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TMI Blog2017 (6) TMI 1323X X X X Extracts X X X X X X X X Extracts X X X X ..... y subscribing to share capital is beneficiary of all the gains of the subsidiary company. Merely, because allotment of shares is delayed and in books share application money is reflected as advance for share application money till the allotment would not alter the characterization to the prejudice of assessee s position anyway. In our considered view, the percentage of ownership is the only material factor which remains at 100% prior to allotment and also post allotment. As the assessee is the only shareholder in it s 100% owned subsidiary company SPG BVI it should not make any difference merely because part of the share application money is converted into equity shares and the balance were allotted in subsequent assessment years. We, therefore, do not find any merit in the submissions of revenue in this behalf. As relying on STERLING OIL RESOURCES (P.) LTD [ 2016 (4) TMI 163 - ITAT MUMBAI] direct the A.O. to delete the addition - Decided in favour of assessee. Addition on account of interest on Optional Fully Convertible Debentures (OFGD) subscribed to in Sun Pharma Global Inc. - HELD THAT:- As decided in own case CIT (A) while deleting the addition has noted that as per the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PSM can offer a solution for highly integrated operations for which a one-sided method would not be appropriate. PSM may also found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions to the transaction - Considering the functions performed by the appellant company to SPG BVI, it is clear that SPIL has performed only one simple function and that is manufacturing of Pantoprazole Tablets. Except for this, there is no significant unique contribution by SPIL. For such simple functions as per OECD guidelines for transaction profit split method typically would not be appropriate of the functional analysis of that party. By the order of the Hon ble High Court Innovative Research and Development /division of the appellant company was demerged and given to Sun Pharma Advance Research company (SPARC) subsequently SPARC transferred ANDA rights to SPG BVI. SPG BVI has been entered into an agreement with the appellant company SPIL for the manufacturing of Pantoprazole. Pursuant to this agreement assessee manufactured Pantoprazole and sold the same to Caraco Ltd on the directions of SPG BVI. On such sale transaction, the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, 11 or 12 apply, if any such amount is credited to the Profit and Loss account and Section 10(2A) defines such income as the share of profit of a partner from the partnership firm, the language is clear and unambiguous and needs no other insertion or deletion. The remuneration to partner may have the colour of appropriation of profit of a partnership firm as held by the Hon ble Supreme Court and Hon ble High Courts in various decisions relied upon by the ld. Senior Counsel but as mentioned elsewhere, Section 115JB is a complete code in itself. Therefore, if the remuneration is credited by the appellant company in its Profit and Loss account then the same could be reduced it specifically provided under the Explanation to Section 115JB of the Act which we find missing from the relevant provisions. We, therefore, do not find any merit in this claim of the assessee. Addition of expense disallowed u/s, 14A for computing book profit u/s. 115JB - HELD THAT:- we direct the A.O. to delete the addition of expense disallowed u/s. 14A for computing book profit u/s. 115JB of the Act. Addition u/s 40A - HELD THAT:- Provisions of section 40A(2) are applicable only in respect of payments made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, no interference is called for addition to the extent of 10,17,500/- is confirmed, Ground No.15 is dismissed. Payment to Nile Ltd. is concerned, we find that the First Appellate Authority has given a categorical finding after verifying the purchase order that this item has replaced damaged bottom body which is also supported by the Excise Challah. Such categorical finding cannot be brushed aside lightly. We, therefore, do not find any error or infirmity in the findings of the First Appellate Authority. Items purchased for effluent treatment systems - First Appellate Authority have given a categorical finding that the effluent treatment systems after regular intervals requires maintenance and upgradation and the expenditure incurred during the year is on existing machines and did not bring into existence any new asset or added advantage to the assessee. As this factual finding has not been controverted before us, we do not find any reason to interfere with the findings of the First Appellate Authority. Disallowance of provision for leave encashment u/s 43B - HELD THAT:- Restore the issue to the files of the A.O. with a direction to decide the issue afresh after decision of M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the sake of convenience. 3. Ld. Senior Counsel Shri S.N. Soparkar argued for the assessee along with S. Parin Shah & Vartik Choksi and ld. Special Counsel Shri G.C. Shrivastava assisted by Shri A K Kale (ACIT) represented the revenue. 4. Rival submissions were heard at length and with the assistance of the ld. Representatives of both sides, we have considered the relevant documentary evidence in the light of Rule 18(6) of the ITAT Rules. The assessee is a Pharma Company engaged in manufacturing of bulk drugs as well as formulation products. The manufacturing work is done at its various factories located at silvasa, Ankleshwar, Panoli, Halol, Ahmednagar, Kanchipuram and Karkhadi [Padra]. The assessee had submitted Form No. 3CEB [Report u/s. 92E relating to International Transactions. Reference thereof was made to the TPO and the A.O. framed the assessment order u/s. 143(3) of the Act on the basis of the order passed by the Transfer Pricing Officer u/s. 92CA(3) Of the Act vide order dated 28.10.2011. We will first take up Assessee's appeal in ITA No. 3297/Ahd/2014 5. Ground no. 1 is of general in nature and requires no separate adjudication. 6. Ground no. 2 relates to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pharma Global Inc, the amount was paid in tranches though the allotment was made only when the entire amount was remitted i.e. on 25.09.2007. The assessee objected to the rate of interest charged by the TPO while calculating the interest addition. Though the TPO has stated in the order that LIBOR rate + 200 BPS is adopted as arm's length rate in respect of loan advance to SPG but has in fact applied LIBOR + 4%. The submissions/contentions of the assessee did not find any favour with the ld. CIT (A) who confirmed the upward adjustment made by the AO/TPO. 11. Before us, the ld. Senior Counsel reiterated what has been stated before the lower authorities. 12. Ld. G.C. Shrivastava contends that relevant provisions of the Indian Companies Act provide for charging of interest if the company is unable to allot shares within a period of 60 days from the receipt of application money if such amount is not to repaid within 15 days from the end of the period of 60 days. The Bench on this issue raised a query that Sun Pharma Global Inc. being incorporated in British Virgin Island in such eventuality whether provisions of Indian Companies Act would be applicable to such a case. Ld. Shri G. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he gains of the subsidiary company. Merely, because allotment of shares is delayed and in books share application money is reflected as advance for share application money till the allotment would not alter the characterization to the prejudice of assessee's position anyway. In our considered view, the percentage of ownership is the only material factor which remains at 100% prior to allotment and also post allotment. As the assessee is the only shareholder in it's 100% owned subsidiary company SPG BVI it should not make any difference merely because part of the share application money is converted into equity shares and the balance were allotted in subsequent assessment years. We, therefore, do not find any merit in the submissions of revenue in this behalf. This proposition, is reinforced by the decision of the Co-ordinate Bench in the case of ITO v. Sterling Oil Resources (P.) Ltd. [2016] 67 taxmann.com 2 (Mum-Trib). The relevant part reads as under:- 9. There is one more aspect of the matter. In the present case, allotment of shares does not make any change to the position of the assessee, as the subsidiary' is admittedly a wholly owned subsidiary of the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allotment as also post new allotment. In the case of CH v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi). Hon'ble Delhi High Court has, though in a very different context and which is materially different from a situation in which the payment is made for subscription of share capital- as in this case, held that re-characterization of a transaction is possible in only two situations - i.e. (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements mode in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The assessee has behaved in a commercially rational manner inasmuch as whether the new shares are allotted at x point of time or y point of time, it does not make a difference to the position of the shareholder so far as the subsidiary is wholly owned by a single shareholder-as is the factual position in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data to show that independent parties had entered into agreements with similar terms (benefits) and not charged any interest thereon whereas in the case in hand, the assessee has not produced comparable data to justify that OFCDs were issued at arm's length price. It is strongly contended that since these facts have not been brought on record, therefore, the Bench should not follow its earlier decision. 