TaxTMI 
TaxTMI 
2017 (11) TMI 324
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....86,032/-. 4. Briefly stated, the facts of the case are that the assessee is engaged in manufacturing of APIs, other intermediaries and bulk drugs and is also providing Contract R&D services for in-house use and for group companies. It is undisputed that manufacturing was done on contract basis with cost plus mark up of 8.7% and contract R&D activities were carried out with cost plus mark up of 19.95%. The assessee reported nine international transactions in its report in Form no. 3CEB, which have been reproduced on page 5 of the Transfer Pricing Officer (TPO)'s order. The AO referred the matter of determination of the arm's length price of the international transactions to the TPO. The TPO observed that the assessee used Transactional Net Margin Method (TNMM) to benchmark its international transactions pertaining to sale of bulk drugs/bulk drug intermediates; purchase of raw material; sale of raw material; and provision of contract R&D services with Profit level indicator (PLI) of Operating Profit to Operating Cost (OP/OC). On analysis of the transfer pricing approach of the assessee, the TPO observed that there were two segments, namely, manufacturing segment and service segmen....
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....terial on record, it is seen that the DRP directed the TPO to examine if foreign exchange gain was on account of sales, and if yes, then that should be treated as operating gain. Impliedly, the direction of the DRP was that foreign exchange gain/loss from trading transactions should be taken as an item of operating nature and in other cases it should be considered as non-operating. This view of the DRP accords with the ratio of the judgment of the Hon'ble Supreme Court in CIT VS. Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC). The ld. counsel for the assessee submitted that the exchange loss of Rs. 112.40 million pertains to loan taken by the assessee from Teva Pharmaceuticals Finance, Netherlands B.V., its holding company. Referring to the balance sheet of the assessee for the year under consideration, the ld. AR submitted that the assessee effected long-term borrowings amounting to Rs. 992.1 million from its holding company and the exchange loss pertained to such borrowing alone. We have gone through the assessee's balance sheet, a copy of which is available on page 242 of the paper book. It can be seen from such balance sheet that there are certain trade receivables as ....
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....erved on page 6 of its direction that this company is functionally similar. However, the TPO was: "directed to include this if it passes all the filters." The TPO, in his order giving effect to the direction given by the DRP excluded this company by noticing that it: "fails the sales filter." The assessee moved an application u/s 154 of the Act. The TPO vide order dated 20.06.2017, observed that this company was passing the sales filter. However, it was noticed that: "the net assets of the company is Rs. 6,38,14,663/- and the sales in the same year is Rs. 26,39,77,179/-. Thus, net fixed assets to sales ratio of the company is 24.17%. Hence, this company fails net fixed assets to sales filter applied by this office." 9. Having heard the rival submissions and perused the relevant material on record, it is noticed that the DRP treated this company as functionally similar. However, direction was given to the TPO to include this company if it was passing other filters. The TPO in his order u/s 154 of the Act has held that the company was not passing the filter of net asset to sales, which was adopted by him at 25% and in the case of Auro Laboratories, it was only 24.17%. We have gone....
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....e company as a whole should be accepted as a good comparable. The DRP rejected this contention. We find from the assessee's Annual accounts as well as report of international transactions that it was engaged not only in APIs. As noticed above, the assessee was engaged in sale of bulk drugs/bulk drug intermediates. Thus, to say that the assessee was engaged only in the business of APIs, is not correct. Once it is clear from the report of the assessee as well as the order of the TPO that the assessee was engaged in the manufacturing of bulk drugs as well, it was unreasonable to restrict the comparability with the companies dealing in APIs alone. At this juncture, it is relevant to mention that the assessee included M/s Shilpa Medicare Ltd. in its list of 22 comparables and the TPO was pleased to include it in the final list of comparables. M/s Shilpa Medicare Ltd. is a company engaged in manufacturing of 'bulk drugs' as is evident from the assessee's transfer pricing study report which mentions that this company is engaged in manufacturing of bulk drugs, intermediates and generation of power. We have gone through the Annual accounts of Neuland Laboratories Ltd., whose copy is availab....