Natco Pharma Ltd, Hyderabad V. DCIT, Cir-16(1), Hyderabad

ITA 1518/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61913 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-06-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 24-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M S RAO
• Assessee Lawyers: A V RAGHURAM
• Keywords: Transfer pricing
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, A.CCOUNTANT MEMBER ITA NO. 1518/HYD/2011 ASSESSMENT YEAR: 2008-09 NATCO PHARMA LTD., APPELLANT HYDERABAD. (PAN AAACN6927A) VS. DY. COMMISSIONER OF INCOME-TAX, RESPONDENT CIRCLE 16(1), HYDERABAD. APPELLANT BY : MR. A.V. RAGHURAM RESPONDENT BY : MR. M.S. RAO DATE OF HEARING : 24/05/2012 DATE OF PRONOUNCEMENT : 06/06 /2012 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL IS PREFERRED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE CIT(A)-V, HYDERABAD, PASSED ON 18/07/2 011 FOR THE ASSESSMENT YEAR 2008-09. 2. THE APPELLANT IS A COMPANY ENGAGED IN MANUFACT URE AND SALE OF BULK DRUGS AND FORMULATIONS. FOR THE ASSESSMENT YEAR 2008-09 IT FILED ITS RETURN OF INCOME DECLARING AN INCOME O F RS 53,39,31,890/- THE ASSESSMENT WAS TAKEN UP FOR SCR UTINY AND THE INCOME WAS DETERMINED AT RS 34,65,56,187/- VIDE ORD ER U/S 143(3) DATED 29.12.2010. THE APPELLANT CLAIMED DEDUCTION U /S 80IC OF RS. 46,57,43,949 IN RESPECT OF PROFITS OF DEHRADUN UNIT 2 ITA NO. 1518/HYD/2011 NATCO PHARMA LTD. 3. THE COMPANYS MEKAGUDA UNIT MANUFACTURES ACTIVE PHARMACEUTICAL INGREDIENTS AND FINISHED DOSAGE FORM ULATIONS ARE PRODUCED AT ITS KOTTUR AND DEHRADUN UNITS. ACTIVE PHARMACEUTICAL INGREDIENTS MANUFACTURED AT MEKAGUDA ARE TRANSFERRE D TO DEHRADUM AND KOTHUR UNITS. CERTAIN ANTI CANCER DR UGS I.E. VEENAT AND GEFTINAT ARE MANUFACTURED AT DEHRADUM PLANT. T HE MATERIALS TRANSFERRED FROM MEKAGUDA TO DEHRADUN IS AT COST PR ICE. 4. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE C OMPANY INFLATED THE INCOME OF DEHRADUN UNIT BY DEFLATING T HE INCOME OF OTHER UNITS. HE ARRIVED AT THE INCOME OF DEHRADUN UNIT BY WORKING OUT THE GROSS PROFITS OF ALL UNITS SEPARATELY AND ARRIVING AT THE AVERAGE GROSS PROFIT RATE AND APPLIED IT TO DEHRADU N SALES. HE IGNORED THE FACT THAT THE FOUR UNITS MANUFACTURE DI FFERENT TYPES OF PRODUCTS HAVING VERIFYING MARGINS AND UNDER DIFFERE NT CIRCUMSTANCES. 5. AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFOR E THE CIT(A) AGAINST REDUCTION OF DEDUCTION U/S 80IC TO RS 16,37 ,32,746 FROM THE CLAIM OF RS/. 46,57,43,949. 