Tribunal remits comparables issue, upholds exclusion of rental income, and clarifies international transactions.

The Tribunal partly allowed the assessee's appeal by remitting the issue of excluding certain companies from the list of comparables back to the Transfer Pricing Officer for redetermination. The appeal was dismissed as infructuous. The Tribunal upheld the exclusion of rental income from operating income and directed consideration of only transactions with Associated Enterprises for Arm's Length Price computation. It was also held that transactions with Matrix Laboratories were not international transactions, allowing related grounds.

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Issues Involved:
1. Validity of the Assessing Officer's order under Sections 143(3), 144C, and 92CA of the Income Tax Act, 1961.
2. Transfer Pricing Officer's (TPO) adjustments and methodology.
3. Classification of transactions with Matrix Laboratories Ltd. as deemed international transactions.
4. Disallowance of depreciation on intangible assets.
5. Disallowance of management fees and R&D development charges.
6. Inclusion of rent from leasing in operating income.
7. Computation of Arm's Length Price (ALP) for transactions with Associated Enterprises (AEs) and non-AEs.

Detailed Analysis:

1. Validity of the Assessing Officer's Order:
The assessee challenged the validity of the final assessment order dated 28.10.2011 passed under Sections 143(3), 144C, and 92CA of the Income Tax Act, 1961. The Dispute Resolution Panel (DRP) confirmed the TPO's adjustments, which led to the appeal.

2. Transfer Pricing Officer's Adjustments and Methodology:
The TPO reduced the operating margin by Rs. 54,13,134, excluding the rent realized from leasing factory buildings and equipment from operating income. The TPO also made an adjustment of Rs. 11,45,00,000 under Section 92CA concerning sales to AEs, determining the arm's length price (ALP) with operating profit margins at 25.43% (OP/operating cost) and 19.11% (OP/operating revenue). The TPO rejected the assessee's comparables and conducted his own search, applying various filters to select final comparables. The Tribunal directed the TPO to recompute margins for Suven Life Sciences Ltd. and Natco Pharma Ltd. based on segmental results of bulk drugs only.

3. Classification of Transactions with Matrix Laboratories Ltd. as Deemed International Transactions:
The TPO treated transactions with Matrix Laboratories Ltd. as deemed international transactions under Section 92B(2) due to a prior agreement involving Aspen Pharmacare Holdings Ltd. The Tribunal, relying on its earlier decisions for assessment years 2006-07 and 2009-10, held that transactions between the assessee and Matrix Laboratories are not international transactions as neither party is a non-resident. Consequently, grounds No.5 to 7 of the assessee were allowed.

4. Disallowance of Depreciation on Intangible Assets:
The TPO disallowed depreciation of Rs. 10,64,50,499 on intangible assets purchased in the preceding assessment year. The Tribunal did not specifically address this issue separately but impliedly included it in the overall adjustments.

5. Disallowance of Management Fees and R&D Development Charges:
The TPO disallowed management fees and R&D development charges of Rs. 1,87,10,408 and reimbursement of expenses of Rs. 54,27,702, applying the Comparable Uncontrolled Price (CUP) method and determining the ALP of such payments at NIL. The Tribunal did not specifically address this issue separately but impliedly included it in the overall adjustments.

6. Inclusion of Rent from Leasing in Operating Income:
The TPO excluded rent from leasing buildings and equipment from operating income, considering it non-operating income. The Tribunal upheld this exclusion, stating that the assessee failed to provide evidence that the income from leasing was related to its business operations.

7. Computation of Arm's Length Price (ALP) for Transactions with AEs and Non-AEs:
The TPO included total turnover, including transactions with non-AEs, for determining the ALP. The Tribunal directed the TPO to consider only the turnover of transactions with AEs for computing the ALP, allowing grounds No.3 and 4 for statistical purposes.

Conclusion:
The Tribunal partly allowed the assessee's appeal (ITA No.2181/Hyd/2011) by remitting the issue of excluding Suven Life and Natco Pharma from the final list of comparables back to the TPO for redetermination. The appeal (ITA No.312/Hyd/2012) was dismissed as infructuous. The Tribunal upheld the TPO's exclusion of rental income from operating income and directed the TPO to consider only AE transactions for ALP computation. The Tribunal also held that transactions with Matrix Laboratories were not international transactions, allowing related grounds.

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