M/s. Sava Medica Ltd, Pune V. Assistant Commissioner of Income Tax, Pune

ITA 738/PUN/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 8128 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 25-08-2021
• Assessment Year: 2011-2012
• Appeal Filed On: 30-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Principle of natural justice; International transaction; Question of law; Competent authority; Set aside
• Section: 92C; 143(3); 92B; 153A; 43; 13; 22; 27; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, C, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER . / ITA NOS.738, 739 & 740/PUN/2017 / ASSESSMENT YEARS : 2011-12, 2012-13 & 2013-14 M/S. SAVA MEDICA LTD., SAVA HOUSE, 3 RD FLOOR, LAWANI PLAZA, B-WING, PLOT NO.57/58, SAKORENAGAR, VIMAN NAGAR, PUNE 411007 PAN: AANCS8819F VS. ACIT, CENTRAL CIRCLE 2(1), PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THESE THREE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINS T THE SEPARATE FINAL ASSESSMENT ORDERS DATED 25.01.2017 PASS ED BY THE ASSESSING OFFICER (AO) U/S 143(3) R.W.SS. 144C(13) AND 153A OF THE INCOME-TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) IN RELATION TO THE ASSESSMENT YEARS 2011-12, 2012-13 & 2013- 14. SINCE SOME COMMON ISSUES HAVE BEEN RAISED IN THESE APPEA LS, WE ARE, THEREFORE, PROCEEDINGS TO DISPOSE THEM OFF BY THIS CO NSOLIDATED FOR THE SAKE OF CONVENIENCE. ASSESSEE BY : SHRI KISHOR PHADKE REVENUE BY : SHRI SANGRAM GAIKWAD DATE OF HEARING : 25-08-2021 DATE OF PRONOUNCEMENT : 30-08-2021 ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 2 A.Y. 2011-12 : 2. THE ASSESSEE IS AGGRIEVED BY AN ADDITION OF RS.37,78 ,910 MADE BY THE AO IN THE IMPUGNED ORDER. PITHILY PUT, THE FACTUAL PANO RAMA OF THE CASE IS THAT THE ASSESSEE IS A PART OF THE SAVA GROUP OF COMPANIES, WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTUR ING, IMPORTING AND EXPORTING PHARMACEUTICAL DRUGS ETC. IT FILED A RETURN DECLARING LOSS OF RS.1,94,792 ON 30.11.2011. A SEARCH ACTION U/S 132 OF THE ACT WAS TAKEN UP IN SAVA GROUP OF COMPANIES IN CLUDING THE ASSESSEE ON 31.10.2012. PURSUANT TO SUCH SEARCH, A NOTICE U/S 153A WAS ISSUED CALLING THE ASSESSEE TO FILE RETURN FOR THE Y EAR UNDER CONSIDERATION. THE ASSESSEE FILED A LETTER STATING THAT THE RETUR N ORIGINALLY FILED FOR THE YEAR MAY BE TREATED AS A RETURN IN RE SPONSE TO NOTICE U/S 153A OF THE ACT. THE ASSESSEE REPORTED AN IN TERNATIONAL TRANSACTION OF SALE OF FINISHED GOODS AMOUNTING TO RS.3,20 ,24,659 TO SAVA TRADING FZC, DUBAI IN FORM 3CEB. AFTER TAKING PRIOR APPROVAL OF THE COMPETENT AUTHORITY, THE AO MADE A REFEREN CE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION. THE TPO IN HIS THREE PAGE ORDER PASSED U/S 92CA(3) OF THE ACT OBSERVED THAT: THE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 3 DETAILED ORDER EXPLAINING THE BUSINESS MODEL OF THE ASSESSEE , THE FACTS OF THE CASE AND RESULTANT ADJUSTMENT UNDER TRANSFER PRICIN G HAVING BEEN DISCUSSED IN THE CASE OF ANAGHA PHARMA LTD FOR THE ASSESSMENT YEAR 2007-08. AS THE FACTS OF THE CASE OF THIS ASSESSEE FOR THIS ASSESSMENT YEAR ARE SAME THESE ARE NOT REPRODUC ED HERE . IN THE NEXT PARA, THE TPO CONCLUDED BY NOTING THAT: IN VIEW OF THE DISCUSSION MADE IN THE ORDER OF ANAGHA PHARMA LTD FOR THE A .Y. 2007-08, THE ADJUSTMENT OF RS.94,92,109/- IS MADE TO THE INTERNATIONAL TRANSACTION AND AS A CONSEQUENCE OF THE ADJUSTMEN TS, INCOME OF THE ASSESSEE SHALL BE INCREASED BY RS.94,92,10 9/-. THE DRAFT ORDER INCORPORATING THE TRANSFER PRICING ADJUSTMENT OF EQUAL AMOUNT WAS NOTIFIED BY THE TPO ON 29.02.2016. THE ASSESS EE ASSAILED VARIOUS FACETS OF THE TRANSFER PRICING ADDITION BEFOR E THE DISPUTE RESOLUTION PANEL (DRP), WHICH GAVE CERTAIN DIRECTIONS ON 30.11.2016. THE AO PASSED THE IMPUGNED ORDER, GIVING E FFECT TO THE DIRECTIONS OF THE DRP, BY MAKING THE TRANSFER PRICING ADDITION AT RS.37,78,910. AGGRIEVED THEREBY, THE ASSESSEE HAS COM E UP IN APPEAL BEFORE THE TRIBUNAL. ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 4 3. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. IT CAN BE SEEN FROM THE TPOS ORDER THAT NO SEPARATE DETAILED DISCUSSION QUA THE ALP DETERMINATION HAS BEEN MADE IN THE BODY OF THE ORDER EXCEPT FOLLOWING HIS OWN ORD ER PASSED IN THE CASE OF ANAGHA PHARMA LTD. NOW SAVA HEALTHCA RE LTD. [HEREINAFTER ALSO CALLED THE `OTHER INDIAN ENTITY (OIE)] FOR THE A.Y. 2007-08, WHOSE COPY HAS BEEN PLACED AT PAGE 99 ONWARD S OF PAPER BOOK. AS SUCH, IT BECOMES IMPERATIVE TO GO THROUGH THIS ORDER FOR DEEPLY UNDERSTANDING THE FACTUAL MATRIX OF THE CASE BEFORE U S AND THE NATURE OF THE TRANSFER PRICING ADDITION. THE TPO IN THAT O RDER HAS RECORDED THE BACKGROUND OF THE CASE BY NOTING THAT SHR I VINOD JADHAV, MAIN PERSON OF ANAGHA GROUP OF COMPANIES, INITIALLY STARTED TRADING OF PHARMACEUTICAL DRUGS. IN APRIL, 2010, A DIVERS IFICATION WAS MADE BY ACQUIRING PHARMA DIVISION OF SOME COMPANY AND THE ASSESSEE GROUP ALSO STARTED A MANUFACTURING FACILITY. APART FROM OIE, THE GROUP ESTABLISHED ANOTHER COMPANY IN INDIA, NAM ELY, SAVA MEDICA LTD. (WHICH IS THE ASSESSEE UNDER CONSIDERATION). I N ADDITION, THE GROUP SET UP CERTAIN ENTITIES IN MAURITIUS, UAE A ND SINGAPORE. THE OBJECT BEHIND CREATION OF THE ENTITIES ABROAD WAS ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 5 HELD TO BE TAX AVOIDANCE ON INCOME IN INDIA. THOUGH THE MANAGEMENT AND CONTROL OF THE ENTIRE GLOBAL BUSINESS OF THE GROUP WAS WHOLLY IN INDIA, THE TPO HELD THAT THE BUSINESS WAS SHOWN TO HAVE BEEN CARRIED OUT IN MAURITIUS AND DUBAI WHERE TAXES WE RE NOT LEVIED ON INCOME. HE HELD THAT THE ASSOCIATED ENTERPRISES (AE S) PLOUGHED BACK THE INCOME EARNED BY THEM TO INDIA THROUGH DIVIDENDS AND REMUNERATION TO SHRI VINOD JADHAV, WHO, IN TURN , CLAIMED SUCH INCOME AS EXEMPT ON THE GROUND OF HIS NON- RESIDENT STATUS. IT WAS FURTHER NOTED THAT THE SETTLEMENT COMMISSION RE JECTED THE NON-RESIDENT STATUS CLAIM OF SHRI VINOD JADHAV AND DECLAR ED HIM AS A RESIDENT. THE TPO NOTED THE FINDINGS OF THE INVESTIGATION TEAM IN RELATION TO THE FUNCTIONS PERFORMED BY THE TWO INDIAN-BASED COMPANIES OF THE GROUP ALONG WITH THOSE SITUATED IN MAURITIUS, SINGAPORE AND DUBAI. HE TABULATED SUCH FUNCTIONAL ANALYSIS D ONE BY VARIOUS GROUP COMPANIES IN PARA 27.3 OF HIS ORDER AND H ELD THAT THE AES PERFORMED NO FUNCTIONS EXCEPT RECEIPT OF SALE PROCEE DS AND SENDING THE SAME TO THE INDIAN ENTITIES. REJECTING THE OIES BENCHMARKING DONE UNDER THE TRANSACTION NET MARGIN METHOD (TNMM), HE PROCEEDED TO DETERMINE THE ALP UNDER THE PROFIT S PLIT ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 6 METHOD (PSM). HE ALLOCATED 3% OF THE AGGREGATE GROUP PROF ITS TO THE AES ABROAD FOR THE SERVICES RENDERED BY THEM AND THE BALANCE 97% WAS DIVIDED BETWEEN THE TWO INDIAN ENTITIES. TO BE MORE PRECISE, HE AGGREGATED THE YEAR-WISE PROFITS SHOWN BY THE FIVE GROUP ENTITIES FROM THE A.YS. 2007-08 TO 2013-14 AND FOUND OUT TH E TOTAL COMBINED PROFIT OF RS.1,57,23,23,733 AS PER TABLE 28.1 OF HIS ORDER. THEN HE PROCEEDED TO SPLIT THE COMBINED PROFIT THROUGH TABLE 28.2 AS UNDER:- A.Y. COMBINED PROFIT OF ANAGHA AND AE'S % OF PROFIT