TMI Blog2018 (10) TMI 1629X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. Commissioner of Income Tax (A) took a reasoned and logical view of the whole issue by placing reliance on the various evidences which had been accepted by him as additional evidences under Rule 46A of the Income Tax Rules. - Decided against revenue Transfer pricing adjustment which pertains to sale of Paclitaxel drug and Disodium Pamidronate - Held that:- CIT(A), while allowing relief to the assessee, has noted that no comparison had been done by the TPO in relation to the sale of Paclitaxel and Disodium Pamidronate with uncontrolled transaction. Also observed that a mere price comparison of uncontrolled transaction of assessee with another uncontrolled transaction as taken from data base was a gross error as far as the application of CUP method was to be considered. TPO has used the data base of export rates maintained by IBIS which do not satisfy stringent condition of comparability regarding CUP method. The assessee was able to demonstrate that by applying TNMM that its margin was better than those of the comparable companies Although the department has vehemently argued against the deletion of the transfer pricing adjustment in this regard, no factual or legal inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o note that the Ld. DRP for immediately preceding assessment year 2006-07 has held that the foreign loan given to UK subsidiary was to be benchmarked at LIBOR plus 100 bps plus certain risk adjustment and accordingly, rate of LIBOR plus 300 bps was proposed by the Ld. DRP. Although the Ld. Commissioner of Income Tax (A) has duly made a mention of this direction of the Ld. DRP for assessment year 2006-07, it is apparent that he has not considered the directions of the Ld. DRP while deciding this issue. We also note that the assessee has not filed any appeal against this direction of the Ld. DRP for assessment year 2006-07. Accordingly, in view of the factual matrix, this issue needs to be restored to the file of the Ld. Commissioner of Income Tax (A) to be decided afresh Disallowance reducing the WDV of assets by the amount of subsidy received from the West Bengal Government - Held that:- Commissioner of Income Tax (A) has noted that he has examined the documents relating to West Bengal Incentive Scheme, 2000 and that further this subsidy is a one-time receipt. It has also been mentioned that nowhere on the perusal of the documents it was found that the subsidy was to be related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited is a 80% subsidiary of Dabur Pharma Limited. During the year, the assessee had undertaken the following international transactions:- S.No. Description of transaction Method Value 1 Purchase of goods TNMM 104.00 lacs 2 Sale of goods TNMM 203.87 lacs 3 Purchase of capital goods TNMM 213.50 lacs 2.2 The assessee had adopted Transactional Net Margin Method (TNMM) with Operating Profit (OP) earned on Sales as the Profit Level Indicator (PLI). The assessee company had selected 9 companies as comparables. The mean operating profit earned on sales was 8%. Since the Operating Profit margin on sales of the assessee was at 9% as per the Transfer Pricing (TP) report, it was contended by the assessee that the international transaction undertaken by the assessee with its Associated Enterprises (AEs) were at arm s length. However, the TPO was not satisfied with the arguments advanced by the assessee. He obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as associate. However, nothing was brought on record to show that the lipholiser was not put to use. The TPO noted that as per the corporate taxation structure of the United Kingdom, depreciation was allowable on such plant and machinery @ 20%. Since the said machine (Lipholiser) was purchased at a price of ₹ 1,66,22,250/-, he computed the depreciation of the said instrument year-wise and arrived at a figure of ₹ 85,10,592/- being the depreciated value in the year 2003-04. Since there was no submission by the assessee on this issue except stating that the said product was used by the overseas associate from 2000 till 2004 and no capital allowance was taken thereon and the item was sold at the value at which it was procured, the TPO, rejecting the submissions made by the assessee determined the value of the Lipholiser at ₹ 85,10,592/- as against ₹ 2,13,50,000/- determined by the assessee and made upward adjustment of ₹ 85,10,592/- on account of purchase of Lipholiser. 2.3 The TPO further observed that the assessee had sold Paclitaxel of 3.6 kg for ₹ 173.36 lacs to its associated enterprise namely Dabur Oncology Plc. Since the assessee had not g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clitaxel. 2.4 With reference to the international transaction related to sale of Disodium Pamidronate, the TPO observed that the assessee had sold 4.55 kgs of the same for ₹ 9.95 lacs to its AEs. As the assessee was not able to give any comparative rates, the TPO obtained the data from the database of export rates maintained by M/s International Business Information Services and determined the upward adjustment of ₹ 67,35,902/- being the arm s length price of the international transactions on account of Disodium Pamidronate. 2.5 Similarly, the TPO observed that the assessee had purchased 2000 kg of MCS (Methylene Chloride Soluble Extract) at ₹ 5200 per kg from its Associated Enterprise, Dabur Nepal and paid ₹ 1,04,00,000/- for the same. Since no substantial details were submitted by the assessee, the TPO again resorted to the taking date from the data base of International Business Services nd determined the landed cost of purchase at ₹ 6048/- per kg. After considering the pro-rata price, the TPO determined the arm s length price of the international transaction at ₹ 1,03,43,105/-. 