TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 989
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....in accordance with the provisions of section 92CA(1) of the Income Tax Act. ('the Act') 2. On the facts and circumstances of the case and in law, provisions of section 144B of the Act were contravened by Ld. AO/NFAC as the final assessment order u/s Section 143(3) rws 144C(13) dated 28 June 2022 was passed by Jurisdictional Assessing Officer (ACIT, Circle 5(1)(1), GB Nagar instead of NFAC, thereby making the entire assessment proceedings as void-ab-initio and is liable to be quashed Grounds of appeal with respect to Export of manufactured Pharmaceutical Products: 3. On the facts and in the circumstances of the case and in law, the Ld. TPO/AO/DRP erred in rejecting the use of overseas associated enterprises ("AEs") of the Appellant as tested parties, which are less complex vis-à-vis the Appellant, citing incorrect and irrelevant reasons. 4. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP erred in using a flawed methodology consequent to which arm's length price for international transactions was determined in excess of the final price recovered by AES from third parties. 5. On the facts ....
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....ivables cleared by AEs in less than normal credit period assumed by TPO/AO herself or received in advance. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP erred by adding 400 basis points to the LIBOR on an ad hoc basis for computing the interest adjustment. Grounds of appeal with respect to Corporate Tax Adjustment 13. On the facts and circumstances of the case and in law, the Ld. AO erred by disallowing an amount of Rs. 12,31,686 u/s 143(1)(a) of the Act in ignorance of the fact that the said amount is deductible under Income Computation and Disclosure Standards notified u/s 145(2) of the Act. 14. On the facts and circumstances of the case and in law, the AD erred in initiating penalty proceedings under Section 270A of the Act on arbitrary premise that there is under-reporting of Income done by the Appellant." Facts of the case: 3. The relevant facts giving rise to this appeal are that the assessee, engaged in the business of manufacturing pharmaceutical products, including Active Pharmaceutical Ingredients (APIs) and Dosage forms, filed its Income Tax Return ('ITR') declaring loss of (-) Rs. 50,05,06,264/....
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....lected 8 comparables to determine the Arm's Length Price ('ALP') by adopting TNMM as a MAM. The Ld. TPO determined the Arm's Length price of 8 comparables ranging from 15.04% to 24.50% (with median of 17.73%) and worked out the transfer pricing adjustment of Rs. 52.66 Crores (the difference between 17.73% and 1.30%) in this regard. Further, the Ld. TPO also denied adjustment on account of working capital differences and made further adjustment of Rs. 1.47 Crores as interest overdue on receivables from AEs by applying 6 months LIBOR+400 bps as the ALP. Consequentially, the adjustment in aggregate proposed by the Ld. TPO was Rs. 54,13,35,405/- (Rs. 52,66,10,000/- plus Rs. 1,47,25,405/-) in his order. Based on which, the draft assessment order was passed by the Ld. Assessing Officer ('AO'). 5. Aggrieved with the draft assessment order, the assessee filed its objections before the Ld. Dispute Resolution Panel ('DRP'), who rejected the assessee's request to treat its AE as a tested party, but partly accepted some objections in respect of few comparables resulting consequential part relief to the appellant assessee. Further, the Ld. DRP upheld the interest on overdue receivables but, ....
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....he Ld. Counsel placed emphasis on the OECD Transfer Pricing Guidelines, 2022. The relevant portion is extracted as below: "3.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II. it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis. 3.19 This can be illustrated as follows. Assume that company A manufactures two types of products. Pl and P2, that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture Pl products using valuable, unique intangibles that belong to B and following technical specifications set by B. Assume that in this Pl transaction, A only performs simple functions and does not make any valu....
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....nd loss of (-) 5.41% in Jubilian Codista and 3.46% in PSI supply. However, no AE would work on losses. Accordingly, it was contended that the TP adjustment made by the Ld. TPO was unjustified as no prudent businessman would operate on losses. Reliance was placed on the following decisions: (i) Global Vantedge Pvt. Ltd., [2010] 1 ITR(T) 326 (Del. Trib) (ii) HCL Technologies BPO Services Ltd. [2015] 60 taxmann.com 186 (Del. Trib.) (iii) Omniglobe Information Technologies (I) Pvt. Ltd. MANU/ID.0546/2019 (iv) Unilog Content Solutions Pvt. Ltd. [2023] 152 taxmann.com 179 (Bang.-Trib.) 11. On the other hand, Mr. Rohit Garg, Ld. CIT-DR on behalf of the Revenue, submitted that the appellant assessee, captive manufacture, had maintained its accounts for the Financial Year ('FY') commencing from 01.04.2017 to 31.03.2018; whereas its AE, situated in USA, had maintained its account on Calendar year basis. Therefore, adjustment on this account was complex in nature. Further, the Ld. CIT-DR, emphasizing on Rule 10B(2) of the Income Tax Rules and drawing analogy from the said Rule, submitted that the AE could not be considered as tested party comparable on t....
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....material on the record and find merit in the Ld. TPO's finding that the appellant assessee did not provide sufficient financial data, etc. (i) to arrive the conclusion that the AE was least complex party to the controlled transactions and (ii) to determine the ALP of international transactions. 14. In similar sets of facts, the Tribunal, in the case of Decathlon Sports India Pvt. Ltd. IT(TP)A No. 1874/Bang/2024 (order dated 26.12.2024) has held as under: "37. The learned dispute resolution panel in paragraph number 2.1 has rejected the foreign AE as a tested party because when the entity being evaluated for transfer pricing purposes is a foreign entity, sufficient information regarding that entity is necessary to ensure the chosen method can be reliably applied and subsequently reviewed by the tax authorities. As in the present case, the Indian public domain lacks reliable information concerning the associated Enterprises company and further the taxpayer is obligated to furnish the tax administration with all the relevant information regarding the associated enterprises, including sufficient data on comparable transactions. This information exchange is crucial to enable....
