Income Tax Appellate Tribunal - Hyderabad
Astrix Laboratories Limited,, ... vs Assessee on 29 January, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI P.MADHAVI DEVI, JUDICIAL MEMEBR AND
SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No.2181/Hyd/11 : Assessment year 2007-08
ITA No.312/Hyd/12 : Assessment year 2007-08
M/s. Astrix Laboratories Ltd., V/s. Asstt. Commissioner of Income-tax
Hyderabad Circle 16(2), Hyderabad
( PAN - AAACI 7064 D)
(Appellant) (Respondent)
Appellant by : Shri Raghunathan Sampath
Respondent by : Shri Mohan singh Singhania, CIT-DR
Date of Hearing 29.10.2015
Date of Pronouncement 29.1.2016
ORDER
Per Smt.P.Madhavi Devi, Judicial Member:
Both the above are assessee's appeals for the assessment year 2007-08. In ITA No.1281 /Hyd/2011, assessee is aggrieved by the final assessment order dated 28.10.2011 passed under S.143(3) read with S.144C and S.92CA of the Income Tax Act,1961 in accordance with the directions of the Dispute Resolution Panel.
2. Assessee has raised the following grounds of appeal.
1. The Order of the Assessing Officer u/s. 143(3) r.w.s. 144C and 92CA of the Income Tax Act,1961 is contrary to facts and law.
2. The Dispute Resolution Panel erred in confirming the Transfer Pricing Officer's order for reducing the operating margin of the Company by a sum of Rs.54,13,134/- being the net rent realized from lease of factory buildings and equipment.
3. The Dispute Resolution Panel erred in confirming the adjustment of Rs.11,45,00,000/- u/s. 92CA of the Act in respect of sales made to Associated Enterprises and determining the arm's length price of profit Level Indicator being operating profit margin at 25.43% (OP/operating cost) and 19.11%(OP/operating revenue) by rejecting the basis adopted by the tax payer u/s. 92C of the Act.
2 ITA No.2181/Hyd/2011 & 312/Hyd/12M/s. Astrix Laboratories Ltd., Hyderabad
4. The Dispute Resolution Panel erred in confirming the methodology adopted by the Transfer Pricing Officer which resulted in making an adjustment not only in respect of Associated Enterprises sales but also non-Associated Enterprises sales, contrary to the provisions of Section 92C of the Act.
5. The Dispute Resolution Panel erred in confirming the Transfer Pricing Officer's order and holding that transactions as between the tax payer company and Mylan Laboratories Limited (formerly Matrix Laboratories Ltd), a resident company are deemed international transactions requiring computation of arm's length price u/s. 92C.
6. The Dispute Resolution Panel erred in confirming the Transfer Pricing Officer's order for making an adjustment by way of disallowing depreciation of Rs.10,64,50,499 on intangible assets purchased in the preceding assessment year by the tax payer from a resident company u/s. 92C.
7. The Dispute Resolution Panel erred in confirming the Transfer Pricing Officer's orders for making an adjustment by way of disallowing management fee and R&D development charges of Rs.1,87,10,408 as well as reimbursement of expenses of Rs.54,27,702 paid by tax payer to a resident company u/s. 92C.
