONAL TRANSACTION. IT WAS SUBMITTED BY HIM THAT THE ENTI RE TRANSFER PRICING PROVISIONS AS CONTAINED IN CHAPTER X OF THE ACT WILL APPLY ONLY WHEN INCOME ARISES FROM AN INTERNATIONA L TRANSACTION. HE DREW OUR ATTENTION TO THE PROVISI ONS OF SEC.92B OF THE ACT, WHICH LAYS DOWN THE MEANING OF INTERNA TIONAL TRANSACTION. HE BROUGHT TO OUR NOTICE THAT TWO CO NDITIONS ARE REQUIRED TO BE SATISFIED BEFORE A TRANSACTION CAN B E SAID TO BE INTERNATIONAL TRANSACTION VIZ., (I) THERE SHOULD BE A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES AND (II) EITHER OR BOTH OF THEM SHOULD BE NON-RESIDENTS. HE POINTED OUT TH AT AT LEAST ONE PARTY TO A TRANSACTION SHOULD BE A NON-RESIDENT. W ITH THIS BACKGROUND HE SUBMITTED THAT THE TRANSACTION FOR SU PPLY OF INCIPIENT WAS BETWEEN NOVO NORDISK A/S AND TPL. TH OUGH THE IT(TP)A NO.146/BANG/2015 PAGE 16 OF 52 CONDITION THAT AT LEAST ONE OF THE PARTIES TO A TRA NSACTION SHOULD BE A NON-RESIDENT IS SATISFIED IN RESPECT OF THIS TRAN SACTION, TPL IS ADMITTEDLY NOT AN ASSOCIATED ENTERPRISE OF NOVO NOR DISK A/S. AND THEREFORE THE SAID TRANSACTION CANNOT BE REGARDED A S INTERNATIONAL TRANSACTION. AS FAR AS THE TRANSACTION OF MANUFAC TURE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS IS BETWEEN TPL AND THE ASSESSEE, THE LEARNED COUNSEL S UBMITTED THAT BOTH THE ASSESSEE AND TPL ARE RESIDENTS AND TH EREFORE THE CONDITION THAT EITHER OR BOTH THE PARTIES TO A TRAN SACTION SHOULD BE NON-RESIDENT IS NOT SATISFIED AND THEREFORE THE SAI D TRANSACTION CANNOT ALSO BE REGARDED AS INTERNATIONAL TRANSACTI ON. 50. HE THEN DREW OUR ATTENTION TO THE PROVISIONS OF SEC.92B(2) OF THE ACT WHICH PROVIDES A TRANSACTION ENTERED INTO BY AN ENTERPRISE WITH A PERSON OTHER THAN AN ASSOCI ATED ENTERPRISE SHALL, FOR THE PURPOSES OF SUB-SECTION (1), BE DEEM ED TO BE A TRANSACTION ENTERED INTO BETWEEN TWO ASSOCIATED ENT ERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN RELATION TO THE R ELEVANT TRANSACTION BETWEEN SUCH OTHER PERSON AND THE ASSOC IATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTIO N ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSO CIATED ENTERPRISE ONLY EXPANDS THE SCOPE OF THE EXPRESSIO N ASSOCIATED ENTERPRISE AS USED IN SEC.92B(1) OF THE ACT AND IT DOES NOT DISPENSE WITH THE CONDITION THAT EITHER OR BOTH THE PARTIES TO A TRANSACTION SHOULD BE NON-RESIDENT FOR A TRANSACTIO N TO BE TERMED AS INTERNATIONAL TRANSACTION. IN OTHER WORDS ACC ORDING TO HIM SEC.92B(2) CONTROLS ONLY THE DEFINITION OF ASSOCIA TED ENTERPRISES AS LAID DOWN IN SEC.92A OF THE ACT. 51, THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE DECISION OF THE ITAT HYDERABAD BENCH IN THE CASE OF SWARNANDRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT CO . PVT. LTD. VS. DCIT ITA NO.2071/HYD/11 AY 07-08 DATED 31.12.20 12 . IN THE AFORESAID DECISION THE FACTS WERE THAT THE A SSESSEE, SWARNANDHRA IJMII, WAS A JOINT VENTURE COMPANY BETW EEN APHB AND IJM (INDIA). IJM (INDIA) WAS A SUBSIDIARY OF A FOREIGN GROUP OF COMPANIES I.E., IJM (GROUP). DURING THE P REVIOUS YEAR THE ASSESSEE ENTERED INTO A TRANSACTION WITH IJM (I NDIA). THE QUESTION WAS WHETHER THE SAID TRANSACTION WAS A DEE MED INTERNATIONAL TRANSACTION. THE HYDERABAD ITAT HELD : 28.4. SECTION 92B(2) EMBODIES A LEGAL FICTION. IT DEEMS A TRANSACTION TO HAVE BEEN ENTERED INTO BETWE EN IT(TP)A NO.146/BANG/2015 PAGE 17 OF 52 TWO ASSOCIATED ENTERPRISES. THOUGH SECTION 92B(2) I S A PART OF SECTION 92B WITH THE HEADING 'DEFINITION OF INTERNATIONAL TRANSACTION', IT IS TO BE READ AS AN EXTENSION OF SECTION 92A(2) AND NOT AS AN EXTENSION OF SECTION 92B(1). THIS IS FOR THE FOLLOWING REASONS: (A) BOTH SECTION 92A(2) AND 92B(2) DEAL WITH SITUATIONS UNDER WHICH TWO OR MORE PERSONS CONSTITUTE ASSOCIAT ED ENTERPRISES. (B) SECTION 92B(1) DOES NOT DEFINE THE TERM 'ASSOCIATED ENTERPRISE'. IT DEFINES THE TERM 'INTERNATIONAL TRANSACTION'. THIS DEFINITION PROVID ES THAT THERE CAN BE AN INTERNATIONAL TRANSACTION ONLY BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES AND NOT OTHERWISE. THEREFORE RECOURSE TO SECTION 92A AND SECTION 92B(2} IS REQUIRED BEFORE REFERRING TO SECT ION 92B(1}. (C) SECTION 92B(2} ONLY DEEMS CERTAIN TRANSACTION TO BE 'TRANSACTION BETWEEN ASSOCIATED ENTERPRISES' AND NOT AS 'INTERNATIONAL TRANSACTION BETWEEN TWO ENTERPRISES'. 28.5 THERE IS A DIFFERENCE BETWEEN ASSOCIATED ENTERPRISES DEFINED UNDER SECTION 92A AND TRANSACTI ON DEEMED TO BE BETWEEN ASSOCIATED ENTERPRISES UNDER SECTION 92B(2}. UNDER SECTION 92A, TWO OR MORE ENTERPRISES ONCE DETERMINED TO BE ASSOCIATED ENTERPRISES REMAIN SO FOR THE ENTIRE FINANCIAL YEAR . THEIR RELATIONSHIP WILL NOT CHANGE FOR DIFFERENT TRANSACTIONS BETWEEN THEM. THEY WILL REMAIN ASSOCIATED ENTERPRISES EVEN IF THEY DO NOT HAVE ANY TRANSACTION DURING THE PREVIOUS YEAR. ON THE OTHER HAND, A TRANSACTION BETWEEN AN ENTERPRISE AND ANOTH ER PERSON CAN BE DEEMED TO BE TRANSACTION BETWEEN ASSOCIATED UNDER SECTION 92B(2} ONLY IN RESPECT OF TRANSACTIONS SPECIFIED THEREIN AND NOT OTHERWISE. T HIS FICTION IS TRANSACTION SPECIFIC AND DOES NOT APPLY TO ALL TRANSACTIONS BETWEEN THE ENTERPRISE AND PERSON, ON THE BASIS THAT ONE TRANSACTION ATTRACTS SECTION 92B(2}. 28.6 SECTION 92B(2} WAS ENACTED TO HIT AT THOSE CAS ES WHERE TWO ASSOCIATED ENTERPRISES INTEND TO HAVE AN INTERNATIONAL TRANSACTION BUT WANT TO AVOID TRANSFE R PRICING PROVISIONS BY INTERPOSING A THIRD PARTY AS AN INTERMEDIARY. IN SUCH CASES, THE THIRD PARTY INTERMEDIARY WILL GENERALLY NOT BE THE ULTIMATE IT(TP)A NO.146/BANG/2015 PAGE 18 OF 52 CONSUMER OF THE SERVICES OR GOODS. THE INTERMEDIARY WOULD FACILITATE THE TRANSFER OF SERVICES OR GOODS FROM ONE ENTERPRISE TO ITS ASSOCIATE ENTERPRISE WITH NO VALUE ADDITION OR INSIGNIFICANT VALUE ADDITION. THE INTERMEDIARY IS USED TO BREAK A TRANSACTION INTO TW O DIFFERENT PARTS, WHICH PARTS WHEN VIEWED IN ISOLATI ON WOULD NOT SATISFY THE REQUIREMENTS OF SECTION 92A. THE LEGAL FORM OF THE TRANSACTION IN SUCH CIRCUMSTANCES IS IGNORED. THE SUBSTANCE OF THE TRANSACTION IS GIVEN EFFECT TO, NOT BY DISREGARDING THE EXISTENCE OF THE INTERMEDIARY BUT BY DEEMING THE TRANSACTION WITH TH E INTERMEDIARY ITSELF TO BE ONE WITH AN ASSOCIATED ENTERPRISE. 28.7 THE LEGAL FICTION CREATED IN RESPECT OF THE SPECIFIED TRANSACTION CAN BE USED ONLY FOR THE PURP OSE OF EXAMINING WHETHER SUCH TRANSACTION CONSTITUTES A N 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B(1). I N CASE SECTION 92B(1) IS NOT ATTRACTED, THE FICTION UNDER SECTION 92B(2) CEASES TO OPERATE. IN OUR OPINION, T HE IMPUGNED TRANSACTION BETWEEN THE ASSESSEE AND IJMII DOES NOT FALL UNDER SECTION 92B(2). THIS IS FOR THE FOLLOWING REASONS. (A) BOTH THE ASSESSEE AND IJMII ARE RESIDENTS OF I NDIA FOR TAX PURPOSES. THEY PAY THEIR TAXES IN INDIA. TO FAL L UNDER 92B(1), THE INTERNATIONAL TRANSACTION HAS TO BE BETWEEN ASSOCIATED ENTERPRISES, AT LEAST ONE OF WHO M IS A NON-RESIDENT. AS BOTH THE PARTIES ARE RESIDENTS, THE TRANSACTION BETWEEN THE ASSESSEE AND IJMII DO NOT CONSTITUTE AN INTERNATIONAL TRANSACTION. THUS THE B ASIC PREMISE FOR INVOKING THE DEEMING FICTION UNDER SECT ION 92B(2) DOES NOT ARISE. (B) THE TRANSACTION IN QUESTION DID NOT INVOLVE TR ANSFER OF GOODS OR SERVICES FROM THE ASSESSEE TO IJM GROUP OR TO ANY OTHER NON-RESIDENT ENTERPRISE, EITHER DIRECTLY OR INDIRECTLY, OR BY USING IJMII AS AN INTERMEDIARY. T HE TRANSACTION IN QUESTION INVOLVED DIRECT RENDERING O F SERVICES BY IJMII TO THE ASSESSEE. (C) THE APHB CAME INTO EXISTENCE UNDER THE A.P. HOUSING BOARD ACT, 1956. IT PERFORMS GOVERNMENTAL IT(TP)A NO.146/BANG/2015 PAGE 19 OF 52 FUNCTIONS. ITS POLICIES ARE DIRECTLY CONTROLLED BY THE ANDHRA PRADESH GOVERNMENT. IN VIEW OF THE ACTIVE PARTICIPATION OF THE GOVERNMENT OF AP IN THE FUNCTIONING OF THE ASSESSEE, IT CANNOT BE SAID THAT IJM GROUP WOULD INFLUENCE THE ASSESSEE EITHER IN ENTERI NG INTO CONTRACT WITH IJMII OR IN DETERMINING THE TERM S AND CONDITIONS THERETO. A. THE TRANSACTIONS BETWEEN THE ASSESSEE AND IJMII FALL UNDER ITEM 4 ABOVE. CONSEQUENTLY, THE TRANSACTION BETWEEN THE ASSESSEE AND IJMII DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION. THE TRANSF ER PRICING PROVISIONS OF CHAPTER X ARE THEREFORE NOT ATTRACTED. B. THAT TRANSFER PRICING PROVISIONS ARE NOT APPLICA BLE TO TRANSACTIONS BETWEEN TWO DOMESTIC RELATED PARTIES. THE TRANSFER PRICING REGULATIONS HAVE BEEN SPECIFICALLY BEEN MADE APPLICABLE TO TRANSACTIONS BETWEEN TWO DOMESTIC RELATED PARTIES BY VIRTUE OF T HE AMENDMENT THROUGH FINANCE ACT, 2012. IN CASE, THE EXISTING PROVISIONS WERE APPLICABLE TO DOMESTIC TRANSACTIONS THEN THERE WAS NO NEED TO BRING ABOUT THE FOR THE ABOVE AMENDMENT. 