EARNED BY THE COMPAR ABLES. AS PER ASSESSEE S T.P. REPORT PROFIT ATTRIBUTABL E TO THE ANAGHA WHICH IS EQUAL TO THE COMPARABLE S PROFIT % AE'S SHARE 3% RESIDUAL PROFIT ALLOCATED TO ANAGHA PHARMA LTD ANAGHAS TOTAL PROFIT A B C D (B*C%) E (B*3%) F (B-D-E) G (D+F) 2007-08 2,28,44,905 2.77 6,32,804 6,85,347 2,15,26,754 2,21,59,558 2008-09 17,69,90,270 0.31 5,48,670 53,09,708 17,11,31,892 17,16,80,562 2009-10 32,69,96,892 2.42 79,13,325 98,09,907 30,92,73,660 31,71,86,985 2010-11 8,81,15,771 4.35 38,33,036 26,43,473 8,16,39,262 8,54,72,298 2011-12 48,58,35,923 6.49 3,15,30,751 1,45,75,078 43,97,30,094 47,12,60,845 2012-13 13,32,70,295 5.71 76,09,734 39,98,109 12,16,62,452 12,92,72,186 2013-14 33,82,69,677 5.16 1,74,54,715 1,01,48,090 31,06,66,871 32,81,21,587 TOTAL 1,57,23,23,733 6,95,23,035 4,71,69,712 1,45,56,30,986 1,52,51,54,021 4. IT CAN BE SEEN FROM THE ABOVE TABLE THAT OIE HAD SHOWN PROFIT RATE OF ITS COMPARABLES AT 6.49% FOR THE A.Y. 2011-12 W HICH WAS REFLECTED BY HIM UNDER COLUMN C. THE TPO FIRST DETERMINED THE ARMS LENGTH PROFIT FROM THE TRANSACTION OF EXPORT BY OIE IN THE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 7 COLUMN D AT RS.3.15 CRORE. AFTER REDUCING THE SHARE OF AES AT 3% UNDER COLUMN E AMOUNTING TO RS.1.45 CRORE, HE COMPUTED THE RESIDUAL PROFIT UNDER COLUMN F AT RS.43.97 CRORE AND THEN TO TALED UP THE ARMS LENGTH PROFIT OF OIE AND THE ASSESSEE UNDER COLUMN G AT RS.47.12 CRORE. THUS IT IS MANIFEST, THAT THOUGH THE TPO INITIALLY TALKED OF PIERCING THE CORPORATE VEIL AND TAKING ALL THE ENTITIES A S ONE, BUT ENDED UP IN ATTRIBUTING SEPARATE COMPENSATION FOR THE ACTIVITIES DONE BY THE FOREIGN AES AT 3% OF TOTAL PROFIT, THERE BY MAINTAINING SEPARATE INDEPENDENT STATUS OF THEM AS DISTINCT FROM THE TWO INDIAN ENTITIES. IT GOES WITHOUT SAYING THAT THE ORDER NEEDS TO BE READ AS A WHOLE. IF SOME OBSERVATIONS ARE MADE IN THE B ODY OF THE ORDER, WHICH ARE EVENTUALLY NOT ACTED UPON, ONE CANNOT CLAI M ANY DECISION BASED ON SUCH OBSERVATIONS. 5. THEREAFTER, THE TPO COMPUTED THE NET TRANSFER PRICING ADJUSTMENT IN THE HANDS OF OIE, THROUGH PARA 28.3, AS U NDER:- A.Y. ANAGHAS TOTAL PROFIT LESS O.P. SHOWN BY THE ASSESSEE TOTAL ADJUSTMENT LESS ADJUSTED IN THE HANDS OF SAVA MEDICA LTD. (AS MENTIONED BELOW) NET ADJT IN THE HANDS OF OIE A B C D E F ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 8 2007-08 2,21,59,558 1,30,38,449 91,21,109 0 91,21,109 2008-09 17,16,80,562 1,69,42,134 15,47,38,428 0 15,47,38,428 2009-10 31,71,86,985 4,55,81,486 27,16,05,499 0 27,16,05,499 2010-11 8,54,72,298 73,95,355 7,80,76,943 0 7,80,76,943 2011-12 47,12,60,845 1,66,56,860 45,46,03,985 94,92,109 44,51,11,876 2012-13 12,92,72,186 5,99,91,658 6,92,80,528 54,08,126 6,38,72,402 2013-14 32,81,21,587 4,78,94,987 28,02,26,600 4,66,98,148 23,35,28,452 TOTAL 1,52,51,54,021 20,75,00,929 1,31,76,53,092 6,15,98,483 1,25,60,54,609 6. THROUGH THIS TABLE, HE FOUND OUT THE AMOUNT OF YEAR -WISE TRANSFER PRICING ADJUSTMENT IN THE HANDS OF THE TWO INDIAN EN TITIES, NAMELY, OIE AND THE ASSESSEE. FIRSTLY, HE COMPUTED THE TOTA L ADJUSTMENT UNDER COLUMN D COLLECTIVELY IN THE HANDS OF BOTH THE INDIAN ENTITIES AT RS.45,46,03,985 AND THEN HE REDUCED THE AMOUNT OF TRANSFER PRICING ADJUSTMENT MADE IN THE HANDS OF THE ASS ESSEE UNDER COLUMN E AT RS.94,92,109 TO WORK OUT THE AMOUNT OF TOTAL ADJUSTMENT IN THE HANDS OF OIE AT RS.44,51,11,876 FOR TH E A.Y. 2011-12 UNDER COLUMN F. IT IS THIS AMOUNT OF THE TRANSFER PR ICING ADJUSTMENT OF RS.95,92,109 WHICH HAS BEEN ADOPTED BY THE TPO IN HIS ORDER PASSED IN THE HANDS OF THE ASSESSEE FOR THE YE AR UNDER CONSIDERATION. THE WORKING OF TRANSFER PRICING ADJUSTMENT IN THE HANDS OF THE ASSESSEE AT RS.94,92,109 HAS COME FROM THE TABLE GIVEN ON THE LAST PAGE OF THE TPOS ORDER IN OIE. THIS HAS BEEN DONE BY TAKING THE VALUE OF INTERNATIONAL TRANSACTION OF EXPORT S ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 9 MADE BY THE ASSESSEE TO ITS AES AT RS.3.20 CRORE ON WHIC H THE PROFIT RATE OF 29.64% (OP/OR OF AES TAKEN AS ARMS LENGTH PROFIT RATE) HAS BEEN APPLIED. THE FIGURES OF THE AES OPERATING PROFIT AT R S.46.93 CRORE AND OPERATING REVENUE OF RS. 158.31 CRORE HAVE BEEN TAKEN FROM THE TABLE 5.1 ON PAGE 2 OF THE TPOS ORDER IN THE HA NDS OF THE ASSESSEE. 7. ON AN OVERVIEW OF THE DISCUSSION MADE BY THE TPO IN HIS ORDER PASSED IN THE CASE OF THE ASSESSEE READ IN CONJUNCTION WITH THE ORDER IN THE CASE OF OIE, IT CAN BE SEEN THAT HE REJECTED THE ADOP TION OF THE TNMM AND INSTEAD CHOSE THE PSM AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. INSOFAR AS THE ASSESSEE IS CONCE RNED, THE TPO HAS SIMPLY TAKEN THE VALUE OF THE INTERNATIONAL TRANSACTION OF EXPORTS TO THE AES AND THEN APPLIED THE PROFIT RATE OF THE AE FOR DETERMINING THE ALP. AS THE ASSESSEE REPORTED ONLY ONE INTERNATIONAL TRANSACTION OF `SALE OF FINISHED GOODS WITH TRANSA CTED VALUED OF RS.3.20 CRORE, THE TPO DETERMINED THE ALP OF SU CH A TRANSACTION LEADING TO THE TRANSFER PRICING ADJUSTMENT OF RS.94,92,109. ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 10 8. THE ASSESSEE ASSAILED THE DRAFT ORDER BEFORE THE DRP ON SEVERAL ISSUES. THE DRP CALLED FOR COMMENTS/REPORTS FROM THE TPO/AO ON CERTAIN ASPECTS AND ALSO THE COMMENTS OF THE ASSESSEE. A FTER ENTERTAINING THE ENTIRE GAMUT OF THE MATERIAL, THE DRP INTER ALIA CAME TO HOLD THAT: - THE TPO WAS NOT JUSTIFIED IN HOLDING THAT THE CONTROL AND MANAGEMENT OF THE AFFAIRS OF THE SAVA GROUP WAS SITUATED WHOLLY IN INDIA AND THE ENTITIES ABROAD WERE SHAM. - THE ASSESSEE HAD UNDERTAKEN ONLY THE ACTIVITIES OF SALE OF FINISHED GOODS AS REPORTED IN FORM NO.3CEB. - THE TPO WRONGLY APPLIED PROFIT SPLIT METHOD IN THE CASE OF ASSESSEE BY CONSIDERING OP/OR OF THE AE'S - THE ASSESSEE ALSO WRONGLY APPLIED THE TNMM FOR BENCHMARKING ITS TRANSACTIONS. - BOTH THE METHODS APPLIED BY THE ASSESSEE AS WELL AS THE TPO WERE WRONG. AS THE ASSESSEE WAS ONLY INTO TRADING EXPORTS FOR THE YEAR UNDER CONSIDERATION, THE CORRECT METHOD TO BE APP LIED WAS THE RESALE PRICE METHOD (RPM). ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 11 9. ACCORDINGLY, THE ASSESSEE WAS DIRECTED TO FURNISH B ENCHMARKING ANALYSIS OF ITS INTERNATIONAL TRANSACTION BY APPLYING THE RPM. T HE ASSESSEE SUBMITTED THE SAME WHICH HAS BEEN REPRODUCED AT PAGE 83 OF THE DRPS DIRECTIONS. AS PER THIS EXERCISE, THE ASSESSEE COMPUTED ITS GP/SALES MARGIN AT 25.22%. THE DRP MADE ALTERATIONS TO CERTAIN FIGURES AND HENCE RE-WORKED OUT THE AMENDED GP/SALE S AT 16.52%. THE ASSESSEE HAD IDENTIFIED 33 COMPANIES AS CO MPARABLES. THE DRP REMOVED 13 COMPANIES FROM SUCH LIST AND COMPUTED THE AVERAGE GP/SALES OF THE REMAINING 20 COMPARABLES AT 28.32%. THIS IS HOW, THE DIFFERENTIAL PROFIT RATE OF 11.80% (28.32% OF THE COMPARABLES AND 16.52% OF THE ASSESSEE) WAS APPLIED TO TH E VALUE OF INTERNATIONAL TRANSACTION OF EXPORTS MADE BY THE ASSESSEE AT RS.3.20 CRORES FOR DETERMINING THE TRANSFER PRICING ADJUSTM ENT AT RS.37,78,910. IT IS THIS AMOUNT OF TRANSFER PRICING ADJUSTM ENT WHICH HAS BEEN MADE BY THE AO IN THE FINAL ASSESSMENT ORDER, AG AINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIB UNAL. 10. ON AN OVERVIEW OF THE ABOVE DISCUSSION, IT IS OSTEN SIBLE THAT THE ASSESSEE APPLIED THE TNMM FOR DETERMINING THE ALP OF T HE INTERNATIONAL TRANSACTION OF `SALE OF FINISHED GOODS WORTH RS.3 .20 ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 12 CRORES. THE TPO REJECTED SUCH A METHOD AND APPLIED THE PSM . THE DRP HAS FINALLY HELD THAT THE RPM IS THE MOST APPROPRIATE METHOD. NOW THE ASSESSEE IS IN APPEAL CHALLENGING THE CORRECTNESS OF THE RPM AS THE MOST APPROPRIATE METHOD. THERE IS NO CROSS APPE AL BY THE DEPARTMENT. THUS THE VIEW OF THE TPO IN APPLYING THE PSM NO MORE STANDS. EVEN OTHERWISE, THERE ARE CERTAIN FLAWS IN THE APPLICATION OF THE PSM BY THE TPO, WHICH WE WILL TOUCH VERY BRIEFLY. 