9911796707
TMI Blog2017 (8) TMI 1560X X X X Extracts X X X X X X X X Extracts X X X X ..... in categories of Insulin and is also engaged in the business of trading, in high purity insulin formulation, insulin delivery systems and other specialized diabetic therapy products in India and Bangladesh. It also functions as a support hub and provides services akin to administrative and co-ordination services to its associates enterprises ('AE'), which are characterized as, administrative services. Besides this, it also undertakes certain support services to its AE's which are characterized as Information Technology enabled services ('ITES'). 2.2 For asst. years 2011-12, the assessee company filed its return of income on 4/11/2011 declaring total income of Rs. 16,77,16,546/-. The return was processed u/s 143(1) of the Act and the case was subsequently taken up for scrutiny. A reference u/s 92CA of the Act was made by the' Assessing. Officer ('AO') to the Transfer Pricing Officer ('TPO') in respect of the international transactions entered into by the assessee with its AE's. The TPO passed an order u/s 92CA of the Act dated 27/1/2015 proposing transfer pricing adjustments amounting to Rs. 36,53,93,349/- under the following heads:- (a) ITES segment -Rs. 3,32,70,129/- (2) Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ork" and liable to tax deduction at source under section 194C of the Act. 7. Impugned order and DRP erred, in law and in facts, by holding that the sale of insulin formulations by Torrent to NNIPL is essentially in nature of "contract for work", which is contrary to CBDT Circular as also principles laid down in various judicial pronouncements which have distinguished ''contract of sale" from "contract for work". 8. Impugned order and DRP proceed on unsubstantiated presumptions ignoring the consistent 'consensus ad idem' between both the parties to the contract, the authorities enforcing other central legislations and taxing enactments over last several years, without citing any valid reasons. 9. Impugned order and DRP erred, in holding that the transaction between NNIPL and Torrent is essentially in nature of "contract for work" without appreciating that purchase of insulin formulations by NNIPL from Torrent would clearly fall outside the definition of "work"' under section 194C of the Act. 10. The impugned order fails to appreciate that the transaction between Torrent and NNIPL clearly falls outside the scope' of express provision of section T194C of the Act and any possib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t's submissions. 18. Without prejudice to above, the impugned order failed in not restricting the disallowance under section 40(a)(ia) of the Act to Rs. 41,92,04,990 being the income that is alleged to be earned by Torrent from the subject transaction, due to the sale transaction being artificially treated as works contract. Transfer Pricing Grounds 19. The order of the learned Additional Commissioner of Income Tax (Transfer Pricing) 2(1). ('ld. Transfer pricing Officer' or ld. TPO'), Bangalore passed under section 92CA of the Act in respect of Assessment Year ('AY') 2011-12 as also directions of DRP are contrary to law, facts and circumstances of the case and liable to be quashed. 20. The impugned order erroneously made an addition of Rs. 36,21,63,126 to the total income on account of adjustment in the arm's length price of the international transactions entered by the Appellant with its associated enterprises. 21. Ld, AO/ DRP and ld. IPC) erred in rejecting the Transfer Pricing. ('TP') documentation maintained by Appellant by reference to sub-section 3 of section 92C of the Act contending that the information or data used in (be computation of the arm's length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naccurate data and limiting the adjustment without providing benefit as per actual position. 32. The learned TPO/AO/DRP erred in ignoring the limited risk nature of the ITES provided by the assessee and in not providing an appropriate adjustment towards risk differential, even when full- fledged entrepreneurial companies are selected as comparables. 33. Without prejudice to the other grounds, the learned TPO/AO/DRP have erred in margin computation of final accepted comparables. Distribution Segment 34. The learned TPO/AO/DRP have erred an making an addition of Rs. 33.21,23.220 to the total income of the Appellant on account of adjustment in the arm's length price with respect to distribution activities relating to insulin product undertaken in India by the Appellant. 35. The learned TPO/AO/DRP have erred, in law and in facts, by characterizing the Appellant as a "Manufacturer" as opposed to a "mere distributor" of insulin products of Novo" Nordisk Group in India. 36. The learned TPO/AO/DRP have erred, in law and in facts, by not accepting the functional and economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 to 33 6.1 These grounds (supra) are raised by the assessee in this appeal in respect of the ITES segment of its operations. 6.2 In this sphere, the assessee renders certain services like accounts payable processing, patent search activities, legal services, data management services to its AE's which have been characterized as being in the nature of ITES and had aggregated these international transactions. The assessee adopted TNMM as the most appropriate method ('MAM'). The assessee adopted 'Operating Profit to Operating Cost', as the profit level indicator ('PLI') and conducted a comparability analysis and based on application of certain filters, selected a set of 14 companies as comparables to the assessee. The TPO, however, rejected the assessee's TP study for reasons recorded in the/his order u/s 92CA of the Act, that the assessee used prior periods/earlier years data and wrongly applied certain filters. The TPO then carried out his own comparability analysis, applying certain filters and after considering the assessee's submissions in this regard, selected the final set of 10 comparable companies, which are as under:- S. N. Name of the Company Margin OP/OC % 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia' is functionally different as it offers services which are in the nature of software development, product development and software support services. In support of the assessee's contentions, the attention of the Bench was invited to extracts of the Annual Report of this company for the year under consideration (placed at pages 1242 to 1325 of paper book) to show that this company, "Accentia' is engaged in development and sale of products and provision of various services. Reliance in this regard, for exclusion of this company from the final set of comparables to the assessee, was, inter alia, placed on the decision of the co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) (P.) Ltd. v. Asstt. CIT [2016] 76 taxmann.com 22 (Bang.) which was rendering ITES services to its AE's. 7.2 Per contra, the ld DR for Revenue placed reliance on the orders of the authorities below in including this company in the final set of comparables to the assessee. 