TMI Blog2017 (6) TMI 1323X X X X Extracts X X X X X X X X Extracts X X X X ..... shares is delayed and in books share application money is reflected as advance for share application money till the allotment would not alter the characterization to the prejudice of assessee's position anyway. In our considered view, the percentage of ownership is the only material factor which remains at 100% prior to allotment and also post allotment. As the assessee is the only shareholder in it's 100% owned subsidiary company SPG BVI it should not make any difference merely because part of the share application money is converted into equity shares and the balance were allotted in subsequent assessment years. We, therefore, do not find any merit in the submissions of revenue in this behalf. As relying on STERLING OIL RESOURCES (P.) LTD [ 2016 (4) TMI 163 - ITAT MUMBAI] direct the A.O. to delete the addition - Decided in favour of assessee. Addition on account of interest on Optional Fully Convertible Debentures (OFGD) subscribed to in Sun Pharma Global Inc. - HELD THAT:- As decided in own case CIT (A) while deleting the addition has noted that as per the agreement, the interest was payable only if the conversion option was not exercised on the expiry of 5 year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a one-sided method would not be appropriate. PSM may also found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions to the transaction - Considering the functions performed by the appellant company to SPG BVI, it is clear that SPIL has performed only one simple function and that is manufacturing of Pantoprazole Tablets. Except for this, there is no significant unique contribution by SPIL. For such simple functions as per OECD guidelines for transaction profit split method typically would not be appropriate of the functional analysis of that party. By the order of the Hon'ble High Court Innovative Research and Development /division of the appellant company was demerged and given to Sun Pharma Advance Research company (SPARC) subsequently SPARC transferred ANDA rights to SPG BVI. SPG BVI has been entered into an agreement with the appellant company SPIL for the manufacturing of Pantoprazole. Pursuant to this agreement assessee manufactured Pantoprazole and sold the same to Caraco Ltd on the directions of SPG BVI. On such sale transaction, the appellant company had shown a net margin of 21.57% benchmark the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt is credited to the Profit and Loss account and Section 10(2A) defines such income as the share of profit of a partner from the partnership firm, the language is clear and unambiguous and needs no other insertion or deletion. The remuneration to partner may have the colour of appropriation of profit of a partnership firm as held by the Hon'ble Supreme Court and Hon'ble High Courts in various decisions relied upon by the ld. Senior Counsel but as mentioned elsewhere, Section 115JB is a complete code in itself. Therefore, if the remuneration is credited by the appellant company in its Profit and Loss account then the same could be reduced it specifically provided under the Explanation to Section 115JB of the Act which we find missing from the relevant provisions. We, therefore, do not find any merit in this claim of the assessee. Addition of expense disallowed u/s, 14A for computing book profit u/s. 115JB - HELD THAT:- we direct the A.O. to delete the addition of expense disallowed u/s. 14A for computing book profit u/s. 115JB of the Act. Addition u/s 40A - HELD THAT:- Provisions of section 40A(2) are applicable only in respect of payments made to related parties m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law. Therefore, no interference is called for addition to the extent of ₹ 10,17,500/- is confirmed, Ground No.15 is dismissed. Payment to Nile Ltd. is concerned, we find that the First Appellate Authority has given a categorical finding after verifying the purchase order that this item has replaced damaged bottom body which is also supported by the Excise Challah. Such categorical finding cannot be brushed aside lightly. We, therefore, do not find any error or infirmity in the findings of the First Appellate Authority. Items purchased for effluent treatment systems - First Appellate Authority have given a categorical finding that the effluent treatment systems after regular intervals requires maintenance and upgradation and the expenditure incurred during the year is on existing machines and did not bring into existence any new asset or added advantage to the assessee. As this factual finding has not been controverted before us, we do not find any reason to interfere with the findings of the First Appellate Authority. Disallowance of provision for leave encashment u/s 43B - HELD THAT:- Restore the issue to the files of the A.O. with a direction to decide the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A)-IV, Ahmedabad dated l4.10.2014 pertaining to A.Y. 2008-09. 2. Both these appeals were heard together and are disposed of by this common order for the sake of convenience. 3. Ld. Senior Counsel Shri S.N. Soparkar argued for the assessee along with S. Parin Shah Vartik Choksi and ld. Special Counsel Shri G.C. Shrivastava assisted by Shri A K Kale (ACIT) represented the revenue. 