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TMI Blog2024 (2) TMI 1518X X X X Extracts X X X X X X X X Extracts X X X X ..... ceptable as resulting a distorted outcome, nor the action of the TPO while cherry picking some of the products out of the total basket of 11 product formulations showing as 11 families of the formulation is a right approach. We further note that in the subsequent A.Y i.e. for the A.Y 2020-21, the TPO himself after rejecting the TP analysis of the assessee has proceeded to conduct an independent search by applying TNNM as the most appropriate method. Assessee has claimed that its specified domestic transactions having operating margin of 25.21% is at arm's length in comparison to the median margin of the comparable at 20.61%. Accordingly, this issue is remanded to the record of the TPO/Assessing Officer for determination of the ALP by adopting TNNM as the most appropriate method based on the external comparables as well as international comparables of the assessee. If the operating margin of the assessee is found to be within the tolerance range of 3% of ALP, then no adjustment would be called for. Needless to say, before passing the fresh order, the assessee be given an appropriate opportunity of hearing. Disallowance of weighted deduction u/s 35(2AB) - AO has restricted the clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he range concept benefit for TP analysis. 3. The Learned DRP/TPO erred in law and on facts and circumstances of the case by making an inter-familial comparison of margins for the purpose of determining the Arms' Length price in respect of material transferred from non-SEZ units to SEZ units. 4. The Learned DRP/TPO erred in law by making a restricted interpretation of the OECD guidelines and not appreciating the principles laid out by the OECD. 5. The Learned DRP/TPO erred in law and on facts and circumstances of the case in taking into consideration only the margins of adverse variances instead of the overall profitability of the families or segments of 11.74% (after considering the 3% benefit as provided U/s 92C) which is much higher than the profitability relating to sales to third parties of 10.41%. 6. Without prejudice to the above, the Learned DRP/TPO erred in law in not considering the internal TNMM Workings furnished by the assessee that the operating profit margins of the non-SEZ units (OPM of 25.21%) was higher than that of the SEZ units (OPM of 23.31%) which clearly indicates that no excess deduction U/s 10AA has been claimed by the assessee. 7. The Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions by the Honourable DRP in this regard allowing the same as eligible expenditure. General 1. Any other ground that may be urged at the time of hearing with the previous approval of the Hon'ble Tribunal." 3. Ground Nos.1 to 8 are regarding TP adjustments made by the TPO/AO in respect of specified domestic transactions. The assessee is in the business of manufacture and sale of API as well as generic pharmaceutical products. The assessee filed its return of income on 28/11/2019 declaring total income of Rs. 1177,63,84,700/- under normal provisions and Rs. 1979,75,97,126/- under MAT provisions. The assessee reported specified domestic transactions entered into between SEZ and non-SEZ Units. Accordingly, the Assessing Officer made reference u/s 92CA(1) of the I.T. Act, 1961 to the TPO for determination of Arms' Length Price (ALP). The details of specified domestic transactions are given by the TPO as under: S.No Description Amount (Rs.) 1 Raw materials transferred from non-SEZ Units to SEZ Units 1533,93,39,771/- 2 Allocation of finance cost from other units to SEZ Units 47,71,23,891/- 3 Allocation of formulation head office salary to SEZ division on sales basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the adjustment as proposed by the TPO and made in the draft assessment order. 6. Before the Tribunal, the learned AR has submitted that the assessee has provided FAR analysis and business overview of each SEZ Units in the TP study submitted before the TPO. The TPO has himself accepted the FAR analysis but only picket up certain families of the products instead of taking the entire lot of specified domestic transactions for determining the ALP. The TPO has also adopted same economic analysis of comparing the sale of the product from non-SEZ Unit to SEZ Unit and to 3rd party. The only objection of the TPO was against the assessee applied range concept i.e. 35th percentile and 65th percentile. The learned AR has submitted that as per Rule 10CA(4), when the data set consisted of 6 or more comparable items, it is mandatory to apply the range concept and multiple year data to arrive at ALP range between 35 and 65 percentiles under CPM whereas the TPO has accepted the CPM as the most appropriate method but while computing the ALP, the TPO has considered net cost and net operating profit which are used in TNNM analysis. Thus, the learned AR has submitted that when the CPM is accepted as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven distorted result due to the reason that the assessee has adopted CPM as most appropriate method and compared the same with internal CPM. However, while determining the average price of comparable, the assessee has applied the median by taking 35 percentile and 65 percentile. The learned DR has submitted that the 11 transactions as taken by the assessee for determining the ALP are not of same product but these are 11 separate products of the assessee called as 11 families and therefore, taking 35 and 65 percentile of the margins of the