Srini Pharmaceuticals Limited, Hyderabad V. The Asst.CIT, Cir-3(2), Hyderabad

ITA 1851/HYD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 5949 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 12-10-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 24-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S MO HARANA
• Keywords: Depreciation; Transfer pricing; Share purchase agreement; International transaction
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. P.MADHAVI DEVI, JUDICIAL MEMBER A ND SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.1851/HYD/2012 : ASSESSMENT YEAR 2008-09 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD (PAN - AACCS 8456 P) V/S ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 3(2), HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI GIRISH DAVE RESPONDENT BY : SHRI S.MOHARANA CIT - DR DATE OF HEARING 10 . 12 .201 5 DATE OF PRONOUNCEMENT 11 .03.2016 O R D E R PER P.MADHAVI DEVI, JUDICIAL MEMBER : IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ASSESSMENT ORDER PASSED UNDER S.143(3) READ WITH S. 144C OF THE INCOME TAX ACT,1961. THE ASSESSEE COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORTING PHARMACEUT ICAL PRODUCTS, I.E. DRUG INTERMEDIATES AND ACTIVE PHARMACEUTICAL INGRED IENTS(API) ENTERED INTO TRANSACTIONS OF PURCHASE OF LAB MATERI ALS AND SALE OF INTERMEDIATES AND APIS TO ITS AE IN CANADA. THE DET ERMINATION OF THE ARMS LENGTH PRICE (ALP) WAS REFERRED TO THE TRANSFE R PRICING OFFICER (TPO IN SHORT) U/S 92CA ACT. THE TPO DETERMINED THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION RELATING TO SALE OF FINISHED GOODS AT RS.89.58 CRORES AS AGAINST RS.73.28 CRORES RECEI VED BY THE ASSESSEE AND THE ADJUSTMENT OF RS.16.30 CORES WAS PROPOSED. THE AO PASSED THE DRAFT ASSESSMENT ORDER IN ACCORDANCE THERETO AG AINST WHICH THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE DISPUTE RE SOLUTION PANEL ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 2 (DRP IN SHORT) WHICH APPROVED THE DRAFT ASSESSMENT ORDER AND IN COMPLIANCE THERETO THE ASSESSING OFFICER PASSED THE FINAL ASSESSMENT ORDER DT.22-10-2012 AGAINST WHICH THE ASSESSEE IS I N APPEAL BEFORE US. 2. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS RAI SED FIVE GROUNDS OUT OF WHICH GROUNDS NO.1 AND 5 ARE GENERAL IN NATURE AND NEED NO ADJUDICATION. AS REGARDS GROUNDS NO.2, WE F IND THAT THERE ARE SUB-GROUNDS THEREIN WHICH ARE ALL AGAINST THE TRANS FER PRICING ADJUSTMENT. WE FIND THAT GROUNDS 2.1.1 TO 2.1.3 ARE GENERAL GROUNDS AGAINST THE TP ADJUSTMENT AND HENCE NEED NO ADJUDIC ATION. 3. AS REGARDS GROUNDS 2.2.1 TO 2.2.2 AGAINST NON CONSIDERATION OF THE COST ACCOUNTANTS ALLOCATION OF COSTS BETWEEN AE AND NON AE SEGMENTS AS CORRECT, BRIEF FACTS RELATING TO THIS I SSUE ARE AS UNDER: THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN THE B USINESS OF MANUFACTURING AND EXPORTING PHARMACEUTICAL PRODUCT S, I.E. DRUG INTERMEDIATES AND ACTIVE PHARMACEUTICAL INGREDIENTS (API). IT WAS INCORPORATED AS A LIMITED COMPANY ON 24.2.95 AND C OMMENCED ITS COMMERCIAL PRODUCTION DURING THE FINANCIAL YEAR 199 8-99 AND THE FACTORY OF THE ASSESSEE IS LOCATED IN NALGONDA