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2021 (9) TMI 341
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....ting pharmaceutical drugs etc. It filed a return declaring loss of Rs. 1,94,792 on 30.11.2011. A search action u/s. 132 of the Act was taken up in Sava group of companies including the assessee on 31.10.2012. Pursuant to such search, a notice u/s. 153A was issued calling the assessee to file return for the year under consideration. The assessee filed a letter stating that the return originally filed for the year may be treated as a return in response to notice u/s. 153A of the Act. The assessee reported an international transaction of "Sale of finished goods" amounting to Rs. 3,20,24,659 to Sava Trading FZC, Dubai in Form 3CEB. After taking prior approval of the Competent authority, the AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transaction. The TPO in his three page order passed u/s. 92CA(3) of the Act observed that: "The detailed order explaining the business model of the assessee, the facts of the case and resultant adjustment under transfer pricing having been discussed in the case of Anagha Pharma Ltd for the Assessment Year 2007-08. As the facts of the case of this assessee for this assessmen....
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....d Enterprises (AEs) ploughed back the income earned by them to India through dividends and remuneration to Shri Vinod Jadhav, who, in turn, claimed such income as exempt on the ground of his Non-resident status. It was further noted that the Settlement Commission rejected the non-resident status claim of Shri Vinod Jadhav and declared him as a Resident. The TPO noted the findings of the Investigation team in relation to the functions performed by the two Indian-based companies of the group along with those situated in Mauritius, Singapore and Dubai. He tabulated such functional analysis done by various group companies in para 27.3 of his order and held that the AEs performed no functions except receipt of sale proceeds and sending the same to the Indian entities. Rejecting the OIE's benchmarking done under the Transaction net margin method (TNMM), he proceeded to determine the ALP under the Profit Split method (PSM). He allocated 3% of the aggregate group profits to the AEs abroad for the services rendered by them and the balance 97% was divided between the two Indian entities. To be more precise, he aggregated the year-wise profits shown by the five group entities from the A.Y....
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....are eventually not acted upon, one cannot claim any decision based on such observations. 5. Thereafter, the TPO computed the net transfer pricing adjustment in the hands of OIE, through para 28.3, as under:- A.Y. Anagha's Total Profit Less O.P. shown by the Assessee Total Adjustment Less Adjusted in the hands of Sava Medica Ltd. (As mentioned below) Net Adjt in the hands of OIE A B C D E F 2007-08 2,21,59,558 1,30,38,449 91,21,109 0 91,21,109 2008-09 17,16,80,562 1,69,42,134 15,47,38,428 0 15,47,38,428 2009-10 31,71,86,985 4,55,81,486 27,16,05,499 0 27,16,05,499 2010-11 8,54,72,298 73,95,355 7,80,76,943 0 7,80,76,943 2011-12 47,12,60,845 1,66,56,860 45,46,03,985 94,92,109 44,51,11,876 2012-13 12,92,72,186 5,99,91,658 6,92,80,528 54,08,126 6,38,72,402 2013-14 32,81,21,587 4,78,94,987 28,02,26,600 4,66,98,148 23,35,28,452 TOTAL 1,52,51,54,021 20,75,00,929 1,31,76,53,092 6,15,98,483 1,25,60,54,609 6. Through this table, he found out....
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....he affairs of the Sava group was situated wholly in India and the entities abroad were sham. - The assessee had undertaken only the activities of sale of finished goods as reported in Form No. 3CEB. - The TPO wrongly applied Profit Split Method in the case of assessee by considering OP/OR of the AE's - The assessee also wrongly applied the TNMM for benchmarking its transactions. - Both the methods applied by the assessee as well as the TPO were wrong. As the assessee was only into trading exports for the year under consideration, the correct method to be applied was the Resale Price Method (RPM). 9. Accordingly, the assessee was directed to furnish benchmarking analysis of its international transaction by applying the RPM. The assessee submitted the same which has been reproduced at page 83 of the DRP's directions. As per this exercise, the assessee computed its GP/Sales margin at 25.22%. The DRP made alterations to certain figures and hence re-worked out the amended GP/Sales at 16.52%. The assessee had identified 33 companies as comparables. The DRP removed 13 companies from such list and computed the average GP/Sales of the remaining....
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....ion would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction or specified domestic transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with t....
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.... D E F G 2007-08 1,30,38,449 -23,39,606 1,21,46,062 0 0 2,28,44,905 2008-09 1,65,77,014 20,73,403 12,10,74,256 3,72,65,597 0 17,69,90,270 2009-10 4,55,01,112 0 1,05,89,783 27,09,05,997 0 32,69,96,892 2010-11 65,46,516 0 0 8,15,69,255 0 8,81,15,771 2011-12 1,65,14,476 0 0 46,93,21,447 0 48,58,35,923 2012-13 5,98,94,492 0 0 - 31,30,45,698 38,64,21,501 13,32,70,295 2013-14 4,72,85,077 0 0 0 29,09,84,600 33,82,69,677 TOTAL 20,53,57,136 -2,66,203 14,38,10,101 54,60,16,598 67,74,06,101 1,57,23,23,733 14. The next step in stage two is enshrined in sub-clauses (ii) and (iii), which provide that the relative contribution by each of the associated enterprises to the earning of such combined net profit is to be evaluated and then the combined net profit is to be split amongst the enterprises in proportionate to their relative contribution. However, before undertaking this exercise, the basic return particular to the concerned entity i....
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....E Though he reduced the amount of arm's length profit of the assessee in Table 28.3, but forgot to add the amount of profit/loss of the assessee in his Table on 28.1 while calculating the Combined profit of the group entities, for further processing under the PSM. 17. Having pointed out a few weaknesses in implementing the PSM, we leave this issue here only because the ALP determination under the PSM has become academic as the DRP has directed to apply the RPM and the assessee is not seeking the application of the PSM. The only thing which we want to accentuate is that the TPO attributed the entire Residual profit (after excluding the arm's length profits of the assessee and OIE from their respective international transactions of sale; and 3% to overseas entities) only to OIE by opining that all other activities were done by it alone. 18. At this juncture we take note of the following additional ground taken by the assessee: "19. The learned AO erred in law and on facts in referring the alleged international transaction of "Control & Management of Sava Group" to the learned TPO, without complying with the provisions of section 92CA(1) r.w.s. 92C(3) and 92B of....
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....2017) passed in OIE, has observed in para No. 84: "That the AO made a reference to the TPO on two aspects, i.e. sale of medicines and drugs by the assessee group which not only included the assessee but various other companies and the second transaction which was reported was the one declared by the assessee in audit report, i.e. export trading of medicines on wholesale basis'. Then allowing the plea of the assessee vide para 99 of its order, the Tribunal held: "that where the AO while making reference of an independent to/and non existing international transactions (as alleged by the Ld. AR) had to come to a finding that income arising from the said international transactions needs to be benchmarked, in order to determine its arm's length price and before such reference to the TPO, show cause notice should have been given to the assessee. In the absence of any such show cause notice being given to the assessee, the same is irregularity (as held by the Hon'ble Bombay High Court) and the said irregularity cannot be made good by restoring back the same to the file of AO.......It is the case of violation of principles of natural justice and such an order passed in the hand....
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....tal as the only transaction of the assessee with the arm's length profit of Rs. 94,92,109 and that no international transaction parallel to the second transaction of OIE with transfer pricing adjustment of Rs. 41.36 crore is there in the hands of the assessee. To sum up, the TPO proceeded with two distinct transactions in the case of OIE, which were albeit processed jointly under the PSM. The Tribunal in its order in OIE, after observing that there were two transactions, came to hold that the reference made by the TPO in respect of the second transaction, without giving opportunity of hearing to the assessee, vitiated the assessment order. As against that, the assessee has only one international transaction of export made to its AE with transacted value of Rs. 3.02 crore and the arm's length profit of Rs. 94,92,109/- It is only this transaction which was referred by the AO to the TPO and whose ALP has been determined. As neither any second international exists in the case of the assessee nor has been referred to the TPO, the ratio laid down by the Tribunal in the case of OIE has no application here. Had the factual position prevailing in the case of the assessee been simila....
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....such a reference. Thereafter, the AO adduced the reasons vide his letter dated 14.10.2014 as to why the international transaction of less than Rs. 5 crores needed to be referred to the TPO. Such reasons were stated to be that the assessee group was subjected to search u/s. 132(4) which transpired that it was routing the business to the foreign companies with an intention to evade taxes in India. Since the ALP determination in the case of the assessee for the year under consideration would have bearing on the ALP determination of other entities of Sava group and other years of assessee also in which the amount of international transactions was more than Rs. 5.00 crores, it was requested that the reference should be made to the TPO so as to maintain consistency and a uniform ALP determination. The CIT got convinced with the AO's reasons and accorded his sanction. It was thereafter that the AO made a reference to the TPO for determining the arm's length price of international transaction of Rs. 3.20 crores vide his letter dated 19.11.2014, a copy of which has been placed at page 1009 of the paper book. The Ld. AR contented that Circular No. 3/2003 dated 20.05.2003 expressly pr....
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.... Hon'ble Summit Court that if the prescription of Circular No. 3/2003 is not followed, the proper course of action is to restore the matter to the stage where irregularity occurred rather than quashing the entire proceedings and the consequential assessment order. We, therefore, respectfully following the Hon'ble Apex Court judgment in Pr. CIT vs. S.G. Asia Holdings (India) Pvt. Ltd. (supra), set aside the impugned order and remit the matter to the file of the AO for determining himself the ALP of the international transaction of 'Sale of finished goods' after allowing a reasonable opportunity of hearing to the assessee. 25. Now, we turn to the application of the Resale Price Method as directed by the DRP through which, it computed the amount of transfer pricing adjustment at Rs. 37,78,910. At this stage, it is pertinent to note the nature of the international transaction, which is 'Sale of Finished goods' to its AE. The DRP held in para 66 that: "Since the assessee is into trading exports of pharma products, Resale Price Method will be the most appropriate method". In order to evaluate if the RPM was properly directed to be applied, we need to refer to t....
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....ities below. Under these circumstances, we set aside the impugned order and remit the matter to the file of the AO for a fresh determination of the ALP of international transaction of 'Sale of finished goods' under the TNMM as per law after allowing reasonable opportunity of hearing to the assessee. A.Ys. 2012-13 & 2013-14 29. The assessee in these two appeals is aggrieved by the transfer pricing additions of Rs. 4,34,17,316 and Rs. 7,76,19,272 made by the AO for the A.Ys. 2012-13 and 2013-14 respectively in his final orders dated 25.01.2017 30. The factual matrix for the A.Y. 2012-13 is that the assessee filed return declaring loss of Rs. 7,36,50,537. International transactions of 'Sale of finished goods' amounting to Rs. 9.55 crores and odd were declared in Form No. 3CEB. The AO made a reference to the TPO for determining their ALP. The TPO, vide his concise order dated 29.01.2016, determined the amount of transfer pricing adjustment at Rs. 54,08,226. He did not separately discuss the merits of the transfer pricing addition but, as done for the preceding year, relied on the discussion made by him in his order passed in the case of OIE for the A.Y. 2007-08....
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....imilar explanation as given for the preceding year. The DRP did not approve the exclusions and re-determined the PLI of the assessee at (-) 52.11% and accordingly computed the transfer pricing adjustment of Rs. 7,76,19,272. The AO in his final order made the above referred transfer pricing additions. Aggrieved thereby, the assessee has come up in appeal before the Tribunal. 31. Having heard both the sides and gone through the relevant material on record, it is observed that the assessee in the initial transfer pricing study report applied the TNMM, which was rejected by the TPO thereby treating the PSM as most appropriate method. The DRP overturned the TPO's action and restored the TNMM as most appropriate method. The assessee is not aggrieved by the TNMM application. The only dispute is about the calculation of its own PLI. We have noted above that while calculating its PLI for the A.Y. 2012-13, the assessee treated Rs. 10.94 crores as non-operating costs on the premise that such expenses were incurred for the purpose of brand building, which efforts were from a futuristic perspective and results of these efforts were not reaped in the current year. The assessee has demonst....
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.... established before us. The irony is that por una parte the assessee is claiming such huge expenses as deductions and filing the returns with spiraling losses of Rs. 7.36 crore for the A.Y. 2012-13 and Rs. 20.82 crores the A.Y. 2012-13; por otra parte, when it comes to the benchmarking, it is showing handsome operating profit rates of 49.44% and 16.61% by slicing away a major component of the operating costs incurred. 33. Arguendo, we proceed with the contention of the Ld. AR that such expenses were brand building costs qualifying for exclusion. The first reason given is of futuristic perspective. Otherwise, there is no dispute as to the otherwise operating nature of the Employee cost and Operating & administrative expenses carved out by the assessee. On a specific query, it was admitted that the assessee started manufacturing operations from this year onwards and out of total sales of Rs. 11.26 crores, domestic sales amounted to Rs. 1.71 crores. It, therefore, transpires that the assessee incurred Employee cost and Operating & administrative expenses in relation to its manufactured products, which were sold in the year under consideration both in the domestic market to non-AEs ....
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....in economies and efficiencies on the cost side - economies in terms of relatively cost-effective purchases of quality raw material and efficiencies in terms of having good and satisfied work force preferring to stick with an established and reputed brand thereby adding the value. Thus we do not countenance the contention that brand building exercise has no impact on the profitability from sales made to related parties. 36. Notwithstanding the above, we note that the working of the PLI under the TNMM for the A.Y. 2012-13, provided at the instance of the DRP, has been given on page 761 of the paper book. The starting point is total revenue from sale made to AEs and non-AEs in domestic market. In such a scenario all the operating costs - both for AE and non-AE transactions - need to be considered for determining the rate of Operating profit to Total cost. The transfer pricing addition will result only by applying the differential PLI rate (PLI of the assessee and PLI of the comparables) only on sales made to the AEs and not the entity level transactions. 37. The position which finally emerges is that neither the Employee Cost and Operating and administration expenses have any re....