8. The appellant craves leave to add to, to alter or amend any of the aforesaid grounds."
3. Brief facts leading to the filing of the present appeal are that the assessee company, a public limited company, is engaged in the business of manufacture of Activated Pharmaceutical Ingredients(API) commonly also known as "Bulk Drugs". For the assessment year 2007-08 in relation to the previous year ended on 31.3.2007 the assessee filed its return of income on 30.10.2007, declaring a total income of Rs.1,26,41,273 under normal provisions and book profit of Rs.14,00,00,298 under S.115JB of the Income Tax Act,1961. During the assessment proceedings under S.143(3) of the Act, the Assessing Officer observed that the assessee has entered into the following international transactions-
SL. Classification Paid/ Amount Method
No. Received Applied
1. Purchase of Raw material Paid 10,90,68,355 TNMM
2. Sale of finished goods Received 99,91,82,316 TNMM
3
ITA No.2181/Hyd/2011 & 312/Hyd/12
M/s. Astrix Laboratories Ltd.,
Hyderabad
He therefore, referred the matter to the Transfer Pricing Officer under S.92C of the Act for determination of the Arm's Length Price of the international transactions entered into by the assessee. The Transfer Pricing Officer observed that the assessee is a 50:50 joint venture between Aspen Pharmacare Limited, South Africa and Matrix Laboratories Ltd., India. He observed that Astrix specializes in the manufacture of Antiretroviral Active Pharmaceutical Ingredients, which drugs are used for the treatment of infection by retroviruses, primarily HIV; and that the manufacturing facility of the assessee is located at Hyderabad and is also approved by the US FDA. He further observed that the assessee, in its transfer pricing documentation, has aggregated the international transactions involving purchase of raw material and sale of finished goods in the manufacturing of API activity and Arm's Length Price is determined. He observed the following financial results of the assessee for the financial year 2006-07 Financial results of Astrix Labs for the FY 2006-07 Operating Revenues : 226.71 Operating costs : 202.93 Op. Profit : 23.78 OP/TC : 11.72% OP/Sales : 10.50% He observed that in the annual report for the financial year 2006-07, the assessee has shown an amount of Rs.2.27 crores under the head "other income", which includes Rs.0.96 crores under Miscellaneous Income. On a query raised by the Assessing Officer about the break up of the Miscellaneous Income, the assessee has furnished the same as follows -
a) Building rent Rs. 50.52 lakhs
b) Equipment rent Rs. 33.00 lakhs
c) Analysis charges Rs.12.70 lakhs
TOTAL Rs. 96.22 lakhs
4
ITA No.2181/Hyd/2011 & 312/Hyd/12
M/s. Astrix Laboratories Ltd.,
Hyderabad
4. The assessee has also claimed that these receipts were from one of its joint venture promoter company, i.e. Matrix Labs India for the services provided to it. The Transfer Pricing Officer, however, observed that the assessee has not submitted any relevant details in the nature of ledger extracts, agreements etc. alongwith reply. Therefore, he held that the building rent and equipment rent constitute 'other income' and not 'operating income', as the said receipts are from leasing out of assets. Further, he also observed that this income is not in the nature of 'business income', since it is derived from leasing of building and equipment of Matrix Labs, which has nothing to do with the business operations conducted by the assessee. Therefore, he reduced the same from the operating income of the assessee for computation of the Arm's Length Price. To come to this conclusion, he placed reliance upon the decision of the Income Tax Appellate Tribunal, Pune, in the case of Honeywell Automation India Ltd. V/s. DCIT (2009-TIOL-104-ITAT-PUNE in ITA No.4/PN/2008 dated 10.02.2009). He thereafter, proceeded to consider the TP study made by the assessee and observed that the assessee has selected the following final comparables-
Sl. Company Name Data Source Average PLI
No.
1. Auro Laboratories Ltd. P -2.75%
2. Dabur Pharma Ltd. P 8.73%
3. Divi's Laboratories Ltd. P 28.27%
4. Marksans Pharma Ltd. P 13.36%
5. Nectar Lifesciences Ltd. P 6.50%
6. Neuland Laboratories Ltd. P 8.22%
7. Shasun Chemicals & Drugs Ltd. P 12.53%
8. Transchem Ltd. P 0.65%
Mean 9.44%
He observed that the average mean of the above companies is 9.44% while the margin of the assessee was 10.50% and therefore, the assessee has treated its international transactions to be at Arm's Length Price.
