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2015 (9) TMI 325 - ITAT AHMEDABAD

2015 (9) TMI 325 - ITAT AHMEDABAD - TMI - Transfer pricing adjustment - CIT(A) deleted the addition - Held that:- For A.Y.04-05, similar issue has been decided by ITAT in favour of assessee following case of associate concern viz. M/s Dishman Pharmaceuticals & Chemicals Ltd. In view of above, CIT(A) was justified to direct the Assessing Officer to delete the adjustment made in assessment order in respect of Armís Length Price because PBIT of 17.13% is very much comparable and better than the ind .....

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rnational transaction. Assessing Officer ought to have taken into consideration FAR analysis and should also take into account various factors such as, quality, quantity, pricing factors, government policy and transportation cost before comparing controlled transaction with uncontrolled transaction. Assessing Officer ought to have evaluated all the methods of transfer pricing, however, he selected directly CUP method being easy in apply. Assessing Officer has taken price from Database without po .....

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en decided in favour of assessee wherein the appellant had shown less consumption of certain input raw material of ₹ 63,04,605/- and the only inference is the same have been purchased from outside the books of account and the same is liable to be added as the investment from undisclosed sources and the appellant has shown more consumption of certain items to the extent of ₹ 1,32,57,449/- which has not been consumed and therefore, the purchased to this extent have been inflated to red .....

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llowed claim - Held that:- CIT(A) granted relief to assessee by observing that issue is directly covered by the decision of S. A. Builders [2006 (12) TMI 82 - SUPREME COURT] wherein it has been held that money advance to sister concern can be considered as out of commercial expediency. In present case, money has been advanced to sister concern out of commercial expediency and therefore, following the decision of S. A. Builders (supra), no disallowance is called for. In any case, assesse has subs .....

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ed amount of ₹ 3,85,90,000/- and therefore, on contrary, amount has been repaid during year under consideration. In view of this, disallowance was correctly deleted. - Decided against revenue

Deemed dividend u/s 2(22)(e) - CIT(A) delted the addition - Held that:- As assessee and M/s Dishman Pharmaceuticals & Chemicals Ltd, both are engaged in business of manufacturing bulk drugs and chemicals. One of the condition for invoking provisions of Section 2(22)(e) of the Act is that mo .....

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bserving that Inter Corporate Deposits (ICD) being different from loans or advances, will not come under the purview of deemed dividend u/s.2(22)(e). See Bombay Oil Industries Ltd. vs. DCIT [2009 (1) TMI 519 - ITAT MUMBAI] - Decided against revenue - ITA. No. 2060/Ahd/2009, ITA. No. 3141/Ahd/2011, ITA. No. 2888/Ahd/2011, ITA. Nos. 3224, 3225/Ahd/2010 - Dated:- 5-6-2015 - SHRI SHAILENDRA KUMAR YADAV AND SHRI ANIL CHATURVEDI, JJ. For The Revenue : Shri Nimesh Yadav, Sr. D.R. For The Assessee : S .....

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on facts in directing to delete additions of ₹ 2,52,05,652/- on account of deficit/excess consumption of raw materials. 3. The Ld. CIT(A)XIV, Ahmedabad erred in law and on facts in allowing ₹ 54,13,383/- on account of interest expenditure. 3. First issue in Revenue s appeal for A.Y. 2005-06 is with regards to addition of ₹ 1,59,51,605/- on account of adjustments in respect of Arms Length Price made u/s.92CA(6) of the Act. Assessee is engaged in business of manufacturing and tr .....

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d. The TPO passed order u/s.92CA(2) of the Act wherein he made total adjustment of ₹ 1,59,51,605/-. 3.1 Matter was carried before the First Appellate Authority wherein various contentions were raised on behalf of assesse as detailed in para 2.1 and having considered the same, CIT(A) granted relief to assessee. Same has been opposed before us on behalf of Revenue inter alia submitting that CIT(A) erred in directing to delete adjustment of ₹ 1,59,51,605/- made in assessment order in re .....

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. 2002-03, method of determining the arms length pricing adopted by assesse viz. Transactional Net Margin Method (TNMM) was rejected by the TPO and in its place, comparable uncontrolled price (CUP) method was adopted. Assessee carried the matter to ITAT, wherein vide order dated 15th February, 2008 in ITA No. 554/Ahd/2006 vide para 39 had decided similar issue in favour of assessee by observing as under: 39. in view of these facts and circumstances, and as referred by both the sides to OECD guid .....

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The relevant para 3.26 reads as under: 3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e. G. costs, sales, assets) that a taxpayer realizes from a controlled transaction (for transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transact .....