6. THE AR OF THE ASSESSEE SUBMITTED BEFORE THE CIT (A) AS FOLLOWS:- THE OVERHEAD AND MAINTENANCE COST OF AN USFDA APPR OVED PLANT ARE MUCH HIGHER THAN OTHER PLANTS. FURTHER TH E PROFIT MARGINS OF PRODUCTS MANUFACTURED AT DIFFERENT PLAN TS VARY SIGNIFICANTLY. THE ASSESSING OFFICER HAS NOT ACCEP TED THE SUBMISSIONS OF THE COMPANY CITING PROVISIONS OF SEC TION 80IA(8) WHICH AUTHORIZES HIM TO ADOPT THE MARKET VALUE OF G OODS WHICH ARE TRANSFERRED FROM A NON ELIGIBLE UNIT TO A UNIT WHICH IS ELIGIBLE FOR DEDUCTION. HOWEVER HE HAS NOT APPLIED THE SAID PROVISION STRICTLY BUT ARRIVED AT THE PROFIT OF DEH RADUN UNIT IN AN IRRATIONAL WAY. BY DOING SO HE HAS NOT APPRECIAT ED THE FACT THAT THE DEHRADUN UNIT IS SELLING FINISHED MARKETAB LE PRODUCT WHICH COMMANDS A MUCH HIGHER PREMIUM AS COMPARED T O THE OTHER UNIT. HE HAS NOT ALSO APPRECIATED THE FACT TH AT AS PER PROVISIONS OF SECTION 80IA(8) THAT WHAT CAN BE DONE BY THE 3 ITA NO. 1518/HYD/2011 NATCO PHARMA LTD. ASSESSING OFFICER IS ONLY TO ADOPT THE MARKET VALU E OF MATERIAL SOLD BY NON ELIGIBLE UNIT TO AN ELIGIBLE UNIT BUT I T DOES NOT EMPOWER THE ASSESSING OFFICER TO MEDDLE WITH THE I TEMS OR RESORT TO ESTIMATION OF INCOME. IF THE ASSESSING O FFICER WAS NOT SATISFIED WITH THE JUSTIFICATION GIVEN BY THE ASSES SEE. THE PROPER COURSE OF ACTION OPEN TO HIM IS TO ASCERTAIN THE MARKET VALUE. SIMILARLY IF HE WAS OF THE OPINION THAT EXP ENSES ON SALARIES AND OTHER EXPENSES ARE LOW HE OUGHT TO HAV E MADE REASONABLE ESTIMATE OF SUCH EXPENSES. WITHOUT SPEC IFICALLY POINTING OUT THE AREAS AND EXTENT OF DEFLATION OF E XPENSES THE ASSESSING OFFICER RESORTED TO AN ESTIMATE OF RATE O F PROFIT BY CONSIDERING AND AGGREGATING BOTH ELIGIBLE AND INELI GIBLE BUSINESS WHICH ARE NOT COMPARABLE AND WHICH IS ALSO NOT PERMITTED BY THE PROVISIONS OF SECTION 80IA(8). 7. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, HELD AS FOLLOWS:- THERE IS ONLY ONE ISSUE IN APPEAL AND THAT RELATES TO THE APPLICATION OF PROVISIONS OF SECTION 80IA(8) AND TH US RESTRICTING THE DEDUCTION U/S 80IC. THE FACTS AR E THAT THE APPELLANT CLAIMED DEDUCTION80IC FOR THE PROFITS OF ITS UNDERTAKING SET UP AT DEHRADUN IN JUNE 2006. THE T OTAL TURNOVER OF THIS UNDERTAKING WAS RS 61,78,23,133/- WITH A NET PROFIT OF RS 47,80,13,876/- I.E. 77.37% OF THE TURNOVER. THE APPELLANT HAS 4 UNITS I,E, AT MEKAGUDA, KOTHUR . SAGAR AND DEHRADUN. THE UNIT AT DEHRADUN WAS SET UP IN J UNE 2006 AND DURING THE CURRENT YEAR DEDUCTION UNDER SE CTION 80IC WAS AVAILABLE. IN MEKAGUDA, BULK DRUGS AND AC TIVE PHARMACEUTICALS (APIS) ARE MANUFACTURED WHEREAS IN KOTHUR AND DEHRADUN FINISHED DOSAGE OF PHARMACEUTICAL FORMULATIONS ARE MADE. THE ASSESSING OFFICER OBSERV ED THAT THE TOTAL TURNOVER OF THE DEHRADUN UNIT WAS RS 61,78,23,133/- AND THE NET PROFIT WAS RS 47,80,13,8 76/- THE NET PROFIT WORKED OUT TO 77.37% FOR THE OTHER U NITS EXCLUDING DEHRADUN UNIT THE PROFIT WAS WORKED OUT T O ONLY 4.25% OF THE TOTAL SALES. EVEN FOR THE KOTHUR UNIT WHERE EXACTLY THE SAME OPERATIONS WERE CARRIED OUT AS AT DEHRADUN, THE PROFIT MARGIN WAS MUCH LESS AND AT MEKAGUDA WHEREAS THE MAIN WORK WAS DONE, THERE WAS