5 ITA No.2181/Hyd/2011 & 312/Hyd/12M/s. Astrix Laboratories Ltd., Hyderabad However, the TPO, after making the FAR analysis, observed that the assessee has adopted inappropriate filters in its search. Therefore, he rejected the assessee's TP study and conducted his own search with databases Capitalline and Prowess. The Transfer Pricing Officer adopted the following final filters-
• Companies whose data is not available for the FY 2006-07 are excluded • Companies whose revenues from operations are at Rs.100 crores to Rs.300 crores only are considered • Companies having different financial year ending (i.e. not march, 2007) or data of the company does not fall within twelve month period i.e. 01.04.2006 to 31.3.2007 are rejected • Companies who have persistent losses for the period under consideration are excluded • Companies having related party transactions more than 25% (income as well as expenditure) are excluded • Manufacturing sales to total sales < 75% are excluded • Domestic companies excluded • Companies having no segmental results are excluded • Companies that are functionally different that of tax payer, after giving valid reasons are excluded"
5. The assessee vide its reply dated 19.3.2010 raised its objections to the above filters. The first objection was that the Transfer Pricing Officer has considered most of the companies which are into formulation business also rather than into 'APIs' which are the assessee's main business operations. The TPO, however found that none of the companies have reported segmental data on the basis of API or Formulations and that most of the companies have business operations i.e. formulations or Finished Dosage forms or Bulk Drugs(APIs) akin to the 6 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad taxpayer company. He further observed that the assessee has not substantiated that the companies engaged in the formulations business profit margins over the companies in the API business and further that two of the all the comparable companies selected by the tax payer are also into formulations business, having significant revenues from formulations. He therefore, rejected the assessee's objection on this count.
6. Without prejudice to the above finding, he further observed that even if only comparables which are 100% manufacturers of bulk drugs are considered, then only six comparable companies are comparable as they satisfy all the filters applied by the TPO and out of the six comparable companies, the assessee accepted four companies and rejected only two companies, i.e. Suven Life Sciences Ltd. and Natco Pharma Ltd. The Transfer Pricing Officer observed that in the case of these two companies, only segmental results are to be taken. As regards the Natco Pharma Ltd., he observed that the company is into manufacturing of both Bulk Drugs and Formulations and the segmental results are available in the Prowess data base. He therefore, considered the financials of only the bulk drugs of the Natco Pharma Ltd. and worked out the profit margin as under-
"Segmental sales of bulk drugs and common Rs.100.35 crores Segmental costs Rs. 53.49 crores Operating profit Rs. 46.86 crores OP/Sales 46.70% OP/cost 87.60% ..."
Thus, he observed that though the segmental results have very high margin, to have a fair and transparent approach, he has considered the gross sales of the enterprise level profit margins, including both the formulations and bulk drugs, as considered for all the other comparable 7 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad companies. As regards Suven life Sciences LTd. is concerned, he considered the segmental results excluding the R&D segment were considered. He therefore, worked out average mean margin at 23.02% on OP/Sales and 34.81% on OP/Cost.
7. Thereafter, the Transfer Pricing Officer proceeded to consider the appropriateness of the comparables selected by the assessee. After considering the assessee's contentions, he rejected the following companies as comparables-
(a) Auro Laboratories Ltd.
(b) Dabur Pharma Ltd.(now known as Fresenius Kabi Oncology
Ltd.)
(c) Divi's Laboratories ltd.
(d) Marksans Pharma Ltd.
(e) Nectar Lifesciences Ltd.
(f) Shasun Chemicals & Drugs Ltd.
(g) Transchem Ltd.
Thus, he accepted only one company, i.e. Neuland Laboratories Ltd., as comparable to the assessee. Thereafter, he selected the following companies as final comparables, and arrived at Average Mean margin on OP/Sales at 19.11% and OP/Cost at 25.43%-
8 ITA No.2181/Hyd/2011 & 312/Hyd/12M/s. Astrix Laboratories Ltd., Hyderabad " Comparables selected by the TPO:
After applying the filters selected by the TPO, following companies are considered as comparables:
rupees in crores Sl Name of the Company Net Operat- Operat- OP/ OP/ No Sales ing Cost ing Sales Cost profit % %