28.8 THE PRIMARY CONDITION FOR ATTRACTING TRANSFER PRICING PROVISIONS IS THAT THERE SHOULD BE A TRANSA CTION BETWEEN TWO OR MORE AES IN TERMS OF SECTION 92A(1) AND 92A(2) OF THE ACT. IN OUR OPINION, THE TRANSACT IONS BETWEEN THE ASSESSEE AND IJMII DO NOT FALL UNDER SECTION 92B(2) OF THE ACT. BEING SO, AS CONTENDED B Y THE LEARNED AR IN HIS LENGTHY ARGUMENTS, IN OUR OPINION, THE DRP SIMPLY WANTS TO KEEP THE MATTER ALIVE, THOUGH THEY AGREED WITH THE ASSESSEE'S COUNS EL, AND CONFIRMED THE ORDER OF THE TPO (AO). IN OUR OPINION, THE ARGUMENT OF THE DEPARTMENT IS DEVOID O F MERIT. ACCORDINGLY, WE AGREE WITH THE CONTENTION OF THE ASSESSEE'S COUNSEL ON LEGAL ISSUE. SINCE WE HAV E DECIDED ON LEGAL ISSUE ON APPLICABILITY OF TRANSFER PRICING ON THE ASSESSEE, WE REFRAIN FROM GOING INTO THE OTHER GROUNDS RAISED BY THE ASSESSEE ON THE ISSUE O F TRANSFER PRICING. THE ADDITION MADE TOWARDS TRANSFE R PRICING TRANSACTIONS IS DELETED IN ITS ENTIRETY. IT(TP)A NO.146/BANG/2015 PAGE 20 OF 52 52. IT WAS FURTHER POINTED OUT BY HIM THAT SEC.92 B(2) HAS BEEN AMENDED BY THE FINANCE ACT, 2014 TO READ AS BE LOW:- (2) A TRANSACTION ENTERED INTO BY AN ENTERPRISE WIT H A PERSON OTHER THAN AN ASSOCIATED ENTERPRISE SHALL, F OR THE PURPOSES OF SUB-SECTION (1), BE [ DEEMED TO BE A TRANSACTION ] ENTERED INTO BETWEEN TWO ASSOCIATED ENTERPRISES, IF THERE EXISTS A PRIOR AGREEMENT IN R ELATION TO THE RELEVANT TRANSACTION BETWEEN SUCH OTHER PERS ON AND THE ASSOCIATED ENTERPRISE, OR THE TERMS OF THE RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH OTHER PERSON AND THE ASSOCIATED ENTERPRISE [ WHERE THE ENTERPRISE OR THE ASSOCIATED ENTERPRISE OR BOTH OF THEM ARE NON-RESIDENTS IRRESPECTIVE OF WHETHER SUCH OTHER PERSON IS A NON- RESIDENT OR NOT ] . 53. THE WORDS IN BRACKETS IN ITALICS WERE INTRODUCE D ONLY W.E.F 1-4-2015. PRIOR TO THE SAID AMENDMENT, IF EITHER O R BOTH THE PARTIES TO A TRANSACTION ARE NOT NON-RESIDENTS, THA N THE PROVISIONS OF SEC.92B(2) OF THE ACT WERE NOT ATTRACTED AND THE REFORE THE TRANSACTION WAS OUTSIDE THE PURVIEW OF SEC.92(1) OF THE ACT. HE ALSO PLACED RELIANCE ON THE DECISION OF THE ITAT MU MBAI IN THE CASE OF KODAK INDIA PVT. LTD. VS. ACIT ITA NO.7349/MUM/2012 ORDER DATED 30.4.2013 WHEREIN A VIEW SIMILAR TO THE VIEW EXPRESSED BY THE ITAT HYDERABAD BENCH IN THE CASE O F SWARNANDHRA IJMII (SUPRA) WAS EXPRESSED. 54. THE LEARNED DR DREW OUR ATTENTION TO THE VARIO US AGREEMENT BETWEEN THE PARTIES AND HIGHLIGHTED THE T ERMS OF THOSE AGREEMENTS AND THE PROXIMITY OF TIME WITHIN WHICH T HESE AGREEMENTS WERE ENTERED INTO BETWEEN THE ASSESSEE A ND TPL ON THE ONE HAND, TPL AND NOVO NORDISK A/S AND THE ASSE SSEE AND NOVO NORDISK A/S. THESE AGREEMENTS WERE ALREADY DI SCUSSED IN THE EARLIER PART OF THIS ORDER AND ARE NOT BEING RE PEATED HERE. CERTAIN ASPECTS WHICH NEED TO BE HIGHLIGHTED HERE A ND ON WHICH THE DR LAID EMPHASIS ARE THE FOLLOWING:- 1. AS PER THE AGREEMENT FOR BULK SUPPLY OF EXCEPIENT BETWEEN NOVO NORDISK A/S AND TPL, WHICH THE RAW MATERIAL FOR MA NUFACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS BY TPL, IN ITS PREAMBLE, THERE IS A REFERENCE TO THE AGREEMENT FOR LONG TERM INSULIN FORMULATIONS SUPPLY AGREEMENT IT(TP)A NO.146/BANG/2015 PAGE 21 OF 52 BETWEEN TPL AND THE ASSESSEE I.E., THE HUMAN MONO C OMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS. CLAUSE 7.1 OF THE AGREEMENT PROVIDES THAT IN THE EVENT OF DISCONTINUA NCE OF PRODUCTION BY TPL, THE ALL SALEABLE UNEXPIRED STOCK OF INSULIN CRYSTALS AND EXCEPIENT SHOULD BE DELIVERED TO NOVO NORDISK A/S. CLAUSE-11.2 OF THE AGREEMENT SPECIFICALLY PROVIDES THAT THE BULK SUPPLY AGREEMENT SHALL BE CO-TERMINUS WITH THE INSU LIN FORMULATIONS SUPPLY AGREEMENT BETWEEN TPL AND THE A SSESSEE AND THE KNOW-HOW AND TRADE MARK SUB-LICENSE AGREEME NT BETWEEN THE ASSESSEE AND TPL. 2. KNOW-HOW LICENSE AGREEMENT AND TRADE MARK LICENSE AGREEMENT BETWEEN TPL AND THE ASSESSEE IN CLAUSE 2. 01 SPECIFICALLY PROVIDES THAT THE AGREEMENT BY WHICH U SE OF KNOW- HOW AND USE OF TRADE MARK BY TPL WAS SUB-LICENSED T O TPL FOR MANUFACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURI FIED INSULIN IN 40 IU VIALS, SPECIFICALLY PROVIDES THAT THE ASSESSEE WILL DISCLOSE THE SOURCE OF THE ASSESSEES RIGHT TO GRAN T SUB-LICENSE OF KNOW-HOW AND TRADE MARK AS FROM NOVO NORDISK A/S AN D FURTHER PROVIDES THAT SUCH ORIGINAL LICENSE AGREEMENT WILL BE DEEMED TO BE INCORPORATED IN THE SUB-LICENSE AGREEMENT. 3. INSULIN FORMULATIONS SUPPLY AGREEMENT BETWEEN THE A SSESSEE AND TPL IN CLAUSE 14.2 SPECIFICALLY PROVIDES THAT THE A GREEMENT IS CO- TERMINUS WITH THE BULK SUPPLY AGREEMENT SHALL BE CO -TERMINUS WITH THE INSULIN CRYSTALS AND EXCEPIENTS SUPPLY AGR EEMENT BETWEEN NOVO NORDISK A/S AND TPL AND THE KNOW-HOW A ND TRADE MARK SUB-LICENSE AGREEMENT BETWEEN THE ASSESSEE AND TPL. 4. HE ALSO DREW OUR ATTENTION TO THE QUALITY TESTING A GREEMENT BETWEEN THE ASSESSEE AND NOVO NORDISK A/S WHEREBY T HE TESTING OF QUALITY OF THE PRODUCT MANUFACTURED BY TPL IS UN DERTAKEN BY NOVO NORDISK A/S. 55. ACCORDING TO HIM ALL THE TERMS OF ALL THE AGREE MENTS HAVE TO BE READ TOGETHER AND IF SO READ IT BECOMES CLEAR TH AT THE ARRANGEMENT BETWEEN THE PARTIES WAS THAT THE ASSESS EE WILL CARRY OUT MANUFACTURE AND SALE OF HUMAN MONO COMPONENT AN D HIGHLY PURIFIED INSULIN IN 40 IU VIALS THROUGH TPL. ACCOR DING TO HIM BOTH THE TPO AND THE DRP HAVE RIGHTLY DRAWN CONCLUS ION THAT THE TRANSACTION OF MANUFACTURE AND SALE OF HUMAN MONO C OMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS THROUGH TPL WAS AN IT(TP)A NO.146/BANG/2015 PAGE 22 OF 52 INTERNATIONAL TRANSACTION ENTERED INTO BETWEEN THE ASSESSEE AND NOVO NORDISK A/S. NOVO NORDISK A/S IS ADMITTEDLY A N ASSOCIATED ENTERPRISE AND WAS A NON-RESIDENT. THER EFORE THE CONDITIONS FOR APPLICABILITY OF THE PROVISIONS OF S EC.92B(1) OF THE ACT WERE SATISFIED AND THEREFORE THE SAID TRANSACTI ON WAS RIGHTLY HELD TO BE SUBJECT TO SCRUTINY U/S.92(1) OF THE ACT . 56. THE LEARNED DR NEXT LAID EMPHASIS ON THE TRANS FER PRICING STUDY CARRIED OUT BY THE ASSESSEE IN SUPPOR T OF ALP OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT W ITH ITS AE. IN PARA 4.3.26 OF ITS T.P. STUDY AT PAGE-26, THE ASSES SEE HAS SPECIFICALLY MENTIONED THAT THE TRANSACTION OF SALE OF PRODUCTS PURCHASED LOCALLY (FROM TPL) WAS A DISTRIBUTION FUN CTION WHICH THE ASSESSEE PERFORMS FOR NOVO NORDISK A/S AND WAS AN INTERNATIONAL TRANSACTION. THE ONLY CHANGE THAT TH E TPO ADOPTED WAS TO CHARACTERISE THE FUNCTION PERFORMED BY THE A SSESSEE AS MANUFACTURE AND SALE. THE FOLLOWING ARE THE CONT ENTS OF ASSESSEES OWN TP STUDY:- DISTRIBUTION 4.3.26: SALE OF PRODUCTS PURCHASED LOCALLY: NOVO NORDISK INDIA SELLS HUMAN MONO-COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS PURCHASED FR OM TORRENT PHARMACEUTICALS LIMITED A COMPANY FORMED AND REGISTERED UNDER THE LAWS OF INDIA. THESE INSU LIN PRODUCTS HAVE BEEN MANUFACTURED BY TORRENT FROM CRYSTALS IMPORTED FROM NOVO NORDISK A/S. THIS ARRANGEMENT MAKES ALL THE THREE PARTIES NAMELY NOVO NORDISK A/S. NOVO NORDISK INDIA AND TORRENT, AS ASSOCIATED ENTERPRISES AND SINCE ONE OF THE PARTIES (I.E. NOVO NORDISK A/S.) IS A NON-RESIDENT, IT WOULD AMOU NT TO AN INTERNATIONAL TRANSACTION THAT NEEDS TO COMPL Y WITH THE INDIAN TRANSFER PRICING REGULATIONS. 57. ACCORDING TO THE LEARNED DR THIS CONTRADICTORY STAND TAKEN BY THE ASSESSEE IN THE COURSE OF PROCEEDINGS BEFORE TPO/DRP AND NOW BEFORE THE TRIBUNAL, THAT THERE IS NO DEEME D INTERNATIONAL TRANSACTION OF MANUFACTURE ACCORDING HIM HAS TO BE REJECTED. ACCORDING TO HIM THE ESSENTIAL FUNCTION PERFORMED BY THE ASSESSEE WAS CLEARLY MANUFACTURING FOR AND ON B EHALF OF NOVO NORDISK A/S. IT(TP)A NO.146/BANG/2015 PAGE 23 OF 52 58. THE LEARNED DR THEN LAID EMPHASIS ON THE POINT THAT SEC.92(1) LAYS EMPHASIS ON DETERMINATION OF INCOME FROM AN INTERNATIONAL TRANSACTION. ACCORDING TO HIM IT WAS IMPORTANT TO UNDERSTAND THE MEANING OF THE TERM TRANSACTION AS USED IN SEC.92(1). HE DREW OUR ATTENTION TO THE PROVISIONS OF SEC.92F(V) OF THE ACT WHICH READS THUS:- DEFINITIONS OF CERTAIN TERMS RELEVANT TO COMPUTATI ON OF ARMS LENGTH PRICE, ETC. 92F. IN SECTIONS 92 , 92A , 92B , 92C , 92D AND 92E , UNLESS THE CONTEXT OTHERWISE REQUIRES, (V) TRANSACTION INCLUDES AN ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT, (A) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR ACTION IS FORMAL OR IN WRITING; OR (B) WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR ACTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDING. 59. HE LAID EMPHASIS ON THE WORDS ARRANGEMENT AN D ACTION IN CONCERT AND SUBMITTED THAT ALL THE AGREEMENTS R EAD AS A WHOLE CLEARLY SHOWS THAT THE ARRANGEMENT WAS BETWEEN THE ASSESSEE AND NOVO NORDISK A/S FOR CARRYING OUT MANUFACTURE AND S ALE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS THROUGH TPL, THE LATTER SUPPLYING RAW MATERIA LS AND THE ASSESSEE CARRYING OUT MANUFACTURE THROUGH TPL. THE ARRANGEMENT STARTS WITH SUPPLY OF RAW MATERIALS AND ENDS WITH MANUFACTURE OF FINISHED PRODUCTS. THEREAFTER THE A SSESSEE SELLS THE FINISHED PRODUCT IN INDIAN MARKET. 