Shri Pharmaceuticals Limited, Hyderabad V. ACIT, Circle -3(2), Hyderabad

ITA 2103/HYD/2011

• Counselvise Citation: 210322514 RSA 2011
• Duration Of Justice: 3 year(s) 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 19-03-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 21-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Additional evidence
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 2103/HYD/2011 ASSESSMENT YEAR: 2007-08 SHRI PHARMACEUTICALS LTD., HYDERABAD PAN AACCS8456P VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 3(2), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI GIRISH DAVE REVENUE BY : SHRI D. SUDHAKAR RAO DATE OF HEARING 19-03-2015 DATE OF PRONOUNCEMENT 01-04-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST AS SESSMENT ORDER DATED 10/12/2010 PASSED U/S 143(3) READ WITH SECTION 144C OF THE ACT AT THE DIRECTIONS OF DISPUTE RESOLUTION PAN EL (DRP), HYDERABAD PERTAINING TO AY A.Y. 2007-08. 2. BRIEFLY THE FACTS ARE, ASSESSEE AN INDIAN COMPAN Y IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF VARIOUS PHA RMACEUTICAL PRODUCTS. ASSESSEE IS A SUBSIDIARY OF APOTEX PHARMA CHEM INC., CANADA. FOR THE AY UNDER CONSIDERATION, ASSESSEE FI LED ITS RETURN OF INCOME ON 27/10/07 DECLARING INCOME OF RS. 12,55,16 ,567. DURING THE ASSESSMENT PROCEEDING, AO NOTICING THAT ASSESSEE HA S ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTER PRISE (AE) MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) TO DETERMINE ARMS LENGTH PRICE (ALP). IN COURSE OF PROCEEDING BEFORE TPO, ON PERUSING 2 ITA NO. 2103/HYD/2011 SHRI PHARMACEUTICALS LTD., HYDERABAD THE REPORT IN FORM NO. 3CEB, TPO NOTICED THAT ASSES SEE HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS: SL. NO. CLASSIFICATION PAID/ RECEIVED AMOUNT INVOLVED (IN RS.) 1 SALE OF FINISHED GOODS RECEIVED 127,61,72,170 2 PURCHASE OF RAW MATERIAL PAID 46,79,99,841 3 PURCHASE OF LAB MATERIALS PAID 8,22,060 HE FURTHER NOTICED THAT FOR ESTABLISHING ARMS LENG TH MARGIN OF THE PRICE CHARGED, ASSESSEE HAS UNDERTAKEN TP STUDY THR OUGH AN EXTERNAL CONSULTANT BY ADOPTING TRANSACTION NET MARGIN METHO D (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT T O SALES AS THE PROFIT LEVEL INDICATOR (PLI). HE FURTHER NOTICED TH AT AS PER THE ANNUAL REPORT, ON NET SALES OF RS. 129.63 CRORES, ASSESSEE HAS INCURRED OPERATING COST OF RS. 119.4 CRORES, WHICH HAS RESUL TED IN OPERATING PROFIT OF RS. 10.09 CRORES ON WHICH THE OP TO SALES WORKS OUT TO 7.78%. AS IS EVIDENT, THE TPO DID NOT ACCEPT ASSESS EES TP STUDY AND ACCORDINGLY REJECTED THE SAME. AFTER REJECTING THE TP STUDY, TPO HIMSELF MADE ANALYSIS INDEPENDENTLY TO DETERMINE AL P. IN THIS PROCESS, AFTER SEARCHING DATA BASES, TPO SELECTED E IGHT COMPARABLES WITH AVERAGE OP TO SALES OF 17.47%. HOWEVER, WHILE COMPUTING ARMS LENGTH MARGIN, TPO APPLYING THE OP TO COST RATIO DE TERMINED THE ALP OF THE INTERNATIONAL TRANSACTIONS AT RS. 144.34 CRO RES AS AGAINST RS. 127.61 CRORES. AS A RESULT, THE SHORTFALL OF RS. 16 .73 CRORES WAS TREATED AS THE TRANSFER PRICING ADJUSTMENT TO BE MA DE TO THE ALP SHOWN BY ASSESSEE. AS PER THE ORDER PASSED BY TPO, AO PROPOSED A DRAFT ASSESSMENT ORDER INCORPORATING THE TP ADJUSTM ENT OF RS. 16.73 CRORES. AGAINST THE DRAFT ASSESSMENT ORDER, ASSESSE E FILED OBJECTIONS BEFORE THE DRP RAISING VARIOUS GROUNDS. 3. THE DRP IN AN UNDATED ORDER DISPOSED OF THE OBJE CTIONS OF ASSESSEE AND IN PURSUANCE TO THE DIRECTIONS OF DRP, THE IMPUGNED 3 ITA NO. 2103/HYD/2011 SHRI PHARMACEUTICALS LTD., HYDERABAD ASSESSMENT ORDER WAS PASSED. BEING AGGRIEVED, ASSES SEE IS BEFORE US RAISING A NUMBER OF GROUNDS. 