1. Suven Life Sciences 113.06 74.06 39.00 34.49 52.66 Ltd.(seg)
2. Jupiter Bioscience Ltd. 110.98 72.58 38.40 34.60 52.91
3. Anu's Labs Ltd 116.13 94.43 21.70 18.69 52.91
4. Brabourne Enterprises Ltd. 117.82 98.94 18.88 16.02 19.08 (merged)
5. Flamingo Pharmaceuticals 128.32 116.47 11.85 9.23 10.17 Ltd.
6. Venus Remedies Ltd. 142.11 108.78 33.33 23.45 30.64
7. Themis Medicare Ltd. 171.82 155.73 16.09 9.36 10.33
8. S M S Pharmaceuticals Ltd. 178.59 140.61 37.98 21.27 27.01
9. Natco Pharma Ltd. 185.88 137.31 48.57 26.13 35.37
10. Neuland Labs Ltd. 209.88 194.57 15.31 7.29 7.87
11. Aarti Drugs Ltd. 276.21 249.40 26.81 9.71 10.75 Average 19.11 25.43 Thereafter, he proceeded to compute the Arm's Length Price as under-
" ......
The price charged by the tax payer to its AEs is compared to the arms length price in respect of sales transactions and provision services is as under:
Sl Item Code Remarks Rupees
No in Crores
1. Total operating costs A 202.93
2. Arms length mean margin B 25.43%
(OP/Cost)(%)
3. Arms length total sales C AXB/100 254.33
(202.93*125,43%)
4. Total operating revenue D 226.72
5. Sales with related parties E 99.02
6. Sales with unrelated parties F D-E 127.70
7. Arms length price of sales made to AEs G C-F 126.83
8. Adjustment u/s. 92CA H G-E 27.81
The total income of the taxpayer is enhanced with Rs.27.81 crores by way of adjustment u/s. 92CA of the Income Tax Act, 1961."9 ITA No.2181/Hyd/2011 & 312/Hyd/12
M/s. Astrix Laboratories Ltd., Hyderabad
8. Subsequently, the Transfer Pricing Officer proceeded to consider various other transactions of the assessee with Matrix Labs i.e. one of the joint venture owner of the assessee during the year under consideration. He observed that the assessee has entered into the following transactions with Matrix Labs-
Sl Classification Related Paid/ Amount
No party Received (in Rs).
1. Purchase of Raw material Matrix Paid 84,74,49,618
2. Sale of finished goods Matrix Received 7,62,87,355
3. Expenditure including manage- Matrix Paid 2,41,38,115
ment fees
4. Interest charges Matrix Paid 1,99,70,511
5. Income including lease rent and Matrix 1,19,77,498
testing charges
6 Contract Manufacturing expenses Matrix Paid 6,96,33,624
7. Purchase of Know-how, DMFs and Matrix Paid 90,02,000
Patent
8. Purchase of fixed assets Matrix Paid 10,26,707
9. Materials transferred Matrix Paid 76,79,770
Total 106,71,86,198
He observed that on 23.9.2005, Matrix Laboratories Ltd., Hyderabad- India and Aspen Pharmacare Holdings Ltd., South Africa executed a definitive agreement for a long term business relationship between the two companies through the joint venture route and that Astrix Laboratories Ltd. is the result of this agreement, wherein both Matrix and Aspen will pick up 50% stake in the newly formed entity. He observed that on the same day Matrix picked up 50% stake in Fine Chemical Corporation(FCC), South Africa, which hitherto is a 100% owned company of Aspen South Africa. Thus, according to him, Aspen and Matrix are having cross-holdings to the tune of 50% equity both in Astrix and Fine Chem. He observed that the API supply agreement entered into in the year 2005 is a tripartite agreement between Aspen Pharmacare Holdings Ltd., South Africa and Matrix Laboratories Limited, India and Astrix Laboratories Limited, India, whereby Aspen purchases 10 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad anti-retroviral-APIs from Astrix and in turn, Astrix purchases requisite know-how which includes Drug Master Files (DMFs) from Matrix Labs. He observed that as per clause 3.2 of the agreement, it is obligatory on the part of Matrix to supply requisite DMFs to the newly formed entity, i.e. Astrix to supply ARV-APIs to Aspen, ad therefore, there is a prior arrangement between Aspen and Matrix vide above referred agreement in terms of S.92B(2), according to which the transaction will be treated as an international transaction for the purpose of determination of Arm's Length Price u/s. 92CA(2) of the Act. Thus, according to him, S.92B(2) provides that a transaction entered into by an enterprise (Astrix) with a person(Matrix) other than an associated enterprise(Aspen) shall, for