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TMI Blog2015 (10) TMI 790X X X X Extracts X X X X X X X X Extracts X X X X ..... edit period of 3 months. Therefore, on the facts of this case, as the DRP accepted similar rate of + 1% for guarantee fee vide its order referred above, we uphold the assessee s contention that LIBOR + 1% is at arms length. However, this finding should not be considered as a precedent either in assessee s own case in other assessment years or in any other case as this decision was given in the light of fact that DRP itself has accepted the guarantee commission of + 1% on its next objection. - Decided in favour of assessee. Reducing the operating profits of the tax payer being the income from settlement of patent infringement suit credited to profit and loss account - whether the income accounted by the assessee will become operational income for the purpose of arriving at the operational profit? - Held that:- The Assessing Officer has excluded the same stating that the same is nothing but notional revenue. We agree with the finding of the Assessing Officer as held by the DRP that the income from settlement of patent infringement cannot become part of operating revenues either on bulk drug manufacturing (API) segment or on product development service (PDS) segment which are two diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary analysis by the TPO. Selection of comparable - Held that:- TPO should re-do fresh analysis of the comparables and analyse the fresh adjustments, after giving due opportunity to the assessee. Since assessee s segmental profits and its profit margins between AE and non-AE are also available, the TPO can examine whether the internal CUP available with the one of the business segments can be accepted as such. In case it is not possible to accept then, fresh comparables should be selected and PLI has to be determined so as to examine assessee s profit margins. For this purpose, we set aside the order of TPO with reference to the determination of ALP on these two segments and direct the TPO to undertake fresh search and compare with the segmental profits submitted by the assessee. However, he is free to examine segmental profits - Inclusion and exclusion of some of the receipts and cost claimed are proper or not. TPO s comparison should be based on segmental profits alone and not at the entity level. Moreover, the assessee is also objecting to arriving at the cost, as far as the PDS is concerned. These objections also should be examined and clear finding should be given, while doing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hands of other domestic company or not has no bearing in the assessee s hands as the said amount was received and was accepted by the assessee to be taxed. We approve the DRP observation that taxability or otherwise of the amount in one hand does not affect the adjustment in other hand unless it is provided so in the Act. - Decided against assessee. Non granting the benefit of the (+/-) 5% standard deduction as per the proviso to Section 92C(2) - Held that:- This ground is legal in nature and depending on the facts, the Assessing Officer is directed to consider this adjustment of plus or minus 5% as per the provisions of the Act if the ALP determined is within the range. This ground is restored to the file of the Assessing Officer to be examined as the main issue of adjustments were already restored to the TPO against grounds No. 3 to 8. Deduction claimed u/s. 10B in respect of Export Oriented Undertaking situated at Jeedimetla (Unit 3.2) - Held that:- The DRP, however, noticed that the issue is subject to revisional proceedings by the CIT and the writ petition is pending before the Hon ble High Court of A.P. Since the matter is contested at the Higher Forum legally, the DRP con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... options are vested in the employees. The amount deductible has to be determined based on the period and percentage of vesting under the ESOP scheme - Therefore, considering the request, we restore this issue to the file of the Assessing Officer to examine the claim afresh in the light of decision of the Hon ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon (2013 (8) TMI 629 - ITAT BANGALORE ) - Decided in favour of assessee for statistical purposes. Quantification of amount eligible for deduction under section 10B - common corporate overheads should be apportioned on the basis of ratio of turnover of the unit to the total turnover of the company and in this manner reducing the eligible profits under Sec. 10B as concluded by CIT(A) - Held that:- Unit starts production only at the fag end of the year cost of working on that unit throughout the year for establishing / starting production may not result in allocation of actual expenditure if turn over is considered. In view of this, since Assessing Officer has not given any rationale in adopting the turnover as the basis, ignoring the assessee s method, we