7.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement cited. We find that a coordinate bench of this Tribunal in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any from the list of comparables. 10. Per contra, Ld. DR submitted that 80% of the revenue of Accentia Technologies Ltd, were from medical transcription, which fell within ITES only. As per the ld. DR, actual activities of the assessee compared favourable with Accentia Technologies Ltd. When 80% of the income was from ITES services, as per the ld. DR further segmentation was not required. As for the reliance placed on the decisions of Delhi Bench in the case of Equant Solutions India P. Ltd., (supra) and coordinate bench in the case of Amba Research India P. Ltd. (supra), Ld. DR submitted that these were for A.Y. 2010-11 and. there was a clear finding by the Tribunal that results of Accentia Technologies Ltd, were skewed because of acquisition of a business during that year and also due to inorganic growth. 11. In reply ld. AR submitted that even within the same ITES segment differentiation could be made based on high-end and low-end services. Relying on judgment of Hon'ble Delhi High Court in the case of Rampgreen Solutions P. Ltd. v. CIT [ITA 102/2015, dt. 10.08.2015], ld. AR submitted that there could be high-end and low-end services which may not be comparable. As per ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, Assessee was providing back office support to its group companies and affiliates, in the field of reinsurance, which its affiliates were engaged in. Work done by the assessee has been captured by us at para three above. This in our opinion was entirely different from the type of activities that Accentia Technologies Ltd, was into. Type of services rendered by the assessee is also clear from the service agreement entered with its AE called Swiss Re, Zurich, dt. 01.02.2009. Annexure-1 to this agreement, is reproduced hereunder : CAT team Bangalore processes and analysis data using standing data analysis and Natural Catastrophic (Nat Cat) techniques, More specifically, CAT team Bangalore would Nat Cat exposure analysis and comparison Review the clients portfolio to better understand underlying exposure and changes in exposure from one year to another Nat Cat Modelling & underwriting support Analysis the clients portfolio by using in house (MultiSNAP) and third party cat modelling software (Risklink) to get an estimate of the cat load for the treaty. Scope of service to be provided is global Tool maintenance and development support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in rendering ITeS. The Tribunal held that, "once a service falls under the category of ITeS, then there is no sub-classification of segment". Thus, according to the Tribunal, no differentiation could be made between the entities rendering ITeS. We find it difficult to accept this view as it is contrary to ftclamentat the rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. ITeS encompasses a wide spectrum of services that use Information Technology based delivery. Such, services could include rendering highly technical 'services by qualified' technical personnel. involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITeS would also include voice-based call centers that render routine customer support for their clients. Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... des on the issue of inclusion/exclusion of the above five companies as comparables and also perused the relevant material on record including the various decisions of the coordinate benches of the Tribunal cited by the learned counsel for the assessee. Accentia Technologies Limited 12. As regards the selection of Accentia Technologies Limited as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. v. Addl. /Dy. Commissioner of Income-tax, Circle 1(2), Hyderabad and vice versa (ITA No. 124 and 170/Hyd/2014 dated 31.7.2014); Excellence Data Research Pvt. Ltd., Hyderabad v. ITO Ward 2(1), Hyderabad (ITA No.l59/Hyd/2014 dated 31.7.2014); and Hyundai Motors India Engineering P. Ltd., Hyderabad v. DCIT, Circle 2(2), Hyderabad (ITA NHo.255/Hyd/2014 dated 31.7.2014), wherein M/s. Accentia Technologies Limited (Seg) was excluded by the Tribunal from the list of comparables on the ground that it was a case of mergers and acquisition, and the company was also found to be functionally different. The relevant observations of the Tribunal as recorded in para 19.2 of the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id company was many times higher than that of the assessee during the year under consideration. Although the learned Departmental Representative has contended that the size of operations does not matter as far as selection of comparables is concerned especially in the sector of IT Enabled services, it is observed that similar issue has been decided by the Hon'ble Delhi High Court in the case of CIT v. Agnity Technologies Pvt. Ltd. (219 Taxman 26) holding that huge turnover companies like Infosys and Wipro cannot be considered as comparables with smaller companies like the assessee in the present case. Respectfully following the decision of the Hon'ble Delhi High Court in the case of Agnity Technologies P. Ltd. (supra), we direct the Assessing Officer/TPO to exclude Infosys BPO from the list of comparables." 