2.6 Thus, the TPO made addition of ₹ 3,97,98,315/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 This appeal pertains to assessment year 2007-08. For this year, the return was filed declaring income of ₹ 5,58,74,312/-. Since the assessee had entered into international transaction during the year as defined u/s 92B of the Act, the Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Income Tax Act, 1961 (hereinafter called the Act ). The TPO recommended transfer pricing adjustment of ₹ 9,25,91,742/- on account of the following transactions:- (i) Corporate Guarantee given to ABN AMRO Bank for Foreign AEs ₹ 7659.70 lakh. Arm s Length Price (ALP) computed by the assessee was Nil under TNMM Method but the TPO proposed an adjustment of ₹ 3,63,83,575/- by adopting interest rate of 4.75%. (ii) Loan given to foreign AEs ₹ 5735.76 lakh. The assessee had computed the ALP by applying interest rate of 7% but the TPO proposed an addition of ₹ 5,62,088,167/- by adopting interest rate of 14%. Apart from this, the Assessing Officer also made a disallowance of ₹ 20,92,221/- depreciation on fixed assets on account of capital subsidy received by holding that the fixed assets were to be reduced by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar transaction. It was further submitted that the TPO had also determined that additional charge of 2% should be levied for the risk profile of Dabur UK considering the fact that the assessee had not taken any security in return for providing guarantee to its AE. Accordingly, an adjustment of 4.75% was made. However, the Ld. Commissioner of Income Tax(A) held that Dabur UK had saved interest of 1% on account of taking corporate guarantee from the assessee and was of the opinion that 0.5% should be charged by the assessee as guarantee fee. It was submitted that by adopting 0.5% as corporate guarantee fees, the Ld. Commissioner of Income Tax (A) had erred because he had not considered the risk profile of Dabur UK/Thailand and also had not taken into consideration the financial performance and credit rating of the AEs. It was further submitted that the Ld. Commissioner of Income Tax (A) had also arbitrarily split the interest saving of 1% between AEs and the assessee without analysing the functions performed, assets utilized and risk assumed by each of the transacting entities. Reliance was placed on the decision of ITAT Mumbai Bench in Maroco Ltd. reported in TS-411-ITAT-2016 (Mum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was against the accepted accounting treatment for subsidies. It was submitted that the Assessing Officer was correct in considering the same as revenue receipt. 7.0 In response, the Ld. AR submitted that as far as the department s ground challenging the restriction of addition with respect to corporate guarantee was concerned, the assessee had provided a letter from RBS Bank (formerly ABN AMRO Bank) wherein it had been mentioned that the same loan could have been taken at LIBOR +1.5% in the absence of corporate guarantee and, thus, Dabur UK got the benefit of 1% and therefore, guarantee fee should not exceed 0.5%. The Ld. AR placed extensive reliance on the order of the Ld. Commissioner of Income Tax (A) and also placed reliance on a number of judicial precedents/decisions of the ITAT in favour of his contention that the corporate guarantee @ 0.5% had been correctly adjudicated by the Ld. Commissioner of Income Tax (A). 7.1 With reference to the interest on loan, it was submitted that the Ld. Commissioner of Income Tax (A), while allowing relief to the assessee, had pointed out that the TPO had not satisfied the conditions for applying the CUP method and had also duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er wherein it has been mentioned that this machine could be used for a further period of 15 or more years. The Ld. Commissioner of Income Tax (A) has also held that the custom valuation was an acceptable method of valuation and, accordingly, found no reason to uphold the transfer pricing adjustment as proposed by the TPO. Although the department has argued at length against the action of the Ld. Commissioner of Income Tax (A) in deleting transfer pricing adjustment with regard to the import of Lipholiser machine, no defect could be pointed out in the documents which had been relied upon by the Ld. Commissioner of Income Tax (A) while deleting the adjustment. The department also does not have any comparative case to support its stand on the issue and, therefore, it is our considered opinion that the Ld. Commissioner of Income Tax (A) took a reasoned and logical view of the whole issue by placing reliance on the various evidences which had been accepted by him as additional evidences under Rule 46A of the Income Tax Rules. It is also undisputed that the Ld. Commissioner of Income Tax (A) had duly obtained the comments of the Assessing Officer through a remand report on these addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellant, the Appellant had earned a net margin of 9% which is higher than average net margins of 8% earned by comparable companies. It is seen that the Ld. TPO had chosen to apply CUP Method as against TNMM Method applied by the Appellant and he has used data of export rates maintained by M/s International Business Information Services (IBIS), 104-A, Raj Umang, Ashokvan, Dahisar, East Bombay-400068. At the stage of application