TaxTMI 
TaxTMI 
2014 (1) TMI 1288
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....ne Pharmachem (P.) Limited as the margin to arrive at ALP. 3. On the facts and circumstances of the case, and in law, the learned CIT (Appeals) has erred in holding that the appellant's functional profile is that of a non-manufacturing exporter. 4. On the facts and circumstances of the case, and in law, the learned CIT (appeals) has erred in not accepting the fact that the appellant acted as only channel or pass-through entity in the transaction of exports by Glenmark Pharmaceuticals Limited (GPL) to Glenmark lmpex LLC Russia (GIR). 5. On the facts and circumstances of the case, and in law, the learned CIT (Appeals) has erred in holding that the appellant undertook International transaction in the form of exports to GIR. 6. On the facts and circumstances of the case, and in law, the learned CIT (Appeals) has erred in holding that the appellant is subject to the Provisions of Chapter X of the I.T. Act 1961. 7. Without prejudice to any of the grounds raised above, the learned CIT (Appeals) has erred in excluding Shelesha Pharmachem Private Limite....
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....AR submitted that Grounds No.1,3,4,5,6 and the additional ground filed on 17-12-2012 as mentioned above are not pressed for. 6. In view of above, the grounds of the assessee's appeal viz Grounds No.1,3,4,5,6 and the additional Ground taken on 17-12-2012 as mentioned above are dismissed. 7. The ld. AR submitted that remaining grounds of appeal i.e. Ground No.2 read with Ground No.7 and also additional ground of appeal filed on 1-1-2013, as mentioned hereinabove relate to only one issue i.e. Transfer Pricing Adjustment. The ld. AR also submitted that Ground No.1 of the appeal taken by the department is connected with Ground Nos. 2 and 7 of the appeal of the assessee. Both the representatives of the parties submitted that the above grounds can be dispose of together. 8. In the light of above, we consider necessary to state the relevant facts. That the assessee company is engaged in the business of exporting Pharmaceutical Products. The assessee filed its return of income declaring income "Zero" . The AO has stated that the case of the assessee was selected for scrutiny and on perusal of 3CEB, it is seen that during the relevant assessment year the assessee entered into an int....
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....pply to the assessee its pharmaceutical products at the same rate as the export prices to GIR; (iii) that assessee shall arrange to ship GPL the pharmaceutical products to Russia; (iv) that GPL shall reimburse the assessee, the expenses incurred by the assessee in respect of aforesaid transitions In terms of the aforesaid agreement, GPL supplied its pharmaceutical products to the assessee at the same rate as the final export price to GIR and also reimbursed all costs incurred by the assessee in course of exports to GIR. It is relevant to state that the major expenses incurred by the assessee and reimbursed by the GPL are as under : Item of expenses Amount (Rs.) Advertisement 1,70,589.00 Depreciation 1, 27,552.00 Exchange Rate Loss 1,34,94,446.00 Freight charges 1,45,69,432.50 Insurance Premium 2,10,000.00 Office expenses 8,09,910.01 Rental Office Premises 17,39,995.22 Sales Promotion expenses 9531. 507.78 Tour Expenses 13,14,525.29 9.2 On behalf of the assessee, it was contended that purchase cost of the asses....
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....t GPL earned operating profit margin of 51.27% on exports to GIR and hence, no profits had been shifted from India to Russia in course of the said transactions. However, GPL also exported to independent parties in Ukraine, Tajikstan and other countries, the same products which were exported by it through the assessee to GIR, at price lesser than the price charged from GIR. Hence, the price on which pharmaceuticals products were sold to GIR by GPL through the assessee were at ALP. However, TPO asked the assessee to show cause as to why proper adjustment should not be made to export value of the transaction with GIR by applying average margin of comparable companies. 9.4 In response to said show-cause notice, the assessee explained before the TPO that the assessee could not be categorized as an exporter to GIR. All costs and risks in respect of export to GIR were borne by GPL and the assessee only assisted GPL in exports. That GPL reimbursed all costs to the assessee. That in absence of any costs or risks borne by the assessee, it could not be expected to realize any profits from the activity of export to GIR. Had the assessee borne entrepreneurial risks ordinarily borne by a dist....