DIS TRICT OF ERSTWHILE UNITED ANDHRA PRADESH STATE. DURING THE RELEVANT PR EVIOUS YEAR, THE ASSESSEE HAS SOLD DRUG INTERMEDIATES AND APIS FOR A SUM OF RS.72.10 CORES OUT OF WHICH SALES TO ITS AE CONSTITUTED 33.6 1% OF THE APIS AND 66.39% OF DRUG INTERMEDIATES. SINCE THE TRANSACTIO N WAS WITH ITS AE, THE ASSESSING OFFICER REFERRED THE ISSUE OF DETERMI NATION OF ARMS LENGTH PRICE TO THE TRANSFER PRICING OFFICER UNDER S.92CA OF THE ACT. THE TPO DURING THE COURSE OF PROCEEDINGS UNDER S.9 2CA OF THE ACT OBSERVED THAT THE AE OF THE ASSESSEE, I.E. APOTEX P HARMACHEM INC. WAS FOUNDED IN 1974 AS A DISTRIBUTOR OF PHARMACEUTI CAL INGREDIENTS AND IN THE LATE 80S WITH THE ADVENT OF RESEARCH AND MA NUFACTURING OF API, STARTED ITS GROWTH AND THAT APOTEX PHARMACHEM INC I S A MEMBER OF ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 3 APOTEX GROUP OF COMPANIES AND IS CANADAS LARGEST M ANUFACTURER AND PROVIDER OF HIGH QUALITY GENERIC PHARMACEUTICALS TO THE CANADIAN HEALTH-CARE SYSTEM. HE FURTHER OBSERVED THAT THE S AID COMPANY IS THE HOLDER OF COMMERCIALLY IMPORTANT PATENTS THAT WILL PROTECT ITS INVENTIONS IN PROCESS CHEMISTRY IN THE IMPORTANT MA RKETS FOR YEARS TO COME AND A TOTAL OF OVER 200 DRUG MASTER FILES, FOR MATTED TO NORTH AMERICAN AND EUROPEAN REQUIREMENTS HAVE BEEN PREPAR ED AND FILED BY APOTEX PHARMACHEM INC. IN ALL THE WORLDS ADVANCED REGULATORY JURISDICTIONS. IT WAS FURTHER OBSERVED THAT THE AE ALSO HAS R&D FACILITY IN TORONTO TO INVENT NEW PRODUCTS AND TO DISCOVER T HE NEW PROCESSES, WITH WHICH THEY ARE HAVING INTERNATIONAL PATENTS FO R THEIR PRODUCTS. IT WAS OBSERVED THAT THE ASSESSEE COMPANY SINCE 1998 H AS BEEN SUPPLYING ITS PRODUCTS TO ITS AE AND THEREFORE THE AE HAS SHOWN INTEREST TO HAVE A JOINT VENTURE WITH THE ASSESSEE COMPANY. THEREFORE IN AUGUST 2002, 50% OF THE SHARE HOLDING OF THE ASS ESSEE COMPANY WERE ACQUIRED BY THE APOTEX PHARMACHEM INC. CANADA AND BECAME A JOINT VENTURE WITH THE COMPANY. THESE SHARES WERE SUBSEQUENTLY TRANSFERRED TO THEIR PARENT COMPANY, APOTEX PHARMAC EUTICAL HOLDINGS INC. IN THE YEAR 2005. 3.1 THE TPO OBSERVED THAT DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS ENTERED INTO THE FOLLOWING INTERNATION AL TRANSACTIONS- CLASSIFICATION AE PAID/RECEIVED AMOUNT INVOLVED (IN RUPEES) SALE OF INTERME - DIATES & APIS APOTEX PHARMACHEM INC. CANADA PAID 72,10,39,514 PURCHA S E OF LAB MATERIALS APOTEX PHARMACHEM INC. CANADA PAID 7,35,036 ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 4 HE OBSERVED THAT THE ASSESSEE HAS CHOSEN TNMM AS TH E MOST APPROPRIATE METHOD FOR DETERMINATION OF THE ARMS LENGTH PRICE FOR ITS INTERNATIONAL TRANSACTIONS WITH ITS AE AND THE MARG IN OF THE ASSESSEE FOR THE FINANCIAL YEAR 2007-08 WAS WORKED OUT AT 1 3.10%, WHEREAS THE MARGIN OF THE FIVE COMPANIES SELECTED BY THE AS SESSEE AS COMPARABLE REFLECTED MARGIN OF 5.11% AND SINCE THE ASSESSEES MARGIN WAS HIGHER, THE INTERNATIONAL TRANSACTIONS WERE TRE ATED TO BE AT ARMS LENGTH PRICE. THE TRANSFER PRICING OFFICER, HOWEVER , DID NOT AGREE WITH THE TP STUDY OF THE ASSESSEE AND THEREFORE CONDUCTE D A FRESH SEARCH ON THE AVAILABLE DATABASES AND SELECTED EIGHT COMPA NIES AS COMPARABLES TO THE ASSESSEE AND DETERMINED THE ARIT HMETIC MEAN PLI OF THE COMPARABLES AT 17.53%. ACCORDINGLY, HE DETER MINED THE ADJUSTMENT UNDER S.92CA OF THE ACT AT A SUM OF RS19 .36 CRORES. 