TaxTMI 
TaxTMI 
2017 (8) TMI 1560
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....ee is in the business of manufacture of certain categories of Insulin and is also engaged in the business of trading, in high purity insulin formulation, insulin delivery systems and other specialized diabetic therapy products in India and Bangladesh. It also functions as a support hub and provides services akin to administrative and co-ordination services to its associates enterprises ('AE'), which are characterized as, administrative services. Besides this, it also undertakes certain support services to its AE's which are characterized as Information Technology enabled services ('ITES'). 2.2 For asst. years 2011-12, the assessee company filed its return of income on 4/11/2011 declaring total income of Rs. 16,77,16,546/-. The return was processed u/s 143(1) of the Act and the case was subsequently taken up for scrutiny. A reference u/s 92CA of the Act was made by the' Assessing. Officer ('AO') to the Transfer Pricing Officer ('TPO') in respect of the international transactions entered into by the assessee with its AE's. The TPO passed an order u/s 92CA of the Act dated 27/1/2015 proposing transfer pricing adjustments amounting to Rs. 36,53,93,349/- under the following heads:- ....
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....le of insulin formulations by Torrent Pharmaceuticals Limited ('Torrent') to NNIPL are in the nature of "contract for work" and liable to tax deduction at source under section 194C of the Act. 7. Impugned order and DRP erred, in law and in facts, by holding that the sale of insulin formulations by Torrent to NNIPL is essentially in nature of "contract for work", which is contrary to CBDT Circular as also principles laid down in various judicial pronouncements which have distinguished ''contract of sale" from "contract for work". 8. Impugned order and DRP proceed on unsubstantiated presumptions ignoring the consistent 'consensus ad idem' between both the parties to the contract, the authorities enforcing other central legislations and taxing enactments over last several years, without citing any valid reasons. 9. Impugned order and DRP erred, in holding that the transaction between NNIPL and Torrent is essentially in nature of "contract for work" without appreciating that purchase of insulin formulations by NNIPL from Torrent would clearly fall outside the definition of "work"' under section 194C of the Act. 10. The impugned order fails to appreci....
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....ing the jurisdictional Tribunal rulings on the retrospective applicability of the amendment to section 40(a)(ia) in assessee's own case, which were placed before the Honourable DRP in the Appellant's submissions. 18. Without prejudice to above, the impugned order failed in not restricting the disallowance under section 40(a)(ia) of the Act to Rs. 41,92,04,990 being the income that is alleged to be earned by Torrent from the subject transaction, due to the sale transaction being artificially treated as works contract. Transfer Pricing Grounds 19. The order of the learned Additional Commissioner of Income Tax (Transfer Pricing) 2(1). ('ld. Transfer pricing Officer' or ld. TPO'), Bangalore passed under section 92CA of the Act in respect of Assessment Year ('AY') 2011-12 as also directions of DRP are contrary to law, facts and circumstances of the case and liable to be quashed. 20. The impugned order erroneously made an addition of Rs. 36,21,63,126 to the total income on account of adjustment in the arm's length price of the international transactions entered by the Appellant with its associated enterprises. 21. Ld, AO/ DRP and ld. IPC....
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....rned TPO/AO/DRP erred in rejecting companies similar to the assesses while performing the comparability analysis in respect of the ITES segment. 31. The learned TPO/AO/DRP erred in the computation of (he working capital adjustment with respect, to the ITES segment of the assessee by considering inaccurate data and limiting the adjustment without providing benefit as per actual position. 32. The learned TPO/AO/DRP erred in ignoring the limited risk nature of the ITES provided by the assessee and in not providing an appropriate adjustment towards risk differential, even when full- fledged entrepreneurial companies are selected as comparables. 33. Without prejudice to the other grounds, the learned TPO/AO/DRP have erred in margin computation of final accepted comparables. Distribution Segment 34. The learned TPO/AO/DRP have erred an making an addition of Rs. 33.21,23.220 to the total income of the Appellant on account of adjustment in the arm's length price with respect to distribution activities relating to insulin product undertaken in India by the Appellant. 35. The learned TPO/AO/DRP have erred, in law and in facts, by ch....
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.... infructuous and are dismissed as not pressed. 5. Grounds 19 to 26 5.1 These grounds at S.Nos. 19 to 26 are in respect of transfer pricing which are either general or conceptual in nature, and since the ld AR did not press or urge these grounds before us, they are rendered infructuous and dismissed as not pressed. Information Technologies Enabled Services Segment ('ITES') 6. Grounds 27 to 33 6.1 These grounds (supra) are raised by the assessee in this appeal in respect of the ITES segment of its operations. 6.2 In this sphere, the assessee renders certain services like accounts payable processing, patent search activities, legal services, data management services to its AE's which have been characterized as being in the nature of ITES and had aggregated these international transactions. The assessee adopted TNMM as the most appropriate method ('MAM'). The assessee adopted 'Operating Profit to Operating Cost', as the profit level indicator ('PLI') and conducted a comparability analysis and based on application of certain filters, selected a set of 14 companies as comparables to the assessee. The TPO, however, rejected the assessee's TP study for reasons recorded in....
