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TMI Blog2018 (6) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, perusal of the Audited Financial Statements for the year ended 31-03-2008 which is placed in file reveals that the said company has two units namely Ankleshwar unit and Nandesari unit. The Ankleshwar unit of Tonira Pharma Limited was hit by an extra-ordinary event of attachment of its inventory by the Excise and Custom Departments The Excise and Custom Department disallowed the clearances of finished goods from the said company’s Tonira Pharma’s Ankleshwar Plant due to litigation with Excise and Custom Department. - matter need to be restored to the file of the AO/TPO for fresh adjudication of this issue of selection of Tonira Pharma Limited as comparable for computing ALP of the international transactions entered into by the assessee with its AE of product development activity is concerned. - I.T.A. No.6072/Mum/2014 - - - Dated:- 1-6-2018 - SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Revenue : Mr. Saurabh Deshpande Ms. Pooja Swarup For The Assessee : Shri. Subodh L. Ratnaparkhi ORDER PER RAMIT KOCHAR, Accountant Member This appeal, filed by the Revenue, being ITA No. 6072/Mum/2014, is direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng etc.. The assessee also carries out product developmental services on contract basis for its AE . The international transactions reported by the assessee with its AE are as under:- Sr. No. Name of the AE Nature of transaction Amount (Rs.) Method used 1 Different AEs Purchase of finished Goods 139,345,778 TNMM 2 Different AEs Sale of finished Goods 647,821 TNMM 3 Ferring International Centre S.A. Interest on Early Payment 29,21,609 TNMM 4 Ferring International Centre S.A. Provision of product development service 2,30,94,302 TNMM The matter was referred by AO to TPO for determining Arm s length price of the international transaction entered into by assessee with its AE. The TPO observed that the assessee has considered the Transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Vimta Labs Ltd. 14.62% 5. Wintac Ltd. -0.50% Arithmetic Mean 11.71% The TPO however was not satisfied with the fresh comparables identified by the assessee as they were found to be not exactly comparables and the TPO shortlisted following comparables:- Sr. No. Name of Comparable cost plus mark-up FY 07-08 1 Engineers India Ltd. (Seg.) 35.10% 2 Alphageo (India) Ltd. 40.52% 3 Agile Electric Technologies Pvt. Ltd. 6.05% 4 Vimta Labs Ltd. 19.67% 5 IDC (India) Ltd. 15.38% 6 Oil Field Instrumentation (India) Ltd:. 45.30% 7 Celestial Labs Ltd 87.94% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately led to passing of the assessment order dated 23.02.2012 u/s 143(3)(ii) r.w.s. 144C(3) of the 1961 Act. The learned CIT(A) while passing appellate orders dated 24-03-2014 directed exclusion of Celestial Labs Limited as comparable for computing ALP of international transaction entered into by the assessee with its AE for product development activity , thus holding in favour of assessee directing exclusion of M/s. Celestial Labs Ltd. as comparable by holding as under:- 15. The TPO has selected M/s. Celestial Labs Ltd. as one of the comparables for determining the arms length price. As per the web-site of said company, the functional profile of M/s. Celestial Labs Ltd. is production and sale of biotechnological products having industrial implications. The appellant on the other hand is engaged in providing contractual product development services to its AE on cost plus markup basis. The functional profile of M/s. Celestial Labs Ltd. is therefore different from the tested party, warranting its exclusion from the set of comparables. Even otherwise, the abnormal profit margin of 87.94% reported by the said company, when none of the other selected comparables by the TPO refl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be at arms length price and no TP adjustment was contemplated by the assessee . But however the TPO selected its own comparables and arrived at average PLI of 30.67%, which led to the addition to the tune of ₹ 33,77,036/- u/s. 92CA of the Act. The assessee disputed for inclusion of Celestial Lab Ltd. which has PLI of 87.94%, while the assessee also pleaded for inclusion of Tonira Pharma Ltd. which has negative PLI of (-)16.90% . The TPO excluded Tonira Pharma Ltd. as comparable while learned CIT(A) directed for its inclusion. The learned CIT(A) also directed for exclusion of Celestial Lab Ltd. as comparable on the grounds of super normal profits and different functional profile. Reference was drawn to Rule 10B(2) and 10B(3) of Income-tax Rules, 1962. our attention was also drawn to decision of Mumbai-trib. In the case of Wills Processing Services Private Limited v. DCIT reported in (2013) 30 taxmann.com 350(Mum.) . The learned DR also relied upon decision of Hon ble Delhi High Court decision in the case of Chryscapital Investment Advisors (India) Private Limited v. DCIT reported in (2015) 56 taxmann.com 417(Delhi) . Our attention was drawn to decision of Hon ble Delhi High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Mum-trib) is not correct as is submitted in the paper book filed by the assessee with the tribunal. Similarly it was submitted that the learned counsel erred in relying on decision of Tevapharm India Private Limited(supra). 