4. Rival submissions were heard at length and with the assistance of the ld. Representatives of both sides, we have considered the relevant documentary evidence in the light of Rule 18(6) of the ITAT Rules. The assessee is a Pharma Company engaged in manufacturing of bulk drugs as well as formulation products. The manufacturing work is done at its various factories located at silvasa, Ankleshwar, Panoli, Halol, Ahmednagar, Kanchipuram and Karkhadi [Padra]. The assessee had submitted Form No. 3CEB [Report u/s. 92E relating to International Transactions. Reference thereof was made to the TPO and the A.O. framed the assessment order u/s. 143(3) of the Act on the basis of the order passed by the Transfer Pricing Officer u/s. 92CA(3) Of the Act vide order dated 28.10.2011. We will first take u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd reiterated that it had advanced the impugned amount as share application money only specifically towards subscription of shares in its associated enterprise Sun Pharma Global Inc, the amount was paid in tranches though the allotment was made only when the entire amount was remitted i.e. on 25.09.2007. The assessee objected to the rate of interest charged by the TPO while calculating the interest addition. Though the TPO has stated in the order that LIBOR rate + 200 BPS is adopted as arm's length rate in respect of loan advance to SPG but has in fact applied LIBOR + 4%. The submissions/contentions of the assessee did not find any favour with the ld. CIT (A) who confirmed the upward adjustment made by the AO/TPO. 11. Before us, the ld. Senior Counsel reiterated what has been stated before the lower authorities. 12. Ld. G.C. Shrivastava contends that relevant provisions of the Indian Companies Act provide for charging of interest if the company is unable to allot shares within a period of 60 days from the receipt of application money if such amount is not to repaid within 15 days from the end of the period of 60 days. The Bench on this issue raised a query that Sun Pharma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100% subsidiary of the appellant company and the appellant company in its capacity as sole owner of the subsidiary my subscribing to share capital is beneficiary of all the gains of the subsidiary company. Merely, because allotment of shares is delayed and in books share application money is reflected as advance for share application money till the allotment would not alter the characterization to the prejudice of assessee's position anyway. In our considered view, the percentage of ownership is the only material factor which remains at 100% prior to allotment and also post allotment. As the assessee is the only shareholder in it's 100% owned subsidiary company SPG BVI it should not make any difference merely because part of the share application money is converted into equity shares and the balance were allotted in subsequent assessment years. We, therefore, do not find any merit in the submissions of revenue in this behalf. This proposition, is reinforced by the decision of the Co-ordinate Bench in the case of ITO v. Sterling Oil Resources (P.) Ltd. [2016] 67 taxmann.com 2 (Mum-Trib). The relevant part reads as under:- 9. There is one more aspect of the matter. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any and the face value of shares does not affect the actual benefits of the assessee, the percentage of ownership is the only material factor- which remains at 100% pre new allotment as also post new allotment. In the case of CH v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi). Hon'ble Delhi High Court has, though in a very different context and which is materially different from a situation in which the payment is made for subscription of share capital- as in this case, held that re-characterization of a transaction is possible in only two situations - i.e. (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements mode in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The assessee has behaved in a commercially rational manner inasmuch as whether the new shares are allotted at x point of time or y point of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Dy. CIT v. Cadila Healthcare Ltd. [2013] 39 taxmann.com 51/[2014] 146 ITD 502 (Ahd. - Trib.) without appreciating the fact that in that case, the assessee has produced comparable data to show that independent parties had entered into agreements with similar terms (benefits) and not charged any interest thereon whereas in the case in hand, the assessee has not produced comparable data to justify that OFCDs were issued at arm's length price. It is strongly contended that since these facts have not been brought on record, therefore, the Bench should not follow its earlier decision. 20. Shri Soparkar ld. senior counsel replying to the submissions of revenue stated that the decision of the Hon'ble Supreme Court in the case of Sahara India Real Estate (supra) relied upon by the learned DR is not applicable to the issue before the Hon'ble ITAT. Even if it is held that OFCD is a hybrid instrument as laid down by the Supreme Court, in applying the Transfer pricing Provisions, the entire instrument has to be considered and the same cannot be re-characterized partly as loan and partly as equity so as to enable any transfer pricing adjustment for the same. In this regard, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , when the same is that of a coordinate Bench, or of a larger Bench. It is also correct to state that, even if a particular issue has not been agitated earlier, or a particular argument was advanced, but was not considered, the said judgment does not lose its binding effect, provided that the point with reference to which an argument is subsequently advanced, has actually been decided. The decision therefore would not lose its authority, merely because it was badly argued, inadequately considered or fallaciously reasoned . The case must be considered taking note of the ratio decidendi of the same i.e. the general reasons, or the general grounds upon which the decision of the court is based, or on the test or abstract, of the specific peculiarities of the particular case, which finally gives rise to the decision. (Vide Somawanti v. State of Punjab, Ballabhadas Mathurdas Lakhani v. Municipal Committee, Matkapui, Ambika Prasad Mishra v. State of U.P and Director of Settlements v. M.R. Apparao.) 