4. THE COMPARABLES SELECTED BY THE ASSESSEE FOR I TS TRANSFER PRICING DOCUMENTATION AND THEIR ARITHMETIC MEAN PLI ARE AS UNDER- SL. NO. COMPARABLE COMPANY ROTC(%) 2008 1. FEMENTA BIOTECH LIMITED 19.15% 2. MEDICAMEN BIOTECH LIMITED 4.59% 3. RUSAN PHARMA LIMITED 28.25% 4. SYNCOM FORMULATIONS (INDIA) LIMITED 9.57% 5. TONIRA PHARMA LIMITED 10.64% ARITHEMETIC MEAN 10.18% ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 5 THE COMPARABLES SELECTED BY THE TPO FOR THE TRANSFE R PRICING STUDY AND THEIR ARITHMETIC MEAN PLI ARE AS UNDER- SL. NO. COMPARABLE COMPANY ROTC(%) 2008 1. BALPHARMA LIMITED 14.50% 2. EMMELLEN BIOTECH PHARMACEUTICALS LIMITED 8.84% 3. RUSAN PHARMA LIMITED 30.81% 4. HAMAN FINOCHEM LIMITED 23.64% 5. MANGALAM DRUGS & O R GANICS LIMI TE D (S E G) 4.40% 6. SHILPA MEDICARE LIMITED (SEG) 23.40% 7. SMRUTHI ORGANICS LIMITED 7.12% 8. SUVEN LIFE SC I E N CE S L I MI TE D (SEG) 27.50% ARITHMETIC MEAN 17.53% 5. DURING THE PROCEEDINGS BEFORE THE TPO, THE ASSE SSEE HAD FILED THE DETAILS OF THE COST ALLOCATION BETWEEN TH E AE AND NON AE IN EXPORTS MARKET AND SALES MADE IN DOMESTIC MARKET, B UT THE TPO DID NOT ACCEPT THE SAME OBSERVING THAT THE SAME WAS NOT AUDITED. FURTHER IT WAS OBSERVED THAT THE ASSESSEE HAS CONSIDERED OT HER INCOME IN THE AE SEGMENT WHICH IS NOT CORRECT. HE THEREFORE DID N OT ACCEPT THE SEGMENTAL INFORMATION FURNISHED BY THE ASSESSEE. TH E ASSESSEE OBJECTED TO THE SAME BEFORE THE DRP STATING THAT DU RING THE F.Y 07-08, IT HAD MAINTAINED COST RECORDS PRODUCT WISE AND ACC ORDINGLY IT HAS PREPARED THE SEGMENTAL DETAILS BETWEEN AE AND NON A E WHICH ARE VERIFIED AND CERTIFIED BY THE COST ACCOUNTANT AND F URTHER THAT THE STATUTORY AUDITOR IN THE CARO REPORT HAS MENTIONED THAT THE ASSESSEE MAINTAINED COST RECORDS AS REQUIRED WHICH WERE BROA DLY REVIEWED BY THE AUDITOR. IT WAS ALSO SUBMITTED THAT THE ASSESSE E, WHILE CARRYING OUT THE EXERCISE OF COST ALLOCATION, ALLOCATED THE FIXE D COSTS TO THE AE AND ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 6 NON AE SEGMENTS BASED ON THE PRODUCTS MANUFACTURED AND CAPACITY UTILIZED BY BOTH THE SEGMENTS AND FURTHER THAT THE COSTS PERTAINING TO THE UNUTILIZED CAPACITY WERE NOT ALLOCATED TO ANY O F THE SEGMENTS AS IT WAS SHOWN SEPARATELY AS UNALLOCATED COSTS AND THAT THE SAME WAS CERTIFIED BY THE COST ACCOUNTANT. WITH REGARD TO TH E OBSERVATION OF THE TPO THAT OTHER INCOME WHICH IS NOT OPERATING INCOME IS INCLUDED IN THE INCOME FROM AE, THE ASSESSEE SUBMITTED THAT EXCEPT FOR INTEREST INCOME ALL THE OTHER ITEMS OF INCOME ARE OPERATING IN NATURE. THE DISPUTE RESOLUTION PANEL AFTER GOING THROUGH THE RE PORT OF THE ASSESSEE OBSERVED THAT THE COST ALLOCATION WAS CERT IFIED BY A COST ACCOUNTANT UNDER THE COMPANIES ACT, AND THAT STATUT ORY AUDITOR UNDER THE COMPANIES ACT REFERRED TO THE REPORT OF THE COS T ACCOUNTANT IN HIS STATUTORY REPORT AND OBSERVED THAT THE COMPANY HAD MAINTAINED COST RECORDS UNDER S.209(1)(D) OF THE COMPANIES ACT AND THEREFORE, THE OBSERVATIONS OF THE