are of the opinion that allocation of expenditure as was done ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine the necessary expenditure and allow the claim. Decided in favour of assessee for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... Pharma (Group) Limited and Xiaman Laboratories, China, (AEs) during different points in time. The advances are in the nature of three months delivery period for the goods supplied. Assessee charged interest on such amounts based on prevailing six months LIBOR + margin of 1%. The TPO Benchmarked the interest rate chargeable on advances to AE with rates prevailing in corporate bonds in India. The assessee objected to the same and after considering the objections, the DRP has directed the Assessing Officer to adopt LIBOR + 2% i.e., at 7.2476% as applicable for the assessment year instead of 14% determined by the TPO. The same ratio was followed in assessment year 2007-08 and also in earlier assessment year 2006-07. Accordingly, the Assessing Officer calculated rate of interest at LIBOR + 2% as against LIBOR + 1% charged by the assessee. The issue before us is whether the directions of the DRP are correct or not ? 8. It was the submission that assessee has charged a margin of 1% over the internationally adopted LIBOR interest rates and accordingly, there is no need to consider further amount of 1% on the issue. 9. The learned DR however, submitted that LIBOR + 2% is an accepted norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, we uphold the assessee's contention that LIBOR + 1% is at arms length. However, this finding should not be considered as a precedent either in assessee's own case in other assessment years or in any other case as this decision was given in the light of fact that DRP itself has accepted the guarantee commission of + 1% on its next objection. Accordingly, assessee's ground No.2 is allowed. 11. Ground No.3 is as under : "The Disputes Resolution Panel erred in confirming the Order of the TPO in reducing the operating profits of the tax payer by ₹ 26,91,30,023/- being the income from settlement of patent infringement suit credited to profit and loss account." 12. Facts leading to the present issue are that the assessee accounted for an income of ₹ 26.91 crores in the Profit and Loss account for the financial year 2007-2008 as income from settlement of patent infringement income. Actually the company received an amount of ₹ 97.87 crores from Les Laboratories Servier, France in a suit relating to patent of "Perindopril" being manufactured by the group company of the assessee. In the Income tax proceedings, the said amount was fully offered to tax on receipt basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... H.C.) and the ITAT decision in the same case reported in 45 SOT (Del.) 14. The learned DR however, reiterated the stand of the Revenue that this amount cannot be considered as operational profit while working out the profit margins of the assesseecompany. 15. We have considered the issue and examined the facts on record and the case law relied upon by the assessee. As per the note given as part of report of Transfer Pricing Report for assessment year 2007-2008, it can be observed that receipts are in the nature of one time settlement in consideration for costs and liabilities incurred by Matrix as a consequence of ceasing its programme to develop and manufacture 'Perindopril' made using the process. The entire amount of ₹ 97.87 crores was offered as income in assessment year 2005-2006 based on receipt basis. As can be seen the amount of ₹ 26.91 crores credited to the P & L account this year is only a notional deferred income whereas the actual income was received much earlier. As can be seen from the facts on record, the corresponding expenditure pertaining to development of 'Perindopril' was spent much earlier i.e., much prior to assessment year 2005-2006. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue to be examined is, whether the income accounted by the assessee will become operational income for the purpose of arriving at the operational profit. The Assessing Officer has excluded the same stating that the same is nothing but notional revenue. We agree with the finding of the Assessing Officer as held by the DRP that the income from settlement of patent infringement cannot become part of operating revenues either on bulk drug manufacturing (API) segment or on product development service (PDS) segment which are two different segments in which assessee is operating and accordingly we agree with the DRP's stand that this income falls under the category of 'other income' and not operating revenue. Not only that the income does not pertain to the relevant financial year nor the costs are incurred in the year under consideration. If without the cost, the income is included in the computation of operational profits, the same gets skewed because of inclusion of extraordinary items. It was decided in number of cases by the Tribunal that incomes of extraordinary nature are to be excluded and further extraordinary events in any company also make it non-comparable while doing exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a set of comparables with a different business profile and base, as against the comparables adopted by the taxpayer whose ALP operating margin of 19.94% is well within the tax-payers' operating margin 51.02%, thus requiring no adjustment u/s.92CA of the Act. 8. The Transfer Pricing Officer erred in not following the directions of the Dispute Resolution Panel for considering the 'cost base' as arrived at under certified segmental results furnished by the tax payer for computing adjustment with regard to ALP in respect of PDS segment." 