32. As far as Accentia Technology Ltd., is concerned, even during the previous year relevant to AY 2010-11, there was amalgamation of Ascent Infoserve Private Limited with Accentia Technology Ltd., and consequent thereto the assets and liabilities and accumulated reserves and the financial results for the year ended 31st March, 2010, of the amalgamating company were inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR drew the attention of the Bench to the Annual Report of this company for years ended 31/3/2011 (extract placed at pages 1326 - 1405 of paper book) to show that it. is engaged in development of computer software, having engineering design services, I.T infrastructure solutions, etc., which are different from the ITES provided by the assessee to its AE's. In support of its contentions for exclusion of this company 'Acropetal' from the final set of comparables, reliance was placed inter alia, on the decision of a co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra). 8.2 Per contra, the ld DR supported the orders of the TPO for including this company in the list of comparables. 8.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that a co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra) has examined in detail the comparability of this company as a comparable to that of a service provider of ITES services to its AE's and at 6 para 21 to 24 thereof held as under:- "21. Arguing for e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport. It is mentioned that the said company was providing comprehensive offerings using its deep domain understanding of infrastructural health care, engineering design and enterprise solutions. In our opinion, the type of services that was being provided by Acropetal Technologies Ltd, was not at all comparable with the type of services that the assesses was providing. It is also mentioned in the annual report of the said company that it was providing high-end services in the engineering design services. No doubt as mentioned by the ld. DR, it may not be feasible to have comparables which fit in the exact mould as that of an assessee in TP analysis. However, when one company is giving sophisticated set of services which involves higher level of skill sets, and the other is doing it on a lower level, we cannot say that the former should be considered as a comparable to the latter. Though for a different year, comparability of Acropetal Technologies Ltd, (seg) had come up before Hyderabad bench of the Tribunal in the case of Excellence Data Research P. Ltd (supra). Observations of the Tribunal as it appears at para 18.1 reads as under : 18.1 After considering the rival conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. We find that the co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (P.) Ltd. (supra), on which the assessee itself has placed reliance for exclusion of other comparable companies; has examined the comparability of this company and has held it to be a good comparable to companies rendering ITES. At paras 25 to 28 thereof, the coordinate bench has held as under:- "25. Seeking exclusion of ICRA Online Ltd, ld. AR submitted that the said company had three lines of business namely, outsourcing services, information service and software product services. As per the ld. AR, TPO had taken the outsourcing service for comparing the assessee. Relying on the annual report of the said company, placed at paper book pages 645 to 667, ld. AR submitted that ICRA Online Ltd, was providing knowledge process outsourcing. As per the ld. AR the back-end analytical services done by the said company which included data extraction, aggregation, validation and analysis could not be compared with the low-end services in the insurance field that was being done by the assessee. Reliance was once again placed on the case of Rampgreen Solutions P. Ltd, (supra) of Hon'ble Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bration etc., It had to use market intelligence, maintain e-tools and provide reporting analytics. In our opinion the level of expertise being used by the assessee in its technology enabled services and that being used by ICRA Online Ltd, were comparable, though they were in different streams of operation. Here we are one with the argument of ld. DR that exact fitting in the mould of comparables is not necessary in a TNMM study. However, once the level of knowledge that is being used for the outsourcing is on a reasonably comparable pedestal, the type of service industry to which the concerns cater may not matter much. In the case of Rampgreen Solutions P. Ltd, (supra), their Lordship had observed that there could be different level of skill sets used within the very same ITES services and a comparison can be attempted only after making a proper analysis of the skill sets that were being employed. In our opinion considering the observation of their Lordship in Rampgreen Solutions P. Ltd, (supra), ICRA Online Ltd, was correctly considered by the lower authorities as a proper comparable. We do not find any reason to interfere with the orders of authorities below in this regard." 9.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s less than Rs. 1 crore. As per the ld. AR, TPO himself had excluded companies having turnover below Rs. 1 crore. Relying on paper book, page 719, which is a part of the annual report of Jeevan Scientific Technologies Ltd, (seg), ld. AR submitted that the revenues from BPO operations of the said company came to only Rs. 79.2l lakhs. As per the ld. AR, the total operating revenue of the said company for the relevant previous year was only Rs. 2.49 crores of which substantial part was from other streams of operation. 30. Per contra, ld. DR submitted that the segment considered by the TPO had a turnover of Rs. 246,75,00,000/-. Thus according to him Jeevan Scientific Technologies Ltd, (seg), was a good comparable. 31. We have heard the rival contentions. Audited balance sheet and financial statement of Jeevan Scientific Technologies Ltd, (seg), taken from capitaline data base has been filed before us by the assessee at paper book page. 677 to 740. Net revenue of the said company for the relevant previous year from its operation was Rs. 2,45,39,231/-, as per its income statement at paper book page 725. TPO had considered the revenue as Rs. 2,46,75,000/-. However segmental revenue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see to now claim that this company 'Infosys' to be functionally not comparable. Further, on a perusal of the record we find that the assessee had neither raised this issue of functional non-comparability before the TPO or specifically in the objections raised in Form No. 35 before the DRP. Therefore, it appears that this issue has been raised for the first time before us. 11.3.2 While it is an accepted principle that the assessee can raise objection to the inclusion of a company as a comparable before appellate authorities even though it was selected as a comparable in its own TP study, it is also an accepted principle that if the issue of non-comparability of a company is raised for the first time, then it is only in the fitness of things that the TPO shall also be afforded adequate opportunity to examine this issue. In this view of the matter, we set aside the matter of examination of the functional comparability of this company with the assessee to the file of the TPO for consideration and adjudication after affording the assessee adequate opportunity of being heard in the matter and to make submissions/file details required in this regard. We hold and direct accordingly. 