5. We have considered rival contentions and perused the material on record including orders of the authorities below and cited cases before us. We have carefully gone through material on record. We have observed that the assessee is engaged in business of import, wholesale trade, manufacture of drug and medicines and research in pharmaceuticals products. The assessee is 99.9% subsidiary of Ferring BV. The assessee is mainly engaged in distribution of finished formulations imported from its AE. The assessee imports finished formulations from its AE for sale in domestic market and these formulations are in the nature of super speciality and temperature sensitive products for treating infertility, bed wetting etc.. The assessee also carries out product developmental services on contract basis for its AE . The international transactions reported by the assessee with its AE are as under:- Sr. No. Name of the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order by the AO . The dispute which finally now remains between rival parties is with regard to two comparables namely Celestial Labs Ltd having PLI of 87.94% which comparable albeit was included by TPO but stood deleted by learned CIT(A) due to different functional profile and super normal profits. The said company Celestial Labs Limited is a listed company on stock exchanges and its financial data s are available in public domain . The evidences placed on record by the assessee of the said company before us in paper book filed which is a Draft Prospectus issued by the said company with respect to Public Issue of 50,00,000 equity shares of ₹ 10 each at a premium of ₹ 50 each. The said draft Prospectus was issued by said company Celestial Labs Limited in the year 2006 while the Initial Public Offer came in June 2007. As per the said draft prospectus, the said company Celestial Labs Limited is engaged in following activities:- CELESTIAL BUSINESS MODEL CELESTIAL LABS LIMITED is 8 years old Hyderabad based ISO 9001-2000 certified company, It has been providing customized enterprise solutions, bioinformatics services to health and life science sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the biotechnology section, including manufacturing of industrial enzymes and laboratories for developing new drug candidate molecules and licensing for manufacture and distribution globally. This facility is being setup in Genome Valley at Hyderabad in Andhra Pradesh. CELESTIAL has competent and experienced personnel on its rolls to effectively carry out the scientific, engineering, finance and management functions of its project activities. CELESTIAL has an experienced and diverse Board of Directors to guide the core management of the company to devise the right strategies and efficiently carry out the tasks to achieve the targets. The company has achieved business of ₹ 1022.18 Lakhs in the year 2005-06 in comparison to ₹ 804.98 Lakhs during the year 2004-05. Products Services of the company CELSUITE Structure-based drug design plays a crucial role in the discovery of novel chemical entities, which are of immense use in health care market. Using in silica tool, one can appreciably reduce the high costs involved in synthesizing and testing the potential bioactive compounds or drug molecules. CELESTIAL LABS has developed CELSUITE- a dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worked on the active site prediction of tubulin complex and designed a few promise showing ligands. Further work is in active progress and CELESTIAL is optimistic for generating potential peptide that can help in tubulin aggregation leading to anti-cancer activity. Industrial Enzymes The bio-industrial sector of the biotechnology industry in India has been recording impressive annual growth at the rate of more than 35%. Industrial enzymes represent the heart of biotechnology processes. The field of industrial enzymes now is experiencing major R D initiatives, resulting both in the development of a number of new products, and in improvement in the process and performance of several existing products. In view of the optimum utilization of expertise and resources, CELESTIAL LABS is developing the appropriate technological-base for the production of two important industrial enzymes, Alpha Amylase and Alkaline Protease, with the requisite infrastructure for manufacturing and quality control. CELESTIAL LABS has tied up with IMTECH at Chandigarh for the technology transfer and will avail the services of leading plant machinery providers to help the company esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... committed management team Experienced scientists and technical team Innovation Tremendous opportunity in Bio-Services and product Technological collaboration with leading research institutions. IPR Generations The above business model is extracted from the Draft Prospectus issued by Celestial Labs Limited in 2006 for its proposed public issue of shares which came in June 2007. The perusal of the financial statement of the Celestial Lab Ltd. extracted from the said Draft Prospectus is reproduced below :- PARTICULARS INCOME YEAR ENDED 31/3/2002 YEAR ENDED 31/3/2003 YEAR ENDED 31/3/2004 YEAR ENDED 31/3/2005 YEAR ENDED. 31/3/200.6 Rs. In Lacs Sales 363.83 373.54 502.8 804.98 1022.18 Others 2.09 Total 363.83 373.54 502.8 807.07 1022.