the purpose of sub-section (1), be deemed to be a transaction entered into between two associated enterprises (Astrix and Matix), if there exists prior agreement (API supply agreement between Aspen, Matrix and Astrix) in relation to the relevant transaction (transactions reflected in the table between Aspen and Matrix- between such other person (Matrix) and the associated enterprise(Aspen)); or the terms of the relevant transaction are determined in substance between such other person (Matrix) and the associated enterprises(Aspen). Thus, he observed that though the Associated Enterprise (Aspen) is not a party to the transaction, yet it has determined its essential terms, and since the terms of transaction are fixed or dictated by the associated enterprise(Aspen), the transaction cannot be said to have been entered into between two independent parties (Astrix and Matrix). He therefore, held the transaction to be an international transaction in terms of sub-section (2) of S.92B of the Act. He, therefore, proceeded to compute the ALP of these transactions and asked the assessee to furnish details of the transactions. However, the assessee filed its reply on 13.10.2010 without making any analysis with reference to the prices paid/received to/from Matrix Ltd. in respect of the above transactions. The TPO 11 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad observed that the above transactions being tangible and pertained to the operations of the assessee, although the same has already been aggregated to the main transactions, and therefore, no separate analysis has been made and the adjustment has been made under TNMM on sales made to AE.
9. As regards the interest charges paid, he did not make any adjustment. As regards the management fee, he adopted CUP method and observed that the assessee has failed to justify the payment made on account of management fee with reference to receipt of services and benefits derived from them in Arm's Length situation. By applying the CUP method, he observed that the payment failed the benefit test, and therefore, Arm's Length Price of such payment is determined at NIL. Accordingly, total income of the assessee is enhanced with this amount.
10. As regards the purchase of DMFs/Patent and technical know- how also, the Transfer Pricing Officer adopted CUP method and observed that this has failed the benefit test and therefore, the entire amount has to be considered for adjustment. The assessee had also argued before the Transfer Pricing Officer that the payments made towards DMF and technical know how, being during the financial year 2005-06, the same are outside the purview of transfer pricing adjustment for 2007-08. However, the Transfer Pricing Officer observed that the assessee has sought amortization of the above expenses and had charged the same to the Profit & Loss Account and therefore, the transactions in question are required to be analysed to find out whether they are at Arm's Length. As a consequence, he brought the entire amount of Rs.10.63 crores as transfer pricing adjustment.
12 ITA No.2181/Hyd/2011 & 312/Hyd/12M/s. Astrix Laboratories Ltd., Hyderabad
11. Thus, the total adjustment under S.92CA proposed by the TPO are as under-
Sl. Transaction Adjustment
No. (Rs. in crores)
1. Sales made to Aspen 27.81
2. Management fee paid to Matrix 2.41
3. Amortized out of payments made 10.63
towards DMFs./Technical know-how
to Matrix
Total 40.85
On the basis of the above proposal of the TPO, the Assessing Officer passed the draft assessment order, against which the assessee preferred its objections before the Dispute Resolution Panel.
12. The Dispute Resolution Panel confirmed the order of the Transfer Pricing Officer as regards the TP adjustment with regard to international transactions between the assessee and its AEs concerned. However, as regards the assessee's objection with regard to its transactions with Matrix Ltd., a resident company, treated as deemed international transaction, the DRP partly allowed the same.
13. In accordance with the directions of the DRP, final assessment order is passed, against which the assessee is in appeal before us.