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly considered the material on record. On the appreciation of the facts on record on this issue, it is seen that the TPO has restricted the working capital adjustment to 1.47%. According to the assessee, such a restriction is not justified as the adjustment seeks to remove the differences in working capital position between the assessee and the comparable companies. We find that this issue of restriction of working capital adjustment was considered by a co-ordinate bench of this Tribunal in the case of Moog Controls (India) (P.) Ltd. in IT (TP) A No. 551/Bang/2015 dated 27.11.2015 and the co-ordinate bench directed the AO / TPO to allow actual adjustments towards the differences in working capital position between the assessee and the companies selected as comparables. At paras 24 to 29 thereof, the co-ordinate bench held as under:- "24. The next contention of the assessee is that the working capital adjustment should not have an upper limit. It was submitted that the average cost of capital cannot be used as a upper threshold for working capital adjustment. 25. The TPO in the order has stated that the profit margin computed in TNMM is a composite figure which includes two compo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the assessee and the companies selected as comparable vary, due; to their characterisation and there exists a methodology which is. also well accepted internationally to nullify these differences. Therefore, it was submitted that such an adjustment should be carried out to bring in appropriate comparability between the tested party and the companies selected as comparable without any upper cap, which is not based on any sound rationale. The ld. counsel for the assessee relied on the decision of the Mumbai Bench of the Tribunal in the case of Dresser-Rand India Pvt. Ltd. v. ACIT (ITA No. 8753/Mum/2010) has held that "The soul of an order is in its reasoning, and unless the reasons for coming to a conclusion in the order are not set out, it is not possible to do a meaningful scrutiny of the order." The Mumbai Bench in the above case has referred to the observations made by Hon'ble Supreme Court in the case of Union of India v. Mohan Lai Capoor (AIR 1974 SC 87) wherein Their Lordships have, inter alia, observed as follows:- "If the statute requires recording of reasons, then it is the statutory requirement and, therefore, there is no scope for further inquiry. But even w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n segment'. All these transactions were aggregated and bench marked on an aggregated basis by adopting 'TNMM' as the 'MAM' for determining the ALP of these international transactions. 14.2.2 The TPO on examination of the assessee's TP study did not agree with the assessee's characterization of these transactions as part of 'Distribution' function. Based on the decisions taken in the earlier years in the case on hand, the TPO considered the transactions as manufacturing activities. The TPO held that the arrangement between the assessee, Novo Nordisk A/S and 'TPL' were in fact a manufacturing activity and cannot be characterized as distribution operations. The TPO conducted a fresh comparability analysis based on the application of TNMM as the most appropriate method and arrived at a set of comparable companies and proposed an adjustment of Rs. 26,08,13,330/-. A further adjustment of Rs. 7,13,09,890/- was proposed on account of the application of Profit Split Method ('PSM') for determining the ALP, as against TNMM applied by the assessee, in respect of its arrangement with 'TPL' for purchase of Insulin. The TPO additionally analyzed purchase of insulin from 'TPL' separately by apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to time and extended vide the extension agreement, granted Novo Nordisk India the right and license to use and or sub-license the use of its know-how to manufacture the products at Novo Nordisk India's facilities or those of the sub-licensee where the said know-how is used for the manufacture of the said products. Similarly, Novo Nordisk A/S has, vide the trademark master license agreement and extensions thereafter, granted to Novo Nordisk India the master license to use and or sub-license the use of the trademarks. These trademarks may be used only to those insulin formulations, which are manufactured from the insulin crystals, and using the know-how supplied by Novo Nordisk A/S. The know-how and trademarks have been licensed by Novo Nordisk A/S to Novo Nordisk India free of charge. 4.3.28 Novo Nordisk A/S has entered into a insulin crystals and excepients bulk supply agreement dated January 04, 2000, which were amended from time to time vide extension agreement with Torrent. As per the above-mentioned insulin crystals and excepients bulk supply agreement, Torrent shall purchase the agreed quantity of insulin crystals and excepients only from Novo IT (TP) A No.146/Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Novo Nordisk India also invoices the customers and bears the credit risk. 4.3.32 Novo Nordisk India has a team of medical representatives and other field staff who market the products. Novo Nordisk India undertakes various programs aimed at both customer service and product promotion. These initiatives include relationship programs for doctors and patients, educational mailers specific to suite the customers through a database management program for patients, organising clinic camps, educational programs etc. Novo Nordisk India also IT (TP) A No.146/Bang/20l5 commissions various agencies to undertake market research to assess the potential business development opportunities and competitors. Target market segments are identified for further sales promotion. Product promotions include providing value added services like technical updates, continuous medical educational programs, global sponsorship programs for doctors etc. 4.3.33 The marketing executives are trained and scientifically equipped with regard to the product and disease through the medical team to enable them to promote the product with doctors and patients. The training includes imparting information ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hosen as the Most Appropriate Method for determining the Arm's Length Price (ALP). The Assessee therefore claimed that its margin of 2% operating profit to sales was better and therefore the international transaction in the distribution segment was at arm's length. 