TPO THAT SEGMENTAL DETAILS ARE NOT AUDITED IS NOT CORRECT. HAVING HELD SO, DISPUTE RESOLUTION PANEL PERUSED THE ALLOCATION MADE BY THE COST ACCOUNTANT AND DID NOT AGREE WITH THE ALLOCATION OF INDIRECT COST OF PRODUCTION AND THE A LLOCATION OF ADMINISTRATIVE OVERHEADS. IT OBSERVED THAT THE COS T ACCOUNTANT DID NOT ALLOCATE THE FOLLOWING EXPENDITURE EITHER TO AE OR TO NON-AE OR TO DOMESTIC TRANSACTIONS. (RS. IN LAKHS) (I) PRODUCTION 323.08 (II) PERSONNEL COST 127.43 (III) DEPRECIATION 619.29 TOTAL 1069.80 THE PANEL FURTHER OBSERVED THAT THE ADMINISTRATIVE OVERHEADS OF A SUM OF RS.303.72 LAKHS WERE NOT ALLOCATED TO ANY SEGMEN T, THOUGH THE ASSESSEE DURING THE PREVIOUS YEAR HAD SALES TO AE, NON-AE AND ALSO TO INDEPENDENT PERSONS IN INDIA. THE PANEL ALSO OB SERVED THAT THE COST ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 7 ACCOUNTANT OF THE ASSESSEE DID NOT ALLOCATE THE ABO VE INDIRECT COST OF PRODUCTION AND ADMINISTRATIVE OVERHEADS AGGREGATING TO RS.1373.52 LAKHS, THOUGH THEY WERE INCURRED BY THE ASSESSEE FO R THE PURPOSE OF BUSINESS AND THEY FORM PART OF THE PROFIT & LOSS AC COUNT. THEREFORE, THE PANEL WORKED OUT THE ALLOCATION OF EXPENSES TO THE SEGMENTS IN THE RATIO OF SALES OF EACH SEGMENT. FURTHER, WITH R EGARD TO THE OTHER INCOME INCLUDED IN THE OPERATING INCOME, THE DRP AG REED WITH THE ASSESSEE THAT OTHER THAN INTEREST INCOME, ALL OTHER ITEMS OF INCOME ARE OPERATING INCOME AND ARE TO BE ALLOCATED IN PROPORT ION TO THE SALES OF THE RESPECTIVE SEGMENTS. THEREAFTER THE DRP ALSO AG REED WITH THE CONTENTION OF THE ASSESSEE THAT THE ADJUSTMENT IN T NMM METHOD SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTI ONS AND HELD THAT THE PLI DETERMINED BY THE TPO SHOULD BE RESTRICTED TO T HE OPERATING COST ATTRIBUTABLE TO THE INTERNATIONAL TRANSACTIONS. THE DRP, THUS REDUCED THE TP ADJUSTMENT FROM RS.19.36 CRORES TO RS.16.97 CRORES. AGAINST THE ALLOCATION OF UNALLOCATED EXPENSES OF RS.1373. 52 LAKHS ONLY TO AES AND NON-AE TRANSACTIONS BY THE DRP, ASSESSEE IS IN APPEAL BEFORE US. 7. THE LEARNED COUNSEL FOR THE ASSESSEE, WHILE RE ITERATING THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW, SUBM ITTED THAT THOUGH THE DRP HAS ACCEPTED THAT THE COST ALLOCATION HAS B EEN AUDITED, HAS ERRONEOUSLY OBSERVED THAT THE UNALLOCATED EXPENDITU RE RELATING TO UNUTILIZED CAPACITY HAS TO BE ALLOCATED TO THE AE A ND NON-AE TRANSACTIONS INCLUDING DOMESTIC TRANSACTIONS. HE SU BMITTED THAT DISPUTE RESOLUTION PANEL HAS ITSELF OBSERVED THAT T HE COST ALLOCATION HAS BEEN AUDITED BY COST ACCOUNTANT AND THAT THE ST ATUTORY AUDITOR HAS ALSO REFERRED TO THE REPORT OF THE COST ACCOUNT ANT IN HIS STATUTORY REPORT, AND THEREFORE THE CONTENTS OF SUCH REPORT S HOULD HAVE BEEN CONSIDERED AND APPLIED WITHOUT ANY ADJUSTMENT. THU S, ACCORDING TO HIM, THE PLI HAS NOT BEEN COMPUTED CORRECTLY. IN SU PPORT OF THE CONTENTION THAT THE AUDITED REPORT OUGHT TO HAVE BE EN ACCEPTED, THE ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 8 LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISI ON OF THE TRIBUNAL AT CHENNAI IN THE CASE OF M/S 3I INFOTECH LIMITED IN I TA NO. 21/MDS/2013 DT. 07-05-2013. 