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TMI Blog2014 (1) TMI 1288X X X X Extracts X X X X X X X X Extracts X X X X ..... n the product sold in such trading activity though the assessee initially incurred the expenditure to undertake activity of advertisement, shipment, insurance and tours and also used its assets /rights in the shape of permission and registration possess by it – all the expenses incurred by the assessee have been reimbursed to it by GPL - it cannot be said that the assessee did not employ any assets for such export activity undertaken by it - CIT(A) has rightly held that the three comparables considered by TPO and taking operating profit margin of 11.94% is not correct as those comparable companies/entities are in the manufacturing of pharmaceutical products and are also in the sales/ export of the same whereas the assessee is in a non-manufacturing export activities - the additional evidence and to seek remand report from the AO in respect of the three comparables entities furnished before him by the assessee. The due adjustment of the working capital assumed by the assessee as well as the comparable entities are to be considered for determining the ALP of the transaction - the assessee had not assumed any risk in respect of marketing of the product, realization of sales proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of exports to GIR. 6. On the facts and circumstances of the case, and in law, the learned CIT (Appeals) has erred in holding that the appellant is subject to the Provisions of Chapter X of the I.T. Act 1961. 7. Without prejudice to any of the grounds raised above, the learned CIT (Appeals) has erred in excluding Shelesha Pharmachem Private Limited from the set of comparables for determination of the mean operating margin of comparable entities." 3. Subsequently, the assessee has filed additional grounds of appeal on 17-12-2012 and 1-1-2013 as under: "Additional Ground taken on 17-12-2012 : 1. The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in not adopting Comparable Uncontrolled Price Method (CUP) instead of Transaction Net Margin Method (TNMM) for determination of Arm's Length Price (ALP) of the international transaction with the Associated Enterprises (AE's). "Additional Ground taken on 01-01-2013 : 1. The learned CIT (A) has erred in law and on facts in not granting the benefit of adjustment in respect of working capital requirement and other differences while computing the margin under the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome declaring income "Zero" . The AO has stated that the case of the assessee was selected for scrutiny and on perusal of 3CEB, it is seen that during the relevant assessment year the assessee entered into an international transaction with its Associated Enterprises exceeding the value of international transaction of Rs.15,00,00,000/-. Hence reference u/s 92CA(2) of the Income-tax Act, 1961 (the Act) was made to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) as per Boards Instruction. 9. The TPO vide its order dated 28-10-2010 determined the ALP for adjustment amounting to Rs.2,92,23,457/-. Since the adjustment was proposed by the TPO, a show-cause letter was issued to the assessee as to why the ALP as determined by the TPO should not be made to the total income of the assessee. The assessee filed its written submissions dated 15-11-2010 which the AO has stated at pages 2 to 7 of the assessment order. We consider it prudent to state the relevant extract of the said written submission. 9.1 That the assessee company; M/s Glenmark Pharmaceuticals Ltd. (hereinafter in short referred to as GPL) and Glenmark Impex Russia (hereinafter in short refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 995.22 Sales Promotion expenses 9531. 507.78 Tour Expenses 13,14,525.29 9.2 On behalf of the assessee, it was contended that purchase cost of the assessee, under the agreement, is equal to the final export prices to GIR, it is obvious that GIR will not pay anything over and above such export to the assessee. In other words, the assessee cannot recover any profit margin from GIR because purchase cost of the assessee is fixed under the agreement as equal to the export price of GIR. GIR would pay only the sales consideration equal to export price, pre-decided with GPL and nothing more to the assessee. Hence, the assessee was only assisting GPL in exporting to Russia and the assessee did not on its own exported to GIR. It was also stated that reimbursement of above mentioned expenses shows that the GPL carried out the following functions : (i) Marketing; (ii) Sales; (iii) Shipping; (iv) Insurance It was further contended that reimbursement of above mentioned expenses also shows that GPL assumed the following risks : (i) Market risk (GPL supplies to the assessee at the export price. So, any fall in export pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributor or exporter of goods, the assessee should have recovered appropriate profits commensurate with the risks borne by it. In absence of any such risk born by the assessee, it cannot be expected to recover any profit from export to Russia. The export price of products exported to GIR was pre-decided before GPL supplied such products to the assessee. Hence, product cost of exported product in the hands of the assessee was equal to the export price on which such products were exported to GIR. The assessee also explained that other companies which export pharmaceutical products out of the India are not comparable to the assessee because of following functional differences between the typical exporter/distributor