20. Shri Soparkar ld. senior counsel replying to the submissions of revenue stated that the decision of the Hon'ble Supreme Court in the case of Sahara India Real Estate (supra) relied upon by the learned DR is not applicable to the issue before the Hon'ble ITAT. Even if it is held that OFCD is a hybrid instrument as laid down by the Supreme Court, in applying the Transfer pricing Provisions, the entire instrument has to be considered and the same cannot be re-characterized partly as loan and partly as equity so as to enable any transfer pricing adjustment for the same. In this regard, we rely on the decisions cited earlier, which have been appropriately followed by the Hon'ble ITAT in A.Y. 2007-08 and the decision of the Supreme Court (supra) cited by the ld. PR do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvanced, but was not considered, the said judgment does not lose its binding effect, provided that the point with reference to which an argument is subsequently advanced, has actually been decided. The decision therefore would not lose its authority, "merely because it was badly argued, inadequately considered or fallaciously reasoned". The case must be considered taking note of the ratio decidendi of the same i.e. the general reasons, or the general grounds upon which the decision of the court is based, or on the test or abstract, of the specific peculiarities of the particular case, which finally gives rise to the decision. (Vide Somawanti v. State of Punjab, Ballabhadas Mathurdas Lakhani v. Municipal Committee, Matkapui, Ambika Prasad Mishra v. State of U.P and Director of Settlements v. M.R. Apparao.) 24. The Hon'ble Jurisdictional High Court of Gujarat in the case of Dy. CIT v. Core Healthcare Ltd. [2001] 251 ITR 61 has observed as under:- As laid down by the apex court in the case of Ambika Prasad Mishra v. State of U.P. ; [1980] 3 SCC 719 (page 1764 of AIR 1980 SC): "Every new discovery or/argumentative novelty cannot undo or compel reconsideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of arms length price in relation to the transaction was made to Transfer Pricing Officer (TPO). TPO noted that the Assessee had entered into an agreement with Zydus International Pvt. Ltd. on 09.10.2007 for a convertible loan of U.S $ 27 Million which was subsequently utilized by the Ireland Company for acquiring shares in Zydus Healthcare, Brazil. As per the terms of agreement, no interest was payable if the amount was converted into equity. However, if the same is redeemed, interest was payable at Libor Plus 290 bps and the interest was to be computed at annual rates and payable at maturity that is 5 years from the date of first disbursement. The rupee value of the amount of loan as on 31.03.2008 was ₹ 108.32 crore. It was also noticed that Assessee has not shown any income from the aforesaid loan. In response, Assessee inter alia submitted that Assessee had not opted for conversion of the loan during the year and therefore it was loan for the year and as per the terms of agreement, no interest accrued to the Assessee and therefore no income was considered. The TPO did not find the contention of the Assessee acceptable. He considered the Optionally Fully Convertible loa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Bench in the light of the ratio laid down by the Hon'ble Supreme Court and the Hon'ble Jurisdictional High Court of Gujarat (supra) and considering the fact that the OFCD were on beneficial terms as per facts mentioned above. Consequently, we have no hesitation to follow earlier judgment in assessee's own case as a result we delete the impugned additions. Ground No. 3 of assessee is allowed 27. Ground No. 4 relates to the addition on account of Corporate Guarantee provided to associated enterprises Sun Pharmaceutical Bangladesh Ltd. amounting to ₹ 23,88,000/-, 28. Facts in issue are that the assessee had given Corporate Guarantee to bank on behalf of its AEs. The TPO found that the assessee had not charged any commission/fee from its AE for extending such guarantee. TPO made an adjustment of corporate guarantee commission @ 2% on to total amount of guarantee extended for the benefit of AE. This adjustment was confirmed by the first Appellate Authority. 29. Before us, the ld. Senior Counsel stated that an identical issue has been decided by ITAT in own ease for A.Y. 2007-08 in ITA Nos. 2076 & 2067/Ahd/2013. Ld. Senior Counsel pleaded that similar view should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er for a lower forum to constitute to a Special Bench to decide the same issue. Since the bench has only directed that Hon'ble High Court's decision is to be applied, there is no prejudice to the Revenue. 33. Following our own findings given in A.Y. 2007-08 in ITA Nos. 2076 & 2067/Ahd/2013, we set aside this issue to the file of the ld. CIT (A) (to avoid any issue of limitation to give effect to ITAT order as apprehended by ld. CR) with a direction that this issue may be decided in accordance with Hon'ble Jurisdictional High Court of Gujarat and after giving adequate of hearing to the assessee. Ground No. 4 is accordingly treated as allowed for statistical purpose. 34. Ground No. 5 relates to the addition on account of Sale of Pantoprazole to Sun Pharma Global amounting to ₹ 612,03,79,468/-. 35. During the course of the Transfer Pricing proceedings, it came to the notice of the TPO that the assessee (SPIL) has sold medicine called Pantoprazole Tablets, manufactured at its US FDA plant worth ₹ 16.67 crore on GRAMS basis-(Contract Research & Manufacturing services) to its AE, Sun Pharma Global BVI (SPG BVI) on which the assessee had earned a margin of 21.57 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assets employed by the assessee, it was mentioned that for carrying out the said manufacturing work the assets that are employed by the assessee is the US FDA Plant facility to manufacture the said product. It was strongly contended that no risk are borne by the assessee since it works on a contract basis and the IPRs are owned by the AE and the AE has to bear all the risks. 41. Insofar as the FAR analysis for the AE is concerned, the functions carried out by the AE relate to the co-ordination with the various job workers to procure the goods and supplying of the same in US and other markets. The ANDA is owned by the AE, the technology to manufacture the product is also owned by the AE. Since, the owner of the IPRs is the AE; the substantial risks related to the product are borne by the AE. The risks borne by the AE are as follows- (a) Litigation risks (b) Chargebacks (c) Self Stock Adjustments (d) Product Returns and Other Allowances (e) Infringement issues 42. It was brought to the notice of the ld. CIT (A) that the propositions of the ld; TPO/AQ that the assessee cannot be merely treated as a contract manufacturer and has performed substantial functions, were neith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y SPG BVI/SPG FZE who is the IP owner. These facts are not disputed and all the litigation documents are on the record. 