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TMI Blog2018 (1) TMI 1044X X X X Extracts X X X X X X X X Extracts X X X X ..... This is imperative that assessee allocates manufacturing overhead, administrative overhead and other fixed overheads on the basis of capacity utilization. As advisable for the assessee to submit segment-wise report i.e. export to AE, export to non-AE, domestic sales to non-AE and idle capacity. Considering the above factual matrix, we direct the TPO/AO to consider the above revised segmental profit and loss reports of the assessee and arrive of the ALP adjustment by considering non-AE transactions as one of the comparable in determining ALP by following TNMM method afresh - remit this file back to the file of TPO/AO for determining the ALP afresh. - Decided in favour of assessee for statistical purposes. - ITA No. 102/Hyd/2015 - - - Dated:- 19-1-2018 - Smt P. Madhavi Devi, Judicial Member And Shri S. Rifaur Rahman, Accountant Member For the Assessee : Shri C.S. Subramanyam For the Revenue : Shri J. Siri Kumar ORDER PER S. RIFAUR RAHMAN, A.M.: This appeal is preferred by the assessee against the order passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short Act ) dated 29/11/2014 relating to AY 2010-11. 2. The assessee has filed gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reimbursement of expenditure -do- Paid 64963 4.3 Analysis of the Transaction: As per the audited statement of accounts the financials of the assessee are as under: Description Amount (in Rs.) Operating revenue 597094012 Operating cost 607633729 Operating profit (-)10539717 OP/OR (%) (-)1.73% OP/OC (-)1.76% 4.4 The TPO examined the TP study furnished by the assessee and summarized as under: a. Based on the FAR analysis, the assessee has been characterized as an entrepreneur, exposed to normal risks while undertaking manufacturing of API activities. b. The assessee is selected as tested party c. In respect of the sale of goods to its AE viz., Apotex Pharmachem Inc., Canada, TNMM is taken as most appropriate method. d. The assessee has selected PBDIT on cost as profit level indicator (PLI) e. The assessee has conducted search using Prowess datab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the total miscellaneous income of ₹ 13.72 Lakhs the taxpayer has considered ₹ 12.71 Lakhs in AE segment, which is 92.63% of miscellaneous income. However this has been done without any basis. Similarly out of scrap sale of ₹ 5.19 Lakhs, an amount of ₹ 4.80 Lakhs has been attributed to AE segment. This is again done without any basis. Therefore, the calculation of PLI cannot be accepted since the direct indirect cost for AE and non-AE sales has been determined without any basis and no such segmental break-up is given in the Annual Report for FY 2009-10. The taxpayer has not filed any supporting documentary evidence in support of the above discussed AE and non-AE profit margin calculation. Therefore, the profit margin calculation of the AE and non-AE segment as given in Annexure 4 of the TP document is hereby rejected. 4.8 In view of the above shortcomings, the TPO reexamined 54 companies shortlisted at page 4 of assessee s search process after applying the turnover filter of selecting companies with turnover between ₹ 30 crores to ₹ 90 crores. It was found that the following two companies are functionally similar and qualify all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of sales made to its AE, Apotex Canada u/s 92CA(3) of the Act. 5. Aggrieved by the TPO s order, the assessee raised objections before the DRP and the DRP rejected the objections of the assessee by observing as under: 07.0 Objection No.3 4 : Internal TNMM to be adopted Segmented results as one of comparables. Since both the objections are inter-related, they have been taken up together. The assessee submitted that the product sold to both the segments i.e., AE Non-AE are identical in all respects, the products are similar and the functions performed, assets employed and risks assumed are similar to both the segments. The products sold to AE non-AE are either active pharmaceutical ingredients or intermediates of pharmaceutical Products. Both the Products are identical in their usage and application and only the chemical composition may be different from one product to the other. It was also submitted that in order to eliminate the differences on account of capacity under utilization and shift from license to generic, an alternate approach would be to consider the non-AE segment as internal comparable to bench mark the AE transactions and TNMM since both t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us. 7. Ld. AR submitted before us that assessee is a subsidiary of Apotex Pharmachme Inc., Canada and during this year, assessee has exported to its AE to the extent of ₹ 53.4 crores, which is 93% of the total sales and exported to non-AE to the extent of ₹ 4.25 crores, which is 7.35% of the total sales. Further, he submitted that the sales recorded during the year is only 30% of the utilization of the total capacity installed. He submitted that DRP and TPO has refused to consider internal TNMM considering the turnover recorded with non-AE exports comparatively a miniscule segment of the exports. For the AY, even though, the project sold to both the segments i.e. AE and non-AE are identical in all respects, the products are similar and the functions performed, assets employed and risk assumed are similar. The products sold to both the segments are either active pharmaceutical ingredients or intermediates pharmaceutical products. He further submitted that in order to eliminate the differences on account of capacity underutilization and shift from license to generic, an alternate approach would be to consider the non-AE segment as internal comparable to benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising clause of the shareholder agreement, the assessee has to sell the goods to its AE with a mark up of 20% in case DMF is not required and 50% in case DMF is required on the cost for manufacturing, but, the assessee is showing profit margin only (-) 1.73%. Therefore, assessee does not get any support from the directions of ITAT. He relied on the findings of the DRP. 9. Considered the rival submissions and perused the material facts on record. We have noticed that assessee has made exports to its AE for ₹ 53.14 crores and exported to non-AE for ₹ 4.23 crores as well as made domestic sale to non-AE to the extent of ₹ 2.28 crores and it has arrived the profit margin of 1.19%, (-) 31%, 58.89% to sales relating to AE, export to non-AE and domestic sales to non-AE respectively. The profit margin is arrived with the help of a Cost Accountant after observing the total cost without factoring for idle capacity. In various judicial pronouncements and ITAT, Hyderabad Benches have always directed that for consideration of comparables there has to be an adjustment for idle capacity utilization which will have a bearing on the final outcome of the ALP. At the same time, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed profitability report based on the capacity utilization. At present, assessee has declared negative profitability of AE and non-AEs and after reallocation of overheads on the basis capacity utilization, it will not be a negative profit. This is imperative that assessee allocates manufacturing overhead, administrative overhead and other fixed overheads on the basis of capacity utilization. It is adviceable for the assessee to submit segment-wise report i.e. export to AE, export to non-AE, domestic sales to non-AE and idle capacity. Considering the above factual matrix, we direct the TPO/AO to consider the above revised segmental profit and loss reports of the assessee and arrive of the ALP adjustment by considering non-AE transactions as one of the comparable in determining ALP by following TNMM method afresh. Needless to say that an opportunity of being heard to the assessee may be provided. Accordingly, we remit this file back to the file of TPO/AO for determining the ALP afresh. 10. In the result, appeal of the assessee is treated as allowed for statistical purposes. 11. The other alternate ground Nos. 5 to 10 raised by the assessee are dismissed. Pronounced in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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