TaxTMI 
TaxTMI 
2018 (1) TMI 1044
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....ompany engaged in the business of manufacture and 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 Dist....
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.... 4 Novodigm Ltd. (Merged) 11.23% 5 Syncom Formulations (I) Ltd. 11.58% 6 Tonira Pharma Ltd. (Merged) 21.60% 7 Tyche Industries Ltd. 14.51% Arithmetic Mean PBDIT/Cost 14.51% 4.6 Comments of TPO on comparables selected by the Assessee, which are as under: 1. The assessee has not used any explicit RPT filter. 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 t....
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....08 Sales to AE as percentage of total operational revenue 89.01% Operational cost in proportion to AE sale to total sales 54,08,65,112 Arm's length margin 17.65% Arm's length sales @ 117.65% 63,63,27,804 Price received from AE 53,14,05,608 Shortfall being the adjustment u/s 92CA(3) 10,49,22,196/-. Accordingly, the total income of the assessee was enhanced by the adjustment of Rs. 10,49,22,196/- in respect of sales made to its AE, Apotex Canada u/s 92CA(3) of the Act. 5. Aggrieved by the TPO's order, the assessee raised objections before the DRP and the DRP rejected the objections of the assessee 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 phar....
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....ustment for such under utilization of capacity needs to be given. 08.1 DRP has dealt this issue in its order for Asst. year 2008-09 in paras- 5.5 to 5.7 and rejected the objection raised by the assessee which has further been followed by the Panel in Asst.year 2009-10. Facts remaining the same, the Panel decline to entertain any adjustment to the profit margin in respect of capacity utilization for this year also." 6. Aggrieved with the above order of DRP, the assessee is in appeal before us. 7. Ld. AR submitted before us that assessee is a subsidiary of Apotex Pharmachme Inc., Canada and during this year, assessee has exported to its AE to the extent of Rs. 53.4 crores, which is 93% of the total sales and exported 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-A....
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.... and indirect cost for AE and non-AE sales has been determined without any basis and no such segmental break up is given in the final report for the current AY. He further submitted that even though ITAT has held a suitable adjustment should be made on account of idle capacity, however, from the records submitted by the assessee, it is not clear to what extent profit margin effected due to idle capacity. He further brought to our notice that the assessee is contract manufacturer and as per the product comprising clause of the shareholder agreement, the assessee has to sell the goods to its AE with a mark up of 20% in case DMF is not required and 50% in case DMF is required on the cost for manufacturing, but, the assessee is showing profit margin only (-) 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....