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....by the TPO in spite of the assessee's objection that it was functionally not comparable, as it is engaged in providing KPO services; is a product development company; holds significant IPR's and also segmental information is not available. The DRP upheld the TPO's action. It was contended by the ld AR that this company needs to be excluded from the set of comparable companies as it is not functionally comparable with the assessee. According to the ld AR, this company i.e 'Accentia' is functionally different as it offers services which are in the nature of software development, product development and software support services. In support of the assessee's contentions, the attention of the Bench was invited to extracts of the Annual Report of this company for the year under consideration (placed at pages 1242 to 1325 of paper book) to show that this company, "Accentia' is engaged in development and sale of products and provision of various services. Reliance in this regard, for exclusion of this company from the final set of comparables to the assessee, was, inter alia, placed on the decision of the co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) (....
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....the Tribunal in the case of Equant Solutions India P. Ltd. v. DCIT [ITA.1202/Del/2015, dt. 21.01.2016] and that of coordinate bench in the case of Amba Research (India) P. Ltd. v. DCIT [IT(TP)A.286/Bang/2015, dt. 09.03.2016]. As per the ld. AR though the above decisions were for A. Y. 2010-11, Accentia Technologies Ltd, was doing the very same activities during the relevant previous year also. Hence according to him these decisions could be taken as a precedence for excluding the said company from the list of comparables. 10. Per contra, Ld. DR submitted that 80% of the revenue of Accentia Technologies Ltd, were from medical transcription, which fell within ITES only. As per the ld. DR, actual activities of the assessee compared favourable with Accentia Technologies Ltd. When 80% of the income was from ITES services, as per the ld. DR further segmentation was not required. As for the reliance placed on the decisions of Delhi Bench in the case of Equant Solutions India P. Ltd., (supra) and coordinate bench in the case of Amba Research India P. Ltd. (supra), Ld. DR submitted that these were for A.Y. 2010-11 and. there was a clear finding by the Tribunal that results of Accen....
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.... to about 16% gross receipts. No segmental results were also available. Its audited financial statements at para 7 of the notes to accounts mentioned as under : (7) The Company is operating in a single business segment that is providing back office support to its gross companies and its affiliates on cost plus basis and as such all business activities revolve around segment, hence there is no separate primary reportable segment as required by Accounting Standard-17 "Segment Reporting" notified under section 21(3C) of the Companies Act, 1956. 15. As against the above, Assessee was providing back office support to its group companies and affiliates, in the field of reinsurance, which its affiliates were engaged in. Work done by the assessee has been captured by us at para three above. This in our opinion was entirely different from the type of activities that Accentia Technologies Ltd, was into. Type of services rendered by the assessee is also clear from the service agreement entered with its AE called Swiss Re, Zurich, dt. 01.02.2009. Annexure-1 to this agreement, is reproduced hereunder : CAT team Bangalore processes and analysis data using s....
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....of guidelines and business intelligence relevant for reviewed units portfolio * Input and maintenance for e-tool * Reporting and Reporting Analytics * Continuous Improvement projects: Other projects as assigned 17. Thus the functions which were done by Accentia Technologies Ltd, and the functions which were rendered by the assessee were entirely different. We cannot say that the type of services done by the assessee was of a level as sophisticated as the one which was being provided by Accentia Technologies Ltd. In the case of Rampgreen Solutions P. Ltd (supra), Hon'ble Delhi High Court mentioned as under at para 31 of its order, which reads as under : 31. In the present case, the Tribunal noted that Vishal and eClerx were both engaged in rendering ITeS. The Tribunal held that, "once a service falls under the category of ITeS, then there is no sub-classification of segment". Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITeS. We find it difficult to accept this view as it is contrary to ftclamentat the rationale of determining ALP by comparing controlled transactions/entities with ....
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....ility' of these company with a ITES company was considered by this Tribunal in the case of Paraxel International (India) Pvt. Ltd. (supra) and the Tribunal held as follows on the comparability of the aforesaid companies with a company providing ITES in the following manner:- "10. In grounds No. 4 to 6, the assessee has challenged the comparables selected by the TPO for the purpose of TP analysis and as submitted by the learned counsel or the assessee, the assessee is objecting to the selection of only the following five comparables, out of the twelve companies selected as comparables - Sr. No Company Name 1. Accentia Technologies Limited 2. Cosmic Global Ltd. 3. Eclerx Services Ltd. 4. Genesys International Ltd. 5. Infosys B P O Ltd. 11. We have heard the arguments of both the sides on the issue of inclusion/exclusion of the above five companies as comparables and also perused the relevant material on record including the various decisions of the coordinate benches of the Tribunal cited by the learned counsel for the assessee. Accentia Technologies Limited 12. As regards the selection of....
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....mental Representative has sought to contend that the acquisition of a company by M/s. Accentia Technologies Ltd. took place at the fag end of the year under consideration, the learned counsel for the assessee has pointed out that the process of acquisition had started on 15.5.2008 itself, i.e. in the earlier part of the year under consideration. We, therefore, follow the decision of the coordinate bench of this Tribunal in the case of Excellence Data Research Services Pvt. Ltd. (supra) and direct the AO/TPO to exclude the Accentia Technologies Limited from the list of comparables. Infosys BPO 20. As regards selection of Infosys BPO as a comparable company, the learned counsel for the assessee has contended that the said company cannot be taken as comparable because of its uncomparable size of operations. He has contended that the turnover of the said company was many times higher than that of the assessee during the year under consideration. Although the learned Departmental Representative has contended that the size of operations does not matter as far as selection of comparables is concerned especially in the sector of IT Enabled services, it is obse....
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....sion in the case of Swiss RE Shared Services (India) (P.) Ltd., (supra), we hold that this. company, Accentia Technologies Ltd.', is functionally dissimilar and therefore not a good comparable to the assessee in the case on hand who merely renders ITES to its AE's and therefore direct the AO/TPO to exclude this company from the final set of comparables. 8. Acropetal Technologies Ltd., ('Acropetal') 8.1 This company was selected as a comparable by the TPO, despite the objections of the assessee that this company 'Acropetal' is functionally dissimilar to the assessee and fails the revenue filter applied by the TPO. Before us, it was contended by the ld AR of the assessee that this company needs to be excluded from the list of comparables as it is not functionally comparable. According, to the ld AR, Acropetal' is engaged in software development and engineering design services. In this context, the ld AR drew the attention of the Bench to the Annual Report of this company for years ended 31/3/2011 (extract placed at pages 1326 - 1405 of paper book) to show that it. is engaged in development of computer software, having engineering design services, I.T infrastructure solutions, e....
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....services. Though these services did not fit in the same mould, the level of expertise required stood more or less on the same pedestal. According to him, applying the yardsticks laid down by Hon'ble Delhi High Court in the judgment of Rampgreen Solutions P. Ltd (supra), Acropetal Technologies Ltd, could be taken as a good comparable. 23. We have perused the orders and heard the rival contentions. There is no dispute that M/s. Acropetal was having at least three segments, namely, engineering design services, IT service and health care. TPO had taken engineering design service as a good comparable with that of the services done by the assessee. Engineering Design Services that were being rendered by Acropetal Technologies Ltd, appears at page 8 of its annual report. It comprised of architectural, structural, electrical, plumbing, steel detailing, and utilities designing. Its revenue model appears at page 9 of its annual report. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural health care, engineering design and enterprise solutions. In our opinion, the type of services that was being provided b....
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.... 9.1 This company was included in the final set of comparables by the TPO brushing aside the objections put forth by the assessee. Before us, it was contended that this company, 'ICRA' needs to be excluded from the final set of comparables as it is not functionally comparable to the assessee. It was further submitted that there is an error in the computation of margin of this company, inasmuch as the TPO had not considered depreciation as an operating expenses while computing the operating margin. 9.2 Per contra, the ld DR for Revenue placed strong reliance on the orders of the authorities below in including this company in the list of comparable. It is submitted that in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra) relied on by the assessee, this company 'ICRA' has been retained in the list of comparable companies to ITES operators. 9.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (P.) Ltd. (supra), on which the assessee itself has placed reliance for exclusion of other comparable companies; has examined the com....
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.... Encouraged by the emerging dynamics of the outsourcing business, ICRON diversified into the Knowledge Process Outsourcing (KPO) business in April 2004, with focus on the Banking, Financial Services and Insurance (BFSI) vertical as well as other verticals like Retail, Healthcare end Pharmaceuticals. The KPO Division of ICRON offers Knowledge Process Outsourcing services that combine advanced analytical abilities and deep domain expertise to deliver value by translating data and information into structured business inputs. It provides back-end analytical services support to its clients in the areas of Data Extraction Aggregation, Validation and Analysis Accounting and Finance, Research, Report Preparation and Modelling. The Division has attained ISO 27001 certification through rigorous adherence to data security policies and practices. 28. Type of work being done by the assessee captured by us at para three above would show that assessing was also doing analysis of results, testing and calibration etc., It had to use market intelligence, maintain e-tools and provide reporting analytics. In our opinion the level of expertise being used by the as....
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....e any revenue from exports and fails the revenue filer. It is also submitted that the BPO segment of 'Jeevan' also cannot be considered as comparable since the revenue from this segment is low. In support of its contention for exclusion of this company from the list of comparables, the ld AR placed reliance inter alia on the decision of the co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra). 10.2 Per contra, the ld DR for Revenue supported the TPO's order including this company as a comparable to the assessee in the case on hand. 10.3.1 We have heard the rival contentions and perused and carefully considered the material on record. We find that a coordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra) has examined the comparability of this company with providers of ITES and held as under at paras 29 to 31 thereof:- "29. Seeking exclusion of Jeevan Scientific Technologies Ltd, (seg), ld. AR submitted that the turnover of the said company was less than Rs. 1 crore. As per the ld. AR, TPO himself had excluded companies having turnover below Rs. 1 crore. Relying on paper book, p....
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.... 11.1 This company was selected as a comparable by the assessee in its TP study and was retained by the TPO in his final list of comparables. Before us, the ld AR of the assessee contended that this company needs to be excluded from the final set of comparables as it is not functionally comparable to the assessee. In support of its contentions, the ld AR, inter alia, placed reliance on the decision of the coordinate bench of this Tribunal in the assessed own case for asst. year 2009-10. 11.2 Per contra, the ld DR for Revenue supported the orders of the TPO and submitted that 'Infosys' should be retained as a comparables as it was chosen by the assessee itself in its TP study. 11.3.1 We have heard the rival contentions and perused and. carefully considered the material on record. We find that this company was chosen as a comparable by the assessee in its TP study, finding 'Infosys' to be functionally comparable. When the assessee found 'Infosys' to be functionally comparable at the time of its TP study, it is not clear to us as to what has now changed for the assessee to now claim that this company 'Infosys' to be functionally not comparable. Further, on a perusal of the recor....
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....he Annual Report of the company, 'iGate' that its operations/revenue relate to the providing of software development services, contract centre Services and ITES. In this factual matrix of the case, we deem it proper to remand the issue of comparability of this company, 'iGate' with the assessee in the case on hand to the file of the TPO for fresh consideration by examining the specific services rendered by this company. The TPO is accordingly directed. 13. Working Capital Adjustment 13.1 The material on record shows that the TPO in his order u/s 92CA of the Act has restricted the working capital adjustment to 1.47%, which is the average working capital component of the comparables. It is the contention of the assessee that it is settled principle, laid down and upheld by various decision of the Tribunals that working capital adjustment is to be allowed on actuals and should not be restricted to the average working capital of comparables. 13.2 Per contra, the ld DR supported the action of the TPO on this issue. 13.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On the appreciation of the facts on record on this issue, ....
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....he assessee as a low risk captive services provider that does not perform entrepreneurial functions and consequently does not bear related risks. The assessee, being part of the larger group has the advantage of healthy working capital position, whereas, entrepreneurial companies ' cannot have that advantage and therefore, need to adjust their prices for the services accordingly to account for working capital related functions, costs and risks. The objective of a benchmarking analysis is to neutralise these differences and bring about an appropriate comparison as far as possible. According to the ld. counsel for the assessee, even Rule 10B says that reasonable and appropriate adjustment needs to be made for a better comparability between the transactions being compared. 28. It was further submitted that the TPO ignored the above principles of comparability and contested that the transfer price of uncontrolled independent companies have component of return for functions and return for working capital. It was submitted that though the assessee is not denying this fact, but the return for working capital position between the assessee and the companies selected as comparable v....
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.... / AO to allow the actual adjustment towards the differences in working capital position between the assessee and the companies in the final set of comparables. DISTRIBUTION SEGMENT (Grounds 34 to 42) 14.1 According to the ld AR of the assessee, the assessee in the case on hand is engaged in the distribution of Insulin and other related products. In this segment, the assessee has reported international transactions related to purchase of excipents, purchase of finished goods, receipt of subvention fee and payment of quality testing fee. While the purchase of excipients was between Novo Nordisk AS, Denmark and Torrent Pharmaceuticals Ltd. ('TPL'), the purchase of finished goods was between the assessee and TPL. Subvention fee was received by the assessee from Novo Nordisk A/S and testing fees was paid by the assessee to Novo Nordisk A/S. 14.2.1 In its TP study, the assessee has taken the stand that the transactions of purchase of excipiernts, purchase of finished goods, payment for quality testing fees and receipt of subvention fee are closely linked to the distribution function and hence all these are aggregated under the 'Distribution segment'. All these transactions were....
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....t as explained by the Assessee in its TP study for AY 2009-10. The distribution segment was divided into two categories :- (1) Sale of products purchased locally: IT (TP) A No.l46/Bang/2015 (2) Direct import and sale pf products from Novo Nordisk A/S and Novo Nordisk HealthCare AG. 8. The two categories as explained by the Assessee in its TP Study for AY 2009-10 was as follows:- "4.3.26 Sale of products purchased locally: Novo Nordisk India sells Human Monocomponent and Purified Insulin in 40 IU Vials purchased from Torrent Pharmaceuticals Limited, a company formed and registered under the laws of India. These insulin products have been manufactured by Torrent from crystals imported from Novo Nordisk A/S. This arrangement makes all the three parties namely Novo Nordisk A/S, Novo Nordisk India and Torrent, as associated enterprises and since one of the parties [i.e. Novo Nordisk A/S] is a non-resident, it would amount to an international transaction that needs to comply with the Indian Transfer Pricing Regulations. 4.3.27 Novo Nordisk A/S has, vide the know-how license agreement dated October 04, 1999 and as amende....
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....checks are undertaken almost quarterly. Quality audits are undertaken once in two years. The drugs need to be maintained at prescribed conditions of temperature (cold storage). Novo Nordisk India undertakes quality inspections of the distributors, stockists, wholesalers, etc. The above arrangement is illustrated in Figure 3 below. IT (TP) A No. 146/Bang/2015 4.3.31 Direct Import and Sale of Products (Buy-sell arrangement): Novo Nordisk India sells various insulin formulations, growth hormones, other diabetes therapy products and related devices including Penfills, Pens, Needles, Norditropin(r), GlucaGen Hypokit(r), Novolet(r), Novonorm(r) and Analogues which are imported directly from Novo Nordisk A/S and Novo Nordisk HealthCare AG. Some of these products are covered under the DPCO. For this purpose, Novo Nordisk India and Novo Nordisk A/S and Novo Nordisk HealthCare AG have entered into a product supply agreement dated October 4, 1999 and August 17, 2004 respectively. The term of these distribution agreements shall continue until terminated with mutual consent. In order to sell the above mentioned products in India, Novo Nordisk India has entered into distribution a....
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....tion fee received as income. 10. As we have already seen Human Mono component and Highly Purified insulin in 40 IU Vials are purchased by the Assessee from Torrent Pharmaceuticals Limited a company which is not an Associated Enterprise of the Assessee. Torrent Pharmaceuticals Limited gets insulin in crystal form which is raw material required for manufacture of Human Mono Component and highly purified insulin in 40 IU Vials, which is imported from Novo Nordisk A/S. The Assessee in its TP study accepts the fact that there is an arrangement between the Assessee, Novo Nordisk A/S and Torrent Pharmaceuticals Limited (TPL) whereby insulin in crystal form will be supplied by Novo Nordisk A/S to TPL. Novo Nordisk A/S will also grant limited license with right to sub-license to TPL, know-how, trademark to manufacture and market with Novo Nordisk A/S's name to the Assessee to enable manufacture of purified insulin in 40 IU Vials, for ultimate sale by the Assessee in India. 11. The Assessee in its TP study had identified 4 comparable companies which were in the business of distribution. The arithmetic mean of the operating profit to sales of the 4 comparable companies chose....
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....now how is used for production of any of Novo Nordisk Products. 2. Trademark Master License Agrement-1 dated 28.2.1994: Novo Nordisk A/S owns Trade marks Actrapid, Lentard, Monotard, Insulatard, Mixtard, NovoPen, NovoFine, Glucagon Novo. By the agreement dated 28.2.1994, the Assessee is given the Master License to exclusively use and or sub-licensee the use of the Trade Marks of the aforesaid products which are listed in Appendix-i to the agreement. 3. Insulin Formulation Supply Agreement dated 1-3-1994: By this Agreement TPL undertakes to manufacture and supply 40m insulin to the Assessee. There is also an arrangement whereby TPL is given sub- license to use Novo Nordisk A/S Know how to manufacture Novo Nordisk Products. 4. Facility Establishment Agreement dated 6.8.2005: Whereby the Assessee and TPL agree about the facility to be created by TPL exclusively for insulin production in terms of agreement of Assessee and TPL for insulin formulation supply. 5. Agreement for quality control testing dated 1-4-1997: This agreement is between Novo Nordisk A/S and the Assessee. Novo Nordisk A/S under this agreement undertakes to do....
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.... exclusively to Novo Nordisk (India) Pvt. Ltd. under another separate product supply agreement." 14. The TPO after analyzing the aforesaid agreements and the claim of the Assessee for characterization of the activities in relation to manufacture of Highly purified Insulin in 40 IU vials through TPL and distribution of products directly imported from Novo Nordisk A/S as distribution function, was of the view that the arrangements between the Assessee, Novo Nordisk A/S and Torrent was in fact a manufacturing activity and cannot be characterized as distribution operations. The TPO in his TP order conducted a fresh comparability analysis based on the application of TNMM and arrived at a set of 15 purported comparable companies with a IT (TP) A No. 146/Bang/2015 mean operating margin of 8.26%. Accordingly, the TPO, considered the whole distribution segment of the Assessee for the purpose of computing the Arm's Length Price (ALP) adjustment, without considering the fact that the entire sales are of purchased products (more than 61% of the total purchases being products imported from Group companies) and made an adjustment of INR 352,638,074 [including additional adjustment compu....
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....be considered as an International Transaction between two Associated Enterprises attracting the provisions of Sec. 92(1) of the Act? 2. If the answer to the above question is in the affirmative, whether the said transaction can be benchmarked for the purpose of determining ALP together with the international transaction of import of products directly from Novo Nordisk A/S and selling the same in India (which is purely distribution function performed by the Assessee on behalf of Novo Nordisk A/S) on IT (TP) A No. 146/Bang/2015 the plea that both the transactions are interlinked and therefore have to be benchmarked together? 3. If the answer to the above question is in the negative, How the ALP of the transactions has to be determined? 4. Whether the determination of ALP as directed by the DRP is correct?" 18. The Tribunal decided the aforesaid issues as follows: Issue No. 1: Whether transaction by which incipient (raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials) is supplied by Novo Nordisk A/S to TPL and the transaction by which the Assessee engages the....
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....a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise" only expands the scope of the expression "Associated Enterprise" as used in Sec. 92B(1) of the Act and it does not dispense with the condition that either or both the parties to a transaction should be non-resident for a transaction to be termed as "International Transaction". In other words according to him Sec. 92B(2) controls only the definition of "Associated Enterprises" as laid down in Sec. 92A of the Act. 51. The learned counsel for the Assessee drew our attention to the decision of the ITAT Hyderabad Bench in the case of Swarnandra IJMII Integrated Township Development Co. Pvt. Ltd. v. DCIT ITA No. 2017/Hyd/11 AY 07-08 dated 31.12.2012. In the aforesaid decision the facts were that the Assessee, Swarnandhra IJMII, was a Joint Venture company between APHB and IJM (India). IJM (India) was a subsidiary of a foreign group of companies....
