TaxTMI 
TaxTMI 
2011 (7) TMI 143
X X X X Extracts X X X X
X X X X Extracts X X X X
....xcise duty) of Rs. 154.39 crores, other income of Rs. 1.85 crores and declared net profit of Rs. 15,99,10,420. During the course of assessment proceedings, the assessee-company furnished various details in support of income declared and claims made in the return of income. The Assessing Officer noted that the assessee had entered into international transaction with Associated parties which can be summarized as under : S. No. Nature of Transaction A.Y. 2006-07 Method used by the assessee to determined the ALP 1. Import of raw material 3,50,65,837 TNMM 2. Purchase of finished goods 24,88,28,463 RPM 3. Reimbursements received 4,41,471 CUP 4. Reimbursement paid 11,68,690 CUP 5. Facilitation of software testing services 19,89,517 - 3.1 A reference was made to the transfer pricing officer for computing the arm's length price under section 92CA(1) on 6-10-2008. The TPO vide his order dated 29-10-2009, which was received by the Assessing Officer on 4-11-2009 had made upward adjustment of Rs. 7,22,93,351 on following grounds :-- (i) Purchase of Netilimicin Sulphate and Mometasone Furoate - Rs. 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt for the distribution segment has benchmarked the international transactions of import of finished goods for distribution by comparing its distribution activities at the entry level with the companies engaged in similar activities and concluded that the transactions are at arm's length. The TPO discussed the various methods prescribed under section 92C of the Income-tax Act to find out the most appropriate method applicable to the assessee. He noted the various shortcomings in the calculations of the arm's length price. He noted from the segmental accounts furnished by the assessee that while rent, depreciation marketing and distribution have been allocated on the basis of the net sales, promotion expenses has been allocated on actual basis. However, salaries, travelling and miscellaneous expenses have been allocated on the criteria of "Fair Allocation". No such explanation has been given as to what is a 'fair allocation' or how the same has been arrived at. According to the TPO under normal circumstances if separate accounts have been maintained, the distribution of common expenses has to be carried out on the basis of turnover, unless there are specific instance to assign somet....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t you to give the assessee an opportunity to discuss the same in detail. In this regard, the detailed submissions dated 28th July, 2009, submitted by the company to the learned TPO are attached herewith, for your good self's kind perusal. Further, and in accordance with section 144C of the Income-tax Act, 1961 (as amended by the Finance Act, 2009), the company requests your good self to kindly share with it, a draft of the proposed order of assessment if your goodself proposes to make any addition to the returned income of the company for the year. This would enable the company to examine the same as well as its response thereto, including filing of objections before the learned Dispute Resolution Panel." 3.9 However, the Assessing Officer was not satisfied with the above explanation. He noted that the assessee's submissions were already considered by the TPO in detail, before finalization of the order under section 92CA(3). Following the order of the TPO the Assessing Officer made an upward adjustment of Rs. 7,22,93,351 to the total income. 3.10 Before the Dispute Resolution Panel, the assessee made various submissions, the gist of which can be summarized as under :-- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....profits. The transfer pricing analysis is of about providing for adequate sharing of profits between various tax jurisdictions. It is because of the ultimate profit earning arises from the sale of product to the consumer and, therefore, the associate enterprise of the assessee should be earning that amount of profit which a business to consumer transaction will earn in the case of a high value medicine. In view of the above the DRP was of the opinion that the adjustment in respect of imported active pharmaceutical ingredients does not call for any interference. According to the DRP the assessee's case could have been of merit if specific active ingredients should have been sold to Indian entity and sold to any other not related enterprises were shown to be equal. In absence of any such data being provided either in the proceedings of transfer pricing or during proceedings before it, the DRP confirmed the arm's length price as determined by the TPO at Rs. 3,09,21,361. 4. So far as the adjustment in the value of import formulations, the DRP noted that this segment is the distribution segment of the company. They noted that the company imports both from AEs and non-AEs (third parti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on functions and secondary manufacturing functions commensurate to its level of involvement for the relevant product. He submitted that when in the non-AE segment, the assessee get operating profit margin of 8.69 per cent as compared to operating margin of 11.37 per cent made in the AE segment, its profitability under AE segment is higher. Therefore one case safely conclude that the terms of import of API from AE are at arm's length consideration for its functions as a value added distributor. 7. As regards the reference is the TPO's order that identical submissions made in past years were duly considered in detail during the course of assessment proceedings, learned counsel for the assessee submitted that the issue relating to past year has not yet been decide by learned CIT(A). There is no consistency in the approach followed by the TPO over the period of time since he has shifted from using section 133(6) to TIPS database. Without prejudice he submitted that TPO has to apply his mind afresh every year. 8. As regards comments of the TPO that the assessee has not demonstrated that so called generic products imported by the other companies were of inferior quality, the learne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oice the product cost by almost 10 times of the comparables, learned counsel for the assessee submitted that all information which are required to be filed with the Indian Regulatory authorities for taking approval etc. was provided by the assessee-overseas affiliates who have undertaken research and development to develop the products. The clinical trials benefits made available to the assessee cannot be said to be of passive nature. He submitted that the product patents are obtained only if drugs pass the stringent clinical trials. This typically costs US$ 1 to 1.5 billion per molecule. Formulations based on such originally researched molecule have a higher acceptability in terms of quality and efficacy. 12. As regards rejection of TNMM adopted by the assessee and CUP method adopted by the TPO, he submitted that in TNMM method many such differences get evened out. Further, application of a robust search process, which involves appropriate quantitative and qualitative filters, supports the proximity to the FAR analysis based on the available data. However, the TPO has not discharged similar onus whilst applying CUP. He submitted that the TPO cannot dictate what the assessee sho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....own volume of production, contractual forms etc. He submitted that certain new facts have been stated in the written submission filed by the assessee. He submitted that the agreement with Zyg Pharma is subsequent to the assessment. Therefore, it cannot be the basis of transaction at the time of agreement for the impugned assessment year. Therefore, the same cannot be relied upon. As regards the submission of the learned counsel for the assessee that it is a licenced manufacturer, he submitted that this fact was not before the Assessing Officer or TRP or DRP. The case of the assessee is simply that of an importer. Therefore, the arguments of the learned counsel are without much force. He accordingly submitted that the order of DRP to be upheld. 15. Learned counsel for the assessee in his rejoinder submitted that various details were before the TPO. As regards the objection of learned Departmental Representative that new pleas are being taken before the Tribunal, learned counsel for the assessee referred to the decision of Chandigarh Bench of the Tribunal in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 132 TTJ 1/38 SOT 307 (SB) and decision of Pune Bench of the Tribunal i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t to back-up of research and development to justify the profit margin...." Similarly in the said paragraph the DRP has further observed as under :-- ".....The assessee's case could have been of merit if specific active ingredients should have been sold to Indian entity and sold to any other not related enterprises were shown to be equal. In absence of any such data being provided either in the proceedings of transfer pricing or during proceedings before the DRP, there is no justification to interfere with the arm's length price as determined by the TPO....." 18. It is an undisputed fact that similar issue that arose in the preceding years has not yet attained finality and is pending before learned CIT(A). In the impugned assessment year, the assessee came to the ITAT because of the order passed by the DRP. We therefore find force in the arguments of learned counsel for the assessee that the TPO should apply his mind afresh every year and should not have relied on the orders of the TPO for the preceding years. Similarly the submission of learned counsel for the assessee that the assessee-company acts as a secondary manufacturer which is akin to a value added distributor als....