60. IT WAS ALSO SUBMITTED BY THE LEARNED DR THAT T HE AMENDMENT TO THE PROVISIONS OF SEC.92B(2) OF THE AC T BY THE FINANCE ACT, 2014 W.E.F. 1-4-2015 IS CLARIFICATORY IN NATURE, CLARIFYING THE LAW AS ALWAYS OUT TO BE. IT MAY IN THAT SENSE BE HELD TO BE RETROSPECTIVE. IT(TP)A NO.146/BANG/2015 PAGE 24 OF 52 61. IN HIS REJOINDER, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SEC.92F SPECIFICALLY PROVIDES THAT UNLESS THE CONTEXT OTHERWISE REQUIRES AND THEREAFTER GIVES DE FINITION OF CERTAIN TERMS. ACCORDING TO HIM IN THE PRESENT CAS E, THE DEFINITION OF TRANSACTION AS GIVEN IN SEC.92F(V) OF THE ACT CANNOT BE PRESSED INTO SERVICE IN THIS CASE BECAUSE PROVISIONS OF SEC.92B(1) OF THE ACT PROVIDES OTHERWISE I.E., IT L AYS DOWN THAT AT LEAST ONE PARTY TO THE TRANSACTION SHOULD BE A NON- RESIDENT. THERE EXISTS NO AGREEMENT BETWEEN THE ASSESSEE AND NOVO N ORDISK A/S AND THEREFORE THE PROVISIONS OF SEC.92(1) OF THE AC T ARE NOT ATTRACTED. HE ALSO SUBMITTED THAT REFERENCE TO FAC ILITATION AGREEMENT IN THE ORDER OF THE DRP IS PERVERSE AS TH E SAID AGREEMENTS DO NOT RELATE TO THE PERIOD RELEVANT TO AY 09-10 AND WAS OPERATIVE ONLY FOR PERIOD AFTER AY 09-10. 62. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. THE ASSESSEE AND NOVO NORDISK A/S. AR E ASSOCIATED ENTERPRISES. DURING THE PREVIOUS YEAR RELEVANT TO 09-10 THERE WERE SEVERAL INTERNATIONAL TRANSACTIONS BETWEEN THE ASSESSEE AND NOVO NORDISK A/S. THE ASSESSEE SUBMIT TED A TRANSFER PRICING STUDY (TP STUDY) ALONG WITH THE RE PORT REQUIRED TO BE FILED IN TERMS OF SEC.92E OF THE ACT IN FORM NO. 3CEB. IN THE TP STUDY THE ASSESSEE ACCEPTED THAT THE TRANSAC TION OF SUPPLY OF EXCEPIENTS WHICH IS A RAW MATERIAL FOR MANUFACTU RE OF HUMAN MONO-COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS, IS AN INTERNATIONAL TRANSACTION. ACCORDING TO THE ASSE SSEE THE ARRANGEMENT FOR SUPPLY OF RAW MATERIALS FOR MANUFAC TURE BETWEEN ASSESSEE, TPL AND NOVO NORDISK A/S. MAKES ALL THE T HREE PARTIES NAMELY NOVO NORDISK A/S. NOVO NORDISK INDIA AND TOR RENT, AS ASSOCIATED ENTERPRISES AND SINCE ONE OF THE PARTIES (I.E. NOVO NORDISK A/S.) IS A NON-RESIDENT, IT WOULD AMOUNT TO AN INTERNATIONAL TRANSACTION THAT NEEDS TO COMPLY WITH THE INDIAN TRANSFER PRICING REGULATIONS. THE ASSESSEE IN IT S TP STUDY CHARACTERIZED THE TRANSACTION OF SUPPLY OF RAW MATE RIAL BY NOVO NORDISK AS AKIN TO THE DISTRIBUTION OF PRODUCTS IMP ORTED FROM NOVO NORDISK A/S. THE ASSESSEE FURTHER TOOK THE ST AND THAT THE TRANSACTION OF PURCHASE OF EXCEPIENTS, PURCHASE OF FINISHED GOODS, PAYMENT FOR QUALITY TESTING AND RECEIPT OF SUBVENTI ON FEE BETWEEN THE ASSESSEE AND NOVO NORDISK A/S ARE CLOSELY LINKE D TO THE DISTRIBUTION FUNCTION (PURCHASE OF FINISHED PRODUCT S) AND HENCE WAS BEING EVALUATED BY ADOPTING A COMBINED TRANSACT ION APPROACH. BEFORE TPO AS WELL AS BEFORE DRP, THE AS SESSEE TOOK A STAND THAT THE TRANSACTION OF SUPPLY OF EXCEPIENT WAS NOT AN IT(TP)A NO.146/BANG/2015 PAGE 25 OF 52 INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC .92(1) READ WITH SEC.92A AND 92B OF THE ACT. 63. THE MAIN THRUST OF THE ARGUMENT ON BEHALF OF T HE ASSESSEE WAS THAT U/S.92B(1) TWO CONDITIONS ARE REQUIRED TO BE SATISFIED BEFORE A TRANSACTION CAN BE SAID TO BE INTERNATION AL TRANSACTION VIZ., (I) THERE SHOULD BE A TRANSACTION BETWEEN TW O OR MORE ASSOCIATED ENTERPRISES AND (II) EITHER OR BOTH OF T HEM SHOULD BE NON-RESIDENTS. ACCORDING TO THE ASSESSEE AT LEAST ONE PARTY TO A TRANSACTION SHOULD BE A NON-RESIDENT. ACCORDING TO THE ASSESSEE THE TRANSACTION FOR SUPPLY OF INCIPIENT WAS BETWEEN NOVO NORDISK A/S AND TPL. THOUGH THE CONDITION THAT AT LEAST ON E OF THE PARTIES TO A TRANSACTION SHOULD BE A NON-RESIDENT I S SATISFIED IN RESPECT OF THIS TRANSACTION, TPL IS ADMITTEDLY NOT AN ASSOCIATED ENTERPRISE OF NOVO NORDISK A/S AND THEREFORE THE SA ID TRANSACTION CANNOT BE REGARDED AS INTERNATIONAL TRANSACTION. AS FAR AS THE TRANSACTION OF MANUFACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS BETWEEN TPL AND THE ASSESSEE, IT IS THE STAND OF THE ASSESSEE THAT BOTH THE ASSESSEE AND TPL ARE RESIDENTS AND THEREFORE THE CONDITION T HAT EITHER OR BOTH THE PARTIES TO A TRANSACTION SHOULD BE NON-RES IDENT IS NOT SATISFIED AND THEREFORE THE SAID TRANSACTION CANNOT ALSO BE REGARDED AS INTERNATIONAL TRANSACTION. THE ABOVE ARGUMENT ON BEHALF OF THE ASSESSEE OVERLOOKS THE OVERALL ARRANG EMENT BETWEEN THE ASSESSEE AND NOVO NORDISK A/S AS EVIDEN CED BY THE VARIOUS AGREEMENTS ENTERED INTO BETWEEN THE PARTIES . 64. THE AGREEMENT BETWEEN THE ASSESSEE AND TPL ON THE ONE HAND AND THE AGREEMENTS BETWEEN TPL AND NOVO NORDIS K A/S AND AGREEMENT BETWEEN THE ASSESSEE AND NOVO NORDISK A/S ARE ALL IN THE YEAR 1994 BUT THE TERMS AS RENEWED FROM TIME TO TIME AND AS APPLICABLE TO AY 09-10 IN SUBSTANCE IS THE S AME. THESE AGREEMENTS ARE:- 1. KNOW-HOW LICENSE AGREEMENT DATED 28.2.1994: NOV O NORDISK A/S OWNS THE KNOW HOW I.E., FORMULAE, PROCE SSES, RECIPES, PRODUCT SPECIFICATIONS, TECHNICAL AND MANU FACTURING DATA, INFORMATION, EQUIPMENT, SPECIFICATION, SPECIF ICATIONS OF RAW MATERIALS AND UTILITIES AND ALL OTHER TECHNICAL INFORMATION AND DATA, WHETHER PATENTED OR NOT, ACCUMULATED TECH NIQUES, EXPERIENCE AND SKILL OWNED OR POSSESSED OR ACQUIRED (REFERRED TO AS NOVO NORDISK KNOW-HOW) TO PRODUCE NOVO NORDIS K PRODUCTS I.E., PRODUCTS LISTED IN APPENDIX-1 TO THE AGREEMENT, IT(TP)A NO.146/BANG/2015 PAGE 26 OF 52 WHICH INCLUDES HUMAN MONOCOMPONENET INSULIN FORMULATIONS (40 IU/ML IN 10ML VIALS) AND HIGHLY PU RIFIED PORCINE INSULIN FORMULATIONS (40IU/ML IN 10ML VIALS ) (REFERRED TO AS NOVO NORDISK PRODUCTS). UNDER CLAUSE 2.01 OF THE KNOW-HOW LICENSE AGREEMENT DATED 28.2.1994, NOVO N ORDISK A/S GRANTS TO THE ASSESSEE THE EXCLUSIVE RIGHT AND LICENSE TO USE OR SUB-LICENSE THE USE OF THE NOVO NORDISK KNOW -HOW TO MANUFACTURE NOVO NORDISK PRODUCTS AT THE PLANT. PL ANT MEANS THE MANUFACTURING FACILITIES OF THE ASSESSEE OR THOSE OF ITS SUB-LICENSEE AND OR CONTRACTOR MANUFACTURER(S) AS THE CASE MAY BE WHERE NOVO NORDISK A/S KNOW HOW IS USED FOR PRODUCTION OF ANY OF NOVO NORDISK PRODUCTS. 2. TRADE MARK MASTER LICENSE AGREMENT-1 DATED 28.2. 1994: NOVO NORDISK A/S OWNS TRADE MARKS ACTRAPID, LENTARD , MONOTARD, INSULATARD, MIXTARD, NOVOPEN, NOVOFINE, GLUCAGON NOVO. BY THE AGREEMENT DATED 28.2.1994, T HE ASSESSEE IS GIVEN THE MASTER LICENSE TO EXCLUSIVELY USE AND OR SUB-LICENSE THE USE OF THE TRADE MARKS OF THE AF ORESAID PRODUCTS WHICH ARE LISTED IN APPENDIX-1 TO THE AGRE EMENT. KNOW-HOW LICENSE AGREEMENT AND TRADE MARK LICENSE AGREEMENT BETWEEN TPL AND THE ASSESSEE IN CLAUSE 2. 01 SPECIFICALLY PROVIDES THAT THE AGREEMENT BY WHICH U SE OF KNOW- HOW AND USE OF TRADE MARK IS SUB-LICENSED FOR MANUF ACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS, THE ASSESSEE WILL DISCLOSE THE SOURCE OF TH E ASSESSEES RIGHT TO GRANT SUB-LICENSE OF KNOW-HOW AND TRADE MA RK AS FROM NOVO NORDISK A/S AND FURTHER PROVIDES THAT SUCH ORI GINAL LICENSE AGREEMENT WILL BE DEEMED TO BE INCORPORATED IN THE SUB-LICENSE AGREEMENT. 3. INSULIN FORMULATION SUPPLY AGREEMENT DATED 1-3-1 994: BY THIS AGREEMENT TPL UNDERTAKES TO MANUFACTURE AND SU PPLY 40IU INSULIN TO THE ASSESSEE. THERE IS ALSO AN ARR ANGEMENT WHEREBY TPL IS GIVEN SUB-LICENSE TO USE NOVO NORDIS K A/S KNOW HOW TO MANUFACTURE NOVO NORDISK PRODUCTS. INS ULIN FORMULATIONS SUPPLY AGREEMENT BETWEEN THE ASSESSEE AND TPL IN CLAUSE 14.2 SPECIFICALLY PROVIDES THAT THE A GREEMENT IS CO-TERMINUS WITH THE BULK SUPPLY AGREEMENT SHALL BE CO- TERMINUS WITH THE INSULIN CRYSTALS AND EXCEPIENTS S UPPLY AGREEMENT BETWEEN NOVO NORDISK A/S AND TPL AND THE IT(TP)A NO.146/BANG/2015 PAGE 27 OF 52 KNOW-HOW AND TRADE MARK SUB-LICENSE AGREEMENT BETWE EN THE ASSESSEE AND TPL. 4. FACILITY ESTABLISHMENT AGREEMENT DATED 6.8.2005: WHEREBY THE ASSESSEE AND TPL AGREE ABOUT THE FACILITY TO BE CREATED BY TPL EXCLUSIVELY FOR INSULIN PRODUCTION IN TERMS OF AGREEMENT OF ASSESSEE AND TPL FOR INSULIN FORMULATION SUPPLY. 5. AGREEMENT FOR QUALITY CONTROL TESTING DATED 1-4- 1997: THIS AGREEMENT IS BETWEEN NOVO NORDISK A/S AND THE ASSES SEE. NOVO NORDISK A/S UNDER THIS AGREEMENT UNDERTAKES TO DO QUALITY CONTROL TESTING FOR 40 IU INSULIN MANUFACTU RED BY TPL PURSUANT TO FORMULATIONS SUPPLY AGREEMENT DATED 1-3 -1994. 