TMI Blog2016 (1) TMI 1281X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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. Transactions with non-AEs - Held that:- 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 computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Transfer Pricing Officer s order for making an adjustment by way of disallowing depreciation of ₹ 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 ₹ 1,87,10,408 as well as reimbursement of expenses of ₹ 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 ₹ 1,26,41,273 under normal provisions and book profit of ₹ 14,00,00,298 under S.115JB of the Income Tax Act,1961. During the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Miscellaneous Income, the assessee has furnished the same as follows a) Building rent ₹ 50.52 lakhs b) Equipment rent ₹ 33.00 lakhs c) Analysis charges Rs.12.70 lakhs TOTAL ₹ 96.22 lakhs 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... boratories 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%- Comparables selected by the TPO: After applying the filters selected by the TPO, following companies are considered as comparables: rupees in crores Sl No. Name of the Company Net Sales Operating Cost Operating profit OP/Sales% OP/Cost% 1. Suven Life Sciences Ltd.(seg) 113.06 74.06 39.00 34.49 52.66 2. Jupiter Bioscience Ltd. 110.98 72.58 38.40 34.60 52.91 3. Anu's Labs Ltd 116.13 94 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 27.81 crores by way of adjustment u/s. 92CA of the Income Tax Act, 1961. 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 No Classification Related party Paid/Received Amount (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troviral-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 relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 ₹ 10.63 crores as transfer pricing adjustment. 11. Thus, the total adjustment under S.92CA proposed by the TPO are as under- Sl. No. Transaction Adjustment (Rs. in crores) 1. Sales made to Aspen 27.81 2. Management fee paid to Matrix 2.41 3. Amortized out of payments made towards DMFs./Technical know-how to Matrix 10.63 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 100 to 300 crores, we direct the TPO to redetermine the margin of this company, and if it fails the TPO s filter adopted for comparables, he shall not take this company into consideration. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 evid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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