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2024 (12) TMI 803

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..... . From the arguments placed by the Ld. AR, we find merit in the submissions of the Ld. AR which was considered by the Ld. CI(T(A) and hence we do not find any infirmity in the order of the Ld. CIT(A) thereby dismissing the grounds raised by the Revenue. - SHRI DUVVURU RL REDDY, HON BLE JUDICIAL MEMBER SHRI S BALAKRISHNAN, HON BLE ACCOUNTANT MEMBER For the Assessee: Sri Mithilesh Sannareddy For the Revenue: Dr. Satyasai Rath, CIT-DR ORDER PER S. BALAKRISHNAN, Accountant Member : This appeal filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-10, Hyderabad d. CIT(A) ] in appeal No. NFAC/2016-17/10057666, dated 08/03/2023 arising out of the order passed U/s. 143(3) r.w.s 144C(3) r.w.s 144B of the Income Tax Act, 1961 for the AY 2017- 18. 2. At the outset, it is noticed from the appeal record that there is a delay of 43 days in filing the appeal before the Tribunal. Explaining the reasons for belated filing of the appeal, the Ld. DR drew our attention to the affidavit filed by the Revenue along with a petition seeking for condonation of delay and read out the contents of the affidavit which is as under: 1 .. 2 ... 3 4. The jurisdictional Range H .....

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..... ee for the FY 2016-17, vide his letter in F.No. AACFF5633L/ACIT/C- 2(1)/VJA/2019-20, dated 27/09/2019 after obtaining prior approval from the Learned Principal Commissioner of Income Tax, Vijayawada. The Learned Transfer Pricing Officer [ Ld. TPO ] issued notices on various dates U/s. 92CA of the Act. In response, the assessee furnished the information as called for along with the T.P. Documentation. The assessee claimed deduction U/s. 10AA of the Act. The domestic transactions reflected in 3CEB/T.P. Study report are as follows: Description In Rs. Purchase of crude Herbal Extracts and oils (Boswellia Serrata Crude Extract and Oil) 42,54,18,060 M/s. Laila Nutraceuticals (Laila Nutra), a partnership firm, being an Associated Enterprise [ AE ] of the assessee, is a manufacturer of Herbal extracts supplying natural products to the healthcare and nutritional industries. During the impugned assessment year, M/s. Laila Nutra supplied crude raw material (Boswellia Serrata Crude Extract and oil) to the assessee for use in the manufacture of herbal extracts for pharmaceutical, ayurvedic, cosmetic, food beverage, nutritional and pet care industry. The assessee has carried out economic analysi .....

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..... the Ld. TPO rejected the benchmarking analysis by the assessee. The Ld. TPO however did not dispute the TNM Method adopted by the assessee as the Most Appropriate Method. The Ld. TPO thereafter proceeded to determine the ALP by conducting an independent search based on the assessee s profile functions, the assets employed and the risks taken and identified the following 13 comparables: S No Company Name PBDIT/OR PBDIT/OC 1. Nagarjuna Herbal Concentrates Ltd 2.05% 2.10% 2. Thikkattu Mooss E T M Qushadhasala (India) Ltd 3.65% 3.79% 3. Unjha Formulations Ltd 4.85% 5.10% 4. Solumiks Herbaceuticals Ltd 4.96% 5.22% 5. Kerala Ayurveda Ltd 5.42% 5.73% 6. V L C C Personal Care Ltd 6.36% 6.80% 7. Jindal Drugs Pvt Ltd 8.93% 9.80% 8. Source Natural Foods Herbal Supplements Ltd 10.48% 11.70% 9. Amrutanjan Health Care Ltd 10.96% 12.31% 10. Arjuna Natural Extracts Ltd 15.16% 17.86% 11. Ayurvet Ltd 16.01% 19.07% 12. Cian Healthcare Ltd 16.37% 19.58% 13. Emami Ltd 29.36% 41.57% 35 Percentile 5.42% 5.73% Median 8.93% 9.80% 65 Percentile 10.96% 12.31% The Ld. TPO has arrived at the Median of the PBDIT/OR at 8.93% and compared with the assessee s PBDIT/OR which stood at 60.44%. The Ld. TPO also obser .....

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..... Ld. AO, the assessee filed an appeal before the Ld. CIT(A). On appeal, the Ld. CIT(A), considering various submissions made by the assessee, directed the Ld. TPO / AO to delete the addition towards TP adjustment of Rs. 62,25,78,803/- thereby allowing the appeal of the assessee. Aggrieved by the order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds of appeal: 1. The Ld. CIT(A) erred in deleting the Transfer Pricing Adjustment of Rs. 62,25,78,803/- made by the AO as per the TPO order U/s. 92CA(3), dated 29/1/2021. 2. Whether on the given facts and circumstances of the case and in law, the Ld. CIT(A) is justified in admitting the additional evidences f iled by the assessee during appellate proceedings which were never produced before the TPO or JAO in contravention of Rule 46A of the Income Tax Rules. 3. Whether on the given facts and circumstances of the case and in law, the Ld. CIT(A) is justified in adopting the same set comparables as finalized by the TPO in respect of the assessee, even after shifting the tested party to assessee s AE ie., M/s. Laila Nutraceuticals and directing to delete entire adjustment of Rs. 62,25,78,803/-. 4 .....