6. SUBVENTION AGREEMENT DATED 1-1-2003: THIS AGREE MENT IS BETWEEN NOVO NORDISK A/S AND THE ASSESSEE. THIS AGREEMENT EXPLAINS IN ITS PREAMBLE THAT THE ASSESSE E IS PRIMARILY A DISTRIBUTOR AND MARKETER OF INSULIN AND PHARMACEUTICAL PRODUCTS IN INDIA. NOVO NORDISK A/S WANTS TO SUPPORT THE OPERATIONS OF THE ASSESSEE AS ITS HOLDI NG COMPANY AND HENCE THE PAYMENT OF SUBVENTION FEE IS BEING MA DE BY THEM TO THE ASSESSEE. THE AGREEMENT PROVIDES THAT THERE ARE NO SPECIFIC SERVICES TO BE RENDERED BY THE ASSESSEE FOR THE PAYMENT OF SUBVENTION FEE. 7. INSULIN CRYSTALS AND EXCIPIENTS BULK SUPPLY AGREEMENT DATED 15-2-1994: THIS AGREEMENT IS BETWEEN NOVO NORDISK A/S AND TPL. THIS AGREEMENT I N ITS PREAMBLE REFERS TO THE FACT THAT TPL WANTS TO ENTER INTO A LONG TERM PURCHASE AGREEMENT WITH NOVO NORDISK FOR PURCH ASE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED PORCINE IN SULIN CRYSTALS AND EXCEPIENTS, WHICH ARE USED AS RAW MATE RIAL IN MANUFACTURE OF 40 IU INSULIN VIALS. THE AGREEMENT ALSO REFERS TO THE KNOW-HOW LICENSE AND TRADE MARK LICENSE BETW EEN THE ASSESSEE AND NOVO NORDISK A/S AND FURTHER REFERS TO INSULATION FORMULATIONS SUPPLY AGREEMENT BETWEEN TP L AND THE ASSESSEE. THESE ARE THE AGREEMENTS SET OUT IN SL.NO.1 TO 3 OF THE VARIOUS AGREEMENTS. THESE ARE REFERRED TO I N APPENDIX 5 TO THIS AGREEMENT. CLAUSE 2.5 OF THE AGREEMENT P ROVIDES THAT APPENDICES TO THE AGREEMENT FORM PART OF THIS AGREE MENT, I.E., INSULIN CRYSTALS AND EXCEPIENTS BULK SUPPLY AGREEME NT DATED 15.2.1994. THE AGREEMENT PROVIDES FOR SEVERAL REST RICTIONS WITH REGARD TO MAINTENANCE OF INVENTORY BY TPL OF T HE RAW IT(TP)A NO.146/BANG/2015 PAGE 28 OF 52 MATERIAL IMPORTED. CLAUSE 5.3 OF THE AGREEMENT IS VERY MATERIAL FOR THE PRESENT CASE AND IT READS THUS: 5.3. THE PURCHASER SHALL USE THE INSULIN CRYSTALS AND EXCEPIENTS ONLY FOR THE PURPOSE OF MANUFACTURING HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS (FORMULATIONS) MORE PARTICULARLY SPECIFIED IN APPENDIX4M WITH THE KNOW-HOW TO BE SUPPLIED BY THE SELLER UNDER A SEPARATE TECHNOLOGY AND KNOW-HOW AGREEMENT TO BE ENTERED INTO BETWEEN THE PURCHASER AND NOVO NORDISK (INDIA) PVT. LTD., A COMPANY INCORPORATED IN ACCORDANCE WITH THE LAWS OF INDIA, HERETO, AND THE FINISHED FORMULATIONS SHALL BE SUPPLIED EXCLUSIVELY TO NOVO NORDISK (INDIA) PVT. LTD. UNDER ANOTHER SEPARATE PRODUCT SUPPLY AGREEMENT. AS PER THE THIS AGREEMENT FOR BULK SUPPLY OF EXCEPI ENT BETWEEN NOVO NORDISK A/S AND TPL, WHICH THE RAW MA TERIAL FOR MANUFACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS BY TPL, IN ITS PREA MBLE, THERE IS A REFERENCE TO THE AGREEMENT FOR LONG TERM INSUL IN FORMULATIONS SUPPLY AGREEMENT BETWEEN TPL AND THE ASSESSEE I.E., THE HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS. CLAUSE 7.1 OF THE AGREEMENT PROVIDES THAT IN THE EVENT OF DISCONTINUANCE OF PRO DUCTION BY TPL, THE ALL SALEABLE UNEXPIRED STOCK OF INSULIN CR YSTALS AND EXCEPIENT SHOULD BE DELIVERED TO NOVO NORDISK A/S. CLAUSE- 11.2 OF THE AGREEMENT SPECIFICALLY PROVIDES THAT TH E BULK SUPPLY AGREEMENT SHALL BE CO-TERMINUS WITH THE INSU LIN FORMULATIONS SUPPLY AGREEMENT BETWEEN TPL AND THE ASSESSEE AND THE KNOW-HOW AND TRADE MARK SUB-LICENS E AGREEMENT BETWEEN THE ASSESSEE AND TPL. 65. IT IS CLEAR FROM THE AFORESAID AGREEMENTS THAT THE SUM AND SUBSTANCE OF ALL THE AGREEMENTS IS THE SUPPLY OF RA W MATERIAL BY NOVO NORDISK A/S TO ASSESSEE TO ENABLE IT TO MANUFA CTURE MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIAL S AND SELL IT IN INDIA. IT IS A CONCERTED ACTION OR ARRANGEMENT WHICH IS BROUGHT OUT IN A FORM WHICH APPARENTLY IS INTENDED AND FRAM ED IN SUCH A MANNER AS NOT TO ATTRACT THE PROVISIONS OF SEC.92B OF THE ACT BUT IN SUBSTANCE IS A TRANSACTION OF SUPPLY OF INSULIN CRYSTAL WHICH IS RAW MATERIAL FOR MANUFACTURE OF MONO COMPONENT AND HIGHLY IT(TP)A NO.146/BANG/2015 PAGE 29 OF 52 PURIFIED INSULIN IN 40 IU VIALS. IF ALL THE AGREEM ENTS ARE READ TOGETHER AN AGREEMENT CLEARLY EMERGES BETWEEN NOVO NORDISK A/S AND THE ASSESSEE FOR SUPPLY OF INSULIN CRYSTALS . ALL THE AGREEMENTS BETWEEN NOVO NORDISK A/S AND TPL AND BET WEEN TPL AND THE ASSESSEE REFER TO EACH OTHER AND SPECIF ICALLY INCORPORATE THE TERMS OF ONE AGREEMENT INTO THE OTH ER. THUS THE PARTIES TO THE ARRANGEMENT ARE NOVO NORDISK A/S, AS SESSEE AND TPL. SINCE ONE OF THE PARTIES TO THE TRANSACTION I S A NON-RESIDENT THE CONDITIONS SPECIFIED IN SEC.92B(1) OF THE ACT A RE SATISFIED. 66. THE DECISION OF THE ITAT HYDERABAD IN THE CAS E OF M/S. SWARNANDHRA IJMII INTEGRATED TOWNSHIP DEVELOPMENT CO. PVT. LTD. (SUPRA) WAS RENDERED ON DIFFERENT FACTS. THE ITAT IN THE AFORESAID DECISION SPECIFICALLY FOUND THAT THE TRAN SACTION IN QUESTION DID NOT INVOLVE TRANSFER OF GOODS OR SERVI CES FROM THE ASSESSEE TO IJM GROUP (NON-RESIDENT AE) OR TO ANY O THER NON- RESIDENT ENTERPRISE, EITHER DIRECTLY OR INDIRECTLY, OR BY USING IJMII AS AN INTERMEDIARY. THE TRANSACTION IN QUESTION INV OLVED DIRECT RENDERING OF SERVICES BY IJMII TO THE ASSESSEE. IN THE PRESENT CASE HOWEVER THE FACTS, AS WE HAVE SEEN, IS THAT THERE W AS TRANSFER OF RAW MATERIAL (EXCEPIENT INSULIN CRYSTALS) BY THE NO N-RESIDENT AE TO THE ASSESSEE, WHICH CLEARLY ATTRACTED THE PROVIS IONS OF SEC.92(1) AND 92B(1) OF THE ACT. IN THE DECISION R ENDERED BY THE ITAT MUMBAI IN THE CASE OF KODAK INDIA PVT. LTD. (SUPRA) IN PARA 52 OF THE ORDER, THE TRIBUNAL HAS CLEARLY BROU GHT OUT THAT THE GLOBAL AGREEMENT DID NOT HAVE ANY ROLE EFFECT ON TH E TRANSACTIONS OF THE TWO DOMESTIC COMPANIES AND THEREFORE DEEMING PROVISIONS OF SEC.92B(2) OF THE ACT IS NOT APPLICABLE TO THE I MPUGNED TRANSACTIONS. THE CONCEPT OF A TRANSACTION BETWEEN TWO RESIDENTS WHO ARE ASSOCIATED ENTERPRISES BEING REGARDED AS IN TERNATIONAL TRANSACTION WAS IMPLICIT IN THE SCHEME OF TRANSFER PRICING PROVISIONS IN INDIA, IF IT IMPACTED OR ERODED TAX B ASE IN INDIA. AMENDMENT TO SECTION 92B(2) BY THE FINANCE ACT, 201 4 WAS INSERTED ONLY BY WAY OF ABUNDANT CAUTION. IT IS MA DE WITH A VIEW TO CLARIFY THE POSITION THAT BY ENTERING INTO SERIE S OF TRANSACTIONS WITH THIRD PARTIES WHO ARE NOT ASSOCIATED ENTERPRIS ES OR NON- RESIDENTS, ONE CANNOT CLAIM THAT THE TRANSFER PRICI NG REGULATIONS WERE NOT APPLICABLE, IF IN REALITY AND IN SUBSTANCE TRANSACTIONS WERE WITH RELATED PARTIES ONE OR BOTH OF WHOM MIGHT BE NON- RESIDENTS. FOR EXAMPLE IN THE PRESENT CASE IF THE COST OF EXCEPIENT/INSULIN CRYSTAL WHICH IS THE RAW MATERIAL FOR IT(TP)A NO.146/BANG/2015 PAGE 30 OF 52 MANUFACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURI FIED INSULIN IN 40 IU VIALS, IS NOT SUBJECTED TO THE TES T OF ALP, IT COULD RESULT IN EROSION OF TAX BASE IN INDIA. THE TRANSF ER PRICING PROVISIONS WILL THEREFORE APPLY TO SUCH TRANSACTION S. WE THEREFORE HOLD THAT THE TRANSACTION BY WHICH SUPPLY OF EXCEPIENTS WAS MADE BY NOVO NORDISK A/S TO TPL WAS IN EFFECT A N INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND NOVO NORDISK A/S. THE INCOME FROM SUCH TRANSACTION HAD TO BE CO MPUTED HAVING REGARD TO ARMS LENGTH PRICE AS LAID DOWN IN SEC.92(1) OF THE ACT. THE CONDITIONS LAID DOWN IN SEC.92B(1) OF THE ACT ARE SATISFIED AND THERE IS NO NECESSITY IN OUR VIEW TO LOOK TO THE PROVISIONS OF SEC.92B(2) OR SEC.92A(2) OF THE ACT, THOUGH THE REASONS GIVEN BY THE DRP IN ITS ORDER ON THIS ASPEC T ALSO, IN OUR VIEW IS ACCEPTABLE. THE TRANSACTION BETWEEN TPL AN D THE ASSESSEE FOR MANUFACTURE OF HUMAN MONO COMPONENT AN D HIGHLY PURIFIED INSULIN IN 40 IU VIALS, IN OUR VIEW , CANNOT FALL WITHIN THE AMBIT OF THE PROVISIONS OF SEC.92(1) OF THE ACT. THE REASON FOR THE ABOVE CONCLUSION IS THAT TAX BASE ER OSION IN INDIA CAN HAPPEN ONLY AT THE POINT OF TIME OF SUPPLY OF I NSULIN CRYSTALS BY NOVO NORDISK A/S. THEREAFTER IT IS THE ASSESSEE WHO GETS THE CRYSTALS CONVERTED INTO MANUFACTURE OF HUMAN MONO C OMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS AND SELL S IT IN THE INDIAN MARKET. THIS TRANSACTION CANNOT RESULT IN E ROSION OF TAX BASE IN INDIA. THE INCOME OF TPL FROM MANUFACTURE IS SUBJECTED TO TAX IN INDIA. THE SALE OF FINISHED PRODUCTS BY ASSESSEE IS SUBJECTED TO TAX IN INDIA. THEREFORE THERE CAN BE NO TAX BASE EROSION IN INDIA FROM THE TRANSACTION OF MANUF ACTURE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS BY ASSESSEE THROUGH TPL. ISSUE NO.1 IS DECID ED ACCORDINGLY. ISSUE NO.2, 3 & 4 2. WHETHER THE TRANSACTION OF SUPPLY OF RAW MATER IAL EXCEPIENT/INSULIN CRYSTAL BY NOVO NORDISK A/S TO TH E ASSESSEE CAN BE BENCHMARKED FOR THE PURPOSE OF DETERMINING A LP TOGETHER WITH THE INTERNATIONAL TRANSACTION OF IMPORT OF PRO DUCTS DIRECTLY FROM NOVO NORDISK A/S AND SELLING THE SAME IN INDIA ( WHICH IS PURELY DISTRIBUTION FUNCTION PERFORMED BY THE ASSES SEE ON BEHALF OF NOVO NORDISK A/S) ON THE PLEA THAT BOTH THE TRAN SACTIONS ARE INTERLINKED AND THEREFORE HAVE TO BE BENCHMARKED TO GETHER IT(TP)A NO.146/BANG/2015 PAGE 31 OF 52 3. IF THE ANSWER TO THE ABOVE QUESTION IS IN THE N EGATIVE, HOW THE ALP OF THE TRANSACTIONS HAS TO BE DETERMINE D? 4. WHETHER THE DETERMINATION OF ALP AS DIRECTED BY THE DRP IS CORRECT? 67. THE LEARNED DR SUBMITTED THAT THE ASSESSEES AC TION IN COMBINING/AGGREGATING THE ACTIVITY OF MANUFACTURE A ND SALE OF HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS WITH THE PURE DISTRIBUTION FUNCTION OF SALE O F PRODUCTS DIRECTLY IMPORTED FROM NOVO NORDISK A/S. WAS NOT IN ACCORDANCE WITH RULE 10A(D) OF THE RULES. IN THIS REGARD HE P OINTED OUT THAT TRANSACTIONS INCLUDE A GROUP OF TRANSACTIONS CLOSEL Y LINKED. PURCHASE OF RAW MATERIAL AND MANUFACTURE AND SALE O F THEM ARE CLOSELY LINKED TRANSACTION. THE DISTRIBUTION OF PR ODUCTS IMPORTED FROM NOVO NORDISK A/S WAS NOT A CLOSELY LINKED TRAN SACTION WITH THE SALE OF MANUFACTURED PRODUCTS AND THEREFORE BOT H HAVE TO BE BENCHMARKED SEPARATELY FOR DETERMINATION OF ALP. T HE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND REITERAT ED THE STAND OF THE ASSESSEE AS MADE BEFORE THE TPO/DRP. 68. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. THE ACT AND THE RULES CONTEMPLATE DET ERMINING ALP BY AGGREGATING INTERNATIONAL TRANSACTIONS WHICH ARE MULTIPLE, INTERLINKED OR INTER-RELATED TO EACH OTHE R AND CANNOT BE EVALUATED SEPARATELY. A COMBINED TRANSACTION APPR OACH WHERE THE TRANSACTIONS ARE CLOSELY LINKED OR CONTINUOUS T HAT THEY CANNOT BE EVALUATED ADEQUATELY ON AN INDIVIDUAL BASIS, IS ADVOCATED BY THE OECD GUIDELINES ON TRANSFER PRICING. IN SUCH A SITUATION, RATHER THAN ASSESSING THE ALP OF THE TRANSACTIONS I NDIVIDUALLY, THE TRANSACTIONS COULD BE EVALUATED TOGETHER USING THE MOST APPROPRIATE METHOD. 