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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 ..... ive at ALP. 3. On the facts and circumstances of the case, and in law, the learned CIT (Appeals) has erred in holding that the appellant's functional profile is that of a non-manufacturing exporter. 4. On the facts and circumstances of the case, and in law, the learned CIT (appeals) has erred in not accepting the fact that the appellant acted as only channel or pass-through entity in the transaction of exports by Glenmark Pharmaceuticals Limited (GPL) to Glenmark lmpex LLC Russia (GIR). 5. On the facts and circumstances of the case, and in law, the learned CIT (Appeals) has erred in holding that the appellant undertook International transaction in the 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 me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12-2012 as mentioned above are not pressed for. 6. In view of above, the grounds of the assessee's appeal viz Grounds No.1,3,4,5,6 and the additional Ground taken on 17-12-2012 as mentioned above are dismissed. 7. The ld. AR submitted that remaining grounds of appeal i.e. Ground No.2 read with Ground No.7 and also additional ground of appeal filed on 1-1-2013, as mentioned hereinabove relate to only one issue i.e. Transfer Pricing Adjustment. The ld. AR also submitted that Ground No.1 of the appeal taken by the department is connected with Ground Nos. 2 and 7 of the appeal of the assessee. Both the representatives of the parties submitted that the above grounds can be dispose of together. 8. In the light of above, we consider necessary to state the relevant facts. That the assessee company is engaged in the business of exporting Pharmaceutical Products. The assessee filed its return of income 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 inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IR; (iii) that assessee shall arrange to ship GPL the pharmaceutical products to Russia; (iv) that GPL shall reimburse the assessee, the expenses incurred by the assessee in respect of aforesaid transitions In terms of the aforesaid agreement, GPL supplied its pharmaceutical products to the assessee at the same rate as the final export price to GIR and also reimbursed all costs incurred by the assessee in course of exports to GIR. It is relevant to state that the major expenses incurred by the assessee and reimbursed by the GPL are as under : Item of expenses Amount (Rs.) Advertisement 1,70,589.00 Depreciation 1, 27,552.00 Exchange Rate Loss 1,34,94,446.00 Freight charges 1,45,69,432.50 Insurance Premium 2,10,000.00 Office expenses 8,09,910.01 Rental Office Premises 17,39,995.22 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, GPL also exported to independent parties in Ukraine, Tajikstan and other countries, the same products which were exported by it through the assessee to GIR, at price lesser than the price charged from GIR. Hence, the price on which pharmaceuticals products were sold to GIR by GPL through the assessee were at ALP. However, TPO asked the assessee to show cause as to why proper adjustment should not be made to export value of the transaction with GIR by applying average margin of comparable companies. 9.4 In response to said show-cause notice, the assessee explained before the TPO that the assessee could not be categorized as an exporter to GIR. All costs and risks in respect of export to GIR were borne by GPL and the assessee only assisted GPL in exports. That GPL reimbursed all costs to the assessee. That in absence of any costs or risks borne by the assessee, it could not be expected to realize any profits from the activity of export to GIR. Had the assessee borne entrepreneurial risks ordinarily borne by a distributor 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 ..... 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Income -tax Rules, 1962, the comparability of international transaction with uncontrolled transaction should be Judged with reference to the following: (i) specific characteristic of the property transfer to services provided in either transaction; and (ii) the functions performed and the risks assumed by the respective parties to the transaction, In view of said provisions of Rule 10B(2) of the Income-tax Rules, due to vast difference in nature of services provided by the assessee to GPL, and in the functions performed and the risk assumed by the assessee as compared to other companies which exported pharmaceutical products out of India, the assessee company can not be compared to such companies. 9.6 The assessee during the course of proceedings before TPO, referred the following three comparable companies and stated that the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufactured by GPL have been exported to GIR in Russia. The ld. CIT(A) has stated that the assessee had incurred the expenditure under following heads : Item of expenses Amount (Rs.) Advertisement 1,70,589.00 Depreciation 1, 27,552.00 Exchange Rate Loss 1,34,94,446.00 Freight charges 1,45,69,432.50 Insurance Premium 2,10,000.00 Office expenses 8,09,910.01 Rental Office Premises 17,39,995.22 Sales Promotion expenses 9531. 507.78 Tour Expenses 13,14,525.29 Total 3,00,96,454.80 The ld. CIT(A) has stated that from the above table of expenses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xistence. In view of the above, during the course of appellate proceedings before ld. CIT(A), the assessee submitted a set of three new comparables which are non-manufacturing export entities. The details of which are stated by the ld. CIT(A) at page 9 of the impugned order as under : S.No. Name F.Y. Gross sales in crores Operating profits % 1 Lyka Exports Ltd. 2006-07 6.91 4.34 2 Megafine Pharmachem (P.) Ltd. 2006-07 35.83 9.99 3 Shelesha Pharmachem 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir arithmetic means of operating profit as profit level indicator (PLI) for arriving at ALP of the international transaction under consideration. The ld. CIT(A) has stated that Transaction Net Margin Method (TNMM) is the most appropriate method and with arithmetic mean of their operating margins as the margin to arrive at the ALP of the international transaction to work out the quantum of adjustment to arrive of ALP of the international 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 pharmac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing reliance on the decision of the Pune Bench of the Tribunal in the case of Demag Cranes and Components (India) (P.) Ltd. v. Dy. CIT in ITA No.120/PN/2011 (AY-2006-07) dated 4.1.2012 submitted that the Tribunal has held that it is the duty of the TPO to apply the provisions of Rule 10B(1)(e) of the Income-tax Rules to establish the ALP in relation to international transaction as per TNMM and working capital is a factor which influence 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 comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export price to GIR and also reimbursed cost incurred by the assessee. The details of the said expenses are mentioned hereinabove in para 9.1 hereinabove. The assessee contended that it acted only as a conduit for export of pharmaceutical products of GPL to GIR and its role was of only risk free services provided to GPL in the transactions of export by GPL to GIR because GPL could not export pharmaceutical product to GIR as GPL was not 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. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les entities furnished before him by the assessee, the details of which are given in paragraph 11.1 of this order. 15. We observe that the ld. CIT(A) has finally considered only two comparables companies viz. Lyka Exports Ltd. and Megafine Pharmachem (P.) Ltd. and has directed AO/TPO to work out the quantum of adjustment by considering their operating profit margin to arrive at ALP of the international transaction in question. During 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is further stated that if these differences are not eliminated or removed, the comparison becomes unsound and unreliable. The Pune Bench of the Tribunal in the case of Demag Cranes and Components (India) (P.) Ltd. (supra), has stated in paragraph 22 that working capital constitutes an item of difference in matters of computation of arm's length price/net margin and it constitutes a subject matter of adjustment in the matters relating 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19. In respect of Ground Nos. 2 and 3 of the appeal taken by the department the issue is as to whether assessee is entitled to get standard deduction from profit margin determined by TPO of +/- 5% as per the proviso to section 92C(2) of the Act , even if, difference of ALP of the international transaction undertaken by the assessee falls beyond +/- 5% of the price of the international transaction after the amendment made by the Finance Act, 2012. 20. At the time of hearing, it was contended by ld.DR that the amendment 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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