14. As regards the comparables adopted by the TPO, the learned counsel for the assessee has submitted that as the assessee company involved in manufacture of APIs/Bulk Drugs, the comparable companies involved in similar activity only should have been taken as comparable by the TPO. He also submitted that while the TPO as well as the DRP have agreed that the bulk drug companies only are comparable to the assessee, the TPO has adopted the formulation companies also on the ground that the number of companies on such comparison would not be sufficiently 13 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad available. He has drawn our attention to the agreement of the DRP that only the bulk drug companies are to be taken into consideration.
15. The Learned Departmental Representative has supported the orders of the Dispute Resolution Panel.
16. Having regard to the rival contentions and material on record, we find that Rule 10D of IT Rules itself provides that the TPO has to conduct the FAR analysis and adopt such companies as comparable which are in similar business as the assessee and that other companies may also be taken into consideration, provided the adjustment for dissimilarities, if any, can be made. The coordinate Bench of this Tribunal at Delhi in the case of Global Vantedge Pvt. Ltd. V/s. DCIT (2010-TIOL-24-ITAT-DEL) held that if a company engages in a variety of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise then, while analyzing the transactions between independent enterprises to the extent they are needed, profit attributable to transactions that are not similar to the controlled transactions under examination should be excluded from comparison. Similar view has been expressed by the Tribunal at Mumbai in the case of IL Jin Electronics (I) P. Ltd. V/s. ACIT (2010-TIOL-151-ITAT- MUM) and also in the case of ACIT V/s. T Two International Pvt. Ltd.(2010- TIOL-166-ITAT-MUM). Thus, for making necessary adjustment if separate segmental accounts are available, the TPO ought to take only the segmental details of the comparable company. In the case before us, the Transfer Pricing Officer has taken companies which are involved in both the activities on the ground that sufficient number of comparables are not available. But, from the order of the TPO, we find that even as per the filter adopted by the Transfer Pricing Officer, at least six companies are available for comparison, which are into manufacture of only bulk drugs as 14 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad in the case of the assessee. Therefore, we hold that only such companies are to be adopted for the purpose of determination of Arm's Length Price.
17. From among these six companies, the assessee is challenging the adoption of Suven Life Sciences Ltd. and Natco Pharma. As for the Suven Life Sciences Ltd is concerned, the objection of the assessee is that Suven Life Sciences Ltd. is mainly engaged in manufacture of intermediates under contract service and products are developed and produced on an exclusive basis under contract manufacturing services. He has drawn our attention to page 865 of the paper book containing the financial details of Suven Life and has drawn our attention to the segmental results of Suven Life wherein the turnover on account of manufacture of bulk drugs was only Rs.13,36,86,930 whereas the TPO has taken the total turnover of the comparable of Rs.113,06,34,350, which among others include the turnover of bulk drugs also. Thus, according to him, the margin taken by the Assessing Officer /TPO is erroneous and it also fails the TPO's filter of Rs,100 to Rs.300 crores turnover. Therefore, the TPO has arrived at an incorrect margin of the company chosen as comparable. Actual working has been given by the assessee at Annexure 2 of the paper-book filed on 29.10.2015, i.e. on the date of hearing. We find this contention of the assessee to be correct and we therefore direct the Assessing Officer/TPO to recompute the margin of the Suven Life by taking the segmental result of bulk drugs only and not the total turnover as done by the TPO in the earlier proceedings.
18. As regards Natco Pharma, the assessee 's objection to this company is that the TPO has taken the financial results of both the bulk chemicals as well as common drugs on the ground that the segmental report is being considered. He submitted that common expenditure is not allocated segment-wise, and in the circumstances, these expenses cannot be attributed to bulk chemicals alone and taking the aggregate of both the expenditure, i.e. expenditure of bulk chemicals as well as common 15 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad expenditure together would distort the financial results of the said company. He submitted that if only the turnover of the bulk chemicals is taken into consideration, as claimed, then it does not satisfy the TPO's filter of Rs.100 to 300 crores turnover and therefore, it has to be excluded from the final list of comparables. He has drawn our attention to page 1188 of the paper-book to demonstrate his contention before us.