of method, it is important to adhere to Rules on Selection of Most Appropriate Method (MAM). The Appellant contended that application of CUP Method requires high degree of comparability and FAR determination for proper application of CUP. It is stated that the Ld TPO failed to conduct the comparability of controlled transaction with uncontrolled transaction within the requirement of Rule 10(B)(2). The Rule 10(B)(2) requires comparison on following factors: For the purposes of sub-rule (1), the comparability of [an international transaction or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s considered. Given the difficulty in application of CUP method, the Appellant conceded that they had applied a more tolerant TNMM Method where most of differences on account of functions and risks are ironed out at net level. The Appellant submitted that its net margins are higher than the average of net margins as earned by independent comparable companies. Besides the overall margin comparison of Appellant Company, the Appellant also produced as additional evidence regarding segmental net margin analysis of its UK branch through which sale of Paclitaxel and Disodium Pamidronate happened. The net margin analysis of UK Branch is reproduced below: TABLE From above table, it can be seen that the net margins earned from sale of Paclitaxel and Disodium Pamidronate is higher at 14.10% versus other sales at 10.90%. 14.4 I find force in the submissions of the Appellant, as it has supported its arguments with proper analysis and facts. The TPO has simply used database of export rates maintained by IBIS which satisfying the stringent conditions of comparability regarding CUP method. It is well known fact that pricing of a drug is greatly influenced by fact whether it is generic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e than the working of the TPO in this regard and thereafter proceeded to allow relief to the assessee. The relevant observations of the Ld. CIT (A) are as under: 17.1 I have considered the manner in which the Appellant had benchmarked the international transaction of purchase of MCS Extract. As per TP Report of the Appellant, the Appellant had earned a net margin of 9% which is higher than average net margins of 8% earned by comparable companies. It is seen that Ld TPO had chosen to apply CUP Method as against TNMM Method applied by the Appellant. At the stage of application of method, it is important to adhere to Rules on Selection of Method. The Appellant contended that application of CUP Method requires high degree of comparability and FAR determination for proper application of CUP. It is stated that the Ld TPO failed to satisfy comparability of controlled transaction with uncontrolled transaction within the requirement of Rule 10(B)(2). The Appellant submitted that no data whatsoever was supplied to it by the TPO to offer its rebuttal on basis on which import price of ₹ 32 per kg of MCS extract was arrived at. 17.2 The Cost Certificate submitted by the Appellant t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same needs to be benchmarked as per provisions of Section 92(1) of the Act. The Ld. Commissioner of Income Tax (A) has also held so and thereafter he proceeded to compute the corporate guarantee fee @ 0.5%. While doing so, the Ld. Commissioner of Income Tax (A) observed that the assessee had given corporate guarantee to a foreign bank for providing loan to its foreign AE in foreign currency whereas the TPO had considered the quote for giving guarantee in India. The Ld. Commissioner of Income Tax (A) also took into account the fact that the assessee s bank was ABN AMRO whereas the TPO had used the quote from the SBI. The Ld. Commissioner of Income Tax (A) thereafter placed reliance on the quote from Royal Bank of Scotland (RBS) (formerly ABN AMRO Bank) and held that there was a saving of 1% in this regard, the benefit of which was attributable both to the assessee as well as the foreign AE. Thereafter by splitting the benefit between the two, the Ld.CIT (A) arrived at corporate bank fee of 0.5%. We agree with the observation of the Ld. Commissioner of Income Tax (A) that this letter from RBS Bank has more evidentiary value as it is from the very same bank which gave loan to Da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the view that LIBOR plus 1.5% could be used as the basis for arriving at the ALP for the loan transaction. Accordingly, the Ld. Commissioner of Income Tax (A) held that interest of both the loans was to be charged at LIBOR plus1.5%. We also note that the Ld. DRP for immediately preceding assessment year 2006-07 has held that the foreign loan given to UK subsidiary was to be benchmarked at LIBOR plus 100 bps plus certain risk adjustment and accordingly, rate of LIBOR plus 300 bps was proposed by the Ld. DRP. Although the Ld. Commissioner of Income Tax (A) has duly made a mention of this direction of the Ld. DRP for assessment year 2006-07, it is apparent that he has not considered the directions of the Ld. DRP while deciding this issue. We also note that the assessee has not filed any appeal against this direction of the Ld. DRP for assessment year 2006-07. Accordingly, in view of the factual matrix, this issue needs to be restored to the file of the Ld. Commissioner of Income Tax (A) to be decided afresh after considering the directions of the Ld. DRP in this regard in assessment year 2006-07 and after giving the assessee a proper opportunity present its case. Accordingly, this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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