TMI Blog2017 (8) TMI 1560X X X X Extracts X X X X X X X X Extracts X X X X ..... hnology Ltd., (Seg) - ( Jeevan ) - Respectfully following the aforesaid decision of the coordinate bench in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra), we restore the issue of examination of the comparability of this company, Jeevan to the file of the TPO for fresh consideration with a direction that if the earnings of this company from BPO operations is less than ₹ 1 crore, then this company shall be excluded from the list of comparable. We hold and direct accordingly. Infosys BPO Ltd., ( Infosys ) - When the assessee found Infosys to be functionally comparable at the time of its TP study, it is not clear to us as to what has now changed for the assessee 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. While it is an accepted principle that the assessee can raise objection to the inclusion of a company as a comparable before appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 and also considering other judicial pronouncements on this issue. Consequently, ground No.2 of Revenue s appeal is allowed for statistical purposes. - IT (TP) Appeal Nos. 247/Bang/2016 And 525/Bang/2016 - - - Dated:- 31-8-2017 - MR VIJAYPAL RAO, JUDICIAL MEMBER AND MR JASON P. BOAZ, ACCOUNTANT MEMBER For The Appellant : Mr Nageshwar Rao, Advocate For The Respondent : MR G.R. Reddy, CIT ORDER Mr Jason P Boaz, Accountant Member These are cross appeals, by the assessee and Revenue, directed against the final order of assessment completed u/s 143(3) r.w.s 144C(13) of the Income-tax Act (in short the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich, inter alia, included the TP adjustment of ₹ 36,53,93,349/-. Aggrieved by this draft order of assessment, the assessee filed its objections thereto before the DRP. The DRP vide order dated 17/12/2015 issued its directions thereon. Pursuant to the directions of the DRP, the AO passed the final order of assessment u/s 143(3) r.w.s 144C(13) of the Act dated 22/1/2016, wherein the assessee s income was determined at ₹ 2,61,43,76,773/-. 2.4 Aggrieved by the final order of assessment dated 22/1/2016 for asst. year 2011-12, both the assessee and Revenue have preferred appeals before the Tribunal which are disposed off hereunder:- Assessee s appeal in IT (TP) No.247/Bang/2016 for asst. year 2011-12. 3. In its appeal, the assessee has raised the following grounds:- 1. Impugned order as also directions of DRP are based on incorrect appreciation of facts and wrong interpretation of law and therefore, are bad in law. 2. Ld. AO and ld. DRP have erred in not accepting that Appellant s international transactions are at arm s-length and without prejudice further erred in completely disregarding jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r influence the obligations under withholding tax provisions. 11. The learned AO and the DRP have erred in not considering the specific declaration given by Torrent which confirms that sale of insulin formulations to NNIPL is on principal to principal basis and the same is accounted as sales in its books and applicable income tax, VAT/sales tax has been discharged by Torrent on such sales. 12. The impugned order erred in treating transaction between Torrent and NNIPI, as contract for work by placing reliance on the decision of Karnataka High Court in NNIPL s own case, without appreciating that the such order passed by the High Court was an exparte order and that NNIPI has challenged the same before Hon ble Supreme Court. Further, the impugned order completely failed to consider without any justification, several important, and relevant facts and legal arguments, which could, not be placed before the Hon ble High Court. 13. Without prejudice to the above, the impugned order and DRP erred in disallowing total purchase value from Torrent of ₹ 208,44,97,101 under section 40(a)(ia) of the Act without appreciating that subjec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or data used in (be computation of the arm s length price is not reliable or correct. 22. The impugned order erroneously rejects the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ( Rules ) and wrongly holds the Appellant s international transactions are not at arm s length. 23. Ld. TPO/AO and DRP have erred, in law and in facts, by determining the arm s length margin/ price using only FY 2010-11 data which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 24. In the facts and circumstances of present case ld. TPO/AO/DRP have erred, while finding existence of international transactions, characterization of same, FAR analysis. choice of Most Appropriate method and application of provisions of chapter X and corresponding rules as also by accepting / rejecting companies based on unreasonable comparability criteria leading to incorrect and unlawful adjustment to Arm s- length Price. 25. The learned TPO/AO/DRP have erred, in law and facts, by not making suitable adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Rules, which was duly accepted by the learned AO/ TPO under identical facts and circumstances in the Appellant s own case for earlier assessment years. i.e., AY 2008-09 or prior, without assigning any cogent or valid reasons. 37. The learned TPO/AO/DRP have erred, in law and in facts, by considering Torrent as Associated Enterprises (AE) of the appellant and holding that purchase of insulin by the Appellant from Torrent is a deemed international transaction without appreciating that this transaction is between two independent resident companies. 38. Without prejudice to the other grounds, the learned TPO/AO/DRP erred in accepting certain comparables which do not undertake manufacturing of insulin. 