19. Learned Departmental Representative has supported the orders of the authorities below.
20. On verification of the material on record, in the light of the arguments of the parties and the TP study of the assessee, we find that the contentions of the assessee are correct. When the TPO is taking segmental results into consideration, he has to consider only the operating revenue and operating cost of the said segment. Common expenditure relating to all the segments cannot be attributed to bulk drugs segment alone. However, common expenditure cannot be ignored altogether. Operating costs include costs directly attributable to the manufacture of bulk chemicals and also includes common expenditure attributable to the bulk drugs segment. Therefore, the TPO ought to have allocated the common expenditure proportionately between all the segments and thereafter ought to have considered the turnover of the bulk chemicals only. Since this exercise has not been carried out by the TPO/AO, we deem it fit and proper to remit this issue to the file of the TPO for re-computation of margin of the bulk drug segment of Natco Pharma Ltd and thereafter to determine the Arm's Length Price accordingly. As for the contention of the assessee that if only bulk drugs turnover is taken into consideration, it failed the TPO's filter of Rs.100 to 300 crores, we direct the TPO to re- determine the margin of this company, and if it fails the TPO's filter adopted for comparables, he shall not take this company into consideration.
16 ITA No.2181/Hyd/2011 & 312/Hyd/12M/s. Astrix Laboratories Ltd., Hyderabad
21. In view of the above discussion, the issue of excluding Suven Life and Natco Pharma from the final list of comparables is remitted back to the file of Assessing Officer/TPO for re-determination, after making verification of the above objections of the assessee.
22. As regards the assessee's contention that the TPO has considered the transactions between the assessee and Matrix Laboratories Ltd. as deemed international transactions, the learned counsel for the assessee has argued that the assessee company was formed in assessment year 2006-07, as a joint venture, having equal share and the factory and know-how were transferred to the assessee. He submitted that in the assessee's own case for the assessment year 2006-07 vide orders under S.263 of the Income Tax Act,1961, the transactions were deemed to be international transactions, but on appeal, the Tribunal, vide order dated 16.1.2015 in ITA No.840/Hyd/2012, has held these transactions to be domestic transactions and not international transactions. A copy of the said order is filed before us.
23. The Learned Departmental Representative, however, supported the orders of the TPO/DRP
24. Having regard to the rival contentions and the material on record, we find that for assessment year 2006-07, the Commissioner initiated proceeding under S.263 on the basis of the assessment proceedings/TPO's order for assessment year 2006-07, which was challenged before the Tribunal and this Tribunal, vide its order dated 26.1.2015, cited above, after considering the provisions of S.92B of the Act, has held that for coming within the expression 'international transactions' at least one of the parties should be a non-resident. It was held that neither the assessee nor Matrix is a non-resident and therefore, the transactions relating to acquisition of know-how and DMF cannot be 17 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad called as international transactions under S.92B of the Act. Similar view has been taken by coordinate Bench of this Tribunal in assessee's own case for the assessment year 2009-10, vide its order dated 25.3.2015 in ITA No.198/Hyd/2014 and a copy of the said order is also filed before us. Taking due note of these decisions of the coordinate benches of this Tribunal in assessee's own case for the assessment years 2006-07 and 2009-10, it is held for the assessment year under consideration as well that the transactions between the assessee and the Matrix Laboratories are not international transactions and the same are not amenable to transfer pricing adjustment under S.92B of the Act. Consequently, grounds No.5 to 7 of the assessee are treated as allowed.