24. The Hon'ble Jurisdictional High Court of Gujarat in the case of Dy. CIT v. Core Healthcare Ltd. [2001] 251 ITR 61 has observed as under:- As laid down by the apex court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to Optionally Convertible Loan of U.S. $ 27 Million issued by Zydus International Pvt. Ltd., Ireland. Accordingly reference under Section 92CA of the Act for computing of arms length price in relation to the transaction was made to Transfer Pricing Officer (TPO). TPO noted that the Assessee had entered into an agreement with Zydus International Pvt. Ltd. on 09.10.2007 for a convertible loan of U.S $ 27 Million which was subsequently utilized by the Ireland Company for acquiring shares in Zydus Healthcare, Brazil. As per the terms of agreement, no interest was payable if the amount was converted into equity. However, if the same is redeemed, interest was payable at Libor Plus 290 bps and the interest was to be computed at annual rates and payable at maturity that is 5 years from the date of first disbursement. The rupee value of the amount of loan as on 31.03.2008 was ₹ 108.32 crore. It was also noticed that Assessee has not shown any income from the aforesaid loan. In response, Assessee inter alia submitted that Assessee had not opted for conversion of the loan during the year and therefore it was loan for the year and as per the terms of agreement, no interest accrued to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in to any proposition so as to convince us to take any divergence from earlier findings and the judicial discipline also guides us to follow the decision of the Co-ordinate Bench in the light of the ratio laid down by the Hon'ble Supreme Court and the Hon'ble Jurisdictional High Court of Gujarat (supra) and considering the fact that the OFCD were on beneficial terms as per facts mentioned above. Consequently, we have no hesitation to follow earlier judgment in assessee's own case as a result we delete the impugned additions. Ground No. 3 of assessee is allowed 27. Ground No. 4 relates to the addition on account of Corporate Guarantee provided to associated enterprises Sun Pharmaceutical Bangladesh Ltd. amounting to ₹ 23,88,000/-, 28. Facts in issue are that the assessee had given Corporate Guarantee to bank on behalf of its AEs. The TPO found that the assessee had not charged any commission/fee from its AE for extending such guarantee. TPO made an adjustment of corporate guarantee commission @ 2% on to total amount of guarantee extended for the benefit of AE. This adjustment was confirmed by the first Appellate Authority. 29. Before us, the ld. Senior C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of law in Tax Appeal No. 567 of 2016. In our considered opinion, when a superior court is seized with a substantial question of law on this very issue, it would be improper for a lower forum to constitute to a Special Bench to decide the same issue. Since the bench has only directed that Hon'ble High Court's decision is to be applied, there is no prejudice to the Revenue. 33. Following our own findings given in A.Y. 2007-08 in ITA Nos. 2076 2067/Ahd/2013, we set aside this issue to the file of the ld. CIT (A) (to avoid any issue of limitation to give effect to ITAT order as apprehended by ld. CR) with a direction that this issue may be decided in accordance with Hon'ble Jurisdictional High Court of Gujarat and after giving adequate of hearing to the assessee. Ground No. 4 is accordingly treated as allowed for statistical purpose. 34. Ground No. 5 relates to the addition on account of Sale of Pantoprazole to Sun Pharma Global amounting to ₹ 612,03,79,468/-. 35. During the course of the Transfer Pricing proceedings, it came to the notice of the TPO that the assessee (SPIL) has sold medicine called Pantoprazole Tablets, manufactured at its US FDA plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reby SPIL is to manufacture the said product on behalf of SPG BVI and the said manufacturing was carried out on a Job Work basis. This was also in support of the FAR analysis. Insofar as the assets employed by the assessee, it was mentioned that for carrying out the said manufacturing work the assets that are employed by the assessee is the US FDA Plant facility to manufacture the said product. It was strongly contended that no risk are borne by the assessee since it works on a contract basis and the IPRs are owned by the AE and the AE has to bear all the risks. 