39. The learned TPO/AO/DRP have erred, in law and in facts, by not considering subvention fee received from the AE as part of operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies 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. Accentia Technologies Ltd., 28.99 2. Acropetal Technologies Ltd., 26.86 3. Cosmic Global Ltd., 9.81 4, E4e Healthcare Business Ltd., 12.38 5. ICRA On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable by the TPO in spite of the assessee s objection that it was functionally not comparable, as it is engaged in providing KPO services; is a product development company; holds significant IPR s and also segmental information is not available. The DRP upheld the TPO s action. It was contended by the ld AR that this company needs to be excluded from the set of comparable companies as it is not functionally comparable with the assessee. According to the ld AR, this company i.e Accentia 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so placed on decision of Delhi Bench of the Tribunal in the case of Equant Solutions India P. Ltd. v. DCIT [ITA.1202/Del/2015, dt. 21.01.2016] and that of coordinate bench in the case of Amba Research (India) P. Ltd. v. DCIT [IT(TP)A.286/Bang/2015, dt. 09.03.2016]. As per the ld. AR though the above decisions were for A. Y. 2010-11, Accentia Technologies Ltd, was doing the very same activities during the relevant previous year also. Hence according to him these decisions could be taken as a precedence for excluding the said company 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 cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 563 Income From Coding 162,823,920 Interest on FD 13,182,314 Income from Exchange Fluctuation 918,215 Total 1,083,127,053 Not only was the medical transcription work done by it of a high-end variety, it also had substantial income from coding coming to about 16% gross receipts. No segmental results were also available. Its audited financial statements at para 7 of the notes to accounts mentioned as under : (7) The Company is operating in a single business segment that is providing back office support to its gross companies and its affiliates on cost plus basis and as such all business activities revolve around segment, hence there is no separate primary reportable segment as required by Accounting Standard-17 Segment Reporting notified under section 21(3C) of the Companies Act, 1956. 15. As against the above, Assessee was providing back office support to its group compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ad hoc projects: Other projects and deliverables as assigned. 16.A reading of the above would show that assessee was functioning in a field different from Ms. Accentia Technologies Ltd. What it was providing may not be low-end services, neither was it of a high-end variety. The deliverables that assessee was expected to give its AE abroad is mentioned in schedule 2 of its agreement which is reproduced hereunder : Market Intelligence for the reviewed units portfolio. Analysis for costing accuracy Overview of prior review/audit issues Overview of guidelines and business intelligence relevant for reviewed units portfolio Input and maintenance for e-tool Reporting and Reporting Analytics Continuous Improvement projects: Other projects as assigned 17. Thus the functions which were done by Accentia Technologies Ltd, and the functions which were rendered by the assessee were entirely different. We cannot say that the type of services done by the assessee was of a level as sophisticated as the one which was b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08. We have perused the orders and heard the rival contentions. No doubt Accentia Technologies Ltd, formed a part of the list of comparables considered by the assessee in its TP study. However assessee had objected to its inclusion citing functional dissimilarity before the AO as well as the DRP. Question regarding comparability of Actentia Technologies in the ITE segment for A. Y. 2010-11 had come up before this Tribunal in the case of Novo Nordisk India P. Ltd (supra). It was held as under at paras 31 and 32 of the order dt. 30.07.2015 : 31. We deal with the comparable companies which the Assessee seeks exclusion. 1. Accentia Technology Ltd., 2. Infosys BPO Ltd. The comparability of these company with a ITES company was considered by this Tribunal in the case of Paraxel International (India) Pvt. Ltd. (supra) and the Tribunal held as follows on the comparability of the aforesaid companies with a company providing ITES in the following manner:- 10. In grounds No. 4 to 6, the assessee has challenged the comparables selected by the TPO for the purpose of TP analysis and as submitted by the learned counsel or the assessee, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit, this company was excluded. As submitted by the learned counsel, this year also, the acquisition of some companies by that company may have impact on the profit. Considering the profit margins of the company and insufficient segmental data, we are of IT (TP) A No. 146/Bang/2015 Page 42 of 52 the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected. 13. As pointed out by the learned counsel for the assessee, there was acquisition of a company by M/s. Accentia Technologies Limited during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research P. Ltd. (supra). Although the learned Departmental Representative has sought to contend that the acquisition of a company by M/s. Accentia Technologies Ltd. took place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etic mean for comparability purpose. The TPO is directed to give effect accordingly. Even after exclusion of Accentia Technologies Ltd, along with the exclusion of four comparable companies directed by DRP, there will be four companies left in the list of comparables which, in our opinion, cannot be considered as too small a sample for an effective TP study. In the circumstances, we direct exclusion of Accentia Technologies Ltd also from the list of comparables. Ordered accordingly. 