Hospira Healthcare India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 821/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7702 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 09-02-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 01-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: MS. ORCHID INDIA
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Valuation report; Revenue expenditure; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 92A; 264; 13; 22

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , !' . #$#% , & '' ( [BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ] ./I.T.A. NO. 821/MDS/2016 / ASSESSMENT YEAR : 2011-2012 M/S. HOSPIRA HEALTHCARE INDIA PRIVATE LIMITED, SRI-NIVAS, NEW NO.86, OLD NO.89, G.N. CHETTY ROAD, T. NAGAR, CHENNAI 600 017. VS THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2(2) CHENNAI. [PAN AABCO 2190F] ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : SHRI. ASHIK SHAH AND SHRI. SRIRAM SESHADRI, C.A. /RESPONDENT BY : SHRI. PATHLAVATH PREEYA, CIT. /DATE OF HEARING : 09-02-2017 ! /DATE OF PRONOUNCEMENT : 28-02-2017 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST AN ORDER DATED 29.01.2016 OF DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2(2), CHENNAI PURSUANT TO DIRECT IONS ISSUED BY THE ITA NO.821/MDS/2016. :- 2 -: DISPUTE RESOLUTION PANEL (IN SHORT THE LD. DPR) U/S.144C OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT). 2. BEFORE ADVERTING TO THE GROUNDS RAISED BY THE A SSESSEE, IT MAY BE CONVENIENT, TO BRIEFLY CAPTURE THE FACTS REL ATING TO THE CASE. ASSESSEE IS ENGAGED IN MANUFACTURING AND SELLING OF GENERIC INJECTABLE DRUGS TO ITS GROUP ENTITIES AND CERTAIN OTHER CONCE RNS CALLED AS DISTRIBUTION PARTNERS. IT WAS INCORPORATED ON 17 TH NOVEMBER, 2009 AS A SUBSIDIARY OF HOSPIRA PTE. LTD, SINGAPORE. ASSES SEE HAD ON 15.12.2009 ACQUIRED THE GENERIC INJECTABLE PHARMACE UTICAL BUSINESS OF M/S. ORCHID CHEMICALS & PHARMACEUTICALS LTD (IN SHO RT ORCHID INDIA) AS A GOING CONCERN ON A SLUMP SALE BASIS. FOR THE L IMITED PURPOSE OF APPLYING A NON COMPETE CLAUSE, ONE SHRI.K. RAGHAV ENDRA RAO WHO WAS MANAGING DIRECTOR OF ORCHID CHEMICALS & PHARMAC EUTICALS LTD WAS ALSO MADE A PARTY TO THIS AGREEMENT. CONSIDERATION AGREED WAS APPROXIMATELY $400,000,000. BY VIRTUE OF THIS SLUM P ACQUISITION, VARIOUS AGREEMENTS ENTERED BETWEEN M/S. ORCHID INDI A AND DISTRIBUTION PARTNERS WERE INHERITED BY THE ASSESSE E. SUCH TYPE OF AGREEMENTS WERE NAMED AS LEGACY AGREEMENTS. IN SUPP ORT OF THE CONSIDERATION PAID FOR THE INJECTABLE DRUG DIVISIO N TAKEN OVER BY THE ASSESSEE FROM M/S. ORCHID INDIA, ASSESSEE HAD FILED A VALUATION REPORT PREPARED BY ONE M/S. R.B. SHAH & ASSOCIATES WHO AS PER ASSESSEE ITA NO.821/MDS/2016. :- 3 -: WERE THE MERCHANT BANKERS AUTHORIZED TO MAKE SUCH VALUATION. THE PRICE PAID WERE FOR THE TANGIBLE ASSETS AS WELL AS THE INTANGIBLE ASSETS LIKE CUSTOMER RELATIONSHIPS, CONTRACT MANUFACTURING , DEVELOPED PRODUCTS, IN-PROCESS RESEARCH AND DEVELOPMENT AND GOODWILL. FOR RAISING THE CAPITAL THAT WAS REQUIRED FOR ACQUIRING THE UNIT FROM ORCHID INDIA, ASSESSEE HAD ISSUED INTER CORPORATE CONVERTI BLE DEBENTURES (ICCD) FOR WHICH INTEREST WAS PAYABLE AT 10.5%. T HE ICCD SERIES WAS SUBSCRIBED BY ITS ASSOCIATED ENTERPRISE NAMELY HOSPIRA PTE LTD, SINGAPORE. 3. SINCE THE INJECTABLE DRUG UNIT ACQUIRED BY THE ASS ESSEE USED CERTAIN ACTIVE PHARMACEUTICAL INGREDIENT (API) PRO DUCED BY CERTAIN OTHER DIVISIONS OF ORCHID INDIA, ASSESSEE HAD ENT ERED INTO A SUPPLY AGREEMENT ON 30 TH MARCH, 2010 WITH ORCHID INDIA FOR ENSURING CONTINUED SUPPLY OF SUCH API. PURSUANT TO THIS AG REEMENT, ASSESSEE PAID A SUM OF H27,13,20,000/- FOR CAPACITY EXPANSIO N OF ORCHID INDIA AND ASSESSEE WAS ENTITLED FOR ASSURED SUPPLY OF TWO INTERMEDIARY DRUGS NAMELY MEROPENEM AND IMIPENEM FOR A TEN YEAR PERIOD. IN THE ACCOUNTS, THIS SUM WAS AMORTIZED AND THE CHARGE FOR THE RELEVANT PREVIOUS YEAR WAS H32,30,000/- ONLY. HOWEVER, ASSE SSEE CLAIMED THE WHOLE OF THE AMOUNT AS REVENUE OUTGO FOR TAX PURPOS E. ITA NO.821/MDS/2016. :- 4 -: 4. IN THE AGREEMENT ENTERED BY THE ASSESSEE WITH ORC HID INDIA FOR ACQUIRING ITS INJECTABLE DRUG UNIT, AS AL READY MENTIONED BY US, SHRI. K. RAGHAVENDRA RAO, MANAGING DIRECTOR OF THAT COMPANY WAS ALSO A PARTY AND HE WAS PAID A COMPETE FEE H4,55,31 ,000/-. THIS WAS ALSO CLAIMED BY THE ASSESSEE AS A REVENUE OUTGO. 5. DURING THE RELEVANT PREVIOUS YEAR, ASSESSEE HAD AFF ECTED FOLLOWING SALES TO ITS ASSOCIATED ENTERPRISES ABR OAD:- NAME OF THE ASSOCIATED ENTERPRISE LOCATION AMOUNT (INR) HOSPIRA INC USA 1,224,648,753 HOSPIRA ENTERPRISES BV NETHERLANDS 1,606,777,998 HOSPIRA AUSTRALIA PTY. LTD AUSTRALIA 6,513,055 ASSESSEE ALSO HAD SIMILAR TRANSACTIONS WITH ONE M/S . APOTEX CORP AND APOTEX INC SIGNET AND THE VALUE OF SHIPMENT TO THE SE PARTIES DURING THE RELEVANT PERIOD ARE AS UNDER:- NAME OF THE PARTY VALUE OF SHIPMENT APOTEX CORP 183,78,66,285 APOTEX INC SIGNET 18,08,60,138 THE BUSINESS MODEL ADOPTED BY THE ASSESSEE AND ITS TRADING PARTNERS MENTIONED ABOVE WERE ON PROFIT SHARING BASIS. PRO FITS WERE WORKED OUT BY DEDUCTING FROM THE SALES EFFECTED BY THE EN TITIES ABROAD COST OF PRODUCTS SOLD AND MARKETING COST. ASSOCIATED ENTER PRISE ABROAD WHO ITA NO.821/MDS/2016. :- 5 -: WERE SELLING ASSESSEES PRODUCTS WERE ENTITLED FOR MARKETING COST OF 7.5% ON THE TOTAL SALE PRICE. COST OF THE PRODUCTS DEDUCTED WAS BASED ON THE BILLINGS BY THE ASSESSEE. RESULTING PROFIT W AS SHARED IN THE RATIO OF 50% EACH. THE BASIS OF THIS MODEL WAS THE AGREE MENT ALREADY ENTERED BY M/S.ORCHID INDIA WITH THE ABOVE ENTERPRI SES ABROAD, WHICH AGREEMENT BECAME THE LEGACY OF THE ASSESSEE WHEN TH EY ACQUIRED THE UNIT OF GENERIC INJECTABLE DRUGS FROM M/S. ORCHID INDIA. IT IS TO BE NOTED THAT M/S. ORCHID INDIA WAS SUPPLYING PHARMAC EUTICALS PRODUCTS TO TWO OTHER COMPANIES NAMED NORTHSTAR AND ACTAVIS ALSO UNDER THE SAME FORMULA. 6. LD. ASSESSING OFFICER WHILE COMPLETING THE ASSESSME NT FOR THE IMPUGNED ASSESSMENT YEAR DISALLOWED THE CLAIM O F DEPRECIATION ON INTANGIBLE ASSETS TRANSFERRED TO THE ASSESSEE BY M/S. ORCHID INDIA ON ACQUISITION OF GENERIC INJECTABLE UNIT AND ALSO THE CLAIM OF NON COMPETE FEE PAID TO MR. K. RAGHAVENDRA RAO. LD. ASS ESSING OFFICER ALSO DISALLOWED THE CLAIM OF UNAMORTIZED EXPENDITUR E IN THE NATURE OF PAYMENTS AFFECTED TO M/S. ORCHID INDIA FOR ITS CAPA CITY EXPANSION. LD. ASSESSING OFFICER ALSO WENT BY THE LD.TPO RECOMMEND ATION WITH REGARD TO ADJUSTMENT FOR THE PROFIT SHARED ON SALE ON THE PHARMACEUTICALS PRODUCTS WITH ITS ASSOCIATED ENTER PRISE PRODUCTS AND ALSO FOR THE RATE OF INTEREST PAID BY THE ASSESSEE ON INTER CORPORATE ITA NO.821/MDS/2016. :- 6 -: CONVERTIBLE DEBENTURES (ICCD) ISSUED TO ITS ASSOCIA TED ENTERPRISE ABROAD. 7. WHILE RECOMMENDING UPWARD ADJUSTMENT FOR THE PROF IT SHARED BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTE RPRISE ABROAD, LD. TPO TREATED M/S. APOTEX CORP AND APOTEX INC SIGNET ALSO AS ASSOCIATED ENTERPRISES OF THE ASSESSEE. LD. TPO RE LIED ON AN ORDER DATED 28.03.2012 OF INCOME TAX SETTLEMENT COMMISSIO N IN THE CASE OF M/S.ORCHID INDIA FOR THE ASSESSMENT YEARS 2006-07 T O 2010-2011 FOR COMING TO A CONCLUSION THAT APOTEX CORP AND APOTEX INC SIGNET WERE ASSOCIATED ENTERPRISES OF THE ASSESSEE AND PROFIT S PLIT RATIO BETWEEN ASSESSEE AND ITS ASSOCIATED ENTERPRISE SHOULD BE 6 0:40 AND NOT 50:50. LD. DRP DID NOT MAKE ANY MODIFICATION WITH RESPECT TO THE PROPOSALS MADE BY THE LD. ASSESSING OFFICER EXCEPT FOR DIRECT IONS ON REVENUE EXPENDITURE RELATING TO SCIENTIFIC RESEARCH AND CO RRECTION OF THE AMOUNT COMPUTED AS PROFIT SHARE OF ASSOCIATED ENTE RPRISE. 