TaxTMI 
TaxTMI 
2024 (7) TMI 1799
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....d the generic injectable pharmaceutical business of M/s. Orchid Chemicals & Pharmaceuticals Ltd (in short "Orchid India) as a going concern on a slump sale basis. By virtue of this slump acquisition, various agreements entered between M/s. Orchid India and distribution partners were inherited by the assessee. Such types of agreements were named as legacy agreements. In support of the consideration paid for the injectable drug division taken over by the assessee from M/s. Orchid India, assessee had filed a valuation report prepared by M/s. R.B. Shah & Associates who as per assessee were the merchant bankers authorized to make such valuation. The prices paid were for the tangible assets as well as the intangible assets like customer relationships, contract manufacturing, developed products, in-process research and development and goodwill. For raising the capital that was required for acquiring the unit from Orchid India, assessee had issued inter corporate convertible debentures (ICCD) for which interest was payable at 10.5%. The ICCD series was subscribed by its Associated Enterprise namely Hospira Pte Ltd, Singapore. 2.1. In the agreement entered by the assessee with Orchid Ind....
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....case of M/s. Orchid India for the assessment years 2006-07 to 2010-2011 for coming to a conclusion that Apotex Corp and Apotex Inc Signet were Associated Enterprises of the assessee . 3. Now before us, assessee had raised the following concise grounds of appeal in lieu of its original grounds: 1. Ground 1 - The assessment order is bad in law 1.1. The impugned Order which includes the contentions of the Learned Assessing Officer ('Ld. AO') and Learned Transfer Pricing Officer ('Ld. TPO'), based on the directions issued by Honourable Dispute Resolution Panel ('Hon'ble DRP'), to the extent prejudice to the Appellant, is contrary to the law, facts, and circumstances of the case. 2. Ground 2 - Disallowance of depreciation on acquired "Intangible assets" is bad in law and facts 2.1. The Ld. AO and the Hon'ble DRP erred in disallowing the claim of depreciation of INR 74,39,88,656 by holding that developed products, in-process research and development, customer relationship and contract manufacturing acquired by the Appellant pursuant to acquisition of business from Orchid Chemicals and Pharmaceuticals Ltd ('Orchid ....
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....- Erroneously applying provisions of Section 92A(2)(i) for sales made to third parties. 5.1. That, the Ld. TPO and Hon'ble DRP erred in concluding Apotex entities as deemed AE. This exercise is violating the provisions of the Income Tax Act and Rules. 5.2. That, without prejudice to the above, distribution agreement between Orchid Chemicals and Pharmaceuticals Limited and Northstar Healthcare Limited (supra) serves as a valid CUP for transactions with Apotex entities, even if it were to be treated as deemed AEs and subject to transfer pricing regulations. 6. Ground 6 - Erroneous adoption of Transaction Net Margin Method ('TNMM') as the most appropriate method for sale of goods 6.1. That the Ld. TPO and Hon'ble DRP erroneously applied a residual method i.e., TNMM, and made an adjustment of INR 204,59,59,557. 6.2. That, without prejudice, the Hon'ble DRP while applying TNMM, erred in adjusting the entire Irungatukottai ('IKKT') manufacturing segment where international transaction is only a portion of the total sales made from the IKKT segment. 7. Ground 7 - Incorrect approach in comparability analysis ....
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....the disallowance of depreciation of Rs. 76,68,50,697/- on intangible assets . The assessee has claimed depreciation on brand and trade marks and non-compete fee as under: Description of asset Value of the asset Addition Amount of depreciation Brand and Trademarks 297,59,54,325/- Nil 74,39,88,656/- Non-compete fee 3,41,48,250/- 6,98,44,885/- 2,28,62,041/- 5.1 The A.O has disallowed the claim of depreciation on intangibles as they are in nature of non compete fee, customer relationships, contract manufacturing & developed products and cannot be sold independently unlike other intangible assets in the form of know how, franchise rights, license etc . The Ld. DRP has also rejected assessee's objection noting that the identical issue was before DRP for A.Y 2011-12 also but the panel has not accepted the view of the taxpayer for the reason given in its order as under: 2.1 The assessee has made detailed submissions on the above issue. The submissions of the assessee have duly been considered. The issue has been discussed in detail by the assessing officer (AO) in para 5 of his order. Identical issue was before DRP for AY 2011-12 also but....