69. IN THE PRESENT CASE, CAN IT BE SAID THAT THE T RANSACTION OF SUPPLY OF RAW MATERIAL AND THE TRANSACTION OF SALE OF IMPORTED PRODUCTS DIRECTLY FROM NOVO NORDISK A/S SAID TO BE INTERLINKED OR CLOSELY LINKED? IN OUR VIEW THE TWO TRANSACTION S HAVE NO CONNECTION WHATSOEVER AND CAN BE EVALUATED INDIVIDU ALLY. WHILE THE SALE OF IMPORTED PRODUCTS IS A TRADING ACTIVITY , THE PURCHASE OF RAW MATERIAL WOULD BE PART OF MANUFACTURING ACTIVIT Y AND DIFFERENT PARAMETERS WOULD NEED CONSIDERATION FOR D ETERMINING IT(TP)A NO.146/BANG/2015 PAGE 32 OF 52 ALP OF THE TWO TRANSACTIONS. WE FIND THAT THE TPO CHARACTERIZED BOTH THE TRANSACTIONS AS MANUFACTURING AND ADOPTE D A COMBINED APPROACH IN DETERMINING ALP. THE DRP HAS ALSO FALLEN INTO THE SAME ERROR. THE DRP CARVED OUT THE CONSIDERATION IN SO FAR AS IT RELATES TO SUPPLY OF RAW MATERIAL B Y NOVO NORDISK A/S IS CONCERNED BUT APPLIED PROFIT SPLIT METHOD (PSM) AND DETERMINED A SUM OF RS.3.14 CRORES AS ADDITION TO B E MADE ON ACCOUNT OF ADJUSTMENT TO ALP. IN OUR VIEW THE ENTI RE APPROACH BY THE TPO AND DRP IN THIS REGARD IS ERRONEOUS. IN OUR VIEW IT WOULD BE JUST AND APPROPRIATE TO SET ASIDE THE ORDE R OF THE TPO /DRP IN THIS REGARD AND DIRECT THAT THE DETERMINATI ON OF ALP OF THE INTERNATIONAL TRANSACTION OF (I) SUPPLY OF RAW MATERIAL BY NOVO NORDISK A/S TO THE ASSESSEE AND (II) IMPORT OF PRODUCT DIRECTLY FROM NOVO NORDISK A/S AND SALE OF SUCH PRO DUCTS, WHICH IS IN THE NATURE OF TRADING, SEPARATELY. THE SEGME NTAL RESULTS AS GIVEN BY THE ASSESSEE IN THE CHART GIVEN AS ANNEXURE- 1 TO THIS ORDER SHOULD BE ADOPTED I N THIS REGARD. AS FAR AS QUALITY TESTING FEE IS CONCERNED, THE ALP OF THE SAID TRANSACTION IS TO BE TESTED AGAIN INDEPENDENTLY. T HE ASSESSEE IS ACCORDINGLY DIRECTED TO GIVE HIS TRANSFER PRICING A NALYSIS ON THE ABOVE LINES FOR EACH OF THE TRANSACTION SEPARATELY. AS TO WHAT IS THE MOST APPROPRIATE METHOD (MAM) TO BE ADOPTED WIL L DEPEND ON THE STAND TAKEN BY THE ASSESSEE IN ITS TP STUDY AND THE OPINION OF THE TPO ON THE APPROACH ADOPTED BY THE TPO. THE APPLICATION OF PROFIT SPLIT METHOD (PSM) AS THE MAM IN OUR VIEW REQUIRES RECONSIDERATION, AS THE ASSESSEES REQUEST FOR A PE RSONAL HEARING BEFORE APPLYING PSM AS MAM HAS NOT BEEN CONSIDERED BY THE DRP. THE SUBVENTION FEE IS CLAIMED TO BE PAID BY NOVO NORDISK A/S JUST TO HELP THE ASSESSEE TO HELP SURVIVE AND T HAT THERE IS NO SPECIFIC SERVICES RENDERED BY THE ASSESSEE. THE SU BVENTION FEE WILL THEREFORE NEED TO BE SET OFF AGAINST ANY TRANS FER PRICING ADJUSTMENT THAT MIGHT ULTIMATELY BE MADE. THUS THE SUBVENTION FEE WILL NOT BE SUBJECTED TO ANY ALP TEST AND WILL ONLY GO TO REDUCE THE ADDITION ON ACCOUNT OF DETERMINATION OF ALP, IF ANY, THAT MIGHT ULTIMATELY SURVIVE. ISSUES NO.2 TO 4 A RE DECIDED ACCORDINGLY. 70. THUS GROUNDS NO. 32 TO 40 AND THE ADDITIONAL GR OUND OF APPEAL ARE PARTLY ALLOWED. IT(TP)A NO.146/BANG/2015 PAGE 33 OF 52 19. THE PARTIES AGREED BEFORE US THAT SIMILAR FINDI NGS AND DIRECTIONS CAN BE FOLLOWED IN THE PRESENT ASSESSMENT YEAR ALSO. A CCORDINGLY, WE HOLD THAT THE ISSUES RAISED IN GROUNDS NO. 39 TO 47 IN THE PR ESENT ASSESSMENT YEAR ARE DECIDED ACCORDING TO THE DECISION RENDERED IN A Y 09-10 REFERRED TO ABOVE. THE AO IS DIRECTED TO GIVE EFFECT TO THE DI RECTIONS AS ARE CONTAINED IN AY 09-10 IN THE PRESENT ASSESSMENT YEAR ALSO. 20. WE SHALL NEXT TAKE UP FOR CONSIDERATION GROUND S NO.4 TO 16 RAISED BY THE ASSESSEE WHICH PROJECTS THE GRIEVANCE OF THE ASSESSEE WITH REGARD TO DISALLOWANCE MADE U/S.40(A)(IA) OF THE ACT. AS WE HAVE ALREADY SEEN HUMAN MONO COMPONENT AND HIGHLY PURIFIED INSULIN IN 40 IU VIALS ARE PURCHASED BY THE ASSESSEE FROM TORRENT PHARMACEUTIC ALS LIMITED A COMPANY WHICH IS NOT AN ASSOCIATED ENTERPRISE OF TH E ASSESSEE. TORRENT PHARMACEUTICALS LIMITED GETS INSULIN IN CRYSTAL FOR M WHICH IS RAW MATERIAL REQUIRED FOR MANUFACTURE OF HUMAN MONO COMPONENT AN D HIGHLY PURIFIED INSULIN IN 40 IU VIALS, WHICH IS IMPORTED FROM NOVO NORDISK A/S. TPL AFTER COMPLETING THE PROCESS OF MANUFACTURE OF PURIFIED I NSULIN IN 40IU VIALS SOLD IT TO THE ASSESSEE AT A SUM OF RS.192,89,16,836 AS STATED IN THE ORDERS OF THE REVENUE AUTHORITIES. ACCORDING TO THE ASSESSEE THE CORRECT SALE VALUE WAS ONLY RS.184,95,91,300/-. ACCORDING TO THE AO, TPL WAS ONLY A CONTRACT MANUFACTURER AND THE PAYMENT MADE BY THE A SSESSEE WAS A PAYMENT FOR CONTRACT OF WORK AND THEREFORE THE ASSE SSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON THE PAYMENTS MADE TO TPL. SINCE THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE, THE AO DISALLOWED THE CLAIM OF THE ASSESSEE IT(TP)A NO.146/BANG/2015 PAGE 34 OF 52 FOR DEDUCTION OF A SUM OF RS.192,89,16,836 WHICH WA S THE PURCHASE VALUE OF THE INSULIN PURCHASED BY THE ASSESSEE FROM TPL, INVOKING THE PROVISIONS OF SEC.40(A)(IA) OF THE ACT. THE REVENUES RELIANC E WAS ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN ASSESSEES OWN CASE IN ITA NO.1262/2006 DATED 5.1.2012 WHEREIN THE HONBLE KARNATAKA HIGH COURT TOOK THE VIEW THAT THE PAYMENT MADE BY THE ASSESSEE TO TPL FOR INSULIN VIALS WAS IN THE NATURE OF CONTRACT FOR WORK WHICH REQUIRES TAX DEDUCTION AT SOURCE U/S.194C OF THE ACT. ACCORDING TO THE ASSES SEE THE ISSUE HAS NOT ATTAINED FINALITY AND AN APPEAL BY WAY OF SLP IS PE NDING AGAINST THE SAID DECISION BEFORE THE HONBLE SUPREME COURT. 21. IT IS NOT NECESSARY FOR US TO DECIDE THE CONTR OVERSY AS TO WHETHER THE PAYMENT MADE BY THE ASSESSEE TO TPL IS PAYMENT FOR CONTRACT OF WORK FALLING WITHIN THE AMBIT OF SEC.194C OF THE ACT WHI CH REQUIRES TAX DEDUCTION AT SOURCE OR NOT FOR THE FOLLOWING REASON. THE LEA RNED COUNSEL FOR THE ASSESSEE FILED BEFORE US COP OF THE ORDER OF THE IT AT BANGALORE IN THE CASE OF SHRI G.SHANKAR VS. ACIT ITA NO.1832/BANG/2013 FOR AY 05-06 DATED 10.10.2014 . IN THE AFORESAID DECISION THE AMENDMENT TO SECTI ON 40(A)(IA) BROUGHT BY THE FINANCE ACT 2012 WAS CONSIDERED. TH E TRIBUNAL NOTICED THAT WITH A VIEW TO LIBERALIZE PROVISIONS OF SECTIO N 40(A)(IA) OF THE ACT FINANCE ACT 2012 BROUGHT AMENDMENT W.E.F 01.04.2013 AS UNDER. THE FOLLOWING SECOND PROVISO WAS INSERTED IN SUB-CLAUSE (IA) OF CLAUSE (A) OF SECTION 40 BY THE FINANCE ACT, 2012, W.E.F. 1-4-201 3 :- IT(TP)A NO.146/BANG/2015 PAGE 35 OF 52 PROVIDED FURTHER THAT WHERE AN ASSESSEE FAILS TO D EDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVI SIONS OF CHAPTER XVII-B ON ANY SUCH SUM BUT IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROVISO TO SUB- SECTION (1) OF SECTION 201, THEN, FOR THE PURPOSE OF THIS SUB-CLAU SE, IT SHALL BE DEEMED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DATE OF FURNISHING OF RETURN OF INCOME B Y THE RESIDENT PAYEE REFERRED TO IN THE SAID PROVISO. 22. SINCE PROVISIONS OF SECTION 40(A)(IA) AS AMEND ED BY FINANCE ACT, 2012 IS LINKED TO SECTION 201 OF THE ACT, IN WHICH A PROVISO WAS INSERTED, THE TRIBUNAL TOOK NOTICE OF THOSE PROVISIONS WHICH READ THUS: SEC.201: (1) WHERE ANY PERSON, INCLUDING THE PRINC IPAL OFFICER OF A COMPANY (A) WHO IS REQUIRED TO DEDUCT ANY SUM IN AC CORDANCE WITH THE PROVISIONS OF THIS ACT; OR (B) REFERRED TO IN SUB-SECTION (1A) OF SECTION 192, BEING AN EMPLOYER, DOES NOT DEDUCT, OR DOES NOT PAY, OR AFTE R SO DEDUCTING FAILS TO PAY, THE WHOLE OR ANY PART OF THE TAX, AS REQUIRED BY OR UNDER THIS ACT, THEN, SUCH PERSON, SHALL, WITHOUT P REJUDICE TO ANY OTHER CONSEQUENCES WHICH HE MAY INCUR, BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPECT OF SUCH TAX: PROVIDED THAT ANY PERSON, INCLUDING THE PRINCIPAL O FFICER OF A COMPANY, WHO FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF THIS CHAPTER ON T HE SUM PAID TO A RESIDENT OR ON THE SUM CREDITED TO THE ACCOUNT OF A RESIDENT SHALL NOT BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPE CT OF SUCH TAX IF SUCH RESIDENT (I) HAS FURNISHED HIS RETURN OF INCOME UNDER SE CTION 139; (II) HAS TAKEN INTO ACCOUNT SUCH SUM FOR COMPUTIN G INCOME IN SUCH RETURN OF INCOME; AND IT(TP)A NO.146/BANG/2015 PAGE 36 OF 52 (III) HAS PAID THE TAX DUE ON THE INCOME DECLARED BY HIM IN SUCH RETURN OF INCOME, AND THE PERSON FURNISHES A CERTIF ICATE TO THIS EFFECT FROM AN ACCOUNTANT IN SUCH FORM AS MAY BE PR ESCRIBED: 23. THE TRIBUNAL CONSIDERED THE MEMORANDUM EXPLAIN ING THE PROVISIONS WHILE INTRODUCING FINANCE BILL, 2012 PROVIDES THE J USTIFICATION OF THE AMENDMENT TO SECTION 40(A)(IA) IN THE FOLLOWING WOR DS:- IN ORDER TO RATIONALISE THE PROVISIONS OF DISALLOW ANCE ON ACCOUNT OF NON-DEDUCTION OF TAX FROM THE PAYMENTS MADE TO A RESIDENT PAYEE, IT IS PROPOSED TO AMEND SECTION 40(A)(IA) TO PROVIDE THAT WHERE AN ASSESSEE MAKES PAYMENT OF THE NATURE SPECI FIED IN THE SAID SECTION TO A RESIDENT PAYEE WITHOUT DEDUCTION OF TAX AND IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER SECTI ON 201(1) ON ACCOUNT OF PAYMENT OF TAXES BY THE PAYEE, THEN, FOR THE PURPOSE OF ALLOWING DEDUCTION OF SUCH SUM, IT SHALL