8. NOW BEFORE US, ASSESSEE HAD RAISED THE FOLLOWING CO NCISE GROUNDS OF APPEAL IN LIUE OF ITS ORIGINAL GROUNDS. 1 .1 THE IMPUGNED ORDER WHICH INCLUDES THE CONTENTIONS O F THE LEARNED ASSESSING OFFICER ('LD. AO') AND THE LEARNED TRANSFER PRICING OFFICER ('LD. TPO'), BASED ON THE DIRECTIONS ISSUED BY HONOURABLE DISPUTE RESOLUTION PANEL ('HON'BLE DRP'), TO THE EXTENT PREJUDICIAL TO THE APPELLANT, IS CONTRARY T O THE LAW, FACTS, AND CIRCUMSTANCES OF THE CASE AND IS VIOLATIVE OF PRINCIPLES OF EQUITY A ND NATURAL JUSTICE. ITA NO.821/MDS/2016. :- 7 -: 2. DEPREDATION ON INTANGIBLE ASSETS 2.1 THE LD. AO AND THE HON'BLE DRP ERRED IN DISALLOWING THE CLAIM OF DEPRECIATION OF INR 99,19,84,875 BY HOLDING THAT DEVELOPED PRODUCTS, IN-PROCESS RESEARCH AND DEVELOPMENT, CUSTOMER RELATIONSHIP AND CONTRACT MANUFACTURING ACQUIRED BY THE APPELLANT PURSUANT TO ACQUISITION OF BUSINES S FROM ORCHID CHEMICALS AND PHARMACEUTICALS LTD ('ORCHID INDIA') ARE NOT INTANG IBLE ASSETS ELIGIBLE FOR DEPRECIATION UNDER SECTION 32 OF THE ACT ON THE BASIS: THAT THE APPORTIONMENT OF COST PAID OVER THE VALUE OF FIXED ASSETS IS NOT ON A SCIENTIFIC BASIS. THAT THE ADVANTAGE IS A RESTRICTED ONE AND DOES NOT CONFER AN EXCLUSIVE RIGHT TO CARRY ON THE PRIMARY BUSINESS ACTIVITY AND THAT SUC H RIGHT CAN BE ASSERTED ONLY AGAINST ORCHID INDIA. THAT THE INTANGIBLE ASSETS CANNOT BE INDEPENDENTLY SOLD. 2.2 WITHOUT PREJUDICE TO THE ABOVE, IN CASE VALUE OF AN Y OF THE ABOVE INTANGIBLE ASSETS ARE REDUCED, THE REDUCTION TO THAT EXTENT W OULD BE CONSTRUED AS 'GOODWILL' AND CONSEQUENTLY, DEPRECIATION UNDER SECTION 32 OF THE ACT OUGHT TO BE ALLOWED ON THE SAME. 2.3 THE LD. AO AND THE HON'BLE DRP ERRED IN DISALLOWING THE CLAIM OF DEPRECIATION OF INR 1,13,82,750 ON THE NON-COMPETE FEE PAID TO MR. K RAGHAVENDRA RAO, THE PRINCIPAL SHAREHOLDER OF ORCHID INDIA ARE NOT INTANGIBLE ASSETS ELIGIBLE FOR DEPRECIATION UNDER SECTION 32 OF THE ACT ON THE BASIS: THAT THE VALUE IT FETCHES WILL NOT BE AVAILABLE TO THE APPELLANT IF IT IS SOLD SEPARATELY IN THE OPEN MARKET. THAT IT IS NOT AN INTANGIBLE ASSET AS PER ACCOUNTIN G STANDARD 26. THAT THE ADVANTAGE IS A RESTRICTED ONE AND DOES NOT CONFER AN EXCLUSIVE RIGHT TO CARRY ON THE PRIMARY BUSINESS ACTIVITY AND THAT SUCH RIGHT C AN BE ASSERTED ONLY AGAINST MR. K RAGHAVENDRA RAO. 2.4 WITHOUT PREJUDICE TO THE ABOVE, THE LD.AO ERRED IN NOT CONSIDERING THE ALTERNATE PLEA OF ALLOWING THE NON-COMPETE FEE AS ' REVENUE EXPENDITURE' SINCE APPROPRIATE TAXES HAVE ALSO BEEN WITHHELD ON THE PA YMENT OR TO ALLOW THE EXPENDITURE AS DEDUCTION OVER THE PERIOD OF THE AGR EEMENT IN LINE WITH THE ACCOUNTING TREATMENT. 3. DISALLOWANCE OF EXPENSES PAID TOWARDS CAPACITY EXPANSION OF ITA NO.821/MDS/2016. :- 8 -: ORCHID INDIA 3.1 THE LD. AO AND HON'BLE DRP ERRED IN DISALLOWING THE CLAIM OF EXPENSE PAID OF INR 26,80,90,000 TO ORCHID INDIA TOWARDS ORCHID'S MANUFACTURING CAPACITY ON THE BASIS THAT IT IS A CAPITAL EXPENDIT URE. 3.2 WITHOUT PREJUDICE TO THE ABOVE, DEPRECIATION SHOULD BE GRANTED UNDER SECTION 32 OF THE ACT ON THE ABOVE EXPENDITURE. 4. ERRONEOUS DOWNWARD ADJUSHNENT FOR DIFFERENCE BETWEE N COST OF SHIPMENT WITH STANDARD PRICE 4.1 THE LD. TPO AND THE HON'BLE DRP ERRED IN MAKING DOW NWARD ADJUSTMENT OF INR 1,23,67,271 FOR DIFFERENCE BETWEEN COST OF SHIPMENT WITH STANDARD PRICE BY CHERRY PICKING TRANSACTIONS WHERE THE EXPORT PRICES WERE LOWER THAN THE ORIGINAL STANDARD PRICE AS PER THE AGREEME NT, WHILE IGNORING CASES WHERE THE EXPORT PRICES WERE HIGHER. 5. ERRONEOUS METHODOLOGY FOR BENCHMARKING INTEREST PAYMENT FOR INDIAN COMPULSORILY CONVERTIBLE DEBENTURES ('ICCD') FROM NSDL DATABASE 5.1 THE LD. TPO AND THE HON'BLE DRP ERRED IN MAKING A D OWNWARD ADJUSTMENT OF INR 22,14,66,575 FOR INTEREST PAID ON ICCD. 5.2 THE ORDER OF THE LD. TPO WAS ERRONEOUS FOR THE FOLL OWING REASONS: THE SEARCH STRATEGY ADOPTED FOR BENCHMARKING THE IN TEREST ON ICCD USING THE NSDL DATABASE WAS NOT PROVIDED THE LD. TPO DISCARDED HIS OWN COMPARABLES WHEN THE APPELLANT DEMONSTRATED THAT THE INTEREST PAID WAS AT ARM'S LENGTH EVEN IF HIS SET OF COMPARABLE COMPANIES ARE APPROPRIATELY USED. THE LD. TPO DISREGARDING THE SUPPLEMENTARY BENCHMAR KING ANALYSIS PROVIDED BY THE APPELLANT USING THE SAME NSDL DATABASE. THE LD. TPO CONCLUDED ON TPG WHOLESALE PRIVATE LIM ITED AS A COMPARABLE COMPANY. 6. ERRONEOUS ADOPTION OF ORDER OFHON'BLE SETTLEMENT COMMISSION (,HSC ORDER') IN THE CASE OF ORCHID INDIA FOR AY 2006-07 TO 2010-11 WITHOUT ASSESSING THE FACTS OF THE APPELLANT INDEPENDENTLY 6.1 THE LD. TPO AND HON'BLE DRP ERRED IN APPLYING HSC ORDER OF ORCHID INDIA TO ITA NO.821/MDS/2016. :- 9 -: MAKE THE ADJUSTMENT OF INR 18,79,11,517 IN THE HAND S OF THE APPELLANT. FURTHER, THE ADJUSTMENT IS VIOLATIVE OF PRINCIPLES OF EQUITY AND NATURAL JUSTICE AS THE COPY OF THE HSC ORDER, UNAVAILABLE IN PUBLIC DOMAIN, WAS NOT PROVIDED TO THE APPELLANT. 6.2 WITHOUT PREJUDICE TO THE ABOVE, THE ORDER OF THE LD. TPO AND HON'BLE DRP IS NOT SUSTAINABLE AS IT FAILS TO DEMONSTRATE THAT HOSPIRA GROUP WAS CONSIDERED AS A DEEMED ASSOCIATED ENTERPRISE (AE') EVEN AS PER THE HSC ORDER, WHICH ANYWAYS CANNOT HAVE A PRECEDENTIAL OR PERSUASIVE VALUE FOR THE APPELLANT'S CASE AND THE METHOD ADOPTED FOR THE ADJUSTMENT IS NOT ONE OF THE PRESCRIBED METHODS UNDER THE ACT. 6.3 WITHOUT PREJUDICE TO THE ABOVE, THE LD. TPO A ND THE HON'BLE DRP ERRED IN DISREGARDING THE CORROBORATIVE METHODOLOGY (I.E. TN MM ANALYSIS) PROVIDED BY THE APPELLANT UPON REQUEST OF THE LD. TPO DURING TH E ASSESSMENT PROCEEDINGS. 7. ERRONEOUSLY APPLYING PROVISIONS OF SECTION Q2A(2)(I) FOR SALES MADE TO THIRD PARTIES 7.1 THE LD. TPO AND THE HON'BLE DRP ERRED IN TREA TING APOTEX AS A DEEMED AE AND MAKING AN ADJUSTMENT OF INR 6,01,46,813 ON ACCOUNT OF REVISING THE PRICING ARRANGEMENT BY ADOPTING THE RATIO PROVIDED IN THE H SC ORDER. THE ABOVE EXERCISE IS VIOLATING THE PROVISIONS OF THE ACT AND ALSO DOE S NOT CONSIDER THE FUNCTIONAL DIFFERENCES BETWEEN THE AGREEMENTS. 9. GROUND NO. 1 IS GENERAL IN NATURE NEEDING NO SPECIF IC ADJUDICATION. 10. LD. COUNSEL FOR THE ASSESSEE ASSAILING THE ORDERS OF THE LOWER AUTHORITIES DISALLOWING THE CLAIM OF DEPRECIA TION ON INTANGIBLE ASSETS SUBMITTED THAT ASSESSEE HAD GIVEN A VALUATIO N DONE BY THE MERCHANT BANKER, WHEREIN TANGIBLE ASSETS AND INTANG IBLE ASSETS WERE ITA NO.821/MDS/2016. :- 10 -: SEPARATELY VALUED. AS PER LD. AUTHORISED REPRESEN TATIVE LD. ASSESSING OFFICER HAD GIVEN DEPRECIATION ON GOODWILL WHICH W AS THE BALANCING FIGURE, AFTER SETTING OFF THE IDENTIFIED VALUES OF THE TANGIBLE AND INTANGIBLE ASSETS FROM THE SLUMP SALE CONSIDERATION PAID. AS PER LD. AUTHORISED REPRESENTATIVE LD. ASSESSING OFFICER HAD ERRONEOUSLY APPLIED ACCOUNTING STANDARD 26AS WHICH WAS APPLICAB LE ONLY TO SELF GENERATED ASSETS. RELIANCE WAS PLACED ON THE JUDGM ENT OF HONBLE DELHI HIGH COURT IN THE CASE OF AREVA T & D INDIA LTD VS. DC IT 345 ITR 421 AND ALSO DECISION OF CO-ORDINATE BENCH IN THE CASE OF HINDUJA FOUNDRIES LTD VS. ACIT (ITA NO. 1590 TO1593/MDS/201 5, DATED 19.02.2016 ). 11. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT THERE WAS NO SCIENTIFIC BASIS ON WHICH VALUER HAD G IVEN THE VALUATION. AS PER LD. DEPARTMENTAL REPRESENTATIVE VALUE OF THE TANGIBLE ASSETS WERE ARTIFICIALLY REDUCED SO AS TO ENHANCE THE VALU E OF INTANGIBLE ASSETS TO TAKE ADVANTAGE OF HIGHER DEPRECIATION AVAILABL E TO INTANGIBLE ASSETS. THUS, ACCORDING TO HIM, DISALLOWANCE OF DE PRECIATION ON INTANGIBLE ASSETS WAS RIGHTLY MADE. 12. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. THE PURCHASE PRIC E ALLOCATION BY M/S. ITA NO.821/MDS/2016. :- 11 -: R.B. SHAH & ASSOCIATES, FOR THE UNIT ACQUIRED BY TH E ASSESSEE FROM M/S.ORCHID INDIA WAS AS UNDER:- A SSETS DESCRIPTION VALUATION OF METHODOLOGY ESTIMATED FAIR VALUE (USD IN MILLIONS) ESTIMATED FAIR VALUE (INR IN MILLIONS)* NET PROPERTY AND EQUIPMENT FIXED ASSETS OF ORCHID CHEMICALS & PHARMACEUTICALS LTD INCLUDE LAND, BUILDING, PLANT AND MACHINERY, FURNITURE & FIXTURES SALES COMPARISON / INCOME APPROACH/ COST APPROACH 98.6 4,431.4 DEBT - FREE NET WORKING CAPITAL (STOCKS, DEBTORS, LOANS AND ADVANCES, CASH AND BANK BALANCE) (CREDITORS, PROVISIONS) BOOK VALUE (ADJUSTED FOR FAIR VALUE OF INVENTORY) 24.6 1,103.8 CUSTOMER RELATIONSHIPS EXCELLENT RELATIONSHIP MAINTAINED WITH CUSTOMERS OF ORCHID CHEMICALS & PHARMACEUTICALS LTD INOCME APPROACH DIFFERENCE IN WITH AND WITHOUT CUSTOMER RELATIONSHIPS 4.9 218.1 CONTRACT MANUFACTURING THE ORAL CEPH FILL/ FINISH AGREEMENT BINDS HOSPIRA TO PERFORM CONTRACT MANUFACTURING SERVICES ON BEHALF ORCHID DURING THE UPCOMING YEARS. INCOME APPROACH 0.1 4.5 DEVELOPED PRODUCTS INJECTABLE GENERICS VIZ CEPHALOSPRINS, 11.8PENICILLINS. INCOME APPROACH 82.8 3,719.6 IN PROCESS OF AWAITING FDA INCOME APPROACH 11.8 530.3 ITA NO.821/MDS/2016. :- 12 -: RESEARCH & DEVELOPMENT (IPR &D) PRODUCTS APPROVAL VIZ. PENEMS AND NEW MOLECULES OF CEPHALOSPORINS GOODWILL ARISING OUT OF THE TRANSACTION EXCESS OF COST OF ACQUISATION OVER NET OF ASSETS ACQUIRED AND THE LIABILITIES ASSUMED 159.2 7,156.4 LD. ASSESSING OFFICER HAD DISALLOWED DEPRECIATION O N BRAND AND TRADEMARK. THE VALUE OF THESE INTANGIBLE ASSETS HA S BEEN TAKEN BY THE LD. ASSESSING OFFICER AT H396,79,39,500/-. HOWEVER, THIS FIGURE IS NOT APPARENT FROM THE VALUATION REPORT RELIED ON BY TH E ASSESSEE. WHETHER THE VALUER NAMELY M/S. R.B. SHAH & ASSOCIAT ES WHO ASSESSEE HAS CLAIMED TO BE A MERCHANT BANKER WAS HAVING THE AUTHORITY TO MAKE A VALUATION UNDER INCOME TAX ACT, ALSO REQUIRE S VERIFICATION. NO DOUBT AS MENTIONED BY LD. AUTHORISED REPRESENTATIVE ACCOUNTING STANDARD AS 26 APPLIES ONLY FOR INTERNALLY GENERAT ED INTANGIBLE ASSETS. THE CONDITIONS SET OUT BY THE LD. ASSESSING OFFICE R AT PARA 5.3 OF HIS ORDER APPLY ONLY TO INTERNALLY GENERATED INTANGIBL E ASSETS AND NOT TO THE INTANGIBLE ASSETS ACQUIRED BY PAYMENT OF CONSID ERATION. WE THEREFORE REMIT THE ISSUE REGARDING DEPRECIATION O N INTANGIBLE ASSETS BACK TO THE FILE OF THE LD. ASSESSING OFFICER FOR C ONSIDERATION AFRESH IN ACCORDANCE WITH LAW. 13. ADVERTING TO, DISALLOWANCE OF NON COMPETE FEES PAID TO SHRI. K RAGHAVENDRA RAO, LD. AUTHORISED REPRESENTATIVE C ONTENTED THAT IT ITA NO.821/MDS/2016. :- 13 -: WAS PURELY A BUSINESS EXPENDITURE ALLOWABLE AS REVE NUE OUTGO. AS PER LD. AUTHORISED REPRESENTATIVE BY VIRTUE OF CLAUSES 8.6.1 TO 8.6.4 OF THE TRIPARTITE AGREEMENT BETWEEN ASSESSEE, M/S. ORCHID INDIA AND SHRI. K. RAGHAVENDRA RAO, BOTH ORCHID INDIA AS WELL AS SHRI. K. RAGHAVENDRA RAO WERE BARRED FROM ENGAGING IN ANY BUSINESS WHIC H WOULD COMPETE WITH THE BUSINESS OF THE ASSESSEE FOR A PERIOD OF T EN YEARS. FURTHER, AS PER LD. AUTHORISED REPRESENTATIVE THERE WAS A SEPAR ATE AGREEMENT ENTERED BY THE ASSESSEE WITH SHRI. K. RAGHAVENDRA R AO, THROUGH WHICH THIS RESTRICTION WAS MADE ABSOLUTE. AS PER LD. AUT HORISED REPRESENTATIVE AMOUNT PAYABLE TO SHRI. K. RAGHAVEND RA RAO WAS 10 MILLION USD AND IT WAS PURELY A REVENUE OUTGO. REL IANCE WAS PLACED ON THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF PENTASOFT TECHNOLOGIES LTD VS. DCIT 264 CTR 187. 14. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT THESE WERE ALL PART OF A SINGLE UNDERSTANDING THAT ASSESSEE HAD WITH M/S. ORCHID INDIA FOR TRANSFERRING THEIR INJECTABLE DRUG DIVISION TO THE ASSESSEE. 15. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUS ED THE ORDERS OF THE AUTHORITIES BELOW. LD. ASSESSING OFF ICER HAD TREATED NON COMPETE FEES AS NOT ELIGIBLE FOR DEPRECIATION. AS PER LD. ASSESSING ITA NO.821/MDS/2016. :- 14 -: OFFICER IT COULD NOT BE CONSIDERED AS AN INTANGIB LE ASSET. NOW THE SUBMISSION OF THE LD. AUTHORISED REPRESENTATIVE IS THAT SUCH PAYMENTS SHOULD BE CONSIDERED AS A REVENUE OUTGO. HOWEVER, WE FIND THAT ASSESSEE HAD NOT PREFERRED ANY SUCH CLAIM BEFORE LD . ASSESSING OFFICER. NO DOUBT IN THE CASE OF PENTASOFT TECHNOLOGIES (SUPRA) JURISDICTIONAL HIGH COURT HAD HELD THAT NON COMPETE CLAUSE UNDER A N AGREEMENT TRANSFERRING A DIVISION EXCLUSIVELY, SHOULD BE REA D AS A SUPPORTING CLAUSE AND SHOULD BE CONSIDERED AS AN INTANGIBLE AS SETS. HOWEVER, WHAT WE FIND IN THE INSTANT CASE IS THAT CLAUSE 8.6 .1 TO 8.6.4 OF THE TRIPARTITE AGREEMENT BETWEEN THE ASSESSEE, ORCH ID INDIA AND SHRI. K. RAGHAVENDRA RAO AND THE BIPARTITE AGREEMENT BE TWEEN ASSESSEE AND SHRI. K. RAGHAVENDRA RAO WERE NOT CAREFULLY VER IFIED BY ANY OF THE LOWER AUTHORITIES. WHAT IS REQUIRED TO BE SEEN IS WHETHER THE PAYMENT OF NON COMPETE FEE WAS A SUPPORTING ONE TO THE TRA NSFER OF THE INJECTABLE DRUGS DIVISION. WE ARE OF THE OPINION T HAT THIS ISSUE ALSO REQUIRES A FRESH LOOK BY THE LD. ASSESSING OFFICER . WE THEREFORE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES WITH REG ARD TO DISALLOWANCE OF DEPRECIATION AN INTANGIBLE ASSETS AND REMIT IT BACK TO LD. ASSESSING OFFICER FOR TO CONSIDERING AFRESH, IN ACCORDANCE WITH LAW. CONCISE GROUND NO.2 OF THE ASSESSEE IS ALLOWED FOR STATISTI CAL PURPOSE. ITA NO.821/MDS/2016. :- 15 -: 16. SUBMITTING HIS ARGUMENTS ON GROUND NO.3, LD. AUTHOR ISED REPRESENTATIVE SUBMITTED THAT BY PAYING H27,13,20,0 00/- TO ORCHID INDIA, ASSESSEE COULD ENSURE CONTINUED SUPPLY OF ES SENTIAL API. AS PER LD. AUTHORISED REPRESENTATIVE, LD. ASSESSING OFFICE R AS WELL AS LD. DRP HAD HELD IT TO BE CAPITAL OUTGO EVEN THOUGH THE E XPANSION OF BUSINESS WAS THAT OF ORCHID INDIA AND NOT OF ASSESSEE. FURTH ER AS PER LD. AUTHORISED REPRESENTATIVE ASSESSEE OBTAINED ENDURI NG BENEFIT ONLY IN THE REVENUE FIELD AND NOT IN CAPITAL FIELD. M/S. OR CHID INDIA HAD COMMITTED TO CONTINUOUS SUPPLY OF THE INTERMEDIARY DRUGS MEROPENEM AND IMIPENEM. THIS ONLY IMPROVED THE BUSINESS CHAI N OF THE ASSESSEE BUT DID NOT ADD TO ANY OF ITS CAPITAL ASSET. RELIAN CE WAS PLACED ON THE JUDGMENT OF HONBLE APEX COURT IN THE CASE OF EMPIRE JUTE CO. LTD VS. CIT 124 ITR 1 AND L.H. SUGAR FACTORY AND OIL MILLS (P) LTD VS. CIT 125 ITR 293 . 17. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT WHEN ASSESSEE ENSURED A CONTINUOUS SUPPLY OF ESSE NTIAL RAW MATERIAL THROUGH A LUMPSUM PAYMENT TO A SUPPLIER AND WHEN S UCH PAYMENT WERE IN ADDITION TO THE COST IT HAD TO PAY FOR SUCH RAWMATERIALS, THEN SUCH PAYMENT COULD BE CONSIDERED ONLY AS A CAPITAL OUTGO. ITA NO.821/MDS/2016. :- 16 -: 18. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. IT IS NOT DISPUTE D THAT CAPACITY EXPANSION WAS OF ORCHID INDIA AND NOT OF THE ASSES SEE. ORCHID INDIA WAS NOT AN ASSOCIATED ENTERPRISE OF THE ASSESSEE. T HE PAYMENTS MADE BY THE ASSESSEE TO ENSURE CONTINUOUS SUPPLY OF RAWM ATERIAL DID NOT ENHANCE ITS OWN ASSET STRUCTURE IN ANY WAY. ASSESS EE WAS OBLIGED TO PAY PRICE CHARGED BY M/S. ORCHID INDIA APART FROM THE LUMPSUM IT HAD AFFECTED. AGREEMENT BETWEEN ASSESSEE AND M/S. ORCH ID INDIA PLACED AT PAPER BOOK PAGE NO.964 CLEARLY PLACES AN OBLIGAT ION ON M/S. ORCHID INDIA TO MAINTAIN SUFFICIENT CAPACITY AND SUPPLY TH E PROJECTED NEEDS OF THE ASSESSEE DURING THE TERM OF THE AGREEMENT. IN OUR OPINION, THE PAYMENTS MADE BY THE ASSESSEE TO M/S. ORCHID INDIA WAS ONLY IN THE REVENUE FIELD TO ENSURE THE SUPPLY OF ITS RAW MATER IAL ON A LONG TERM BASIS. EXPENDITURE WAS PRIMARILY AND ESSENTIALLY RE LATED TO MANUFACTURING OPERATION OF THE ASSESSEE WHICH ENSUR ED ITS PROFIT EARNING CAPABILITY. IT WAS ONLY AN OUTLAY OF BUSIN ESS IN ORDER TO CARRY IT ON IN AN EFFICIENT MANNER. IN OUR OPINION, THE EXPENDITURE WAS ALLOWABLE AS REVENUE OUTGO. TREATMENT OF THE ASSESS EE IN ITS BOOKS OF ACCOUNTS DOES NOT HAVE SUBSTANTIAL BEARING WHEN THE CLAIM IS SPECIFICALLY MADE BY THE ASSESSEE AND ALLOWABLE UND ER THE ACT. IN THE RESULT, WE ALLOW GROUND NO.3 OF THE ASSESSEE. ITA NO.821/MDS/2016. :- 17 -: 19. THIS LEAVES US WITH GROUNDS NO.4 TO 7 WHICH ARE ON TRANSFER PRICING ISSUES. 20. LD. AUTHORISED REPRESENTATIVE ADVERTING TO GROUND N O.4 SUBMITTED THAT LD. TPO HAD RECOMMENDED AN UPWARD AD JUSTMENT OF H1,23,67,271/- FOR DEFICIENCY IN THE PRICING OF ITS SUPPLIES TO ITS ASSOCIATED ENTERPRISE NAMELY HOSPIRA GROUP ABROAD; AS PER LD. AUTHORISED REPRESENTATIVE, LD. TPO DID A CHERRY PIC KING OF THE ITEMS SUPPLIED. LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THERE WERE LARGE NUMBER OF ITEMS WHICH WERE ISSUED AT A PRICE HIGHER THAN WHAT WAS AGREED BETWEEN ORCHID INDIA AND HOSPIRA GROUP C ONCERNS. CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT REVISION OF THE PRICES WAS DONE IN LINE WITH THE LEGACY AGREEME NT BETWEEN M/S. ORCHID INDIA AND HOSPIRA GROUP, WHICH ASSESSEE HAD INHERITED. IN ANY CASE ACCORDING TO HIM, ONLY NEGATIVE DIFFERENCES WE RE CONSIDERED, IGNORING POSITIVE DIFFERENCE. THIS GAVE A SKEWED AND ERRONEOUS RESULT. 21. CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT ASSESSEE DID NOT PRODUCE DOCUMENTATION TO SHOW THAT IT HAD INCURRED HIGHER OR LOWER COST OF PRODUCTION THAN WHAT WAS AG REED IN THE LEGACY AGREEMENT. WHEN ASSESSEE SUPPLIED AT A LOWER PRICE THAN WHAT WAS ITA NO.821/MDS/2016. :- 18 -: AGREED WITH ITS ASSOCIATED ENTERPRISE THEN AS PER L D. DEPARTMENTAL REPRESENTATIVE DIFFERENCES WERE RIGHTLY CONSIDERED FOR ADDITION BY THE LD. TPO. 22. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUS ED THE ORDERS OF THE AUTHORITIES BELOW. AS ALREADY NOTED BY US, ASSESSEE HAD TAKEN OVER GENERIC INJECTABLE DRUGS DIVISION OF O RCHID INDIA THROUGH A SLUMPSALE. BY VIRTUE OF THIS, IT WAS OBLIGED TO HON OUR THE AGREEMENTS ENTERED BY M/S. ORCHID INDIA WITH VARIOUS THIRD PA RTIES IN RELATION TO SUCH UNIT. THE BUSINESS MODEL AS ALREADY EXPLAINED BY US, WAS ONE IN WHICH ULTIMATE PROFIT WAS SHARED BETWEEN THE ASSO CIATED ENTERPRISE ABROAD AND ASSESSEE. ONCE THE ASSOCIATED ENTERPRIS ES HAD SOLD THE PRODUCTS SUPPLIED BY THE ASSESSEE, THE PROFIT WAS G ROSS REALIZATION LESS THE COST OF PRODUCTION WHICH WAS BILLED BY THE ASSE SSEE ON ITS ASSOCIATED ENTERPRISE AND DISTRIBUTION COMMISSION O F 7.5% RETAINED BY THE ASSOCIATED ENTERPRISE. COST OF PRODUCTION THAT WAS TO BE BILLED BY THE ASSESSEE FOR THE SUPPLIES WAS TO BE WORKED OU T BASED ON CERTAIN CONDITIONS SET OUT IN AN AGREEMENT EARLIER ENTERED BETWEEN M/S. ORCHID INDIA AND M/S. HOSPIRA GROUP OF CONCERNS. H OWEVER, FOR CERTAIN ITEMS ASSESSEE HAD BILLED THE ASSOCIATED ENTERPRIS E A PRICE LOWER THAN THE AGREED ONE. CLAIM OF THE ASSESSEE IS THAT THE LEGACY AGREEMENT WAS SUBJECT TO REVISION OF PRICES FOR INF LATION. FURTHER, AS ITA NO.821/MDS/2016. :- 19 -: PER THE ASSESSEE BILLING FOR A NUMBER OF ITEMS WER E AT A PRICE HIGHER THAN THE AGREED RATIO. BE THAT AS IT MAY, WHEN THE ASSESSEE HAD SUPPLIED A NUMBER OF ITEMS TO ITS ASSOCIATED ENTERP RISE ABROAD, PRICES OF SOME OF WHICH WERE LOWER THAN THE AGREED PRICE R ATES AND SOME WERE HIGHER THAN THE AGREED RATES, THEN, IN OUR OPI NION, CONSIDERING ONLY THE ITEMS WHERE THERE WAS A DEFICIENT PRICING WAS NOT APPROPRIATE. ASSESSEE HAS PRODUCED A CHART AT PAPER BOOK PAGE N O.587 TO 589 WHICH INTERALIA SHOW THAT SOME OF THE ITEMS WERE CH ARGED AT HIGHER THAN THE AGREED RATES. WE ARE OF THE OPINION THAT EVEN THOUGH AN ADJUSTMENT CAN BE MADE, SUCH ADJUSTMENT HAS TO C ONSIDER BOTH POSITIVE AS WELL AS NEGATIVE PRICE DIFFERENCE. WE A RE OF THE OPINION THAT THIS ISSUE REQUIRES A FRESH LOOK BY THE LD. ASSESSI NG OFFICER. WE THEREFORE SET ASIDE THE ORDERS OF THE LOWER AUTHORI TES WITH REGARD TO ADJUSTMENT FOR DIFFERENCE IN PRICING BETWEEN COST O F SHIPMENT AND STANDARD PRICE, BACK TO THE FILE OF THE LD. ASSESS ING OFFICER /TPO FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. GROU ND NO.4 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 23. ADVERTING TO GROUND NO.5, LD. AUTHORISED REPRESENTA TIVE SUBMITTED THAT LD. TPO WHILE RECOMMENDING A DOWNWA RD ADJUSTMENT OF H22,14,66,575/- ON INTEREST PAID BY THE ASSESSE E TO ITS ASSOCIATED ENTERPRISE FOR ICCD, HAD RELIED ON THE INTEREST R ATES ON ICCD PAID BY ITA NO.821/MDS/2016. :- 20 -: TWO COMPANIES NAMELY PARSVNATH ESTATE DEVELOPERS PR IVATE LIMITED AND TPO WHOLESALE PRIVATE LIMITED. AS PER THE LD. AUTHORISED REPRESENTATIVE THE INTEREST RATE PAID BY THE ASSES SEE WAS ERRONEOUSLY BENCH MARKED CONSIDERING THE INTEREST CHARGED BY T HESE TWO COMPANIES ON ICCD. LD. AUTHORISED REPRESENTATIVE SU BMITTED THAT ICCD RATE FOR TPG WHOLESALE PRIVATE LIMITED WAS CON SIDERED BY THE TPO AT 0.5%. ACCORDING TO HIM, TPG WHOLESALE PRIVA TE LIMITED WAS NOT A GOOD COMPARABLE SINCE THEIR RATE OF INTEREST ON DEBENTURES WAS BASED ON A CORPORATE RESTRUCTURING. RELYING ON THE BALANCE SHEET OF TPG WHOLESALE PRIVATE LIMITED, LD. AUTHORISED REPRE SENTATIVE SUBMITTED THAT DEBENTURE RATE OF THE SAID COMPANY W AS 50% AND NOT 0.5%. RELYING ON THE AUDIT REPORT OF THE SAID COMPA NY, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT IT HAD ACQUIRED THE A SSETS AND LIABILITIES OF ONE M/S.VISHAL RETAIL LIMITED AS A GOING CONCE RN DURING THE RELEVANT PREVIOUS YEAR AND SUCH HIGH RATE OF INTERE ST ON DEBENTURES WAS DUE TO THIS ACQUISITION. 24. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 25. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. IT IS NOT DISPUTED THAT ASSESSEE HAD ITA NO.821/MDS/2016. :- 21 -: PROVIDED FOR INTEREST AT THE RATE OF 10.5% ON ITS I CCD. LD. TPO HAD SELECTED TWO COMPANIES FOR COMPARISON OF WHICH ONE COMPANY WAS HAVING ICCD INTEREST RATE OF 15.5% AND THE OTHER COMPANY 0.5%. CONTENTION OF THE ASSESSEE IS THAT M/S.TPG WHOLESAL E PRIVATE LIMITED FOR WHICH LD. TPO HAD TAKEN ICCD INTEREST AT 0.5% H AD ACTUAL INTEREST RATE OF 50%. IN OUR OPINION THERE IS A WIDE DISPARI TY BETWEEN WHAT IS STATED IN THE BALANCE SHEET AND THE SCHEDULE OF M/S . TPG WHOLESALE PRIVATE LIMITED FILED BEFORE REGISTRAR OF COMPANIES AND THE RATE CONSIDERED BY THE TPO. THE RATE 0.5% AS WELL AS 5 0% PRIME- FACIE APPEAR TO BE INCORRECT, UNLESS THERE WERE OTHER CON DITIONS WHICH CONSTRAINED THE SAID COMPANY TO PAY A INTEREST WHIC H WAS SIGNIFICANTLY DIFFERENT FROM NORMAL MARKET RATE FOR CONVERTIBLE D EBENTURES. THE QUESTION OF COMPARABILITY OF TPG WHOLESALE PRIVATE LIMITED FOR BENCH MARKING THE ICCD INTEREST RATE OF THE ASSESSEE IN OUR OPINION REQUIRES A FRESH VISIT BY THE LD. ASSESSING OFFICER/TPO. WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES WITH REGARD TO DOWNWARD AD JUSTMENT OF H22,14,66,575/- AND REMIT THE ISSUE BACK TO THE LD. ASSESSING OFFICER/TPO FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. GROUND NO.5 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PUR POSE. 26. ADVERTING TO GROUNDS NO. 6 & 7, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT LOWER AUTHORITIES BLI NDLY FOLLOWED A ITA NO.821/MDS/2016. :- 22 -: SETTLEMENT COMMISSION ORDER DATED 28.03.2012, IN TH E CASE OF ORCHID INDIA FOR THE ASSESSMENT YEARS 2006-2007 TO 2010-20 11. AS PER LD. AUTHORISED REPRESENTATIVE THERE WERE TWO LIMBS OF A RGUMENT BASED ON WHICH HE WAS ASSAILING THE ADJUSTMENT MADE BY THE LOWER AUTHORITIES ON THE PROFIT SHARING RATIO BETWEEN ASSESSEE AND I TS ASSOCIATED ENTERPRISE. IN THE FIRST PLACE, ACCORDING TO HIM, M/S.APOTEX CORP AND M/S. APOTEX INC SIGNET WERE NOT ASSOCIATED ENTERPR ISE OF THE ASSESSEE. ACCORDING TO LD. AUTHORISED REPRESENTATIV E LD. TPO ERRED IN APPLYING SEC. 92A(2)(I) OF THE ACT FOR CONSIDERING THESE COMPANIES AS ASSOCIATED ENTERPRISES OF THE ASSESSEE. LD. AUTHORI SED REPRESENTATIVE SUBMITTED THAT THERE WAS NO COMMON CONTROLLING INTE REST OF SHAREHOLDERS OR DIRECTORS. ACCORDING TO HIM, UNLESS CONDITIONS SET OUT IN AND UNTIL SEC. 92A(1) SATISFIED, SEC. 92A(2) OF THE ACT COULD NOT BE BROUGHT INTO PLAY. CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT DIRECT/INDIRECT PARTICIPATION IN THE MANAGEMEN T OR CONTROL OR CAPITAL OF ONE ENTERPRISE IN THE OTHER AT ENTERP RISE LEVEL WAS REQUIRED FOR ESTABLISHING A RELATIONSHIP OF ASSOCIATION. RE LYING ON THE DECISION OF CO-ORDINATE IN THE CASE OF ORCHID PHARMA LTD VS DCIT (ITA NO. 771/MDS/2016, DATED 30.11.2016) FOR THE VERY SAME A SSESSMENT YEAR, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE TY PE OF INFLUENCE MENTIONED IN SEC. 92A(2)(I) OF THE ACT WAS A DOMIN ANT INFLUENCE AND NOT A PASSIVE ONE, WHICH HAPPEN IN COURSE OF ORDINA RY BUSINESS. ITA NO.821/MDS/2016. :- 23 -: OTHERWISE, ACCORDING TO HIM, EVEN A SOLITARY TRANSA CTION COULD BE TREATED AS ONE WHICH GIVES RISE TO A RELATIONSHIP O F ASSOCIATED ENTERPRISE. FURTHER, ACCORDING TO HIM, BANGALORE BE NCH OF THE TRIBUNAL IN THE CASE OF PAGE INDUSTRIES LTD VS DCIT, 159 ITD 680 HAD HELD THAT FOR BECOMING AN ASSOCIATED ENTERPRISE, PARAMETERS IN BOTH SUB SECTION (1) AND (2) OF SECTION 92A HAD TO BE SATIS FIED. AS PER LD. AUTHORISED REPRESENTATIVE, ASSESSEE DID NOT HAVE E ITHER DEFACTO OR DEJURE CONTROL OVER APOTEX CORP AND APOTEX INC SIGN ET. ONCE THESE TWO ENTERPRISES WERE TREATED AS NON ASSOCIATED, THE N THE PRICING OF THE PRODUCTS AND SHARING OF PROFIT WITH THEM, BECAME A UTOMATICALLY AT ARMS LENGTH AND A PERFECT BASIS FOR APPLYING UNCO NTROLLED PRICE (CUP). VIS--VIS OTHER TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE, NAMELY HOSPIRA GROUP ENTITIES, AS PER T HE LD. AUTHORISED REPRESENTATIVE THE SAME PROFIT SHARING RATIO WAS TO BE ADOPTED. ACCORDING TO HIM THERE WAS NO OCCASION FOR MAKING A NY ADJUSTMENT IN THE ARMS LENGTH PRICING. AS PER LD. AUTHORISED RE PRESENTATIVE LOWER AUTHORITIES ERRED IN GOING BY THE DECISION OF SETTL EMENT COMMISSION IN THE CASE OF ORCHID INDIA FOR THE ASSESSMENT YEARS 2 006-07 TO 2010- 2011. DECISION OF THE SETTLEMENT COMMISSION, AS PER THE LD. AR DID NOT LAY DOWN A PRECEDENT WHICH WAS REQUIRED TO BE FOLLO WED IN SUBSEQUENT YEARS. ACCORDING TO HIM, ASSESSEE WAS NOT A PARTY IN THE PROCEEDINGS BEFORE SETTLEMENT COMMISSION. FURTHER, ACCORDING TO ITA NO.821/MDS/2016. :- 24 -: HIM, THE COMMON THREAD PERMEATING THROUGH CLAUSES ( A) TO (F) OF SEC. 92A(2) OF THE ACT WAS CONTROL BY ASSOCIATED ENTERP RISE OVER THE ASSESSEE OR BY THE ASSESSEE ON THE ASSOCIATED ENT ERPRISE. SUCH CONTROL IF IT WAS TO BE CONSTRUED FROM THE INFLUENC E EXERTED ON PRICING, THEN IT HAD TO BE CLEARLY BROUGHT OUT BY THE REVENU E. THUS, ACCORDING TO HIM LOWER AUTHORITIES ERRED IN CONSIDERING APOTE X CORP AND APOTEX INC SIGNET AS ASSOCIATED ENTERPRISE AND FURTHER ER RED IN APPLYING THE RATIO OF 60:40 IN SPLITTING THE PROFIT BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES NAMELY HOSPIRA GROUP CONCERN S. ACCORDING TO HIM, RELEVANT AGREEMENTS WERE CONVENIENTLY IGNORED BY THE LOWER AUTHORITIES, AND AN ARTIFICIAL PROFIT SHARING RATIO THRUSTED ON THE ASSESSEE. 27. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT DOMINANT INFLUENCE IS NOT MENTIONED IN SEC. 92A(2) (I) OF THE ACT. WHAT WAS REQUIRED WAS ONLY INFLUENCE. ONCE THERE WAS A LEGAL AGREEMENT WHICH WAS THE BASIS FOR SUPPLYING GOODS B Y THE ASSESSEE TO APOTEX CORT AND APOTEX INC SIGNET, AND PRICINGS WER E INFLUENCED BY THE LATTER, THEY BECAME ASSOCIATED ENTERPRISES OF THE ASSESSEE. IN SO FAR AS SPLITTING OF THE PROFIT WAS CONCERNED, LD. D EPARTMENTAL REPRESENTATIVE SUBMITTED THAT ASSESSEE DID NOT BRI NG IN ANY MATERIAL TO JUSTIFY SPLITTING OF PROFIT IN THE RATIO 50:50. ACCORDING TO LD. ITA NO.821/MDS/2016. :- 25 -: DEPARTMENTAL REPRESENTATIVE, RISKS WERE ALL BORNE BY THE ASSESSEE AND NOT THE TRADING PARTNERS. THIS WAS THE REASON WHY THE SETTLEMENT COMMISSION RECOMMENDED PROFIT SPLITTING IN THE RA TIO OF 60:40. 28. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. FIRST, WE HAVE TO DEAL WITH THE ISSUE WHETHER APOTEX CORT AND APOTEX INC SIGNET WERE ASS OCIATED ENTERPRISE OF THE ASSESSEE. CONTENTION OF THE ASSES SEE IS THAT CLAUSE (1) AND (2) OF SECTION 92A OF THE ACT SHOULD NOT B E APPLIED INDEPENDENTLY. IN OTHER WORDS AS PER THE ASSESSEE INFLUENCE IN PRICING SHOULD BE SUCH THAT, AN ELEMENT OF CONTROL IS APPARENT THEREFROM. INTERPRETATION OF SEC. 92A(2)(I) WAS AN ISSUE WHICH WAS CONSIDERED BY THE CO-ORDINATE BENCH IN THE CASE OF ORCHID PHARMA LIMITED (SUPRA). THERE ONE M/S.NORTHSTAR WITH WHIC H ORCHID INDIA HAS HAVING A SIMILAR PROFIT SHARING ARRANGEMENT WAS CO NSIDERED AS AN ASSOCIATED ENTERPRISE OF M/S. ORCHID INDIA, BY THE LD. TPO. INTERPRETING SEC. 92A(2)(I) OF THE ACT, THE CO-ORDI NATE BENCH HELD AS UNDER:- 12. IT IS IN THIS BACKGROUND THAT WE HAVE TO ADDR ESS OURSELVES TO THE SCOPE OF SECTION 92A(2)(I) WHICH PROVIDES THAT TWO ENTERPRISES WILL BE DEEMED TO BEASSOCIATED ENTERPRISESWHEN THE GOODS OR ARTICLES MANUFACTURED OR PROCESSED BY ONE ENTERPRISE, ARE SO LD TO THE OTHER ENTERPRISE OR TO PERSONS SPECIFIED BY THE OTHER ENTERPRISE, AND THE PRICES AND OTHER CONDITIO NS RELATING THERETO ARE INFLUENCED BY SUCH OTHER ENTER PRISE . ITA NO.821/MDS/2016. :- 26 -: AS WE DO SO, WE MAY TAKE NOTE OF THE FACT, AS DISCU SSED EARLIER AS WELL, THAT THE DEFINITION OF ASSOCIATED ENTERPRISES IN THE CASES COVERED BY SECTION 92A(1), WHICH REFER S TO THE PARTICIPATION IN MANAGEMENT, CONTROL OR CAPITAL OF THE OTHER ENTERPRISES, EXTEND ONLY TO SUCH EXTENT AS COVERED BY SECTION 92A(2). IN OTHER WORDS, EVEN WHEN IT IS AN ADMITTED SITUATION THAT THE ASSESSEE HAS PARTICIPATED IN CON TROL, CAPITAL OR MANAGEMENT OF THE OTHER ENTERPRISE, THE ASSESSEE WILL NOT BE TREATED AS AN AE OF THE OTHER ENTERPRISE UNLESS THE CONDITIONS SET OUT IN ONE OF THE CLAUSES OF SECTION 92A(2) ARE SATISFIED. IT IS IN THIS SENSE THAT BOTH THE LIMBS OF SECTION 92A ARE REQUIRED TO BE READ TOGETHER. HOWEVER, THE SITU ATION THAT WE ARE DEALING WITH IS EXACTLY CONTRARY TO THE SITU ATION SO VISUALIZED BY US. WE HAVE A CASE IN WHICH WORDIN GS OF SECTION 92A(2) ARE ADMITTEDLY SATISFIED, BUT THE MA NDATE OF SECTION 92A(1) IS NOT SATISFIED INASMUCH AS THE SCA LE OF INTER SE BUSINESS RELATIONS BETWEEN THE TWO ENTERPRISES I S SO INSIGNIFICANT, AT LESS THAN 5% OF ENTIRE SALES, THA T THERE IS NO ELEMENT OF DE FACTO CONTROL OVER THE OTHER ENTERPRI SE SO AS HOLD THAT TWO ENTERPRISES ARE ASSOCIATED ENTERPRISE S. 13. WE MAY, AT THIS STAGE, TAKE NOTE OF DECISION OF A COORDINATE BENCH OF THIS TRIBUNAL, IN THE CASE OF PAGE INDUSTRIES LIMITED VS DCIT [(2016) 159 ITD 680 (BAN G)] . THAT IS A CASE IN WHICH THE COORDINATE BENCH HAS HE LD THAT EVEN THOUGH THE PROVISIONS OF SECTION 92A(2)(G) ARE SATISFIED IN A CASE, THE ASSESSEE CANNOT BE TREATED AS AN ASS OCIATE ENTERPRISE OF THE NON RESIDENT COMPANY GRANTING IT LICENCE TO MANUFACTURE ITS PRODUCTS, BECAUSE THE PROVISIONS OF SECTION 92A(1) ARE NOT SATISFIED. 