2016 (1) TMI 1281 - AT - Income Tax

Transfer pricing adjustment - appropriateness of the comparables selected by the assessee - Held that - The assessee company involved in manufacture of APIs/Bulk Drugs, the comparable companies involved in similar activity only should have been taken as comparable. Transactions between the assessee and Matrix Laboratories Ltd. as deemed international transactions - Held that - Taking due note of the decisions of the coordinate benches of this Tribunal in assessee s own case for the assessment years 2006-07 and 2009-10, it is held for the assessment year under consideration as well that the transactions between the assessee and the Matrix Laboratories are not international transactions and the same are not amenable to transfer pricing adjustment under S.92B of the Act. Consequently, grounds of the assessee are treated as allowed. Whether the rent realised on lease of the building and equipment can be considered as operating income of the assessee? - Held that - Though the assessee submitted that the building and the equipment were given for carrying out the business operations and sales and boost the assessee s business income, assessee has not filed copies of agreement between the assessee and the Matrix Laboratories in India or the services provided to the lessee of the building and equipment. Therefore, it is not verifiable as to the nature of the income derived by the assessee by leasing out the building or equipment. Unless and until the property is let out for the purpose of assessee s business, the same cannot be treated as business income or operating income of the assessee. Even before us, the assessee has not been able to produce any evidence in support of its contention that the income from letting out of the building and equipment is operating income. In view of the same, we do not see any reason to interfere with the orders of the Assessing Officer/DRP on this issue. Transactions with non-AEs - Held that - TPO has taken the total turnover including transactions with non-AE companies, for the purpose of determination of ALP. It has been held in a catena of cases that it is only the transactions or the turnover involved in the transactions with AEs alone, which have to be considered for computation of ALP. The Assessing Officer/TPO are accordingly directed to take into account the turnover of the transactions with AE only for the purpose of computing the ALP. Accordingly, grounds treated as allowed for statistical purposes.

Issues Involved:
1. Validity of the Assessing Officer's order under Sections 143(3), 144C, and 92CA of the Income Tax Act, 1961.
2. Transfer Pricing Officer's (TPO) adjustments and methodology.
3. Classification of transactions with Matrix Laboratories Ltd. as deemed international transactions.
4. Disallowance of depreciation on intangible assets.
5. Disallowance of management fees and R&D development charges.
6. Inclusion of rent from leasing in operating income.
7. Computation of Arm's Length Price (ALP) for transactions with Associated Enterprises (AEs) and non-AEs.

Detailed Analysis:

1. Validity of the Assessing Officer's Order:
The assessee challenged the validity of the final assessment order dated 28.10.2011 passed under Sections 143(3), 144C, and 92CA of the Income Tax Act, 1961. The Dispute Resolution Panel (DRP) confirmed the TPO's adjustments, which led to the appeal.

2. Transfer Pricing Officer's Adjustments and Methodology:
The TPO reduced the operating margin by Rs. 54,13,134, excluding the rent realized from leasing factory buildings and equipment from operating income. The TPO also made an adjustment of Rs. 11,45,00,000 under Section 92CA concerning sales to AEs, determining the arm's length price (ALP) with operating profit margins at 25.43% (OP/operating cost) and 19.11% (OP/operating revenue). The TPO rejected the assessee's comparables and conducted his own search, applying various filters to select final comparables. The Tribunal directed the TPO to recompute margins for Suven Life Sciences Ltd. and Natco Pharma Ltd. based on segmental results of bulk drugs only.

3. Classification of Transactions with Matrix Laboratories Ltd. as Deemed International Transactions:
The TPO treated transactions with Matrix Laboratories Ltd. as deemed international transactions under Section 92B(2) due to a prior agreement involving Aspen Pharmacare Holdings Ltd. The Tribunal, relying on its earlier decisions for assessment years 2006-07 and 2009-10, held that transactions between the assessee and Matrix Laboratories are not international transactions as neither party is a non-resident. Consequently, grounds No.5 to 7 of the assessee were allowed.

4. Disallowance of Depreciation on Intangible Assets:
The TPO disallowed depreciation of Rs. 10,64,50,499 on intangible assets purchased in the preceding assessment year. The Tribunal did not specifically address this issue separately but impliedly included it in the overall adjustments.

5. Disallowance of Management Fees and R&D Development Charges:
The TPO disallowed management fees and R&D development charges of Rs. 1,87,10,408 and reimbursement of expenses of Rs. 54,27,702, applying the Comparable Uncontrolled Price (CUP) method and determining the ALP of such payments at NIL. The Tribunal did not specifically address this issue separately but impliedly included it in the overall adjustments.

6. Inclusion of Rent from Leasing in Operating Income:
The TPO excluded rent from leasing buildings and equipment from operating income, considering it non-operating income. The Tribunal upheld this exclusion, stating that the assessee failed to provide evidence that the income from leasing was related to its business operations.

7. Computation of Arm's Length Price (ALP) for Transactions with AEs and Non-AEs:
The TPO included total turnover, including transactions with non-AEs, for determining the ALP. The Tribunal directed the TPO to consider only the turnover of transactions with AEs for computing the ALP, allowing grounds No.3 and 4 for statistical purposes.

Conclusion:
The Tribunal partly allowed the assessee's appeal (ITA No.2181/Hyd/2011) by remitting the issue of excluding Suven Life and Natco Pharma from the final list of comparables back to the TPO for redetermination. The appeal (ITA No.312/Hyd/2012) was dismissed as infructuous. The Tribunal upheld the TPO's exclusion of rental income from operating income and directed the TPO to consider only AE transactions for ALP computation. The Tribunal also held that transactions with Matrix Laboratories were not international transactions, allowing related grounds.

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