TaxTMI 
TaxTMI 
2016 (1) TMI 1281
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 54,13,134/- being the net rent realized from lease of factory buildings and equipment. 3. The Dispute Resolution Panel erred in confirming the adjustment of Rs. 11,45,00,000/- u/s. 92CA of the Act in respect of sales made to Associated Enterprises and determining the arm's length price of profit Level Indicator being operating profit margin at 25.43% (OP/operating cost) and 19.11%(OP/operating revenue) by rejecting the basis adopted by the tax payer u/s. 92C of the Act. 4. The Dispute Resolution Panel erred in confirming the methodology adopted by the Transfer Pricing Officer which resulted in making an adjustment not only in respect of Associated Enterprises sales but also non-Associated Enterprises sales, contrary to the provisions of Section 92C of the Act. 5. The Dispute Resolution Panel erred in confirming the Transfer Pricing Officer's order and holding that transactions as between the tax payer company and Mylan Laboratories Limited (formerly Matrix Laboratories Ltd), a resident company are deemed international transactions requiring computation of arm's length price u/s. 92C. 6. The Dispute Resolution Panel erred in confirming the Tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... goods in the manufacturing of API activity and Arm's Length Price is determined. He observed the following financial results of the assessee for the financial year 2006-07 Financial results of Astrix Labs for the FY 2006-07 Operating Revenues : 226.71 Operating costs : 202.93 Op. Profit : 23.78 OP/TC : 11.72% OP/Sales : 10.50% He observed that in the annual report for the financial year 2006-07, the assessee has shown an amount of Rs. 2.27 crores under the head "other income", which includes Rs. 0.96 crores under Miscellaneous Income. On a query raised by the Assessing Officer about the break up of the Miscellaneous Income, the assessee has furnished the same as follows - a) Building rent Rs. 50.52 lakhs b) Equipment rent Rs. 33.00 lakhs c) Analysis charges Rs.12.70 lakhs TOTAL Rs. 96.22 lakhs 4. The assessee has also claimed that these receipts were from one of its joint venture promoter company, i.e. Matrix Labs India for the services provided to it. The Transfer Pricing Officer, however, observed that the assessee has not submitted any relevant details in the nature of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onsideration are excluded * Companies having related party transactions more than 25% (income as well as expenditure) are excluded * Manufacturing sales to total sales < 75% are excluded * Domestic companies excluded * Companies having no segmental results are excluded * Companies that are functionally different that of tax payer, after giving valid reasons are excluded" 5. The assessee vide its reply dated 19.3.2010 raised its objections to the above filters. The first objection was that the Transfer Pricing Officer has considered most of the companies which are into formulation business also rather than into 'APIs' which are the assessee's main business operations. The TPO, however found that none of the companies have reported segmental data on the basis of API or Formulations and that most of the companies have business operations i.e. formulations or Finished Dosage forms or Bulk Drugs(APIs) akin to the taxpayer company. He further observed that the assessee has not substantiated that the companies engaged in the formulations business profit margins over the companies in the API business and further that two of the all the compar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ereafter, he selected the following companies as final comparables, and arrived at Average Mean margin on OP/Sales at 19.11% and OP/Cost at 25.43%- " Comparables selected by the TPO: After applying the filters selected by the TPO, following companies are considered as comparables: rupees in crores Sl No. Name of the Company Net Sales Operating Cost Operating profit OP/Sales% OP/Cost% 1. Suven Life Sciences Ltd.(seg) 113.06 74.06 39.00 34.49 52.66 2. Jupiter Bioscience Ltd. 110.98 72.58 38.40 34.60 52.91 3. Anu's Labs Ltd 116.13 94.43 21.70 18.69 52.91 4. Brabourne Enterprises Ltd. (merged) 117.82 98.94 18.88 16.02 19.08 5. Flamingo Pharmaceuticals Ltd. 128.32 116.47 11.85 9.23 10.17 6. Venus Remedies Ltd. 142.11 108.78 33.33 23.45 30.64 7. Themis Medicare Ltd. 171.82 155.73 16.09 9.36 10.33 8. S M S Pharmaceuticals Ltd. 178.59 140.61 37.98 21.27 27.01 9. Natco Pharma Ltd. 185.88 137.31 48.57 26.13 35.37 10. Neuland Labs Ltd. 209.88 194.57 15.31 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a long term business relationship between the two companies through the joint venture route and that Astrix Laboratories Ltd. is the result of this agreement, wherein both Matrix and Aspen will pick up 50% stake in the newly formed entity. He observed that on the same day Matrix picked up 50% stake in Fine Chemical Corporation(FCC), South Africa, which hitherto is a 100% owned company of Aspen South Africa. Thus, according to him, Aspen and Matrix are having cross-holdings to the tune of 50% equity both in Astrix and Fine Chem. He observed that the API supply agreement entered into in the year 2005 is a tripartite agreement between Aspen Pharmacare Holdings Ltd., South Africa and Matrix Laboratories Limited, India and Astrix Laboratories Limited, India, whereby Aspen purchases anti-retroviral-APIs from Astrix and in turn, Astrix purchases requisite know-how which includes Drug Master Files (DMFs) from Matrix Labs. He observed that as per clause 3.2 of the agreement, it is obligatory on the part of Matrix to supply requisite DMFs to the newly formed entity, i.e. Astrix to supply ARV-APIs to Aspen, ad therefore, there is a prior arrangement between Aspen and Matrix vide above referre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e, Arm's Length Price of such payment is determined at NIL. Accordingly, total income of the assessee is enhanced with this amount. 