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW . 9. HAVING REGARD TO THE RIVAL SUBMISSIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE COST ALLOCATION BETWEEN AE AND NON AE SEGMENTS BY THE COST ACCOUNTANT HAS BEEN AUDITED A ND THE SAME HAS ALSO BEEN REPORTED BY THE STATUTORY AUDITOR. THE SE GMENTAL DETAILS FURNISHED BY THE ASSESSEE ARE REPRODUCED AT PARA 4.10 OF THE DRPS ORDER. A PERUSAL OF THE SAME SHOWS THAT A SUM OF RS .1069.80 LAKHS HAS BEEN SHOWN AS UNALLOCATED COSTS. ACCORDING TO THE ASSESSEE, THIS PERTAINS TO THE UNUTILIZED CAPACITY. THE ASSESSEE H AS SPECIFICALLY STATED SO BEFORE THE DRP. BUT DRP PROCEEDED TO ALLOCATE TH E UNALLOCATED EXPENDITURE BETWEEN THE AE AND NON AE WITHOUT SPECI FICALLY DEALING WITH THE CONTENTION OF THE ASSESSEE. CORRECT ALLOCA TION OF EXPENDITURE AMONGST VARIOUS SEGMENTS OF THE ASSESSEES TRANSACT IONS HAS TO BE DONE TO ARRIVE AT THE CORRECT PLI. IT IS THE CONTE NTION OF THE ASSESSEE THAT THE ASSESSEE HAS UNUTILISED CAPACITY, TO WHICH THE UNALLOCATED COST PERTAINS TO AND THAT THE AUDITED BOOKS OF ACCOUNT O UGHT NOT TO HAVE BEEN INTERFERED WITH. FOR THIS PURPOSE, THE LEARNE D COUNSEL FOR THE ASSESSEE HAD RELIED ON THE DECISION OF THE MADRAS B ENCH OF THE TRIBUNAL IN THE CASE OF 3I INFOTECH LTD. DATED 7.5 .2013 WHEREIN IT WAS HELD THAT IT IS NOT OPEN TO THE REVENUE TO REJECT T HE WORKING PREPARED BY THE ASSESSEE WITHOUT POINTING OUT ANY ERROR THER EIN. HOWEVER, IN THE CASE BEFORE US, THE REVENUE IS SEEKING TO INTER FERE WITH THE COST ACCOUNTANTS REPORT AS THE ADJUSTMENT TOWARDS UNDER UTILIZATION OF THE CAPACITY HAS NOT BEEN ALLOWED BOTH BY THE TPO AS WE LL AS THE DRP. ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 9 THEREFORE, THIS ISSUE WOULD DEPEND ON THE DECISION TAKEN ON WHETHER THE ADJUSTMENT FOR UNDER UTILIZATION OF THE CAPACIT Y IS ALLOWABLE OR NOT. 10. THE ASSEESSEES GROUNDS OF APPEAL NO. 2.3 AND 2.4 ARE AGAINST THE DENIAL OF CAPACITY UTILIZATION ADJUSTME NT AND DEPRECIATION ADJUSTMENT RESPECTIVELY. AS REGARDS THESE ADJUSTME NTS TO BE MADE WHILE TAKING THE COMPARABLES, THE LEARNED COUNSEL F OR THE ASSESSEE SUBMITTED THAT THE CAPACITY UTILISATION OF THE ASSE SSEE WAS JUST 21% AS COMPARED TO 64.51% OF THE COMPARABLES. IT WAS A LSO SUBMITTED THAT VARIOUS BENCHES OF THE TRIBUNAL HAVE HELD THAT CAPACITY UTILISATION IS A FACTOR TO BE CONSIDERED AND ADJUSTMENT IS TO B E MADE BEFORE DETERMINATION OF ARMS LENGTH PRICE. SIMILARLY, WIT H REGARD TO DEPRECIATION ADJUSTMENT, IT WAS SUBMITTED THAT THE ASSESSEE FOLLOWS DEPRECIATION RATE AS PER THE WRITTEN DOWN VALUE MET HOD UNDER THE COMPANIES ACT, WHEREAS SOME OF THE COMPARABLES SELE CTED BY THE TPO FOLLOWED STRAIGHT-LINE METHOD AND APPLIED DEPRECIAT ION RATE PRESCRIBED UNDER THE COMPANIES ACT. IT WAS SUBMITTED THAT THE RATE OF DEPRECIATION UNDER WRITTEN DOWN VALUE METHOD IS HIG HER THAN THE STRAIGHT-LINE METHOD AND HENCE, THE DEPRECIATION CO ST FOR ASSESSEE IS HIGHER THAN ITS COMPARABLES. THEREFORE, HE SUBMITTE D THAT WHILE DETERMINING THE ARMS LENGTH PRICE, ADJUSTMENT WITH REGARD TO THE DIFFERENCE IN DEPRECIATION HAS TO BE ALLOWED. IN SU PPORT OF HIS CONTENTION THAT ADJUSTMENT FOR THE DIFFERENCES IN T HE DEPRECIATION RATES IS