25. Further ground raised by the assessee is against the component of the operating income, i.e. whether the rent realised by the assessee on lease of the building and equipment can be considered as operating income of the assessee. We find that the assessee has let out the building as well as equipment to Matrix Laboratories and has derived income therefrom. The TPO held that the assessee's business is manufacturing of APIs and not hiring out/leasing the building and equipment and therefore, the rents derived cannot form part of operating income. Though the assessee submitted that the building and the equipment were given for carrying out the business operations and sales and boost the assessee's business income, assessee has not filed copies of agreement between the assessee and the Matrix Laboratories in India or the services provided to the lessee of the building and equipment. Therefore, it is not verifiable as to the nature of the income derived by the assessee by leasing out the building or equipment. Unless and until the property is let out for the purpose of assessee's business, the same cannot be treated as business income or operating income of the assessee. Even before us, the assessee has not been able to produce any evidence in support of its contention that the income from letting out of the building 18 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad and equipment is operating income. In view of the same, we do not see any reason to interfere with the orders of the Assessing Officer/DRP on this issue.
26. As regards the assessee's grounds No. 3 and 4, we find that the assessee has also transactions with non-AEs and the TPO has taken the total turnover including transactions with non-AE companies, for the purpose of determination of ALP. It has been held in a catena of cases that it is only the transactions or the turnover involved in the transactions with AEs alone, which have to be considered for computation of ALP. The Assessing Officer/TPO are accordingly directed to take into account the turnover of the transactions with AE only for the purpose of computing the ALP. Accordingly, grounds No.3 and 4 are treated as allowed for statistical purposes.
27. In the result, assessee's appeal is partly allowed.
ITA No.312/Hyd/2012 : Assessment year 2007-0828. This appeal is directed against the action of the Assessing Officer in rejecting, vide letter dated 8.12.2011, the petition of the assessee under S.154 for rectification of the order dated 28.10.2011 passed under S.143(3) read with S.92CA and S.144C of the Income Tax Act,1961 in accordance with the directions of the Dispute Resolution Panel, and the effective ground raised by the assessee, being ground No.2, reads as follows-
"2. The Assessing Officer erred in not comparing the revised operating margins of the appellant of 16.43%(OP/sales) with the TPO comparable margin of 19.11%(OP/sales) and instead making an addition of Rs.11.45 crores in respect of AE sales as adjustment u/s. 92C of the Act, without considering the fact that the revised operating margin of the appellant falls within the (+) or (-) range 19 ITA No.2181/Hyd/2011 & 312/Hyd/12 M/s. Astrix Laboratories Ltd., Hyderabad of the TPO comparable margin as per second proviso to Sub-section (2) to Seciton92C of the Act."
29. Thus, the issue in dispute in this appeal relates to the TP adjustment of Rs.11.45 crores made by the Assessing Officer while giving effect to the directions of the Dispute Resolution Panel in the final assessment order, and rejection of the assessee's petition for rectification of the said order under S.154 vide his letter dated 8.12.2011. Since various objections of the assessee with regard to determination of the Arm's Length Price and ultimate Transfer Pricing Adjustment made by the Assessing Officer in the final assessment order dated 28.10.2011, have been elaborately considered by us hereinabove, while dealing the main appeal of the assessee hereinabove, and the issue of determination of Arm's Length Price has been set aside to the file of the Assessing Officer with certain directions, for fresh determination, the present appeal of the assessee has become infructuous. We accordingly, reject the grounds of this appeal.
30. In the result, assessee's appeal, ITA No.312/Hyd/2012, being infructuous is dismissed.
31. To sum up, while appeal ITA No.2181/Hyd/2011 is treated as partly allowed, appeal ITA No.312/Hyd/2012, being infructuous, is dismissed.
Order pronounced in the court on 29.01.2016
Sd/- Sd/-
(S.Rifaur Rahman (P.Madhavi Devi)
Accountant Member Judicial Member
Dt/- 29th January, 2016
20
ITA No.2181/Hyd/2011 & 312/Hyd/12
M/s. Astrix Laboratories Ltd.,
Hyderabad
Copy forwarded to:
1. M/s. Astrix Laboratories Ltd., Plot No.564/A/22, Road No.92, Jubilee Hills, Hyderabad
2. Asst. Commissioner of Income-tax Circle 16(2), Hyderabad
3. Dispute Resolution Panel, Hyderabad
4. Addl. Commissioner of Income-tax Transfer Pricing, Hyderabad
5. Departmental Representative, ITAT, Hyderabad.
B.V.S