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..... nt assessment year. The Ld. DR further submitted that the decisions cited by the Ld. AR are of pre-specified domestic transaction regime (Pre-SDT). The Ld. DR further submitted that there may not be collusion between the assessee and the AE but however, the procedure was not followed by the Ld. CIT(A). Countering the arguments of the Ld. DR, the Ld. AR submitted that the assessee and its AE maintained consistent profits and there is no claim of extraordinary profits in the current assessment year due to the tax exemption claimed by the assessee U/s. 10AA of the Act. He reiterated that the Ld. TPO in the earlier assessment year has upheld the assessee s stand. The Ld. AR submitted that even though the principle of res judicata does not apply to income tax proceedings, in the instant case, there is no change in the circumstances when compared to previous assessment years, necessitating shifting of Tested Party by the Ld. TPO. The Ld. AR also referred to its written submissions wherein in page 9, Keywords selected by the Ld. TPO in the impugned assessment year as well as in the previous assessment year remained the same, however the Ld. TPO resorted to choose the assessee as the Teste .....

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..... he assessee and its AE. We also find that the Ld. CIT(A) has also observed and by relying on the decisions of the Hon ble Karnataka High Court in the case of CIT vs. HP Global Soft Ltd reported in 342 ITR 263 (Kar.) concluded that the Ld. AO was not justified in invoking the provisions of section 80IA(9) analogous to the provisions of section 80IA(8) and 80IA(10). The Ld. TPO failed to prove that there exists an arrangement for what may be considered as more than ordinary profits. The Ld. TPO also erred in considering the fact that the assessee has FDA license, and also GMP-111 Guidelines compliant and assumes risks performs more complex functions and dealing with 100% exports. However the AE Laila Nutra performs only the basic operation of extraction. The process flow chart of M/s. Laila Nutra is given below: Detailed supply chain process at Laila and Fysolate from the extraction of Boswellia Serrata Crude oil till the conversion to finished goods. 1. Supply chain process at Laila for extraction of Boswellia Serrata crude oil and extract and conversion to finished goods at Fysolate: From the above process flow it can be observed that the AE performs less complex functions as compa .....

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..... 5-16 Particulars Total Sales Quantity (In Kgs) Average Unit Price M/s. Laila Nutraceuticals sales to Fysolate 46,49,63,802 88,200 5,271.70 To direct third party sales 61,44,59,900 2,36,950 1889.77 Total Sales 1,07,94,23,702 3,25,150 Financial Year 2016-17 Particulars Total Sales Quantity (In Kgs) Average Unit Price M/s. Laila Nutraceuticals sales to Fysolate 42,54,15,060 70,500 6,034.30 To direct third party sales 24,95,46,406 60,806 1900.50 Total Sales 67,49,64,466 1,31,306 From the above table, the Assessee s Representative has demonstrated that the AE has charged increased rates to the assessee and also has been consistent in maintenance of profit for the Fysolate segment. Further, the Ld. AR also has submitted the segmental financials wherein the OP/OC of the AE, M/s. Laila Nutra, to the assessee s segment stood at 30%. Further, we also find merit in the argument of the Ld. AR that the Forex Filter has been wrongly applied by the Ld. TPO in the selection of comparables. It is also observed from the table submitted by the assessee which is extracted below for reference wherein the export income of the selected comparables are at an average of less than 10% when compared to the e .....

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..... has chosen to consider the assessee as a Tested Party. Therefore, it can be concluded that no additional evidence has been provided by the assessee before the Ld. CIT(A) in the form of segmental information which was not furnished before the Ld. AO. Therefore, we are unable to accept the contention raised in by the Revenue in its grounds of appeal. We also find that the Ld. CIT(A) has rightly excluded two companies which have exports while arriving at the Arm s Length range. Further, we also concur with the views of the Ld. CIT(A) that the Tested Party M/s. Laila Nutra which is the AE of the assessee can be compared only with the comparables selected by the Ld. TPO as they are functionally broadly similar to that of the AE as a Tested Party. We extract below the findings of the Ld. CIT(A) for reference: Therefore, the arguments of the appellant, is being the manufacturer and exporter of niche ayurvedic products is factually correct and finding reliable comparables having considerable exports in this category might be a challenge, whereas reliable comparables might be available for domestic manufacturers for different ayurvedic products, when appellant s AE is taken as tested party .....

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