ACTUALLY A LOSS. ACCORDINGLY THE ASSESSING OFFICE R RECALCULATED THE PROFITS AND THE ELIGIBLE DEDUCTION S UNDER SECTION 80IC. THE MAIN ARGUMENT OF THE APPELLANT IS THAT THE PROV ISIONS OF SECTION 80IA(8) WHICH ARE APPLICABLE IN RESPECT OF THE APPELLANT ONLY STIPULATE THAT MARKET VALUE OF GOODS TRANSFERS 4 ITA NO. 1518/HYD/2011 NATCO PHARMA LTD. FROM OTHER UNITS TO THEIR UNITS BE CONSIDERED FOR C ALCULATION OF DEDUCTION UNDER SECTION 80IC. THE APPELLANT STA TES THAT NO OTHER METHOD CAN BE CONSIDERED. I FIND THAT PROV ISO TO SECTION 80IA(8) CLEARLY EMPOWERS THE ASSESSING OFF ICER TO RE COMPUTE THE ELIGIBLE PROFITS ON A REASONABLE BASIS AS HE DEEMS FIT. THE SAID SECTION IS QUOTED BELOW: SECTION 80IA(8) WHERE ANY GOODS OR SE VICES HELD F OR THE PURPOSES OF THE ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE OR WHERE ANY GOODS OR SERVICES HELD BY THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE ARE TRANSFERRED TO THE E LIGIBLE BUSINESS AND IN EITHER CASE THE CONSIDERATION IF A NY FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE ELIGIBL E BUSINESS DOES NO CORRESPOND TO THE MARKET VALUE OF SUCH GOOD S OR SERVICES AS ON THE DATE OF THE TRANSFER, THEN FOR T HE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, THE PROFITS AN D GAINS OF SUCH ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER IN EITHER CASE HAD BEEN MADE AT THE MARKET VALUE OF SU CH GOODS OR SERVICES AS ON THAT DATE. PROVIDED THAT WHERE IN THE OPINION OF THE ASSESSING OFFICER THE COMPUTATION OF THE PROFITS AND GAINS OF THE ELI GIBLE BUSINESS IN THE MANNER HEREINBEFORE SPECIFIED PRES ENTS EXCEPTIONAL DIFFICULTIES THE ASSESSING OFFICER MAY COMPUTE SUCH PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE MAY DEEM FIT. EXPLANATION FOR THE PURPOSES OF THIS SUB SECTION MARKET VALUE IN RELATION TO ANY GOODS OR SERVICES MEANS TH E PRICE THAT SUCH GOODS OR SERVICES WOULD ORDINARILY FETCH IN THE OPEN MARKET. THE FACTS OF THE CASE ARE SELF EVIDENT AS IT IS BEY OND THE LAW AND ANY PROBABILITY THAT THE DEHRADUM UNIT WOULD BE GIVING SUCH EXCEPTIONAL PROFITS WHILE THE MAIN UNIT AT MEK AGUDA KOTHUR AND DEHADUN ACCOUNT FOR A TOTAL TURNOVER OF RS 159 CRORES AMONGST THEMSELVES. THE ACTIVE PHARMACEUTICA LS INGREDIENTS MANUFACTURED AT MEKAGUDA UNIT ARE TRANS FERRED TO KOTHUR AND DEHRADUN FOR MAKING THE FINISHED FORM ILATIONS. WHICH MENS THAT KOTHUR AND DEHRADUN ESSENTIALLY DO THE SAME WORK. FOR A TURNOVER OF RS 39,48,53,623. THE KOTHUR UNIT HAS A NET PROFIT RS 47,80,13,876/- I.E. 77.37 % THE ASSESSING OFFICER HAS RIGHTLY POINTED OUT IN THE AS SESSMENT ORDER THAT THE APPELLANT HAS CLEARLY DEFLATED SALAR Y EXPENSES RAW MATERIAL EXPENSES ETC WITH RESPECT TO DEHRADUN TO ARTIFICIALLY INFLATE THE PROFIT. IN FACT THE TOTAL SALARIES WAGES 5 ITA NO. 1518/HYD/2011 NATCO PHARMA