41. Insofar as the FAR analysis for the AE is concerned, the functions carried out by the AE relate to the co-ordination with the various job workers to procure the goods and supplying of the same in US and other markets. The ANDA is owned by the AE, the technology to manufacture the product is also owned by the AE. Since, the owner of the IPRs is the AE; the substantial risks related to the product are borne by the AE. The risks borne by the AE are as follows- (a) Litigation risks (b) Chargebacks (c) Self Stock Adjustments (d) Product Returns and Other Allowances (e) Infringement issues 42. It was brou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent claim was paid by the AE pursuant to the Settlement Agreement dated 11.06.2013, the assessee conclusively claimed that the infringement risk which is the largest risk in Para IV product is borne by SPG BVI/SPG FZE who is the IP owner. These facts are not disputed and all the litigation documents are on the record. 44. In support of its ALP working, the assessee brought to the notice of the FAA the following distinct facts relating to the sales of Pantoprazole made by the AE and the ultimate profit earned by it and the sale of the same product made by the assessee and the ultimate profit earned by it:- Particulars A.Y. 08-09 A.Y. 09-10 A.Y. 10-11 Total USD(Mio.) USD(Mio.) USD(Mio) USD(Mio) Gross Sales 420.00 93.12 248.87 761.99 Less: Returns, Chargebacks etc. 160.00 53.75 122.38 336.13 Net Sales 260.00 39.37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08-09 A.Y. 09-10 A.Y. 10-11 Gross Sales 420.00 93.12 248.87 Less: Returns, Chargebacks, etc. 160.00 53.75 122.38 Net Sales 260.00 39.37 126.49 Less: Other expenses 10.54 9.73 26.03 Profitability 249.46 29.64 100.46 Total Profitability 379.56 Infringement Claim 506 Mn USD Net Prof it/(Loss) (126.44) Since the entire profitability is wiped off, there is nil profit to he attributed to the entities on account of profit split method. In view of this there ought to be no addition on account of profit split method on sale of Pgntoprazole by the Assessee. 45. After considering the facts and the submissions along with the related documentary evidences, ld. CIT (A) observed as under:- 7.9.1.1 In order to decide whether appellant is 'contract manufacturer' and whether TNMM can be applied, the copies of agreements entered into by the appellant with SPG BVI dtd. 10-11-2007 and with Lilly dtd. 01-04-2005 were collected, thoroughly examined and compared during appeal proceedings. A comparable study of the two is as below: (i) Tine main clause of both the agreements are: SPG - SPIL hereby agrees to sell and supply the Products to SPGI and S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Interest is available in the agreement with SPG. (v) There is a specific clause 2(2.2) and Appendix-E specifying technical, assistance to be provided by Lilly but no such technical agreement is available in the agreement with SPG. (vi) As per clause 3(3.5.3) SPIL shall not use the material provided by Lilly for any other purpose. Again no such clause is available in the agreement with SPG. (vii) As per clause 3(3.7) Lilly should provide 'C Form' within 6 months from the end of each F.Y. or an equivalent deposit is to be provided by Lilly. Again no such clause is available in the agreement with SPG. (viii) As per clause 3(3.14.8) Lilly is supposed to make the payment within 15 days and as against this SPG has been given 45 days for payment. (ix) As per clause 3(3.14.8) in case of delay in shipment, Lilly would reimburse the internal cost of carrying inventory with interest at 12%. No such financial clauses making another party responsible for timely payment, timely removals of goods are available in the agreement with SPG. (x) The agreement with Lilly has 4 Appendix. In Appendix-A the manufacturing activity has been clearly defined as comprising formulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions are needed. In its submissions, even appellant has admitted that it is difficult to find a comparable uncontrolled transaction of the similar nature. The appellant is in Pharma sector involving complicated issues like research and development, patents etc. where valuation of business transaction is highly technical with no commonality. Where there is no or limited publicly available reliable gross margin information on third parties, traditional transaction methods might be difficult to apply and a transactional profit Method might be the most appropriate method. The only method which do not require a comparable uncontrolled transaction is 'Profit Split Method (PSM)' prescribed in Rule 10B(1)(d). 7.9.2.1 This method is applied mainly to international transactions involving transfer of unique intangibles. As discussed in this order at appropriate places, the technology to manufacture Pantoprazole Sodium was originally developed by appellant and was subsequently transferred to SPG indirectly. Therefore, the relevant international transactions involve transfer of unique intangibles: A transactional profit split method may be the most appropriate method in cases where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this; the assessee is before us. The ld. Senior Counsel Shri S.N. Soparkar explained the entire factual matrix as to what prompted the assessee to manufacture the drug Pantoprazole Tablets for and on behalf of SPG BVI. It is the say of the ld. It is vehemently contended that the assessee has done no other work then manufacturing of the said drug as per the agreement between the assessee and SPG BVI. Lower authorities have grossly erred in not appreciating the facts in correct perspective as nowhere it is disputed that ownership of IPRs/ANDA rights remained with SPG BVI. Once the ownership has been accepted with SPG BVI, the assessee cannot be alleged to be in complex function FAR with AE with such propensity that respective functions could not be segregated and therefore Profits Spilt Method should be adopted qua the sales made through Caraco Ltd. more so when SPG BVI had a separate agreement with Caraco Ltd. for the supply of drugs in various markets. 50. Ld. Counsel for the assessee adverted to the facts about TP adjustments carried out by TPO/AO and as enhanced by ld. CIT (A) in the written synopsis which is placed on record. 51. In the A.Y. in question assessee transacte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been done on the following basis. Comparable Uncontrolled Price Method (CUP): SPIL does not have any major exports of any pharmaceuticals products to the regulated markets of US apart from those made to Caraco. The products, which are sold to other customers in other countries as well cannot be considered as a comparable having regards to the geographical diversity. Therefore, internal CUP, though available in certain cases cannot be considered. Resale Price Method: This method is most appropriate for purchase of goods from related parties and resale of the same to unrelated parties without substantial value addition, this not being in the case of SPIL, this method is not applicable. Cost Plus Method: This method is particularly useful where semi finished goods are sold between associates or where there are long term buying and selling arrangements or in the case of provision of services or contract manufacturing. None of the above circumstances exist in the case of exports to Caraco hence the method cannot be applied to the present case. Profit Split Method: This method applies in cases where there are significant interlaced/multifold operations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Orchid Chemical Chemicals and Pharmaceuticals Ltd. 82 Krebs Biochemicals and Industries 12 Wockhardt Ltd. 83 Makers Laboratories Ltd. 13 Ipca Laboratories 84 Ahlcon Parenterals India Ltd. 14 Divi's Laboratories 85 Kopran Ltd. 15 Torrent Pharmaceuticals Ltd. 86 Caplin Point Laboratories 16 Alembic Ltd. 87 Pharmaceuticals Ltd. 17 Matrix Laboratories 88 Sun Pharma Advanced Research Company Ltd. 18 Sterling Biotech Ltd. 89 Coral Laboratories Ltd. 19 Aventis Pharma Ltd. 90 Hester Biosciences Ltd. 20 Biocon Ltd. 91 Tonira Pharma Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41 Twilight Li-taka Pharma Ltd. 112 Shamrock Industrial Co. Ltd. 42 Ajanta Pharma Ltd. 113 Ortin Laboratories Ltd. 43 Indoco Remedies Ltd. 114 Gennex Laboratories Ltd. 44 Dabur Pharma Ltd. 115 DIL Ltd. 45 Natco Pharrna Ltd. 116 Advik Laboratories Ltd. 46 Marksans Pharma Ltd. 117 Zyden Gentec Ltd. 47 Themis Medicare Ltd. 118 Nutraplus Products Ltd. 48 Neuland Laboratories Ltd. 119 Beryl Drugs Ltd. 49 Venus Remedies Ltd. 120 Shaba Chemicals Ltd. 50 Parenteral Drugs (India) Ltd. 121 Colinz Laboratories Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lpa Medicare Ltd. 141 Brabourne Enterprises Ltd. - Step 2: Selection of Comparable Pharmaceutical Companies: In the current period, the turnover of SPIL was approximately ₹ 2427 crores. Accordingly, companies having sales in the range of ₹ 1214 crores to ₹ 3640 crores i.e. 50% plus/ minus sales of SPIL are considered to be comparable. On the above basis, the following eight companies, including SPIL were identified: Sr. No. Company Name Sales (Rs. Cr.) 1 Aurobindo Pharma Ltd. 2351.12 2 Cadila Healthcare Ltd. 1719.10 3 Dr. Reddy's Laboratories Limited 3449.70 4 GlaxoSmithKline Pharma Ltd. 1751.56 5 Lupin Ltd. 2609.86 6 Orchid Chemicals Pharmaceuticals Ltd. 1250.18 7 Piramal Healthcare Limited 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .S.A 46954.08 Sun Pharmaceutical Ltd., Brazil 276.22 Sun Pharmaceuticals Industries Inc., 18.57 In sales transactions, the general functions performed, assets deployed and risks assumed are similar irrespective of the AE to whom the sales are made. Rather the FAR analysis would be based on the ownership of the Intellectual Property Rights (IPRs) of product sold to the AE. Accordingly the FAR analysis has been carried under the following broad heads: - Sale of formulation products whose IPR are owned by SPIL - Sale of formulation products whose IPR are owned by Associated Enterprise - Sale of bulk products whose IPR are owned by SPIL FORMULATIONS-IPR OWNED BY SPIL Description of Functions SPIL Associated Enterprise Purchase Function - Receives raw materials ordered and handles administration, if any - Material Management Yes Yes Manufacturing Function - Setting up of quality standards - Implem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Credit Risk of Customers - Risk of non-payment of dues by customers to whom, credit has been extended Yes Service Level Quality risk - Risk of delivering quality product Yes Yes Working Capital Risk - Risk of financing the working, capital Yes Yes Foreign Currency Risk - Risk of fluctuation in earnings due to fluctuations in currency conversion rates Yes Yes Market Risk - Risk of uncertainty in business volumes Yes Yes Technology Risk - Risk of technology/obsolescence Yes Human Capital Risk - Risk of appropriately trained human skill sets Yes Yes Inventory Obsolescence Risk - Risk of obsoleteness of acquired' inventory Yes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and and office building - Moveable assets Yes Yes Yes Yes Yes Intangibles - Brandname - Trademarks - Patents - Technical know-how - Distributor network in foreign country Yes Yes Yes Yes Yes Description of Risks SPIL Associated Enterprise Credit Risk of Customers - Risk of non-payment of dues by customers to whom credit has been extended Yes Service Level Quality risk - Risk of delivering quality product Yes Yes Working Capital Risk - Risk of financing the working capital Yes Yes Foreign Currency Risk - Risk of fluctuation in earnings due to fluctuations in currency conversion rates Yes Yes Market Risk - Risk of uncertainty i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Trademarks - Patents - Technical know-how Yes Yes Yes Yes Description of Risks SPIL Associated Enterprise Service Level Quality risk - Risk of delivering quality product Yes Yes Working Capital Risk - Risk of financing the working capital Yes Yes Foreign Currency Risk - Risk of fluctuation in earnings due to fluctuations in currency conversion rates Yes Yes Market Risk - Risk of uncertainty in business volumes Yes Yes Human Capital Risk - Risk of appropriately trained human skill sets Yes Yes Inventory Obsolescence Risk - Risk of obsoleteness of acquired inventory Yes Yes Research and Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the product are borne by the AE - The risks borne by the AE are as follows: Litigation risks Chargebacks Shelf Stock Adjustments Product Returns and Other Allowances Infringement issues In the case present case since the product is a para IV product the same is subjected to huge litigations. The expenses that can arise out of the litigations are as follows:- ■ Lost profits due to diminished sales because of infringement of patents ■ Lost profits due to the necessity of having to reduce price to compete With the infringing party ■ Lost profits due to overall reduction in business attributable to the need to divert resources because of infringement ■ Lost future profits due to depressed prices that cannot now again be raised ■ Projected Lost profits for future competition with infringer because infringer established a market position The details description about the risks is placed on record. From the above FAR it is evident that the SPIL is just a contract manufacturer of the said product whereas the major IPR owner and the bearer of the substantial risks is SPG BVI. The evidences submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted amongst the AE and the Assessee as evident from the FAR Analysis mentioned above. 4. Thus the fact stiff remains that the owner of the IPRs is the AE and not the Assessee and hence the primary risks pertaining to the IPRs shall be that of the owner of the IPRs i.e. the AE. 5. In the show cause notice at para 4.4 it has been stated that the Annual report of Caraco refers about the said agreement without any reference to SPG. On the contrary if one refers to page 1 of the Annual Report of Caraco it very clearly mentions that Caraco distributes products manufactured by both, SPIL and SPG BVI- Annexure-12 . 6. Even before this Agreement was entered into between SPIL and Caraco the AE had already initiated supply of Pantoprazole in 2007 itself. In the above background the Agreement was entered into to formalize the relationship for supply and distribution of Para IV products by the Sun Pharma Group covering all Sun Group entities including the AE. 7. It will not be out of place to mention that the Assessee has also made sales of a Para IV product - Oxcarbazepine (of which the Assessee is the owner) to its: US based AE- Caraco in 2007-08. On the said sales the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s earned by the AE. - The suits of infringement have been filed on the AE by Wyeth and Nycomed who have sought damages in the form of loss of profits, including damages for price erosion from the AE. The District Court of New Jersey in the United States of America has upheld the appeal of Wyeth and Nycomed and has given the verdict against the defendants including SPG. Due to this Sun cannot sell pantoprazole tablets and it has to pay to Wyeth and Nycomed its claim. The order of the US Court has been enclosed as per Annexure - 14 . This further substantiates that the AE being the owner of the IPR has had to bear the risk of litigation. - In view of the substantial assets being employed by the AE and substantial risks being borne by the AE, it is entitled to a higher share of profits. This is of the principle that - Higher the risks, Higher the rewards. Also the said Para IV drug was under the exclusivity period whereby the product commands the monopoly which a patented product demands and hence the owner of the IPR enjoys the right to charge a higher price for the said product. Once the said exclusivity period expires the price has to be reduced. Thus the overall profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparable to the terms of sales with the AE. The Assessee has earned the profit margins of 13% on the sales made to the Eli Lilly. 52. These submissions did not found any favor from the lower authorities. 53. The Ld Senior counsel concluded by stating that these facts clear demonstrate that assessee's TNMM method and not the PSM as proposed by revenue is the most appropriate method. Assessee being only a contract manufacturer the AE transactions are at an arm's length price. 