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.... A. Y 2011-12 has not allowed the claim on depreciation and the Ld. DRP has agreed to the finding of Ld A.O . On appeal, the ITAT for A.Y 2011-12 has remitted the matter back to the A.O on both the issues observing as under: "12. We have considered the rival contentions and perused the orders of the authorities below. The purchase price allocation by M/s. R.B. Shah & Associates, for the unit acquired by the assessee from M/s. Orchid India was as under :- Assets Description Valuation of methodology Estimated fair value (USD in Millions) Estimate d Fair Value (INR In Millions)* Net Property and Equipment Fixed Assets of orchid Chemicals & Pharmaceuticals Ltd include Land, Building, Plant and Machinery, Furniture & Fixtures Sales Comparison / Income Approach/Cost Approach 98.6 4,431.4 Debt-Free Net Working Capital (Stocks, Debtors, Loans and Advances, Cash and Bank Balance) (Creditors, provisions) Book Value (adjusted for fair value of inventory) 24.6 1,103.8 Customer Relationships Excellent relationship maintained with customers of orchid Chemicals & Pharmaceuticals Ltd ....
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....eement entered by the assessee with Shri. K. Raghavendra Rao, through which this restriction was made absolute. As per ld. Authorised Representative amount payable to Shri. K. Raghavendra Rao was 10 million USD and it was purely a revenue outgo. Reliance was placed on the judgment of Hon'ble Jurisdictional High Court in the case of Pentasoft Technologies Ltd vs. DCIT 264 CTR 187. 14. Per contra, ld. Departmental Representative submitted that these were all part of a single understanding that assessee had with M/s. Orchid India for transferring their injectable drug division to the assessee. 15. We have considered the rival contentions and perused the orders of the authorities below. Ld. Assessing Officer had treated non-compete fees as not eligible for depreciation. As per ld. Assessing Officer it could not be considered as an intangible asset. Now the submission of the ld. Authorised Representative is that such payments should be considered as a revenue outgo. However, we find that assessee had not preferred any such claim before ld. Assessing Officer. No doubt in the case of Pentasoft Technologies (supra) Jurisdictional High Court had held that non compete c....
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....87, as observed by Hon'ble ITAT. 10.7 On a careful consideration of the assessee's submissions along with the observations and directions of the Hon'ble ITAT, the disallowance made in the assessment order in respect of Brand & Trade Marks (Rs.99,19,84,875) and Non- compete fee (Rs.1,13,82,750) is hereby deleted." 5.6 However, the assessee has filed writ petition against the above assessment order and the Hon'ble High Court has held that the impugned order is barred by limitation. As the assessment order passed consequent to ITAT order for A. Y 2011-12 does not survive, the WDU on which depreciation is to be computed is not available . A.O is therefore directed to re-compute the WDV as on 01.04.2011 on the intangible assets as per direction given by ITAT in AY 2011-12 and allow the depreciation as per law in force. In view of the above, ground No.2 is allowed for statistical purposes. 6. Ground No 3.1 has not been pressed. 7. Ground No 3.2 is against non consideration of TDS credit while computing the demand. The Ld AR has submitted that the Ld AO has not given credit of TDS and prayed for direction . The Ld AO is directed to allow the credit as per....
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.... to findings of Ld TPO and found the findings uncontroverted . Assessee's submission: 8.2 The Ld. A.R has submitted that the assessee-company was incorporated for the specific purpose of acquiring the business of an Indian unrelated company Orchid Chemicals & Pharmaceuticals Ltd. hereinafter refer as "Orchid India". The generic injectable pharmaceuticals business of Orchid India was acquired through a slump sale arrangement on 30.03.2010. Prior to the acquisition of business from Orchid India, the assessee and its group entities globally transacting with Orchid India throughout trade arrangements. Since, the assessee acquired the business from slump sale transaction from Orchid India, the trade agreement between Orchid India and Hospira group entities which was entered into before acquisition continued to be operational and were adopted after the acquisition also and were acted upon. These trade agreements are referred to a legacy agreement. Subsequent to the acquisition, the same legacy agreement which was originally entered between independent third party was adopted and transacted, it was considered as a CUP for transfer pricing purpose. The Ld. A.R argued that same fo....
