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TMI Blog2014 (9) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... fit 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 justifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 144C(2)(b) of Income Tax Act 1961 on 17.04.2013. 7. The facts of the case are that the assessee is engaged in manufacturing of pharmaceutical and biotechnological products. The assessee company has undertaken following international transactions during the year under consideration. 8. For the purpose of benchmarking the aforesaid international transactions, Cost Plus method (CPM) was adopted as the most appropriate method for all the transactions. The transactions in respect of sale of products have been compared with the external comparables for which the details were provided in annexure-3 of written submission dated 10th January 2011 to the TPO and on this basis the conclusion was arrived at that the inter-company transactions between Concord Biotech and its associated enterprises (hereinafter also referred as AE) are consistent with the arm's length standard from the Indian Transfer Pricing perspective. 9. The TPO called for invoice-wise details of export sale to AE, non- AE, and calculations of cost and margins earned thereon which formed the basis for cost plus method applied by the assessee. After examining the details submitted, the benchmarking done i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The sale is in the USA that is a regulated market posing equal regulations for the drugs sold in the states. 3. The comparable sales are in the same geographical area representing same demographic statistics. 4. The drugs compared here are in comparable quantities (7005 kgs and 4002 kgs respectively). 5. The drugs compared here are commercial quantities and not for development quantity. On the basis of above discussion, it is seen that in the sale of other products in Non AEs in USA, the company is earning 106.25% profit over cost in comparison to sale of Myco Mofteil (31.68%) profit over total cost), then why not a profit/total cost ratio of 106.25% be adopted for the sale of Myco Mofteil. The sale of other products (Lovastatin) in Non AEs in USA, the company is earning 106.25% profit over cost in comparison to sale of Mycophenolate Mofteil (31.68%) profit over total cost, therefore a profit /total cost ratio of 106.25% treating the margin of other products (Lovastatin) sold to Non AE as arm's length price is adopted for the sale of Mycophenolate Myco Mofteil. (It is worthwhile to mention here that 106% margin on cost on ANDA drugs manufactured in India is reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions are more important. The TPO therefore has compared two different products but sold in the same market whereas the assessee is asking for comparing the same product but sold in different markets. 8. The assessee has relied heavily on the decision of jurisdictional Tribunal in the case of Mission Pharma. We have gone through this decision and we find that the decision does not support the assessee s case. The assessee in that case was a limited risk bearer trader of goods. The facts are discussed on page 74 of the Tribunal's order. The Tribunal actually in that order accepted that in normal circumstances geography does make a difference and an exporter's profits can not be compared with profit from domestic sales. The Tribunal however held that in the case of Mission Pharma there were exceptional circumstances which denied the assessee the benefits of a normal exporter. In the present case there are no such exceptional circumstances prevailing and hence as per the ITAT we must hold that profitability in domestic market would be significantly different from the same in export market. This impliedly means that prices in domestic markets would be much lower than in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows: In the above captioned appeal, assessee challenged order of DRP erred in upholding the Action of TPO/AO in making transfer pricing adjustment of ₹ 9,84,12,422/-. The assessee makes two primary submissions. 1. The TPO has erroneously rejected internal comparable used by the assessee. During the year under consideration, the assessee has sold bulk drug being Mycophenolate Mofetil in following particulars: As per assessee as the product sold to associated enterprise (AE) is at a price higher than the one sold in India to Non AE (Cadila Health Care Ltd. hereinafter referred to as 'Cadila'), the international transaction is at Arm's Length Price. However Ld. TPO/AO/DRP held that the price at which the said drug was sold in USA to the A.E. is not comparable with the price at which the said drug is sold in India. At the outset the Appellant submits that in as much as the TPO did not find any error in the TP records or the TP working of the Appellant, no adjustment is permissible as per the 2 CBDT circulars referred to in the judgment of Hon ble Delhi High Court in the case of Li Fung India (P) Ltd. (223 Taxman 368). More so when on the same fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much comparable in certain conditions irrespective of geographical differences. 1. Wrigley India (P) Ltd. (Relevant Para 19-20, page: 63-65 of compilation of orders) 2. Bharti Airtel Limited (Relevant para 48-51 page: 121-122 of compilation of orders) 3. Mission Pharma Logistics India (P) Ltd (Relevant para: 26 page 563-566 of paperbook-II) B. The TPO has compared the profitability of the assessee's sale transaction (Mycophenolate Mofetil) with the sale of a completely different product (Pencilin G Amidase Enzyme and Lovastatin) Having held that the sale of the said drug to Cadila would not be a comparable transaction, the TPO then proceeded to compare the profitability of the sales between two completely different products sold by assessee; one (Mycophenolate Mofetil) to AE and second (Pencilin G Amidase Enzyme and Lovastatin) to non AEs in US. TPO held that as the assessee has earned 106.25% profit in Pencilin G Amidase Enzyme and Lovastatin, it ought to have earned same percentage profit while selling Mycophenolate Mofetil as well. This approach of the TPO is fundamentally erroneous for following reasons. 1. The two products are entirely different products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price at which it was sold to associated enterprise 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. According to the TPO, in USA which is a controlled market, the sale price of drugs are higher and naturally, profit percentage in sale to such market is higher than the profit percentage earned in sale to uncontrolled markets like India and Mexico. The TPO observed that the assessee sold Pencillin G Amidase Enzyme and Lovastatin in US market which are also generic drugs and earned profit margin of 106.25%. Thus, the TPO took this 106.25% margin as percentage of margin in respect of Mycophenolate Mofetil for sale in US Market and benchmarked the arms length price on that basis consequently addition of ₹ 9,84,14,422.00 was made to the income of the assessee. 13. On appeal, the Dispute Resolution Panel confirmed the action of the lower authorities for the similar reason. 14. Before us, the AR of the assessee submitted that both the products [1] Mycophenolate Mofetil and [2] Pencillin G Amidase Enzyme and Lovastatin are not comparable. Both are used for making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable uncontrolled transaction, or a number of such transactions, is determined. iii) The normal gross profit mark up referred to in sub clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark up in the open market. iv) The costs referred to in sub clause (i) are increased by the adjusted profit mark up arrived at under sub clause (iii) v) The sum so arrived at is taken to be an arm s length price in relation to the supply of the property or provision of services by the enterprise. 21. In the instant case, the main argument of the AR of the assessee is that both the products [1] Mycophenolate Mofetil and [2] Pencillin G Amidase Enzyme and Lovastatin are not similar and therefore, profit earned in one cannot be applied for determining arm s length price of the other product. 22. On the other hand, as per the department, both the products are generic drugs and therefore, they are similar products. 23. We find that as per the assessment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing this ground of appeal, hence the same is dismissed as not pressed. 27. Ground no. 6 of the appeal reads as under: The Ld. DRP and Ld. AO has erred in making disallowance of ₹ 8,86,820/- under section 14A read with rule 8D. This action of both the lower authorities in not accepting the claim of the appellant is totally erroneous, prejudicial, and against the principles of Natural Justice that deserves to be quashed. 28. The brief facts of the case are that the Assessing Officer observed that the assessee has claimed exempt dividend income of ₹ 17,28,619/-. No expenses have been offered for disallowance u/s. 14A in the return of income filed by the assessee. Further, the Assessing Officer observed that the assessee has debited interest expenditure on cash credit account of ₹ 67,98,753/-. According to Assessing Officer, had the assessee not made investments then the assessee would not have been required to borrow from bank and incur interest expenditure. Therefore, he made a disallowance to proportionate interest expenditure of ₹ 5,85,981/- u/s. 14A of the Act. Further, he also made a disallowance at the rate of 0.5% of average value of investment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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