54. Ld TPO/ AO held that assessee's adoption of TNMM method as most appropriate method was not acceptable and its AE transactions were not performed as contract manufactures. The transactions with AE were complex, integrated and the respective functions could not be distinctly ascertained, therefore, Profit Split Method (PSM) was most appropriate method. On that basis the profit qua Pantoprazole were worked out and allocated between assessee and AE in the ratio of 50% each. 55. Aggrieved by the order of the AO/TPO assessee preferred first appeal before CIT(A), who not only upheld the PSM but proposed to enhance the profit share from 50% each to 80% attributable to assessee and 20% to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is also required to defend the litigation and challenge to the Patent from the Original Patent Holder and again the cost of such litigation and claim by patent holder in countries such as UK, USA is extremely high and substantial. In case the holder/owner of ANDA is unable to defend the suit then it will be required to pay a huge amount of claim on account of infringement/damage which may wipe off the entire profit earned by the holder/owner. 2. Risk Analysis of the intellectual Property i.e. 'AMPA':- (i) In the present case, the owner of the ANDA is the Associated Enterprise ( AE ) of the Appellant - SPG BVI (100% subsidiary of the Appellant). SPG also owns the technology to manufacture Pantoprazole Tablets. Product was a para IV Filing Product. AE, being an owner of Para IV product and the related IPRs, the high profit of the exclusive period is attributable to the AE, The exclusivity period falls in the relevant Assessment Year. However the flip side to the above is that the Para IV filing is prone to huge litigations that can wipe off the entire profits of the entity. A suit had been lodged against the AE also against the Para IV filing. This confirms the basic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tio between the assessee and its AE. 57. The assessee in response to enhancement notice dated 17-9-2014, proposing enhancement contended that: 1. With respect to the enhancement proposed in respect of additions made by the TPO u/s 92CA(3): of the Act the appellant would like to reiterate their submissions made earlier that the ALP determined by the appellant is appropriate and there was no justification to adopt the profit split method in the given case. We would like to further state at the very outset that the CIT (A) does not have the jurisdiction to enhance the adjustments made by the TPO and further we would like to state that: (e) It prima facie appears that the TPO/AO carried out detailed working of the FAR after conclusion of the TP proceedings. This is evident from the fact that the breakup of FAR as it does not form part either of the TP Order as well as the SCN issued by the TPO. Therefore the entire exercise carried out by the TPO is denovo. Therefore what is transpired that the TPO has carried out the entire exercise on directions of your goodself. The appellant objects to the very jurisdiction of the TPO in respect of a concluded case. As discussed above TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technology to manufacture of Pantoprazole Tablets. (b) That SPG has already authorized the Appellant to manufacture and supply these products on Contract basis. (c) That the aforesaid products manufactured by the Appellant Company were sold to its AE i.e. SPG BVI. (d) That SPG had marketed these products in United States which were distributed by Caraco Pharmaceutical laboratories Limited, USA (Caraco). (e) That the appellant had sold goods worth ₹ 1666.93 Lakhs to its AE i.e. SPG for the year ended on 31-3-2008. Of the above, the major sales (Approx. 99%) comprises of sales of Pantoprazole Tablets. (f) That the appellant manufactured the above pharmaceutical products for its AE on Contract Manufacturing basis at its US FDA approved plant. Apart from Pantaprazole the appellant also manufactures and sells products for US Regulated market at its US FDA approved manufacturing plant. (g) That except for manufacturing Of the pharmaceutical products, the appellant does not undertake any of the following functions namely marketing, distribution, credit risk, product litigation liabilities, patent infringement or damage claim risk, bad debts, sales returns, charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty, who drives the business by, identifying the IPRs to be acquired out of numerous IPRs available in the market, acquiring IPRs, absorbing the risk of dropping of ANDAs on account of non-feasibility, and identify the country where it should be marketed. The second party is the One who actually manufactures in an approved plant as per the specifications prescribed by the first party. Third party is the one who markets the products. The FAR is as follows: Description of SPIL SPG Caraco Pharma Remarks Function USA ANDA Ownership YES Copy of US FDA Approval is enclosed Annexure-'B' Co-ordination with' the various Job workers to procure the goods YES Supplying the same in US and other markets YES Manufacturing of Product as per the Specifications provided by the AE on a contract basis Agreement be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore the appellant has correctly characterized itself as a contract manufacturer. Accordingly the appellant has benchmarked its using TNMM as the most appropriate method. Further in order to Substantiate the above method the appellant has also submitted a summary of margins earned by it in its contract with Eli Lilly and Company (India) Pvt. Ltd. wherein it has earned 14.43%. It may also be pointed out that the transaction of manufacturing goods for its AE is comparable with the Elli Lilly where in the Appellant is also doing similar contract manufacturing. Copies of contract with Eli Lilly have already been submitted to you during the course of appellate proceedings. Based on the above analysis of the submissions as well as evidences compiled and submitted to your good self should appreciate the fact that the appellant company is merely a contract manufacturer and accordingly the risks assumed by it are limited to that extent. 