44. In support of its ALP working, the assessee brought to the notice of the FAA the following distinct facts relating to the sales of Pantoprazole made by the AE and the ultimate profit earned by it and the sale of the same product made by the assessee and the ultimate profit earned by it:- "Particulars A.Y. 08-09 A.Y. 09-10 A.Y. 10-11 Total USD(Mio.) USD(Mio.) USD(Mio) USD(Mio) Gross Sales 420.00 93.12 248.87 761.99 Less: Returns, Chargebacks etc. 160.00 53.75 122.38 336.13 Net Sales 260.00 39.37 126.49 425.86 Less: Other expenses 10.54 9.73 26.03 46.30 Profitability 249.46 29.64 100.46 379.56 Infringement Claim 506 Mn USD 506.00 Net Profit/(Loss) (126.44) As against this, the summary of the sales made by the assesses in respect of the said product and the profit earned by the assessee as considered by TPO in its assessment order as summarised in the table below: [All Amount in Rs.] Particulars A.Y. 08-09 A.Y. 09-10 A.Y. 10-11 Total Gross Sales 16,66,93,000 6,67,83,600 24,67,71,030 48,02,47,630 Less: Expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Lilly and SPIL hereby agree that SPIL shall perform the manufacturing activities (the "Manufacturing Activities") as set out in Appendix A for the Products in the form listed in Appendix B (the "Products") using of the bulk material(s) set forth in Appendix C (the "Bulk Material") and excipient materials as set forth in Appendix D (the/Other Material") and that SPIL shall not use a third party to perform the Manufacturing Activities without Lilly's prior written consent." From the above, it is clear the Lilly has given the task of only manufacturing the product listed in the agreement with proper specifications and using the bulk material mentioned in Appendix C and excipient materials as mentioned in Appendix-D. This definitely indicates towards contractual activity where only the task of manufacturing of product is outsourced with specific directions regarding manufacturing process. As against this, the clause in the agreement with SPG mentions that appellant has agreed to 'sell and supply' the products to SPG which has agreed to 'purchase' the products. In the entire agreement with SPG, there are no details lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts to be manufactured and Appendix-D contains the details of different raw materials, primary packaging components and secondary packaging materials. No such technical details are available in the agreement with SPG. 7.9.1.2 From the above detailed analysis of both the agreements, it is clear that the two agreements are not at all comparable. The agreement with Lilly is definitely in the nature of a 'contract manufacturing agreement' where specific details of the activities to be carried out, financial implication, and duty to procure raw materials have been clearly mentioned with specific clauses defining the responsibilities of SPIL and Lilly under various covenants. On the other hand, in the agreement with SPG no such specific details are available describing responsibilities and financial burden of the two parties. In fact, the clause (1) of agreement with SPG itself says that SPG was ready to 'purchase' and SPIL was ready to 'sell' and supply products. The appellant has sold goods to SPG which were manufactured in appellant's plant and were directly shipped to Coraco and not SPG. Once it is established that appellant is not contract manufacturer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on because in such a case independent parties might wish to share: the profits in proportion to their respective contributions and a two-sided method might be more appropriate than done sided method, in: addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. An advantage to apply PSM to such kind of transactions is that it offers flexibility by taking into account specific, possibly unique facts and circumstances of the associated enterprises that are not present in independent enterprises, while still constituting an arm's length approach to the extent that it reflects what independent enterprises reasonably would have done if faced with the same circumstances. It is less likely that either party to the controlled transaction will be left with an extreme and improbable profit result, since both parties to the transaction are evaluated. This aspect is particularly important because the present case involves analysis of contributions by both the parties in respect to intangible property i.e. ANDA/IPR employed in the controlled international transaction. 47. In view of the above discussion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including: - 1. The US pharmaceutical markets are highly regulated having tough compliance and regulatory norms. Caraco was an existing US Company having an efficiently functional distribution network and a broad understanding of the module of the US markets. SPIL on the other hand would have had to build a distribution network and gain an understanding of how the US markets operate. Besides the distribution networks in the US are very different to that of India where only the approved generics and the formulations are sold. Caraco has got its own manufacturing facilities in US and was not merely a trader of medicines. Assessee sold bulk drugs as well which have been used for manufacture by Caraco having independent own set of operations in a market which was not easily accessible to SPIL. 2. The main criteria governing the transactions entered into with Caraco were the following: a. To get entry for SPIL in the US markets; b. To understand the regulatory markets of US; c. To establish a foothold for itself on a long term basis. 3. Consequent to these arrangements SPIL's exports to Caraco have multiplied manifold over the past few years. SPIL's main operations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith Caraco is 70.45%. 3. The average external net profit margins of comparable companies are around 20:82%. Detailed workings and derivation of the said margins were filed with TPO. - Step 1: Selection of Pharmaceutical Companies: A sample list of 141 pharmaceutical companies was found from various websites like www.moneypore.com and www.moneycontrol.com. The companies found are listed as under: Sr. No. Company Name Sr. No. Company Name 1 Ranbaxy Laboratories 72 Mangalam Drugs and Organics Ltd. 2 Cipla Ltd. 73 Bal Pharma Ltd. 3 Dr Reddys Laboratories 74 Medicamen Biotech Ltd. 4 Lupin Ltd. 75 Amrutanjan Healthcare Ltd. 5 Sun Pharmaceuticals Industries Ltd. 76 Sanjivani Paranteral Ltd. 6 Aurobindo Pharma Ltd. 77 Elder Healthcare Ltd. 7 Piramal Healthcare Ltd. 78 Syncom Formulations India Ltd. 8 Cadila Healthcare Ltd. 79 Lincoln Pharmaceuticals Ltd. 9 GlaxoSmithkline Pharma Limited 80 Smruthi Organics Ltd. 10 Glenmark Pharmaceuticals Ltd. 81 Gufic Bio-sciences Ltd. 11 Orchid Chemical Chemicals and Pharmaceuticals Ltd. 82 Krebs Biochemicals and Industries 12 Wockhardt Ltd. 83 Makers Laboratories Ltd. 13 Ipca Laboratories 84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a India 127 Unjha Formulations Ltd. 57 KDL Biotech Ltd. 128 Zenith Healthcare Ltd. 58 Albert David Ltd. 129 Triochem Products Ltd. 59 Vivimed Labs Ltd. 130 Gujarat Inject Kerala Ltd. 60 Wanbury Ltd. 131 Biofil Chemicals and Pharmaceuticals Ltd. 61 Jagsonpal Pharmaceuticals Ltd. 132 Vista Pharma Ltd. 62 Zandu Pharmaceutical Works Ltd. 133 Country Gondo's Ltd. 63 Jupiter Bioscience Ltd. 134 Pharmaids Pharmaceuticals Ltd. 64 Morepen Laboratories Ltd. 135 Inwinex Pharmaceuticals Ltd. 65 Hiran Orgochem Ltd. 136 Bharat Immunological and Biological Corporation Ltd. 66 Suven Life Sciences Ltd. 137 Saamya Biotech India Ltd. 67 Kilitch Drugs(lndia) Ltd. 138 Kappac Pharma Ltd. 68 Anuh Pharma Ltd. 139 Piramal Lifesciences Ltd. 69 Trans Asia Corporation Ltd. 140 Bacil Pharma Ltd. 70 Shilpa Medicare Ltd. 141 Brabourne Enterprises Ltd. - Step 2: Selection of Comparable Pharmaceutical Companies: In the current period, the turnover of SPIL was approximately ₹ 2427 crores. Accordingly, companies having sales in the range of ₹ 1214 crores to ₹ 3640 crores i.e. 50% plus/ minus sales of SPIL are considered to be compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se by SPIL, such adjustments have not being carried out at present. It is thus seen that the transactions have been carried out at arm's length. I. Sale of Pharmaceutical Products Name of the Associated Enterprise Amount in Lacs Caraco Pharmaceutical laboratories Ltd., U.S.A 46954.08 Sun Pharmaceutical Ltd., Brazil 276.22 Sun Pharmaceuticals Industries Inc., 18.57 In sales transactions, the general functions performed, assets deployed and risks assumed are similar irrespective of the AE to whom the sales are made. Rather the FAR analysis would be based on the ownership of the Intellectual Property Rights (IPRs) of product sold to the AE. Accordingly the FAR analysis has been carried under the following broad heads: - Sale of formulation products whose IPR are owned by SPIL - Sale of formulation products whose IPR are owned by Associated Enterprise - Sale of bulk products whose IPR are owned by SPIL FORMULATIONS-IPR OWNED BY SPIL Description of Functions SPIL Associated Enterprise Purchase Function - Receives raw materials ordered and handles administration, if any - Material Management Yes Yes Manufacturing Function - Setting up of quality standar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing Function - Setting up of quality standards - Implementation of quality standards Yes Yes Distribution Function - Warehouse finished goods inventory - Perform inventory control - Ship finished goods Yes Yes Yes Sales Function - Sells goods directly or to distributor - Determines sales personnel needs - Determine sales price to third party customers Yes Yes Yes Marketing Function - Develops marketing strategy for foreign country - Performs market research and develops new goods - Controls/co-ordinates marketing activities Yes Yes Yes Product Strategy Function - Develops promotional activities - Trains sales force and develops training materials - Co-ordinates marketing strategy implementation - Designs packaging material - Identifies need for goods modification - Introduces new goods in the market place Yes Yes Yes Yes Yes Accounting Function - Processes sales orders from third parties Yes Research and Development Function Yes Employees Yes Property, plant and equipment - Warehouse - Manufacturing facilities - Land and office building - Moveable assets Yes Yes Yes Yes Yes Intangibles - Brandname - Trademarks - Pate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uman skill sets Yes Yes Inventory Obsolescence Risk - Risk of obsoleteness of acquired inventory Yes Yes Research and Development Risk - Risk of failed research and development Yes Yes Note: 1. The bulk drugs sold by SPIL are utilized by the Associated Enterprise for its captive consumption. The bulk drugs are subsequently used by the AE as raw material for the production of formulation products. Accordingly no sales or marketing functions are carried out in respect of the sale of bulk drugs. The said transaction pertains to the sale of the product Pantaprozole by the Assessee to its AE, In the said transaction the issue has been raised on the allocation of the profit margin among the Assessee and its AEs. On merits following is submitted by the assessee:- FAR ANALYSIS:- Functions Carried out by the Assessee: - Manufacturing of Product as per the Specifications provided by the AE on a contract basis. To substantiate the same we hereby enclose the agreement between SPIL and SPG BVI whereby the SPIL is to manufacture the said product on behalf of SPG BVI. (The said agreement is enclosed as per ("Annexure - 8")) The said manufacturing is carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arer of the substantial risks is SPG BVI. The evidences submitted also substantiate that the owner of the IPRs is the AE. Hence the substantial assets are borne by the AE. Consequently the risks shall be borne by the AE. II. SPIL Caraco Agreement dated 29th January, 2008:- 1. In respect of the said agreement it is [hereby submitted that the agreement has been entered into by the Assessee in the capacity of the representative of the Sun Pharma Group. This is because the Assessee is the Ultimate holding Company. Sun Pharma Group had various ANDAs which were partially owned by it as well as its other affiliates. Some of these ANDAs were para IV products. Although Caraco is also a subsidiary of the SPSL and thus belonged to Sun Group, still it was an independent listed company in USA with very strong requirements to corporate governance and with very strong insight by the independent directors. Due to this for all regulatory purposes including repriting and complying with the SEC, as well as for all commercial transactions between Caraco and entities belonging to Sun Pharma Group, were carried out on an arm's length basis. The Agreement in question was entered into by SPIL fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o its: US based AE- Caraco in 2007-08. On the said sales the Assessee has earned huge profits because the substantial asset - the IPR was owned by the Assessee and the substantial risks were also borne by the Assessee. Consequently the Assessee has earned huge profits in the said transaction. The details of said transaction is already submitted vide our submission dated 31/01/2011. 8. Hence it will be clearly evident that the sales relating to para IV products or other ANDA products were carried out by entities that owned the underlying ANDA. It is further contended by assesse that: 1. The Assessee does not own the technology to manufacture the product. The same is owned by the AE. Only for the limited purpose of contract manufacturing on behalf of the AE that the same has been used by the Assessee. 2. The Assessee has made the supply to Caraco only on the instructions given by the AE. There was no marketing function involved in the said transaction of sale because the ultimate distribution was to be done by Caraco. Hence there was no marketing function to be carried out by the Assessee or the AE. 3. The AE has issued the bills for sales made to Caraco. The Caraco has mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usivity period expires the price has to be reduced. Thus the overall profitability of the product during its life -cycle is leveled out. Hence while determining the profitability of the transaction of sales the overall economic life - cycle of the product is to be considered and the evaluation should not be on a yearly basis. As an example we submit the profit and loss Account of A.Y. 09-10 whereby there is substantial loss of revenue. The brief extract of the same is as follows: Particulars Amount in USD Amount in USD Income: Income/(loss) from Operations (87,752,391) Expenditure: Cost of Materials/ Goods 3,140,1,88 Personnel Cost 738,027 Operating and Other Expenses 5,459,090 Depreciation/Amortization/Impairment 1,519,232 10,856,537 Profit/(loss) After Tax (98,608,928) As an example for how the high profits of one year get wiped off in the subsequent years we also give the following schedule: Particulars Amount (in USD) Product replacement on account of price revision in A.Y. 2009-10 $ 63,690,396 Credit given in A.Y. 2009-10 on account of rate difference sales life/adjustment, special rate contracts etc. $ 96,447,614 Cost of litigation incurred so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... razole Tablets transferred its ownership to SPG BVI on Oct- 2007. - SPG therefore became the owner of the IPRs - Both the Abbreviated New Drug Application (herein after referred as ANDA) and the technology to manufacture of Pantoprazole Tablets and other ANDAs. - SPG has vide the Supply agreement dated 1st November, 2007 has authorized the Assessee Company: Sun Pharmaceuticals Industries Limited (herein after referred as SPIL) to manufacture and supply these products on Contract basis. - The products manufactured by SPIL are sold to SPG BVI. SPG has marketed these products in United States which were distributed by Caraco. - SPIL has sold goods worth ₹ 1666,93 Lacs to SPG for the year ended on 31-3-2008. of the above, the major sales (Approx. 99 %) comprises of sales of Pantoprazole Tablets. - Other than manufacturing of the products, SPIL does not undertake any of the following functions namely marketing, distribution, credit risk, product litigation liabilities, Patent infringement or damage claim, inventory holding costs and risks, sales returns, charge backs, damage & expiry etc. In spite of the above SPIL has earned a margin of 21.57% on its sale to SPG. 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears no risk in respect of the IPR. (iv) The above fact was explained at length to the TPO which was partly accepted. (v) However the contention of the appellant that para IV Filing Products are susceptible to high risk became a fact when the litigation with Pfizer surfaced. The AE was defending a claim of USD 960 million which was substantially higher than the earnings made from this product. The claim by Pfizer was ultimately settled for USD 550 million. (vi) The amount payable on account of settlement paid by the AE of the assessee company out of its internal accruals and borrowings. (vii) In order to meet with the commitment of making payment of settlement charges SPG FZE had to raise a loan from Standard Chartered Bank. Bank memo/Confirmation with Standard Chartered were filed. It clearly demonstrated that the AE had borrowed funds to meet with entire settlement claim. (vi) The document reflecting payment of infringement settlement claim by SPG FZE to Pfizer from its own bank account was also filed. (vii) The AE thereafter approached Standard Chartered Bank and raised the above amount to meet with the funding requirement for discharging the infringement claim. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken place between your good self and the TPO wherein the appellant was not given any notice to remain present. Therefore any hearings conducted in absence of the appellant are not legal and accordingly it lacks any legal validity. 4. Without prejudice to the above, we would like to reiterate that the Appellant company (appellant) is in the business of the manufacturing of Generic Drugs. One of the key business drivers in generics business is the approval and ownership of Abbreviated New Drug Application (ANDA).Approval and Ownership of ANDA gives the right to market the product in the specific market i.e. USA. Also if ANDA is filed under Para IV of US FDA, then the Applicant gets the six months exclusivity to sell the product like the original inventor even before the expiry of the Patent. Hence in case where approval under Para IV is granted, then depending on other parameters like market size, no. of competitors' etc. substantial profits may be earned during the exclusivity period. Since filing and approval under Para IV is on the ground that the Applicant challenges the validity of the patent of the originator, the Para IV Approval is also associated with a very high ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "On October 28, 2007, SPARCL has sold pharmaceutical manufacturing technology developed in the form of Abbreviated New Drug Applications [ANDA] to Sun Pharma Global Inc. BVI [SPG]. The consideration for sale of such ANDA were determined on the basis of valuation report of the government approved independent valuer for the entire basket of technologies totalling to 38 for USA market and 14 for Europe market, The transfer of the said ANDA was subject to transfer pricing assessment and as informed to us, some adjustments have been carried out by TPO in the case of SPARCL for A.Y. 2008-2009 