20. No doubt the said decision was for A. Y. 2010-11, but the conditions which prevailed in the said previous year more or less existed in the impugned assessment year also. Considering all these aspects, we are therefore of the opinion that Accentia Technologies Ltd, was not a good comparable for the purpose of ALP study of the assessee. 7.3.2 On a careful consideration of the aforesaid order of the co-ordinate bench for asst. year 2011-12 (supra), we find that it squarely applies to the facts of the case on hand. Therefore, respectfully following the aforesaid decision in the case of Swiss RE Shared Services (India) (P.) Ltd., (supra), we hold that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnologies Ltd, as a comparable segment with ITES services of the assessee. Ld. AR pointed out that engineering design services rendered by M/s. Acropetal was entirely different from the type of services done by the assessee. Further according to him Hyderabad bench of the Tribunal in the case of Excellence Data Research P. Ltd v. ITO [ITA.159/Hyd/2014, dt.31.07.2014 had held that Acropetal Technologies Ltd, was not a good comparable in the BPO segment. As per the Ld. AR M/s. Excellence Data Research P. Ltd, was rendering back office data creation, content development and support services which were not comparable to what assessee was doing. Though the decision of the Hyderabad Bench was for A. Y. 2009-10, as per the Ld. AR, M/s. Acropetal Technologies Ltd, was doing the very same business during the relevant previous year also and therefore it could be considered as a good precedent. 22. Per contra, ld. DR submitted that TPO had considered the argument of the assessee that BPO and KPO had to be distinguished. According to him, Acropetal Technologies Ltd, was giving engineering design services and the assessee was rendering insurance support services. Though these s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... design services, which was considered as high-end, by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company. 24. Considering all these, we are constrained to take a view that engineering design services segment of M/s. Acropetal Technologies Ltd, (seg), cannot be considered as a proper comparable for the TP study of the assessee. 8.3.2 Taking into consideration the facts and circumstances of the case and respectfully following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra), we hold that the engineering design services segment of Acropetal Technologies Ltd., is functionally different and hence cannot be considered as a good comparable to the assessee in the case on hand who is providing only ITES services to its AE s. The AO/TPO are, therefore, directed to exclude this company from the list of comparables in the case on hand. 9. CRA online ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany called itself a knowledge process outsourcing provider would not mean it was giving any such high-end services. As per the ld. DR nature of activities of ICRA Online Ltd, compared favourably with that of the assessee. 27. We have heard the rival contentions. What the assessee has been doing is reproduced by us at para three above. What ICRA Online Ltd, was doing as it appears in its annual report for the relevant financial year is reproduced hereunder : Knowledge Process Outsourcing and Online Software ICRA Online Limited (ICRON) is a wholly-owned subsidiary of ICRA Limited. ICRGN was incorporated in January 1999 and has over the period since then established itself as on independent and credible source of authentic information, software end outsourcing solutions provider. ICRON caters For some of the biggest names in the financial services sector in India and barcode, which is a testimony to its product quality, commitment and credibility. ICRON has two Strategic Business Units (SBUs) with a list of reputed global and domestic clients: The Knowledge Process Outsourcing Division (KPO Divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the aforesaid decision of the coordinate bench of this Tribunal in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra), we hold that this company TCRA Online Pvt., Ltd., (Seg) shall be retained in the list of comparables to the assessee in the case on hand. 9.3.3 In respect of the issue of error in computation of margin raised by the assessee, we find that the TPO has taken the segmental details as provided in the Annual Report of the company for the year under consideration. Whether the depreciation has been considered in the computation of margin, does not appear to have been examined by the TPO/DRP. In this view of the matter, we deem it appropriate to render this issue of margin, computation with reference to depreciation to the file of the TPO for consideration and to adjudicate thereon after affording the assessee adequate opportunity of being heard in the matter. 10. Jeevan Scientific Technology Ltd., (Seg) - ( Jeevan ) 10.1 This company was selected as a comparable to the assessee by the TPO, overruling the objections raised by the assessee. Before us, it is contended that this company Jeevan cannot be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatement at paper book page 725. TPO had considered the revenue as ₹ 2,46,75,000/-. However segmental revenue of the said company, as it appear at paper book page 719 show its earnings from BPO operations is ₹ 71.219 lakhs. Thus TPO had considered the total revenue instead of the segmental revenue. The turnover of the segment which was being compared was less than ₹ 1 crore and by the yardstick applied by the TPO himself, the company ought have been excluded from the list of comparables. Whether the segmental information of the said company given by the assessee at paper book page 719, nevertheless requires a verification. We therefore set aside the comparability of Jeevan Scientific Technologies Ltd, (seg), back to the file of the AO / TPO for consideration afresh. In case the earning of the said company from its BPO operations is less than ₹ 1 crore it has to be excluded from the list of comparables. 