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....ases, the third party intermediary will generally not be the ultimate IT (TP) A No. 146/Bang/2015 consumer of the services or goods. The intermediary would facilitate the transfer of services or goods from one enterprise to its associate enterprise with no value addition or insignificant value addition. The intermediary is used to break a transaction into two different parts, which parts when viewed in isolation would not satisfy the requirements of section 92A. The legal form of the transaction in such circumstances is ignored. The substance of the transaction is given effect to, not by disregarding the existence of the intermediary but by deeming the transaction with the intermediary itself to be one with an associated enterprise. 28.7 The legal fiction created in respect of the specified transaction can be used only for the purpose of examining whether such transaction constitutes an 'international transaction' under section 92B(1). In case section 92B(1) is not attracted, the fiction under section 92B(2) ceases to operate. In our opinion, the impugned transaction between the assessee and IJMII does not fall under section 92B(2). This is for the following reasons.....
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....pinion, the DRP simply wants to keep the matter alive, though they agreed with the assessee's counsel, and confirmed the order of the TPO (AO). In our opinion, the argument of the Department is devoid of merit. Accordingly, we agree with the contention of the assessee's counsel on legal issue. Since we have decided on legal issue on applicability of transfer pricing on the assessee, we refrain from going into the other grounds raised by the assessee on the issue of transfer pricing. The addition made towards transfer pricing transactions is deleted in its entirety." 52. It was further pointed out by him that Sec. 92B(2) has been amended by the Finance Act. 2014 to read as below:- (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be [deemed to be a transaction] entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise [w....
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....-how and use of trademark by TPL was sub-licensed to TPL for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, specifically provides that the Assessee will disclose the source of the Assessee's right to grant sub-license of know-how and trademark as from Novo Nordisk A/S and further, provides that such, original license agreement will be deemed, to be incorporated in the sub-license agreement. 3. Insulin formulations supply agreement between the Assessee and TPL in clause 14.2 specifically provides that the agreement is co-terminus with the bulk supply agreement shall be co-terminus with the Insulin Crystals and Excepients Supply agreement between Novo Nordisk A/S and TPL and the know-how and trade mark sub-license agreement between the Assessee and TPL. 4. He also drew our attention to the Quality Testing Agreement between the Assessee and Novo Nordisk A/S whereby the testing of quality of the product manufactured by TPL is undertaken by Novo Nordisk A/S. 55. According to him all the terms of all the agreements have to be read together and if so read if becomes clear that the arrangement between the parties....
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....s clearly Manufacturing for and on behalf of Novo Nordisk A/S. 58. The Learned DR then laid emphasis on the point that Sec. 92(1) lays emphasis on determination of income from an International Transaction. According to him it was important to understand the meaning of the term "Transaction" as used in Sec. 92(1). He drew our attention to the provisions of Sec. 92F(v) of the Act which reads thus:- "Definitions of certain terms relevant to computation of arm's length price, etc. 92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,- xxx xxx  ....
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....isk A/S. The Assessee submitted a Transfer Pricing Study (TP Study) along with the report required to be filed in terms of Sec.92E of the Act in Form No. 3CEB. In the TP Study the Assessee accepted that the transaction of supply of excepients which is a raw material for manufacture of Human Mono-component and Highly Purified Insulin in 40 IU Vials, is an international transaction. According to the Assessee the arrangement for supply of raw materials for manufacture between Assessee, TPL and Novo Nordisk A/S. makes all the three parties namely Novo Nordisk A/S. Novo Nordisk India and Torrent, as associated enterprises and since one of the parties (i.e. Novo Nordisk A/S.) is a non-resident, it would amount to an international transaction that needs to comply with the Indian Transfer Pricing Regulations." The Assessee in its TP study characterized the transaction of supply of raw material by Novo Nordisk as akin to the distribution of products imported from Novo Nordisk A/S. The Assessee further took the stand that the transaction of purchase of excepients, purchase of finished goods, payment for quality testing and receipt of subvention fee between the Assessee and Novo Nordisk A/S a....
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....on, specifications of raw materials and utilities and all other technical information and data, whether patented or not, accumulated techniques, experience and skill owned or possessed or acquired (referred to as Novo Nordisk know-how) to produce Novo Nordisk products i.e., products listed in appendix-1 to the agreement, IT(TP)A No.146/Bang/2015 which includes Human Monocomponenet Insulin Formulations (40 iu/ml in 10ml vials) and Highly Purified Porcine Insulin Formulations (40iu/ml in 10ml vials) (referred to as Novo Nordisk Products). Under clause 2.01 of the know-how license agreement dated 28.2.1994, Novo Nordisk A/S grants to the Assessee the exclusive right and license, to use or sub-license the use of the Novo Nordisk know-how to manufacture Novo Nordisk Products at the Plant. Plant means the manufacturing facilities of the Assessee or those of its sub-licensee and or contractor manufacturer(s) as the case may be where Novo Nordisk A/S know how is used for production of any of Novo Nordisk Products. 2. Trademark Master License Agrement-1 dated 28.2.1994: Novo Nordisk A/S owns Trade marks Actrapid, Lentard, Monotard, Insulatard, Mixtard, NovoPen, NovoFine, Gluc....
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.... of subvention fee is being made by them to the Assessee. The agreement provides that there are no specific services to be rendered by the Assessee for the payment of subvention fee. 7. INSULIN CRYSTALS AND EXCIPIENTS BULK SUPPLY AGREEMENT DATED 15-2-1994: This agreement is between Novo Nordisk A/S and TPL. This Agreement in its preamble refers to the fact that TPL wants to enter into a long-term purchase agreement with Novo Nordisk for purchase of Human Mono component and Highly Purified Porcine Insulin Crystals and Excepients, which are used as raw material in manufacture of 40 iu insulin vials. The agreement also refers to the know-how license and trademark license between the Assessee and Novo Nordisk A/S and further refers to insulation formulations supply agreement between TPL and the Assessee. These are the agreements set out in sl. No. 1 to 3 of the various agreements. These are referred to in appendix 5 to this agreement. Clause 2.5 of the agreement provides that appendices to the agreement form part of this agreement, i.e., Insulin Crystals and Excepients Bulk Supply Agreement dated 15.2.1994. The agreement provides for several restrictions with regard to m....
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....nt clearly emerges between Novo Nordisk A/S and the Assessee for supply of insulin crystals. All the agreements between Novo Nordisk A/S and TPL and between TPL and the Assessee refer to each other and specifically incorporate the terms of one agreement into the other. Thus the parties to the arrangement are Novo Nordisk A/S, Assessee and TPL. Since one of the parties to the transaction is a non-resident the conditions specified in Sec.92B(1) of the Act are satisfied. 66. The decision of the ITAT Hyderabad in the case of M/S. Swarnandhra IJMII Integrated Township Development Co. Pvt. Ltd. (supra) was rendered on different facts. The ITAT in the aforesaid decision specifically found that the transaction in question did not involve transfer of goods or services from the assessee to IJM Group (non-resident AE) or to any other non-resident enterprise, either directly or indirectly, or by using IJMII as an intermediary. The transaction in question involved direct rendering of services by IJMII to the assessee. In the present case however the facts, as we have seen, is that there was transfer of raw material (excepient insulin crystals) by the non-resident AE to the Assess....
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....ime of supply of insulin crystals by Novo Nordisk A/S. Thereafter it is the Assessee who gets the crystals converted into manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials and sells it in the Indian market. This transaction cannot result in erosion of tax base in India. The income of TPL from manufacture is subjected to tax in India. The sale of finished products by Assessee is subjected to tax in India. Therefore there can be no tax base erosion in India from the transaction of manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials by Assessee through TPL. Issue N0.1 is decided accordingly. "2. Whether the transaction of supply of raw material excepient/insulin crystal by Novo Nordisk A/S to the Assessee can be benchmarked for the purpose of determining ALP together with the international transaction of import of products directly from Novo Nordisk A/S and selling the same in India (which is purely distribution function performed by the Assessee on behalf of Novo Nordisk A/S) on the plea that both the transactions are interlinked and therefore have to be benchmarked together IT(TP)A No.146/Bang/2015. &nbs....
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....h in determining ALP. The DRP has also fallen into the same error. The DRP carved out the consideration insofar as it relates to supply of raw material by Novo Nordisk A/S is concerned but applied "Profit Split Method" (PSM) and determined a sum of Rs. 3.14 crores as addition to be made on account of adjustment to ALP. In our view the entire approach by the TPO and DRP in this regard is erroneous. In our view it would be just and appropriate to set aside the order of the TPO/DRP in this regard and direct that the determination of ALP of the international transaction of (i) supply of raw material by Novo Nordisk A/S to the Assessee and (ii) import of product directly from Novo Nordisk A/S and sale of such products, which is in the nature of trading, separately. The segmental results as given by the Assessee in the chart given as ANNEXURE-1 to this order should be adopted in this regard. As far as Quality Testing Fee is concerned, the ALP of the said transaction is to be tested again independently. The Assessee is accordingly directed to give his Transfer Pricing Analysis on the above lines for each of the transaction separately. As to what is the Most Appropriate Method (MAM) to be ....
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....s that the assessee had, purchased insulin formulations from 'TPL' and characterized this transaction in its TP study as 'distribution' function and prepared its TP study accordingly. The TPO, however, on examination thereof, considered the transaction as 'Manufacturing' and made TP adjustment accordingly. Perhaps, taking a cue from this, the AO considered these transactions to be in the nature of 'contract for work' and consequently held the assessee liable for TDS thereon u/s. 194C of the Act. The AO observed that the Hon'ble Karnataka High Court, in the assessee's own case, held that the transaction between the assessee and 'TPL' involving supply of Insulin is in the nature of works contract liable for deduction of tax at source u/s. 194C of the Act. As tax was not deducted at source by the assessee on payments to TPL in this regard, the entire purchase expenditure was disallowed u/s. 40(a)(ia) of the Act. The DRP confirmed the action of the AO and thereafter the AO passed the impugned final order of assessment, making the aforesaid disallowance u/s. 40(a)(ia) of the Act. 15.1.2 It is in respect of the aforesaid disallowance of Rs. 208,44,97,101/- u/s. 40(a)(ia) of the Act th....