14. AS EVIDENT FROM THE LIMITED NARRATION OF FACTS IN THE SAID DECISION, THE ASSESSEE-COMPANY (I.E. PAGE INDUSTRIE S LTD; PIL IN SHORT) WAS A LICENSEE OF THE BRAND- NAME 'JOCKEY' FOR EXCLUSIVE MANUFACTURE AND MARKETING OF GOODS UN DER LICENSE AGREEMENT BUT THE ASSESSEE-COMPANY OWNS ENTIRE MANUFACTURING FACILITY, CAPITAL INVESTMENT O F RS.100 CRORES AND 15000 EMPLOYEES AND THERE IS NO PARTICIPATION OF JII (I.E. JOCKEY INTERNATIONAL INC., USA ) IN THE CAPITAL AND MANAGEMENT OF THE ASSESSEE-COMPANY . ON THESE FACTS, THE COORDINATE BENCH HAS HELD THAT JII AND PIL ARE NOT ASSOCIATED ENTERPRISES AS THERE IS NO P ARTICIPATION BY JII IN MANAGEMENT OR CAPITAL OF PIL(EMPHASIS SUPPLIED BY US). WE HAVE OUR RESERVATION, WHATEVER BE ITS WORTH, ON THE CONCLUSIONS ARRIVED AT IN THIS CASE BUT THAT DO ES NOT DILUTE OUR HIGHEST RESPECT FOR AN IMPORTANT PRINCIPLES OF LAW LAID DOWN BY THE COORDINATE BENCH. THE REASONS FOR THIS APPROACH ARE AS FOLLOWS. THE EXPRESSION CONTROL A PPEARING IN SECTION 92A(1) IS VERY CRUCIAL AND THE MANNER IN WHICH ITA NO.821/MDS/2016. :- 27 -: CONTROL IS EXERCISED COULD GO WELL BEYOND CAPITAL A ND MANAGEMENT, BUT THE COORDINATE BENCH HAD NO OCCASIO N TO DEAL WITH THE CONTROL ASPECT AT ALL. AS HELD IN THE CASE OF DIAGEO INDIA PVT LTD VS DCIT [(2011) 47 SOT 252 (MU M)], EVEN WHEN AN ENTERPRISE EXERCISE CONTROL OVER THE O THER ENTERPRISES BY WAY OF CONTROLLING THE SUPPLY OF RAW MATERIAL OR USE OF TRADE MARKS, THIS ALSO CONSTITUTES PARTICIP ATION IN CONTROL LEADING TO THE STATUS OF ASSOCIATED ENTERP RISES UNDER SECTION 92A(1). IT APPEARS THAT THIS ASPECT OF THE MATTER HAS NOT BEEN BROUGHT TO THE NOTICE OF, OR PLEADED BEFOR E, THE BENCH. WHILE THE CONCLUSION ARRIVED AT BY THE BENCH CLEARLY OVERLOOKS THE SPECIFIC MENTION OF THE WORD CONTROL IN BOTH LIMBS OF THE BASIC RULE UNDER SECTION 92A(1) (I) AS ALSO UNDER SECTION 92A(1)(II), AND TO THAT EXTENT WE ARE UNABL E TO CONCUR THAT IN THE ABSENCE OF PARTICIPATION IN CAPITAL OR MANAGEMENT, TWO ENTERPRISES CANNOT BE ASSOCIATED ENTERPRISES UNDER SECTION 92A, WHAT IS IMPORTANT TO US IS THAT THE CO ORDINATE BENCH HAS, INTER ALIA, ALSO HELD THAT, . IN ORDER TO CONSTITUTE RELATIONSHIP OF AN AE, THE PARAMETERS LA ID DOWN IN BOTH SUB -. SECTIONS (1) AND (2) SHOULD BE FULFILLED AND JUSTIFIED THIS APPROACH BY OBSERVING THAT IF WE WERE TO HOLD THAT THERE IS A RELATIONSHIP OF AE, ONCE THE REQUIREMENTS OF SUB-SEC.(2) ARE FULFILLED, THEN THE PROVISIONS OF SUB-SEC.(1) RENDERS OTIOSE OR SUPERFLUOUS AND THAT IT IS WELL SETTLED CANON INTERPRETATION OF STATUTES THAT WHILE INTERPRETING THE TAXING STATUTE, CONSTRUCTION SHALL NOT BE ADOPTED W HICH RENDERS PARTICULAR PROVISION OTIOSE. THE COORDINATE BENCH THEN FURTHER OBSERVED THAT WHEN INTERPRETING A PROVISION IN A TAXING STATUTE, A CONSTRUCTION, WHIC H WOULD PRESERVE THE PURPOSE OF THE PROVISION, MUST B E ADOPTED . THE LEGAL POSITION THUS SUMMED UP BY THE COORDINATE BENCH IS THAT IN A SITUATION IN WHICH TH E CONDITIONS, WITH RESPECT TO A SET OF ENTERPRISES, SET OUT IN SE CTION 92A(1) ARE CLEARLY NOT FULFILLED, EVEN IF THE CONDITIONS U NDER ONE OF THE CLAUSES OF SECTION 92A(2) ARE FULFILLED, SUCH E NTERPRISES CANNOT BE TREATED AS ASSOCIATED ENTERPRISE UNDER SE CTION 92A. TO THE LIMITED EXTENT OF THE PRINCIPLE SO LAID DOWN BY THE COORDINATE BENCH, WE ARE IN CONSIDERED AGREEMENT WI TH THE VIEWS OF THE COORDINATE BENCH, AND IT IS THIS PRINC IPLE WHICH IS RELEVANT FOR THE PURPOSES OF OUR ADJUDICATION. IT D OES DIRECTLY AFFECT THE ISSUE IN APPEAL BEFORE US INASMUCH AS WE ARE ALSO DEALING WITH A SITUATION IN WHICH ADMITTEDLY WORDS OF SECTION 92A(2)(I) ARE CLEARLY SATISFIED ON THE FACTS OF THI S CASE, THE SCALE OF COMMERCIAL RELATIONSHIP IS SO INSIGNIFICAN T VIS--VIS TOTAL BUSINESS OPERATIONS OF THE ASSESSEE THAT THER E IS ADMITTEDLY NO PARTICIPATION IN CONTROL BY ONE OF TH E ENTERPRISE OVER THE OTHER ENTERPRISE SO AS TO SATISFY THE MAND ATE OF SECTION 92A(1). ITA NO.821/MDS/2016. :- 28 -: 15. WHILE DEALING WITH THIS, WE MAY ALSO REFER TO S OME OBSERVATIONS MADE BY DR RAMON DWARKASING, AN ASSOCI ATE PROFESSOR IN TRANSFER PRICING AT MAASTRICHT UNIVERS ITY, THE NETHERLANDS, IN HIS BOOK ASSOCIATED ENTERPRISES- A CONCEPT ESSENTIAL FOR APPLICATION OF THE ARMS LENG TH PRINCIPLE [ ISBN: 978-90-81724-0-1, PUBLISHED BY WOLF LEGAL PUBLISHERS, THE NETHERLANDS @ PAGE 6], AS FOL LOWS: ..IN VARIOUS COUNTRIES, THE CONCEPT OF ASSOCIATED ENTERPRISES MAY EVEN COVER RELATIONSHIPS BETWEEN INDEPENDENT ENTERPRISES, FOR INSTANCE, WHERE A FOREIGN BUYER HAS A STRONG NEGOTIATING POWER . FOR EXAMPLE, AN INDIAN SOFTWARE COMPANY HAS A CUSTOMER IN NETHERLANDS WHICH IS RESPONSIBLE FOR MORE THAN 9 0% OF TURNOVER OF INDIAN SOFTWARE DEVELOPER. THE DUTCH CUSTOMER IS ABLE TO DICTATE THE PRICES TO INDIAN SO FTWARE DEVELOPER. THE INDIAN SOFTWARE COMPANY IS, THEREFOR E, ABLE TO CHARGE A PRICE WITH 1% MARGIN/MARK UP, WHIC H IS VERY LOW COMPARED TO HIS INDIAN COUNTERPARTS (WHICH APPLY, FOR INSTANCE, 6% MARK UP). ACCORDING TO THE INDIAN TRANSFER PRICING LAW, IF TH E GODS OR ARTICLES MANUFACTURED OR PROCESSED BY ONE ENTERPRISES, ARE SOLD TO OTHER ENTERPRISE ABROAD O R TO PERSON SPECIFIED BY SUCH OTHER ENTERPRISE, AND THE PRICES AND OTHER CONDITIONS RELATING THERETO AR E INFLUENCED BY SUCH OTHER ENTERPRISES, THE TWO ENTERPRISES SHALL BE DEEMED TO BE ASSOCIATED ENTERPRISES [SEE SECTION 92A(2)(I) OF THE INDIAN INCOME TAX ACT, 1961]. THE INDIAN TAX AUTHORITIES CONSIDER THE INDIAN SOFTWARE DEVELOPER AND ITS DUTCH CUSTOMER TO BE ASSOCIATED. THEY MAY ADJUST THE PRICES AND TAX AN UNREALIZED PROFIT, I.E. DIFFERENCE BETWEEN REAL RES ULTS AND RESULTS BASED ON PRICES DERIVED FROM OTHER SOFT WARE DEVELOPERS IN INDIA. THE NETHERLANDS DOES NOT CONSI DER THE COMPANIES TO BE ASSOCIATED AS IT APPLIES A NARR OW CONCEPT THAT DOES NOT INCLUDE DE FACTO CONTROL AS A CRITERION FOR ASSOCIATION. CONTROL IN THE ABSENCE OF COMPANY LAW BASED RELATIONSHIP OR IN THE ABSENCE OF ANY FORMAL RIGHT TO EXERCISE CONTROL CAN BE DESCRIBED AS DE FACTO CONTROL. PARTICIPATION IN CAPITAL AND MANAGEMENT CAN BE CHARACTERIZED AS DE JURE CONCEPTS; CONCEPTS COVERED BY COMPANY LAW . ITA NO.821/MDS/2016. :- 29 -: [EMPHASIS, BY UNDERLINING, SUPPLIED BY US] 16. WHILE THE ABOVE OBSERVATIONS DO SEEM TO BE AT V ARIANCE WITH THE PLAIN WORDS OF THE STATUTORY PROVISION INA SMUCH AS IT REFERS TO INFLUENCE BY WAY OF STRONG NEGOTIATING P OWER RATHER THAN AN INFLUENCE SIMPLICTOR- AS IS THE APPA RENT SCHEME OF THE STATUTORY PROVISION, WHAT IS IMMEDIAT ELY DISCERNIBLE FROM THE ABOVE EXTRACTS IS THAT THE DE FACTO CONTROL IS THE FOUNDATION OF THE WIDER APPROACH TO THE