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TMI Blog2016 (3) TMI 1305X X X X Extracts X X X X X X X X Extracts X X X X ..... venue is seeking to interfere with the cost accountants report as the adjustment towards under utilization of the capacity has not been allowed both by the TPO as well as the DRP. Therefore, this issue would depend on the decision taken on whether the adjustment for under utilization of the capacity is allowable or not. Denial of Capacity Utilization adjustment and depreciation adjustment respectively - TPO and the DRP have disallowed these adjustments on the ground that the assessee was a contract manufacturer and therefore the prices at which the goods were supplied to AE cannot go below the agreed price as stipulated in the agreement with its AE - Held that:- the adjustments of under utilization of the capacity and the difference in the depreciation are the factors which are likely to materially affect the price or cost charged or paid, or the profit arising from, such transactions in the open market. Therefore, we direct the AO/TPO to allow the adjustments on account of under-utilisation of capacity and also difference in depreciation method adopted by the assessee and the comparable companies. Since we have held that the adjustment for the under utilization of capacity is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed. The AO passed the draft assessment order in accordance thereto against which the assessee preferred objections before the Dispute Resolution Panel (DRP in short) which approved the draft assessment order and in compliance thereto the assessing officer passed the final assessment order dt.22-10-2012 against which the assessee is in appeal before us. 2. In the grounds of appeal, the assessee has raised five grounds out of which grounds No.1 and 5 are general in nature and need no adjudication. As regards grounds No.2, we find that there are sub-grounds therein which are all against the transfer pricing adjustment. We find that grounds 2.1.1 to 2.1.3 are general grounds against the TP adjustment and hence need no adjudication. 3. As regards grounds 2.2.1 to 2.2.2 against non consideration of the Cost Accountants allocation of costs between AE and NON AE segments as correct, brief facts relating to this issue are as under: The assessee is a company which is engaged in the business of manufacturing and exporting pharmaceutical products, i.e. drug intermediates and Active Pharmaceutical Ingredients(API). It was incorporated as a limited company on 24.2.95 and commenced its commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rials Apotex Pharmachem Inc. Canada Paid 7,35,036 He observed that the assessee has chosen TNMM as the most appropriate method for determination of the Arm's Length Price for its international transactions with its AE and the margin of the assessee for the financial year 2007-08 was worked out at 13.10%, whereas the margin of the five companies selected by the assessee as comparable reflected margin of 5.11% and since the assessee's margin was higher, the international transactions were treated to be at Arm's Length Price. The Transfer Pricing Officer, however, did not agree with the TP study of the assessee and therefore conducted a fresh search on the available databases and selected eight companies as comparables to the assessee and determined the Arithmetic Mean PLI of the comparables at 17.53%. Accordingly, he determined the adjustment under S.92CA of the Act at a sum of ₹ 19.36 crores. 4. The comparables selected by the assessee for its Transfer Pricing Documentation and their Arithmetic Mean PLI are as under- Sl. No. Comparable Company RoTC(%) 2008 1. Fementa Biotech Limited 19.15% 2. Medicamen Biotech Limited 4.59% 3. Rusan Pharma Limited 28.25% 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the report of the Cost Accountant in his statutory report and observed that the company had maintained cost records under S.209(1)(d) of the Companies Act and therefore, the observations of the TPO that segmental details are not audited is not correct. Having held so, Dispute Resolution Panel perused the allocation made by the Cost Accountant and did not agree with the allocation of indirect cost of production and the allocation of Administrative Overheads. It observed that the Cost Accountant did not allocate the following expenditure either to AE or to non-AE or to domestic transactions. (Rs. in lakhs) (i) Production 323.08 (ii) Personnel cost 127.43 (iii) Depreciation 619.29 Total 1069.80 The Panel further observed that the administrative overheads of a sum of ₹ 303.72 lakhs were not allocated to any segment, though the assessee during the previous year had sales to AE, non-AE and also to independent persons in India. The panel also observed that the cost Accountant of the assessee did not allocate the above indirect cost of production and administrative overheads aggregating to ₹ 1373.52 lakhs, though they were incurred by the assessee for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are reproduced at para 4.10 of the DRP's order. A perusal of the same shows that a sum of ₹ 1069.80 lakhs has been shown as unallocated costs. According to the assessee, this pertains to the unutilized capacity. The assessee has specifically stated so before the DRP. But DRP proceeded to allocate the unallocated expenditure between the AE and Non AE without specifically dealing with the contention of the assessee. Correct allocation of expenditure amongst various segments of the assessee's transactions has to be done to arrive at the correct PLI. It is the contention of the assessee that the assessee has unutilised capacity, to which the unallocated cost pertains to and that the audited books of account ought not to have been interfered with. For this purpose, the learned counsel for the assessee had relied on the decision of the Madras Bench of the Tribunal in the case of 3i Infotech Ltd. dated 7.5.2013 wherein it was held that it is not open to the revenue to reject the working prepared by the assessee without pointing out any error therein. However, in the case before us, the revenue is seeking to interfere with the cost accountants report as the adjustment towards under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement with its AE. The TPO and the DRP observed that there was a share purchase agreement between the parties wherein it is stipulated that the assessee shall supply the drug intermediate at cost+ a 20% mark up and in the case of API, if a Drug Master file is not required for sale of API, the purchase price shall be the lesser of cost of such goods+ a 30% mark up on the prevailing price of such goods of similar quality exported from India, but in no case, the company is required to sell the purchaser, the goods at less than the cost + 20% markup. Further it was also observed that if a Drug Master file is required, the purchase price of the product by the AE shall be 75% of the lowest price available to the purchase for goods of similar quality in the market in which the material is intended to be used or the tax payer's cost in producing such product + a 50%A markup, whichever is lower and if no comparable product is available, the purchaser's price shall be the taxpayer's cost + a 50% markup. Therefore, they held that the assessee has an assured return of 20% on cost and hence the under utilization of capacity has no impact on the PLI of the assessee. Further, with regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the assessee has placed reliance upon, we are of the opinion that the adjustments of under utilization of the capacity and the difference in the depreciation are the factors which are likely to materially affect the price or cost charged or paid, or the profit arising from, such transactions in the open market. Therefore, we direct the AO/TPO to allow the adjustments on account of under-utilisation of capacity and also difference in depreciation method adopted by the assessee and the comparable companies. Since we have held that the adjustment for the under utilization of capacity is allowed, the issue of apportionment of unallocated expenses also needs to be allowed. How much of the un allocated costs do really pertain to under utilization and nature of such costs unallocated were not examined either by the TPO or the DRP and neither are the details filed before us. Consequently, TPO has to examine and consider to what extent the claim can be allowed. The AO/TPO are accordingly directed to re-compute the ALP after allowing the above adjustments after due verification. Therefore, Grounds No.2 and sub-grounds there under are treated as allowed and the issue of recomputation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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