10.3.2 Respectfully following the aforesaid decision of the coordinate bench in the case of Swiss Re Shared Services (India) (P.) Ltd. (supra), we restore the issue of examination of the comparability of this company, Jeevan to the file of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. iGate Global Solutions Ltd., ( iGate ) 12.1 This company was included as a comparable by the TPO overruling the objections of the assessee. Before us, it was contended that this company iGate should be excluded from the list of comparable as it is functionally different from the assessee, as apart from ITES it is also engaged in software development services, contract services etc. and further its segmental details are not available. In support of the assessee s contentions, the ld AR referred to page 48 of the Annual Report of iGate placed at pages 1526-1725 of paper book III), wherein it has been mentioned under the head Identification of Segments that the company is engaged in the business of software development and services, contract center services and IT Enabled Services which together are considered as the only business segment. The ld AR contends that the above statement evidences that this company iGate is in the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 components. They are the profit margin on account of operating profit and profit margin on account of cost of capital recovered. Therefore, when the arithmetical average of net profit margins computed in the case of uncontrolled comparables is considered as arm s length profit margin in transfer pricing that arise from operating business, then the average cost of capital computed in the case of uncontrolled comparables should also be considered as arm s length price of the cost of capital in transfer pricing exercise. Accordingly, the average cost of capital computed in the case of the uncontrolled comparables should be an upper cap for the purpose of allowing working capital adjustment. 26. It was submitted that the TPO in the order has advocated limiting the working capital adjustment contending that the adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iny 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 when the statute does not impose such an obligation it is necessary for the quasi-judicial authorities to record reason as it is only visible safeguard against possible injustice and arbitrariness and affords protection to the person adversely affected. Reasons are the links between the material on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject matter for a decision, whether it is purely administrative or quasi-judicial. They should reveal rational nexus between the facts considered and the conclusion reached Only in this way can opinions or decisions recorded be shown to be manifestly just and reasonable. 29. In view of the decision in the case of Dresser-Rand India Pvt. Ltd. (supra) rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rability 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 ₹ 26,08,13,330/-. A further adjustment of ₹ 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 applying residual PSM based on FAR analysis following the approach of the TPO and DRP in earlier asst. years. The DRP confirmed the order of the TPO, by relying on its own orders for the earlier asst. years. These TP adjustments were incorporated by the AO in the final order of assessment for asst. year 2011-12 and the assessee is in appeal before us in this regard. 14.3.1 At the outset, it is relevant to mention that in the case on hand, the facts and circumstances and the basis on which the addition was made in the year under consideration i.e; asst. year 2011-12, are identical to the facts and circumstances and basis on which the addition was made in the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufactured 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/Bang/2015 Nordisk A/S. Further the crystals and excepients shall be used solely for the manufacture of human monocomponent and highly purified insulin in 40 IU vials with the know-how and trade mark sub-licensed by Novo Nordisk India. Additionally, the insulin shall be sold only to Novo Nordisk India. 4.3.29 In the light of the above, Novo Nordisk India has entered into, a insulin. formulations supply agreement dated January 04, 2000, which were amended from time to time vide extension agreement with Torrent, whereby it agrees to buy the confirmed quantity of insulin, prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 about the disease and its control, drug therapy etc. The medical team handles customer complaint and undertakes Market Research so as to collate data and to provide assistance to customers in coping with the disease and administering the drug. This data is used as a database and feedback generated allows to understand the acceptability of the product and its effects on the patients. Necessary corrective actions are taken especially if such complaints are related to quality control reasons and ample monitoring is done both by Novo Nordisk India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the, know how i.e., formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment, specification, specifications of raw materials and utilities and all other technical information and data, whether patented or not, accumulated techniques, experience and skill owned or possessed or acquired (referred to as Novo Nordisk know-how) to produce Novo Nordisk products i.e., products listed in appendix-1 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em 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 Assessee. These are the agreements set out in sl. No. 1 to 3 of the various agreements. These are referred to in appendix 5 to this agreement. Clause 2.5 of the agreement provides that appendices to the agreement form part of this agreement, i.e., Insulin Crystals and Excepients Bulk Supply Agreement dated 15.2.1994. The agreement provides for several restrictions with regard to maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings. 