11. RULE 10B(1) OF THE INCOME-TAX RULES, 1962 (HEREIN AFTER ALSO CALLED `THE RULES) DEALS WITH THE DETERMINATION OF THE ALP AS PER SECTION 92C UNDER DIFFERENT METHODS. THE MODUS OPERANDI FOR DETERMINING THE ALP UNDER THE `PROFIT SPLIT METHOD HAS BEEN SET OUT IN RULE 10B(1)(D) READING AS UNDER:- ( D ) PROFIT SPLIT METHOD, WHICH MAY BE APPLICABLE MAIN LY IN INTERNATIONAL TRANSACTIONS OR SPECIFIED DOMESTIC TR ANSACTIONS INVOLVING TRANSFER OF UNIQUE INTANGIBLES OR IN MULTIPLE INTERNATIONAL TRANSACTIONS OR SPECIFIED DOMESTIC TRANSACTIONS WHICH ARE SO INT ERRELATED THAT THEY CANNOT BE EVALUATED SEPARATELY FOR THE PURPOSE OF D ETERMINING THE ARMS LENGTH PRICE OF ANY ONE TRANSACTION , BY WHICH ( I ) THE COMBINED NET PROFIT OF THE ASSOCIATED ENTERPR ISES ARISING FROM THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION IN WHICH THEY ARE ENGAGED, IS DETERMINED; ( II ) THE RELATIVE CONTRIBUTION MADE BY EACH OF THE ASS OCIATED ENTERPRISES TO THE EARNING OF SUCH COMBINED NET PROFIT, IS THEN EVALUATED ON THE BASIS OF THE FUNCTIONS PERFORMED, ASSETS EMPLOYED O R TO BE EMPLOYED AND RISKS ASSUMED BY EACH ENTERPRISE AND ON THE BAS IS OF RELIABLE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 13 EXTERNAL MARKET DATA WHICH INDICATES HOW SUCH CONTR IBUTION WOULD BE EVALUATED BY UNRELATED ENTERPRISES PERFORMING COMPA RABLE FUNCTIONS IN SIMILAR CIRCUMSTANCES; ( III ) THE COMBINED NET PROFIT IS THEN SPLIT AMONGST THE ENTERPRISES IN PROPORTION TO THEIR RELATIVE CONTRIBUTIONS, AS EVAL UATED UNDER SUB-CLAUSE ( II ); ( IV ) THE PROFIT THUS APPORTIONED TO THE ASSESSEE IS TA KEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION: PROVIDED THAT THE COMBINED NET PROFIT REFERRED TO IN SUB-CLA USE ( I ) MAY, IN THE FIRST INSTANCE, BE PARTIALLY ALLOCATED TO EA CH ENTERPRISE SO AS TO PROVIDE IT WITH A BASIC RETURN APPROPRIATE FOR THE TYPE OF INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION IN WH ICH IT IS ENGAGED, WITH REFERENCE TO MARKET RETURNS ACHIEVED FOR SIMIL AR TYPES OF TRANSACTIONS BY INDEPENDENT ENTERPRISES, AND THEREA FTER, THE RESIDUAL NET PROFIT REMAINING AFTER SUCH ALLOCATION MAY BE SPLIT AMONGST THE ENTERPRISES IN PROPORTION TO THEIR RELATIVE CONTRIB UTION IN THE MANNER SPECIFIED UNDER SUB-CLAUSES ( II ) AND ( III ), AND IN SUCH A CASE THE AGGREGATE OF THE NET PROFIT ALLOCATED TO THE ENTERP RISE IN THE FIRST INSTANCE TOGETHER WITH THE RESIDUAL NET PROFIT APPO RTIONED TO THAT ENTERPRISE ON THE BASIS OF ITS RELATIVE CONTRIBUTIO N SHALL BE TAKEN TO BE THE NET PROFIT ARISING TO THAT ENTERPRISE FROM THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION; 12. RULE 10A(1)(D) EXPRESSLY SETS FORTH THE SITUATIONS IN WHICH THE PROFIT SPLIT METHOD CAN BE APPLIED, INTER ALIA, `IN MULTIPLE INTERNATIONAL TRANSACTIONS OR SPECIFIED DOMESTIC TRANSACTIONS WHIC H ARE SO INTERRELATED THAT THEY CANNOT BE EVALUATED SEPARATELY FO R THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF ANY ONE TRANSACTION. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THAT THE APPLICATION OF THE PSM PRE-SUPPOSES EXISTENCE OF SEPARATE CH ARACTER OF THE ENTITIES PERFORMING INTERLINKED PARTS OF ONE OVERALL ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 14 TRANSACTION. IT IS ONLY BECAUSE OF THE INHERENT DIFFICULTY IN EVA LUATING THE ARMS LENGTH PRICE OF THE SEPARATE PARTS OF THE LARGE TRANSACTION UNDERTAKEN BY DIFFERENT ENTITIES THAT THE INDIVIDUAL PROFIT EARNED BY EACH ENTITY FROM THE OVERALL TRANSACTION IS AGGREGATED, WHICH IS THEN SPLIT BETWEEN THEM IN PROPORTION OF THEIR RELATIVE CONTRIBUTIONS FOR FINDING OUT THE ALP. 13. ON GOING THROUGH THE PRESCRIPTION OF THE METHOD, IT BECOMES OVERT THAT IT REQUIRES DETERMINATION OF THE ARMS LENGTH PROFIT IN TWO STAGES, WHICH IS THEN AGGREGATED AS PER THE LATTER PART OF THE PROVISO PROVIDING FOR AGGREGATING BASIC RETURN WITH THE RESIDUAL NET PR OFIT REMAINING AFTER SUCH ALLOCATION. THE FIRST STAGE IS ENSHRINED IN THE OPENING PART OF THE PROVISO EXPRESSLY PROVIDING FOR COMPU TATION OF THE BASIC RETURN CORRESPONDING TO THE EFFORTS PUT IN BY A P ARTICULAR ENTITY. THE SECOND STAGE IS SET OUT IN VARIOUS SUB-CLAUSES O F RULE 10B(1)(D). SUB-CLAUSE (I) PROVIDES FOR AGGREGATING NET PRO FIT EARNED BY THE CONCERNED ASSOCIATED ENTERPRISES. THE TPO ON TAB LE 28.1 OF HIS ORDER IN OIA HAS AGGREGATED OPERATING PROFITS OF FIVE E NTITIES FROM A.YS.2007-08 TO 2013-14 AND THE COMBINED NET PROFIT HAS BEEN DETERMINED AT RS.157.23 CRORES AS UNDER:- ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 15 28.1 DETERMINATION OF COMBINED PROFITS OF THE ASSESSEE AND A E'S ANAGHA PHARMA - INDIA ANAM TRADING CO. MAURITIU SAVA TRADING CO. (SAVA PHARMA LTD) MAURITIU SAVA TRADING FZE (SHARJAH) (WESTSIDE FZE) GOLDWING TRADING FZE COMBINED PROFIT OF ANAGHA AND AE'S A.Y OP. PROFIT OP. PROFIT OP. PROFIT OP. PROFIT OP. PROFIT A B C D E F G 2007-08 1,30,38,449 -23,39,606 1,21,46,062 0 0 2,28,44,905 2008-09 1,65,77,014 20,73,403 12,10,74,256 3,72,65,597 0 17,69,90,270 2009-10 4,55,01,112 0 1,05,89,783 27,09,05,997 0 32,69,96,892 2010-11 65,46,516 0 0 8,15,69,255 0 8,81,15,771 2011-12 1,65,14,476 0 0 46,93,21,447 0 48,58,35,923 2012-13 5,98,94,492 0 0 - 31,30,45,698 38,64,21,501 13,32,70,295 2013-14 4,72,85,077 0 0 0 29,09,84,600 33,82,69,677 TOTAL 20,53,57,136 -2,66,203 14,38,10,101 54,60,16,598 67,74,06,101 1,57,23,23,733 14. THE NEXT STEP IN STAGE TWO IS ENSHRINED IN SUB-C LAUSES (II) AND (III), WHICH PROVIDE THAT THE RELATIVE CONTRIBUTION BY EACH OF THE ASSOCIATED ENTERPRISES TO THE EARNING OF SUCH COMBINED NET PROFIT IS TO BE EVALUATED AND THEN THE COMBINED NET PROFIT IS TO BE SPLIT AMONGST THE ENTERPRISES IN PROPORTIONATE TO THEIR RELATIVE CONTRIBUTION. HOWEVER, BEFORE UNDERTAKING THIS EXERCISE, THE BASIC RETURN PARTICULAR TO THE CONCERNED ENTITY IS TO BE DETERMINED AS PE R FIRST PART OF THE PROVISO, WHICH IS TO BE REDUCED FROM TH E AGGREGATE PROFIT. THE TPO IN THE EXTANT CASE DETERMINED THE BASIC RETUR N FOR OIE (COLUMN D) AND THE OVERSEAS ENTITIES (COLUMN E) IN TA BLE 28.2 AND THEN WORKED OUT THE ENTIRE RESIDUAL PROFIT (COLUMN F). IN FINDING OUT THE FIGURES UNDER CERTAIN COLUMNS OF TABLE 28 .2, THE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 16 TPO MADE SOME INFIRMITIES. FIRSTLY, FOR CALCULATING THE BASIC RE TURN OF OIE UNDER COLUMN D, THE TPO APPLIED PERCENTAGES OF PRO FIT EARNED BY THE COMPARABLES AS PER THE TP REPORT OF OIE ON THE COMBINED OPERATING PROFIT OF ALL THE FIVE ENTITIES TAKEN TOGETHER. INSTEAD OF THAT, HE SHOULD HAVE DETERMINED THE BASIC RETURN OF OIE BY APPLYING THE COMPARABLES NET PROFIT RATE TO THE AMOUNT OF SALES MADE BY OIE FOR SUCH YEARS. SIMILAR MISTAKE WAS COMMIT TED IN COMPUTING THE AMOUNT OF BASIC RETURN APPROPRIATE FOR OVERSE AS ENTITIES BY APPLYING 3% OF THE COMBINED PROFIT OF ALL THE FIVE ENTITIES. HE MENTIONED IN PARA 28 THAT: `THE ROLES OF THE A ES HAVE BEEN NARRATED ABOVE. FOR WHICH NOT MORE THAN 2% TO 3% W OULD BE CHARGED AS COMMISSION. COMMISSION IS COMPUTED WITH REF ERENCE TO THE AMOUNT OF SALES AND NOT THE OVERALL PROFIT OF ALL THE ENTITIE S TAKEN TOGETHER. 