10. As regards the purchase of DMFs/Patent and technical knowhow also, the Transfer Pricing Officer adopted CUP method and observed that this has failed the benefit test and therefore, the entire amount has to be considered for adjustment. The assessee had also argued before the Transfer Pricing Officer that the payments made towards DMF and technical know how, being during the financial year 2005-06, the same are outside the purview of transfer pricing adjustment for 2007-08. However, the Transfer Pricing Officer observed that the assessee has sought amortization of the above expenses and had charged the same to the Profit & Loss Account and therefore, the transactions in question are required to be analysed to find out whether they are at Arm's Length. As a consequence, he brought the entire amount of Rs. 10.63 crores as transfer pricing adjustment. 11. Thus, the total adjustment under S.92CA proposed by the TPO are as under- Sl. No. Transaction Adjustment (Rs. in crores) 1. Sales made to Aspen 27.81 2. Management fee pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s between independent enterprises to the extent they are needed, profit attributable to transactions that are not similar to the controlled transactions under examination should be excluded from comparison. Similar view has been expressed by the Tribunal at Mumbai in the case of IL Jin Electronics (I) P. Ltd. V/s. ACIT (2010-TIOL-151-ITATMUM) and also in the case of ACIT V/s. T Two International Pvt. Ltd.(2010- TIOL-166-ITAT-MUM). Thus, for making necessary adjustment if separate segmental accounts are available, the TPO ought to take only the segmental details of the comparable company. In the case before us, the Transfer Pricing Officer has taken companies which are involved in both the activities on the ground that sufficient number of comparables are not available. But, from the order of the TPO, we find that even as per the filter adopted by the Transfer Pricing Officer, at least six companies are available for comparison, which are into manufacture of only bulk drugs as in the case of the assessee. Therefore, we hold that only such companies are to be adopted for the purpose of determination of Arm's Length Price. 17. From among these six companies, the assessee is challen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ties below. 20. On verification of the material on record, in the light of the arguments of the parties and the TP study of the assessee, we find that the contentions of the assessee are correct. When the TPO is taking segmental results into consideration, he has to consider only the operating revenue and operating cost of the said segment. Common expenditure relating to all the segments cannot be attributed to bulk drugs segment alone. However, common expenditure cannot be ignored altogether. Operating costs include costs directly attributable to the manufacture of bulk chemicals and also includes common expenditure attributable to the bulk drugs segment. Therefore, the TPO ought to have allocated the common expenditure proportionately between all the segments and thereafter ought to have considered the turnover of the bulk chemicals only. Since this exercise has not been carried out by the TPO/AO, we deem it fit and proper to remit this issue to the file of the TPO for re-computation of margin of the bulk drug segment of Natco Pharma Ltd and thereafter to determine the Arm's Length Price accordingly. As for the contention of the assessee that if only bulk drugs turnover is tak....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e note of these decisions of the coordinate benches of this Tribunal in assessee's own case for the assessment years 2006-07 and 2009-10, it is held for the assessment year under consideration as well that the transactions between the assessee and the Matrix Laboratories are not international transactions and the same are not amenable to transfer pricing adjustment under S.92B of the Act. Consequently, grounds No.5 to 7 of the assessee are treated as allowed. 25. Further ground raised by the assessee is against the component of the operating income, i.e. whether the rent realised by the assessee on lease of the building and equipment can be considered as operating income of the assessee. We find that the assessee has let out the building as well as equipment to Matrix Laboratories and has derived income therefrom. The TPO held that the assessee's business is manufacturing of APIs and not hiring out/leasing the building and equipment and therefore, the rents derived cannot form part of operating income. Though the assessee submitted that the building and the equipment were given for carrying out the business operations and sales and boost the assessee's business income, assessee ....