12. The Transfer Pricing Officer (TPO), to whom the question of determination of ALP was referred to by the AO u/s. 92CA of the Act, examined the transactions claimed by the Assessee to be of the nature of distribution service rendered by the Assessee to Novo Nordisk A/S. The TPO took note of the various agreements between the Assessee, Novo Nordisk A/S and TPL. 13. We have already seen that the Assessee categorised its "Distribution" segment into two viz., (1) Selling products purchased locally and (2) Direct import and sale of products from Novo Nordisk A/S and Novo Nordisk Health Care AG. The products purchased locally are procured by the Assessee from TPL. The Agreement between the Assessee and TPL on the one hand and the Agreements between TPL and Novo Nordisk A/S and agreement between the Assessee and Novo Nordisk A/S are as follows: 1. Know-how license Agreement dated 28.2.1994: Novo Nordisk A/S owns t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp;6. Subvention Agreement dated 1-1-2003: This agreement is between Novo Nordisk A/S and the Assessee. This agreement explains in its preamble that the Assessee is primarily a distributor and marketer of insulin and pharmaceutical products in India. Novo Nordisk A/S wants to support the operations of the Assessee as its holding company and hence the payment of subvention fee is being made by them to the Assessee. The agreement provides that there is no specific services to be rendered by the Assessee for the payment of subvention fee. 7. INSULIN CRYSTALS AND EXCIPIENTS BULK SUPPLY AGREEMENT DATED 15-2-1994: This agreement is between Novo Nordisk A/S and TPL. This Agreement in its preamble refers to the fact that TPL wants to enter into a long-term purchase agreement with Novo Nordisk for purchase of Human Mono component and Highly Purified Porcine Insulin Crystals and Excepients, which are used as raw IT (TP) A No. 146/Bang/2015 material in manufacture of 40 iu insulin vials. The agreement also refers to the know-how license and trademark license between the Assessee and Novo Nordisk A/S and further refers to insulation formulations supply agreement between TPL and the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as against TNMM applied by the Assessee in respect of the arrangement with the Torrent for purchase of Insulin. The TPO, additionally analyzed purchase of insulin from Torrent separately by applying residual PSM based on the FAR analysis following the approach of the TPO and the learned Panel in the previous year's assessment proceedings/Panels proceedings. The TPO applied residual PSM in the ratio of 50:50 between Novo Nordisk A/S and Novo Nordisk India after reducing the margins of Torrent of 9.85% from the value of insulin products. The TPO computed the total margin in the entire transaction to be 31% alleging that on an overall basis Novo Nordisk AS earns a margin of 29% and Novo Nordisk India's margin for FY 2009-10 is 2% in the transaction relating to purchase of insulin products from Torrent and sold by Novo Nordisk India. Thereafter, the TPO, held that both Novo Nordisk A/s and the Assessee have an equal share in the overall transaction, arrived at an operating IT (TP) A No. 146/Bang/2015 margin of 15-5% (50% of 31%) to be earned by the Assessee based on application of PSM, thereby enhanced the overall adjustment in distribution segment by INR 58,831,508. 16. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction between two Associated Enterprises attracting the provisions of Sec.92(1) of the Act?" 49. The learned counsel for the Assessee drew our attention to Sec. 92(1) of the Act which provides that any income arising from an international transaction shall be computed having regard to the arm's length price contemplates existence of an international transaction. It was submitted by him that the entire Transfer Pricing Provisions as contained in Chapter X of the Act will apply only when income arises from an "International Transaction". He drew our attention to the provisions of Sec. 92B of the Act, which lays down the meaning of "International Transaction". He brought to our notice that two conditions are required to be satisfied before a transaction can be said to be "International Transaction" viz., (i) there should be a transaction between two or more associated enterprises and (ii) either or both of them should be non-residents. He pointed out that at least one party to a transaction should be a non resident. With this background he submitted that the transaction for supply of incipient was between Novo Nordisk A/S and TPL. Though the IT (TP) A No. 146/Bang/2015 condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l fiction. It deems a transaction to have been entered into between IT (TP) A No. 146/Bang/2015 two associated enterprises. Though section 92A(2) is a part of section 92B with the heading "Definition of international transaction", it is to be read as an extension of section 92A(2) and not as an extension of section 928(1). This is for the following reasons: (a) Both section 92A(2) and 92B(2) deal with situations under which two or more persons constitute associated enterprises, (b) Section 92B(1) does not define the term "associated enterprise". It defines the term "international transaction". This definition provides that there can be an international transaction only between two or more associated enterprises and not otherwise. Therefore recourse to section 92A and section 92B(2) is required before referring to section 92B(1). (c) Section 92B(2) only deems certain transaction to be 'transaction between associated enterprises' and not as 'international transaction between two enterprises'. 