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have been earned in comparable transactions by an independent enterprise may serve as a guide, A functional analysis of the associated enterprise and, in the latter case, the independent enterprise is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results. Further, the other requirements for comparability, and in particular those of paragraphs 3.34-3.40 must be applied. In view of the above guidelines of OECD, it is clear th .....

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and Cadila Pharma is too small to be taken into consideration for the purposes of deciding the transfer pricing of the International Transactions of the assessee-company, for adopting CUP method as adopted by the TPO. Even otherwise the PBIT in regard to export which is as high as 23.02%, as against the overall PBIT of the assessee-company was to the extent of 20.04% and the transactions of export were more than 92% of the- exports having been made to AE resulted into more PBIT for the assessee .....

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cost plus methods that the transactional net margin method resembles, this, however, does not mean that a mere similarity of functions between two enterprises will necessarily lead to reliable comparisons. Assuming similar functions can be isolated from among the wide range of functions that enterprises may exercise, in order to apply the method, the profit margins related to such functions may still not be automatically comparable where, for instance, the enterprises concerned carry on those f .....

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ns. 3.40 Another important aspect of comparability is measurement consistency. The net margins must be measured consistently between the associated enterprise and the independent enterprise. In addition, there may be differences in the treatment across enterprises of operating expenses and non-operating expenses affecting the net margins such as depreciation and reserves or provisions that would need to be accounted for in order to achieve reliable comparability. In view of the above guidelines .....

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controlled transaction should be considered. In the present case, the assessee while adopting the TNM method has given the complete details regarding Transfer Pricing Documentation, Complete Ownership Structure, Profile of the assesse-company, Business Description and the Financial capacity / Asset base and that also of Associated Enterprise were provided to the TPO. The assessee-company has demonstrated the average of PBIT of various group companies in the Organic Chemical Business during the r .....

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speak out itself and the same are discussed in detail in above paragraphs. We find no fault with the TNM method adopted by the assessee on the above facts of the case. Even the Hon ble Apex Court in the case of Morgan Stanley and Co. inc. (supra) has clearly upheld the adoption of TNM method as most appropriate method and the relevant particular line from the judgment reads as under: As regards income attributable to the P. E. (MSAS), we hold that the transactional net margin method was the appr .....

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sy task. But it is not so in most of transactions and rarely one is able to locate an identical transaction. In such cases Arm s Length Price is determined by taking results of a comparable transaction in comparable circumstances and make suitable adjustments for the differences. Similarly, in the present case also, the PBIT of the assessee-company is exactly similar or nearby with that of the other uncontrolled transactions of unconnected enterprises. The PBIT of exports is as high as 23.02% as .....

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by the Revenue. Accordingly, this issue of the assessee s appeal is allowed. Nothing contrary was brought to our knowledge on behalf of Revenue and we find that in assessee s own case in ITA No.3590 & 3751/Ahd/2007 for A.Y.04-05, similar issue has been decided by ITAT in favour of assessee following case of associate concern viz. M/s Dishman Pharmaceuticals & Chemicals Ltd. In view of above, CIT(A) was justified to direct the Assessing Officer to delete the adjustment of ₹ 1,59,51, .....

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not be compared. Fundamental requirement, in any of the method selected, is selection of comparables for benchmarking international transaction. Whatever methodology is chosen for the purpose of determination of ALP u/s.92C, the criteria, as specified in the Act and the Rules, have to form a basis of judging the comparability. There should be proper analysis of such transaction with respect to functional performed, assets employed and risk assumed by respective parties with reference to transact .....

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Assessee is responsible for qualitative product and it assumes risk thereof. So, it was decided to continue with qualitative raw material being purchased from Amari Packagin. Assessing Officer ought to have taken into consideration FAR analysis and should also take into account various factors such as, quality, quantity, pricing factors, government policy and transportation cost before comparing controlled transaction with uncontrolled transaction. Assessing Officer ought to have evaluated all t .....

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tiated (c) Industry average cannot be applied (d) No specific preference to any method compared to other methods be given. In view of above decision, order of CIT(A) on the issue is upheld. 4. Next issue in Revenue s appeal is with regards to addition of ₹ 2,52,05,652/- made on account of deficit/excess consumption of raw materials. This amount include addition of ₹ 73,43,999/- on account of inflation of purchase of raw material and addition of ₹ 1,77,61,653/- on account of une .....

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dard consumption. As per the details given in Annexure-II to the assessment order, Assessing Officer noticed that there was short consumption of raw material of Rs. ;,77,61,653/- and excess consumption of raw materials of ₹ 74,43,999/-. Assessing Officer referred to assessment order of A.Y. 2002-03 and the statement of Sri R. S. Sharma, the then General Manager (Works) and addition made for that year of ₹ 89,l0,724/-. After relying on the assessment orders of earlier years, Assessing .....

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have gone through the facts narrated by the CIT(A) in para 2.2 which reads as under: 2.2 I have considered the submissions of the appellant, remand report of the AO and facts of the case carefully. From the facts on record, it is clear that the appellant is manufacturing medicines which are being exported. The quality control of these drugs is of high standards and the composition of the drugs will have to be maintained as per the prescribed norms and of internationally quality. For a particular .....

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consumption of various raw material for the production of particular medicine. The statement has been reproduced in the assessment order on page 10 & 11. He has categorically stated in reply to various questions which have been put-up by the AO that the consumption of raw materials is exactly in accordance to the input output ratio prescribed by the Government and printed in the sale invoices, in reply to question No.5, 6, and 8 he has categorically mentioned that the production of export i .....

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ratio will have to be adhered to. He has not mentioned in any of the reply to the question that there was any variation between the standard input and output ratio in the consumption of the raw materials. Therefore, his statement who controls the production certifies that the consumption of raw material has been in accordance with the standard input output ratio. The appellant s submission that the consumption depends on various factors like efficiency of the plant and process involved is only a .....

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g the statement of General Manager. After comparing the standard input and output ratio and actual consumption, it was found that there was a deficiency of certain raw material of ₹ 63,04,605/-and there was excess consumption shown by the appellant of other raw materials as ₹ 1,32,57,449/-. As the deficit and excess is of different raw materials, there cannot be offset against each other as has been done by AO in the assessment order. The appellant s another argument that record are .....

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e because the income will have to be computed on the basis of accounts and records maintained by the appellant and not on the basis of motive of the appellant and benefit of section 80HHC will be given as per provisions of the Act. The appellant has also not proved with any other evidence that the consumption has been different because of factors mentioned by it. The fact remains that the appellant has not been in a position to explain the deficiency and the alleged extra consumption of raw mate .....

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have been purchased from outside the books of account and the same is liable to be added as the investment from undisclosed sources and the appellant has shown more consumption of certain items to the extent of ₹ 1,32,57,449/- which has not been consumed and therefore, the purchased to this extent have been inflated to reduce the profit of the company. Thus the total addition which is liable to be made is ₹ 1,95,62,054/-. After considering the addition of ₹ 89,10,074/-, the in .....

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records have been maintained by the assessee after carding stage that by itself is not a ground for making addition and treating the production at the carding stage as final. The difference of 11,506 kg is due to wastage in the production approximately 13% of the production and looking to the standard fixed by the Handbook of the Procedures, the percentage of wastage cannot be said to be excessive. In these circumstances, particularly in the absence of any specific material to show that the asse .....

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lowing the claim of the assessee. 42. It is seen from the above facts as narrated in the order of the CIT(A), which are undisputed, as well as the case law relied on by the learned counsel for the assessee, we are of the view that the CIT(A) has adopted the norms prescribed under the standard input and output ratio of consumption but the assessee-company has clearly demonstrated that it would be better of had it imported the raw material as per the input output norms. The assessee-company has cl .....

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04-05. Nothing contrary was brought to our knowledge, facts being similar, so following the same reasoning, we are not inclined to interfere in the finding of CIT(A) who has rightly deleted the addition of ₹ 2,52,05,652/-made on account of deficit/excess consumption of raw materials. 5. Next issue is with regards to disallowance of interest expenditure of ₹ 54,13,383/- u/s. 36(I)(iii) of the Act. Assessing Officer observed that assesse has given an interest free deposit of ₹ 3 .....

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is directly covered by the decision of Hon ble Supreme Court in case of S. A. Builders 288 ITR 1 (SC), wherein it has been held that money advance to sister concern can be considered as out of commercial expediency. In present case, money has been advanced to sister concern out of commercial expediency and therefore, following the decision of S. A. Builders (supra), no disallowance is called for. In any case, assesse has substantial interest free funds at its disposal so as to justify the advanc .....

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amount has been repaid during year under consideration. In view of this, disallowance was deleted. Learned Authorized Representative pointed out that this issue is covered by the order of ITAT for A.Y. 04-05 in ITA No. 3590 & 3751/Ahd/2007, dated 10.12.2010 has decided similar issue in favour of assesse by observing as under: 18. We find that these loans are old loans and no disallowance was made in earlier years and moreover these are business advances for the purpose of business expediency .....