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.... GPL exports to GI, Russia. The actual cost of goods exported to GI, Russia is booked by GPL., The actual cost of goods exported is booked 9.5 On behalf of the assessee it was also contended that under Rule 10B of the Income -tax Rules, 1962, the comparability of international transaction with uncontrolled transaction should be Judged with reference to the following: (i) specific characteristic of the property transfer to services provided in either transaction; and (ii) the functions performed and the risks assumed by the respective parties to the transaction, In view of said provisions of Rule 10B(2) of the Income-tax Rules, due to vast difference in nature of services provided by the assessee to GPL, and in the functions performed and the risk assumed by the assessee as compared to other companies which exported pharmaceutical products out of India, the assessee company can not be compared to such companies. 9.6 The assessee during the course of proceedings before TPO, referred the following three comparable companies and stated that the operating margin earned by GPL from export to Russia is 51.27% as against t....
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....submissions on the above lines as made before the AO/TPO. 11. The ld. CIT(A) has stated that the assessee had the permission to export and sale pharmaceutical product to Russia. Therefore, when the transactions being routed through the assessee, the pharmaceutical products which were manufactured by GPL have been exported to GIR in Russia. The ld. CIT(A) has stated that the assessee had incurred the expenditure under following heads : Item of expenses Amount (Rs.) Advertisement 1,70,589.00 Depreciation 1, 27,552.00 Exchange Rate Loss 1,34,94,446.00 Freight charges 1,45,69,432.50 Insurance Premium 2,10,000.00 Office expenses 8,09,910.01 Rental Office Premises 17,39,995.22 Sales Promotion expenses 9531. 507.78 Tour Expenses 13,14,525.29 Total 3,00,96,454.80 The ld. CIT(A) has stated that from the above table of expenses it can be seen that the assessee has undertaken the activities of advertisement, shipment for which the concerned charges has been paid, that assessee has undertaken the insurance activities, has rented office and has incurred office expenses and further has undertaken tours and sales promotion fu....
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....hich are into manufacturing and sale of pharmaceutical products. He has stated that the assessee's such bench mark has not found to be acceptable for the reasons given by the TPO in his order and for the reasons that GPL and the assessee has combined entity cannot be taken only as GPL, which would in turn render the assessee as non-existence. In view of the above, during the course of appellate proceedings before ld. CIT(A), the assessee submitted a set of three new comparables which are non-manufacturing export entities. The details of which are stated by the ld. CIT(A) at page 9 of the impugned order as under : S.No. Name F.Y. Gross sales in crores Operating profits % 1 Lyka Exports Ltd. 2006-07 6.91 4.34 2 Megafine Pharmachem (P.) Ltd. 2006-07 35.83 9.99 3 Shelesha Pharmachem P. Ltd. 2005-06 31.89 3.39 11.2 The ld. CIT(A) has stated that these are additional evidences and accordingly forwarded the details to the TPO to give his remand report. It is observed that TPO submitted remand report. The ld. CIT(A) has stated that it is seen from the remand report that nothing on merits of comparable entities have been mention....
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....rrect operating margin of this comparable and accordingly excluded the same from the set of comparable for bench marking the international transaction of the assessee. However, the ld. CIT(A) has stated that for the purpose of bench marking the remaining set of two comparable viz. Lyka Exports Ltd. and Megafine Pharmachem (P.) Ltd. are considered as a set of comparables with their arithmetic means of operating profit as profit level indicator (PLI) for arriving at ALP of the international transaction under consideration. The ld. CIT(A) has stated that Transaction Net Margin Method (TNMM) is the most appropriate method and with arithmetic mean of their operating margins as the margin to arrive at the ALP of the international transaction to work out the quantum of adjustment to arrive of ALP of the international transactions in question. Therefore, ld.CIT(A) has directed the TPO/AO to work out the quantum of adjustment to arrive at ALP accordingly of the impugned transaction. Hence the assessee as well as the department are in appeals before the Tribunal. 12. During the course of hearing, ld. AR after summarising the facts whereby the assessee had assisted GPL to export pharmaceut....