28.5 There is a difference between associated enterprises defined under section 92A and transaction deemed to be between associated enterprises under section 92B(2). Under section 92A, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction between the assessee and IJMII do not constitute an international transaction. Thus the basic premise for invoking the deeming fiction under section 92B(2) does not arise. (b) The transaction in question did not involve transfer of goods or services from the assessee to IJM Group or to any other non-resident enterprise, either directly or indirectly, or by using IJMII as an intermediary. The transaction in question involved direct rendering of services by IJMII to the assessee. (c) The APHB came into existence under the A.P. Housing Board Act, 1956. It performs governmental IT(TP)A No. 146/Bang/2015 functions. Its policies are directly controlled by the Andhra Pradesh Government. In view of the active participation of the Government of AP in the functioning of the assessee, it cannot be said that IJM Group would influence the assessee either in entering into contract with IJMII or in determining the terms and conditions thereto. a. The transactions between the assessee and IJMII fall under item 4 above. Consequently, the transaction between the assessee and IJMII does not constitute an international transaction. The transfer pricing provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Sec. 92B(2) of the Act were not attracted and therefore the transaction was outside the purview of Sec. 92(1) of the Act. He also placed reliance on the decision of the ITAT Mumbai in the case of Kodak India Pvt. Ltd. v. ACIT ITA No.7349/Mum/2012 order dated 30.4.2013 wherein a view similar to the view expressed by the ITAT Hyderabad Bench in the case of Swarnandhra IJMII (supra) was expressed. 54. The learned DR drew our attention to the various agreement between the parties and highlighted the terms of those agreements and the proximity of time within which these agreements were entered into between the Assessee and TPL on the one hand, TPL and Novo Nordisk A/S and the Assessee and Novo Nordisk A/S. These agreements were already discussed in the earlier part of this order and are not being repeated here. Certain aspects which need to be highlighted here and on which the DR laid emphasis are the following:- l. As per the Agreement for bulk supply of excepient between Novo Nordisk A/S and TPL, which the raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials by TPL, in its preamble, there is a reference to the Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into between the Assessee and Novo Nordisk A/S. Novo Nordisk A/S is admittedly an Associated Enterprise and was a non-resident. Therefore the conditions for applicability of the provisions of Sec. 92B(1) of the Act were satisfied and therefore the said transaction was rightly held to be subject to scrutiny u/s. 92(1) of the Act. 56. The learned DR next laid emphasis on the Transfer Pricing Study carried out by the Assessee in support of ALP of the international transactions entered into by it with its AE. In Para 4.3.26 of its T.P. Study at page-26, the Assessee has specifically mentioned that the transaction of sale of products purchased locally (from TPL) was a distribution function which the Assessee performs for Novo Nordisk A/S and was an international transaction. The only change that the TPO adopted was to characterise the function performed by the Assessee as "Manufacture and sale". The following are the contents of Assessee's own TP study:- "Distribution 4.3.26: Sale of products purchased locally: Novo Nordisk India sells Human Mono-component and Highly Purified Insulin in 40 IU vials purchased from Torrent Pharmaceuticals Limited a company formed and reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that all the agreements read as a whole clearly shows that the arrangement was between the Assessee and Novo Nordisk A/S for carrying out manufacture and sale of Human Mono component and Highly Purified insulin in 40 IU Vials through TPL, the latter supplying raw materials and the Assessee carrying out manufacture through TPL. The arrangement starts with supply of raw materials and ends with manufacture of finished products. Thereafter the Assessee sells the finished product in Indian market. 60. It was also submitted by the learned DR that the amendment to the provisions of Sec. 92B(2) of the Act by the Finance Act. 2014 w.e.f. 1-4-2015 is clarificatory in nature, clarifying the law as always out to be. It may in that sense be held to be retrospective. 61. In his rejoinder, the learned counsel for the Assessee submitted that Sec.92F specifically provides that "Unless the context otherwise requires" and thereafter gives definition of certain terms. According to him in the present case, the definition of "Transaction" as given in Sec.92F(v) of the Act cannot be pressed into service in this case because provisions of Sec.92B(1) of the Act provides otherwise i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions are required to be satisfied before a transaction can be said to be "International Transaction" viz., (i) there should be a transaction between two or more associated enterprises and (ii) either or both of them should be non-residents. According to the Assessee at least one party to a transaction should be a non-resident According to the Assessee the transaction for supply of incipient was between Novo Nordisk A/S and TPL. Though the condition that at least one of the parties to a transaction should be a non-resident is satisfied in respect of this transaction, TPL is admittedly not an associated enterprise of Novo Nordisk A/S and therefore the said transaction cannot be regarded as "International Transaction". As far as the transaction of manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials between TPL and the Assessee, it is the stand of the Assessee that both the Assessee and TPL are residents and therefore the condition that either or both the parties to a transaction should be non-resident is not satisfied and therefore the said transaction cannot also be regarded as "International Transaction". The above argument on behalf of the Assessee overl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls, the Assessee will disclose the source of the Assessee's right to grant sub-license of know-how and trademark as from Novo Nordisk A/S and further provides that such Original license agreement will be deemed to be incorporated in the sub-license agreement. 