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....ose of CUP. He also submitted that agreement between Orchid Pharma and North Star cannot be considered as comparable for external CUP as North Star is in oral whereas assessee is in injectables. 8.4 We have heard the rival contentions and perused the materials available on record. Section 92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. The term "arm's length price" has been defined in section 92F(ii) to mean: `a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions'. Section 92C dealing with computation of ALP provides through sub-section (1) that the ALP shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe. Five specific methods have been set out, namely, (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split me....
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....arable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction." 8.6 This method stipulates that, firstly, the price paid for property in a comparable uncontrolled transaction is identified. The term uncontrolled transaction has been defined in rule 10A(b) to mean : `a transaction between enterprises other than associated enterprises .. '. So the price in an uncontrolled transaction is a price of some actual transaction between enterprises other than AEs. Such price is then adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transaction. The adjusted price is taken as ALP. On going through the mandate of the CUP method, it follows that the benchmark price is the actually transacted price (charged or paid and not some theoretical price) in a comparable uncontrolled situation. 8.7 The Assessee has ....
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....s most appropriate method and adopting TNMM as most appropriate method . Grounds 4 and 6 are accordingly dismissed. 9. Ground No.5 is against applying the provisions of section 92A(2)(i) of the Act for sale made to Apotex Corp and Apotex Signet treating as a deemed AE. 9.1 The Ld TPO/DRP has held that the Apotex group shall be treated as a deemed AE as per Section 92A(2)(i) of the Act and accordingly, benchmarked the international transactions undertaken by the assessee with Apotex group. 9.2 The Ld. A.R has submitted that the issue of treating the Apotex group has a deemed AE is covered against the assessee vide assessee's order for A. Y 2011-12 dated 28.02.2017. However, the arms length nature of transactions must be benchmarked under the CUP method based on legacy agreement or under the Orchid India - Northstar arrangement. 9.3 We have considered the rival submissions. The issue of deemed AE of Apotex group has been decided by the Tribunal in A. Y 2011-12 as under : "28. We have considered the rival contentions and perused the orders of the authorities below. First, we have to deal with the issue whether Apotex Cort and Apotex Inc Signet were Associated ....
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....his Tribunal, in the case of Page Industries Limited Vs DCIT [(2016) 159 ITD 680 (Bang)]. That is a case in which the coordinate bench has held that even though the provisions of Section 92A(2)(g) are satisfied in a case, the assessee cannot be treated as an associate enterprise of the non resident company granting it licence to manufacture its products, because the provisions of Section 92A(1) are not satisfied. 14. As evident from the limited narration of facts in the said decision, the assessee-company (i.e. Page Industries Ltd; PIL in short) was "a licensee of the brand- name 'Jockey' for exclusive manufacture and marketing of goods under license agreement" but "the assessee-company owns entire manufacturing facility, capital investment of Rs. 100 crores and 15000 employees" and "there is no participation of JII (i.e. Jockey International Inc., USA) in the capital and management of the assessee-company". On these facts, the coordinate bench has held that JII and PIL are not associated enterprises as there is no participation by JII in "management or capital of PIL(emphasis supplied by us)". We have our reservation, whatever be it's worth, on the conclusions....
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....ciated enterprise under section 92A. To the limited extent of the principle so laid down by the coordinate bench, we are in considered agreement with the views of the coordinate bench, and it is this principle which is relevant for the purposes of our adjudication. It does directly affect the issue in appeal before us inasmuch as we are also dealing with a situation in which admittedly words of section 92A(2)(i) are clearly satisfied on the facts of this case, the scale of commercial relationship is so insignificant vis-a-vis total business operations of the assessee that there is admittedly no participation in control by one of the enterprise over the other enterprise so as to satisfy the mandate of Section 92A(1). 15. While dealing with this, we may also refer to some observations made by Dr Ramon Dwarkasing, an Associate Professor in Transfer Pricing at Maastricht University, the Netherlands, in his book "Associated Enterprises- A Concept Essential for Application of the Arm's Length Principle" [ ISBN: 978-90-81724-0-1, published by Wolf Legal Publishers, the Netherlands @ page 6], as follows: " ..... in various countries, the concept of associated enterpri....