LTD. AND STAFF WELFARE EXPENSES DEBITED IN THE P& L A/C IS RS 45,75,322/ WHICH IS EQUIVALENT TO 0.74% OF THE TURN OVER, THIS CLEARLY SHOWS THAT EXPENSES HAD NOT BEEN BOOKED IN DEHRADUN BUT IN OTHER UNITS TO ARTIFICIALLY SHIFT P ROFITS INTO DEHRADUN UNIT SINCE THE FORMULATIONS IN MEKAGUDA U NIT CANNOT BE SOLD IN THE MARKET IT IS OBVIOUSLY NOT PR ACTICAL FOR THE ASSESSING OFFICER TO CALCULATE THE PRICES OF I NPUTS ON THE BASIS OF MARKET PRICES VIS A VIS DEHRADUN UNIT. TH IS IS BECAUSE THE MARKET PRICES ARE NOT KNOWN DUE TO THE FACT THAT THE PRODUCTS ARE NOT MARKETABLE AT THAT POINT. ANOTHER ARGUMENT OF THE APPELLANT IS THAT IN THE AS ST. YEAR 2007-08 THE ASSESSING OFFICER HAS COMPARED 3 UNITS WHILE IN THE CURRENT YEAR HE COMPARED ALL THE UNITS. THIS AR GUMENT IS FALLACIOUS IN THE SENSE THAT JUST BECAUSE THE ASSES SING OFFICER HAS COMPARED THE OTHER UNITS THE CONCLUSION AND FAC TS DO NOT CHANGE. THE ASSESSING OFFICER WAS DEFINITELY WITHIN HIS RIGHTS TO MAKE COMPARISONS HE DEEM FIT. THE FACT IS THAT T HERE IS A CLEAR CUT ATTEMPT BY THE APPELLANT TO SHIFT ARTIFIC IALLY THE PROFITS INTO THE DEBRADUN UNIT TO EVADE TAXES BECAU SE THAT UNIT GETS DEDUCTION UNDER SECTION 80IC. AN IDENTICAL ISSUE HAS BEEN DECIDED BY ME IN THE C ASE OF THE APPELLANT FOR THE ASST. YEAR 2007-08 VIDE ORDER IN ITA 274/DR.C16(1)/CITR(A)V/2009-2010 DATED 15.2.2011 HE NCE THE DECISION OUTLINED IN THE ABOVE ORDER ALSO APPLI ES TO THE CURRENT YEAR ALSO. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US RAI SING THE FOLLOWING GROUNDS OF APPEAL:- 1. THE ORDER OF THE LEARNED CIT(A) CONFIRMING THE ORD ER OF ASSESSMENT RESTRICTING THE DEDUCTION U/S 80IC IS ER RONEOUS BOTH ON LAW AND IN FACTS IN SO FAR AS IT IS PREJUDI CIAL TO THE ASSESSEE. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE AO HAS THE POWERS TO ESTIMATE THE PROFITS FOR THE PURPOSES OF SEC 80 IC IN THE MANNER IN WHICH HE DID WITHOUT APPRECIATING THE FAC T THAT SUCH ESTIMATION SHOULD BE REASONABLE AND NOT ARBITRARY. 3. THE LEARNED CIT(A) FAILED TO APPRECIATE THE FACT TH AT THE PROFITS OF ALL THE UNITS CANNOT BE SAME WHEN THE ACTIVITIES IN EACH UNITS DIFFER AND THEREBY ERRED IN CONFIRMING THE ACTION O F THE AO WHO CONSIDERED AVERAGE PROFITS BY CLUBBING PROFITS OF A LL THE UNITS SOME OF WHICH ARE NOT ELIGIBLE FOR DEDUCTION U/S 80 IC. 4. THE LEARNED CIT(A) FAILED TO APPRECIATE THE FACT TH E PROVISIONS OF SEC 80IC ARE SIMILAR TO TRANSFER PRICING PROVISIONS AND IT IS REQUIRED TO HAVE COMPARABLE CASE WHICH IS WITH SIMI LAR NATURE 6 ITA NO. 1518/HYD/2011 NATCO PHARMA LTD. OF BUSINESS AND IT IS NOT LEFT TO THE AO TO DETERMI NE IN A WHIMSICAL MANNER AND THERE BY ERRED IN CONFIRMING T HE ACTION OF THE AO IN RESTRICTING THE DEDUCTION U/S 80IC BY ADOPTING AVERAGE GROSS PROFIT RATE BY CLUBBING PROFITS OF A LL UNITS INCLUDING INELIGIBLE UNITS. 