to A.Y. 2010-2011 and the said adjustment are contested/would be contested in appeal by the SPARCL, Consideration towards sale of the ANDA for pantoprazole tablet to SPG was USD 3 million and USD 1.4 million for USA and Europe market respectively whereas TPO in its show cause notice for A.Y. 2008-2009, has recomputed the arms length price at USD 7.41 million for USA market" (k) That it is an undisputed fact that para IV products are subject to huge litigations. The expenses/losses that can arise out of the litigation for defending the ownership of Para IV products can be su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndisputed fact that the appellant company is not the owner of ANDA. All the relevant intangibles required to market the said medicines are owned by its AE. The appellant is solely manufacturing the said medicines for the limited reason that the site of the appellant is an approved facility. There is long procedure for the AE to request the Manufacturing Site change. However it has been ensured that the appellant is providing its facility at the Arms' Length Price which is offered by peers in the industry. Therefore the appellant has correctly characterized itself as a contract manufacturer. Accordingly the appellant has benchmarked its using TNMM as the most appropriate method. Further in order to Substantiate the above method the appellant has also submitted a summary of margins earned by it in its contract with Eli Lilly and Company (India) Pvt. Ltd. wherein it has earned 14.43%. It may also be pointed out that the transaction of manufacturing goods for its AE is comparable with the Elli Lilly where in the Appellant is also doing similar contract manufacturing. Copies of contract with Eli Lilly have already been submitted to you during the course of appellate proceedings. Bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of pharmaceutical products in an US FDA approved facility. The average profit earned by these companies is 15.47%. On the other hand the appellant has earned a margin of 21.57% which is far more than the average profit earned by similar companies. Comparable Companies in Contract Manufacturing in USFDA Plants: DESCRIPTION Emcure Pharma Ltd. Hetero Drugs Ltd. SMS Pharma Ltd. Strides Arcolab Ltd. Year End 200803 200803 200803 200812 No of Months 12 12 12 12 Gross Sales 481.22 848.90 237.43 596.03 Less: Sates Returns Less: Excise Duty 41.82 16.77 0.34 2.89 Net Sales 439.40 832.13 237.09 593.14 Total Expenditure 395.97 702.69 197.73 526.76 Operating Profit (Exce 01) 43.43 129.44 39.36 66.38 Other income 27.27 4.29 5.05 69.00 Operating Profit 70.70 133.73 44.42 135.37 Interest 18.73 24.83 6.87 65.43 PBDT 51.97 108.90 37.55 9.95 Depreciation 16.85 14.18 5.18 18.88 Profit Before Taxation & Exceptional Iter 35.12 94.72 32.37 51.07 Opertional Profit /Operating Cost 10.97% 18.42%. 19.91% 12.60% Simple Average 15.47% Weightage Average 15.28% 63. On perusal of the above companies your good self will appreciate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d self has also observed that no allocation of weightage to technology obsolescence is required. In this respect it may be noted that as soon as the Pantoprazole product got off patented the sale price of the drug fell substantially. To substantiate that the AE is the ultimately absorbing the IPR obsolescence, it is submitted that in Feb 2010 the product was off patented and the sale price of AE in US Market has dropped from 210$ to 7.50$ i.e. by more than 95%. it is further submitted that in spite of such drop in the selling price in US Market the margin of appellant, being a contract manufacturer was not affected. Inspite of this vital fact the transfer price from appellant to its A.E. was increased from USD 2.10 to USD 2.85. The copies of sample invoices are enclosed herewith for your ready reference vide Annexure-'H'. 12. Your good self has also alleged that no Functions were carried on by the AE inspite of the fact that the AE was in fact co-ordinating with various agencies and job workers, supplying the goods procured in US markets, appointed distributors, and carrying out supply chain management functions. The A.E. of the appellant company has incurred huge expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vastava appearing as a special counsel for the revenue vehemently rebutted the submissions made by the ld, Senior Counsel. Supporting the findings of the TPO/AO, reliance is placed upon the findings of the ld. CIT (A) and it is contended that the arrangement of the affairs by the appellant company is the crudest form of tax evasion. It is the say of the ld. special counsel that SPIL had carried out the requisite processes for development for a number of years investing its time and money and a few months before the grant of approval, it transferred the technology to SPARC which in turn transferred the technology to SPG BVI. This was done just one month before the beginning of the exclusivity period in December 2007. Therefore, the R&D behind the technology was done by of SPIL not SPG. Shri Shrivastava pointed that the USFDA approval in the name of SPG is dated 10.09.2007, however, Technology was purchased by SPG only in the month of October, 2007. SPG therefore allegedly has become the owner of ANDA without even buying the technology from SPARC. Refuting the claim of the assessee that there was a pay out of USD 550 million pursuant to the settlement agreement between the original o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... litigation risk and the consequential burden have been admittedly borne by SPIL, the balance portion thereof has also been transferred to it as a result of merger in May, 2013. Drawing our attention to Rule 10B(l)(d) of the income Tax Rules read with Section 92C of the Act, PSM can be applied in cases when the international transaction either involves transfer of unique intangibles or where there are multiple interrelated transactions which cannot be evaluated separately. 73. Ld. Counsel for revenue vehemently contends that the assessee has tried to artificially shift its profits to a group entity in British Virgin Islands, which is a tax heaven. The aforesaid arrangement has lead to the group entity located in BVI to enjoy maximum profits without making any substantial contributions to the transaction of sale of drug in the US market. Even if the legal ownership of SPG, BVI is accepted, the ld. CIT (A) has still very liberally allowed a substantial profit of 20% to be allocated to it. The assessee has tried to attribute risks and functions to the AE on the basis of mere agreement. These agreements are a smoke screen and subterfuge to evade taxes in India. The A.O. and also the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court approving the said scheme is placed on record vide pages 475 to 518 in the Paper Book - Compilation IV. The approval was with effect from 28th February, 2007. Consequent to the demerger of the SPIL, all 52 ANDA's (Approved/Pending/Application) including that of Pantoprazole was transferred by the assessee-company to SPARC Ltd. The transfer of the ANDAs including Pantoprazole was specially included as part of the order of the High Court and the same is placed at pages 475 to 518 of the Paper Book-Compilation IV. 5. Thereafter, the said IPR's were transferred by SPARC 2 to SPGBVI by way of sale at a consideration. This agreement took place on 28th October, 2007 and the transfer of IPR was subject to pending litigation in United States District Court. This assignment was subject matter of Transfer Pricing scrutiny in the case of SPARC 2. Arm's length valuation of the rate at which all ANDA's including that of Pantoprazole were transferred to AE for all the 52 products transferred was agreed at total consideration of $ 52.93 million which was restated at $ 100.73 million by TPO and then has carried out addition on accrual basis year after year. The learned TPO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of intellectual property (i) In the present case, the owner of the ANDA is the; Associated Enterprise ('AE') of the appellant - SPG BVI (100% subsidiary of the appellant). SPG BVI also owned the technology to manufacture Pantoprazole Tablets which is a para IV filing product. The AE, being the owner of Para IV product and the related IPRs, the high profit during the exclusivity period is attributable to its ownership of the ANDA with a para IV certification which inherently also carries the risk of any negative outcome of any pending litigation (already initiated in the present case). The exclusivity period falls in the relevant assessment year. However, the flip side to the above is that the Para IV filing is prone to huge litigation capable of not only wiping off the entire potential profits of the entity but also creating further losses. A suit had already been lodged against the AE against the Para IV filing and resulted in subsequent settlement with payment of, substantial damages. This confirms the basic risk in a para IV filing. (ii) The AE thus owns the most important assets that drives the generics business -- i.e. ANDA approval under the Para IV filing and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE of the assessee. Without prejudice to the above, it was submitted that the subsequent demerger of the relevant division into SPIL was an independent transaction carried out subsequent to the assessment year under question and cannot be considered to decide the legal risks arising to SPG BVI for the assessment year A.Y. 2008-09. (xi) Further the damages of USD 400 million dollar have not been claimed as a deductible expenditure/loss by SPIL in the year of demerger i.e. A.Y. 2014-15. On perusal of the above facts, it will be appreciated that the entire ownership and risks in the AE of the appellant company. C. Regarding Profit Split Method being the MAM 1. The appropriate situations for applying the PSM is where the transaction involves transfer of unique intangibles or where the underlying transactions being multiple in number are so inter related that they cannot be evaluated separately for determining the ALP. 2. It is submitted that there was no transfer of intangible in the transaction under question. As pointed out earlier, the transfer of intangibles was effected under a separate transaction which was carried out by the resulting company - SPARC 2 pursuant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant responsibilities and risks pursuant to the distribution agreement. - The goods have been invoiced by the contract manufacturer to the AE who has in turn invoiced to the distributor; - All the risks on account of the price change, sales return, charge backs, expiry of the goods etc. were borne by the AE - SPG FZE. The assessee-company as a contract manufacturer has not assumed any risks on this account; - The entire risks relating to the ANDA ownership were also assumed by the AE. Hence it is clear that the relevant agreement if not properly read with the clause 11 and the actual conduct of the parties can be greatly misleading and confusing which advantage the learned DR has tried to take but without any merits. 8. The learned counsel has admitted that if the arrangement was of contract manufacturing then PSM will not apply and TNMM was the appropriate method. 9. Having said that, the learned DR highlighted that transfer of unique intangibles and inter related functions were not the only grounds when PSM could be invoked. It is submitted that the said argument is without merit since the use of 'mainly' in relevant rule 10B(l)(d) can only cover situatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing. Copy of supply agreement between SPG and SPIL is exhibited at pages 648 to 659 of the paper book. Relevant clauses of the supply agreement read as under:- AND WHEREAS SPGI is the owner of the various abbreviated new drug applications and is interested to market the products in United States of America and in Europe and is therefore interested to buy various products from side approved by US FDA. 1. SUPPLY AND PURCHASE ARRANGEMENTS SPIL hereby agrees to sell and supply the Products to SGI and SPGI hereby agrees to Purchase the Products from SPIL with the terms and conditions of this Agreement, it is understood by the parties that this Agreement in no way obliges SPGI to purchase or take any or all the said products or any part of SPG's requirements thereof, manufactured. Processed and/or packed by SPIL only and does not preclude SPGI from making similar or alternative arrangements with one or more other parties at its sole discretion. 2.1 SPIL agrees to sell and supply the product to SPGI at prices as agreed to between the parties. SUN will dispatch consignment of the PRODUCT within 45 (forty-five) days of acceptance by SUN of purchase order from SPGI or within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reof. SPGI shall conduct any defense of such suit at its own expense and SPGI shad indemnify and hold SPIL harmless from and against any loss, claim, damage, expense or liability if any resulting from any such suit in accordance with Section 5. However, in any such litigation suit SPIL agrees to assist SPGI, without assuming any monetary obligation. 4.3 Legal Compliance SPIL hereby undertakes to comply with all requirements of law for obtaining various licenses, approvals, permissions and no objection certificates for meeting all legal obligations in respect of any matter whatsoever, enabling it lawfully, to properly manufacture the Products Vibe execution, delivery and performance of this agreement by SPIL does not and will not violate any provision of applicable law or of any regulation, order decree of any court, arbitration or/governmental authority or any other agreement to which SPIL is a party, SPIL hereby indemnifies SPGI from any consequences whatsoever of any failure or lapses or gross neglect or damage etc. on its part on account of legal liabilities or Otherwise. SPGI hereby also undertakes to indemnify SPIL wherever found appropriate, on account of any failure or lap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual property right or any product liability. Notwithstanding anything to the contrary in this Agreement, in no event shall SPGI be liable to SPIL for any incidental indirect, exemplary, special or consequential damages whatsoever (including, but not limited to, lost profits, loss of goodwill, or interruption of business) that may be suffered or incurred by SPIL as a result of SPGI's violation of this representation. 5.2 SPIL Indemnification. SPIL shall indemnify- and hold SPGI harmless from and against any loss, claim, damage, expense or liability resulting from any misrepresentation, negligence or intentional misconduct by SPIL in performing this Agreement; provided however, that SPIL's obligation of indemnification shall not extend to any loss, claim, damage or expense or liability, resulting from SPGI's gross negligence or misconduct Notwithstanding anything to the contrary in this Agreement, in no event shall SPIL be liable to SPGI for any incidental indirect, exemplary, special or consequential damages whatsoever (including but not limited to, lost profits, loss of goodwill, any patent/trademark infringement or interruption of business) that may be suffered or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as economic entities with legal independence vis-a-vis their shareholders or participants. Consequently, the entities subject to income-tax are taxed on profits derived by them on stand alone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to the shareholders or participants. Furthermore, shareholders or participants, that are subject to (personal or corporate) income-tax, are generally taxed on profits derived in consideration of their shareholding or participations, such as capital gains. It is fairly well settled that for tax treaty purposes a subsidiary and its parent are also totally separate and distinct taxpayer's. The fact that a parent company exercises a shareholder's influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. Where the subsidiary's executive directors' competences are transferred to other persons or bodies or where the subsidiary's executive directors' decision-making has become fully subordinate to the holding company with the consequence that the subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the authority of its own executive directors. (vii) A typical large business corporation consists, of sub-incorporates. Such division is legal and recognized by company law, laws of taxation, takeover codes. The parent is the only group member that normally discloses financial results. Below the parent company are the subsidiaries which hold operational assets of the business and which often have their own subordinate entities that can extend layers. Subsidiaries are often created for tax or regulatory reasons. They at times come into existence from mergers and acquisitions. As group member, subsidiaries are financially interlinked. Such grouping is based on the principle of internal correlation. 82. A thought full consideration of the aforementioned decision of the Hon'ble Supreme Court would show that even the Apex court have recognized that multinationals and multi entities group companies constitute subsidiaries in furtherance to their objects and to carry on their business smoothly in a competitive world . Moreover no person would arrange its affairs in such a manner which would culminate into huge losses to the extent of USD 506 millions as was suffered by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e.g. contract manufacturing or contract service activities in relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate In view of the functional analysis of that party. See paragraphs 3.38-3.39 for a discussion of limitations in available comparables. 85. United Nations practical manual on transfer pricing states as under:- 6.3.13. Profit Split Method 6.3.13.1. The Profit Split Method is typically applied when both sides of the controlled transaction contribute significant intangible property. The profit is to be divided such as is expected in a joint venture relationship. 