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inance Act, 1992, in order that interest paid on borrowings can be allowed as a deduction in computing the business profits, every assessee, including a firm, has to establish, in the first instance, that it was allowable under section 36(1)(iii); and, in the case of a firm, further that the amount does not exceed the limit fixed by section 40(b)(iv). Held, however, on the facts, in this case, that since the assessee had borrowed the moneys from its partners as early as 1991, and the Appellate T .....

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Appellate Tribunal ought to have held that the loan given was from the assessee s own funds, Accordingly, we confirm the order of CIT(A) deleting the addition and this issue of the Revenue s appeal is dismissed. Nothing contrary was brought to our knowledge, facts being similar, so following the same reasoning, we are not inclined to interfere in the finding of CIT(A) who has deleted the disallowance of interest expenditure of ₹ 54,13,383/- u/s. 36(I)(iii) of the Act, by following ratio o .....

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red in law and on facts in deleting the addition of ₹ 2,49,98,986/- & ₹ 84,61,907/-u/s.69 of the I. T. Act on account of unexplained investment in purchase of raw materials. 3. The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the addition of interest amounting to ₹ 29,11,419/-made by the Assessing Officer u/s.36(i)(iii) of the I. T. Act. 8. First issue is with regards to addition of ₹ 1,58,88,008/-made by Assessing .....

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7; 2,49,98,986/- & ₹ 84,61,907/- u/s.69 of the I. T. Act on account of unexplained investment in purchase of raw materials. We find that similar issue arose in ITA No. 2060/Ahd/2009 for A.Y. 2005-06, wherein vide para 4 of this order, we have decided the similar issue in favour of assessee. Facts being similar, so following same reasoning, we are not inclined to interfere in the finding of CIT(A) who has rightly deleted the addition of ₹ 2,49,98,986/- & ₹ 84,61,907/- u/ .....

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finding of CIT(A) who has rightly deleted the the addition of interest amounting to ₹ 29,11,419/- made by the Assessing Officer u/s.36(i)(iii) of the I. T. Act. Same is upheld. 11. As a result, Revenue s appeal for A.Y. 2006-07 is also dismissed. 12. In ITA No. 2888/Ahd/2011 for A.Y. 2006-07, Assessee has filed the appeal on the following grounds: 1. The ld. CIT(A) has erred in law and on the facts of the case in not accepting the arm s length pricing adopted by the assesse. 1.1 The ld. C .....

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ng profit without giving any cogent reason. 1.3 The ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in invoking the provisions of Chapter X without prima facie demonstrating that there was some tax avoidance. 2. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought .....

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, same is dismissed as not pressed for above said reason. 14. As a result, this appeal in ITA No. 2888/Ahd/2011 for A.Y. 2006-07 is dismissed. 15. In ITA No. 3224/Ahd/2010 for A.Y. 2004-05, Revenue has filed the appeal on the following ground: 1. The ld. CIT(A) has erred in law as well as facts of the case in deleting the order passed u/s.201(1) & interest charged u/s. 201(1A) of the IT Act of ₹ 45,38,515/-and ₹ 31,76,960/- for A.Y. 2004-05 by the A.O. even though the assesse had .....

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070/-and ₹ 33,59,400/- for A.Y. 2005-06 by the A.O. even though the assesse had advanced fund to M/s. Dishman Pharmaceuticals & Chemicals Ltd. and the amounts advanced were in the nature of deemed dividend as per provisions of Section 2(22)(e) of the IT Act and same is subject to sec.194 of I. T. Act. ITA Nos. 3224 & 3225/Ahd/2010, both Revenue s appeals are filed on similar issue, so both are being disposed of by common order. 17. As stated above, assessee is engaged in business o .....

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tax at source on such deemed dividend u/s.194 of the Act and therefore assessee has made default u/s.201(1) of the Act. Assessing Officer has also levied interest u/s.201(1A) of the Act for both the years. 17.1 Matter was carried before the First Appellate Authority in both years, wherein various contentions were raised on behalf of assessee and having considered the same, CIT(A) has granted relief to assesse by consolidated order by observing that provisions of Section 2(22)(e) of the Act are .....

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een given to associate concern. It is an account which is in nature of current adjustment accommodation account wherein there is a movement of funds both ways, on need basis. Unlike transactions of loans and advances, in this kind of current adjustment accommodation account, the movement of funds is both ways and the same is more in nature of current account rather than a loan account. Transactions in nature of loans and advances are usually very few and for a longer duration. In present case, n .....

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