15. COMING BACK TO SUB-CLAUSES (II) AND (III), THE TPO IS REQUIRED TO SPLIT THE RESIDUAL PROFIT BETWEEN THE ENTITIES WHO CONTRIBUTE TO THE OVERALL TRANSACTION. IN THE INSTANT CASE, THE TPO UNDER COLUMN F OF TABLE 28.2 ATTRIBUTED THE ENTIRE RESIDUAL PROFIT TO OIE, WHICH HE THEN AGGREGATED WITH THE BASIC RETURN OF OIE AS PER COLUMN D TO ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 17 FIND OUT THE TOTAL ARMS LENGTH PROFIT OF OIE AS PER COLUMN G OF TABLE 28.2. FROM 100% ALLOCATION OF RESIDUAL PROFIT TO OIE, IT IS VIVID THAT THE TPO ATTRIBUTED ALL THE COMBINED FUNCTIONS ONLY TO OIE AND NONE TO ANY OTHER ENTITY INCLUDING THE ASSESSEE UNDER CONSIDERATION OR OVERSEAS AES. 16. ANOTHER MISTAKE WHICH THE TPO COMMITTED IN TABLE 28. 3 IS THAT HE TOOK THE FIGURE OF OIES TOTAL PROFIT UNDER COLUMN B , WHICH IS THE SAME FIGURE AS COLUMN G IN TABLE 28.2. AFTER REDUCIN G THE AMOUNT OF OPERATING PROFIT SHOWN BY OIE UNDER COLUMN C, HE DETERMINED THE TOTAL AMOUNT OF TRANSFER PRICING ADJUSTMENT AS PER COLUMN D OF TABLE 28.3. FROM THIS, HE REDUCED THE ARMS LE NGTH PROFIT OF THE ASSESSEE AS CALCULATED ON THE LAST PAGE OF THE ORDER IN OIE, TO FIND OUT THE AMOUNT OF TRANSFER PRICING ADJUSTMENT IN THE HANDS OF OIE THOUGH HE REDUCED THE AMOUNT OF ARMS LENGTH PROFIT OF THE ASSESSEE IN TABLE 28.3, BUT FORGOT TO ADD THE AMOUN T OF PROFIT/LOSS OF THE ASSESSEE IN HIS TABLE ON 28.1 WHILE CALCULATIN G THE COMBINED PROFIT OF THE GROUP ENTITIES, FOR FURTHER PROCESSING UNDER THE PSM. ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 18 17. HAVING POINTED OUT A FEW WEAKNESSES IN IMPLEMEN TING THE PSM, WE LEAVE THIS ISSUE HERE ONLY BECAUSE THE ALP DETERMINA TION UNDER THE PSM HAS BECOME ACADEMIC AS THE DRP HAS DIRECTED TO APPLY THE RPM AND THE ASSESSEE IS NOT SEEKING THE APPLICATION OF THE PSM. THE ONLY THING WHICH WE WANT TO ACCENTUATE IS THAT THE T PO ATTRIBUTED THE ENTIRE RESIDUAL PROFIT (AFTER EXCLUDING THE ARMS LENGTH PROFITS OF THE ASSESSEE AND OIE FROM THEIR RESPECTIVE INTE RNATIONAL TRANSACTIONS OF SALE; AND 3% TO OVERSEAS ENTITIES) ONLY TO OIE BY OPINING THAT ALL OTHER ACTIVITIES WERE DONE BY IT ALONE. 18. AT THIS JUNCTURE WE TAKE NOTE OF THE FOLLOWING ADDITIONAL GROUND TAKEN BY THE ASSESSEE : 19. THE LEARNED AO ERRED IN LAW AND ON FACTS IN RE FERRING THE ALLEGED INTERNATIONAL TRANSACTION OF CONTROL & MAN AGEMENT OF SAVA GROUP TO THE LEARNED TPO, WITHOUT COMPLYING W ITH THE PROVISIONS OF SECTION 92CA(1) R.W.S. 92C(3) AND 92B OF ITA, 1961. 19. THE HONBLE SUPREME COURT IN NATIONAL THERMAL POWER COMPANY LTD. VS. CIT (1998) 229 ITR 383 (SC) HAS OBSERVED THAT THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TA XING AUTHORITIES IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JU DICIAL ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 19 DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUN AL, IT IS FOUND THAT A NON-TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUC TION IS DENIED, WE DO NOT SEE ANY REASON WHY THE ASSESSEE SHOU LD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESP ECT OF THAT ITEM. ANSWERING THE QUESTION POSED BEFORE IT IN AFFIRMATIV E, THEIR LORDSHIPS HELD THAT ON THE FACTS FOUND BY THE AUTHORITIES BELOW , IF A QUESTION OF LAW ARISES (THOUGH NOT RAISED BEFORE THE AUTHOR ITIES) WHICH HAS BEARING ON THE TAX LIABILITY OF THE ASSESSEE, THE TR IBUNAL HAS JURISDICTION TO EXAMINE THE SAME. HAVING GONE THROUGH TH E SUBJECT MATTER OF THE ADDITIONAL GROUND ESPOUSED BY THE ASSES SEE, IT IS DISCERNIBLE THAT THE SAME RAISES A PURE QUESTION OF LAW. W E, THEREFORE, ADMIT THE SAME AND TAKE IT UP FOR DISPOSAL ON M ERITS. 20. THE LD. AR SUBMITTED THAT THE AO WENT WRONG AND COM MITTED THE SAME MISTAKE AS WAS DONE IN THE CASE OF OIE BY MA KING A REFERENCE TO THE TPO FOR DETERMINING THE ALP OF A TRANSACTION WHICH WAS NOT REPORTED BY THE ASSESSEE IN FORM NO. 3CEB, WITHOUT GRANTING OPPORTUNITY OF HEARING. HE RELIED ON THE ORDER PA SSED BY THE TRIBUNAL IN THE CASE OF OIE FOR THE ASSESSMENT YEARS 2 007-08 TO ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 20 2013-14 IN WHICH THE ASSESSMENT HAS BEEN HELD TO BE VITIATE D ON THIS COUNT. ANOTHER SUBMISSION WAS MADE TO THE EFFECT THAT THE TP O HELD THE ENTIRE NETWORK OF SAVA GROUP COMPANIES AS SHAM THAT DID NOT LIE IN HIS DOMAIN, WHICH, IF WARRANTED, COULD HAVE BEEN DONE ONLY BY THE AO. THIS POINT ALSO, IN HIS OPINION, VITIATED THE ASSESSMENT AS HAS BEEN HELD BY THE TRIBUNAL IN THE CASE IN OIE. THESE CONTENTIONS WERE COUNTERED BY THE LD. DR WHO SUBMITTE D THAT THERE WAS NO ILLEGALITY IN THE ACTION OF THE AO IN MAKING A REFE RENCE TO THE TPO NOR DID THE TPO COMMIT ANY MISTAKE IN EXERCISING H IS JURISDICTION IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 21. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THROUG H THE RELEVANT MATERIAL ON RECORD. THE TRIBUNAL IN ITS ORDER DATE D 27-06- 2019 (ITA NOS. 1062 TO 1068/PUN/2017) PASSED IN OIE, HAS OBSERVED IN PARA NO. 84: THAT THE AO MADE A REFERENC E TO THE TPO ON TWO ASPECTS, I.E. SALE OF MEDICINES AND DRUGS BY TH E ASSESSEE GROUP WHICH NOT ONLY INCLUDED THE ASSESSEE BUT VARIOUS OTHE R COMPANIES AND THE SECOND TRANSACTION WHICH WAS REPORTED WA S THE ONE DECLARED BY THE ASSESSEE IN AUDIT REPORT, I.E. EXPOR T TRADING OF MEDICINES ON WHOLESALE BASIS. THEN ALLOWING THE PLEA OF THE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 21 ASSESSEE VIDE PARA 99 OF ITS ORDER, THE TRIBUNAL HELD: THAT WHERE THE AO WHILE MAKING REFERENCE OF AN INDEPENDENT TO/ AND NON EXISTING INTERNATIONAL TRANSACTIONS (AS ALLEGED BY THE LD. AR) H AD TO COME TO A FINDING THAT INCOME ARISING FROM THE SAID INTERNATIONA L TRANSACTIONS NEEDS TO BE BENCHMARKED, IN ORDER TO DETERMINE ITS ARMS LENGTH PRICE AND BEFORE SUCH REFERENCE TO THE TPO, SH OW CAUSE NOTICE SHOULD HAVE BEEN GIVEN TO THE ASSESSEE. IN THE ABSENCE OF ANY SUCH SHOW CAUSE NOTICE BEING GIVEN TO THE ASSESSEE, THE SAME IS IRREGULARITY (AS HELD BY THE HONBLE BOMBAY HIGH COURT) AN D THE SAID IRREGULARITY CANNOT BE MADE GOOD BY RESTORING BACK TH E SAME TO THE FILE OF AO.IT IS THE CASE OF VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AND SUCH AN ORDER PASSED IN THE HANDS OF THE ASSESSEE CANNOT STAND AND THE SAME IS INVALID AND BAD IN L AW . IT CAN BE SEEN FROM THE ORDER OF THE TRIBUNAL IN THE CASE OF OIE THAT THE AO MADE A REFERENCE TO THE TPO IN RESPECT OF TWO TRANSA CTIONS VIZ., THE FIRST OF SALE TO THE AES WHICH WAS DECLARED