17.1. The facts leading to the adjustments made by the TPO are that the assessee has international transactions with AEs in purchase of raw materials, purchase of samples, sale of finished goods and provision of services apart from interest and corporate guarantees. As briefly stated earlier, assessee is in two different areas of business activity which the Assessing Officer acknowledges in the order, one is that manufacturing of APIs and the second one is provision of PDS (product development services). Thus, two functions of its business are analysed by the Assessing Officer vide para 6, under Head "FAR analysis". However, the difference arose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is aggrieved on the above issues and raised the corresponding grounds. Referring to the paper book filed in this behalf and relating cost statements submitted, it was the submission of the learned Counsel that the DRP vide objection No.8 has given a finding with reference to segmental accounts as under : "Within a single business activity like A.P.I. business, neither the law mandates nor the Accounting Standards require maintenance of separate accounts for A.E. and non-A.E. transactions. Still, the assessee is found to have maintained cost records in this business from which sufficiently fair segmental accounts for A.E. and non-A.E. transactions can be arrived at. These accounts are certified by cost accountants. Though the cost records were not accepted by the T.P.O. for the purpose of profit margin computation under the TNMM method, this Panel is of the opinion that the segmental accounts for A.E. and non-A.E. transactions based on cost records is sufficient enough for the purpose of applying the ALP margin on AE cost base." 20. Referring to the above, it was the submission of the learned Counsel that once the accounts were certified by the Cost Accountants and accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE transactions at 29.44% whereas, the operating profit of non-AE transactions was at 11.61% and thus, internal comparables should have priority over the external comparables and relied on the decisions of the ITAT in the cases of Destination of the World (Sub-Continent) Pvt. Ltd. vs. ACIT, Circle 10(1), New Delhi; M/s. Green Land Exports Pvt. Ltd. vs. ACIT, Company Circle II(2), Chennai (2012) 12 TMI 558, ITAT Chennai; , Birlasoft (India) Limited vs. DCIT, Circle 3(1), New Delhi vide ITA.No. 4776/Del/2011 dated 30.12.2011. 23. With reference to the segmental financials of APIs, it was submitted that on AE transactions the profit arrived at by the TPO was at 29.44%. Therefore, since segmental results are available operating profit at entity level should not be considered. The learned Counsel relied on the decisions of the ITAT in the following cases : (i) Foursoft Ltd. Hyderabad vs. DCIT 1(3), Hyderabad vide ITA.No.1495/Hyd/2010 dt. 09.09.2011. (ii) Brigade Global Services Pvt. Ltd. vs. ITO, Ward 1(1), Hyderabad vide ITA.1494/Hyd/2010 dt.26.06.2012. (iii) M/s. Sandoz Pvt. Ltd. Mumbai vs. DCIT, Circle 7(1), Mumbai vide ITA.No.6922/Mum/2012 dt.05.04.2013. (iv) Tecnimount ICB ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the comparables and analyse the fresh adjustments, after giving due opportunity to the assessee. Since assessee's segmental profits and its profit margins between AE and non-AE are also available, the TPO can examine whether the internal CUP available with the one of the business segments can be accepted as such. In case it is not possible to accept then, fresh comparables should be selected and PLI has to be determined so as to examine assessee's profit margins. For this purpose, we set aside the order of TPO with reference to the determination of ALP on these two segments and direct the TPO to undertake fresh search and compare with the segmental profits submitted by the assessee. However, he is free to examine segmental profits - Inclusion and exclusion of some of the receipts and cost claimed are proper or not. TPO's comparison should be based on segmental profits alone and not at the entity level. Moreover, the assessee is also objecting to arriving at the cost, as far as the PDS is concerned. These objections also should be examined and clear finding should be given, while doing the T.P. analysis. Therefore, while accepting the assessee's objections in the grounds raised, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee then, the reimbursement should not be considered as part of assessee's sales. The amounts should be excluded in computing the operating profits. Since the Assessing Officer has not examined and it is also not on record whether the said expenditure was not part of claim under section 37(1) of the I.T. Act in the regular computation or not, in the interest of justice, we remit the matter back to the file of the TPO to examine the facts and to exclude only in the case the said amount is reimbursement of expenditure and there was no claim by the assessee in its computation of income. Ground No.9 of the assessee is allowed for statistical purposes. 32. Ground No. 10 reads as under : "The Dispute Resolution Panel erred in confirming that the tax-payer is not entitled to deduct ₹ 2,17,69,943/- from out of its taxable income, being the expenditure disallowed in the hands of Astrix Laboratories Limited (a resident J.V Company) under sec. 92CA of the Act." 33. As seen from the above ground itself the assessee is agitating the reduction of its adjustment by the amounts disallowed in sister concern a resident J.V. Company of the assessee in the case of Astrix Laboratories Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under "Without prejudice to the above grounds, the Disputes Resolution Panel erred in confirming the order of the TPO in not granting the benefit of the (+/-) 5% standard deduction as per the proviso to Section 92C(2) of the Act." 36. This ground is legal in nature and depending on the facts, the Assessing Officer is directed to consider this adjustment of plus or minus 5% as per the provisions of the Act if the ALP determined is within the range. This ground is restored to the file of the Assessing Officer to be examined as the main issue of adjustments were already restored to the TPO against grounds No. 3 to 8. 37. Ground No.12 reads as under : "The Dispute Resolution Panel erred in failing to direct Assessing Officer to allow the deduction of ₹ 26,15,29,315/- claimed u/s. 10B of the Act in respect of Export Oriented Undertaking situated at Jeedimetla (Unit 3.2)" 38. The facts leading to the above ground are that the assessee company is engaged in manufacturing sale of API (bulk drugs) and commenced business of formulations/ pharma company as several units situated at various places. The unit situated at Jeedimetla unit 3.2 is said to be eligible for claiming deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer held that the expenditure is not revenue and is contingent and notional in nature. This issue was considered in earlier year also and the DRP following the same rejected the objection. It was submitted that the issue of ESOP was decided by the Hon'ble Special Bench of the ITAT Bangalore in the case of M/s. Biocon Limited vs. DCIT (LTU) Bangalore vide ITA.368 to 371/Bang/2010 etc., dated 16.07.2013 and accordingly, requested for restoring the issue to the file of the Assessing Officer to examine in the light of the findings and decision of the Special Bench of the ITAT. In the case of Dr Reddy Laboratories the issue was decided as under: 9.3 After hearing the case, the Special Bench of the Incometax Appellate Tribunal Bangalore in the case of Boicon Ltd Vs DCIT held that ESOP discount (difference between market price and issue price) is a deductible expenditure at the time of vesting of the option. An adjustment has to be made if the market price is different at the time of exercise of the option. In that case also assessee framed an Employee Stock Option Plan (ESOP) pursuant to which it granted options to its employees to subscribe for shares at the face value of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... options (when the deduction is allowable) and at the stage of exercise of the options. The difference has to be adjusted by making suitable northwards or southwards adjustment at the time of exercise of the option depending on the market price of the shares then prevailing. The fact that the SEBI Guidelines do not provide for the adjustment of discount at the time of exercise of options is irrelevant because accounting principles cannot affect the position under the Incometax Act. (v) On facts, the assessee's method of claiming a larger deduction in the first year defies logic. As the options vest equally over a period of four years, the deduction ought to be claimed in four equal installments on a straight line basis. The decision in the case of Ranbaxy Laboratories 124 TTJ 771 (Delhi) was reversed and S.S.I. Ltd. v. DCIT 85 TTJ 1049 (Chennai) approved, PVP Ventures 211 Taxman 554 referred. The decision of Spray Engineering Devices Ltd 53 SOT 70 (Chd) was also approved. The above decisions referred by Special Bench was relied upon by assessee, therefore there is no need to refer them again. AO is directed to work out