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....d is as dominant influence in the nature of defacto control. The definition of 'associated enterprise', as the above academic analysis shows, has two approaches- wider approach and narrow approach. A narrow approach to the concept of associated enterprises takes into account only "de jure" association i.e. though formal participation in the capital or participation in the management. A wider approach to the concept of 'associated enterprises' takes into account not only the de jure relationships but also de facto control, in the absence of participation in capital or participation in management, through other modes of control such as commercial relationships in which one has dominant influence over the other. This wider concept is clearly discernible from the principles underlying approach to the definition of 'associated enterprises' in the tax treaties and has also been adopted by the transfer pricing legislation in India in an unambiguous manner. There is no other justification in the Indian transfer pricing legislation, except the participation in capital of an enterprise, management of an enterprise or control of an enterprise, which can lead to the rel....
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....e has to be something more than influence in the ordinary course of business and in the process of negotiation, because, even in the course of ordinary every business and in the course of day to day negotiation, selling prices as also conditions of sale are invariably, in a way, influenced by the buyer. Therefore, even when a customer offers terms to someone with a 'take it or leave it' message, such an approach, by itself, cannot be termed as 'influence', for our purposes, unless the seller is in such a position and under such an influence that he has to simply accept the dictated terms. Any other view of the matter will result in all the enterprises dealing with each other as every party to a transaction has an influence over the price and conditions relating to the sale, and will lead to a situation in which all the enterprises dealing with each other on negotiated prices will have to be as associated enterprises. That again is a clearly absurd and unintended result, and it is only elementary that law is to be interpreted in such a manner as to make it workable rather than redundant. This principle is expressed in the latin maxim "utres magis valeat quam pereat".....
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....he distribution part constitutes less than 5% of its entire exports, and less than 6% of its entire sales, Northstar is certainly not in a position to exercise any dominant influence, over the assessee. The assessee's decision to accept the terms set out by Northstar, even if that be so, may be justified on account of commercial expediencies or warranted by business exigencies or may simply be compulsion of this somewhat unique and complex business model, but it cannot, by any stretch of logic, be on account of dominant influence of Northstar as a customer. It may even be a sound business strategy to accept a rather passive and back seat role, if one can term it that way, in day to day decision making under this business model, but cannot be on account of dominant influence that Northstar exercises on buying of products from the assessee. The influence of Northstar, given the scale of business through Northstar as a distribution part, is too modest to make it a dominant influence in the nature of control. In this view of the matter, as also bearing in mind the earlier discussions on the issue, the assessee and Northstar can not be treated as 'associated enterprises' und....
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.... adjustment of amortization of goodwill while computing the operating profit under TNMM. The Ld AR argued that amortization of goodwill is an extraordinary item and therefore should be excluded from the operating expenditure for computing the arms length margin . The Ld DRP has rejected the assessees objection on the ground that TNMM is robust enough to take care such difference. The Ld AR submitted that in preceding year after the TP issue was remanded back by the ITAT, the Ld TPO has granted adjustment on amortization of goodwill. Assessee has relied upon the ITAT, Banglore decision in the case Continental automotive component (India) Pt Ltd 139 taxman.com 187 and Delhi ITAT decision in the case of DHR Holding India Ltd 133 taxman.com 519. 10.2 The Ld DR relied upon findings of the Ld. TPO/DRP. 10.3 We have considered the rival arguments and perused the TP documents . We agree with assessee submission that amortization of goodwill is an abnormal item arising out of business acquisition and therefore not part of operating expenditure . The Ld AO/TPO in A.Y 2011-12 has allowed the assessee's claim of adjustment on account of amortization . The Ld AO/TPO are accordingly, d....