AI Drafter 
TaxTMI 
TaxTMI 
2018 (10) TMI 1629
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....ompany was incorporated in the year 2003. In the initial stages, it was the pharmaceutical business arm of Dabur India Limited. In the year 2003 it was demerged from Dabur India Limited in order to position Dabur Pharma Limited as a specialty pharmaceutical company based on allopathic form of medicine. It filed its return of income declaring income of Rs. 2,81,80,075/-. Since the assessee had entered into international transactions during the year as defined u/s 92B of the I.T. Act, 1961, the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determining of the Arm's Length Price (ALP) of the international transactions. 2.1 During the year, the assessee had entered into international transactions with two Associated Enterprises (AEs) namely Dabur Oncology PLC and Dabur Neparl Private Limited. Dabur Oncology Private Limited is a 100% subsidiary of Dabur Pharma Limited and Dabur Nepal Limited is a 80% subsidiary of Dabur Pharma Limited. During the year, the assessee had undertaken the following international transactions:- S.No. Description of transaction Method Value 1 Purchase of goods TNMM 104.00 lacs 2 Sale of goo....
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....iser in the hands of Dabur Oncology PLC came to Rs. 1,66,22,250/-. Dabur Oncology PLC had sold the Lipholiser to the assessee on 09.08.2004 whose conversion rate in Indian Rupee came to Rs. 2,13,62,500/-. Thus, as per the TPO, the said Lipholiser was produced at a higher value by the assessee than paid by the overseas enterprise to the unrelated party. He further observed that the Lipholiser was in the hands of Dabur Oncology PLC from 31.10.2000 till 09.08.2004. The relative block related to three full financial years viz. 2001-02, 2002-03 and 2003-04. On being questioned by the TPO, it was explained by the assessee that the machine was not put to use by the overseas associate. However, nothing was brought on record to show that the lipholiser was not put to use. The TPO noted that as per the corporate taxation structure of the United Kingdom, depreciation was allowable on such plant and machinery @ 20%. Since the said machine (Lipholiser) was purchased at a price of Rs. 1,66,22,250/-, he computed the depreciation of the said instrument year-wise and arrived at a figure of Rs. 85,10,592/- being the depreciated value in the year 2003-04. Since there was no submission by the assessee....
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....f Disodium Pamidronate, the TPO observed that the assessee had sold 4.55 kgs of the same for Rs. 9.95 lacs to its AEs. As the assessee was not able to give any comparative rates, the TPO obtained the data from the database of export rates maintained by M/s International Business Information Services and determined the upward adjustment of Rs. 67,35,902/- being the arm's length price of the international transactions on account of Disodium Pamidronate. 2.5 Similarly, the TPO observed that the assessee had purchased 2000 kg of MCS (Methylene Chloride Soluble Extract) at Rs. 5200 per kg from its Associated Enterprise, Dabur Nepal and paid Rs. 1,04,00,000/- for the same. Since no substantial details were submitted by the assessee, the TPO again resorted to the taking date from the data base of International Business Services nd determined the landed cost of purchase at Rs. 6048/- per kg. After considering the pro-rata price, the TPO determined the arm's length price of the international transaction at Rs. 1,03,43,105/-. 2.6 Thus, the TPO made addition of Rs. 3,97,98,315/- to the international transactions. The Assessing Officer, thereafter made addition of Rs. 3,97,98,315/- on ac....
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.... Rs. 5,58,74,312/-. Since the assessee had entered into international transaction during the year as defined u/s 92B of the Act, the Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Income Tax Act, 1961 (hereinafter called "the Act"). The TPO recommended transfer pricing adjustment of Rs. 9,25,91,742/- on account of the following transactions:- (i) Corporate Guarantee given to ABN AMRO Bank for Foreign AEs - Rs. 7659.70 lakh. Arm's Length Price (ALP) computed by the assessee was Nil under TNMM Method but the TPO proposed an adjustment of Rs. 3,63,83,575/- by adopting interest rate of 4.75%. (ii) Loan given to foreign AEs - Rs. 5735.76 lakh. The assessee had computed the ALP by applying interest rate of 7% but the TPO proposed an addition of Rs. 5,62,088,167/- by adopting interest rate of 14%. Apart from this, the Assessing Officer also made a disallowance of Rs. 20,92,221/- depreciation on fixed assets on account of capital subsidy received by holding that the fixed assets were to be reduced by the amount of subsidy. (iii) The Assessing Officer also made certain additions/ disallowances on account of late deposit of PF/ESI ra....
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.... Dabur UK considering the fact that the assessee had not taken any security in return for providing guarantee to its AE. Accordingly, an adjustment of 4.75% was made. However, the Ld. Commissioner of Income Tax(A) held that Dabur UK had saved interest of 1% on account of taking corporate guarantee from the assessee and was of the opinion that 0.5% should be charged by the assessee as guarantee fee. It was submitted that by adopting 0.5% as corporate guarantee fees, the Ld. Commissioner of Income Tax (A) had erred because he had not considered the risk profile of Dabur UK/Thailand and also had not taken into consideration the financial performance and credit rating of the AEs. It was further submitted that the Ld. Commissioner of Income Tax (A) had also arbitrarily split the interest saving of 1% between AEs and the assessee without analysing the functions performed, assets utilized and risk assumed by each of the transacting entities. Reliance was placed on the decision of ITAT Mumbai Bench in Maroco Ltd. reported in TS-411-ITAT-2016 (Mum)-TP for the proposition that there was no difference between a bank or a corporate entity as far as corporate guarantee is concerned and both hav....
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....s revenue receipt. 7.0 In response, the Ld. AR submitted that as far as the department's ground challenging the restriction of addition with respect to corporate guarantee was concerned, the assessee had provided a letter from RBS Bank (formerly ABN AMRO Bank) wherein it had been mentioned that the same loan could have been taken at LIBOR +1.5% in the absence of corporate guarantee and, thus, Dabur UK got the benefit of 1% and therefore, guarantee fee should not exceed 0.5%. The Ld. AR placed extensive reliance on the order of the Ld. Commissioner of Income Tax (A) and also placed reliance on a number of judicial precedents/decisions of the ITAT in favour of his contention that the corporate guarantee @ 0.5% had been correctly adjudicated by the Ld. Commissioner of Income Tax (A). 7.1 With reference to the interest on loan, it was submitted that the Ld. Commissioner of Income Tax (A), while allowing relief to the assessee, had pointed out that the TPO had not satisfied the conditions for applying the CUP method and had also duly considered the rate quoted by the ABN AMRO Bank with and without corporate guarantee and had accordingly held that the loans advanced to Dabur UK and....
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....d that the custom valuation was an acceptable method of valuation and, accordingly, found no reason to uphold the transfer pricing adjustment as proposed by the TPO. Although the department has argued at length against the action of the Ld. Commissioner of Income Tax (A) in deleting transfer pricing adjustment with regard to the import of Lipholiser machine, no defect could be pointed out in the documents which had been relied upon by the Ld. Commissioner of Income Tax (A) while deleting the adjustment. The department also does not have any comparative case to support its stand on the issue and, therefore, it is our considered opinion that the Ld. Commissioner of Income Tax (A) took a reasoned and logical view of the whole issue by placing reliance on the various evidences which had been accepted by him as additional evidences under Rule 46A of the Income Tax Rules. It is also undisputed that the Ld. Commissioner of Income Tax (A) had duly obtained the comments of the Assessing Officer through a remand report on these additional evidences before proceeding to adjudicate the issue. Since there is nothing on record which would justify drawing an adverse inference, we find no reason t....
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....e Ld. TPO had chosen to apply CUP Method as against TNMM Method applied by the Appellant and he has used data of export rates maintained by M/s International Business Information Services (IBIS), 104-A, Raj Umang, Ashokvan, Dahisar, East Bombay-400068. At the stage of application of method, it is important to adhere to Rules on Selection of Most Appropriate Method (MAM). The Appellant contended that application of CUP Method requires high degree of comparability and FAR determination for proper application of CUP. It is stated that the Ld TPO failed to conduct the comparability of controlled transaction with uncontrolled transaction within the requirement of Rule 10(B)(2). The Rule 10(B)(2) requires comparison on following factors: "For the purposes of sub-rule (1), the comparability of [an international transaction or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the....
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....hey had applied a more tolerant TNMM Method where most of differences on account of functions and risks are ironed out at net level. The Appellant submitted that its net margins are higher than the average of net margins as earned by independent comparable companies. Besides the overall margin comparison of Appellant Company, the Appellant also produced as additional evidence regarding segmental net margin analysis of its UK branch through which sale of Paclitaxel and Disodium Pamidronate happened. The net margin analysis of UK Branch is reproduced below: TABLE From above table, it can be seen that the net margins earned from sale of Paclitaxel and Disodium Pamidronate is higher at 14.10% versus other sales at 10.90%. 14.4 I find force in the submissions of the Appellant, as it has supported its arguments with proper analysis and facts. The TPO has simply used database of export rates maintained by IBIS which satisfying the stringent conditions of comparability regarding CUP method. It is well known fact that pricing of a drug is greatly influenced by fact whether it is generic or otherwise. Quantity of drug and geographical location of buyer are....
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....to the assessee. The relevant observations of the Ld. CIT (A) are as under: "17.1 I have considered the manner in which the Appellant had benchmarked the international transaction of purchase of MCS Extract. As per TP Report of the Appellant, the Appellant had earned a net margin of 9% which is higher than average net margins of 8% earned by comparable companies. It is seen that Ld TPO had chosen to apply CUP Method as against TNMM Method applied by the Appellant. At the stage of application of method, it is important to adhere to Rules on Selection of Method. The Appellant contended that application of CUP Method requires high degree of comparability and FAR determination for proper application of CUP. It is stated that the Ld TPO failed to satisfy comparability of controlled transaction with uncontrolled transaction within the requirement of Rule 10(B)(2). The Appellant submitted that no data whatsoever was supplied to it by the TPO to offer its rebuttal on basis on which import price of Rs. 32 per kg of MCS extract was arrived at. 17.2 The Cost Certificate submitted by the Appellant throws some light upon the pricing of MCS Extract. The Cost Certificate cannot ....
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....sioner of Income Tax (A) has also held so and thereafter he proceeded to compute the corporate guarantee fee @ 0.5%. While doing so, the Ld. Commissioner of Income Tax (A) observed that the assessee had given corporate guarantee to a foreign bank for providing loan to its foreign AE in foreign currency whereas the TPO had considered the quote for giving guarantee in India. The Ld. Commissioner of Income Tax (A) also took into account the fact that the assessee's bank was ABN AMRO whereas the TPO had used the quote from the SBI. The Ld. Commissioner of Income Tax (A) thereafter placed reliance on the quote from Royal Bank of Scotland (RBS) (formerly ABN AMRO Bank) and held that there was a saving of 1% in this regard, the benefit of which was attributable both to the assessee as well as the foreign AE. Thereafter by splitting the benefit between the two, the Ld.CIT (A) arrived at corporate bank fee of 0.5%. We agree with the observation of the Ld. Commissioner of Income Tax (A) that this letter from RBS Bank has more evidentiary value as it is from the very same bank which gave loan to Dabur UK. The Ld. Commissioner of Income Tax (A) has also recorded a finding that he has also exam....
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....e loan transaction. Accordingly, the Ld. Commissioner of Income Tax (A) held that interest of both the loans was to be charged at LIBOR plus1.5%. We also note that the Ld. DRP for immediately preceding assessment year 2006-07 has held that the foreign loan given to UK subsidiary was to be benchmarked at LIBOR plus 100 bps plus certain risk adjustment and accordingly, rate of LIBOR plus 300 bps was proposed by the Ld. DRP. Although the Ld. Commissioner of Income Tax (A) has duly made a mention of this direction of the Ld. DRP for assessment year 2006-07, it is apparent that he has not considered the directions of the Ld. DRP while deciding this issue. We also note that the assessee has not filed any appeal against this direction of the Ld. DRP for assessment year 2006-07. Accordingly, in view of the factual matrix, this issue needs to be restored to the file of the Ld. Commissioner of Income Tax (A) to be decided afresh after considering the directions of the Ld. DRP in this regard in assessment year 2006-07 and after giving the assessee a proper opportunity present its case. Accordingly, this ground stands allowed for statistical purposes. 10.2 Coming to the remaining issue whic....