BY THE ASSESSEE IN ITS FORM NO.3CEB AND THE SECOND OF WORLDWIDE SALE BY THE ASSESSEE GROUP, WHICH WAS NOT DECLARED. WE HAVE REPRO DUCED TABLE 28.2 FROM THE ORDER OF THE TPO IN THE CASE OF OIE IN WHIC H COLUMN ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 22 NO. D REPRESENTS PROFIT ATTRIBUTABLE TO OIE FOR THE REPORTED INTERNATIONAL TRANSACTIONS AND THEN COLUMN NO. F WITH THE RESID UAL PROFIT ALLOCATED TO OIE. THESE TWO TRANSACTIONS DETERMINED BY THE TPO UNDER THE PROFIT SPLIT METHOD WERE CLUBBED AND IN TABLE NO.28.3 HE PROPOSED THE TRANSFER PRICING ADDITION FOR THEM AFTER EXCLUDING THE ARMS LENGTH PROFIT IN THE HANDS OF THE ASSESS EE UNDER CONSIDERATION FOR THE ASSESSMENT YEARS 2011-12, 2012-13 AND 2013- 14, WHICH AMOUNT WAS, IN TURN, COMPUTED BY APPLYING THE PR OFIT RATE OF AES TO THE EXPORTS MADE BY THE ASSESSEE. THUS, IT CAN BE SEEN THAT THE TWO TRANSACTIONS WERE BENCHMARKED IN THE HANDS OF OIE COLLECTIVELY UNDER THE PSM, VIZ., ONE BEING THE EXPORT MADE BY OIE DIRECTLY AND THE OTHER BEING THE ALLOCATION OF RESIDUAL PROF IT TO IT AS RELATABLE TO THE WORLDWIDE OPERATIONS. TO PUT IT SIMPLY, THE TPO COMBINED PROFIT OF ALL THE ENTITIES FOR THE A.Y. 2011-12 UNDER CONSIDERATION AT RS.48.58 CRORE (TABLE 28.2 COLUMN B), FROM WHICH HE REDUCED 3% PROFIT AS ALLOCABLE TO THE ENTITIES ABROAD AT RS. 1.45 CRORE (TABLE 28.2 COLUMN E); THEN THE ARMS LENGTH PROFIT O F THE ASSESSEES ONLY TRANSACTION OF SALE MADE TO THE AES AT RS. 94,92,109 (TABLE 28.3 COLUMN E); AND THEN THE ARMS LENGTH PROFIT OF THE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 23 REPORTED TRANSACTION OF THE SALES MADE BY OIE AT RS.3.15 CRORE (TABLE 28.2 COLUMN D); AND THE REMAINDER AMOUNT OF TOTAL PR OFITS WAS TAKEN AS THE ARMS LENGTH PROFIT OF THE SECOND UNREPO RTED INTERNATIONAL TRANSACTION OF OIE, BEING, THE PROFIT ALLOCATION FO R THE WORLDWIDE OPERATIONS OF THE SAVA GROUP AT RS.41.36 CRORE ( TOTAL TRANSFER PRICING ADJUSTMENT OF OIE OF RS.44.51 CRORE AS PER TABLE 28.3 COLUMN E MINUS RS.3.15 CRORE TOWARDS THE FIRST REPOR TED INTERNATIONAL TRANSACTION OF OIE). FROM THE ABOVE DISCUSSION, IT IS GRAPHICALLY CLEAR THAT THE DECLARED TRANSACTION OF EXPORTS OF OIE WITH ARMS LENGTH PROFIT OF RS.315 CRORE LIES AT THE SAME PE DESTAL AS THE ONLY TRANSACTION OF THE ASSESSEE WITH THE ARMS LENGTH PRO FIT OF RS.94,92,109 AND THAT NO INTERNATIONAL TRANSACTION PARALLEL TO TH E SECOND TRANSACTION OF OIE WITH TRANSFER PRICING ADJUSTMENT OF RS.41.36 CRORE IS THERE IN THE HANDS OF THE ASSESSEE. TO SUM UP, THE TPO PROCEEDED WITH TWO DISTINCT TRANSACTIONS IN THE CASE OF OIE, WHICH WERE ALBEIT PROCESSED JOINTLY UNDER THE PSM. THE TRIBUNAL IN ITS ORDER IN OIE, AFTER OBSERVING THAT THERE WERE TWO TRANSAC TIONS, CAME TO HOLD THAT THE REFERENCE MADE BY THE TPO IN RESPECT OF THE SECOND TRANSACTION, WITHOUT GIVING OPPORTUNITY OF HEARING TO THE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 24 ASSESSEE, VITIATED THE ASSESSMENT ORDER. AS AGAINST THAT, THE ASSESSEE HAS ONLY ONE INTERNATIONAL TRANSACTION OF EXPORT MADE TO ITS AE WITH TRANSACTED VALUE OF RS.3.02 CRORE AND THE ARMS LENGTH PR OFIT OF RS.94,92,109/- IT IS ONLY THIS TRANSACTION WHICH WAS REFERR ED BY THE AO TO THE TPO AND WHOSE ALP HAS BEEN DETERMINED. AS NEITHE R ANY SECOND INTERNATIONAL EXISTS IN THE CASE OF THE ASSESSEE N OR HAS BEEN REFERRED TO THE TPO, THE RATIO LAID DOWN BY THE TRIBUNAL IN THE CASE OF OIE HAS NO APPLICATION HERE. HAD THE FACTUAL POSITIO N PREVAILING IN THE CASE OF THE ASSESSEE BEEN SIMILAR, FOLLOWIN G THE RULE OF STARE DECISIS , WE WOULD HAVE GONE WITH THE ORDER PASSED IN OIE. THE FACT THAT THERE IS ONLY ONE INTERNATIONAL TRANSACTION IN THE CASE OF THE ASSESSEE WHICH WAS REFERRED BY THE AO TO TH E TPO AND WHOSE ALP HAS BEEN DETERMINED, THERE CAN BE NO QUESTION O F DECLARING THE ASSESSMENT ORDER TO BE BAD IN LAW ON THIS SCOR E. 22. THE NEXT CONTENTION OF THE LD. AR, RELYING ON THE TRIBUNAL ORDER IN OIE, IS THAT THE ASSESSMENT ORDER IS BAD IN LAW BEC AUSE THE TPO HAD NO POWER TO CONCLUDE THAT THE CONTROL AND MANAGEMEN T OF AFFAIRS WAS SITUATED WHOLLY IN INDIA, WHICH COULD HAVE BEEN D ONE ONLY BY THE AO. AGAIN HERE, WE FIND THIS ARGUMENT AS NOT ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 25 APPLICABLE TO THE FACTS OF THE ASSESSEE BEFORE US. THE CON TENTION PUT FORTH BEFORE THE TRIBUNAL IN OIE, WHICH GOT ACCEPTED, HAS TO BE SEEN IN THE BACKGROUND OF THE FACTS IN WHICH THAT CASE WAS PLA CED. WE HAVE NOTED ABOVE THAT THE TPO DETERMINED THE ALP IN THE CASE O F OIE OF THE INTERNATIONAL TRANSACTIONS OF DIRECT EXPORTS MADE TO THE AES AND ALSO OF THE REMAINING WORLDWIDE PROFIT FROM THE SA LES ON THE PREMISE THAT THE CONTROL AND MANAGEMENT OF THE GROUP AFF AIRS WAS WHOLLY IN INDIA WITH OIE IT WAS THE SECOND TRANSACTION, W ITH REFERENCE TO WHICH THE TRIBUNAL DECLARED THE ASSESSMENT OR DER BAD IN LAW BY HOLDING THAT ONLY THE AO AND NOT THE TPO COULD HOLD THA T CONTROL AND MANAGEMENT OF AFFAIRS WAS SITUATED WHOLLY IN INDIA . AS NO TRANSFER PRICING ADDITION HAS BEEN MADE IN THE HANDS OF THE ASSESSEE UNDER CONSIDERATION QUA THE TRANSACTION SIMILAR TO THE SECOND TRANSACTION IN OIE OF THE PROFIT ON THE WORLDWIDE SALE S, THAT PART OF THE DECISION HAS NO RELEVANCE TO THE INSTANT CASE. TH ERE IS NO WHISPER MUCH LESS ANY REFERENCE IN THE ORDER OF THE TPO PASSED IN THE CASE OF THE ASSESSEE HOLDING THAT THE CONTROL AND MANAGE MENT OF AFFAIRS WAS SITUATED WHOLLY IN INDIA. THE CONTENTION IS, THEREFO RE, REPELLED. ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 26 23. THE ASSESSEE HAS RAISED ANOTHER LEGAL ISSUE CONTE NDING THAT THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WAS ONLY WORTH R S.3.20 CRORES. WHILE REFERRING TO THE CERTAIN DOCUMENTS, IT WAS S UBMITTED THAT THE AO APPLIED TO THE CIT U/S 92CA(1) OF THE ACT FOR SEE KING PERMISSION FOR MAKING A REFERENCE TO THE TPO FOR THE ALP DETERMINATION. THE CIT, IN TURN, TOOK NOTE OF THE FACT THAT TH E AMOUNT OF INTERNATIONAL TRANSACTION IN THE CASE WAS LESS THAN RS.5 CRORES AND CALLED UPON THE AO TO ASSIGN SPECIFIC REASONS FOR MAKING SUCH A REFERENCE. THEREAFTER, THE AO ADDUCED THE REAS ONS VIDE HIS LETTER DATED 14.10.2014 AS TO WHY THE INTERNATIONAL TRANSACTION OF LESS THAN RS.5 CRORES NEEDED TO BE REFERRED TO THE TPO. SUCH REASONS WERE STATED TO BE THAT THE ASSESSEE GROUP WAS SU BJECTED TO SEARCH U/S 132(4) WHICH TRANSPIRED THAT IT WAS ROUTING THE BUS INESS TO THE FOREIGN COMPANIES WITH AN INTENTION TO EVADE TAXES IN IN DIA. SINCE THE ALP DETERMINATION IN THE CASE OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WOULD HAVE BEARING ON THE ALP DETERM INATION OF OTHER ENTITIES OF SAVA GROUP AND OTHER YEARS OF ASSESSE E ALSO IN WHICH THE AMOUNT OF INTERNATIONAL TRANSACTIONS WAS MORE THAN RS.5.00 CRORES, IT WAS REQUESTED THAT THE REFERENCE SHOUL D BE MADE TO ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 27 THE TPO SO AS TO MAINTAIN CONSISTENCY AND A UNIFORM ALP DETERMINATION. THE CIT GOT CONVINCED WITH THE AO'S REASONS AND ACCORDED HIS SANCTION. IT WAS THEREAFTER THAT THE AO MADE A REFERENCE TO THE TPO FOR DETERMINING THE ARM'S LENGTH PRICE O F INTERNATIONAL TRANSACTION OF RS.3.20 CRORES VIDE HIS LETTER DATED 19.11.2014, A COPY OF WHICH HAS BEEN PLACED AT PAGE 10 09 OF THE PAPER BOOK. THE LD. AR CONTENTED THAT CIRCULAR NO.3/2003 D ATED 20.05.2003 EXPRESSLY PROVIDES THAT REFERENCE TO THE TPO CA N BE MADE BY THE AO ONLY WHEN THE VALUE OF INTERNATIONAL TRANSAC TION EXCEEDS RS.5 CRORES. IT WAS SUBMITTED THAT SINCE THE VALUE OF INTERNATIONAL TRANSACTION IN THE INSTANT CASE WAS LESS THAN SUCH A THRESHOLD, IT WAS INCUMBENT UPON THE AO HIMSELF TO DETERMINE THE ALP. AS THE AO MADE A REFERENCE TO THE TPO, AND THE LATTER DETERMINED THE ALP, ALL THE PROCEEDINGS WERE VITIATED. 