3. Insulin Formulation Supply Agreement dated 1-3-1994: By this Agreement TPL undertakes to manufacture and supply 40 iu insulin to the Assessee. There is also an arrangement whereby TPL is given sub-license to use Novo Nordisk A/S Know how to manufacture Novo Nordisk Products. Insulin formulations supply agreement between the Assessee and TPL in clause 14.2 specifically provides that the agreement is co-terminus with the bulk supply agreement shall be co-terminus with the Insulin Crystals and Excepients Supply agreement between Novo Nordisk A/S and TPL and the IT(TP)A No. 146/Bang/20l5 know-how and trademark sub-license agreement between the Assessee and TPL. 4. Facility Establishment Agreement dated 6.8.2005: Whereby the Assessee and TPL agree about the facility to be created by TPL exclusively for insulin production in terms of agreement of Assessee and TPL for insulin formulation supply. 5. Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disk (India) Pvt. Ltd., a company incorporated in accordance with the laws of India, hereto, and the finished formulations shall be supplied exclusively to Novo Nordisk (India) Pvt. Ltd. under another separate product supply agreement." As per the this Agreement for bulk supply of excepient between Novo Nordisk A/S and TPL, which the raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials by TPL, in its preamble, there is a reference to the Agreement for long-term insulin formulations supply agreement between TPL, and the Assessee i.e., the Human Mono component and Highly Purified insulin in 40 IU Vials. Clause 7.1 of the agreement provides that in the event of discontinuance of production by TPL, the all saleable unexpired stock of Insulin Crystals and excepient should be delivered to Novo Nordisk A/s. Clause-11.2 of the Agreement specifically provides that the bulk supply agreement shall be co-terminus with the Insulin Formulations Supply agreement between TPL and the Assessee and the know-how and trademark sub-license agreement between the Assessee and TPL. 65. It is clear from the aforesaid agreements that the sum and subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme of Transfer Pricing provisions in India, if it impacted or eroded tax base in India. Amendment to Section 92B(2) by the Finance Act. 2014 was inserted only by way of abundant caution. It is made with a view to clarify the position that by entering into series of transactions with third parties who are not associated enterprises or non-residents, one cannot claim that the Transfer Pricing regulations were not applicable, if in reality and in substance transactions were with related parties one or both of whom might be non-residents. For example in the present case if the cost of excepient/insulin crystal which is the raw material for IT(TP)A No.146/Bang/2015 manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, is not subjected to the test of ALP, it could result in erosion of tax base in India. The transfer pricing provisions will therefore apply to such transactions. We therefore hold that the transaction by which supply of excepients was made by Novo Nordisk A/S to TPL was in effect an international transaction between the Assessee and Novo Nordisk A/S. The income from such transaction had to be computed having regard to Arm's Length Price as laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transactions closely linked. Purchase of raw material and manufacture and sale of them are closely linked transaction. The distribution of products imported from Novo Nordisk A/S was not a closely linked transaction with the sale of manufactured products and therefore both have to be benchmarked separately for determination of ALP. The learned counsel for the Assessee on the other hand reiterated the stand of the Assessee as made before the TPO/DRP. 68. We have given a careful consideration to the rival submissions. The Act and the Rules contemplate determining ALP by aggregating international transactions which are multiple, interlinked or interrelated to each other and cannot be evaluated separately. A 'combined transaction approach' where the transactions are closely linked or continuous that they cannot be evaluated adequately on an individual basis, is advocated by the OECD Guidelines on Transfer Pricing. In such a situation, rather than assessing the ALP of the transactions individually, the transactions could be evaluated together using the most appropriate method. 69. In the present case, can it be said that the transaction of supply of raw material and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus the subvention fee will not be subjected to any ALP test and will only go to reduce the addition on account of determination of ALP, if any, that might ultimately survive. Issues N0.2 to 4 are decided accordingly. 70. Thus grounds No. 32 to 40 and the additional ground of appeal are partly allowed." 19. The parties agreed before us that similar findings and directions can be followed in the present assessment year also. Accordingly, we hold that the issues raised in Grounds No. 39 to 47 in the present assessment year are decided according to the decision rendered in AY 09-10 referred to above. The AO is directed to give effect to the directions as are contained in AY 09-10 in the present assessment year also. 14.3.2 As the issues and facts before us in this year are similar to that of the earlier asst. years, in our view, similar findings and directions are to be followed in the present asst. year 2011-12. Accordingly following the decision rendered by the coordinate bench in the assessee's own case for asst. year 2010-11 in Novo Nordisk India (P.) Ltd.'s case (supra) IT(TP)A No.l46/Bang/2015 dated 30/1/2015, we hold that the issues raised in grounds 34 to 42 in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Assesses with regard to disallowance made u/s. 40(a)(ia) of the Act. As we have already seen Human Mono component and Highly Purified insulin in 40 IU Vials are purchased by the Assesses from Torrent Pharmaceuticals Limited a company which is not an Associated Enterprise of the Assessee. Torrent Pharmaceuticals Limited gets insulin