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said profit and loss for the year ended 31st March 2006 of Celestial Labs Limited clearly shows that the profit after tax is ₹ 328.23 lacs on sales of ₹ 1022.18 lacs which gives Net profit Ratio of 32.11% for the year ended 31st March 2006. Similarly, for the year ended 31st March 2005, net profit ratio is 32.83%. The said company Celestial Labs Limited, thus, for the year ended 31-03-2005 and 31-03-2006 as per above profit and loss account does not have super normal profits . One of the reasons for deletion by learned CIT(A) is the super normal profits reportedly earned by said concern of 87.94% wherein no deeper probe of the financial statements were made by the authorities below to find out reasons for earning super normal profits in the year under consideration which is not in line with the profits earned in immediately preceding years. The second reason for deletion by learned CIT(A) of this comparable is different functional profile of Celestial Labs Limited. However, ld. DR has submitted before us , this company is engaged in similar activities of research and development in the pharma industry as were the product development services rendered by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by the assessee in its defence in de-novo proceedings shall be admitted by AO/TPO in the interest of substantial justice and thereafter adjudicated on merits in accordance with law. Keeping in view the relevant case laws which may be relied upon by the assessee. We order accordingly. Now, coming to the comparable Tonira Pharma Ltd. which was rejected by TPO but was directed to be included by learned CIT(A). The said company has negative PLI of (-) 16.90%. The audited financial statements of Tonira Pharma Limited is placed on record. As per audited financial statements , Tonira Pharma Limited is engaged in the business of as under:- Industry Scenario and Developments: Indian economy, has been one of the fastest growing economy of the World backed by Country's strong GDP Growth and improved F D I inflow and healthy foreign Exchange Reserves with manufacturing and service sectors playing significant role in the growth of Indian economy. India is preferred manufacturing destination for pharmaceutical because of wide range of capabilities and attractive and cost effective manufacturing opportunities, comparatively low production cost of Active Pharmaceutica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Internal Control, which helps the management to take informed and timely decisions. Opportunities and threats: All medium sized pharmaceutical companies which have succeeded in achieving manufacturing excellent over the years and have developed cost-effective synthesis routes have scope for partnering with, multinational companies for contract manufacturing and research services, i.e. CRAMS. With the state-of the art R D Center and extensive manufacturing facilities, Tonira is gearing up to cash in the market opportunities Intense competition in the field has to be tackled with constant cost- reduction, process improvement and operational excellence. Internal Control and its Adequacy For effective inter departmental communications and follow up process, computers and requisite software and networks for communication have been Installed. The system of internal control provides undated accounting records, the reliability of financial information essential for running business. The Company has a clearly defined organization structure and delegated authority. Sufficient control is exercised through monthly, quarterly and annual business review by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are subject to certain future events and uncertainties, which could cause actual results to differ materially from those that may be indicated in such statements. The extract of the financial performance of Tonira Pharma Limited for the financial year ended 31-03-2007 and 31-03-2008 are reproduced hereunder: We have observed that the TPO rejected the said company due to the said company having effluent treatment plant/waste disposal system which in our considered view is not a justified cause for its exclusion by TPO. Primarily all Industries in India requires pollution control clearances which is mandate of law and part of State Policy because environmental concerns are growing and State/Pollution Control Boards while granted pollution clearances for setting up/continuation of running of an Industry require setting up ETP/Waste disposal plants to be set up as pre-condition for the set up and continuation of the running of Industry . The setting up of ETP/Waste disposal plants are in line with State Policy and this is not a valid reason for discarding comparable. However, perusal of the Audited Financial Statements for the year ended 31-03-2008 which is placed in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. The Excise and Customs Department also, for some period of time during the year under report, disallowed the clearances of finished goods from the Company's Ankleshwar plant. This Excise and Customs duty demand matter is still outstanding and the appeals of the Company before Hpn'ble Gujarat High Court and CESTAT is pending for disposal. Future Outlook: The Company has a Star Export House status assigned by KFTZ in Active Pharmaceuticals Ingredients (APIs) and exports its products mainly to Japan, Europe, South East Asia and South America apart from selling small quantities in the Domestic market. Company s Manufacturing facility at Nandesari was recently inspected and approved by US FDA and with this approval, the company will expand its reach to regulated markets of North and South Americans for exports of its APIs. With these development the company expects relatively a good performance in the coming years, barring unforeseen circumstances. Under these circumstances , in our considered view, the matter need to be restored to the file of the AO/TPO for fresh adjudication of this issue of selection of Tonira Pharma Limited as comparable for com ..... 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