CONCERNED, THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUN AL DATED 31.1.2013 IN THE CASE OF MARKET TOOLS RESEARCH PVT. LTD. (ITA NO.2066/HYD/2011 FOR ASSESSMENT YEAR 2007-08). AS REGARDS ADJUSTME NT FOR CAPACITY UTILISATAION, HE PLACED RELIANCE UPON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF TASTY BITE EATABLES LI MITED (1682/PN/2011 FOR ASSESSMENT YEAR 2007-08). THE LD. DR, ON THE OT HER HAND, RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 10 11. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE TPO AND THE DRP HAVE DISAL LOWED THESE ADJUSTMENTS ON THE GROUND THAT THE ASSESSEE WAS A C ONTRACT MANUFACTURER AND THEREFORE THE PRICES AT WHICH THE GOODS WERE SUPPLIED TO AE CANNOT GO BELOW THE AGREED PRICE AS STIPULATED IN THE AGREEMENT WITH ITS AE. THE TPO AND THE DRP OBSERVED THAT THERE WAS A SHARE PURCHASE AGREEMENT BETWEEN THE PARTIES WHER EIN IT IS STIPULATED THAT THE ASSESSEE SHALL SUPPLY THE DRUG INTERMEDIATE AT COST+ A 20% MARK UP AND IN THE CASE OF API, IF A DR UG MASTER FILE IS NOT REQUIRED FOR SALE OF API, THE PURCHASE PRICE SH ALL BE THE LESSER OF COST OF SUCH GOODS+ A 30% MARK UP ON THE PREVAILING PRICE OF SUCH GOODS OF SIMILAR QUALITY EXPORTED FROM INDIA, BUT I N NO CASE, THE COMPANY IS REQUIRED TO SELL THE PURCHASER, THE GOOD S AT LESS THAN THE COST + 20% MARKUP. FURTHER IT WAS ALSO OBSERVED THA T IF A DRUG MASTER FILE IS REQUIRED, THE PURCHASE PRICE OF THE PRODUCT BY THE AE SHALL BE 75% OF THE LOWEST PRICE AVAILABLE TO THE PURCHASE F OR GOODS OF SIMILAR QUALITY IN THE MARKET IN WHICH THE MATERIAL IS INTE NDED TO BE USED OR THE TAX PAYERS COST IN PRODUCING SUCH PRODUCT + A 50%A MARKUP, WHICHEVER IS LOWER AND IF NO COMPARABLE PRODUCT IS AVAILABLE, THE PURCHASERS PRICE SHALL BE THE TAXPAYERS COST + A 50% MARKUP. THEREFORE, THEY HELD THAT THE ASSESSEE HAS AN ASSUR ED RETURN OF 20% ON COST AND HENCE THE UNDER UTILIZATION OF CAPACITY HAS NO IMPACT ON THE PLI OF THE ASSESSEE. FURTHER, WITH REGARD TO TH E DEPRECIATION ADJUSTMENT , IT WAS HELD BY THE DRP THAT THE DEPREC IATION DEBITED TO THE P&L ACCOUNT OF THE ASSESSEE IS NOT ABNORMAL AS COMPARED TO THE DEPRECIATION DEBITED TO P&L ACCOUNT IN EARLIER YEAR S AND FURTHER THAT IN TNMM METHOD, A BROAD COMPARISON AT ENTITY LEVEL IS MADE AND EACH AND EVERY EXPENDITURE CANNOT BE COMPARED WITH THE C OMPANIES IN THE BASKET OF COMPARABLES AND THE DEPRECIATION BEING A FIXED COST WHICH THE ASSESSEE HAS TO RECOVER FROM THE AE AS A CONTRA CT MANUFACTURER, IT BECOMES A PART OF THE COST OF THE ASSESSEE AND A SE PARATE ADJUSTMENT ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 11 IS NOT REQUIRED AS A CONTRACT MANUFACTURER. THUS, IT SEEN THAT THE ADJUSTMENTS HAVE BEEN DENIED ON THE GROUND THAT THE ASSESSEE IS A CONTRACT MANUFACTURER AND HENCE THE PRICE CHARGED T O THE PURCHASER INCLUDES THE SAID COSTS AND DOES NOT AFFECT THE PRO FIT MARGIN OF THE ASSESSEE. WE FIND THAT SUB-RULE (2) TO RULE 10B OF I T RULES PROVIDE FOR DETERMINATION OF ARMS LENGTH PRICE AFTER MAKIN G FAR (FUNCTIONS, ASSETS AND RISKS) ANALYSIS. THE RULE PRESCRIBES THA T NECESSARY ADJUSTMENTS ARE TO BE MADE BEFORE COMPARING THE ASS ESSEE WITH ANY OTHER COMPARABLE