4. HOWEVER, AT THE OUTSET, LD. AR SUBMITTED BEFORE US, THOUGH IN COURSE OF HEARING BEFORE THE DRP ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS ON THE MERITS OF VARIOUS ISSUES RAISED AGAINST THE DETERMINATION OF ALP AS WELL AS ADDITIONAL EVIDENCE S, HOWEVER, WHILE DISPOSING OF THE OBJECTIONS OF ASSESSEE, DRP HAS TO TALLY IGNORED THE SUBMISSIONS MADE ON MERITS WHILE SELECTIVELY CONSID ERING A PART OF IT BY INCORPORATING THE ADDITIONAL SUBMISSIONS. IN THI S CONTEXT, LD. AR DRAWING OUR ATTENTION TO PAGES 34 TO 46 OF THE PAPE R BOOK SUBMITTED BEFORE US, THE SUBMISSIONS MADE ON MERIT WERE TOTAL LY IGNORED WHEREAS ADDITIONAL SUBMISSIONS MADE AT PAGES 49 TO 51 OF PAPER BOOK WERE CONSIDERED BY DRP. FURTHER, LD. AR SUBMIT TED BEFORE US, ASSESSEE HAS ADOPTED OP TO SALES AS PLI WHICH WAS A LSO TO CERTAIN EXTENT ACCEPTED BY TPO. HOWEVER, WHILE FINALLY COMP UTING THE ARMS LENGTH MARGIN, TPO HAS ADOPTED OP TO COST AS PLI TH AT TOO WITHOUT GIVING ANY OPPORTUNITY OF BEING HEARD TO ASSESSEE O N THE ISSUE. LD. AR SUBMITTED, AS ASSESSEE WAS NOT AFFORDED OPPORTUN ITY BY TPO AND FURTHER ASSESSEES SUBMISSIONS ON MERITS AS RAISED BEFORE DRP WAS NOT AT ALL CONSIDERED THERE IS GROSS VIOLATION OF R ULES OF NATURAL JUSTICE. LD. AR THEREFORE REQUESTED THAT THE MATTER MAY BE R EMITTED TO THE DRP FOR DECIDING AFRESH AFTER CONSIDERING ALL THE S UBMISSIONS OF ASSESSEE AS SUBMITTED IN THE WRITTEN SUBMISSIONS FI LED ON 29/08/11. 5. LD. DR, THOUGH, RAISED A DOUBT WHETHER ASSESSEE AT ALL HAS FILED ANY WRITTEN SUBMISSIONS ON 29/08/11 CONSIDERI NG THE FACT THAT THE LAST DATE OF HEARING BEFORE THE DRP WAS 09/08/2011, BUT, HE NEVERTHELESS SUBMITTED, DEPARTMENT HAS NO OBJECTION IF THE MATTER IS REMITTED BACK TO DRP FOR FRESH HEARING ON ALL THE I SSUES. 6. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. AS CAN BE SEEN, THE GRIEVANCE OF THE ASSESSEE IS LI MITED TO THE FACT 4 ITA NO. 2103/HYD/2011 SHRI PHARMACEUTICALS LTD., HYDERABAD THAT SUBMISSIONS MADE BEFORE DRP ON 29/08/11 ON THE MERITS OF VARIOUS ISSUES RAISED AGAINST THE DETERMINATION OF ALP BY TPO HAS NOT AT ALL BEEN CONSIDERED BY DRP. ON A PERUSAL OF THE MATERIAL ON RECORD, WE FIND THAT THOUGH THE DRP HAS CONSIDERED PART OF THE WRITTEN SUBMISSIONS FILED BY ASSESSEE, WHICH HAS BE EN INCORPORATED IN THE ORDER OF DRP, BUT, THE SUBMISSIONS MADE BY A SSESSEE ON MERITS WHICH WERE CLAIMED TO HAVE BEEN FILED BEFORE DRP ON 29/08/11 HAVE NOT AT ALL BEEN CONSIDERED. FURTHERMORE, ASSES SEES GRIEVANCE THAT THE TPO WITHOUT GIVING ASSESSEE OPPORTUNITY HA S CHANGED PLI FROM OPERATING PROFIT TO SALES TO OPERATING PROFIT TO COST ALSO NEEDS TO BE ADDRESSED BY DRP. IT IS WORTH MENTIONING, AT THE TIME OF HEARING BEFORE US, LD. AR POINTED OUT THAT EVEN WHILE COMPU TING ARMS LENGTH MARGIN BY ADOPTING OP TO COST RATIO, TPO HAS MADE A MISTAKE AS THE ACTUAL AVERAGE OP TO OC RATIO OF THE COMPARABLE COM PANIES SELECTED BY TPO WORKS OUT TO 16.22% AS AGAINST 22.44% CALCUL ATED BY TPO. IN OUR VIEW, THIS FACT ALSO REQUIRES EXAMINATION. IN T HE AFORESAID FACTUAL BACKGROUND, WE ARE INCLINED TO REMIT THE MATTER BAC K TO THE FILE OF DRP FOR DECIDING AFRESH AFTER CONSIDERING ALL THE S UBMISSIONS OF ASSESSEE AS MADE IN THE WRITTEN SUBMISSIONS FILED O N 29/08/11 AND ANY FURTHER SUBMISSIONS TO BE MADE ON BEHALF OF ASS ESSEE. IT GOES WITHOUT SAYING, DRP SHOULD AFFORD REASONABLE OPPORT UNITY OF BEING HEARD TO ASSESSEE IN THE MATTER. 7. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 1 ST APRIL, 2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 1 ST APRIL, 2015 5 ITA NO. 2103/HYD/2011 SHRI PHARMACEUTICALS LTD., HYDERABAD KV COPY TO:- 1) SRINI PHARMACEUTICALS LTD., PLOT NO. 10C, ROAD N O. 8, FILM NAGAR, JUBILEE HILLS, HYDERABAD 2) ACIT, CIRCLE 3(2), HYDERABAD 3) DRP, HYDERABAD 4) ADDL. CIT(TRANSFER PRICING), HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER