FULFORD (I) LTD, MUMBAI V. DCIT RG 2(1), MUMBAI

ITA 8312/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49405 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 07-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RAHUL MITRA; VISHAL NANAVATI
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92C; 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G BEFORE SHRI D. MANMOHAN (VP) & SHRI R.K. PANDA (AM) I.T.A.NO 8312/MUM/2010 (ASSESSMENT YEAR : 2006-07 ) FULFORD (INDIA) LTD. PLATINA BUILDING 8 TH FLOOR, C-59 G-BLOCK BANDRA-KURLA COMPLEX BANDRA EAST MUMBAI-400 098. VS. THE DCIT RANGE-2(1) ROOM NO. 561 AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. PAN/GIR NO. : AAACF1795L ASSESSEE BY : SHRI RAHUL MITRA & SHRI VISHAL NANAVATI DEPARTMENT BY : SHRI PAVAN VED ORDER PER R.K. PANDA (AM) :- THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 28.9.2010 OF THE DISPUTE RESOLUTION PANEL-1, MUMBAI RELATING TO A.Y. 2006-07. 2. THE ASSESSEE IN THE GROUNDS OF APPEAL HAS CHALLE NGED THE ORDER OF DRP IN CONFIRMING THE ACTION OF THE ASSESSING OFFIC ER IN RE-COMPUTING THE ALP OF THE INTERNATIONAL TRANSACTION IN RELATION TO IMPORT OF ACTIVE PHARMACEUTICAL INGREDIENTS (API) AND IN RELATION TO IMPORT OF FORMULATIONS AND THEREBY MAKING ADJUSTMENT OF ` 3,09,21,351/- AND ` 4,13,72,000/- RESPECTIVELY. 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF PHARMACEUTICA L PRODUCTS AND FORMULATIONS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS SHOWN NET TURNOVER (AFTER REDUCING EXCISE DUTY) OF ` 154.39 CRORES, OTHER INCOME OF ` 1.85 CRORES AND DECLARED NET PROFIT OF ` 15,99,10,420/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE-COMPANY FURNISHED VARIOUS DETAILS IN SUPPORT OF INCOME DECL ARED AND CLAIMS MADE IN THE RETURN OF INCOME. THE ASSESSING OFFICER NOTE D THAT THE ASSESSEE FULFORD (INDIA) LTD. 2 HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ASS OCIATED PARTIES WHICH CAN BE SUMMARIZED AS UNDER : S.NO. NATURE OF TRANSACTION A.Y. 2006- 07 METHOD USED BY THE ASSESSEE TO DETERMINED THE ALP 1 IMPORT OF RAW MATERIAL 3,50,65,837 TNMM 2 PURCHASE OF FINISHED GOODS 248828463 RPM 3 REIMBURSEMENTS RECEIVED 441471 CUP 4 REIMBURSEMENT PAID 1168690 CUP 5 FACILITATION OF SOFTWARE TESTING SERVICES 1989517 - 3.1 A REFERENCE WAS MADE TO THE TRANSFER PRICING OF FICER FOR COMPUTING THE ARMS LENGTH PRICE U/S. 92CA(1) ON 6.10.2008. TH E TPO VIDE HIS ORDER DATED 29.10.2009, WHICH WAS RECEIVED BY THE ASSESSI NG OFFICER ON 4.11.2009 HAD MADE UPWARD ADJUSTMENT OF ` 7,22,93,351/- ON FOLLOWING GROUNDS :- (I) PURCHASE OF NETILIMICIN SULPHATE AND MOMETASONE FUR OATE ` 3,09,21,351/-. (II) VARIATION IN THE MARGINS OF THE AE SEGMENT AND THE NON-AE SEGMENTS- ` 4,13,72,000/-. 3.2 IT WAS FOUND BY TPO THAT THE ASSESSEE HAS OVER INVOICED PURCHASES FROM ITS AES WITH RESPECT TO NETILIMICIN SULPHATE AND MOMETASONE FUROATE. DETAILS WERE GATHERED FROM CUST OMS DATA AVAILABLE ON PUBLIC DOMAIN THROUGH TIPS SOFTWARE AND FROM INQ UIRIES MADE UNDER SECTION 133(6) OF THE INCOME TAX ACT, 1961. A COPY OF THE INQUIRIES WAS PROVIDED TO THE ASSESSEE ALONG WITH THE SHOW-CAUSE FOR MAKING AN ADJUSTMENT SIMILAR TO THAT OF LAST YEAR. 3.3 THE ASSESSEE VIDE REPLY DATED 28.7.2009 OBJECTE D TO SUCH PROPOSAL ON THE FOLLOWING GROUNDS : (A) STANDARD OF COMPARABILITY UNDER CUP METHOD IS V ERY HIGH. PRICES PAID BY UNRELATED PARTIES MAY NOT BE FOR SIM ILAR PRODUCT. (B) OTHER MANUFACTURER DOES NOT MAINTAIN THE SAME Q UALITY STANDARD AS SCHERING PLOUGH GROUP. FULFORD (INDIA) LTD. 3 (C) ORIGINAL RESEARCHED/DEVELOPED DRUGS ARE COSTLY THAN GENERIC DRUGS ARE ALSO BETTER. (D) THERE MAY BE TRANSACTIONAL DIFFERENCES SUCH AS VOLUME/CONTRACTUAL TERMS ETC. (E) THE APIS HAVE BEEN SUPPLIED TO THE ASSESSEE AT A PRICE THAT IS LOWER THAN THE PRICE AT WHICH THE OTH ER ENTITIES OF THE SCHERING PLOUGH ARE SOLD. 3.4 IT WAS ACCORDINGLY SUBMITTED THAT THE TNMM METH OD FOLLOWED BY THE ASSESSEE IS THE MOST APPROPRIATE METHOD AND NOT THE CUP METHOD AS PROPOSED BY THE TPO. 3.5 THE TPO NOTED THAT IDENTICAL SUBMISSIONS WERE F URNISHED DURING THE PRECEEDING YEARS WHICH WERE DULY CONSIDERED IN A.YS. 2003-04, 2004- 05 AND 2005-06. THE ARGUMENTS WERE FOUND TO BE WITH OUT MERIT AND WERE REJECTED. THE ASSESSEE HAD NOT DEMONSTRATED TH AT THE SO CALLED GENERIC PRODUCTS IMPORTED IN THE OTHER COMPANIES WE RE OF INFERIOR QUALITY AND THERE WERE TRANSACTIONAL DIFFERENCES. THE TPO N OTED THAT THE ASSESSEE IN ITS TRANSFER PRICING STUDY REPORT HAS B ENCHMARKED THE INTERNAL TRANSACTIONS OF IMPORTS OF FINISHED GOODS FOR DISTRIBUTION BY COMPARING ITS DISTRIBUTION ACTIVITIES AT THE ENTRY LEVEL WITH THE COMPANIES ENGAGED IN SIMILAR ACTIVITIES AND HAS CONCLUDED THA T THE INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. 3.6 REJECTING THE VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE THE TPO MADE AN ADJUSTMENT OF ` 3,09,21,351/- ON ACCOUNT OF OVER INVOICING OF PURCHASES. 3.7 THE TPO NOTED THAT THE ASSESSEE IN ITS TRANSFER PRICING STUDY REPORT FOR THE DISTRIBUTION SEGMENT HAS BENCHMARKED THE INTERNATIONAL TRANSACTIONS OF IMPORT OF FINISHED GOODS FOR DISTRI BUTION BY COMPARING ITS DISTRIBUTION ACTIVITIES AT THE ENTRY LEVEL WITH THE COMPANIES ENGAGED IN SIMILAR ACTIVITIES AND CONCLUDED THAT THE TRANSACTI ONS ARE AT ARMS LENGTH. THE TPO DISCUSSED THE VARIOUS METHODS PRESCRIBED U/ S. 92C OF THE INCOME TAX ACT TO FIND OUT THE MOST APPROPRIATE MET HOD APPLICABLE TO THE ASSESSEE. HE NOTED THE VARIOUS SHORTCOMINGS IN THE CALCULATIONS OF THE ARMS LENGTH PRICE. HE NOTED FROM THE SEGMENTAL ACC OUNTS FURNISHED BY FULFORD (INDIA) LTD. 4 THE ASSESSEE THAT WHILE RENT, DEPRECIATION MARKETIN G AND DISTRIBUTION HAVE BEEN ALLOCATED ON THE BASIS OF THE NET SALES, PROMOTION EXPENSES HAS BEEN ALLOCATED ON ACTUAL BASIS. HOWEVER, SALARI ES, TRAVELING AND MISCELLANEOUS EXPENSES HAVE BEEN ALLOCATED ON THE C RITERIA OF FAIR ALLOCATION. NO SUCH EXPLANATION HAS BEEN GIVEN AS TO WHAT IS A FAIR ALLOCATION OR HOW THE SAME HAS BEEN ARRIVED AT. AC CORDING TO THE TPO UNDER NORMAL CIRCUMSTANCES IF SEPARATE ACCOUNTS HAV E BEEN MAINTAINED, THE DISTRIBUTION OF COMMON EXPENSES HAS TO BE CARRI ED OUT ON THE BASIS OF TURNOVER, UNLESS THERE ARE SPECIFIC INSTANCE TO ASSIGN SOMETHING ON SPECIFIC BASIS. AN ALLOCATION BASED ON TURNOVER WOU LD NORMALLY BE A FAIR ALLOCATION. IN ABSENCE OF ANY PLAUSIBLE EXPLANATION , THE TPO ALLOCATED THESE EXPENSES ON NET SALES BASIS AND ACCORDINGLY M ADE AN ADJUSTMENT OF ` 4,13,72,000/-. THUS, THE TPO MADE TOTAL ADJUSTMENT OF ` 7,22,93,361/-. 3.8 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER ASKED THE ASSESSEE TO SHOW-CAUSE AS TO WHY THE ADJUSTMENTS OF ` 7,22,93,361/- AS PER TRANSFER PRICING ORDER SHOULD NOT BE MADE. IN RESPONSE TO THE SAME THE ASSESSEE VIDE ITS LETTER D ATED 23.11.2009 SUBMITTED OBJECTIONS FOR THE ABOVE SAID ADJUSTMENTS IN TRANSFER PRICING ORDER AS DETAILED ABOVE. THE CONTENTS OF THE LETTER OF THE ASSESSEE COMPANY AS EXTRACTED IN THE ASSESSMENT ORDER READS AS UNDER :- WE REFER TO THE LAST HEARING WITH OUR AUTHORIZED R EPRESENTATIVES ON THE CAPTIONED MATTER WHEREIN YOUR GOODSELF HAS A SKED THE ASSESSEE TO FILE THE SUBMISSIONS AS TO WHY THE AMOU NT OF ` 72,293,351/- DETERMINED BY LEARNED TRANSFER PRICING OFFICER (TPO), BEING THE DIFFERENCE BETWEEN TRANSACTION PRI CE AS PER BOOKS AND ARMS LENGTH PRICE, SHALL NOT BE ASSESSED AS IN COME UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. IN THIS REGARD, WE WOULD LIKE TO BRING TO YOUR GOOD SELFS KIND ATTENTION THE RELEVANT PROVISIONS OF THE ACT INTROD UCED BY THE FINANCE ACT 2007 EFFECTIVE FROM JUNE 1, 2007. THE R ELEVANT EXTRACT FROM THE ACT IS REPRODUCED BELOW FOR YOUR GOOD SELF S REFERENCE : QUOTE : SECTION 92(C)(4) ON RECEIPT OF THE ORDER UNDER SUB-SECTION (3), THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME O F THE ASSESSEE UNDER SUB-SECTION (4) OF SECTION 92C IN CO NFORMITY FULFORD (INDIA) LTD. 5 WITH THE ARMS LENGTH PRICE AS SO DETERMINED BY THE TPO. UNQUOTE. THUS, THOUGH THE ASSESSEE DOES NOT AGREE WITH THE TP ADJUSTMENT RECOMMENDED BY THE TPO SINCE THE SAME IS NOT IN ACCORDANCE WITH THE INDIAN TP REGULATIONS CONTAINED IN THE ACT AND IS HIGHLY DISPUTED, HOWEVER, WE UNDERSTAND THAT, IN LINE WITH THE AFOREMENTIONED AMENDED REQUIREMENT OF THE LAW, YOUR GOODSELF WOULD PROCEED TO ISSUE A DRAFT ORDER AND ASSESS THE TOTAL INCOME OF THE ASSESSEE IN CONFORMITY WITH THE ARMS LENGTH REVENUE DETERMINED BY THE TPO IN HIS TP ORDER DATED 29.10.2009. HOWEVER, SHOULD YOUR GOODSELF WISH TO RECONSIDER TH E DETERMINATION/RE-DETERMINATION OF THE ARMS LENGTH REVENUE FOR THE ASSESSEE ON THE MERITS OF THE INSTA NT CASE, WE REQUEST YOU TO GIVE THE ASSESSEE AN OPPORTUNITY TO DISCUSS THE SAME IN DETAIL. IN THIS REGARD, THE DETAILED SUBMISSIONS DATED 28 TH JULY 2009, SUBMITTED BY THE COMPANY TO THE LEARNED TPO ARE ATTACHED HEREWITH, FOR YOUR GOOD SELFS KIND PERUSAL. FURTHER, AND IN ACCORDANCE WITH SECTION 144C OF THE INCOME TAX ACT, 1961 (AS AMENDED BY THE FINANCE ACT 2009), THE COMPANY REQUESTS YOUR GOOD SELF TO KINDL Y SHARE WITH IT, A DRAFT OF THE PROPOSED ORDER OF ASSESSMENT IF YOUR GOODSELF PROPOSES TO MAKE ANY ADDITION TO THE RETURNED INCOME OF THE COMPANY FOR THE YEAR. THIS WOULD ENABLE THE COMPANY TO EXAMINE THE SAME AS WELL AS ITS RESPONSE THERETO, INCLUDING FIL ING OF OBJECTIONS BEFORE THE LEARNED DISPUTE RESOLUTION PANEL. 3.6 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE ABOVE EXPLANATION. HE NOTED THAT THE ASSESSEES SUBMISSIO NS WERE ALREADY CONSIDERED BY THE TPO IN DETAIL, BEFORE FINALIZATIO N OF THE ORDER U/S. 92CA(3). FOLLOWING THE ORDER OF THE TPO THE ASSESSI NG OFFICER MADE AN UPWARD ADJUSTMENT OF ` 7,22,93,351/- TO THE TOTAL INCOME. 3.7 BEFORE THE DISPUTE RESOLUTION PANEL, THE ASSESS EE MADE VARIOUS SUBMISSIONS, THE GIST OF WHICH CAN BE SUMMARIZED AS UNDER :- (I) THAT THE TPO REJECTED THE TP DOCUMENTATION MAINTAIN ED BY THE ASSESSEE I.E. REJECTED TNMM AND CONSIDERED CUP AS MOST APPROPRIATE METHOD. FULFORD (INDIA) LTD. 6 (II) THAT THE TPO PLACED RELIANCE ON CUSTOMS DATA AND COMPARED THE PURCHASE PRICE OF ORIGINALLY RESEARCHE D API IMPORTED BY FIL WITH THE PURCHASE PRICE TO GENERIC MEDICINES PURCHASED BY THIRD PARTY. (III) THAT THE TPO DID NOT CONSIDER DIFFERENCE BETWEEN OR IGINALLY RESEARCHED AND GENERIC DRUGS. (IV) BUSINESS RATIONALE FOR IMPORTS OF API. (V) OPPORTUNITY TO REFUTE COMPARABILITY. (VI) RELIANCE ON THE JUDGMENT OF UCB INDIA PVT. LTD. (VII) RELIANCE ON THE DECISION OF SUPREME COURT OF CANADA IN THE CASE OF GLAXOSMITHKLINE INC. (VIII) TPO IGNORED SIGNIFICANT DIFFERENCES BETWEEN ORIGINA L RESEARCHED/DEVELOPED DRUGS AND GENERIC DRUGS AND TH US VIOLATE COMPARABILITY REQUIRED FOR THE USE OF CUP M ETHOD. 3.8 HOWEVER, THE DISPUTE RESOLUTION PANEL WAS NOT C ONVINCED WITH THE ARGUMENTS ADVANCED BEFORE THEM. THEY NOTED THAT THE TPO ANALYZED THE FACTS AND DID NOT FIND THEM ACCEPTABLE SINCE SIMILA R ARGUMENTS WERE REJECTED IN THE PRECEEDING ASSESSMENT YEARS. THE AS SESSEE HAS NOT DEMONSTRATED BEFORE THE TPO THAT THE SO CALLED GENE RIC DRUG IMPORTED BY OTHER COMPANIES WERE OF INFERIOR QUALITY AND THERE WERE TRANSACTIONAL DIFFERENCE. THE DRP NOTED THAT IN THE CASE OF MANUF ACTURE AND SALE OF MEDICINES, THEY HAVE TO GO THROUGH STRINGENT QUALIT Y CONTROL NORMS IN RESPECT OF EACH MEDICINE WHETHER GENERAL OR OTHERWI SE IRRESPECTIVE OF THE COST TO USER OF THE MEDICINES AND, THEREFORE, THE A RGUMENT THAT MANUFACTURERS WHICH WERE CONSIDERED AS COMPARABLE W ERE OF INFERIOR QUALITY IS NOT A VALID ARGUMENT. 3.9 THE DRP ALSO WAS OF THE OPINION THAT THE CUP ME THOD ADOPTED BY THE TPO WAS MORE APPROPRIATE AS AGAINST THE TNMM ME THOD ADOPTED BY THE ASSESSEE. ACCORDING TO DRP THE ASSESSEE MAY BE JUSTIFIED IN CLAIMING THAT GENERIC OWN RESEARCHED MEDICINE SHOULD FETCH H IGH PROFIT MARGIN, BUT THE SAME HAS TO BE SUPPORTED BY ADEQUATE FACT A ND EACH AND EVERY MEDICINE HAS TO BE SHOWN WITH RESPECT TO BACK-UP OF RESEARCH AND DEVELOPMENT TO JUSTIFY THE MARGIN. ACCORDING TO THE DRP, THE PROFIT MARGIN IN RESPECT OF THESE MEDICINES VIS--VIS CONS UMER, I.E. PROFIT FULFORD (INDIA) LTD. 7 MARGIN FROM THE BUSINESS TO BUSINESS AND BUSINESS T O CONSUMER IS TO BE SUITABLY ALLOCATED SO AS TO ACCOUNT FOR ADEQUATE SH ARING OF PROFITS. THE TRANSFER PRICING ANALYSIS IS OF ABOUT PROVIDING FOR ADEQUATE SHARING OF PROFITS BETWEEN VARIOUS TAX JURISDICTIONS. IT IS BE CAUSE OF THE ULTIMATE PROFIT EARNING ARISES FROM THE SALE OF PRODUCT TO T HE CONSUMER AND, THEREFORE, THE ASSOCIATE ENTERPRISE OF THE ASSESSEE SHOULD BE EARNING THAT AMOUNT OF PROFIT WHICH A BUSINESS TO CONSUMER TRANS ACTION WILL EARN IN THE CASE OF A HIGH VALUE MEDICINE. IN VIEW OF THE A BOVE THE DRP WAS OF THE OPINION THAT THE ADJUSTMENT IN RESPECT OF IMPOR TED ACTIVE PHARMACEUTICAL INGREDIENTS DOES NOT CALL FOR ANY IN TERFERENCE. ACCORDING TO THE DRP THE ASSESSEES CASE COULD HAVE BEEN OF M ERIT IF SPECIFIC ACTIVE INGREDIENTS SHOULD HAVE BEEN SOLD TO INDIAN ENTITY AND SOLD TO ANY OTHER NOT RELATED ENTERPRISES WERE SHOWN TO BE EQUAL. IN ABSENCE OF ANY SUCH DATA BEING PROVIDED EITHER IN THE PROCEEDINGS OF TR ANSFER PRICING OR DURING PROCEEDINGS BEFORE IT, THE DRP CONFIRMED THE ARMS LENGTH PRICE AS DETERMINED BY THE TPO AT ` 3,09,21,361/-. 4. SO FAR AS THE ADJUSTMENT IN THE VALUE OF IMPORT FORMULATIONS, THE DRP NOTED THAT THIS SEGMENT IS THE DISTRIBUTION SEG MENT OF THE COMPANY. THEY NOTED THAT THE COMPANY IMPORTS BOTH FROM AES A ND NON-AES (THIRD PARTIES) AND SELL THE PRODUCTS IN THE LOCAL MARKETS . THE DRP JUSTIFIED THE COMPARISON OF THE INTERNAL MARGIN BY THE TPO WHICH COULD PROVIDE BETTER COMPARISON RATHER THAN EXTERNAL COMPARABLE COMPANIE S BECAUSE INTERNAL MARGIN ELIMINATE THE VALUATION IN FUNCTIONING ASSET S PROFILES OF OTHER COMPANIES WHICH ARE TAKEN AS COMPARABLE. THE DRP RE JECTED THE CONTENTION OF THE ASSESSEE THAT BENCHMARKING SHOULD BE DONE AS A WHOLE AND NOT ON SEGMENTAL BASIS ON THE GROUND THAT THE S AME IS AGAINST THE TRANSFER PRICING REGULATIONS ACCORDING TO WHICH BEN CHMARKING HAS TO BE DONE IN RESPECT OF INTERNATIONAL TRANSACTIONS AND N OT THE BUSINESS AS A WHOLE. THE DRP NOTED THAT IN FORM NO. 3CEB THE DETA ILS IN RESPECT OF EACH ASSOCIATE ENTERPRISE AND EACH TRANSACTION WITH IN THE CLASS OF TRANSACTIONS ARE REQUIRED. REJECTING THE VARIOUS S UBMISSIONS OF THE ASSESSEE, THE DRP UPHELD THE ACTION OF THE TPO IN M AKING THE ADJUSTMENT OF ` 4,13,72,000/- FULFORD (INDIA) LTD. 8 5. AGGRIEVED WITH SUCH ORDER OF THE DRP, THE ASSESS EE IS IN APPEAL BEFORE US. 6. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO APPLIED COMPARABLE UNCONTROLLED PRICE (CUP) METHOD FOR ACTI VE PHARMACEUTICAL INGREDIENTS (APIS) IMPORTED FROM ASSOCIATED ENTERPR ISES BY COMPARING GENERIC APIS IDENTIFIED FROM THE CUSTOMS DATABASE, ETC., THEREBY IMPUTING AN OPERATING MARGIN OF 32.09%. HE SUBMITTED THAT TH E ASSESSEE ACTS AS A SECONDARY MANUFACTURER WHICH IS AKIN TO A VALUE ADD ED DISTRIBUTOR. HE SUBMITTED THAT THE TPO ADOPTED THE CANADIAN FEDERAL COURT DECISION IN THE CASE OF GLAXO CANADA. HE REFERRED TO THE FAR PR OFILE OF THE AE SEGMENT AND NON-AE SEGMENT AS PER THE SYNOPSIS AND SUBMITTED THAT LOOKING AT THE FUNCTIONS, ASSET AND RISK PROFILE OF SECONDARY MANUFACTURER OR VALUE ADDED DISTRIBUTOR IN THE CONT EXT OF LICENSE ARRANGEMENT ONE CANNOT BLINDLY APPLY CUP METHOD. HE SUBMITTED THAT THE DECISION OF CANADIAN COURT HAS SINCE BEEN REVER SED BY THE FEDERAL COURT. HE SUBMITTED THAT THE MUMBAI BENCH OF THE TR IBUNAL IN THE CASE OF SERDIA PHARMACEUTICALS HAS ACKNOWLEDGED IT. HOWE VER, IN THE ABSENCE OF ANY ARGUMENTS MADE BY THE ASSESSEE, THE TRIBUNAL DID NOT DECIDE ON THAT ASPECT AND LEFT IT OPEN FOR FUTURE ADJUDICATIO N. HE SUBMITTED THAT BASED ON THE FAR ANALYSIS, THE ASSESSEE IS A VALUE ADDED DISTRIBUTOR IN THE SEGMENT OF IMPORT OF API FOR DISTRIBUTION IN IN DIA AFTER CONVERTING IT INTO FORMULATIONS. THUS, IT IS ENTITLED TO RETURN F OR DISTRIBUTION FUNCTIONS AND SECONDARY MANUFACTURING FUNCTIONS COMMENSURATE TO ITS LEVEL OF INVOLVEMENT FOR THE RELEVANT PRODUCT. HE SUBMITTED THAT WHEN IN THE NON-AE SEGMENT, THE ASSESSEE GET OPERATING PROFIT M ARGIN OF 8.69% AS COMPARED TO OPERATING MARGIN OF 11.37% MADE IN THE AE SEGMENT, ITS PROFITABILITY UNDER AE SEGMENT IS HIGHER. THEREFORE ONE CASE SAFELY CONCLUDE THAT THE TERMS OF IMPORT OF API FROM AE AR E AT ARMS LENGTH CONSIDERATION FOR ITS FUNCTIONS AS A VALUE ADDED DI STRIBUTOR. 7. AS REGARDS THE REFERENCE IS THE TPOS ORDER THAT IDENTICAL SUBMISSIONS MADE IN PAST YEARS WERE DULY CONSIDERED IN DETAIL DURING THE COURSE OF ASSESSMENT PROCEEDINGS, LEARNED COUNS EL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE RELATING TO PAST YEAR HAS NOT YET BEEN DECIDE BY FULFORD (INDIA) LTD. 9 LEARNED CIT(A). THERE IS NO CONSISTENCY IN THE APPR OACH FOLLOWED BY THE TPO OVER THE PERIOD OF TIME SINCE HE HAS SHIFTED FR OM USING SECTION 133(6) TO TIPS DATABASE. WITHOUT PREJUDICE HE SUBMI TTED THAT TPO HAS TO APPLY HIS MIND AFRESH EVERY YEAR. 8. AS REGARDS COMMENTS OF THE TPO THAT THE ASSESSEE HAS NOT DEMONSTRATED THAT SO CALLED GENERIC PRODUCTS IMPORT ED BY THE OTHER COMPANIES WERE OF INFERIOR QUALITY, THE LEARNED COU NSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS NOT PROVIDED WITH E ITHER THE SAMPLES FOR LABORATORY TESTING OR THE TEST REPORT FROM A LABORA TORY CERTIFYING THE TECHNICAL QUALITIES OF THE GENERIC PRODUCTS. HE SUB MITTED THAT THE ONUS WAS ON THE TPO TO DEMONSTRATE THE COMPARABILITY. AC CORDING TO LEARNED COUNSEL FOR THE ASSESSEE, CUP REQUIRES STRINGENT CO MPARABILITY AND ANY DIFFERENCES IN THE THIRD PARTY PRICE AND THE INTERN ATIONAL TRANSACTION PRICE WHICH COULD MATERIALLY AFFECT THE PRICE IN TH E OPEN MARKET, WARRANT APPROPRIATE ADJUSTMENTS TO SUCH THIRD PARTY PRICES. 9. AS REGARDS COMMENTS OF THE TPO THAT THE ASSESSEE WAS SEEKING VARIOUS DETAILS AND THEREBY TRYING TO DELAY THE PRO CEEDINGS AND ALSO DIVERT THE ATTENTION FROM THE MAIN ISSUE, LEARNED C OUNSEL SUBMITTED THAT THE ASSESSEE WAS SEEKING INFORMATION SO AS TO ANALY ZE THE COMPARABILITY OF THE PROPOSAL BY THE TPO. HE SUBMITTED THAT THE B ONAFIDE INTENTION OF THE ASSESSEE SHOULD NOT HAVE BEEN CHALLENGED AND TH E ONUS WAS ON THE TPO TO DEMONSTRATE THE COMPARABILITY. 10. AS REGARD OBSERVATIONS OF TPO THAT TWO COMPANIE S CAN HAVE DIFFERENT METHODOLOGY FOR MAKING THE SAME PRODUCT A ND, THEREFORE, IT IS NOT NECESSARY THAT THE MATERIAL USED OR TESTS CONDU CTED SHOULD BE THE SAME, HE SUBMITTED THAT DIFFERENCE IN MANUFACTURING PROCESSES WILL LEAD TO DIFFERENCE IN COST OF PRODUCTION AND ACCORDINGLY , DIFFERENCE IN FINAL SELLING PRICE. HE SUBMITTED THAT IN PHARMACEUTICAL WORLD APIS, WITH SIMILAR NAMES HAVE DIFFERENT THERAPEUTIC APPLICATIO NS AND THEREFORE THE TWO PRODUCTS CANNOT BE COMPARED. HE SUBMITTED THAT THE ASSESSEE IS THE MARKET LEADER WITH MAXIMUM MARKET SHARE OF ABOUT 48 % AND THE BALANCE MARKET SHARE IS HELD BY A NUMBER OF ENTITIE S. THIS DEMONSTRATES THAT IRRESPECTIVE OF THE HIGH COST OF THE PRODUCT, THE ASSESSEE ENJOYS FULFORD (INDIA) LTD. 10 PREMIUM POSITION IN THE MARKET ON ACCOUNT OF HIGH Q UALITY AND EFFECTIVENESS OF THE DRUGS. REFUTING OBSERVATION OF THE TPO THAT THE GENERIC PRODUCTS HAVE SIMILAR PROPERTIES, LEARNED C OUNSEL FOR THE ASSESSEE SUBMITTED THAT THE GENERIC APIS MAY HAVE S IMILAR PROPERTIES BUT STILL COULD BE DIFFERENT ON QUALITY EFFICACY AND LE VEL OF IMPURITIES PRESENT IN THE DRUG AMONGST OTHER THINGS. 11. AS REGARD OF THE OBSERVATION OF TPO THAT AN AE CAN CONTINUE TO HAVE THE BENEFITS AT BENCHMARKED COSTS DUE TO BENEF IT OF CLINICAL TESTING, HOWEVER, THIS FACILITY DOES NOT PERMIT THE AE TO OV ER INVOICE THE PRODUCT COST BY ALMOST 10 TIMES OF THE COMPARABLES, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALL INFORMATION WHICH ARE R EQUIRED TO BE FILED WITH THE INDIAN REGULATORY AUTHORITIES FOR TAKING A PPROVAL ETC. WAS PROVIDED BY THE ASSESSEE-OVERSEAS AFFILIATES WHO HA VE UNDERTAKEN RESEARCH AND DEVELOPMENT TO DEVELOP THE PRODUCTS. T HE CLINICAL TRIALS BENEFITS MADE AVAILABLE TO THE ASSESSEE CANNOT BE S AID TO BE OF PASSIVE NATURE. HE SUBMITTED THAT THE PRODUCT PATENTS ARE O BTAINED ONLY IF DRUGS PASS THE STRINGENT CLINICAL TRIALS. THIS TYPICALLY COSTS US$ 1 TO 1.5 BILLION PER MOLECULE. FORMULATIONS BASED ON SUCH ORIGINALLY RESEARCHED MOLECULE HAVE A HIGHER ACCEPTABILITY IN TERMS OF QU ALITY AND EFFICACY. 12. AS REGARDS REJECTION OF TNMM ADOPTED BY THE ASS ESSEE AND CUP METHOD ADOPTED BY THE TPO, HE SUBMITTED THAT IN TNM M METHOD MANY SUCH DIFFERENCES GET EVENED OUT. FURTHER, APPLICATI ON OF A ROBUST SEARCH PROCESS, WHICH INVOLVES APPROPRIATE QUANTITATIVE AN D QUALITATIVE FILTERS, SUPPORTS THE PROXIMITY TO THE FAR ANALYSIS BASED ON THE AVAILABLE DATA. HOWEVER, THE TPO HAS NOT DISCHARGED SIMILAR ONUS WH ILST APPLYING CUP. HE SUBMITTED THAT THE TPO CANNOT DICTATE WHAT THE A SSESSEE SHOULD DO. HE SUBMITTED THAT IF THE METHOD ADOPTED BY THE TPO IS ACCEPTED, THEN IT GIVES MORE THAN 30% MARGIN WHICH IS JUST NOT POSSIB LE IN SUCH TYPE OF BUSINESS. HE SUBMITTED THAT THE CUP METHOD CANNOT B E APPLIED HERE BECAUSE A METHOD HAS TO BE ADOPTED ON THE BASIS OF CHARACTERISTIC. THE ASSESSEE HAS GOT INTERNAL COMPARABLES. HE SUBMITTED THAT THE TPOS ACTION OF APPLYING CUP IS BLATANTLY ABSURD, WHICH R ESULTS IN AN OPERATING FULFORD (INDIA) LTD. 11 MARGIN OF 32.09% WHICH IS BY FAR HIGHER THAN WHAT I S EARNED BY FIL IN ITS OWN NON-AE SEGMENT I.E. 8.69% BY DOING EXACTLY SIMI LAR FUNCTIONS. 13. AS REGARD ADJUSTMENT MADE ON ACCOUNT OF IMP ORT FORMULATIONS, LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IMPORTS THE SAME FROM OUTSIDE AND SELL IN INDIAN MARKET. THE TP O COMPARED MARGIN WITH THAT OF ZYG PHARMA SEGMENT AND DETERMINED THE MARGIN AT 21.70% AS AGAINST 14.43% DISCLOSED BY THE ASSESSEE. HE SUB MITTED THAT THESE ARE CHARACTERISTICALLY TWO DIFFERENT SEGMENTS. LEAR NED COUNSEL FOR THE ASSESSEE FILED SOME FRESH COMPARABLE COMPANIES LIKE GUJARAT TERCE LABORATORIES LTD., J.K. HELENE CURTIS LTD., LOTUS H ERBALS LTD., LYKA EXPORTS LTD., SERUM INTERNATIONAL LTD., BRUSHMAN (I NDIA) LTD., J.L. MORISON (INDIA) LTD., T.T.K. HEALTHCARE LTD. AND SU BMITTED THAT ARITHMETIC MEANS OF OP/SALES IS 1.32%. HE SUBMITTED THAT THE ABOVE COMPANIES ARE COMPARABLE COMPANIES FOR DISTRIBUTION SEGMENT WITH FINANCIAL DATA FOR F.Y. 2005-06. HE ACCORDINGLY SUB MITTED THAT THE METHOD ADOPTED BY THE ASSESSEE SHOULD BE ACCEPTED. 14. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND WHILE SUPPORTING THE ORDER OF THE ASSESSING OFFICER AND T HE DRP SUBMITTED THAT THE ORDER OF THE TPO IS BASED ON THE EARLIER 3 YEAR S AND THOSE ORDERS ARE PENDING WITH THE LEARNED CIT(A). FOR THE IMPUGNED A SSESSMENT YEAR, THE ASSESSEE HAS COME THROUGH THE DRP. AS REGARDS THE V OLUMINOUS PAPERS FILED BY THE LEARNED COUNSEL FOR THE ASSESSEE TO SU BSTANTIATE ITS CASE, LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE CAN BE PERMITTED TO FILE THOSE PAPERS IF JUSTIFIABLE REASO NS CAN BE GIVEN AS TO WHY THESE WERE NOT FURNISHED BEFORE THE LOWER AUTHORITI ES. HOWEVER, THE ASSESSEE HAS NOT GIVEN ANY SUCH REASONS. HE SUBMITT ED THAT THE REPLY BY THE ASSESSEE IS GENERAL IN NATURE. IT HAS NOT SUBST ANTIATED AS TO HOW ITS PRODUCT IS BETTER. THE ASSESSEE SHOULD HAVE SHOWN V OLUME OF PRODUCTION, CONTRACTUAL FORMS ETC. HE SUBMITTED THAT CERTAIN NE W FACTS HAVE BEEN STATED IN THE WRITTEN SUBMISSION FILED BY THE ASSES SEE. HE SUBMITTED THAT THE AGREEMENT WITH ZYG PHARMA IS SUBSEQUENT TO THE ASSESSMENT. THEREFORE, IT CANNOT BE THE BASIS OF TRANSACTION AT THE TIME OF AGREEMENT FOR THE IMPUGNED ASSESSMENT YEAR. THEREFORE, THE SA ME CANNOT BE RELIED FULFORD (INDIA) LTD. 12 UPON. AS REGARDS THE SUBMISSION OF THE LEARNED COUN SEL FOR THE ASSESSEE THAT IT IS A LICENCED MANUFACTURER, HE SUBMITTED TH AT THIS FACT WAS NOT BEFORE THE ASSESSING OFFICER OR TRP OR DRP. THE CAS E OF THE ASSESSEE IS SIMPLY THAT OF AN IMPORTER. THEREFORE, THE ARGUMENT S OF THE LEARNED COUNSEL ARE WITHOUT MUCH FORCE. HE ACCORDINGLY SUBM ITTED THAT THE ORDER OF DRP TO BE UPHELD. 15. LEARNED COUNSEL FOR THE ASSESSEE IN HIS REJOIND ER SUBMITTED THAT VARIOUS DETAILS WERE BEFORE THE TPO. AS REGARDS THE OBJECTION OF LEARNED DEPARTMENTAL REPRESENTATIVE THAT NEW PLEAS ARE BEIN G TAKEN BEFORE THE TRIBUNAL, LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO THE DECISION OF CHANDIGARH BENCH OF THE TRIBUNAL IN THE CASE OF QUA RK SYSTEMS PVT. LTD., 132 TTJ 1 AND DECISION OF PUNE BENCH OF THE T RIBUNAL IN THE CASE OF SKODA AUTO INDIA VS. ACIT, 30 SOT 319. REFERRING TO THE ABOVE DECISIONS, HE SUBMITTED THAT UNDER IDENTICAL CIRCUM STANCES THE TRIBUNAL HAS RESTORED THE MATTER TO THE FILE OF THE ASSESSIN G OFFICER FOR FRESH ADJUDICATION IN THE LIGHT OF THE FRESH SEARCHES AND ASSESSEE WAS PERMITTED TO TAKE A NEW PLEA ON THE BASIS OF FRESH SEARCHES. 16. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AND T HE VOLUMINOUS PAPER BOOKS FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISP UTE TO THE FACT THAT THE ASSESSEE-COMPANY DURING THE YEAR HAS ENTERED INTO I NTERNATIONAL TRANSACTIONS WITH ITS AES, THE DETAILS OF WHICH ARE ALREADY GIVEN AT PARA 2 OF THIS ORDER. WE FIND THE TPO IN HIS ORDER PASSED U/S. 92CA(3) COMPUTED THE ALP OF THE INTERNATIONAL TRANSACTION I N RELATION TO IMPORT OF API, I.E. THE MANUFACTURING SEGMENT AND MADE ADJUST MENT OF ` 3,09,21,351/-. WHILE DOING SO, HE APPLIED CUP METHO D AS MOST APPROPRIATE METHOD AS AGAINST TNMM ADOPTED BY THE A SSESSEE. HE ALSO REJECTED THE VARIOUS OBJECTIONS RAISED BY THE ASSES SEE ON THE GROUND THAT ALL THOSE OBJECTIONS WERE CONSIDERED BY THE TPO IN THE A.Y. 2002-03 TO 2004-05. SIMILARLY WHILE MAKING ADJUSTMENT OF ` 4,13,72,000/- IN THE DISTRIBUTION SEGMENT, THE TPO DECIDED TO COMPARE TH E INTERNAL MARGIN WHICH COULD PROVIDE BETTER COMPARISON RATHER THAN E XTERNAL COMPARABLE FULFORD (INDIA) LTD. 13 COMPANIES BECAUSE INTERNAL MARGIN ELIMINATE THE VAR IATION IN FUNCTIONING ASSETS PROFILES OF OTHER COMPANIES WHICH ARE TAKEN AS COMPARABLES. WE FIND THE ASSESSING OFFICER REJECTED THE VARIOUS ARG UMENTS PUT FORTH BY THE ASSESSEE AND FOLLOWED THE ORDER OF THE TPO AND MADE UPWARD ADJUSTMENT OF ` 7,22,93,351/- (I.E. ` 30921351+41372000) WHICH HAS BEEN UPHELD BY THE DRP. 17. IN OUR OPINION THE MATTER REQUIRES FRESH ADJUDI CATION AT THE LEVEL OF THE ASSESSING OFFICER. WE FIND THE DRP WHILE UPH OLDING THE ALP ADJUSTMENT OF ` 30,9,21,351/- ON ACCOUNT OF INTERNATIONAL TRANSACT ION IN RELATION TO APIS AT PARA 5.2 OF THE ORDER HAS OBSER VED AS UNDER :- ......THE ASSESSEE MAY JUSTIFIED IN CLAIMING THAT GENERIC OWN RESEARCHED MEDICINE SHOULD FETCH HIGH PROFIT MARGIN , MAY BE JUSTIFIABLE ARGUMENTS, BUT THE SAME HAS TO BE SUPPO RTED BY ADEQUATE FACT AND EACH AND EVERY MEDICINE HAS TO BE SHOWN WITH RESPECT TO BACK-UP OF RESEARCH AND DEVELOPMENT TO J USTIFY THE PROFIT MARGIN. SIMILARLY IN THE SAID PARAGRAPH THE DRP HAS FURTHER OBSERVED AS UNDER :- ..THE ASSESSEES CASE COULD HAVE BEEN OF MERIT IF SPECIFIC ACTIVE INGREDIENTS SHOULD HAVE BEEN SOLD TO INDIAN ENTITY AND SOLD TO ANY OTHER NOT RELATED ENTERPRISES WERE SHOWN TO BE EQUA L. IN ABSENCE OF ANY SUCH DATA BEING PROVIDED EITHER IN THE PROCE EDINGS OF TRANSFER PRICING OR DURING PROCEEDINGS BEFORE THE D RP, THERE IS NO JUSTIFICATION TO INTERFERE WITH THE ARMS LENGTH PR ICE AS DETERMINED BY THE TPO.. 18. IT IS AN UNDISPUTED FACT THAT SIMILAR ISSUE THA T AROSE IN THE PRECEEDING YEARS HAS NOT YET ATTAINED FINALITY AND IS PENDING BEFORE LEARNED CIT(A). IN THE IMPUGNED ASSESSMENT YEAR, TH E ASSESSEE CAME TO THE ITAT BECAUSE OF THE ORDER PASSED BY THE DRP. WE THEREFORE FIND FORCE IN THE ARGUMENTS OF LEARNED COUNSEL FOR THE ASSESSE E THAT THE TPO SHOULD APPLY HIS MIND AFRESH EVERY YEAR AND SHOULD NOT HAV E RELIED ON THE ORDERS OF THE TPO FOR THE PRECEEDING YEARS. SIMILAR LY THE SUBMISSION OF LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE- COMPANY ACTS AS A SECONDARY MANUFACTURER WHICH IS AKIN TO A VALUE ADD ED DISTRIBUTOR ALSO NEEDS VERIFICATION AT THE LEVEL OF THE ASSESSING OF FICER SINCE ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE THIS FACT W AS NOT BEFORE THE ASSESSING OFFICER OR TPO OR DRP. SINCE THE VARIOUS ARGUMENTS NOW FULFORD (INDIA) LTD. 14 PUTFORTH BY THE LEARNED COUNSEL FOR THE ASSESSEE RE QUIRES VERIFICATION AT THE LEVEL OF THE ASSESSING OFFICER, WE IN THE INTER EST OF JUSTICE DEEM IT PROPER TO RESTORE THE ISSUE RELATING TO ALP ADJUSTM ENT OF ` 3,09,21,351/- TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJU DICATION. 19. SO FAR AS THE UPWARD ADJUSTMENT OF ` 4,13,72,000/- IN RELATION TO INTERNATIONAL TRANSACTION OF IMPORT OF FORMULATIONS IS CONCERNED, THIS IN OUR OPINION ALSO REQUIRES FRESH ADJUDICATION AT THE LEVEL OF THE ASSESSING OFFICER IN VIEW OF VARIOUS DISTINGUISHING FEATURES BROUGHT BEFORE US BY LEARNED COUNSEL FOR THE ASSESSEE IN THE SYNOPSIS AN D THE LIST OF FRESH SEARCHES FOR THE SAME FINANCIAL YEAR. 20. CONSIDERING THE TOTALITY OF THE FACTS OF THE CA SE AND CONSIDERING THE FACT THAT VARIOUS SUBMISSIONS MADE BY THE LEARN ED COUNSEL FOR THE ASSESSEE NEED VERIFICATION AT THE LEVEL OF THE ASSE SSING OFFICER/TPO, THEREFORE, WE, IN THE INTEREST OF JUSTICE DEEM IT P ROPER TO RESTORE BOTH THE ISSUES TO THE FILE OF THE ASSESSING OFFICER FOR FRE SH ADJUDICATION. NEEDLESS TO SAY, THE ASSESSING OFFICER SHALL GIVE DUE OPPORT UNITY OF BEING HEARD TO THE ASSESSEE AND DECIDE THE ISSUE AFRESH AS PER LAW . WE HOLD AND DIRECT ACCORDINGLY. THE GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 21. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER HAS BEEN PRONOUNCED ON 4 TH DAY OF JULY, 2011. SD/- (D. MANMOHAN) VICE-PRESIDENT SD/- (R.K. PANDA) ACCOUNTAT MEMBER DATED : 4 TH JULY, 2011. COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. 4. THE CIT, CONCERNED. 5. THE DR CONCERNED, MUMBAI 6. GUARD FILE FULFORD (INDIA) LTD. 15 BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI PS