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....urred by other traders. The ld. AR submitted that there was no inventory risk and data risk which has to be factored in adjustment. He submitted that no reserves were employed by the assessee except that name of the assessee was used because the assessee was holding the permission and right to export pharmaceutical products to Russia which GPL did not possess. The ld. AR by placing reliance on the decision of the Pune Bench of the Tribunal in the case of Demag Cranes and Components (India) (P.) Ltd. v. Dy. CIT in ITA No.120/PN/2011 (AY-2006-07) dated 4.1.2012 submitted that the Tribunal has held that it is the duty of the TPO to apply the provisions of Rule 10B(1)(e) of the Income-tax Rules to establish the ALP in relation to international transaction as per TNMM and working capital is a factor which influence the price in the open market; therefore, the net profit margin of the business segment of the assessee in that case has to be considered while determining the Arm's length operating margin of the comparables. The ld. AR submitted that the matter may be restored to consider the ALP after considering all the above three new comparables, submitted before the First Appellate Auth....
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....00,000/- and accordingly made a reference to TPO for determination of ALP. That the assessee contended that it assisted GPL to supply pharmaceutical products in Russia to GIR which is also an Associated Enterprises belonging to Glenmark Pharmaceutical Group. The contention of the assessee is that GPL supplied its pharmaceutical products to the assessee at the same rate as the final export price to GIR and also reimbursed cost incurred by the assessee. The details of the said expenses are mentioned hereinabove in para 9.1 hereinabove. The assessee contended that it acted only as a conduit for export of pharmaceutical products of GPL to GIR and its role was of only risk free services provided to GPL in the transactions of export by GPL to GIR because GPL could not export pharmaceutical product to GIR as GPL was not registered and did not have required permission to supply pharmaceutical products to Russia, but the same were available with the assessee company. It is not in dispute that GPL owns intellectual rights of pharmaceutical products to export to GIR. There is also no dispute to the facts that the products were shipped to GIR in the same packing which was originally done by GP....
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.... margin of 11.94% is not correct as those comparable companies/entities are in the manufacturing of pharmaceutical products and are also in the sales/ export of the same whereas the assessee is in a non-manufacturing export activities. Hence, on the facts, ld. CIT(A) has rightly considered the additional evidence and to seek remand report from the AO in respect of the three comparables entities furnished before him by the assessee, the details of which are given in paragraph 11.1 of this order. 15. We observe that the ld. CIT(A) has finally considered only two comparables companies viz. Lyka Exports Ltd. and Megafine Pharmachem (P.) Ltd. and has directed AO/TPO to work out the quantum of adjustment by considering their operating profit margin to arrive at ALP of the international transaction in question. During the course of hearing ld.AR submitted before us that exclusion of third comparable company viz. Shelesha Pharmachem Pvt.Ltd is not justified as the assessee furnished requisite data viz balance sheet, Profit and Loss Account and operating profit margin for Financial Year 2006-07 and had not merely given the name of the said comparable company and not put onus on the TPO t....
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....se of E-gain Communication (P.) Ltd. v. ITO [2009] 118 ITD 243 (Pune) and stated that when TNMM is applied to a case "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". It is further stated that if these differences are not eliminated or removed, the comparison becomes unsound and unreliable. The Pune Bench of the Tribunal in the case of Demag Cranes and Components (India) (P.) Ltd. (supra), has stated in paragraph 22 that working capital constitutes an item of difference in matters of computation of arm's length price/net margin and it constitutes a subject matter of adjustment in the matters relating to ALP in Transfer Pricing. The above observations of the Tribunal has been substantiated by relying on the earlier decision of the Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 and stated working capital adjustments constitutes one which is required to be adjusted for the purpose of establishing the ALP. It i....