and the assessee (which only acted as an intermediary or a channel entity) S.No. Characteristics GEL Typical Exporters 1 Does the entity Act as an intermediary or channel entity Acts as an intermediary or channel entity for exports of GPL Do not Act as intermediary or channel entity 2 Does the entity exports on behalf of some one or does it exports on its own behalf Exports on behalf of GPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating margin earned by GPL from export to Russia is 51.27% as against the operating margin of 11.94% earned by comparable companies. The said companies are listed by the TPO at page 5 of his order as under : S.No. Company Name OM(%) 1 Dr.Reddy Laboratories Ltd. 5.41% 2 Ipca Laboratories Ltd. 13.28% 3 Strides Acrolabs Limited 17.14% Mean 11.94% 9.7 In view of above, it was contended that since operating margin of 51.27% declared by GPL from export to GIR is much higher than the operating margin of the comparable companies, the export sale price booked by the assessee company might be considered at Arm's Length and no adjustment to the export sale price booked by the assessee company is proposed. However, the TPO after considering submissions of the assessee and abovementioned three comparable companies, has stated that the assessee has entered into agreement with GPL and assessee has also entered into agreement with GIR relating to international transaction. That as per the agreement the risk of quality, packing, marking, quality of the goods, insurance of the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it can be seen that the assessee has undertaken the activities of advertisement, shipment for which the concerned charges has been paid, that assessee has undertaken the insurance activities, has rented office and has incurred office expenses and further has undertaken tours and sales promotion functions. It indicates that these expenses have been incurred by the assessee company which are indicative of the undertaking of functions and risks pertaining to the export activity of the assessee. It is a different matter altogether that these expenses have been reimbursed by GPL to the assessee but there is no denial to the fact that these functions were undertaken by the assessee. That ld. CIT(A) has stated that reimbursement of expenses done by the GPL to the assessee, which is on account of various functions, that assessee has performed, is without any mark-up. The ld. CIT(A) further stated that the assessee holds the permission and rights to export pharmaceutical product to Russia. Therefore, the assessee did possess assets in the shape of such permission and right for the export, besides, having the assets in the shape of office which it is maintaining and the personnel who are w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machem P. Ltd. 2005-06 31.89 3.39 11.2 The ld. CIT(A) has stated that these are additional evidences and accordingly forwarded the details to the TPO to give his remand report. It is observed that TPO submitted remand report. The ld. CIT(A) has stated that it is seen from the remand report that nothing on merits of comparable entities have been mentioned except brief factual narration of what was done by the assessee in its transfer price study report and has further mentioned that in the case of Shelesha Pharmachem Pvt. Ltd the data for FY 2006-07 is not available. The ld. CIT(A) has stated that the assessee in his submissions has mentioned that while doing the bench mark, the TPO, if had not accepted the proposition of the bench marking done by the assessee should have given show-cause notice along with the proposition of comparables entities proposed to be adopted. It is further stated that had opportunity been given, the assessee would have submitted such non-manufacturing export entities as comparable on without prejudice basis. That the TPO as per provisions of section 92C(3) of the Act was required to benchmark the international transaction on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transactions in question. Therefore, ld.CIT(A) has directed the TPO/AO to work out the quantum of adjustment to arrive at ALP accordingly of the impugned transaction. Hence the assessee as well as the department are in appeals before the Tribunal. 12. During the course of hearing, ld. AR after summarising the facts whereby the assessee had assisted GPL to export pharmaceutical products in Russia to GIR submitted that TPO considered three companies' analysis, the details of which are mentioned in paras 9.4 to 9.6 of this order, are into manufacturing, sales and export of pharmaceutical products and whereas the assessee-company is a non-manufacturer. He submitted that assessee company only assisted its parent company GPL to effect export of pharmaceutical products to GIR. That it required registration and permission to supply pharmaceuticals products in Russia which were not available with GPL, but the same were available with the assessee. He submitted that in the Transfer Pricing study, the assessee-company stated that the operating margin earned by GPL from export to Russia was 51.27% as against operating margin of 11.94% earned by the three comparable companies who were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the price in the open market; therefore, the net profit margin of the business segment of the assessee in that case has to be considered while determining the Arm's length operating margin of the comparables. The ld. AR submitted that the matter may be restored to consider the ALP after considering all the above three new comparables, submitted before the First Appellate Authority and due adjustment on account of working capital and the other risks be considered while determining the profit margin in respect of the transaction under consideration. 