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF TH E AUTHORITIES BELOW. WE FIND THAT THE ISSUE UNDER CONSIDERATION I S SQUARELY COVERED BY THE DECISION OF THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO. 319 /HYD/2011, ORDER DATED 29 TH FEBRUARY, 2011, WHEREIN IT WAS HELD AS UNDER:- WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIALS AVAILABLE ON RECORD. WE HAVE ALSO CONSID ERED CAREFULLY THE FACTS AND CIRCUMSTANCES OF THIS CASE. WE FIND THAT PROVISO TO SECTION 80IA(8) OF THE ACT CLEARLY EMPOWERS THE ASSESSING OFFICER TO RE COMPUTE THE ELIGIBLE PROFIT S ON A REASONABLE BASIS AS HE DEEMS FIT. THE FACTS OF THE CASE ARE SELF EVIDENT THAT IT IS UNTHINKABLE THAT THE DEHRAD UN UNIT WOULD BE GIVING SUCH EXCEPTIONAL PROFITS WHILE THE MAIN UNIT AT MEKAGUDA IS SHOWN LESS THE ASSESSING OFFICER HAS POINTED OUT IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS C LEARLY DEFLATED SALARY EXPENSES RAW MATERIAL EXPENSES ETC WITH RESPECT TO DEHRADUN TO ARTIFICIALLY INFLATE THE PRO FIT. THE STATEMENTS RECORDED BY THE ASSESSING OFFICER FROM T WO EMPLOYEES OF THE ASSESSEE COMPANY CLEARLY SHOWS THA T EXPENSES HAD NOT BEEN BOOKED IN DEHRADUN BUT BOOKED IN OTHER UNITS TO ARTIFICIALLY SHIFT PROFITS INTO DEHR ADUN UNIT. ACCORDING TO THE ASSESSING OFFICER THE FORMULATIONS IN MEJAGUDA UNIT CANNOT BE SOLD IN THE MARKET IT IS OB VIOUSLY NOT PRACTICAL FOR HIM TO CALCULATE THE PRICES OF INPUTS ON THE BASIS OF MARKET PRICES. IN OUR OPINION IT IS MOST APPROPR IATE TO CONSIDER THE ACTUAL COST AS PER COST RECORDS MAINTA INED BY THE ASSESSEE AND THEREAFTER ASSESSING OFFICE CONSIDER T HE PROFITS ON THESE TRANSACTION AS COMPARED TO OTHER INDUSTRIE S IN SIMILAR LINE OR IF THERE IS NO COMPARABLE FIX REASONABLE PE RCENTAGE OF PROFIT DEPENDING UPON MARKET CONDITION PREVAILING I N THE SIMILAR LINE OF INDUSTRY. ACCORDINGLY WE SET ASIDE THIS ISSUE TO THE FILE OF ASSESSING OFFICE TO BRING THE COMPARAB LE CASES ON RECORD AND REDO THE ASSESSMENT ON THIS ISSUE. 7 ITA NO. 1518/HYD/2011 NATCO PHARMA LTD. 9. SINCE THE ISSUE UNDER CONSIDERATION IS IDENTICA L TO THE ONE DECIDED BY THE COORDINATE BENCH(SUPRA), RESPECTFULL Y FOLLOWING THE SAME, WE SET ASIDE THE ORDER OF THE CIT(A) AND RES TORE THE ISSUE TO THE FILE OF THE AO TO BRING THE COMPARABLE CASES ON RECORD AND REDO THE ASSESSMENT ON THIS ISSUE. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 06/06/2012. SD/- SD/- (D. KARUNAKARA RAO) (ASHA VIJAYAR AGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 6 TH JUNE, 2012. KV COPY TO:- 1) NATCO PHARMA LTD. C/O S/SHRI K. VASANTKUMAR & A.V. RAGHURAM ADVOCATES, 610, 6 TH FLOOR, BABUKHAN ESTATE, BASHEERBAGH, HYDERABAD 500 001. 2) DCIT, CIRCLE 16(1), HYDERABAD 3) THE CIT (A)-V, HYDERABAD 4) THE CIT-IV, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.