24. THERE IS NO DOUBT THAT CIRCULAR NO.3/2003 PROVIDE S FOR MAKING REFERENCE TO THE TPO ONLY WHERE THE VALUE OF INTERNATIO NAL TRANSACTION EXCEEDS RS.5 CRORES. IN OTHER WORDS, IF THE AGGREGATE VALUE OF INTERNATIONAL TRANSACTION IN A CASE IS LESS THAN THAT, TH EN THE AO IS SUPPOSED TO BENCHMARK THE INTERNATIONAL TRANSACTION AT H IS ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 28 OWN LEVEL WITHOUT MAKING A REFERENCE TO THE TPO. TO THIS EXTE NT, THE ARGUMENT OF LD. AR IS CORRECT. HOWEVER, THE CONSEQU ENCE OF SUCH A WRONG DOING, AS CLAIMED BY THE LD. AR TO BE FATAL AND VITIATING THE FINAL ASSESSMENT ORDER, IN OUR CONSIDERED OPINION IS NOT CORRECT. IF SOME IRREGULARITY, WHICH IS NOT A LEGAL INFIRMITY, TAKES PLACE IN THE PROCESS OF ASSESSMENT, SUCH AN IRREGULARITY NE EDS TO BE CURED BY RESTORING THE MATTER TO THE STAGE AT WHICH SUCH AN IRREGULARITY OCCURRED. THE OUTCOME OF SUCH AN IRREGULARITY CANNOT BE TO QUASH THE ASSESSMENT. THE HON'BLE SUPREME COURT IN PR.CIT VS. S.G. ASIA HOLDINGS (INDIA) PVT. LTD. (2019) 310 CTR 1 (SC) CAME ACROSS A SITUATION IN WHICH THE SAME THE CBDTS CIRCULAR NO.3/2003 WAS NOT FOLLOWED BUT IN THE CONVERSE DIRECTIONS , NAMELY, THE AO SUO MOTU DETERMINED THE ALP OF INTERNATIONAL TRANSACTION WITH THE VALUE EXCEEDING RS.5 CRORES. THE TRIBUNAL APPROV ED THE CONTENTION OF THE ASSESSEE THAT THE AO FAILED IN FOLLOWING THE MANDATE OF THE CIRCULAR AND QUASHED THE ASSESSMENT ORDER. WHEN THE MATTER REACHED BEFORE THE HON'BLE SUPREME COURT, IT APP ROVED THE VIEW OF THE TRIBUNAL TO THE EXTENT THAT THE AO WAS BOUND T O MAKE A REFERENCE TO THE TPO WHEN THE AGGREGATE VALUE OF ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 29 INTERNATIONAL TRANSACTION EXCEEDED RS.5 CRORES IN TERMS OF INSTRUCTION NO.3/2003. HOWEVER, IT REVERSED THE TRIBUNAL OR DER ON THE OTHER ISSUE BY HOLDING THAT THE TRIBUNAL OUGHT TO HAVE ACCEPTED THE SUBMISSIONS MADE BY THE DEPARTMENTAL REPRESENTATIVE . A ND THE MATTER OUGHT TO HAVE BEEN RESTORED TO THE FILE OF AO SO TH AT APPROPRIATE REFERENCE COULD BE MADE TO THE TPO. THUS, IT IS EVIDENT FROM THE JUDGMENT OF THE HON'BLE SUMMIT COURT THAT IF THE PRESCRIPTION OF CIRCULAR NO.3/2003 IS NOT FOLLOWED, THE PROPE R COURSE OF ACTION IS TO RESTORE THE MATTER TO THE STAGE WHERE IRREGULARITY OCCURRED RATHER THAN QUASHING THE ENTIRE PROCEE DINGS AND THE CONSEQUENTIAL ASSESSMENT ORDER. WE, THEREFORE, RESP ECTFULLY FOLLOWING THE HON'BLE APEX COURT JUDGMENT IN PR.CIT VS. S.G. ASIA HOLDINGS (INDIA) PVT. LTD. (SUPRA) , SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO FOR DETERMINING HIMSELF THE ALP OF THE INTERNATIONAL TRANSACTION OF SALE OF FINISHED GOODS AFTER ALLOWING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 25. NOW, WE TURN TO THE APPLICATION OF THE RESALE PRICE METHOD AS DIRECTED BY THE DRP THROUGH WHICH, IT COMPUTED THE AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.37,78,910. AT THIS STAGE, IT IS ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 30 PERTINENT TO NOTE THE NATURE OF THE INTERNATIONAL TRANSACTION, WHICH IS `SALE OF FINISHED GOODS TO ITS AE. THE DRP HELD IN PARA 66 THAT: SINCE THE ASSESSEE IS INTO TRADING EXPORTS OF PHARMA PRODU CTS, RESALE PRICE METHOD WILL BE THE MOST APPROPRIATE METHOD. IN ORDER TO EVALUATE IF THE RPM WAS PROPERLY DIRECTED TO BE APP LIED, WE NEED TO REFER TO THE RELEVANT PART OF RULE 10B(1)(B), WHIC H READS AS UNDER: 10B(1).. (B) RESALE PRICE METHOD, BY WHICH (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVICES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED; (II) TO (V) . 26. SUB-CLAUSE (I) OF THE RULE EMPHATICALLY PROVIDES THA T: `THE PRICE AT WHICH PROPERTY PURCHASED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD TO AN UNRELATED ENTERPRISE, IS IDENTIFIED. THUS, IT IS GLARING THAT THIS METHOD APPLIES WHERE AN INDIAN ENTITY PURCHASES GOODS FROM ITS FOREIGN/AE AND THEN RESELLS THE SAME. THE ENTIRE MECHANISM IN THE SUBSEQUENT SUB-CLAUS ES OF RULE 10B(1)(B) IS A CONSEQUENCE OF THIS FOUNDATIONAL FACT. IF THE INTERNATIONAL TRANSACTION IS NOT THAT OF PURCHASE BY AN INDIAN E NTITY, ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 31 THEN THE RPM CANNOT BE APPLIED. HERE IS A CASE IN WHICH TH E ASSESSEE SOLD GOODS TO ITS AE IN THE INTERNATIONAL TRANSACTION R ATHER THAN PURCHASING THE SAME. IN FACT, THE PURCHASES FOR SUCH A RESALE WERE MADE FROM NON-AES. IN SUCH A SCENARIO, WE CANN OT COUNTENANCE THE DRPS DIRECTION TO APPLY THE RPM FOR THE ALP DETERMINATION OF THE INTERNATIONAL TRANSACTION OF `SALE OF FINISHED GOODS TO THE AES. 27. ONCE THE APPLICATION OF THE PSM HAS BEEN RULED OUT BY THE DRP AND RIGHTLY SO AND FURTHER WE HAVE HELD HEREINABOVE THA T THE RPM IS NOT THE CORRECT METHOD TO BE APPLIED, THEN THERE CAN BE NO HITCH IN ACCEPTING THE ASSESSEES CONTENTION OF APPLYING THE TN MM AS THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCE S OF THE CASE. IN FACT, THE DRP ALSO DIRECTED TO APPLY THE TNMM FOR THE NEXT TWO YEARS, WHICH ARE PART OF THIS BATCH OF APPEALS, IN WHICH THE INTERNATIONAL TRANSACTIONS ARE SALE OF MANUFACTURED GOODS TO T HE AES. 28. NOW THE ASSESSEE HAS CAME OUT WITH A CONTENTION THA T IF THE TNMM IS TO BE APPLIED, THEN ITS ORIGINAL ALP DETERMINATION IN THE TRANSFER PRICING STUDY REPORT SHOULD BE ACCEPTED WITHOUT RE MITTING ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 32 THE MATTER TO THE AO. WE CANNOT CONCUR WITH THIS CONTENTION BECAUSE THE WORKING DONE BY THE ASSESSEE IN THIS REGARD H AS NOT BEEN VETTED EITHER BY THE TPO OR THE DRP. THE TPO REJECTED SU CH A METHOD AND WENT AHEAD WITH THE PSM AND THE DRP SUGGESTED THE RPM. HENCE VERACITY OF THE CALCULATIONS MADE BY THE ASSES SEE UNDER TNMM HAS YET TO PASS THROUGH THE EYES OF THE AUTHOR ITIES BELOW. UNDER THESE CIRCUMSTANCES, WE SET ASIDE THE IMPUGN ED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO FOR A FRESH DETER MINATION OF THE ALP OF INTERNATIONAL TRANSACTION OF SALE OF FINISHED GOO DS UNDER THE TNMM AS PER LAW AFTER ALLOWING REASONABLE OPPOR TUNITY OF HEARING TO THE ASSESSEE. A.YS. 2012-13 & 2013-14 29. THE ASSESSEE IN THESE TWO APPEALS IS AGGRIEVED BY THE TRANSFER PRICING ADDITIONS OF RS.4,34,17,316 AND RS.7,76,19,272 M ADE BY THE AO FOR THE A.YS. 2012-13 AND 2013-14 RESPECTIVELY IN HIS FINAL ORDERS DATED 25.01.2017 30. THE FACTUAL MATRIX FOR THE A.Y. 2012-13 IS THAT THE ASSESSEE FILED RETURN DECLARING LOSS OF RS.7,36,50,537. INTERNATIONAL TRANSACTIONS OF `SALE OF FINISHED GOODS AMOUNTING TO RS.9.5 5 CRORES ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 33 AND ODD WERE DECLARED IN FORM NO.3CEB. THE AO MADE A REFERENCE TO THE TPO FOR DETERMINING THEIR ALP. THE TPO, VIDE HIS CONCISE ORDER DATED 29.01.2016, DETERMINED THE AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.54,08,226. HE DID NOT SEPARATELY DISCUSS THE MERITS OF THE TRANSFER PRICING ADDITION BUT, AS DONE FOR TH E PRECEDING YEAR, RELIED ON THE DISCUSSION MADE BY HIM IN HIS ORDER PASSED IN THE CASE OF OIE FOR THE A.Y. 2007-08. SIMILARLY , FOR THE A.Y. 2013-14, THE ASSESSEE FILED RETURN DECLARING LOSS OF RS.20,82,40,706. THE ASSESSEE REPORTED INTERNATIONAL TRAN SACTION OF `SALE OF FINISHED GOODS AT RS.13,25,91,855. THE AO MA DE A REFERENCE TO THE TPO FOR DETERMINING THE ALP OF INTERNATIONAL TRANSACTION. THE LATTER VIDE HIS ORDER DATED 29.01.2016, P ASSED IN THE SAME WAY AS FOR THE PRECEDING TWO YEARS, DETERMINED TH E AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.4,66,98,148 BY MAINLY RELYING ON HIS ORDER IN THE CASE OF OIE FOR THE A.Y. 2007-08. FOR BOTH THE YEARS, THE ASSESSEE HAD APPLIED TRANSACTIONAL NET MARGIN ME THOD (TNMM). THE TPO REJECTED THIS METHOD AND RESORTED TO THE PS M. THE ASSESSEE ASSAILED THE DRAFTS ORDERS CONTAINING SUCH TRA NSFER PRICING ADJUSTMENTS BEFORE THE DRP, WHICH DID NOT COUNTENANCE THE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 34 APPROACH OF THE TPO IN APPLYING THE PSM. IT DIRECTED TO APPLY THE TNMM FOR BOTH THE YEARS AND REQUIRED THE ASSESSEE TO FUR NISH BENCHMARKING UNDER THE TNMM. FOR THE A.Y. 2012-13, THE ASSESSEE IDENTIFIED THREE COMPARABLES WITH MEAN PLI (OP/OC) A T 7.63% AND ITS OWN OP/TC AT 49.44%. THE DRP OBSERVED THAT THE ASSESSEE EXCLUDED EMPLOYEE COST AND OPERATING & ADMINISTRA TIVE COSTS OF RS.10.94 CRORES IN COMPUTING ITS OWN OPERATING CO ST BASE, FOR WHICH NO JUSTIFIABLE REASONS WERE ASSIGNED. THE ASSESS EE TRIED TO SUPPORT SUCH EXCLUSION BY PUTTING FORTH THAT: `MAJOR EXPENSES FOR MARKET AND BRAND CREATION WERE UNDERTAKEN IN KEEPING WITH TH E LONG DRAWN STRATEGY TO MANUFACTURE PHARMA PRODUCTS. MASSIVE EFF ORTS OF CREATING DOMESTIC MARKET FOR THE SAVA BRANDED PRODUCTS WERE UNDERTAKEN. THESE EFFORTS WERE FROM A FUTURISTIC PERSPECTIVE . RESULT OF THESE EFFORTS WERE NOT REAPED IN THE CURRENT YEAR. RE JECTING SUCH A CONTENTION AND INCLUDING SUCH COSTS WITHIN THE OPERATING COST BASE, THE DRP DETERMINED OPERATING LOSS OF THE ASSESSEE AT RS.7,45 ,42,027 AND THE PLI OF OP/OC AT (-) 39.82%. THIS IS HOW, THE DRP COMPUTED TRANSFER PRICING ADJUSTMENT OF RS.4,34,17,316 W HICH WAS MADE BY THE AO IN THE FINAL ASSESSMENT ORDER FOR THE A.Y. 2012-13. ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 35 SIMILARLY, FOR THE A.Y. 2013-14, THE ASSESSEE FURNISHED BENCHMARKING UNDER THE TNMM BY IDENTIFYING FIVE COMPARABLES WITH MEAN PLI (OP/OC) AT 5.26%. THE ASSESSEE COMPUTED ITS OW N OP/TC AT 16.61%. IN THE CALCULATION OF ITS OWN OPERATING COST B ASE, THE ASSESSEE AGAIN EXCLUDED EMPLOYEE COST AND OPERATING & ADMINISTRATIVE COST OF RS.23.89 CRORES WITH THE SIMILAR EXPLANA TION AS GIVEN FOR THE PRECEDING YEAR. THE DRP DID NOT APPROVE THE EXCLUSIONS AND RE-DETERMINED THE PLI OF THE ASSESSEE AT (-) 52.11% AND ACCORDINGLY COMPUTED THE TRANSFER PRICING ADJUSTMENT OF RS.7,76,19,272. THE AO IN HIS FINAL ORDER MADE THE ABO VE REFERRED TRANSFER PRICING ADDITIONS. AGGRIEVED THEREBY, THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 31. HAVING HEARD BOTH THE SIDES AND GONE THROUGH THE R ELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE ASSESSEE IN THE INITIA L TRANSFER PRICING STUDY REPORT APPLIED THE TNMM, WHICH WAS R EJECTED BY THE TPO THEREBY TREATING THE PSM AS MOST APPROPRIATE METHOD. THE DRP OVERTURNED THE TPOS ACTION AND RESTORED THE TNMM AS MOST APPROPRIATE METHOD. THE ASSESSEE IS NOT AGGRIEVED B Y THE TNMM APPLICATION. THE ONLY DISPUTE IS ABOUT THE CALCULATION OF ITS ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 36 OWN PLI. WE HAVE NOTED ABOVE THAT WHILE CALCULATING ITS PLI F OR THE A.Y. 2012-13, THE ASSESSEE TREATED RS.10.94 CRORES AS NON- OPERATING COSTS ON THE PREMISE THAT SUCH EXPENSES WERE INCU RRED FOR THE PURPOSE OF BRAND BUILDING, WHICH EFFORTS WERE FROM A FUTURISTIC PERSPECTIVE AND RESULTS OF THESE EFFORTS WERE NOT REAPED IN THE CURRENT YEAR . THE ASSESSEE HAS DEMONSTRATED ITS PLI WORKING ON THIS BASIS ON PAGES 761 AND 762 OF PAPER BOOK. WHEREAS THE ABOVE EXTRACTED NOTE HAS BEEN GIVEN ON PAGE 761, IT HAS BEEN ME NTIONED ON PAGE 762 THAT: THE COST WITH RESPECT TO EMPLOYEES HIRED F OR THE PURPOSE OF BRAND CREATION, PROMOTION AND MARKETING IN DOME STIC MARKET WHICH HAS NO RELEVANCE WITH THE SALES OF MANUFACTUR ED PRODUCTS SOLD TO AES, HENCE THE SAME IS CARVED OUT TO DETE RMINE OPERATING COST. THE LD. AR ATTEMPTED TO JUSTIFY THE EXCLUSION OF SUM OF RS.10.94 CRORES BY CONTENDING THAT THE ASSESSEE IN CURRED THESE EXPENSES CONSIDERING THE FUTURISTIC IMPACT OF THE MARKE T CREATION MADE IN THIS YEAR. HE ELABORATED BY STATING THAT SUC H COSTS RESULTED INTO THE BRAND BUILDING OF THE ASSESSEE, WHOSE BEN EFIT WAS TO BE REAPED IN FUTURE YEARS. THUS, IT CAN BE SEEN THAT TH E ASSESSEE ADDUCED TWO REASONS FOR THE CARVE-OUT, VIZ., FIRST THAT SUC H COSTS ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 37 RESULTED INTO BENEFITS IN FUTURE YEARS AND SECOND THAT THE EX PORTS MADE TO THE AES WERE NEUTRAL TO THESE COSTS. 32. BEFORE WE TAKE UP THE ASSESSEES ARGUMENT FOR CONSIDERATION, IT IS SINE QUA NON TO CONSIDER THE NATURE OF EXPENSES CONSIDERED AS `BRAND BUILDING AND HENCE EXCLUDED. BREAK-UP OF THIS A MOUNT FOR THE A.Y. 2012-13 HAS BEEN GIVEN ON PAGE 762 OF THE PA PER BOOK, WHICH CONSISTS OF EMPLOYEE COST OF RS.3.69 CRORE (OUT OF TOTAL EMPLOYEE COST OF RS.4.77 CRORE) AND OPERATING AND ADMINIS TRATION EXPENSES OF RS.7.28 CRORES (OUT OF TOTAL OPERATING AND ADMINISTRATION EXPENSES OF RS.8.25 CRORE). THUS IT CAN BE SEEN THAT EMPLOYEES COST AND OPERATING AND ADMINISTRATION EXPENSES HA VE BEEN TREATED AS `BRAND BUILDING EXPENSES . WHAT IS THE LINK BETWEEN THESE EXPENSES AND BRAND BUILDING IS DIFFICULT TO COMPREHEND . IT CAN BE SEEN WITH NAKED EYES THAT ROUGHLY 84% OF TOTAL EMPLOYEE COSTS AND OPERATING AND ADMINISTRATION EXPENSES HAVE BEEN SLICED AWAY AND GIVEN AN IMAGINARY NOMENCLATURE OF `BRAND BUILDING EX PENSES FOR TRANSFER PRICING PURPOSE ONLY WITH AN AVOWED OBJECT OF SHRINKING THE OPERATING COSTS AND RESULTANTLY BOOSTING THE OPERATING PROFITS SO AS TO PRESENT A ROSY PICTURE FOR BENCHMARKING. THUS WE H OLD THAT THE ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 38 EXPENSES CARVED OUT BY THE ASSESSEE BY CLAIMING THEM TO BE TOWARDS BRAND BUILDING ARE ORDINARY OPERATING EXPENSES CON NECTED WITH THE RUNNING OF BUSINESS AND HAVE NO ELEMENT OF BRAND BUILDING. NO AUTHENTIC REASONING FOR SUCH ALLOCATION OR CORRELATION HAS BEEN ESTABLISHED BEFORE US. THE IRONY IS THAT POR UNA PARTE THE ASSESSEE IS CLAIMING SUCH HUGE EXPENSES AS DEDUCTIONS AND FILING THE RE TURNS WITH SPIRALING LOSSES OF RS.7.36 CRORE FOR THE A.Y. 2012 -13 AND RS.20.82 CRORES THE A.Y. 2012-13; POR OTRA PARTE , WHEN IT COMES TO THE BENCHMARKING, IT IS SHOWING HANDSOME OPERATING PROFIT RATE S OF 49.44% AND 16.61% BY SLICING AWAY A MAJOR COMPONENT OF THE OPERATING COSTS INCURRED. 