2018 (6) TMI 468 - AT - Income Tax

TPA - selection of comparable for determining the ALP - import of finished formulations from its AE - these formulations are in the nature of super speciality and temperature sensitive products for treating infertility, bed wetting etc.. - providing product developmental services on contract basis for its AE - extraordinary event. Comparable Celestial Labs Ltd. - Held that - impact of the expenses incurred in connection with IPO as well interest income earned on escrow account wherein proceeds of IPO were kept shall be excluded while computing PLI of the said company for benchmarking international transactions of the assessee with its AE, as it is clearly visible that this extra-ordinary event of IPO happened in the relevant period under consideration before us. Thus, there is a need to further analyse the financial statements of Celestial Labs Limited. Comparable Tonira Pharma Ltd. - Held that - The setting up of ETP/Waste disposal plants are in line with State Policy and this is not a valid reason for discarding comparable. However, perusal of the Audited Financial Statements for the year ended 31-03-2008 which is placed in file reveals that the said company has two units namely Ankleshwar unit and Nandesari unit. The Ankleshwar unit of Tonira Pharma Limited was hit by an extra-ordinary event of attachment of its inventory by the Excise and Custom Departments The Excise and Custom Department disallowed the clearances of finished goods from the said company s Tonira Pharma s Ankleshwar Plant due to litigation with Excise and Custom Department. - matter need to be restored to the file of the AO/TPO for fresh adjudication of this issue of selection of Tonira Pharma Limited as comparable for computing ALP of the international transactions entered into by the assessee with its AE of product development activity is concerned.

Summary

Issues Involved:
1. Exclusion of Celestial Labs Ltd. from the comparables for determining the ALP.
2. Inclusion of Tonira Pharma Ltd. in the final set of comparables for determining the ALP.

Issue-wise Detailed Analysis:

1. Exclusion of Celestial Labs Ltd. from the comparables for determining the ALP:

The Revenue's primary contention was that the CIT(A) erred in excluding Celestial Labs Ltd. from the comparables on the grounds of abnormal profit levels and different functional profiles. The CIT(A) had directed the exclusion of Celestial Labs Ltd., noting that the company reported an abnormal profit margin of 87.94% and was involved in different functional activities compared to the assessee. The TPO had included Celestial Labs Ltd. as a comparable, asserting that it was engaged in clinical research, which aligned with the assessee's product development activities.

The Tribunal observed that the financial data of Celestial Labs Ltd. indicated significant profits in the years preceding the assessment year, but a deeper analysis of the financial statements was necessary to understand the reasons behind the abnormal profits. The Tribunal noted that the company had undergone an Initial Public Offering (IPO) during the relevant period, which could have influenced its profitability. The Tribunal directed the AO/TPO to re-examine the financial statements of Celestial Labs Ltd., excluding the impact of the IPO and other extraordinary events, to determine its appropriateness as a comparable.

2. Inclusion of Tonira Pharma Ltd. in the final set of comparables for determining the ALP:

The Revenue challenged the CIT(A)'s decision to include Tonira Pharma Ltd. as a comparable, arguing that it was a loss-making company with a negative PLI of (-)16.90%. The CIT(A) had directed the inclusion of Tonira Pharma Ltd., stating that the presence of waste disposal systems was not a valid reason for exclusion and that the company was otherwise functionally comparable.

The Tribunal noted that Tonira Pharma Ltd. had faced extraordinary events, including the attachment of its inventory by the Excise and Customs Department, which affected its profitability. The Tribunal emphasized that the impact of such extraordinary events should be excluded when computing the PLI for benchmarking purposes. The Tribunal directed the AO/TPO to re-evaluate the financial statements of Tonira Pharma Ltd., excluding the impact of the extraordinary events, to determine its suitability as a comparable.

Conclusion:

The Tribunal set aside the matter to the AO/TPO for a fresh adjudication on both issues. The AO/TPO was directed to provide the assessee with a proper opportunity to present evidence and arguments. The Tribunal emphasized the need for a detailed analysis of the financial statements of both Celestial Labs Ltd. and Tonira Pharma Ltd., excluding the impact of extraordinary events, to accurately determine their comparability for computing the ALP of the international transactions. The appeal of the Revenue was allowed for statistical purposes.