6.3.13.2. The Profit Split Method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction -[or specified domestic transaction] in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and, (iii), and in such a case the aggre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 90. The revenue authorities have compared the agreements of SPIL with Eli Lily and SPIL with SPG BVI and have come to the conclusion that a conspectus reading of the relevant clauses show that the assessee is not a contract manufacturer in the case of SPG BVI. This finding of the revenue authorities is not acceptable for the simple reason that they have compared the clauses of the respective agreements without considering the nature of work done by SPIL. It may be possible that certain terms and conditions may be absent in the agreement between the assessee and SPG BVI but that itself would not deny the assessee, the status of contract manufacturer. In our considered opinion the assessee has performed only one function and that is manufacturing of Pantoprazole Sodium and for this, the demonstrative evidence is exhibited at pages 569 and 570 of the paper book, and as mentioned elsewhere, clearly establishes the ownership of ANDA with Sun Pharma Global. For the sake of completeness, it would not be out of place to mention that the printout of these documents were taken from the Website on 28.09.2011 and 27.09.2011 and the order of the First Appellate Authority is 14.10.2014 and ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to Sun Pharma Advance Research company (SPARC) subsequently SPARC transferred ANDA rights to SPG BVI. SPG BVI has been entered into an agreement with the appellant company SPIL for the manufacturing of Pantoprazole. Pursuant to this agreement assessee manufactured Pantoprazole and sold the same to Caraco Ltd on the directions of SPG BVI. On such sale transaction, the appellant company had shown a net margin of 21.57% benchmark the same on transactional net ,margin method which was dismissed by the revenue authorities questioning firstly, the ANDA rights with SPG BVI and secondly, comparing the contract manufacturing agreement of SPIL with SPG BVI and SPIL with ELI Lily. The revenue authorities ultimately applied profit split method and 'made the upward adjustment. 93. As demonstrated elsewhere, the IPR/ANDA rights were very much with SPG BVI who entered into an agreement with the appellant company for the manufacturing of the said drug. The application of Transactional Net Margin Method is the most appropriate method in such sale transaction and has been benchmarked by the assessee by showing it to be higher than the margin earned from the sales made to Eli Lily. 94. Consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, the ld. CIT (A) followed the findings of his predecessor given in A.Ys. 2002-03 to 2004-05. Before us, the ld. counsel for the assessee stated that the Tribunal in assessee's own case in earlier years has decided this issue in favour of the assessee and against the revenue in ITA No. 1558/Ahd/2006. The Id. D.R. could not bring any distinguishing decision in favour of the revenue. 14. We have given a thoughtful consideration to the order of the Tribunal in earlier years; we find that the Tribunal while deciding the issue in favour of the assessee has followed the decision of the Co- ordinate Bench, Mumbai in the case of USV Ltd. 54 SOT 615. Findings of the Tribunal read as under:- 24. We have carefully perused the orders of the authorities below. We find that the ld. CIT (A) has simply followed the findings of his predecessor for A.Y. 2000-01. We also find that the assessment order for A.Y. 2000-01 has been quashed by the Tribunal vide a ITA Nos. 1199 & 1279/Ahd/2006, which means that the basis for upholding the disallowance has been removed. We further find that on identical set of facts, the Mumbai Bench in the case of USV Ltd. (supra) has allowed the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not taxable in the hands of the assessee under the proviso to section 28(v) of the Act, therefore, the assessee did not offer the remuneration received from partnership firm SPI as income due to proviso to Section 28(v) of the Act. 105. The assessee claimed that the total receipt from the partnership firm SPI being the share of profit including remuneration should be deducted while computing book profit. 106. Ld. CIT (A) was also not convinced with the claim of the assessee. The FAA was of the opinion that the computation of book profit is to be done strictly as per Explanation to Section 115JB and accordingly no assistance from any other section of the Act can be taken for that purpose, The ld. CIT (A) concluded by holding that remuneration of 40.12 crores should not be deducted while computing book profit as per Section 115JB of the Act. 107. Aggrieved by this, the assessee is before us. 108. The ld. Senior Counsel once again explained the factual matrix relating to the claim of deduction of remuneration for the computation of book profit u/s. 115JB of the Act. It is the say of the ld. Senior Counsel that for the purpose of computation of book profits u/s 115JB read with Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded by any of the Explanations under that section. 110. We have considered the facts, circumstances, relevant provisions and rival submissions, A harmonious reading of the provisions of section 115JB of the Act reflects that in the case of a company subject to the provisions of Section 115JB of the Act has to prepare P&L statement in accordance with the provisions of part (ii) of Schedule (vi) of the Companies Act. 111. The relevant clause of Explanation 1 reads as under:- Explanation [1]- For the purposes of this section, "book profit" means the [profit] as shown in the [statement of profit and loss] for the relevant previous year prepared under sub-section (2), as increased by- (f) the amount or amounts of expenditure relatable to any income to which [section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply; or] 112. And as reduced by :- (ii)the amount of income to which any of the provisions of [section 10 (other than the provisions contained in clause (38) thereof) or [***] section 11 or section 12 apply, if any such amount is credited to the [statement of profit and loss]; or 113. And section 10(2A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trongly contended that this action of the A.O. stating that Clause F of Explanation to Section 115JB does not cover disallowance made u/s. 14A of the Act. Therefore, disallowance made u/s. 14A cannot consider for the purpose of calculating book profit as mentioned u/s. 115JB of the Act. Rejecting this contention ld. A.O. proceeded by making addition of expenses disallowed u/s. 14A for the computation of book profit u/s. 115JB of the Act. 117. The assessee carried the matter before the FAA without any success. 118. Before us, the ld. Senior Counsel strongly relied upon the judgment of the Hon'ble Jurisdictional High Court of Gujarat in the case of CIT v. Alembic Ltd. in [Tax Appeal No. 1249 of 2014, dated 15-12-2014]. The ld. D.R. relied upon the findings of the revenue authorities. 119. We have considered the orders of the authorities below and have given a thoughtful consideration to the order of the Hon'ble Jurisdictional High Court in the case of Alembic Ltd. (supra) The Hon'ble High Court was seized, inter alia, with the following substantial question of law:- (iii) whether on the facts and in the circumstances of the case and in law, the ITAT was justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the book profit under Section 115JB of the Act, the disallowance of interest expenditure on exempt income was wrongly negative by both the authorities on the ground that it was not the liability for expenses, but a liability relating to assets. 6.5 We find no fault in the approach adopted by both the authorities. The addition under section 115JB of the Act of a sum of ₹ 1,14,43,040/- when was made as an expenditure estimated on earning of dividend income under Section 14A of the Act, without reiterating the rationale of confirming deletion of such amount as has been elaborately done at the time of deciding question No. 1, this deletion requires to be confirmed." 8. Taking into consideration the evidence on record and considering the division of this court in the case of Gujarat State Fertilizers & Chemicals Ltd. (supra), we are of the opinion that issue Nos. (iii) and (iv) required to be answered in favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred, to us in favour of the assessee and against the revenue. The appeal of revenue is dismissed. 121. Respectfully following the decision of the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to third parties and thereby diverting the profits. Assessee was asked to explain its stand. Assessee filed a detailed reply giving details of raw materials/products being sold to its sister concern and to third parties along with rates and quantity sold, On analysis of the reply, the A.O. found that there were certain raw materials/products which were being sold to the sister concern at a lower rate than sold to third parties. The A.O proceeded by computing an addition of ₹ 19,49,930/- on account of unreasonably low selling price on sale of raw materials/products sold to its sister concern. 