13. On the other hand, the ld. DR submitted that it is a fact that the three comparables as considered by the TPO in his order dated 28-10-2010, mentioned in paragraph 9.6 of this order, are not comparables with the assessee but the said comparables were given by the assessee in its Transfer Price analysis and same were considered by the TPO. The ld. DR further submitted that the assessee furnished three new comparables before the First Appellate Authority. He submitted that the ld. CIT(A) has rightly not considered Shelesha Pharmachem Pvt.Ltd., as financial result thereof were not available in public domain. He submitted that onus is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot registered and did not have required permission to supply pharmaceutical products to Russia, but the same were available with the assessee company. It is not in dispute that GPL owns intellectual rights of pharmaceutical products to export to GIR. There is also no dispute to the facts that the products were shipped to GIR in the same packing which was originally done by GPL. However, there is no dispute to the fact also that the assessee also entered into an agreement with GIR in terms of which the assessee provided services of shipping the GPL pharmaceutical product to GIR in Russia. Therefore, TPO considered that as per the agreement, the risk of quality, packing, marking, quality of the goods, insurance of the goods etc. lie with the assessee. Hence, the assessee owned up all risks under the said agreement. In view of above, we observe, that TPO proceeded to make profit margin of three companies and arrived at mean of the profit margin at 11.94%, the details of which are given hereinabove in paras 9.6 and 9.7 hereinabove. Thus, the TPO suggested the bench markup on the cost of the assessee for the above transactions and suggested ALP adjustment of Rs.2,92,23,457/-. It is a fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the course of hearing ld.AR submitted before us that exclusion of third comparable company viz. Shelesha Pharmachem Pvt.Ltd is not justified as the assessee furnished requisite data viz balance sheet, Profit and Loss Account and operating profit margin for Financial Year 2006-07 and had not merely given the name of the said comparable company and not put onus on the TPO to find out other particulars. During the course of hearing, ld. AR submitted that assessee furnished copy of Balance Sheet, Profit and Loss Account to CIT(A) and whereas the ld. DR supported the order of the ld. CIT(A) in excluding the said company viz. Shelesha Pharmachem Pvt.Ltd on the ground that the full details of the current Financial Year were not made available and TPO is not bound to gather the information at the time of making his studies. He submitted that onus is on the assessee to furnish the results of the comparables which the assessee failed to do so. The ld. DR, substantiated his submissions by referring Rule 10(B)(e)(4) of the Rules. Considering the above facts and the facts that ld. DR has agreed to restore the matter to AO to examine ALP afresh after giving due adjustments of working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to ALP in Transfer Pricing. The above observations of the Tribunal has been substantiated by relying on the earlier decision of the Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 and stated working capital adjustments constitutes one which is required to be adjusted for the purpose of establishing the ALP. It is relevant to state para 27 of the said order which reads as under : "It is a simple principle of economics that the greater the risk, the greater the expected return (compensation). If there are material and significant differences in the risk involved, then the comparables identified are not correct as appropriate adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered. However, it can always be shown on the given facts of the case that comparables found are similar or almost similar to the controlled transaction and no adjustments are needed. It is useful to see the level of intangible assets in comparison to an appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment has been made by Finance Act, 2012 by inserting Sub-section (2A) to section 92C(2) with retrospective effect from 1-4-2002 and if the arithmetic mean of the profit margin of the comparable is beyond 5%, the assessee is not entitled for the said 5% adjustment as it is not a standard deduction. 21. Since we have held hereinabove to remit the matter to the file of the AO to make a afresh study by considering the comparables as stated hereinabove to arrive at ALP of the transaction under consideration and give due adjustments as per Rule 10B of the Rules, we do not consider it necessary to decide this issue as to whether the ld. CIT(A) has given direction to allow 5% deduction to the assessee correctly or not. We may state that AO will decide the issue of adjustment on the basis of the fresh analysis and will make the adjustment as per law as applicable to the assessment year under consideration. Hence, Ground Nos.2 and 3 of the appeal taken by the department are allowed for statistical purposes. 22. In the result, appeal of the assessee as well as of the department are allowed in part. Order pronounced in the open court on 26 th July,2013 - - TaxTMI - TMITax - Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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