BE DEEM ED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DATE OF FURNISHING OF RETURN OF INCOME BY THE RESIDENT PAYE E. 24. THE TRIBUNAL THEREAFTER OBSERVED THAT THE PROV ISIONS OF SEC.40(A)(IA) OF THE ACT ARE MEANT TO ENSURE THAT THE ASSESSEES PERFORM THEIR OBLIGATION TO DEDUCT TAX AT SOURCE IN ACCORDANCE WITH THE PROV ISIONS OF THE ACT. SUCH COMPLIANCE WILL ENSURE REVENUE COLLECTION WITHOUT M UCH HASSLE. WHEN THE OBJECT SOUGHT TO BE ACHIEVED BY THOSE PROVISIONS AR E FOUND TO BE ACHIEVED, IT WOULD BE UNJUST TO DISALLOWANCE LEGITIMATE BUSIN ESS EXPENSES OF AN ASSESSEE. DESPITE DUE COLLECTION OF TAXES DUE, IF DISALLOWANCE OF GENUINE BUSINESS EXPENSES ARE MADE THAN THAT WOULD BE UNJUS T ENRICHMENT ON THE PART OF THE GOVERNMENT AS THE PAYEE WOULD HA VE ALSO PAID THE TAXES ON SUCH INCOME. IN ORDER TO REMOVE THIS ANOMALY, TH IS AMENDMENT HAS IT(TP)A NO.146/BANG/2015 PAGE 37 OF 52 BEEN INTRODUCED. IN CASE OF PAYMENT TO NON-RESIDENT , THE GOVERNMENT DOES NOT HAVE ANY OTHER MECHANISM TO RECOVER THE DUE TAX ES. HENCE, NO AMENDMENT WAS MADE IN SECTION 40(A)(I). THE LEGISL ATURE HAS NOT GIVEN BLANKET DEDUCTION UNDER SECTION 40(A)(IA). THE DEDU CTION AS PER AMENDED SECTION WILL BE ALLOWED ONLY IF THE - (I) PAYEE HAS FURNISHED HIS RETURN OF INCOME UNDER SECTION 139; (II) PAYEE HAS TAKEN INTO ACCOUNT SUCH SUM FOR COM PUTING INCOME IN SUCH RETURN OF INCOME; AND (III) PAYEE HAS PAID THE TAX DUE ON THE INCOME DEC LARED BY HIM IN SUCH RETURN OF INCOME, AND THE PAYER FURNISHES A CERTIFICATE TO THIS EFFEC T FROM AN ACCOUNTANT IN SUCH FORM AS MAY BE PRESCRIBED. 25. THE TRIBUNAL THEREAFTER CONSIDERED THE QUESTIO N AS TO WHETHER THE AMENDMENT MADE AS ABOVE IS PROSPECTIVE OR RETROSPEC TIVE W.E.F. 1.4.2005 WHEN THE PROVISIONS OF SEC.40(A)(IA) WERE INTRODUCE D. KEEPING IN VIEW THE PURPOSE BEHIND THE PROVISO INSERTED BY THE FINANCE ACT, 2012 IN SECTION 40(A)(IA) OF THE ACT, IT CAN BE SAID TO BE DECLARAT ORY AND CURATIVE IN NATURE AND THEREFORE, SHOULD BE GIVEN RETROSPECTIVE EFFECT FROM 1ST APRIL, 2005, BEING THE DATE FROM WHICH SUB-CLAUSE (IA) OF SECTIO N 40(A) WAS INSERTED BY THE FINANCE (NO. 2) ACT, 2004. 26. THE LEARNED COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT A CERTIFICATE IN FORM NO.26A OF THE RULES HAD ALREADY BEEN FILED BEFORE THE AO AND DRP. THE SAID CERTIFICATE IN FORM NO.26A OF A CHARTERED ACCOUNTANT IS A CERTIFICATE CERTIFYING THAT TPL HAS PAID TAX ON THE SUM OF IT(TP)A NO.146/BANG/2015 PAGE 38 OF 52 RS.184,95,91,300/- RECEIVED FROM THE ASSESSEE. IT WAS THEREFORE CONTENDED BY HIM THAT IN VIEW OF THE AMENDED PROVIS IONS OF LAW REFERRED TO ABOVE WHICH HAVE BEEN HELD TO HAVE RETROSPECTIVE OP ERATION AND IN VIEW OF THE FACT THAT THE ASSESSEE HAS SATISFIED THE REVENU E THAT TAXES DUE ON PAYMENT MADE BY IT TO TPL HAVE BEEN DECLARED BY TPL IN THEIR RETURN OF INCOME, THE ISSUE MAY BE RESTORED TO THE AO TO VERI FY THE CLAIM OF THE ASSESSEE AND IF IT IS FOUND THAT TPL HAS IN FACT IN CLUDED THE RECEIPTS FROM THE ASSESSEE IN ITS RETURNS OF INCOME AND PAID TAXE S THEREON THAN TO THAT EXTENT THE DISALLOWANCE U/S.40(A)(IA) OF THE ACT BE DELETED. 27. WE HAVE CONSIDERED THE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT THE PLEA MADE BY HIM IN THE LIGHT OF THE DECISIONS RELIED UPON BY HIM DESERVE TO BE ACCEPTED . ACCORDINGLY, THE ORDER OF THE AO MAKING DISALLOWANCE U/S.40(A)(IA) O F THE ACT WHICH WAS SUSTAINED BY THE AO/DRP IS SET ASIDE AND THE ISSUE OF DISALLOWANCE U/.S.40(A)(IA) OF THE ACT IS DIRECTED TO BE DECIDED AFRESH BY THE AO IN THE LIGHT OF THE CERTIFICATE IN FORM NO.26-A FILED BY T HE ASSESSEE AND IN THE LIGHT OF THE DECISION REFERRED TO BY THE LEARNED COUNSEL FOR THE ASSESSEE. THE CORRECTNESS OF THE SALE VALUE AS CLAIMED BY THE ASS ESSEE WILL ALSO BE VERIFIED BY THE AO. THE AO WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE DECIDING THE ISSUE WITH LIBERTY TO FURNISH ADDITIONAL EVIDENCE TO SUBSTANTIATE THE CLAIM OF THE ASSESSEE. ACCORDINGLY THESE GROUNDS ARE TREATED AS ALLOWED. IT(TP)A NO.146/BANG/2015 PAGE 39 OF 52 28. GROUND NOS.1 TO 3 ARE GENERAL GROUNDS AND GROUN D NOS.17 TO 24 RAISED BY THE ASSESSEE ARE GENERAL GROUNDS IN RELAT ION TO DETERMINATION OF ALP IN RESPECT OF ALL INTERNATIONAL TRANSACTIONS WH ICH WERE REFERRED TO TPO AND CONSIDERED BY THE DRP IN SO FAR AS IT IS PREJUD ICIAL TO THE ASSESSEE. THESE GROUNDS NEED NO SPECIFIC ADJUDICATION. 28. GROUND NO.25 TO 32 RAISED BY THE ASSESSEE ARE WITH REGARD TO ADDITION OF RS.83,95,951/- MADE TO THE TOTAL INCOME CONSEQUENT TO DETERMINATION OF ALP IN RESPECT OF AN INTERNATIONAL TRANSACTION OF RENDERING IT ENABLED SERVICES(ITES) BY THE ASSESSEE TO ITS AE . THE ASSESSEE RECEIVED A SUM OF RS.6,48,93,316/- FOR RENDERING IT ES TO ITS AE. THE ASSESSEE OPERATING PROFIT TO TOTAL COST WAS 13%. T HE TP STUDY OF THE ASSESSEE ARRIVED AT ARITHMETIC MEAN OF CERTAIN COMP ARABLE COMPANIES OF 14% AND CLAIMED THAT THE PRICE THE ASSESSEE CHARGED ITS AE WAS AT ARMS LENGTH. THE TPO REJECTED THE TP STUDY OF THE ASSES SEE AND ARRIVED AT A SET OF 9 COMPARABLE COMPANIES WHOSE ARITHMETIC MEAN WAS 25.69%. THE DETAILS IN THIS REGARD ARE GIVEN AT PARA 3.5. AT PA GE 8 OF THE TPOS ORDER. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF -1.93% , THE ARITHMETIC MEAN OF COMPARABLE WAS ARRIVED AT BY THE TPO AT 27.62%. 29. THE TPO ULTIMATELY MADE AN ADDITION OF RS.67,83 ,95,931 WHICH WAS SUBSEQUENTLY REDUCED TO RS.83,95,931. THE ADDITION WAS SUSTAINED BY THE DRP. HENCE, THE AFORESAID GROUNDS OF APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. IT(TP)A NO.146/BANG/2015 PAGE 40 OF 52 30. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE PRAYS FOR EXCLUSION OF 2 COMPARABLE COMPANIES OUT OF THE 9 COMPARABLE C OMPANIES FINALLY CHOSEN BY THE TPO FOR THE PURPOSE OF COMPARISON. A CHART WAS FILED BEFORE US SHOWING HOW THE 2 COMPARABLE COMPANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE VIZ., ACCENTIA TECHNOLOGY LIMITED AND INFOS YS BPO LTD., WERE ALSO CONSIDERED BY ITAT BANGALORE BENCH IN THE CASE OF S YMPHONY MARKETING SOLUTIONS INDIA PVT.LTD. VS. ITO IT (TP) A/NO.1316/ BANG/2012 FOR AY 08- 09, BY THE HYDERABAD BENCH OF ITAT IN THE CASE OF PARAXEL INTERNATIONAL (INDIA) PRIVATE LIMITED VS. ACIT ITA NO.144/HYD/2014 AY 09-10 ORDER DATED 30.9.2014 AND IT WAS HELD THEREIN THAT THE AFORESAID COMPANI ES ARE NOT COMPARABLE WITH A ITES SERVICE PROVIDERS SUCH A S THE ASSESSEE. 31. WE DEAL WITH THE COMPARABLE COMPANIES WHICH THE ASSESSEE SEEKS EXCLUSION. 1. ACCENTIA TECHNOLOGY LTD., 2. INFOSYS BPO LTD. THE COMPARABILITY OF THESE COMPANY WITH A ITES COMPANY WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF PARAXEL INTERNATIONAL (INDIA) PVT. LTD. (SUPRA) AND THE TRIBUNAL HELD AS FOLLOWS ON THE COMPARABILI TY OF THE AFORESAID COMPANIES WITH A COMPANY PROVIDING ITES IN THE FOLL OWING MANNER:- 10. IN GROUNDS NO.4 TO 6, THE ASSESSEE HAS CHALLEN GED THE COMPARABLES SELECTED BY THE TPO FOR THE PURPOSE OF TP ANALYSIS AND AS SUBMITTED BY THE LEARNED COUNSEL OR THE ASSE SSEE, THE ASSESSEE IS OBJECTING TO THE SELECTION OF ONLY THE FOLLOWING FIVE COMPARABLES, OUT OF THE TWELVE COMPANIES SELECTED A S COMPARABLES- IT(TP)A NO.146/BANG/2015 PAGE 41 OF 52 SL. NO. COMPANY NAME 1. ACCENTIA TECHNOLOGIES LIMITED 2. COSMIC GLOBAL LTD. 3. ECLERX SERVICES LTD. 4. GENESYS INTERNATIONAL LTD. 5. INFOSYS B P O LTD. 11. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES O N THE ISSUE OF INCLUSION/EXCLUSION OF THE ABOVE FIVE COMPANIES AS COMPARABLES AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD IN CLUDING THE VARIOUS DECISIONS OF THE COORDINATE BENCHES OF THE TRIBUNAL CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE. ACCENTIA TECHNOLOGIES LIMITED 12. AS REGARDS THE SELECTION OF ACCENTIA TECHNOLOG IES LIMITED AS COMPARABLE, THE LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED ON THE DECISIONS OF THIS TRIBUNAL IN THE CASES OF CAPI TAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD. V/S. ADDL./DY . COMMISSIONER OF INCOME-TAX, CIRCLE 1(2), HYDERABAD AND VICE VERSA (ITA NO.124 AND 170/HYD/2014 DATED 31.7.2014) ; EXCELLENCE DATA RESEARCH PVT. LTD., HYDERABAD V/S. ITO WARD 2(1), HYDERABAD (ITA NO.159/HYD/2014 DATED 31.7.201 4); AND HYUNDAI MOTORS INDIA ENGINEERING P. LTD., HYDERABAD V/S. DCIT, CIRCLE 2(2), HYDERABAD (ITA NHO.255/HYD/2014 DATED 31.7.2014), WHEREIN M/S. ACCENTIA TECHNOLOGIES LIMI TED(SEG) WAS EXCLUDED BY THE TRIBUNAL FROM THE LIST OF COMPA RABLES ON THE GROUND THAT IT WAS A CASE OF MERGERS AND ACQUISITIO N, AND THE COMPANY WAS ALSO FOUND TO BE FUNCTIONALLY DIFFERENT . THE RELEVANT OBSERVATIONS OF THE TRIBUNAL AS RECORDED I N PARA 19.2 OF THE ORDER PASSED IN THE CASE OF EXCELLENCE DATA RES EARCH PVT. LTD., HYDERABAD (SUPRA), BEING RELEVANT IN THIS CAS E, ARE REPRODUCED BELOW- 19.2 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND NOTICED THAT THIS COMPANY OPERATES IN A DIFFERENT B USINESS STRATEGY OF ACQUIRING COMPANIES FOR INORGANIC GROWT H AS ITS STRATEGY. IN EARLIER YEARS ON THE REASON OF ACQ UISITION OF VARIOUS COMPANIES, BEING AN EXTRAORDINARY EVENT WHICH HAD AN IMPACT ON THE PROFIT, THIS COMPANY WAS EXCLU DED. AS SUBMITTED BY THE LEARNED COUNSEL, THIS YEAR ALSO , THE ACQUISITION OF SOME COMPANIES BY THAT COMPANY MAY HAVE IMPACT ON THE PROFIT. CONSIDERING THE PROFIT M ARGINS OF THE COMPANY AND INSUFFICIENT SEGMENTAL DATA, WE ARE OF IT(TP)A NO.146/BANG/2015 PAGE 42 OF 52 THE OPINION THAT THIS COMPANY CANNOT BE SELECTED AS A COMPARABLE. MOREOVER, THIS IS ALSO NOT A COMPARABLE IN THE CASE OF M/S. MERCER CONSULTING (INDIA) P. LTD. (SUPRA), WHICH INDICATES THAT THE TPO THEREIN HAS EXCLUDED IT AT THE OUTSET. IN VIEW OF THIS, WE DIRE CT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPARABLE, F ROM THE LIST OF COMPARABLES SELECTED. 