33. ARGUENDO, WE PROCEED WITH THE CONTENTION OF THE LD. AR THAT SUCH EXPENSES WERE BRAND BUILDING COSTS QUALIFYING FOR EXC LUSION. THE FIRST REASON GIVEN IS OF FUTURISTIC PERSPECTIVE. OTHERWIS E, THERE IS NO DISPUTE AS TO THE OTHERWISE OPERATING NATURE OF THE EMPLO YEE COST AND OPERATING & ADMINISTRATIVE EXPENSES CARVED OUT BY THE ASSESSEE. ON A SPECIFIC QUERY, IT WAS ADMITTED THAT THE ASS ESSEE STARTED MANUFACTURING OPERATIONS FROM THIS YEAR ONWARDS AND OUT OF TOTAL SALES OF RS.11.26 CRORES, DOMESTIC SALES AMOUNTED TO R S.1.71 ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 39 CRORES. IT, THEREFORE, TRANSPIRES THAT THE ASSESSEE INCU RRED EMPLOYEE COST AND OPERATING & ADMINISTRATIVE EXPENSES IN RELATION TO ITS MANUFACTURED PRODUCTS, WHICH WERE SOLD IN THE YEAR UNDER CONSIDERATION BOTH IN THE DOMESTIC MARKET TO NON-AES AND IN THE FOREIGN MARKET TO THE AES. IN SUCH A SITUATION, THE ASSESSEE CANNOT JUSTIFY THE EXCLUSION BY CORRELATING THE SAME WITH ITS IMPACT IN TH E YEARS TO COME. ON A PERTINENT QUERY, THE LD. AR ADMITTED TH AT THESE COSTS WERE NOT CAPITALIZED IN THE BOOKS OF ACCOUNT BUT WERE T AKEN AS REVENUE EXPENSES FOR THE YEAR UNDER CONSIDERATION. ONC E THESE COSTS ARE INCURRED FOR THE YEAR IN QUESTION AND CLAIMED AS DEDU CTION IN ENTIRETY IN THIS YEAR ALONE, WE FAIL TO UNDERSTAND AS TO HOW THE SE CAN BE CORRELATED WITH THE SALES TO BE MADE IN FUTURE YEARS WITHO UT CAPITALIZING THEM FOR ACCOUNTING OR TAX PURPOSE. 34. IF THE CONTENTION IS THAT SUCH EXPENSES, WHICH ARE O THERWISE OPERATING IN NATURE, RELATE TO THE FUTURE YEARS, THEN NATURALLY SUCH EXPENSES SHOULD HAVE FORMED PART OF THE OPERATING COSTS BASE FOR THE FUTURE YEARS. ON A CLARIFICATION IN THIS REGARD, THE LD. AR CA NDIDLY ADMITTED THAT SUCH COSTS FOR BOTH THE YEARS WERE NOT INCLUDED IN THE OPERATING COST BASE OF ANY OF THE FUTURE YEARS. THIS SHO WS THAT ALBEIT ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 40 THE ASSESSEE CLAIMS TO HAVE INCURRED RS.10.94 CRORES FO R THE A.Y. 2012-13 AND RS.23.89 CRORES FOR THE A.Y. 2013-14 AS OPERATING COST FOR THE FUTURE YEARS, BUT NEITHER CAPITALIZED THEM IN THE ACCO UNTS FOR THE YEARS UNDER CONSIDERATION NOR INCLUDED THEM IN THE OPE RATING COSTS BASE FOR ANY OF THE FUTURE YEARS. IF WE ACCEPT TH E CONTENTION OF ASSESSEE TO EXCLUDE SUCH EXPENSES, THEN THEY WILL NEITHER F ORM PART OF OPERATING COST BASE FOR THE YEARS UNDER CONSIDERATION N OR IN THE FUTURE YEARS THOUGH THESE HAVE ACTUALLY BEEN GRANTED DEDUC TION IN THE COMPUTATION OF TOTAL INCOME FOR THE YEARS IN QUESTION. AS TH E SO- CALLED BRAND BUILDING EXERCISE DONE BY THE ASSESSEE FACILITATED MAKING OF THE SALES IN THE YEARS UNDER CONSIDERATION, WE AR E IN FULL AGREEMENT WITH THE DRP THAT THE EXPENSES SO CARVED OUT AND EXCLUDED FROM THE OPERATING COST BASE WERE LIABLE TO BE INCLUD ED BACK. 35. THE SECOND REASON GIVEN BY THE LD. AR IS THAT THE BRAND BUILDING EXPENSES HAVE NO RELATION WITH THE SALE OF FINISHED GO ODS TO THE AES AND HENCE SHOULD BE EXCLUDED. WE AGAIN FAIL TO AP PRECIATE AS TO HOW BRAND BUILDING EXERCISE DOES NOT HELP IN FACILITATING P ROFIT FROM SALES TO RELATED PARTIES. EVERY SALE TO THE AES HAS A ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 41 CORRESPONDING MANUFACTURING ALSO. A GOOD BRAND NOT ONLY H ELPS IN ACCELERATING REVENUE SIDE BY PUSHING SALES ACROSS THE BOA RD TO THE RELATED AND UNRELATED PARTIES BUT ALSO REINS IN ECONOMIES AND EFFICIENCIES ON THE COST SIDE ECONOMIES IN TERMS OF RELATIV ELY COST- EFFECTIVE PURCHASES OF QUALITY RAW MATERIAL AND EFFICIENCIES IN TERMS OF HAVING GOOD AND SATISFIED WORK FORCE PREFERRING TO STIC K WITH AN ESTABLISHED AND REPUTED BRAND THEREBY ADDING THE VALUE. THU S WE DO NOT COUNTENANCE THE CONTENTION THAT BRAND BUILDING EXERCISE H AS NO IMPACT ON THE PROFITABILITY FROM SALES MADE TO RELATED PARTIES. 36. NOTWITHSTANDING THE ABOVE, WE NOTE THAT THE WORKING OF THE PLI UNDER THE TNMM FOR THE A.Y. 2012-13, PROVIDED AT TH E INSTANCE OF THE DRP, HAS BEEN GIVEN ON PAGE 761 OF THE PA PER BOOK. THE STARTING POINT IS TOTAL REVENUE FROM SALE MADE TO AES AND NON- AES IN DOMESTIC MARKET. IN SUCH A SCENARIO ALL THE OPERATING COSTS BOTH FOR AE AND NON-AE TRANSACTIONS NEED TO BE CONSIDER ED FOR DETERMINING THE RATE OF OPERATING PROFIT TO TOTAL COST. THE TRANS FER PRICING ADDITION WILL RESULT ONLY BY APPLYING THE DIFFERENTIAL PLI R ATE (PLI OF THE ASSESSEE AND PLI OF THE COMPARABLES) ONLY ON SALES MADE TO THE AES AND NOT THE ENTITY LEVEL TRANSACTIONS. ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 42 37. THE POSITION WHICH FINALLY EMERGES IS THAT NEITHER THE EMPLOYEE COST AND OPERATING AND ADMINISTRATION EXPENSES HAVE ANY RELATION WITH THE `BRAND BUILDING NOR EVEN GENUINE BRAND BUILDING EXPENSES CAN BE EXCLUDED FROM THE OPERATING COST B ASE ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. THUS THE C ONTENTION OF THE LD. AR FOR REDUCING THE OPERATING COST BASE WITH THE E XPENSES OF RS.10.94 FOR THE A.Y. 2012-13 AND RS.23.89 CRORES FOR THE A.Y. 2013-14 IS REPELLED. TO SUM UP, WE HOLD THAT THE DRP RIGHTLY ORDERED THE INCLUSION OF SUCH COSTS IN THE OPERATING COST BAS E FOR COMPUTING THE ASSESSEES PLI FOR BOTH THE YEARS UNDER CONSIDERATION. 38. BUT FOR THE ABOVE, THE LD. AR DID NOT ASSAIL ANY OTHER ASPECT OF ITS OWN ALP DETERMINATION PRESENTED BEFORE THE DRP. WE, THEREFORE, ACCORD OUR IMPRIMATUR TO THE FINAL ASSESSMENT ORDERS MAKING THE ABOVE ADDITIONS. 39. FOR THE TWO YEARS UNDER CONSIDERATION ALSO, THE ASSE SSEE HAS RAISED ADDITIONAL GROUND CONTENDING THAT THE REFERENCE MADE B Y THE AO TO THE TPO FOR THE SECOND INTERNATIONAL TRANSACTION, WITHOU T GRANTING OPPORTUNITY OF HEARING TO THE ASSESSEE, WAS CONTRA RY TO LAW ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 43 AND HENCE THE ASSESSMENT ORDERS BE DECLARED AS NULL AND VOID. WE HAVE DISCUSSED THIS ISSUE IN EXTENSO WHILE DISPOSING OF THE APPEAL FOR THE A.Y. 2011-12 ABOVE. FOR THE TWO YEARS INSTANTLY B EFORE US, AGAIN THE ALP DETERMINATION BY THE TPO IS CONFINED TO THE ONLY REPORTED INTERNATIONAL TRANSACTION OF SALE MADE TO THE AES. UNLIK E IN THE CASE OF OIE, THERE IS NO SECOND TRANSACTION REFERRED BY THE AO TO THE TPO. FOLLOWING THE RAISON D`ETRE GIVEN FOR THE PRECEDING YEAR, THE ADDITIONAL GROUNDS FOR THESE TWO YEARS ARE ALSO DISMISSE D. 40. IN THE RESULT, THE APPEAL FOR THE A.Y. 2011-12 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEALS FOR THE A.YS. 2012 -13 AND 2013-14 ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH AUGUST, 2021. SD/- SD/- (S.S. VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE P RESIDENT PUNE; DATED : 30 TH AUGUST, 2021 GCVSR/SATISH ITA NOS.738 TO 740/PUN/2017 M/S. SAVA MEDICA LTD. 44 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE DRP-3 (WZ), MUMBAI 4. 5. 6. THE CONCERNED CIT, PUNE DR, ITAT, C BENCH, PUNE / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 25.8.2021 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 30.8.2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *