TaxTMI 
TaxTMI 
2024 (9) TMI 1688
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....al to the controversy. The assessee is reported to be engaged in the global business of research, manufacturing and marketing of pharmaceutical products. The assessee produces API's as well as finished dosage forms. It has several manufacturing and other facilities located in India as well as overseas. For the year under consideration it has raised 11 grounds of appeal contesting the disturbance made to its returned income. The assessee had filed return of income on 30.11.2017 declaring loss of Rs.287,06,34,988/. The Ld.AO had, inter-alia, considering the TPO's order u/s 92CA(3) dated 22.01.2021 made adjustments of Rs.2,92,67,546/- in respect of ALP of International Transactions comprising sale of finished goods (formulations to Orchid Pharmaceuticals) Rs.1,25,11,398/- u/s.14A r.w. rule 8D and Rs.17,36,192/- under disallowance of community development expenses determined taxable income at loss of Rs.260,17,98,996/- vide his order dated 08.07.2021. 3.0 At the outset, the Ld. Counsel for the assessee submitted that grounds of appeal No.1 to 3 and 6 to 11 are all centering around the principal controversy of treatment of assesse's overseas entities as deemed AE's. It was further ar....
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....more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,- (a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; o....
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...., by underlining, supplied by us] 10. A plain reading of this statutory provision makes the legal position quite clear. The basic rule for treating the enterprises as associated enterprises is set out in Section 92A(1). The illustrations in which basic rule finds application are set out in Section 92A(2). Section 92A(1) lays down the basic rule that in order to be treated as associated enterprise one enterprise, in relation to another enterprise, participate, directly or indirectly, or through one or more intermediaries, "in the management or control or capital of the other enterprise" or when "one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise". Section 92(A)(2) only provides illustrations of the cases in which such an enterprise participates in management, capital or control of another enterprise. In other words, what Section 92A (1) decides is the principle on the basis of which one has to examine whether or not two or ....
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....ontrol" of the other enterprise. 11. As a matter of fact, when we look at all the clauses of Section 92A(2)-barring clause (i) which we shall deal with a little later and clause (m) which is a residuary clause enabling any other test being prescribed by the Government, the common factor in all these clauses is that all the clauses therein refer to control by one enterprise over the other enterprise-whether by way of participation in capital or in management or through any other mechanism. The situations envisaged by the statue, and the parameters set out by the statute, unambiguously demonstrate the scheme of the Act in this respect. An analysis of Section 92A(2) shows that there are three distinct segments of this sub section-participation in capital, participation in management and participation by way control otherwise. First segment consists of clauses (a) to (d), Clause (a) refer to shareholding with 26% of voting power in other enterprise. clause (b) refers to common shareholding with 26% of voting powers in both the enterprise, clause (c) refers to advance by one enterprise to the other to the tune of 51% or more of the books value of the assets of the latter, and c....
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....y the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise. Here also the role of the enterprise supplying or controlling the supplies of raw materials and consumables is so significant that it virtually ends up having control over the enterprise. Clause (m), which is at the core of this dispute before us, refers to the situation in which the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise but then interestingly no quantitative threshold finds place in the statute. We will deal with this clause in greater detail a little later but one thing which is immediately discernible is that if this clause is interpreted literally,. even when sales of one enterprise to the other enterprise constitute less than one percent and that other enterprise can influence the prices at which the goods are sold, these two enterprise will be treated as associated enterprises on account of commercial relationship. That is clearly incongruous and in fact abs....
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....) which provides that " .....two enterprises will be deemed to be associated enterprises ...... When the goods or articles manufactured or processed by one enterprise, are sold to the Other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise". As we do so, we may take note of the fact, as discussed earlier as well, that the definition of associated enterprises in the cases covered by Section 92A(1), which refers to the participation in management, control or capital of the other enterprises, extend only to such extent as covered by Section 92A(2). In other words, even when it is an admitted situation that the assessee has participated in control, capital or management of the other enterprise, the assessee will not be treated as an AE of the other enterprise unless the conditions set out in one of the clauses of section 92A(2) are satisfied. It is in this sense that both the limbs of Section 92A are required to be read together. However, the situation that we are dealing with is exactly contrary to the situation so visualized by us. We have a case in which wordings of Section 92A(2) ....
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.... of associated enterprises under section 92A(1). It appears that this aspect of the matter has not been brought to the notice of, or pleaded before, the bench. While the conclusion arrived at by the bench clearly overlooks the specific mention of the word "control" in both limbs of the basic rule under section 92A(1) (i) as also under section 92A(1)(ii), and to that extent we are unable to concur that in the absence of participation in capital or management, two enterprises cannot be 'associated enterprises' under section 92A, what is important to us is that the coordinate bench has, inter alia, also held that, "...in order to constitute relationship of an AE, the parameters laid down in both sub-sections (1) and (2) should be fulfilled" and justified this approach by observing that "if we were to hold that there is a relationship of AE, once the requirements of sub-sec.(2) are fulfilled, then the provisions of sub-sec.(1) renders otiose or superfluous" and that "it is well settled canon interpretation of statutes that while interpreting the taxing statute, construction shall not be adopted which renders particular provision otiose". The coordinate bench then further observ....