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 DRP confirmed the order of the AO. Hence grounds, No. 39 to 47 by the Assessee before the Tribunal 17. At the time of hearing it was agreed by the parties before us that the facts and circumstances and the basis on which the addition was made in the present assessment year is identical to the facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising 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 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 trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eading 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, two or more enterprises once determined to be associated enterprises remain so for the entire financial year. Their relationship will not change for different transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 provisions, of Chapter X are therefore not attracted. b. That transfer pricing provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for long-term insulin formulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on entered 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 Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture 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., it lays down that at least one party to the transaction should be a non-resident. There exists no agreement between the Assessee and Novo Nordisk A/S and therefore the provisions of Sec.92(1) of the Act are not attracted. He also submitted that reference to Facilitation Agreement in the order of the DRP is perverse as the said agreements do not relate to the period relevant to AY 09- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 overlooks the overall arrangement between the Assessee and Novo Nordisk A/S as evidenced by the various agreements entered into between the parties. 64. 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 all in the year 1994 but the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Agreement for quality control testing dated 1-4-1997: This agreement is between Novo Nordisk A/S and the Assessee. Novo Nordisk A/S under this agreement undertakes to do quality control testing for 40 iu insulin manufactured by TPL pursuant to Formulations supply Agreement dated 1-3-1994. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 substance of all the agreements is the supply of raw material by Novo Nordisk A/S to Assessee to enable it to manufacture Mono component and Highly Purified Insulin in 40 IU Vials and sell it in India. It is a concerted action or arrangement which is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 down in Sec.92(1) of the Act. The conditions laid down in Sec.92B(1) of the Act are satisfied and there is no necessity in our view to look to the provisions of Sec.92B(2) or Sec.92A(2) of the Act, though the reasons given by the DRP in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 the transaction of sale of imported products directly from Novo Nordisk A/S said to be interlinked or closely linked? In our view the two transactions have no connection whatsoev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive. 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 the present asst. year 2011-12 are decided in accordance with the findings, rendered by the coordinate bench in asst. year 2010-11 (Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 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 ₹ 160,53,25,687 which was the purchase value of the insulin purchased by the Assessee from TPL, invoking the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 192, being 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Sec.40(a)(ia) were introduced. Keeping in view the purpose behind the proviso inserted by the Finance Act, 2012 in section 40(a)(ia) of the Act, 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 ₹ 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 delet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPL , the AO considered the transaction to be works contract . While adjudicating the TP adjustment with respect to this transaction, the coordinate bench of this Tribunal in its order for asst. year 200.9-10 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34D of the Act while giving effect to this order. 17. Ground No.46 17.1 In this ground the assessee has challenged the initiation of penalty proceedings u/s. 271(l)(c) of the Act. In our view, since we find that no grievance is caused to the assessee by mere initiation of penalty proceedings, 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 ₹ 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee samples to doctors. ) 21.1.3 The above referred observation of the Hon ble Apex Court (supra) has been interpreted in some decisions of the Tribunals/to mean that free samples given for products that are getting launched in the market and once the product is established then such free samples are not allowable as business expenditure. Further, we also notice that in the case law relied upon by the assessee, the expenditure has been allowed as business expenditure essentially because the issue was decided in favour of the assessee 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 allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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