in crystal form which is raw material required for manufacture of Human Mono Component and highly purified insulin in 40 IU Vials, which is imported from Novo Nordisk A/S. The value of excepients (insulin in crystal form imported from Novo Nordisk A/S) supplied fey Novo Nordisk A/S to TPL was Rs. 1,26,71,54,811, TPL after completing the process of manufacture of purified insulin in 40 IU Vials sold it to the Assessee at a sum of Rs. 160,53,25,687. According to the AO, TPL was only a contract manufacturer and the payment made by the Assessee was a payment for contract of work and therefore the Assessee ought to have deducted tax at source on the payments made to TPL. Since the Assessee did not deduct tax at source, the AO disallowed the claim of the Assessee for deduction of a sum of Rs. 160,53,25,687 which was the purchase value of the insulin purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing an employer, does not deduct or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: Provided that any person, including the principal officer of a company, who fails to deduct, the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident- (i) has furnished his return of income under-Section 139; (ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed: 77. The Tribunal considered the Memorandum explaining the provisions while introducing Finance Bill, 2012 provides the justification of the amendment to section 40(a)(ia) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, it can be said to be declaratory and curative In nature and therefore, should be given retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No. 2) Act, 2004. 80. The learned counsel for the Assessee filed before us a Certificate in Form No.26A of a Chartered Accountant certifying that TPL has paid tax on the sum of Rs. 160,06,04,817 received from the Assessee. It was therefore contended by him that in view of the amended provisions of law referred to above which have been held to have retrospective operation and in view of the fact that the Assessee has satisfied the Revenue that taxes clue on payment made by it to TPL have been declared by TPL in their return of income, the issue may be restored to the AO to verify the claim of the Assessee and if it is found that TPL has in fact included the receipts from the Assessee in its returns of income and paid taxes thereon than to that extent the disallowance u/s.40(a)(ia) of the Act be deleted. 81. We have considered the submission of the learned counsel for the Assessee and are of the view that the plea made by him in the light of the decisions relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 in the assessee's own case (Supra) had held this transaction to be 'trading' activity. This decision has been followed by us in this year also as discussed in the earlier paragraphs. 15.3.2 The co-ordinate bench of this Tribunal, while deciding the issue of disallowance u/s. 40(a)(ia) of the Act in assessee's own case for asst. year 2009-10 had decided as to whether the payment made by the assessee to TPL would constitute payment for contract of work falling under the ambit of the provisions of sec. 194C of the Act requiring TDS to be made on such payments. Therefore, the discussion and examination as to whether these purchase transactions between the assessee and TPL constitute 'trading' or 'manufacture' or 'contract manufacture' has not been gone into at all. The co-ordinate bench decided the issue of disallowance u/s. 40(a)(ia) of the Act in conjunction with the provisions of sec. 201 of the Act, particularly the provision contained in the Act, which provide that the tax dedcutor shall not be considered as an 'assessee in default' if the conditions contained in the provisos are satisfied. The coordinate bench noted the submission of the assessee that 'TPL' has shown the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings, this ground is premature and not maintainable and is accordingly dismissed. 18. In the result, the assessee's appeal for asst. Year 2011-12 is partly allowed. Revenue's appeal in IT(TP)A No.525/Bang/2016 for asst. year 2011-12 19. In this appeal, Revenue has raised the following grounds:- 1. The direction of the Dispute Resolution Panel are opposed to the law and not on the facts and circumstances of the case. 2. Whether Ld. DRP is correct in allowing the claim of assessee as expenses on distribution of promotional samples free of cost to physicians amounting to Rs. 38,70,333/-. 3. Whether Ld.DRP has erred in granting 1% risk adjustment arbitrarily without appreciating the facts of the case and its comparables. 4. For these and other grounds that may be urged upon, direction of the Dispute Resolution Panel may be reversed and that assessment order be restored. 5. The appellant craves leave to add, alter, amend or delete any other grounds on or before hearing of the appeal. 20. Grounds 1. 4 & 5 20.1 The grounds raised at S. Nos. l, 4 and 5 being general in nature, no adjudication is called for thereon. 21. Ground No.2 - Expenses towards promotional sample ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in the earlier year by the DRP and Revenue had not preferred any appeal against this finding. It is also seen that certain facts of the case were highlighted, like free samples given on the express request of doctors, etc. We are of the considered opinion that, to that extent at least, the DRP ought to have examined the facts of the case on hand before placing reliance on the decision of the ITAT, Delhi Bench cited. (supra). 21.2.1 In our view, based on the aforesaid judicial pronouncements (supra) and others on this issue, what emerges is that free samples to Doctors can be allowed as business expenditure, but such allowance is attendant upon the examination of the facts of the cases. While it has been held that the MCI Regulations apply to Doctors and not companies like the assessee in the case on hand, that does not absolve the assessee the onus of establishing the genuineness and correctness of the claim made. This aspect has not been examined by the AO/DRP. In this view of the matter, we deem it appropriate to remand this issue back to the file of the AO to examine the assessee's claim in the light of the judicial pronouncements relied upon by the DRP, our observations ..... X X X X Extracts X X X X X X X X Extracts X X X X
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