CONCEPT OF ASSOCIATED ENTERPRISES, AND, OF COURSE, THE IMP RESSION THAT ONE OF THE WAYS IN WHICH USE OF EXPRESSION IN FLUENCE, IN CONCEPT OF ASSOCIATED ENTERPRISES UNDER THE TRANSFE R PRICING, CAN BE RATIONALIZED IS AS DOMINANT INFLUENCE IN THE NATURE OF DEFACTO CONTROL. THE DEFINITION OF ASSOCIATED ENTE RPRISE, AS THE ABOVE ACADEMIC ANALYSIS SHOWS, HAS TWO APPROACH ES- WIDER APPROACH AND NARROW APPROACH. A NARROW APPROA CH TO THE CONCEPT OF ASSOCIATED ENTERPRISES TAKES INTO AC COUNT ONLY DE JURE ASSOCIATION I.E. THOUGH FORMAL PARTICIPAT ION IN THE CAPITAL OR PARTICIPATION IN THE MANAGEMENT. A WIDER APPROACH TO THE CONCEPT OF ASSOCIATED ENTERPRISES TAKES IN TO ACCOUNT NOT ONLY THE DE JURE RELATIONSHIPS BUT ALSO DE FACT O CONTROL, IN THE ABSENCE OF PARTICIPATION IN CAPITAL OR PARTICIP ATION IN MANAGEMENT, THROUGH OTHER MODES OF CONTROL SUCH AS COMMERCIAL RELATIONSHIPS IN WHICH ONE HAS DOMINANT INFLUENCE OVER THE OTHER. THIS WIDER CONCEPT IS CLE ARLY DISCERNIBLE FROM THE PRINCIPLES UNDERLYING APPROACH TO THE DEFINITION OF ASSOCIATED ENTERPRISES IN THE TAX T REATIES AND HAS ALSO BEEN ADOPTED BY THE TRANSFER PRICING L EGISLATION IN INDIA IN AN UNAMBIGUOUS MANNER. THERE IS NO OTHE R JUSTIFICATION IN THE INDIAN TRANSFER PRICING LEGISL ATION, EXCEPT THE PARTICIPATION IN CAPITAL OF AN ENTERPRISE, MANA GEMENT OF AN ENTERPRISE OR CONTROL OF AN ENTERPRISE, WHICH CA N LEAD TO THE RELATIONSHIP BETWEEN ENTERPRISE BEING TREATED A S ASSOCIATED ENTERPRISES. WHAT ESSENTIALLY FOLLOWS IS THAT CLAUSE (I) OF SECTION 92A(2) HAS, AT ITS CONCEPTUAL FOUNDATION, DE FACTO CONTROL BY ONE OF THE ENTERPRISE OVER THE OTHER ENTERPRISE, ON ACCOUNT OF COMMERCIAL RELATIONSHIP O F ITS BUYING THE PRODUCTS, EITHER ON HIS OWN OR THROUGH A NY NOMINATED ENTITIES, FROM SUCH OTHER ENTERPRISE AND IN A SITUATION IN WHICH IT CAN INFLUENCE THE PRICES AND OTHER RELATED CONDITIONS. THE WORDINGS OF CLAUSE (I), HOWEVER, DO NOT REFLECT THIS POSITION IN AN UNAMBIGUOUS MANNER INAS MUCH AS IT DOES NOT SET OUT A THRESHOLD OF ACTIVITY, GIVING DE FACTO CONTROL TO THE OTHER ENTERPRISE ENGAGED IN SUCH COM MERCIAL ACTIVITY, IN PERCENTAGE TERMS OR OTHERWISE- AS IS S ET OUT IN CLAUSE (G) AND (H) OR, FOR THAT PURPOSE, IN ALL OTH ER OPERATIVE CLAUSES OF SECTION 92A(2). IF THE WORDS OF THIS CLA USE ARE TO BE INTERPRETED LITERALLY, AS THE AUTHORITIES BELOW HAVE READ, EVEN IF THERE IS ONE ISOLATED TRANSACTION WITH AN E NTERPRISE IN ITA NO.821/MDS/2016. :- 30 -: SUCH AN ENTERPRISE CAN INFLUENCE THE PRICES, SUCH A N ENTERPRISE IS TO BE TREATED AS AN ASSOCIATED ENTERP RISE- WHETHER OR NOT THIS COMMERCIAL RELATIONSHIP AMOUNTS TO CONTROL ON THE OTHER ENTERPRISE. THAT WILL CLEARLY BE AN INCONGRUOUS RESULT. HOWEVER, AS SECTION 92A(2)(I) I S TO BE READ ALONGWITH SECTION 92(A)(1), IN SUCH A SITUATIO N IN WHICH AN ENTERPRISE DOES NOT PARTICIPATE IN (A) CAPITAL, (B) MANAGEMENT, OR (C) CONTROL OF OTHER ENTERPRISE, AND THUS DOES NOT FULFIL THE BASIC RULE UNDER SECTION 92A(1) , EVEN IF THE CONDITIONS OF SECTION 92A(2)(I) ARE FULFILLED, THES E ENTERPRISE CANNOT BE TREATED AS ASSOCIATED ENTERPRISE. IN TH E CASE BEFORE US, IT IS NOT EVEN THE CASE OF THE REVENUE T HAT THE ASSESSEE HAS ANY PARTICIPATION IN MANAGEMENT OR CAP ITAL OF THE OTHER ENTERPRISE, NOR THERE IS ANYTHING TO EVEN REMOTELY INDICATE, MUCH LESS ESTABLISH, THAT ONE OF THE ENTE RPRISE, BY WAY OF THIS COMMERCIAL RELATIONSHIP, PARTICIPATES I N CONTROL OVER THE OTHER ENTERPRISE. VIEWED THUS, NORTHSTAR, EVEN IF IT IS ASSUMED THAT IT CAN INFLUENCE PRICES AND OTHER COND ITIONS RELATING TO SALE, CANNOT BE TREATED AS ASSOCIATED E NTERPRISE OF THE ASSESSEE BEFORE US. IT IS ALSO IMPORTANT TO BEA R IN MIND THE FACT THAT GIVEN THE CONTEXT IN WHICH THE EXPRES SION PRICES AND OTHER CONDITIONS RELATING THERETO ARE INFLUENCE D BY SUCH OTHER ENTERPRISE APPEARS IN SECTION 92A(2)(I), THI S INFLUENCE HAS TO BE SOMETHING MORE THAN INFLUENCE IN THE ORDI NARY COURSE OF BUSINESS AND IN THE PROCESS OF NEGOTIATIO N, BECAUSE, EVEN IN THE COURSE OF ORDINARY EVERY BUSIN ESS AND IN THE COURSE OF DAY TO DAY NEGOTIATION, SELLING PR ICES AS ALSO CONDITIONS OF SALE ARE INVARIABLY, IN A WAY, INFLUE NCED BY THE BUYER. THEREFORE, EVEN WHEN A CUSTOMER OFFERS TERM S TO SOMEONE WITH A TAKE IT OR LEAVE IT MESSAGE, SUCH AN APPROACH, BY ITSELF, CANNOT BE TERMED AS INFLUENCE , FOR OUR PURPOSES, UNLESS THE SELLER IS IN SUCH A POSITION AND UNDER SUCH AN INFLUENCE THAT HE HAS TO SIMPLY ACCEPT THE DICTATED TERMS. ANY OTHER VIEW OF THE MATTER WILL RESULT IN ALL THE ENTERPRISES DEALING WITH EACH OTHER AS EVERY PARTY TO A TRANSACTION HAS AN INFLUENCE OVER THE PRICE AND CON DITIONS RELATING TO THE SALE, AND WILL LEAD TO A SITUATION IN WHICH ALL THE ENTERPRISES DEALING WITH EACH OTHER ON NEGOTIATED P RICES WILL HAVE TO BE AS ASSOCIATED ENTERPRISES. THAT AGAIN IS A CLEARLY ABSURD AND UNINTENDED RESULT, AND IT IS ONLY ELEMEN TARY THAT LAW IS TO BE INTERPRETED IN SUCH A MANNER AS TO MAK E IT WORKABLE RATHER THAN REDUNDANT. THIS PRINCIPLE IS E XPRESSED IN THE LATIN MAXIM UTRES MAGIS VALEAT QUAM PEREAT . EXPLAINING THIS PRINCIPLE, HONBLE SUPREME COURT HA S, IN THE CASE OF CIT VS HINDUSTAN BULK CARRIERS [(2003) 259 ITR 449 (SC)], HAS OBSERVED THAT A CONSTRUCTION WHICH REDUCES THE STATUTE TO A FUTILITY HAS TO BE AVOIDED AND THAT A STATUTE OR ANY ENACTING PROVISION THEREIN MUST B E SO CONSTRUED AS TO MAKE IT EFFECTIVE AND OPERATIVE ON THE ITA NO.821/MDS/2016. :- 31 -: PRINCIPLE EXPRESSED IN MAXIM UTRES MAGIS VALEAT QUA M PEREAT I.E., A LIBERAL CONSTRUCTION SHOULD BE PUT U PON WRITTEN INSTRUMENTS, SO AS TO UPHOLD THEM, IF POSSI BLE, AND CARRY INTO EFFECT THE INTENTION OF THE PARTIES. [SEE BROOMS LEGAL MAXIMS (10TH EDITION), P. 361, CRAIES ON STATUTES (7TH EDITION) P. 95 AND MAXWELL ON STATUTES (11 TH EDITION) P. 221.] IT IS, THEREFORE, IMPORTANT THAT THE EXPRESSION INFLUENCE IS GIVEN A SENSIBLE MEANING SO AS TO MAKE THE PROVISIONS OF SECTION 92A(2)(I) WORK ABLE RATHER THAN ADOPTING A LITERAL MEANING WHICH WILL L EAD TO WHOLLY INCONGRUOUS RESULTS. 17. VIEWED IN THIS PERSPECTIVE, WE MUST ADOPT A SEN SIBLE MEANING OF EXPRESSION INFLUENCE WHICH ADVANCES TH E SCHEME OF THE TRANSFER PRICING PROVISIONS RATHER TH AN MAKING THESE PROVISIONS UNWORKABLE. THAT MEANING HAD TO BE A DOMINANT INFLUENCE WHICH LEADS TO DE FACTO CONTROL OVER THE OTHER ENTERPRISE RATHER THAN AN INFLUENCE SIMPLICTO R. IF WE ARE TO ADOPT LITERAL MEANING OF INFLUENCE, AS HAS BEEN ADOPTED BY THE AUTHORITIES BELOW, ALL THE TRANSACTIONS ON NEGO TIATED PRICES WILL BE HIT BY THE PROVISIONS OF SECTION 92A (2)(I). IN THE LIGHT OF THE DISCUSSIONS ABOVE, THE EXPRESSION INF LUENCE, IN THE PRESENT CONTEXT, MUST REMAIN CONFINED TO DOMINA NT INFLUENCE WHICH AMOUNTS TO DE FACTO CONTROL. ACCEPT ANCE OF TERMS OF THE BUYER ON COMMERCIAL CONSIDERATIONS, AS IN THIS CASE, CANNOT BE TREATED AS INFLUENCE OF THE BUYER. IT IS A COMMERCIAL DECISION WHETHER TO ACCEPT THE TERMS OF THE BUYER, WITH RESPECT TO THE PRICE OR RELATED CONDITI ONS, OR NOT. IT BECOMES INFLUENCE, FOR THE PURPOSE OF SECTION 92A(2 )(I), WHEN THE SELLER IS PLACED IN SUCH A SITUATION THAT HE HAS NO CHOICE, BECAUSE OF BUYERS DOMINANT INFLUENCE, BUT TO ACCEPT IT. IT IS THUS CLEAR THAT CONTEXT IN WHICH A REFERE NCE IS MADE TO THE EXPRESSION INFLUENCE IN SECTION 92A(2)(I) REQ UIRES THIS EXPRESSION TO BE READ AS A DOMINANT INFLUENCE IN T HE SENSE OF CONTROL BY ONE ENTERPRISE OVER THE