2014 (9) TMI 160 - AT - Income Tax

Transfer pricing adjustment sale of MycoMofteil to AE Held that - The assessee is engaged in the business of manufacturing and Consultancy of Biotechnology based products and bulk drugs - the assessee sold 7005 kgs. of Mycophenolate Mofetil to its AE situated in USA for ₹ 17,37,87,525.00 i.e. at an average rate of ₹ 24,809.00 per kg - The TPO observed that though the same products were sold to non-associate enterprises situated in India and in Mexico at a price lesser then the price at which it was sold to AE but those prices cannot be compared because those sales were in an uncontrolled market whereas sale to associated enterprise was in USA which is controlled market - the sale of Mycophenolate Mofetil to AE is at a price which is more than the price at which the same product was sold to non-associated enterprise situated in India and Mexico - the cost of Mycophenolate Mofetil is ₹ 18,840.00 per kg whereas the cost of Pencillin G Amidase Enzyme and Lovastatin is ₹ 6,011.00 per kg - as because the latter product is of lesser value - more profit in terms of percentage is earned on the latter product - the lower authorities have not examined the issue from this angle - No material has been brought by both the parties to show what was the profit earned in Pencillin G Amidase Enzyme and Lovastatin in its sale in India or other uncontrolled markets - no material has been brought by both the parties to show that sale of same products to associated enterprises situated in USA at the same profit margin at which disclosed during the year was accepted by the department in earlier years or succeeding years thus, the matter is to be remitted back to the TO for fresh adjudication Decided in favour of assessee. Disallowance u/s 14A r.w. Rule 8D Held that - The AO made disallowance of interest expenditure and administrative expenses for earning interest free dividend income of assessee by invoking the provisions of section 14A of the Act which was confirmed in appeal by the DRP following the decision in CIT Vs. Hitachi Home and Life Solutions (I) Ltd. 2013 (7) TMI 359 - GUJARAT HIGH COURT - where the assessee s interest free funds exceed investment made for earning dividend income, disallowance u/s. 14A was not justified disallowance of interest expenses deleted Decided partly in favour of assessee.

Summary

Issues Involved:
1. Depreciation on electric installation.
2. Transfer pricing adjustment for the sale of MycoMofteil to Associated Enterprise.
3. Late payment of employee's contribution to the provident fund.
4. Disallowance under section 14A read with rule 8D.

Detailed Analysis:

1. Depreciation on Electric Installation:
The appellant claimed depreciation on electric installation at 15%, which was restricted to 10% by the DRP and AO, resulting in an addition of Rs. 1,05,437/-. The appellant did not press this ground of appeal, and it was dismissed as not pressed.

2. Transfer Pricing Adjustment for the Sale of MycoMofteil to Associated Enterprise:
The core issue was the DRP's confirmation of the TPO's transfer pricing adjustment of Rs. 9,84,14,422/- related to the sale of MycoMofteil to an Associated Enterprise (AE). The TPO determined the Arms Length Price (ALP) using the Cost Plus Method (CPM) and found discrepancies in the benchmarking of international transactions. The TPO observed that the MycoMofteil sold to AE was at a lower price compared to sales to non-AE in the USA, leading to the adjustment.

The DRP upheld the TPO's order, emphasizing that the US market is a regulated market with higher price realizations compared to non-regulated markets like India and Mexico. The DRP rejected the appellant's argument that product similarity should be prioritized over geographical differences. The DRP also noted that the appellant had not provided evidence that US regulations affected the pricing of drugs sold in India.

The appellant argued that the TPO erroneously rejected internal comparables and compared profitability across different products, which was fundamentally flawed. The appellant cited case laws supporting the argument that geographical differences can be comparable under certain conditions and that different products should not be compared under CPM.

The tribunal noted that the lower authorities did not examine the issue from the angle of cost differences between the products and that no material was provided to show the profit earned in uncontrolled markets. The tribunal restored the issue to the TPO for fresh adjudication, emphasizing the need for consistency and proper examination of facts.

3. Late Payment of Employee's Contribution to the Provident Fund:
The appellant did not press this ground of appeal, and it was dismissed as not pressed.

4. Disallowance under Section 14A Read with Rule 8D:
The AO disallowed Rs. 8,86,820/- under section 14A, comprising Rs. 5,85,981/- for interest expenditure and Rs. 3,00,839/- for administrative expenses. The AO observed that the appellant had claimed exempt dividend income of Rs. 17,28,619/- without offering any expenses for disallowance. The DRP confirmed the AO's action, noting that interest-bearing funds were used for earning dividend income.

The appellant argued that it had sufficient interest-free funds (Rs. 6,44,02,630/-) to cover the investments (Rs. 1,14,36,151/-) and cited case laws supporting that disallowance under section 14A was not justified when interest-free funds exceeded the investments. The tribunal agreed with the appellant, deleting the disallowance of interest expenditure but confirming the administrative expenses disallowance due to lack of submissions from the appellant.

Conclusion:
The appeal was partly allowed, with the transfer pricing issue remanded for fresh adjudication and partial relief granted on the disallowance under section 14A. The other grounds were dismissed as not pressed.