84. Aggrieved by this, assessee carried the matter before the ld. CIT (A) but without any success. 85. Before us, the ld. counsel for the assessee stated that it is not clear under which provision of the Act additions have been made. Further the counsel stated that no 80-IB deduction has been claimed by it which could justify the action of the A.O. Per contra, the ld. D.R. strongly supported the findings of the revenue authorities. 87. We have given a thoughtful consideration to the orders of the authorities below. We agree with the contention of the ld. Counsel that no specific se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the income of ₹ 40.12 crores should not be taxed as royalty income. 129. In its reply, the assessee strongly objected to the proposed action of the ld. CIT (A) stating that it has a control of 97.5% of profit share in the firm SPI and as per the provisions of the partnership deed read with supplementary partnership deed, the assessee has received a remuneration of ₹ 40.12 crores for rendering the following services- (a) Technical assistance in manufacturing activities. (b) Advising on Product Stability and Product Positioning, (c) Looking after entire Marketing and Distribution of the products. 130. It was further brought to the notice of the first Appellate Authority that the proposed addition is based on the findings of the A.O. given in the case of the firm SPI wherein the A.O. had made addition of ₹ 73.38 crores and ₹ 17.29 crores applying the provisions of Section 80-IB(10) of the Act. Assessee drew further attention to the decision; of the Tribunal, Amritsar Bench in ITA No. 129/ASR/2009 wherein the Bench deleted the addition made by the A.O. in the case of firm SPI. It was further contended that in assessee's own case in earlier years, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm SPI as per the partnership deed read with supplementary partnership deed. It is also an undisputed fact that the said partnership deed read with supplementary deed has not been treated as sham or unlawful deeds. The First Appellate Authority emphasized on the entire transaction as a device of tax evasion. The partnership firm SPI has claimed ₹ 40.12 crores as remuneration to the assessee company but at the same time, it did not claim the same as deduction as it was not paid to a whole time partner as provided in the Act. It is true that the appellant company has also not offered the same for taxation taking a shelter behind the provisions of Section 28(v) of the Act. No doubt, the profits of the partnership firm are exempt u/s. 80-IB(4) of the Act, Even, if the partnership firm had not charged ₹ 40.12 crores as remuneration to the appellant company, the profits of the firm would have increased by this amount. Since the assessee is holding 97.5% share in the profits of the partnership firm, this amount of 40.12 crores would have otherwise come to the assessee in the firm of share of profit which again is exempt from taxation u/s. 10{2A) of the Act, Therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1 Panoli Northen Lipids Inc., 416pu80106 10,17,500/- 2 Panoli Nile Limited 015pu80543 5,60,000/- 3 Panoli Shree Nandinee Fibre Glass Engineers 075pu81190 1,47,500/- 4 Panoli Rajeshwari Marketing Corporation 075pu85774 1,51,500/- Total 18.76,500/- 142. The A.O. was of the opinion that the aforementioned expenditure have been made for the purpose of purchasing capital assets. The A.O. accordingly treated the impugned expenditure as capital expenditure and allowed depreciation as per the provisions of the law. After allowing depreciation, the A.O. made an addition of ₹ 14,88,900/-. 143. After Considering facts and the submissions, the ld. CIT (A) observed that the A.O. has merely given the findings that the items purchased are capital assets without giving any reasons as to how the purchase of various items made by the appellant company has resulted into bringing the new asset into existence or obtain a new advantage. After considering the copies of bills/vouchers for the relevant purchases, the First Appellate Authority came to the conclusion that the purchase of extruder 800 ml. Thermobarrel Stainless Steel from Northen Lipids Inc was an asset indepen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeal is in relation to the addition deleted by the ld. CIT (A) on the very same issue, therefore, the same is considered herein only, insofar as the payment of ₹ 5,60,000/- to Nile Ltd. is concerned, we find that the First Appellate Authority has given a categorical finding after verifying the purchase order that this item has replaced damaged bottom body which is also supported by the Excise Challah. Such categorical finding cannot be brushed aside lightly. We, therefore, do not find any error or infirmity in the findings of the First Appellate Authority. 149. Insofar as the items purchased amounting to ₹ 1,47,500/- and 1,51,500/- is concerned, the First Appellate Authority have given a categorical finding that the effluent treatment systems after regular intervals requires maintenance and upgradation and the expenditure incurred during the year is on existing machines and did not bring into existence any new asset or added advantage to the assessee. As this factual finding has not been controverted before us, we do not find any reason to interfere with the findings of the First Appellate Authority. The addition of ₹ 8,59,000/- stands deleted. With this grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the formula given under Rule 8D, Ground No. 17 is treated as allowed for statistical purpose. 155. Ground No. 18 is an additional ground raised by the assessee for the claim u/s. 35(2AB) on revenue expenditure incurred for the purpose of research and development not considered for weighted deduction. 156. The ld. Senior Counsel fairly stated that this issue was not raised before the lower authorities though; it is purely a legal issue and has been raised the first time because of the judgments of the Co-ordinate Bench in assessee's own case given in earlier assessment years. 157. We find force in the contention of the ld. Senior Counsel. Since this issue was not raised before the First Appellate Authority, we set aside this issue to the files of the FAA with a direction to decide the same as per the provisions of the law considering the earlier decisions of the Co-ordinate Bench. Additional ground is treated as allowed for statistical purpose. ITA No. 3420/Ahd/2014 Revenue's appeal 158. Ground Nos. 1, 2 & 3 relate to the allowance of weighted deduction u/s. 35(2AB) of the Act in respect of (a) Marriage Gift ₹ 21,400/- (b) Repairs and Municipal Taxes ₹ 1,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round Nos. 1 & 2 herein above. For the reasons given therein, ground No. 3 is dismissed, 160. Respectfully following the findings of the Co-ordinate Bench on identical set of facts, we decline to interfere with the findings of the First Appellate Authority. Ground Nos. 1, 2 & 3 are dismissed. 161. Ground No. 4 relates to the deletion of the disallowance of depreciation on motor car @ 30% claimed by the assessee and allowed by the A.O. @ 15%. 162. Once again, we find that an identical issue was considered by the Co-ordinate Bench in assessee's own case in ITA No. 2067/Ahd/2013 qua ground No. 4 of that appeal and has decide this issue in favour of the assessee. The relevant part reads as under:- 79. Before us, the ld. D.R. supported the assessment order and the ld, Senior Counsel reiterated what has been stated before the First Appellate Authority. It is true that the main business of the assessee is manufacturing of bulk drugs as well as formulation products. It is equally true that the assessee is also in the business of leasing and finance activity. There is no dispute that the Hire charges have been assessed as business income. Therefore, we do not find any reason why th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 6 relates to the deletion of the addition made on account of price difference on sales made to SPI partnership Firm. 169. This issue has been considered at length by us in assessee's appeal in ITA No. 3297/Ahd/2014 qua ground No. 11 of that appeal. For our detailed discussion therein, this ground is dismissed. 170. Ground No. 7 relates to the deletion of the disallowance on account of repairs treating them as a capital expenditure. 171. This issue has been considered at length by us in assessee's appeal in ITA No. 3297/Ahd/2014 qua ground No. 15 of that appeal. For our detailed discussion therein, this ground is dismissed. 172. Ground No. 8 relates to the claim of the assessee allowed u/s. 80-IA(4) in respect of captive power plant. 173. While scrutinizing the return of income for the year under consideration, the A.O. noticed that the assessee has claimed deduction u/s. 80-IA(4) of the Act amounting to ₹ 43,48,120/- in respect of undertaking engaged in generation of power. This claim of the assessee was denied by the A.O. on the following grounds:- (a) The A.O. was of the opinion that the profits from captive power plant were not engaged in the gross total ..... X X X X Extracts X X X X X X X X Extracts X X X X
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