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....edent that foreign AE can be taken as a tested party, but all the decisions have held the tested party only could be the party on which the transfer pricing methods can be applied in the most reliable manner and for which most reliable comparables can be found. 41. Therefore, in view of above discussion, we restore ground numbers 4 - 11 back to the file of the learned transfer pricing officer with a direction to the assessee to substantiate the arm's-length price of the transaction of trading segment by showing with sufficient data about the foreign AE as a tested party. The learned TPO may examine that the tested party selected by the assessee gives a reliable method and computation of arm's-length price or not. Thereafter, after giving assessee an opportunity of hearing, determine the arm's-length price of the international transaction of trading segment." 15. We have heard both parties and have perused material available on the record. In view of above discussion, profit derived by the AE from trading segment of finished goods of the appellant assessee, we deem it fit to remit the issue of AE as a tested party emerging from grounds numbered e and 4, back ....
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.... R & D expenses are non-recurring (R & D expenses of Rs. 67.15 Crores charged to the P & L Account of relevant year as against Rs. 1.54 Crores of preceding year), (iii) R & D expenses of Rs. 67.15 Crores charged to the P & L Account of relevant year is based on current carrying cost of the asset its remaining useful life, (iv) R & D expenses of Rs. 67.15 Crores have no future economic/real value, (vi) sale of this intangible asset valued at Rs. 67.15 Crores would have resulted loss, which is non-operating loss. The Ld. Counsel relied on following decisions: Insofer Manufacturing India Pvt. Ltd. [2020] 121 taxmann.com 209 (Del. ITAT) and DLAB Core Material Pvt. Ltd. ITA No. Manu/IX/0337/2022 (Chenn. ITAT) 18. On the other hand, the Ld. CIT-DR argued this issue vehemently and supported orders/directions of Authorities below. 19. We have heard both parties and have perused material available on the record. Research and development (R & D) expenses are direct expenditures relating to a company's efforts to develop, design, and enhance its products, services, technologies, or processes. R & D offers companies a way to improve how they do business and what they offer customers.....
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....erations. A capital expense is a different type of expense that relates to acquiring, maintaining, or upgrading an asset. 22. We have given thoughtful consideration to the facts of the case and are of the considered view that there is no infirmity in finding of the Ld. TPO and the Ld. DRP that the R & D expenses of Rs. 67.15 Crores debited as impairment of intangible assets is nothing but operating expenses as the same is directly related to the survival, growth and sustenance of the business. This ground, therefore, fails. 23. The next issue is in respect of inclusion of loss of Rs. 1.17 Crores derived from sale/disposal of property, plant & equipment in operating expenses for determining the ALP. The Ld. Counsel, placing reliance on the decisions of the Tribunal in cases of DHL Express (India) Pvt. Ltd. [2011] 12 ITR(T) 457 (Mum) and Thyssenkrup Industries (India) Pvt. Ltd. [2013] 25 ITR(T) 243 (Mum), contended that this expenditure did not fall under the head 'operating expenses'. On the other hand, the Ld. CIT-DR supported orders/directions of Authorities below. We have heard both parties and have perused material on the record. We, in view of the above discussion/ observ....
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....o the appellant assessee. Ordered accordingly. The appellant assessee, no doubt, shall cooperate in remitted proceedings. The ground limited to the issue of inclusion of Flamingo Lifesciences Ltd. in the final set of comparables, therefore, succeeds as above. 25. In the case of Everest Organics Ltd., the Ld. Counsel failed to demonstrate that this comparable passes the export filter of => 25%. The appellant assessee is 100% export turnover. The Ld. TPO has applied export filter of => 25% of the operating turnover. We are of the considered view that the operating turnover should be from manufacturing and or trading only. Not all revenue taken in turnover in the books of account will form the operating turnover. Excluding non-operating revenue from the turnover has to be considered for comparison. We have given thoughtful consideration to the facts of the case and are of the considered view that there is no infirmity in excluding Everest Organics Ltd. from the final set of comparables by the Ld. TPO and the Ld. DRP on the reasoning that this comparable does not pass the export filter. Ordered accordingly. The ground limited to the issue of inclusion of Everest Organics Ltd. in the....
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....arrangement of parking huge receivables with the related parties reflects an international transaction with underlying intent to benefit the AE. Here, in the present case, facts highlighted by the Ld. TPO clearly show that the appellant assessee has benefitted its AE by not recovering its trade receivables in stipulated time. In the present case, since the assessee had not factored the impact of receivables on its profitability; therefore, further adjustment for outstanding receivables is held warranted. Thus, the reliance placed by the Ld. Counsel on the decision of the Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra) is of no relevance in view of the facts and findings considered in totality. We do not find any merit in the argument of the Ld. Counsel that the interest should not be worked out overdue receivables from AEs as it has not charged any interest on overdue receivables from third parties as the facts of third parties are totally different. 29. The Hyderabad ITAT, in the case of Corteva Agriscience Services India Pvt. Ltd. [ITA-TP No 78/Hyd./2022], accepted the stand of the Revenue in holding overdue receivables from associated enterpris....