13. AS POINTED OUT BY THE LEARNED COUNSEL FOR THE A SSESSEE, THERE WAS ACQUISITION OF A COMPANY BY M/S. ACCENTIA TECHN OLOGIES LIMITED DURING THE RELEVANT YEAR, AND THE SAID COMP ANY, THEREFORE, CANNOT BE CONSIDERED AS COMPARABLE DUE T O THIS EXTRAORDINARY EVENT WHICH OCCURRED IN THE RELEVANT YEAR AS RIGHTLY HELD BY THE TRIBUNAL INTER ALIA IN THE CASE OF EXCE LLENCE DATA RESEARCH P. LTD. (SUPRA). ALTHOUGH THE LEARNED DEPA RTMENTAL REPRESENTATIVE HAS SOUGHT TO CONTEND THAT THE ACQUI SITION OF A COMPANY BY M/S. ACCENTIA TECHNOLOGIES LTD. TOOK PLA CE AT THE FAG END OF THE YEAR UNDER CONSIDERATION, THE LEARNE D COUNSEL FOR THE ASSESSEE HAS POINTED OUT THAT THE PROCESS OF AC QUISITION HAD STARTED ON 15.5.2008 ITSELF, I.E. IN THE EARLIER PA RT OF THE YEAR UNDER CONSIDERATION. WE, THEREFORE, FOLLOW THE DECISION O F THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF EX CELLENCE DATA RESEARCH SERVICES PVT. LTD. (SUPRA) AND DIRECT THE AO/TPO TO EXCLUDE THE ACCENTIA TECHNOLOGIES LIMITED FROM THE LIST OF COMPARABLES. .. INFOSYS BPO 20. AS REGARDS SELECTION OF INFOSYS BPO AS A COMPAR ABLE COMPANY, THE LEARNED COUNSEL FOR THE ASSESSEE HAS C ONTENDED THAT THE SAID COMPANY CANNOT BE TAKEN AS COMPARABLE BECA USE OF ITS UNCOMPARABLE SIZE OF OPERATIONS. HE HAS CONTENDED T HAT THE TURNOVER OF THE SAID COMPANY WAS MANY TIMES HIGHER THAN THAT OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. A LTHOUGH THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS CONTENDED T HAT THE SIZE OF OPERATIONS DOES NOT MATTER AS FAR AS SELECTION O F COMPARABLES IS CONCERNED ESPECIALLY IN THE SECTOR OF IT ENABLED SE RVICES, IT IS OBSERVED THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V/S. AGNITY TEC HNOLOGIES PVT. LTD. (219 TAXMAN 26) HOLDING THAT HUGE TURNOVE R COMPANIES LIKE INFOSYS AND WIPRO CANNOT BE CONSIDERED AS COMP ARABLES WITH SMALLER COMPANIES LIKE THE ASSESSEE IN THE PRESENT CASE. IT(TP)A NO.146/BANG/2015 PAGE 43 OF 52 RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF AGNITY TECHNOLOGIES P. LTD. (S UPRA), WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE INFOSYS BPO FROM THE LIST OF COMPARABLES. 32. AS FAR AS ACCENTIA TECHNOLOGY LTD., IS CONCERN ED, EVEN DURING THE PREVIOUS YEAR RELEVANT TO AY 2010-11, THERE WAS AMA LGAMATION OF ASCENT INFOSERVE PRIVATE LIMITED WITH ACCENTIA TECHNOLOGY LTD., AND CONSEQUENT THERETO THE ASSETS AND LIABILITIES AND ACCUMULATED RESERVES AND THE FINANCIAL RESULTS FOR THE YEAR ENDED 31 ST MARCH, 2010, OF THE AMALGAMATING COMPANY WERE INCORPORATED IN THE AMGALAMATED COMPAN Y. AS FAR AS INFOSYS BPO LTD., IS CONCERNED, THE OBSERVATIONS MA DE BY THE TRIBUNAL IN THE DECISION REFERRED IN THE EARLIER PARAGRAPH WILL HOLD GOOD FOR THE PRESENT AY 2010-11 ALSO. RESPECTFULLY FOLLOWING THE DECISI ON OF THE TRIBUNAL REFERRED TO ABOVE, WE DIRECT THAT THE AFORESAID 2 C OMPANIES BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES FOR THE PURPO SE OF COMPUTING ARITHMETIC MEAN FOR COMPARABILITY PURPOSE. THE TPO IS DIRECTED TO GIVE EFFECT ACCORDINGLY. 33. THE LAST ISSUE THAT ARISES FOR CONSIDERATION I N THIS APPEAL IS GROUND NOS. 33 TO 38 OF THE GROUNDS OF APPEAL RAISED BY TH E ASSESSEE ARE WITH REGARD TO AN ADDITION OF RS. 1,17,46,336 TO THE TOT AL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENT IN THE ARMS LENG TH PRICE WITH RESPECT TO CO-ORDINATION/MONITORING SERVICES RELATING TO CLINI CAL TRIAL ACTIVITIES UNDERTAKEN IN INDIA PROVIDED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES. IT(TP)A NO.146/BANG/2015 PAGE 44 OF 52 IT IS THE GRIEVANCE OF THE ASSESSEE THAT THE TPO/A O/DRP HAVE ERRED IN RE- CHARACTERIZING THE ASSESSEE AS A CLINICAL RESEARCH ORGANIZATION (CRO) AS OPPOSED TO A MERE COORDINATOR OF CLINICAL TRIAL ACTIVITIES BEING CARRIED OUT IN INDIA ON BEHALF OF ITS AE. WITHOUT PREJUDICE IT HAS ALSO BEEN PRAYED THAT TPO/AO/DRP ERRED IN ACCEPTING CERTAIN COMPARABLES W HICH DO NOT RENDER CLINICAL TRIAL SERVICES. IT HAS ALSO BEEN URGED BY THE ASSESSEE THAT TPO/AO/DRP HAVE ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE FUNCTIONAL AND ECONOMIC ANALYSIS UNDERTAKEN BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, WHICH WAS DULY ACCEPTED BY THE LEARNED AO/ TPO UNDER IDENTICA L FACTS AND CIRCUMSTANCES IN THE ASSESSEES OWN CASE FOR THE EA RLIER ASSESSMENT YEAR WITHOUT ASSIGNING ANY COGENT OR VALID REASONS. 34. THE TAXPAYER DISCLOSED RECEIPT OF RS.22,11,19, 930/- AS INTERNATIONAL TRANSACTIONS IN ITS ADMINISTRATIVE SUPPORT SERVICES SEGMENT DURING THE FY 2010-11. THIS RECEIPT COMPRISES OF TWO DISTINCT AC TIVITIES : (1) ROFE, WHICH IS IN THE NATURE OF ADMINISTRATIVE SUPPORT SERVICES ; AND (II) CLINICAL TRIAL ACTIVITIES. THE INTERNATIONAL TRANSACTIONS PERTAIN ING TO CLINICAL TRIAL SEGMENT WAS ANALYSED BY THE TPO AS UNDER. 35. IN CARRYING OUT CLINICAL TRIAL ACTIVITIES, THE TAXPAYER HAD INCURRED TWO TYPES OF EXPENDITURE. FIRST, ITS OWN COST OF RS. 68 ,03,275/- AND SECOND, COST OF RS.6,19,54,270/- ON ACCOUNT OF ACTIVITIES OUTSOU RCED. WHILE IT HAS RECEIVED COMPENSATION OF COST WITH MARK UP OF 13% R ELATING TO FORMER, IT IT(TP)A NO.146/BANG/2015 PAGE 45 OF 52 RECEIVED LATTER AMOUNT ON COST-TO-COST BASIS AND CL AIMED IT AS REIMBURSEMENTS. 36. THE TPO HOWEVER WAS OF THE VIEW THAT THE ASSESS EE WAS IN FACT RENDERING CLINICAL TRIAL SERVICES TO ITS AE AND CH OSE COMPARABLE COMPANIES ENGAGED IN CLINICAL TRIAL SERVICES AND ARRIVED AT A ARITHMETIC MEAN OF THOSE COMPANIES AT 18.37% OPERATING COST TO TOTAL COST IN PARA 5.5 OF THE TPOS ORDER. THE ASSESSEE OBJECTED TO THE CHARACTERIZATI ON OF THE ADMINISTRATIVE SUPPORT SERVICES RENDERED BY IT TO ITS AE AS CLINIC AL TRIAL. THE ASSESSEE SUBMITTED THAT IT WAS OPERATING AS A SUPPORT HUB AN D PROVIDED COORDINATION FOR THE CLINICAL TRIAL ACTIVITY OF NOVO NORDISK A/S . THE ASSESSEE IS COMPENSATED AT A COST-PLUS MARK UP OF 13% BASED ON THE SERVICES PROVIDER AGREEMENT (SERVICE AGREEMENT) DATED JULY 01, 2007. THE ASSESSEE PROVIDES SERVICES WITH RESPECT TO ARRANGIN G FOR, COORDINATION AND SUPERVISION OF CLINICAL TRIAL ACTIVITY OF NOVO NORD ISK A/S. THESE SERVICES PROVIDED BY THE ASSESSEE INCLUDE THE FOLLOWING: CONCLUDE CLINICAL STUDY CONTRACTS WITH THE INDEP ENDENT INVESTIGATORS CAPABLE TO CARRY OUT THE TRIALS ACCOR DING TO THE REQUIRED STANDARDS AND PROCEDURES; CONTROL AND MONITOR THE CLINICAL STUDY PROCESS; PROVIDE THE INVESTIGATORS (AND SUPPORT PERSONAL) WITH NECESSARY INFORMATION AND TRAINING WITH RESPECT TO PROCEDURES AND SCOPE OF RESEARCH; UNDERTAKE PERIODICAL VERIFICATION OF THE PROGRES S OF CLINICAL TRIALS; IT(TP)A NO.146/BANG/2015 PAGE 46 OF 52 PAY VISITS TO HOSPITALS AND COLLECT THE STUDY ME DICATION AND ADDITIONAL MATERIALS, STUDY DOCUMENTATION; CONDUCT PRELIMINARY COMPILATION OF RESULTS; ASSIST IN FINAL ELABORATION OF THE OUTCOME OF TE STS; CONDUCT THE ADDITIONAL ACTIVITIES NECESSARY TO P ERFORM THE ABOVE ACTIVITIES, SUCH AS SUPPLYING SERVICES THE IN VESTIGATORS WITH THE APPROPRIATE FORMS AND QUESTIONNAIRES FOR E ACH PHASE OF THE RESEARCH, ORDERING TRANSLATION OF THE NECESS ARY DOCUMENTS AND SUPPLYING THE INVESTIGATORS WITH STUD Y MEDICATION TO BE USED EXCLUSIVELY WITHIN THE TRIALS . FURTHER, THE ASSESSEE BASICALLY ACTS AS THE FIRST L INE LOCAL LIAISON AND IS RESPONSIBLE FOR COMPLYING WITH ALL THE LOCAL REGULATORY REQUIREMENTS INCLUDING FILING PRICE INFORMATION WIT H THE PRICE CONTROL AUTHORITIES. THE COSTS OF LOCAL REGISTRATIO N TRIALS AND PHASE IV (POST MARKETING STUDIES) TRIALS ARE MET BY THE A SSESSEE AS PART OF ITS DISTRIBUTION ACTIVITIES. PHASE IV TRIALS HAV E A MAINLY MARKETING FUNCTION TO SPREAD KNOWLEDGE ABOUT A NEW DRUG AND TO INDUCE DOCTORS TO PRESCRIBE IT. IF A COMPETITIVE PR ODUCT ALREADY EXISTS IN THE INDIAN MARKET AND NOVO NORDISK A/S IS INTRODUCING A SIMILAR BUT SUPERIOR PRODUCT, THE MEDICAL DEPARTM ENT PROVIDES INFORMATION ABOUT THE SUPERIORITY OF NOVO NORDISK A /S PRODUCT TO THE INDIAN DRUG CONTROL AUTHORITIES AND OBTAINS THE NECESSARY PERMISSION TO LAUNCH THE PRODUCT. HOWEVER, IN CASE OF LAUNCHING A NEW PRODUCT THEN THE CLEARANCE FROM THE INDIAN DR UG CONTROL AUTHORITIES IS OBTAINED BY PROVIDING FACTUAL PROOF OF TRIALS (ALL PHASES) INCLUDING THE APPROVALS IF ANY RECEIVED IN OTHER COUNTRIES. FURTHER, ON AN ONGOING BASIS, SO LONG AS THE DRUG I S MARKETED IN INDIA, NOVA NORDISK INDIA UPDATES THE AUTHORITIES O N SAFETY INFORMATION. THE ASSESSEE UNDERTAKES SUPPORT AND COORDINATION S