TaxTMI 
TaxTMI 
2014 (9) TMI 160
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....e involved in ground no. 2 to 4 of the appeal is that the Dispute Resolution Panel erred in confirming the order of the Transfer Pricing Officer in making transfer pricing adjustment in relation to the sale of MycoMofteil to Associated Enterprise and thereby making addition of Rs. 9,84,14,422/-. 5. The return of income was filed by the assessee on 30/09/2009 declaring total income of Rs. 15,06,16,920/-. The DCIT(OSD), Range-1, Ahmedabad (AO) referred the case under Section 92CA of the Income Tax Act 1961 (the Act) to the Transfer Pricing Officer (in short TPO) for determining the Arms Length Price (in short ALP) in relation to the international transactions entered into by the assessee with its Associated Enterprise (in short AE). 6. The TPO, based on the Transfer Pricing study which was made in the case of the assessee, passed the order under Section 92CA of the Income Tax Act 1961 on 15/01/2013 proposing an upward adjustment of Rs. 9,84,14,422/-. The Assessing Officer prepared the draft assessment order on 18.03.2013 incorporating the adjustment suggested by the TPO and served a copy thereof to the assessee on the same day. The assessee filed its objections before the Draft Res....
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....33 kgs at average rate of Rs. 22,239/-). The rate at which this product was sold to these third parties is lesser than the rate at which it was sold to AE, but yet it could not be treated as comparables since USA is a regulated market where the price realization are higher compared to sates in domestic and other non regulated market, where product could be sold without any regulatory hurdle to the formulation company. Hence in the non regulated markets like Mexico and India, the prices were lower than that offered in the USA. The other products sold to Non associated companies in USA can be treated as quite comparable with the sale of Myco Mofteil in USA to the Associated Party (Matrix Labs Inc.) The comparative details of sales made to Matrix Labs and other non AE's in USA in respect of these two products is reproduced below (based on the assessee's submissions/documents accepting the cost plus method). The products sold to AE and Non AEs in USA are comparables on following grounds. 1. The Myco Mofteil (sold to AE) and other products (Pencil/n G Amidase Enzyme and Lovastatin) are generic drugs manufactured by the assessee company. 2. The sale is in the USA that is a r....
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....d by the TPO but he has refused to accept the CUP for the reasons as under appearing in the TP order: "The assessee has sold Myco Mofteil to third parties located in other than USA (252 kgs at rate of 22,636/-) and to the third party domestic (3651.33 kgs at average rate of Rs. 22,239/-). The rate at which this product was sold to these third parties is lesser than the rate at which it was sold to AE, but yet it could not be treated as comparables since USA is a regulated market where the price realization are higher compared to sates in domestic and other non regulated market, where product could be sold without any regulatory hurdle to the formulation company. Hence in the non regulated markets like Mexico and India, the prices were lower than that offered in the USA. The other products sold to non-associated companies in USA can be treated as quite comparable with the sale of Myco Mofteil in USA to the Associated Party (Matrix. Labs lnc.)(page 5 of the order) 7. Thus the assessee is arguing that product similarity is more important for comparability, whereas the TPO has held that geography and the market conditions are more important. The TPO therefore has compared two differe....
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....ected the price charged by the assessee to its AE. 11. As regards assessee's objections against the CPM applied by the TPO, we must mention that the assessee himself had selected profit based methods to justify its international transactions. The assessee had taken external comparables and compared its margins with their margins. In such a situation, it does not behove the assessee to argue that margin earned from one product can not be compared with the margin earned from another product. The assessee himself had carried out comparability analysis across the products at entity level. Therefore we do not subscribe to the assessee's view that margin earned from one product should not be compared with margins earned from another product. If there are factors which might have affected the margins of different products the assessee has failed to point them out. No case has been made out that there were any differences between Myco Mofteil and other drugs as to patent period, brand value etc. In the absence of these facts we uphold the action of the TPO." 11. Before us, the assessee has submitted as follows: "In the above captioned appeal, assessee challenged order of DRP erred in up....
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....he assessee). Hence the assessee has to ensure absolutely identical rules regarding quality and standards irrespective of that being sold to AE or Cadila. (Pg 454 - 472 of paperbook II) 3. Alternatively, Assessee also submits an external comparable transaction in form of that Biocon Limited sells the identical drug (Mycophenolate Mofetil) to its third party i.e. INTAS Pharmaceutical Limited at the average rate of 18,250Rs/kg.(as against the assessee selling at 24,809Rs/kg to its AE) INTAS Pharmaceutical then supplies the same to its sister concern to sell in the US Market. The same transaction can also be taken as comparable where the assessee has sold the same to its AE at a price being higher, is at Arm's Length. Therefore it is submitted that even considering the external comparable prices of the transaction between Biocon Limited and INTAS Pharmaceuticals also, the transaction of the assessee is at Arm's Length Price (Pg 473 - 474 of paperbook II) The assessee relies on following case laws for the argument that in geographical two transactions can be very much comparable in certain conditions irrespective of geographical differences. 1. Wrigley India (P) Ltd. (Releva....
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....ant Para 33,37,50 page :86- 87,96 of compilation of orders) 4. Atul Ltd (Relevant Para 5.18, page: 147-149 of compilation of orders) Hence the order passed by the TPO, as confirmed by the DRP, is ex facie erroneous and the adjustments/made by them to the income of the Appellant needs to be deleted." 12. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the assessee is engaged in the business of manufacturing and Consultancy of Biotechnology based products and bulk drugs. During the year under consideration, the assessee sold 7005 kgs. of Mycophenolate Mofetil to its associated enterprise situated in USA for Rs. 17,37,87,525.00 i.e. at an average rate of Rs. 24,809.00 per kg. According to the assessee, the above transaction was at arms length price determined by applying cost plus method [C.P.M.]. The TPO observed that though the same products were sold to non-associate enterprises situated in India and in Mexico at a price lesser then the price at which it was sold to associated enterprise but those prices cannot be compared because those sales were in an uncontrolled market whereas sal....
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....erprise situated in India and Mexico. 19. At the same time, it is observed that the assessee has not disputed before us that US market is a controlled market in respect of products in question and India and Mexico are uncontrolled markets. The assessee has also not disputed before us, that the observation of the lower authorities that prices in controlled markets of the products in question are higher than the prices in uncontrolled markets. 20. The cost price method has been defined in rule-10B, the relevant portion of which is abstracted as under:- 10B[1][c]:- cost plus method, by which- i) The direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined. ii) The amount of a normal gross profit mark up to such costs [computed according to the same accounting norms] arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined. iii) The normal gross profit mark up referred to in sub clause (ii) is adjusted to take....
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....he same profit margin at which disclosed during the year was accepted by the department in earlier years or succeeding years. In the above circumstances, in our considered view, it shall be fair and in the interest of the justice to restore this issue back to the file of the TPO for adjudication afresh in light of the discussions made hereinabove after allowing proper opportunity of hearing to the assessee. Thus, this ground of appeal of the assessee is allowed for the statistical purposes. 25. Ground no. 5 of the appeal reads as under: The Ld. DRP and Ld. AO has erred in not allowing late payment of employee's contribution to the provident fund and making addition of Rs. 15,514/-. This action of both the lower authorities in not accepting the claim of the appellant is totally erroneous, prejudicial, and against the principles of Natural Justice that deserves to be quashed. 26. At the time of hearing, the Authorized Representative of the assessee submitted that he is not pressing this ground of appeal, hence the same is dismissed as not pressed. 27. Ground no. 6 of the appeal reads as under: The Ld. DRP and Ld. AO has erred in making disallowance of Rs. 8,86,820/- under sectio....