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Teva API India Pvt. Ltd. (Formerly known as Teva API India Ltd.) Versus Addl. CIT, Special Range-9, New Delhi

2017 (11) TMI 324 - ITAT DELHI

Transfer pricing adjustment - exclusion of Exchange loss from total expenses - TPO treated such amount as of non-operating nature and, hence, excluded it from the ambit of total expenses for working out operating costs - Held that:- As the assessee could not link exchange loss of ₹ 112.40 million with the borrowings effected by the assessee from its holding company. It is patent that foreign exchange loss on account of trade receivables and payables has to be taken as an item of operating .....

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ons from the assessee’s AE or trading transactions as well. A part of such exchange loss which pertains to borrowing made by the assessee from Teva Pharmaceuticals Finance Netherlands B.V., should be considered as non-operating and the remaining amount, if any, pertaining to trading transactions should be taken as operating expense. Needless to say, the assessee will be allowed a reasonable opportunity of hearing before taking any decision for the purposes of computing the assessee’s ‘Operating .....

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Ms Vrinda Tulshan, Advocates For The Department : Mrs Y.S. Kakkar, CIT, DR ORDER PER R.S. SYAL, VP: Since the appeal has also been taken up for hearing today along with the Stay Application and the same is being disposed of, the stay application is dismissed as having become infructuous. 2. This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) on 30.11.2016 u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter a .....

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g was done on contract basis with cost plus mark up of 8.7% and contract R&D activities were carried out with cost plus mark up of 19.95%. The assessee reported nine international transactions in its report in Form no. 3CEB, which have been reproduced on page 5 of the Transfer Pricing Officer (TPO) s order. The AO referred the matter of determination of the arm s length price of the international transactions to the TPO. The TPO observed that the assessee used Transactional Net Margin Method .....

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major international transactions of Manufacturing and R&D. For the reasons given in the order, the TPO combined these two segments and then proceeded to determine the ALP on an aggregate basis. Here, it is pertinent to mention that albeit a ground has been taken in the appeal before the Tribunal against the combining of manufacturing segment with service segment by the TPO, but the ld. AR did not press the same. As such, we are not referring to the reasons and justification given by the TPO .....

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y, Shilpa Medicare Ltd. and Sri Krishna Pharmaceuticals Ltd. Average OP/OC of such nine companies was computed at 13.02%. By applying this PLI as a benchmark, the TPO worked out transfer pricing adjustment of ₹ 42,87,51,255/-. The assessee approached the Dispute Resolution Panel (DRP) which gave certain directions. The TPO, while giving effect to such directions, computed the fresh amount of transfer pricing adjustment at ₹ 40,91,86,032/-, which amount stood added by the Assessing Of .....

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of capital expenditure) it should be treated as operating gains. The TPO recorded in his order dated 22.11.2016 giving effect to the directions of the DRP that: the TPO has been directed to take foreign exchange fluctuation as operating while computing margins of the company. 6. Having heard both the sides on the point and perused the relevant material on record, it is seen that the DRP directed the TPO to examine if foreign exchange gain was on account of sales, and if yes, then that should be .....

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aken by the assessee from Teva Pharmaceuticals Finance, Netherlands B.V., its holding company. Referring to the balance sheet of the assessee for the year under consideration, the ld. AR submitted that the assessee effected long-term borrowings amounting to ₹ 992.1 million from its holding company and the exchange loss pertained to such borrowing alone. We have gone through the assessee s balance sheet, a copy of which is available on page 242 of the paper book. It can be seen from such ba .....

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enditure and exchange loss on account of financing transactions will be considered as non-operating. Since the ld. AR could not link the amount of foreign exchange loss of ₹ 112.40 million with the transaction of borrowing from the assessee s AE, we cannot uphold the argument put forth before us without verification. Under these circumstances, we set aside the impugned order and remit the matter to the file of Assessing Officer/TPO for ascertaining if exchange loss of ₹ 112.40 millio .....

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g the assessee s Operating costs to find out its OP/OC. 7. The next issue raised before the tribunal is about certain comparables. Before proceeding to deal with the comparables, it is significant to note that the assessee is engaged in the manufacturing of APIs, other intermediaries and bulk drugs. The first international transaction is sale of bulk drugs/bulk drug intermediates. The TPO aggregated provision of contract R&D services with the manufacturing segment and we have noted above tha .....

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at this company is functionally similar. However, the TPO was: directed to include this if it passes all the filters. The TPO, in his order giving effect to the direction given by the DRP excluded this company by noticing that it: fails the sales filter. The assessee moved an application u/s 154 of the Act. The TPO vide order dated 20.06.2017, observed that this company was passing the sales filter. However, it was noticed that: the net assets of the company is ₹ 6,38,14,663/- and the sale .....

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the company was not passing the filter of net asset to sales, which was adopted by him at 25% and in the case of Auro Laboratories, it was only 24.17%. We have gone through the Annual accounts of this company for the year under consideration, whose copy is available on page 769 of third paper book filed by the assessee. It can be seen that the balance sheet of the company gives figure of Fixed assets at ₹ 10,81,52,547/-, which is total of Tangible assets at ₹ 6,36,14,663/- and Capita .....

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ts at the end of the year. If we go with the logic of the ld. DR justifying the exclusion of Capital work in progress that only the fixed assets resulting in sales should be considered and the fixed assets which do not contribute to sales should be excluded, then, it would require independent evaluation of each and every item of fixed assets as to whether the same was being used for the business purpose or not. Obviously, this is not a correct proposition. Since the filter taken by the TPO himse .....

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g that it was functionally different. The DRP noticed that it was also engaged in API manufacturing. The TPO was directed to include its API segment if the assessee was able to provide segmental data and the segment passed all the filters. 11. Here, it is important to mention that the assessee moved application u/s 154 of the Act before the DRP contending that M/s Neuland Laboratories Ltd. was engaged in sales of bulk drugs as was the assessee and, hence, no segmental data was required as origin .....

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see as well as the order of the TPO that the assessee was engaged in the manufacturing of bulk drugs as well, it was unreasonable to restrict the comparability with the companies dealing in APIs alone. At this juncture, it is relevant to mention that the assessee included M/s Shilpa Medicare Ltd. in its list of 22 comparables and the TPO was pleased to include it in the final list of comparables. M/s Shilpa Medicare Ltd. is a company engaged in manufacturing of bulk drugs as is evident from the .....

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