OTHER. GIVEN THE FACT THAT THE ASSESSEES EXPORTS THROUGH THE DISTRIBUTIO N PART CONSTITUTES LESS THAN 5% OF ITS ENTIRE EXPORTS, AND LESS THAN 6% OF ITS ENTIRE SALES, NORTHSTAR IS CERTAINLY NOT IN A POSITION TO EXERCISE ANY DOMINANT INFLUENCE, OVER THE ASSESS EE. THE ASSESSEES DECISION TO ACCEPT THE TERMS SET OUT BY NORTHSTAR, EVEN IF THAT BE SO, MAY BE JUSTIFIED ON ACCOUNT OF COMMERCIAL EXPEDIENCIES OR WARRANTED BY BUSINESS EXIGENCIES OR MAY SIMPLY BE COMPULSION OF THIS SOMEWHAT UNIQUE AND CO MPLEX BUSINESS MODEL, BUT IT CANNOT, BY ANY STRETCH OF LO GIC, BE ON ACCOUNT OF DOMINANT INFLUENCE OF NORTHSTAR AS A CUS TOMER. IT MAY EVEN BE A SOUND BUSINESS STRATEGY TO ACCEPT A R ATHER PASSIVE AND BACK SEAT ROLE, IF ONE CAN TERM IT THAT WAY, IN DAY TO DAY DECISION MAKING UNDER THIS BUSINESS MODEL, B UT CANNOT BE ON ACCOUNT OF DOMINANT INFLUENCE THAT NOR THSTAR ITA NO.821/MDS/2016. :- 32 -: EXERCISES ON BUYING OF PRODUCTS FROM THE ASSESSEE. THE INFLUENCE OF NORTHSTAR, GIVEN THE SCALE OF BUSINESS THROUGH NORRTHSTAR AS A DISTRIBUTION PART, IS TOO MODEST TO MAKE IT A DOMINANT INFLUENCE IN THE NATURE OF CONTROL. IN THI S VIEW OF THE MATTER, AS ALSO BEARING IN MIND THE EARLIER DISCUSS IONS ON THE ISSUE, THE ASSESSEE AND NORTHSTAR CAN NOT BE TREATE D AS ASSOCIATED ENTERPRISES UNDER SECTION 92 A. WE UPH OLD THE PLEA OF THE ASSESSEE. 29. WHAT WE UNDERSTAND FROM THE ABOVE IS THAT THE TERM INFLUENCE APPEARING IN SEC.92A(2)(I) OF THE ACT IS A TYPE OF DOMINANT INFLUENCE WHICH LEAD TO A DEFACTO CONTROL OVER THE OTHER ENTERPRISE. CO- ORDINATE BENCH HAD HELD THAT M/S. NORTHSTAR WAS NOT IN A POSITION TO EXERCISE ANY SUCH DOMINANT INFLUENCE SINCE M/S. ORC HID INDIA HAD ALSO EXPORTED THROUGH VARIOUS OTHER DISTRIBUTION PARTNER S AND DEALINGS WITH M/S.NORTHSTAR CONSTITUTED LESS THAN 5% OF THE ENTIR E EXPORTS AND LESS THAN 6% OF THE ENTIRE SALES OF M/S.ORCHID INDIA. A S AGAINST THIS ADMITTEDLY, IN THE CASE BEFORE US, THE ENTIRE SALE S OF THE ASSESSEE WERE TO APOTEX CORT/ APOTEX INC SIGNET AND M/S. HOS PIRA GROUP, CONCERNS OF WHICH THE LATTER ADMITTEDLY WERE ASSO CIATED ENTERPRISES OF THE ASSESSEE. THE PROFIT SHARE WHICH CAME TO TH E ASSESSEE FROM THESE PARTIES WERE AS UNDER:- PARTY NAME PROFIT SHARE AMOUNT APOTEX CORP 29,21,54,195 APOTEX INC 85,79,870 TOTAL 30,07,34,065 HOSPIRA ENTERPRISES BV 95,19,26,971 95,19,26,971 GRAND TOTAL 125,26,61,036 ITA NO.821/MDS/2016. :- 33 -: THE TOTAL SALES TO HOSPIRA GROUP AS ALREADY MENTION ED BY US AT PARA 5 ABOVE, AGGREGATED TO H283,79,39,806/-. IT CAN BE SAFELY CONCLUDED FROM THE ABOVE DATA THAT MORE THAN 20% OF ASSESSEE S SALES WERE TO APOTEX CORP AND APOTEX INC. THE PROFIT SHARED EARN ED BY THE ASSESSEE FROM THEM AGGREGATED TO H30,07,34,065/ - OUT OF THE TOTAL PROFITS OF H125,26,61,036/-. WE ARE THEREFORE OF T HE OPINION THAT M/S. APOTEX CORP AND APOTEX INC WERE IN A POSITION TO EX ERCISE A DOMINANT INFLUENCE OVER THE ASSESSEE. A PERSON WHO PURCHASE D MORE THAN 1/5TH OF THE TOTAL SALES OF THE ASSESSEE, IN OUR OPINION, WOULD HAVE A DISTINCTLY DOMINANT INFLUENCE ON THE PRICING AND CA N EXERCISE A DEFACTO CONTROL. IN THE CIRCUMSTANCES, WE ARE OF THE OPINI ON THAT LOWER AUTHORITIES WERE JUSTIFIED IN TREATING M/S. APOTEX CORP AND APOTEX INC AS ASSOCIATED ENTERPRISE OF THE ASSESSEE. 30. NOW COMING TO THE ISSUE OF PROFIT SPLIT RATIO, IT I S NOT DISPUTED THAT LEGACY AGREEMENT BASED ON WHICH ASSESSEE WAS E NTITLED FOR THE PROFIT SHARE WAS ENTERED BY M/S. ORCHID INDIA. IT HAS BEEN NOTED BY THE SETTLEMENT COMMISSION AT PARA 2.2.4.17 OF ITS ORDER DATED 28.03.2012 IN THE CASE OF ORCHID INDIA THAT M/S. OR CHID INDIA HAD AN AGREEMENT WITH ONE M/S.PAR PHARMACEUTICALS ALSO WHI CH WAS SIMILAR TO WHAT IT HAD WITH M/S.NORTHSTAR AND APOTEX. PROFIT SPLITTING WITH M/S. PAR PHARMACEUTICALS WAS IN THE RATIO 60:40. M/S. PAR ITA NO.821/MDS/2016. :- 34 -: PHARMACEUTICALS WAS ALSO IN SAME US MARKET AND IN T HE SAME LINE OF BUSINESS. THE LD. TPO IN THE CASE OF M/S. ORCHID IN DIA FOR ASSESSMENT YEARS 2006-07 TO 2010-2011 HAD RECOMMENDED A PROFI T SPLIT RATIO OF 70:30: THIS WAS LOWERED TO 60:40 BY SETTLEMENT CO MMISSION CONSIDERING THE EXPENDITURE INCURRED BY M/S. ORCHID INDIA FOR ITS R& D IN DEVELOPING THE PRODUCTS SOLD. IT WAS HELD THAT 60:40 RATIO OF SPLITTING OF THE PROFIT WAS APPROPRIATE, CONSIDER ING THIS ASPECT ALSO. IN THE CASE BEFORE US, THE AGREEMENTS BASED ON WHICH, ASSESSEE WAS RECEIVING THE SHARE OF THE PROFIT, WERE ALL LEGACY OF M/S. ORCHID INDIA, ENTERED PRIOR TO THE SALE OF ITS GENERIC INJECTAB LE DRUGS DIVISION TO THE ASSESSEE. ASSESSEE HAD NO CASE THAT IT HAD SPENT R & D EXPENDITURE OF A SCALE COMPARABLE TO THE M/S. ORCHID INDIA. NONE OF THESE ASPECTS WERE CONSIDERED BY THE LOWER AUTHORITIES. AT THIS J UNCTURE, IT IS NECESSARY TO HAVE A LOOK AT RULE 10B(D) OF THE INCO ME TAX RULES, 1962. D) PROFIT SPLIT METHOD, WHICH MAY BE APPLICABLE M AINLY IN INTERNATIONAL TRANSACTIONS INVOLVING TRANSFER OF UN IQUE INTANGIBLES OR IN MULTIPLE INTERNATIONAL TRANSACTIO NS WHICH ARE SO INTER-RELATED THAT THEY CANNOT BE EVALUATED SEPARATELY FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF ANY ONE TRANSACTION, BY WHICH- (I) THE COMBINED NET PROFIT OF THE ASSOCIATED ENTERPRISES ARISING FROM THE INTERNATIONAL TRANSACTION IN WHICH THEY ARE ENGAGED, IS DETERMINED ; ITA NO.821/MDS/2016. :- 35 -: (II) THE RELATIVE CONTRIBUTION MADE BY EACH OF THE ASSOCIATED ENTERPRISES TO THE EARNING OF SUCH COMBINED NET PROFIT, IS THEN EVALUATED ON THE BASIS OF THE FUNCTIONS PERFORMED, ASSETS EMPLOYED OR TO BE EMPLOY-ED AND RISKS ASSUMED BY EACH ENTERPRISE AND ON THE BASIS OF RELIABLE EXTERNAL MARKET DATA WHICH INDICATES HOW SUCH CONTRIBUTION WOULD BE EVALUATED BY UNRELATED ENTERPRISES PERFORMING COMPARABLE FUNCTIONS IN SIMILAR CIRCUMSTANCES ; (III) THE COMBINED NET PROFIT IS THEN SPLIT AMONGST THE ENTERPRISES IN PROPORTION TO THEIR RELATIVE CONTRIBUTIONS, AS EVALUATED UNDER SUB-CLAUSE (II) ; (IV) THE PROFIT THUS APPORTIONED TO THE ASSESSEE IS TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION: IN OUR OPINION, LOWER AUTHORITIES HAD FAILED IN PR OPERLY APPLYING THE ABOVE RULE, THOUGH WHAT WAS EFFECTIVELY APPLIED W AS A PROFIT SPLIT METHOD. ESSENTIAL ELEMENTS THAT ARE REQUIRED TO BE VERIFIED FOR APPLYING THE SAID METHOD WAS NEVER CONSIDERED BY T HE LOWER AUTHORITIES WHILE CONSIDERING THE PROFIT SPLIT RATI O AT 60:40. CONSIDERING ALL THESE FACTS, WHILE HOLDING THAT M/S. APOTEX CO RP AND M/S. APOTEX INC WERE ASSOCIATED ENTERPRISE OF THE ASSESSEE, THE MATTER REGARDING BENCH MARKING ARMS LENGTH PRICING OF THE PROFIT SH ARE, IN OUR OPINION REQUIRES A FRESH VISIT BY THE LD. ASSESSING OFFICER /TPO. WE THEREFORE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND REMIT THE ISSUE REGARDING ADJUSTMENT OF PROFIT SHARE BACK TO THE FILE OF THE LD. ASSESSING OFFICER/TPO FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. GROUND ITA NO.821/MDS/2016. :- 36 -: NO.6 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PUR POSE WHEREAS ITS GROUND NO.7 IS PARTLY ALLOWED FOR STATISTICAL PURPO SE. 31. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON TUESDAY, THE 28TH DAY OF FE BRUARY, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( !' . #$#% ) (ABRAHAM P. GEORGE) & / ACCOUNTANT MEMBER '# / CHENNAI $% / DATED:28TH FEBRUARY, 2017 KV %& '()( / COPY TO: 1 . / APPELLANT 3. *+, / CIT(A) 5. (-. / / DR 2. / RESPONDENT 4. * / CIT 6. .01 / GF