PERFORMING SIMILAR FUNCTIONS, APPL YING SIMILAR ASSETS WITH SAME OR SIMILAR RISKS INVOLVED. FOR THIS PURP OSE, THE TPO HAS TO NECESSARILY MAKE THE FAR ANALYSIS AND MAKE SUITABLE ADJUSTMENTS WHEREVER NECESSARY TO BRING A COMPARABLE ON PAR WIT H THE ASSESSEE, AS FAR AS THE FINANCIAL RESULTS ARE CONCERNED. WE A LSO AGREE WITH THE CONTENTION OF THE ASSESSEE THAT WHERE SUITABLE ADJU STMENTS ARE NOT POSSIBLE, SUCH COMPANY CANNOT BE TAKEN AS A COMPARA BLE TO THE ASSESSEE. HOWEVER, IT IS PERTINENT TO NOTE THAT NO COMPANY IS EXACTLY SIMILAR TO THE OTHER COMPANY AND THERE ARE ALWAYS S OME DIFFERENCES BETWEEN THE COMPANIES. THEREFORE, IT HAS BEEN HELD THAT THE COMPARABILITY HAS TO BE AMONG THE MOST COMPARABLE C OMPANIES AND THE ADJUSTMENTS ARE TO BE CARRIED OUT TO THE POSSIB LE EXTENT. IN THE CASE BEFORE US, WE FIND THAT THE ASSESSING OFFICER AS WELL AS THE DRP HAVE REFUSED TO MAKE ADJUSTMENT ON ACCOUNT OF LOW C APACITY UTILIZATION AND ALSO ON ACCOUNT OF DIFFERENCE IN THE METHOD AND RATE OF DEPRECIATION CLAIMED BY THE ASSESSEE AS AGAINST THE COMPARABLES. THE DECISIONS ON WHICH THE LEARNED COUNSEL FOR THE ASSE SSEE HAS PLACED RELIANCE UPON, HELD THAT NECESSARY ADJUSTMENTS HAVE TO BE MADE BEFORE COMPARING SUCH COMPANIES WITH THE ASSESSEE. THE DECISIONS OF THE TRIBUNAL CITED SUPRA ON WHICH THE ASSESSEE HAS PLACED RELIANCE UPON, WE ARE OF THE OPINION THAT THE ADJUSTMENTS OF UNDER UTILIZATION OF THE CAPACITY AND THE DIFFERENCE IN THE DEPRECIATION ARE THE FACTORS WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID, ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 12 OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN TH E OPEN MARKET. THEREFORE, WE DIRECT THE AO/TPO TO ALLOW THE ADJUST MENTS ON ACCOUNT OF UNDER-UTILISATION OF CAPACITY AND ALSO DIFFERENC E IN DEPRECIATION METHOD ADOPTED BY THE ASSESSEE AND THE COMPARABLE C OMPANIES. SINCE WE HAVE HELD THAT THE ADJUSTMENT FOR THE UNDE R UTILIZATION OF CAPACITY IS ALLOWED, THE ISSUE OF APPORTIONMENT OF UNALLOCATED EXPENSES ALSO NEEDS TO BE ALLOWED. HOW MUCH OF THE UN ALLOCATED COSTS DO REALLY PERTAIN TO UNDER UTILIZATION AND NA TURE OF SUCH COSTS UNALLOCATED WERE NOT EXAMINED EITHER BY THE TPO OR THE DRP AND NEITHER ARE THE DETAILS FILED BEFORE US. CONSEQUENT LY, TPO HAS TO EXAMINE AND CONSIDER TO WHAT EXTENT THE CLAIM CAN B E ALLOWED. THE AO/TPO ARE ACCORDINGLY DIRECTED TO RE-COMPUTE THE A LP AFTER ALLOWING THE ABOVE ADJUSTMENTS AFTER DUE VERIFICATION. THERE FORE, GROUNDS NO.2 AND SUB-GROUNDS THERE UNDER ARE TREATED AS ALLOWED AND THE ISSUE OF RECOMPUTATION OF THE ALP ONLY IN ACCORDANCE WITH TH E ABOVE DIRECTIONS IS REMITTED TO THE FILE OF THE AO/TPO. 13. AS REGARDS GROUND NO.3 RELATING TO DISALLOWANC E OF LOSS ON ACCOUNT OF THE DIRECTIONS PASSED BY THE DRP, BRIEF FACTS ARE THAT THE ASSESSEE WHILE EXPORTING THE BULK DRUGS, LODGED REB ATE CLAIM WITH THE EXCISE AUTHORITIES AND CREDITED THE CENVAT RECEIVA BLE ACCOUNT. DURING THE RELEVANT FINANCIAL YEAR, CLAIM WAS MADE TO THE EXTENT OF RS.3,17,00,903. THE ASSESSING OFFICER CONSIDERED T HE SAME AS INCOME OF THE ASSESSEE UNDER S.41(1) OF THE ACT. AGAINST IT, THE ASSESSEE RAISED OBJECTION BEFORE THE DRP. THE