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....by such other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprises, the two enterprises shall be deemed to be associated enterprises [See section 92A(2)(i) of the Indian Income Tax Act, 1961] The Indian tax authorities consider the Indian software developer and its Dutch customer to be associated. They may adjust the prices and tax an unrealized profit, i.e. difference between real results and results based on prices derived from other software developers in India. The Netherlands does not consider the companies to be associated as it applies a narrow concept that does not include "de facto control" as a criterion for association. "Control" in the absence of company law based relationship or in the absence of any formal right to exercise control can be described as "de facto" control. Participation in capital and management can be characterized as "de jure" concepts; concepts covered by company law.' (Emphasis, by underlining, supplied by us]..." 16. While the above observations do seem to be at variance with the plain words of the statutory provision inasmuch as it refers to influence by way of "strong nego....
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....or otherwise- as is set out in clause (g) and (h) or, for that purpose, in all other operative clauses of Section 92A(2). If the words of this clause are to be interpreted literally, as the authorities below have read, even if there is one isolated transaction with an enterprise in such an enterprise can influence the prices, such an enterprise is to be treated as an associated enterprise- whether or not this commercial relationship amounts to control on the other enterprise. That will clearly be an incongruous result. However, as Section 92A(2)(i) is to be read along with Section 92(A)(1), in such a situation in which an enterprise does not participate in (a) capital, (b) management, or (c) control of other enterprise, and thus does not fulfil the basic rule under section 92A(1), even if the conditions of Section 92A(2)(i) are fulfilled, these enterprise cannot be treated as 'associated enterprise', In the case before us, it is not even the case of the revenue that the assessee has any participation in management or capital of the other enterprise, nor there is anything to even remotely indicate, much less establish, that one of the enterprise, by way of this commercial re....
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....efore, Important that the expression 'influence' is given a sensible meaning so as to make the provisions of Section 92A(2)(i) workable rather than adopting a literal meaning which will lead to wholly incongruous results. 17. Viewed in this perspective, we must adopt a sensible meaning of expression 'influence' which advances the scheme of the transfer pricing provisions rather than making these provisions unworkable. That meaning had to be a dominant influence which leads to de facto control over the other enterprise rather than an influence simplictor. If we are to adopt literal meaning of influence, as has been adopted by the authorities below, all the transactions on negotiated prices will be hit by the provisions of Section 92A(2)(i). In the light of the discussions above, the expression 'influence', in the present context, must remain confined to dominant influence which amounts to de facto control. Acceptance of terms of the buyer on commercial considerations, as in this case, cannot be treated as influence of the buyer. It is a commercial decision whether to accept the terms of the buyer, with respect to the price or related conditions, or n....
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....ustments ceases to hold good in law. The impugned ALP adjustment of Rs.2,51,91,556 must stand deleted for this short reason alone. Ground nos. 3, 4 and 5 are thus dismissed as infructuous, but the relief prayer for, in this appeal, is granted...." . 5.0 We have considered the above decision of the Hon'ble Coordinate Bench and are in total conformity with the ratio prescribed therein. The observation that a sensible meaning deserves to be adopted to the expression "influence" which is integral in the scheme of transfer pricing provision has been found to be correct. It was rightly held the meaning had to be a dominant influence leading to a de facto control over another enterprise rather than an influence simplicitor. Adoption of literal meaning of influence would lead to all the transactions on the negotiated prices being hit by section 92A(2)(i). Considering a small component of sales exports made to AE's out of its total sales exports, the presumption of the AE being in a dominant position to exercise any "influence" cannot be made. Consequently, in respectful compliance to the decision of the Hon'ble Coordinate Bench of this tribunal in ITA No.771 Supra we hold that the impug....
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....ere is no linkage and all the formulations can be produced separately. The Ld. First Appellant Authority thus held that the profit margins under the TNMM can be arrived at separately product wise in this case. He held that rule 10A(d) is not applicable in the case and that it is an exception to the general rule of transaction by transaction bench marking as also the ratio laid down in Mainetti India Pvt. Ltd., ITA No.1789 / Mds / 2011 for AY-2007-08 Supra. It was argued that the referred case law was upon CUP and not on TNMM and therefore distinguished. He concluded that comparison of margins earned by comparable companies individually to the product wise sales of the appellant, conducted by the TPO was in conformity with the transfer pricing principle. 8.0 The Ld. Counsel for the assessee argued that the product wise bench marking done by the TPO is the only bone of contention and which has resulted in an artificial profit being attributed to the assessee through TP adjustments. It was argued that in a same type of pharmaceutical formulation there can be different products so if the adjustment has to be made it should be done formulation wise and not product wise as a product i....
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....tion defined in rule 10A(d) includes a number of closely linked transaction. Consequently for a comparability analysis a number of similar transaction may be required to be aggregated as Indian TP regulations do not have any guidelines for aggregation beyond the norm of closely linked transactions, reliance is required to be made to OECD and American guidelines. According to s 482-1-1(f)(2)(i) of the US regulation the combined effect of two or more separate transactions may be considered if such transactions taken as a whole are interrelated. It thus postulates that transactions are to be aggregated when they involve related product / services. We have also noted that the Hon'ble Coordinate Bench of this tribunal in the case of Mainetti India Pvt. Ltd., ITA No.1789 / Mds / 2011 for AY-2007-08 Supra has, ruling on nearly identical facts postulated that fairness requires that while determining ALP a TPO must consider all transaction i.e those where margins were lower as well as those where margins were higher to arrive at holistic picture. The argument of the Ld. CIT(A) that the said decision is distinguished on the basis of being relevant to CUP method only and not TNMM is misplaced....