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....gainst the said decision before the Hon'ble Supreme Court. 75. It is not necessary for us to decide the controversy as to whether the payment made by the Assessee to TPL is payment for contract of work falling within the ambit of Sec.194C of the Act which requires tax deduction at source or not for the following reason. The learned counsel for the Assessee filed before us copy of the order of the ITAT Bangalore in the case of Shri G. Shankar v. ACIT ITA NO. 1832/Bang/2013 for AY 05-06 dated 10.10.2014. In the aforesaid decision the amendment to Section 40(a)(ia) brought by the Finance Act 2012 was considered. The Tribunal noticed that with a view to liberalize provisions of Section 40(a)(ia) of the Act Finance Act 2012 brought amendment w.e.f 01.04.2013 as under. The following second proviso was inserted in sub-clause (ia) of clause (a) of Section 40 by the Finance Act, 201,2, w.e.f. 1-4-2013 :- "Provided further that where an assesses fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of Section 201, the....
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....then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee." 78. The Tribunal thereafter observed that the provisions of Sec.40(a)(ia) of the Act are meant to ensure that the Assessees' perform their obligation to deduct tax at source in accordance with the provisions of the Act. Such compliance will ensure revenue collection without much hassle. When the object sought to be achieved by those provisions are found to be achieved, it would be unjust to disallowance legitimate business expenses of an Assessee. Despite due collection of taxes due, if disallowance of genuine business expenses are made than that would be unjust enrichment on the part of the Government as the payee would have also paid the taxes on such income. In order to remove this anomaly, this amendment has been introduced. In case of payment to non-resident, the government does not have any other mechanism to recover the due taxes. Hence, no amendment was made in section 40(a)(i). The legislature has not given blanket deduction under section 40(a)(ia). The deductio....
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....counsel for the Assessee, The AO will afford opportunity of being heard to the Assessee before deciding the issue with liberty to furnish additional evidence to substantiate the claim, of the Assessee. Accordingly these grounds are treated as allowed." 15.2 In the course of proceedings, before us, the ld AR of the assessee while agreeing that the facts of the case, the views of the AO and the submissions of the assessee on this issue are similar to those that prevailed in its own case for asst. year 2009-10, as extracted above, submitted that the decision of the Hon'ble Karnataka High Court in the assessee's own case in CIT v. Nova Nordisk Pharma India Ltd. [2012] 341 ITR 451, relied upon by the AO has been set aside by the Hon'ble Apex Court vide order in CA Nos:9616-9617 of 2016 dated 2179/2016, a copy of which has been placed on record. As per this order, the Hon'ble Apex Court has set aside the order of the Hon'ble High Court (supra) and remitted the matter to the Hon'ble Karnataka High Court for hearing afresh. It is submitted by the ld AR before the Bench that the matter is still pending before the Hon'ble High Court. It is contention of the ld AR that since the order of t....
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....xamine/verify the claim of the assessee and decide the matter. We find that in the year under consideration i.e, asst. year 2011-12 also, the assessee has raised this claim that From No.26A has been submitted evidencing the payment of taxes by "TPL' on these transactions and therefore disallowance u/s. 40(a)(ia) of the Act is not tenable. 15.3.3 Respectfully following the decision of the coordinate bench of this Tribunal in the assessee's own case for asst. year 2009-10 (supra), we set aside this issue to the file of the AO to verify the assessee's claim and if it is established that 'TPL' has included the receipts from the assessee in respect of these transactions, reflected the same in its books of account and offered the receipts for taxation in its return of income for asst. year 2011-12 and paid taxes thereon; to that extent the disallowance u/s. 40(a)(ia) of the Act is to be deleted. We hold and direct accordingly. Consequently, these grounds at S. Nos. 6 to 18, are allowed for as indicated above. COMMON GROUNDS 16. Grounds: 43 to 45 - Charging of interest u/s. 234B and 234D of the Act 16.1 In these grounds the assessee denies itself liable to be charged interest ....
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....sallowed the same u/s. 37(1) of the Act. The DRP, however, in its order issued directions allowing the assessee's claim by relying on the decision of the Delhi Bench of ITAT in the case of Eli Lilly & Co. (India) (P.) Ltd. v. Asstt. CIT [2016] 159 ITD 482. Revenue is now in appeal before us challenging this finding of the DRP. 21.1.2 We have heard the rival contentions and perused and carefully considered the material on record and the judicial pronouncement relied upon by the DRP i.e Eli Lilly & Co. (India) (P.) Ltd.'s case (supra). However, we are not in agreement with the manner in which the DRP has decided the issue. No doubt, in the decision relied on by the DRP, the Tribunal has allowed such expenses as business expenditure. In the said decision the Tribunal has also referred to the decision of the Hon'ble Apex Court in the case of Eskayef Pharmaceuticals (India) Ltd. v. CIT [2000] 245 ITR 116 which is extracted hereunder:- ("6.11.7 However,- as held by the Hon'ble Supreme Court in the case of Eskayef Pharmaceuticals (245 ITR 116), the object of distribution of the samples of the drugs to the doctors is to make them aware that such drugs are available in the marke....