DRP RELYING O N THE TRIBUNALS ORDER IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEA R 2002-03 DIRECTED THE ASSESSING OFFICER TO VERIFY THE REVIS ED PROFIT & LOSS ACCOUNT PREPARED AFTER MERGING THE CENTRAL EXCISE DUTY ACCOUNT AND ADOPT THE RESULTANT PROFIT FOR THE PURPOSE OF COMP UTATION OF TAX. PURSUANT TO THE DIRECTIONS OF THE DRP, THE ASSESSIN G OFFICER CONSIDERED THE REVISED PROFIT & LOSS ACCOUNT FILED BEFORE THE ASSESSING OFFICER ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 13 DEBITING RS.3,44,61,286 ON ACCOUNT OF CENVAT AVAILE D ON VARIOUS ITEMS AND CREDITING RS.3,29,71,595 BEING CENTRAL EX CISE REBATE RECEIVABLE, AND ARRIVED AT RESULTANT LOSS OF RS.5,4 9,17,427 AS AGAINST RS.5,34,27,736 AS PER THE FINANCIAL STATEMENTS. TH IS HAS RESULTED IN AN ADDITIONAL LOSS OF RS.14,89,691. HOWEVER, THE A SSESSING OFFICER HAS NOT ALLOWED THE SAME ON THE GROUND THAT THE ASSESSE E HAS NOT CLAIMED THIS ADDITIONAL LOSS IN THE RETURN OF INCOME FILED. AGAINST THIS FINDING OF THE ASSESSING OFFICER, ASSESSEE IS IN APPEAL BEF ORE US. 14. WHILE THE LEARNED COUNSEL FOR THE ASSESSEE RE LIED UPON THE ABOVE SUBMISSIONS, THE LEARNED DEPARTMENTAL REPRESE NTATIVE SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 15. HAVING REGARD TO THE RIVAL CONTENTIONS AND T HE MATERIAL ON RECORD, WE FIND THAT ARTICLE 265 OF THE CONSTITUTIO N OF INDIA ALLOWS THE REVENUE TO LEVY TAXES BUT ONLY IN ACCORDANCE WITH L AW. IF DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT IS FOUND THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION IN EXCESS OF THE SUM CLAIMED BY IT IN THE RETURN OF INCOME, IT DOES NOT AMOUNT TO A FRESH CLAIM. IN OUR OPINION, THE ASSESSING OFFICER HAS ERRED IN HOLDING IT TO BE A F RESH CLAIM. THEREFORE WE DIRECT THE AO TO VERIFY AND ALLOW THE CLAIM OF T HE ASSESSEE IN ACCORDANCE WITH LAW. GROUND NO.3 IS ACCORDINGLY SET ASIDE TO THE FILE OF THE ASSESSING OFFICER AND TREATED AS ALLOWED FOR S TATISTICAL PURPOSES. 16. AS REGARDS GROUND NO.4 AGAINST SHORT DEDUCTION OF TDS OF RS.1,37,864, WE REMAND THIS ISSUE ALSO TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO VERIFY THE CLAIM OF THE ASSESSEE ON THIS ASPECT AND ALLOW THE SAME IN ACCORDANCE WITH LAW. 17. TO SUM UP, ON ALL THE ISSUES INVOLVED IN THIS APPEAL, THE MATTER IS REMITTED TO THE FILE OF THE ASSESSING OFF ICER FOR ITA NO.1851/HYD/2012 M/S. SRINI PHARMACEUTICALS LTD., HYDERABAD 14 REDETERMINATION OF THE ALP AFRESH IN THE LIGHT OF O UR OBSERVATIONS HEREIN ABOVE AND IN ACCORDANCE WITH LAW, AFTER GIVI NG REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 18. IN THE RESULT, ASSESSEES APPEAL IS TREATED A S ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 11 TH MARCH, 2016 SD/- SD/- (B.RAMAKOTAIAH) ( P.MADHAVI DEVI) ACCOUNTANT MEMBER. JUDICIAL MEMBER DT/- 11 TH MARCH, 2016 COPY FORWARDED TO: 1. M/S. SRINI PHARMACEUTICALS LTD., PLOT NO.10C, R OAD NO.8, FILM NAGAR, JUBILEE HILLS, HYDERABAD 500 033. 2. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 3(2), HYD ERABAD 3. DISPUTE RESOLUTION PANEL HYDERABAD 4. DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION, HYDERABAD 5. DEPARTMENTAL REPRESENTATIVE ITAT, HYDERABAD B.V.S.