the deduction keeping in mind the principle laid down by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. A detailed note was also given to the Assessing Officer that out of manufacturing expenses unit relating to purchases were identified at ₹ 2.50 crores and allocated on the basis of salary cost on various employees and production, planning control of ₹ 18.03 lakhs also on the basis of salary cost on employees and likewise commercial unit at ₹ 57.24 lakhs on the same basis after identifying the amount aggregating to ₹ 3.62 crores. These were identified and allocated on the basis of the value of cost purchase for each unit and accordingly, an amount of ₹ 57.28 lakhs was allotted to unit 3.2 Jeedimetla with reference to the cost on corporate office these costs are debited on the basis of number of employees and the amount allocated to Jeedimetla was at ₹ 1.50 crores. It was the contention that ignoring the scientific basis adopted by the assessee, the Assessing Officer allocated on the basis of turnover of the sales in each unit thereby, arriving at a different percentage and excess apportionment of common overhead costs to the tune of ₹ 42.91 lakhs. The learned Counsel relied on the decision of Hon'ble Delhi High Court in the case of S.T. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of non-compete fee of ₹ 40,00,000/- paid in relation to Concord Biotech Limited during the previous year relevant to Financial Year 2006-07 ; and b) Depreciation @ 25% amounting to ₹ 8,89,893/- on brought forward written down value of ₹ 35,59,570/- in respect of non-compete fee of ₹ 200 lakhs paid to Medispan Ltd., by Medicorp Technologies Ltd., (amalgamating company) in the previous year relevant to assessment year 2002- 03." 47. This ground is against the claim of depreciation on different amounts paid by the assessee. The sub ground(b) is with reference to the claim of depreciation of ₹ 8,89,893/- on brought forward written down value of ₹ 35,59,570/- in respect of non-compete fee paid to M/s. Medispan Ltd by Medicorp Technolgoies Ltd. in previous year relevant to assessment year 2002-2003. Consequent to merger of the Medicorp Technologies Ltd. with the assessee-company, the depreciation was claimed on the written down value. Even though the assessee's claim was crystallized by the Orders of the ITAT in ITA.No.201/2004- 2005 dated 25.06.2007, wherein the payment of fee was considered eligible for depreciation, the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be not correct. Be that as it may, we have proceeded to examine the issue as if the claim was made in this year only. 49. Before the Assessing Officer and DRP, the assessee relied on the decision of the CIT vs. Medicorp Technologies India Ltd. which was upheld by the ITAT, Chennai Bench (supra). The learned Assessing Officer relying on the decisions of the ITAT, Chennai Bench in the case of AB Mourya Pvt. Ltd. in ITA.No.1293/2006 dated 23.11.2007 and Guruji Entertainment Net Work Ltd. reported in 14 SOT 556 (Del.); M.M. Nissim & Co. vs. ACIT (2007) 18 SOT 274 (Mum.) and Motor Surveyors Pvt. Ltd. vs. ITO 32 SOT 268 (Chennai) rejected the claim of the assessee and DRP upheld the order of the AO. 50. Learned Counsel submitted that the issue is decided by the Coordinate Bench in assessee's own case, accordingly, the same has to be upheld for the other amount also. As far as the claim of depreciation on carry forward non-compete fee is concerned, we have already directed the Assessing Officer to follow ITAT Orders given in that case which is binding, being the claim of depreciation on the written down value. However, for the fresh claim to be entertained on the payment made for Conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Medicorp relied by the assessee itself, which is reported at (2010) 2 ITR (Trib.) 367 (Chennai). In view of this, we are of the opinion that the depreciation cannot be allowed on an amount of non-compete fee, which was in fact paid to the Managing Director of the Company for not taking any employment. This cannot be considered under section 32(1) as an intangible asset. Accordingly, the claim of depreciation on the item (a) is not allowed and to that extent ground is rejected. In the result, ground No. 15 is partly allowed. 53. Ground No.16 is as under : "The Dispute Resolution Panel erred in not allowing weighted deduction under section 35(2AB) of the Act to an extent of ₹ 16,36,53,709/- being 50% of the actual expenditure of ₹ 32,73,07,418/- duly certified by the prescribed authority in Form 3CL vide Certificate # TU/IV/15(46)/35(2AB)/3CL/681/2011 dated 31.10.2011 as 'total cost of in house research' in respect of approved R & D facilities". 54. This ground is with reference to not allowing the weighted deduction to the extent of ₹ 16,36,53,709/-. This is one of the grounds which the DRP could have considered and allowed the objection raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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