ERVICES WITH RESPECT TO PHASE II AND PHASE III OF THE MULTI-CENT RIC TRIALS FOR PRODUCTS OF NOVO NORDISK A/S, WHICH ARE UNDER DEVEL OPMENT. THE ASSESSEE IDENTIFIES CENTERS FOR TRIALS, SELECTS THE PATIENTS AND ENSURES THAT THE TRIALS ARE RUN AS PER GOOD CLINICA L PRACTICES (GCP) LAID OUT BY NOVO NORDISK A/S. THESE TESTS A RE ADMINISTERED ON PATIENTS IN INDIA WITH LOCAL PERMIS SION FROM THE AUTHORITIES AND WITH THE CONSENT OF THE PATIENTS TH ROUGH THE INVESTIGATORS. THE RESULTS OF THESE STUDIES ARE THE N COLLATED AND IT(TP)A NO.146/BANG/2015 PAGE 47 OF 52 REPORTED TO NOVO NORDISK A/S FOR FURTHER ANALYSIS A ND RESEARCH. THE ASSESSEE POINTED OUT THAT ITS INFRASTRUCTURE W AS ONLY IN THE FORM OF FURNITURE AND FIXTURES, OFFICE EQUIPMENT, D ATA PROCESSING MACHINES, MOTOR VEHICLES AND LEASE HOLD IMPROVEMENT S, WHICH WERE USED FOR GENERAL ADMINISTRATION AND IT WAS NOT SUFFICIENT FOR CARRYING OUT THE WHOLE CLINICAL RESEARCH ACTIVITY. THE MAIN FUNCTION OF THE ASSESSEE IS TO COLLATE THE DATA AND TRANSMIT THE SAME TO NOVO NORDISK A/S FOR WHICH IT IS SUBSTANTIA LLY REIMBURSED BY NOVO NORDISK A/S BY MARK-UP OF 13% ON COST. THE ABOVE ACTIVITIES ARE AKIN TO PROVISION OF ADMIN ISTRATIVE AND CO-ORDINATION SERVICES. THE ASSESSEE ACTS AS A LOCA L LIAISON WITH HOSPITALS/DOCTORS/INVESTIGATORS/PATIENTS AND IS RES PONSIBLE FOR COMPLYING WITH ALL THE LOCAL REGULATORY REQUIREMENT S. THE SERVICES INCLUDE INITIATE, PLAN AND CO-ORDINATE WIT H NECESSARY DEPARTMENTS INCLUDING CORPORATE GLOBAL DEVELOPMENT FOR UNDERTAKING OF CLINICAL TRIALS SUPPORT SERVICES AS DIRECTED BY NOVO NORDISK A/S. THE ASSESSEE REITERATED THAT IT WAS N OT INVOLVED IN ANY CLINICAL RESEARCH ACTIVITY BUT WAS FACILITATING ONLY CONTRACT SUPPORT SERVICES TO NOVO NORDISK A/S, AS REFERRED T O ABOVE. THE ASSESSEE SUBMITTED THAT IT TRANSFERS THE COST OF CL INICAL TRIAL ACTIVITIES UNDERTAKEN BY INDEPENDENT INVESTIGATORS WITHOUT ANY MARK-UP. THE ASSESSEE EMPHASIZED THAT THE ACTUAL SE RVICES PERFORMED AS STATED EARLIER, IS LIMITED TO MERE SUPPORT AND COORDINATION SERVICES FOR THE CLINICAL TRIAL ACTIVI TY OF NOVO NORDISK A/S, AND DOES NOT PERFORM ANY SERVICES/FUNC TIONS OF A CLINICAL RESEARCH OR ORGANIZATION AS ALLEGED BY YOU R GOOD(SELF) DURING THE HEARING . 37. THE ASSESSEE ALSO OBJECTED TO THE CHOICE OF C OMPARABLE COMPANIES AS ADOPTED BY THE TPO. THE ASSESSEE PLAC ED RELIANCE ON THE DECISION OF THE ITAT MUMBAI BENCH IN THE CASE O F ZYDUS ATLANTA HEALTHCARE PVT. LTD. ITA NO.3311 & 3312/MUM/2008 WHEREIN ON IDENTICAL FACTS AS THE CASE OF THE ASSESSEE THE MUM BAI BENCH HELD THAT THE SERVICES RENDERED CANNOT BE CHARACTERIZED AS CL INICAL TRIAL SERVICES. IT(TP)A NO.146/BANG/2015 PAGE 48 OF 52 38. THE TPO HOWEVER DID NOT DEAL WITH ANY OF THE O BJECTIONS RAISED BY THE ASSESSEE BUT COMPUTED THE ALP AS FOLLOWS: 5.7 ALP COMPUTATION : IN THE LIGHT OF THE ABOVE DISCUSSIONS, THE ARMS LE NGTH PRICE OF RECEIPT OF COMPENSATION IN CLINICAL TRIAL SEGMENT, IS COMPUTED AS UNDER. ARMS LENGTH MEAN MARGIN 18.37% CLINICAL TRIAL COST + REIMBURSEMENT RELATING TO CLINICAL TRIAL (RS.68,03,275 + RS.6,19,54,270) RS.6,87,57,545 ARMS LENGTH PRICE (ALP) @ 118.37% OF CLINICAL TRIAL OPERATING COST RS.8,13,88,306 PRICE RECEIVED + REIMBURSEMENT RELATING TO CLINICAL TRIAL (RS.76,87,700 + RS.6,19,54,270) RS.6,96,41,970 ADJUSTMENT U/S. 92CA RS.1,17,46,336 THE ABOVE AMOUNT OF RS.1,17,46,336/- IS TREATED A S TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF CLINICAL TRIAL SEGMENT OF THE TAXPAYERS INTERNATIONAL TRANSACTION FOR THE AY 2009-10. 39. BEFORE THE DRP, THE ASSESSEE REITERATED SUBMIS SIONS AS WERE MADE BEFORE TPO. THE DRP HOWEVER CONFIRMED THE ORD ER OF THE TPO FOLLOWING THE ORDER OF THE DRP FOR AY 09-10. IN AY 09-10, THE DRP HAD HELD ON THIS ISSUE OF CLINICAL TRIAL SEGMENT AS FOLLOWS: 15.3. BASED ON THE ABOVE ARGUMENTS, THE ASSES SEE HOLDS THAT THE COMPARABLES SELECTED BY THE TPO ARE FUNCTIONALL Y DIFFERENT FROM ITS OWN ACTIVITIES. HOWEVER, THE TPO ON A CONS IDERATION OF THE ARGUMENT PROCEEDED TO DETERMINE THE TRANSFER PRICING ADJUSTMENT FOUND THAT THE FUNCTIONS DISCHARGED BY T HE TAX PAYER, ASSETS DEPLOYED, RISKS ASSUMED NEED NOT BE S EPARATED OUT IN ORDER TO DISTINGUISH ITS OWN COST AND THE COMPAR ABLE COST IF IT(TP)A NO.146/BANG/2015 PAGE 49 OF 52 DONE THROUGH THIRD PARTIES, WHEN ALL THE ACTIVITIES LED TO CLINICAL TRIALS CONDUCTED ON BEHALF OF THE AE, WHICH DOES NO T HAVE ANY PHYSICAL PRESENCE IN INDIA. 15.4. WE HAVE CAREFULLY CONSIDERED THE ISSUE. FROM A PERUSAL OF THE ACTIVITIES OF THE ASSESSEE, WE FIND IT FARFE TCHED TO CLASSIFY THE SAME AS MERE ADMINISTRATIVE OR COORDINATION SER VICES. THE CONDUCING OF CLINICAL TRIALS IS A COMPLICATED PROCE SS INVOLVING VARIOUS STATUTORY AND REGULATORY FRAMEWORKS AND RESPONSIBILITIES, ALL OF WHICH, ARE SHOULDERED BY T HE ASSESSEE ITSELF. THE FAR ANALYSIS MADE BY THE TPO DOES NOT I NDICATE THE SUPERFICIAL LEVEL OF INVOLVEMENT WHICH COULD CHARAC TERIZE THE ACTIVITIES OF A MERE SUPPORTER OR COORDINATOR. 15.5. FROM THE ASSESSEES SUBMISSIONS, IT IS ALSO NOTED THAT THE ROLE OF THE PRINCIPAL IS LIMITED TO DECIDING UPON T HE PARTICULAR CLINICAL TRIAL TO BE CONDUCTED AND IDENTIFICATION O F COUNTRIES/GEOGRAPHICAL AREAS FOR THE PURPOSE. IT IS THE ASSESSEE WHICH APPLIES FOR ALL LOCAL APPROVALS AND CONDUCTS ALL ASPECTS OF THE CLINICAL TRIAL ACTIVITIES. APART, FROM SELECTIO N OF THE HOSPITALS/INSTITUTIONS, THE CLINICAL TRIAL AGREEMEN TS WITH THESE BODIES ARE ALSO ENTERED INTO BY THE ASSESSEE ITSELF . ALL QUALITY CONTROL AND INSPECTION WORK IS PERFORMED BY THE ASS ESSEE, WHICH IS ALSO FULLY RESPONSIBLE FOR LEGAL COMPLIANC ES IN INDIA. AS SUCH IT FOLLOWS THAT THE ASSESSEE SHOULDERS SUBS TANTIAL LOCAL RISK IN THE COURSE OF ITS ACTIVITIES. 15.6. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THA T COMPARABLES TAKEN BY THE TPO AS BODIES ENGAGED IN C LINICAL TRIAL ACTIVITIES ARE FULLY JUSTIFIED. FOR DETERMINA TION OF THE ALP, THEREFORE, THE AO HAS CORRECTLY ADOPTED CERTAIN COM PARABLES WHICH ARE HOWEVER NOT ACCEPTABLE TO THE ASSESSEE. T HE ARGUMENT OF THE ASSESSEE SEEKS TO LIGHTEN THE DEPTH OF ITS INVOLVEMENT IN CLINICAL TRIALS WHICH WE DO NOT FIND ACCEPTABLE. IT PERFORMS AS A FULL FLEDGED CLINICAL SERVICES PRO VIDER TO ITS AE AND OUGHT TO BE COMPENSATED AS SUCH. ACCORDINGLY, T HIS OBJECTION IS NOT ACCEDED TO. IT(TP)A NO.146/BANG/2015 PAGE 50 OF 52 40. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSE E REITERATED THE STAND OF THE ASSESSEE AS WAS PUT FORTH BEFORE THE T PO/DRP. THE LEARNED DR RELIED ON THE ORDER OF THE DRP. 41. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT THE ORDER OF THE DRP HAS TO BE SET ASIDE AND THE IS SUE REQUIRES TO BE REMANDED FOR FRESH CONSIDERATION BY THE TPO. WE H AVE PERUSED THE DECISION OF THE MUMBAI ITAT IN THE CASE OF ZYDUS ATLANTA HEALTHCARE (P) LTD. (SUPRA) AND FIND THAT THE ISSUE AS TO WHETHER THE AE WAS DOING CLINICAL RESEARCH OR ADMINISTRATIVE SERVICE I S ESSENTIALLY A FACTUAL ISSUE. THE ASSESSEE TO SUBSTANTIATE ITS CASE THAT IT WAS ONLY CO- ORDINATING IN THE MATTER OF CARRYING OUT CLINICAL R ESEARCH ON BEHALF OF THE AE HAS NOT FILED ANY EVIDENCE BUT HAS ONLY MADE ASS ERTIONS. FACTS WITH REGARD TO THE ACTIVITIES CARRIED OUT BY IT ON BEHALF OF THE AE FOR WHICH THE ASSESSEE RECEIVED ADMINISTRATIVE SUPPORT SERVICE FEE ARE WITHIN ITS KNOWLEDGE. IT HAS TO SUBSTANTIATE THAT CLINICAL RESEARCH WAS IN FACT CARRIED OUT BY A THIRD PARTY PURSUANT TO AGREE MENT WITH THE AE AND NOT WITH THE ASSESSEE AND THAT THE ASSESSEE ONLY CA RRIED OUT CO- ORDINATION ACTIVITY FOR WHICH IT RECEIVED PAYMENT F ROM AE. MERE ASSERTION BEFORE TPO/DRP AND DESCRIPTION OF FUNCTIO NAL PROFILE IN THE TP STUDY WILL NOT BE SUFFICIENT. WE THEREFORE DIRE CT THE TPO TO CONSIDER THE ISSUE AFRESH. THE ASSESSEE HAS TO SUBSTANTIATE THE REAL ACTIVITIES WITH SUPPORTING EVIDENCE AND SHOW THAT IT DID NOT C ARRY OUT ANY CLINICAL TRIAL AND THAT IT ACTED ONLY AS CO-ORDINATOR BETWEE N THE AE AND IT(TP)A NO.146/BANG/2015 PAGE 51 OF 52 INDEPENDENT CLINICAL TRIAL SERVICE PROVIDERS OR HOS PITALS. IN THE EVENT OF THE ASSESSEES ACTIVITIES HELD TO BE CLINICAL TRIAL THAN THE AO/TPO SHALL AFFORD THE ASSESSEE OPPORTUNITY TO OBJECT TO THE CO MPARABILITY OF THE COMPARABLES THAT HAS BEEN CHOSEN OR MIGHT BE CHOSEN BY THE TPO AND IN PARTICULAR THE ADDITIONAL EVIDENCE IN THE FO RM OF ANNUAL REPORTS OF CHOKSI LABORATORIES LTD., NG INDUSRTRIES LTD. AND S UVEN LIFE SCIENCES LTD., SOUGHT TO BE FILED BEFORE US SHOULD BE PERMIT TED TO BE FILED IN THE SET ASIDE PROCEEDINGS. THESE GROUNDS ARE ACCORDING LY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 42. GROUND NO.48 WITH REGARD TO LEVY OF INTEREST U/ S.234B IS PURELY CONSEQUENTIAL. THE OTHER GROUNDS NO. 49 & 50 WITH REGARD TO INITIATION OF PENALTY U/S.271(1)( C) AND 271G ARE NOT APPEALAB LE. 43. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF JULY , 2015 . SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 30 TH JULY , 2015 . /D S/ IT(TP)A NO.146/BANG/2015 PAGE 52 OF 52 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR/ SENIOR PRIVATE SECRETARY ITAT, BANGALORE.