TaxTMI 
TaxTMI 
2018 (1) TMI 1044
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd sale of bulk drugs and intermediates. For the AY 2010-11, the assessee company filed its return of income on 25/09/2010 declaring an income of Rs. 16,61,857/-. Since the assessee had international transactions with its associate enterprises which necessitated reference to the Transfer Pricing Officer (TPO) as per the provisions of section 92CA for determination of Arm's Length Price. Accordingly, the case was referred to the TPO for determination of Arm's Length Price with the prior approval of the CIT-III, Hyderabad. 4.1 Assessee's Profile: The assessee, Srini Pharmaceuticals Ltd., was incorporated under the Companies Act, 1956, on 24th February, 1995. Its main objectives are to manufacture various drugs, trading in chemicals, import and export and generally dealing with all types of pharmaceuticals, drugs and intermediates and to develop new products and substitute for imported products and technical consultation in drugs and pharmaceuticals. Srini Pharmaceuticals Ltd. has commenced its commercial production during the FY 1998-99. The factory is situated at Survey No. 247, Choutuppal Manda & Village 508 252, Nalgonda District, AP. 4.2 International Transactions: As per 3C....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The TPO checked the related party transactions of the comparables selected by the assessee and found that the company Novodigm Ltd. has substantial related party transactions and it cannot be selected as comparable. 2. The assessee has not applied its filter of 'companies having line of activity other than bulk drugs eliminated' properly. This resulted in selection of some companies which are not functionally similar. 4.7 The TPO rejected the segmental details furnished by the Assessee, by observing as under: "At Annexure No-4 of the TP report, the taxpayer has apportioned costs among the sales made to its AE and non-AE in exports market and sales made in domestic market. The allocation of direct & indirect cost has been done without any basis. Out of the total miscellaneous income of Rs. 13.72 Lakhs the taxpayer has considered Rs. 12.71 Lakhs in AE segment, which is 92.63% of miscellaneous income. However this has been done without any basis. Similarly out of scrap sale of Rs. 5.19 Lakhs, an amount of Rs. 4.80 Lakhs has been attributed to AE segment. This is again done without any basis. Therefore, the calculation of PLI cannot be accepted since the direct & indirect cost f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by observing as under: "07.0 Objection No.3 & 4 : Internal TNMM to be adopted & Segmented results as one of comparables. Since both the objections are inter-related, they have been taken up together. The assessee submitted that the product sold to both the segments i.e., AE & Non-AE are identical in all respects, the products are similar and the functions performed, assets employed and risks assumed are similar to both the segments. The products sold to AE & non-AE are either active pharmaceutical ingredients or intermediates of pharmaceutical Products. Both the Products are identical in their usage and application and only the chemical composition may be different from one product to the other. It was also submitted that in order to eliminate the differences on account of capacity under utilization and shift from license to generic, an alternate approach would be to consider the non-AE segment as internal comparable to bench mark the AE transactions and TNMM since both the segments are functionally comparable. It was also submitted that the external comparables adopted by the TPO suffer from the limitation of non-adjustment for lower capacity utilization and shift from licen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orted to non-AE to the extent of Rs. 4.25 crores, which is 7.35% of the total sales. Further, he submitted that the sales recorded during the year is only 30% of the utilization of the total capacity installed. He submitted that DRP and TPO has refused to consider internal TNMM considering the turnover recorded with non-AE exports comparatively a miniscule segment of the exports. For the AY, even though, the project sold to both the segments i.e. AE and non-AE are identical in all respects, the products are similar and the functions performed, assets employed and risk assumed are similar. The products sold to both the segments are either active pharmaceutical ingredients or intermediates pharmaceutical products. He further submitted that in order to eliminate the differences on account of capacity underutilization and shift from license to generic, an alternate approach would be to consider the non-AE segment as internal comparable to bench mark the AE transactions and both the segments are functionally comparable in terms of TNMM. He further submitted that the external comparables adopted by the TPO suffer from the limitation of non-adjustment for lower capacity utilization and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) 1.73%. Therefore, assessee does not get any support from the directions of ITAT. He relied on the findings of the DRP. 9. Considered the rival submissions and perused the material facts on record. We have noticed that assessee has made exports to its AE for Rs. 53.14 crores and exported to non-AE for Rs. 4.23 crores as well as made domestic sale to non-AE to the extent of Rs. 2.28 crores and it has arrived the profit margin of 1.19%, (-) 31%, 58.89% to sales relating to AE, export to non-AE and domestic sales to non-AE respectively. The profit margin is arrived with the help of a Cost Accountant after observing the total cost without factoring for idle capacity. In various judicial pronouncements and ITAT, Hyderabad Benches have always directed that for consideration of comparables there has to be an adjustment for idle capacity utilization which will have a bearing on the final outcome of the ALP. At the same time, the Bench has also considered the option of adopting internal TNMM as a comparable for determining ALP. In the given case, the question is whether the quantum of turnover of non-AE i.e. uncontrolled transactions with total turnover has to be considered for treating a....