products resulting exclusion of the 70% products in the process of determination of ALP which would represent only 30% of the products. Therefore, the TPO has rightly rejected the methodology applied by the assessee for determining the ALP for benchmarking specified domestic transactions. The learned DR has relied upon the decision of the Bangalore Bench of this Tribunal in case of GE Medical Systems (India) (P) Ltd vs. DCIT in IT(TP)A Nos. 332 and 333/Bang/2011. She has also relied upon the order of the TPO and DRP. 8. We have considered the rival submissions as well as perused the relevant material available on record. The TP analysis of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pha Laboratories Ltd Passed all filters adopted by TPO 2 Lincoln Pharmaceuticals Ltd Passed all filters adopted by TPO 3 Bliss GVS Pharma Ltd Passed all filters adopted by TPO 4 Gland Pharma Ltd Passed all filters adopted by TPO 5 Caplin Point Laboratories Ltd Passed all filters adopted by TPO 6 Natco Pharma Ltd Passed all filters adopted by TPO 7 Concord Biotech Ltd Passed all filters adopted by TPO 10. However, in the final set of comparables, the TPO has taken only 2 companies from the set of 7 as accepted having passed all the filters and then added 2 more companies while determining the ALP for the said A.Y without going into the comparability of the companies selected by the TPO as well as rejection of the 5 of the companies which were considered as passed all the filters applied by the TPO, at the outset, we note that when the TPO himself has accepted the TNNM as most appropriate method for determining the ALP in the subsequent year, then the supplementary TP analysis submitted by the assessee ought to have been considered for the purpose of determining the ALP for the year under consideration. The assessee has furnished the list of the comparable compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,95,521 5,48,39,93,282 - 5,48,39,93,282 Revenue 1,88,42,15,484 -0 - 1,88,42,15,484 Expenses - inhouse - - 1,88,42,15,484 - Revenue Expenses Clinical Expenses 1,05,18,47,348 1,57,77,71,022 - 1,57,77,71,022 Capital Expenses building and vehicles 3,23,23,418 3,23,23,418 3,23,23,418 Capital Expenses - others 56,34,60,622 84,51,90,933 - 84,51,90,933 Total 7,18,78,42,393 7,90,69,55,237 1,91,65,38,902 9,82,34,94,139 14. The deduction was restricted by the Assessing Officer in Para 5.4.4 and 5.1.5 as under: "5.1.4 Thus, the claim of the weighted deduction of Rs. 790,69,55,237/-is restricted to 100% of Rs. 365,59,95,521/-+ Rs. 105,18,47,348/- + Rs. 56,34,60,622 which comes to Rs. 527,13,03,491/=-. Hence the claim of extra weighted deduction claimed to the extent of Rs. 263,56,51,745/- is not considered and added back to the total income of the assessee. 5.1.5 Penalty proceedings u/s 270A of the Act will be initiated separately in the final assessment order as the assessee has under reported the income. Addition:Rs.263,56,51,745". 15. Before the Tribunal, the learned AR of the assessee has invited our attention to the decision of the Coordinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reason why the lower authorities are not following the decision rendered by the Tribunal in the earlier assessment years. 35. In reply, learned AR submitted that as could be seen from the order of the Hon'ble Supreme Court in special leave petition to appeal (C) No. 770/2015, dated 13/10/2015 the grievance of the Revenue was with reference to non-framing of certain questions, it was considered by the Hon'ble Apex Court and held that such questions were substantial questions of law, and thereupon referred the matter to the Hon'ble Gujarat High Court to hear the appeal on the aforesaid three questions of law, but the judgement already passed by the Hon'ble Gujarat High Court touching the aspect of allowability of weighted deduction has not been set aside. He placed reliance on the decision taken by a coordinate Bench in assessee's own case for the assessment year 2013-14 and 2014-15 in ITA numbers 1772 and 1773 /Hyd/ 2017 where the Tribunal on a perusal of the decision of the Hon'ble Apex Court clarified that. 36. On a careful perusal of the record we find that the Hon'ble Gujarat High Court rendered the decision in Cadila healthcare Ltd (supra) hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s). Assessment Years-- 2019-2020 2020-2021 Land & Building - 22.99 Capital Exp. (excl. Land & Building) 5626.95 1963.77 Revenue Exp. (excl. Land & Building) 36518.40 36799.54 Net R&D expenditure eligible for deduction U/s 35(2AB) of IT Act, 1961 42145.35 38763.31 Clinical Trials expenses conducted outside the approved R&D facilities not included in the above expenses 10518.18 12795.48 17. Accordingly, when the issue as well as the facts are identical for the year under consideration to that of the A.Y 2017- 18, then to maintain the rule of consistency, we following the earlier order of this Tribunal and allow the claim of the assessee u/s 35(2AB) of the I.T. Act, 1961 for the entire expenditure as referred in the report of the DSIR. 18. The next issue is regarding the additional depreciation disallowed by the Assessing Officer. The learned AR has submitted that the assessee has claimed additional depreciation in respect of plant & machinery u/s 32(iia) of the I.T. Act, 1961 which was dis-allowed by the Assessing Officer in the draft assessment order by giving the reasons that it was used for less than 180 days. The learned AR has pointed out that the DRP after ..... X X X X Extracts X X X X X X X X Extracts X X X X
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