60. Your good self has very rightly accepted the fact that Para IV drugs are prone to huge litigation. However your good self has also mentioned that vide the impugned SCN stated that the weightage of 'Functions', Assets' and 'Risk& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand the appellant has earned a margin of 21.57% which is far more than the average profit earned by similar companies. Comparable Companies in Contract Manufacturing in USFDA Plants: DESCRIPTION Emcure Pharma Ltd. Hetero Drugs Ltd. SMS Pharma Ltd. Strides Arcolab Ltd. Year End 200803 200803 200803 200812 No of Months 12 12 12 12 Gross Sales 481.22 848.90 237.43 596.03 Less: Sates Returns Less: Excise Duty 41.82 16.77 0.34 2.89 Net Sales 439.40 832.13 237.09 593.14 Total Expenditure 395.97 702.69 197.73 526.76 Operating Profit (Exce 01) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to the 'Risk' of owning and using IPR of a Para IV drug by observing that the part of the risk relating to litigation and infringement are borne by the appellant company. In this respect it is submitted that the liability Of Infringement Claim was provided and settled by the AE of the appellant company i.e. SPG FZE. The amount payable on account of settlement was also accounted for and paid by the AE of the assesse company out of Its internal accruals and borrowings. The details of payment of infringement claim of USD 506 Mn by SPG are enclosed at Annexure-'G'. Further it was submitted that the appellant group has incurred a loss of USD 124.29 Million on account of settlement of infringement claim. The working is reproduced herewith: Description of Function SPIL India US $ Mn SPG BVI [SPG FZE] US $ Mn Caraco USA US $ Mn Total US $ Mn Approximate Profit earned Wring A.Y. 08-09 to A.Y. 10-11, before liability 2.15 379.56 44.00 425.71 Share of liability on account of infringement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither delete the addition or reduce/ reallocate the profit allocation made to the Appellant and oblige. 66. Ld. CIT (A) was not convinced with the submissions of the assessee and upheld the PSM method adopted by the TPO/AO and enhanced the profit sharing by attributing 80% to assessee and 20% to AE and made the ALP working and TP addition accordingly. 67. Before us the ld. Senior Counsel vehemently stated that TNMM is the most appropriate method on the facts of the case and the same cannot be disturbed at the whims and surmises of the revenue authorities. The ld. Senior Counsel further drew our attention to the settlement agreement dated 11th June, 2013 and pointed out that the litigation between the original patent owner finally culminated in a settlement resulting in an award/settlement of USD 550 million, out of which the AE has incurred and paid claim of 506 million USD in respect of sale of Pantoprazole. It is the say of the ld. Counsel, without prejudice, even in case if the profit spilt method as applied by the TPO/AO is accepted, the deduction of the payment made on account of infringement claim of USD 506 million ought to be allowed so as to arrive at the correct pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of SPG. Sri Shrivastava referred to the relevant clauses of both the agreements to canvas his contention that though with Eli Lily assessee is a contract manufacturer however qua AE SPG BVl agreement, assessee does not fulfil the conditions as a contract manufacturer. 70. Replying to the FAR analysis done by the assessee, it was stated that the entire manufacturing function was carried out by SPIL, in its US FDA approved plant SPG does not have any R D facility, while SPIL has its full fledged R D facility was used for the development of ANDA. No Marketing functions were performed by SPG as it does not have any marketing setup. The Distribution and Marketing agreement between SPIL and Caraco dealt with product marketing, the same does not even mention SPG and no warehouses are available with SPG, therefore, it has no role in inventory management, supply chain management etc. 71. Shri Shrivastava further stated that all marketing, selling and distribution expenses are to be borne by Caraco and not SPG and SPG had no freedom to approach any other manufacturer. He continued by saying that none of the major functions have really been performed by SPG. 72. It is further conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D. That at best SPG BVI was merely a legal owner and did not perform sufficient functions, deploy assets or assume risks A. Regarding Ownership of ANDA 1. Relying on ownership documents compiled in additional evidences filed on 21st April 2017, the learned Counsel for the Department pointed out that SPG BVI/SPG FZE were not the only/ absolute owner of ANDA rights. 2. Sun Pharma Advance Research Centre Ltd. (SPARC 1) was a 100% subsidiary of the Assessee Company and was amalgamated with the Assessee Company with effect from 1.4.2000 as a result of which 52 ANDA rights and obligations were transferred to the Assessee Company being the Amalgamated Company. The said amalgamation has been approved by the Hon'ble High Court. A copy of the order of the High Court approving the amalgamation has been filed at pages 466 to 474 of the Paper Book-Compilation IV. 3. Subsequently, the original patent holder viz. Wyeth Pharmaceutical Inc. and Atlanta Pharma AG filed a complaint for patent infringement. Since the suit had been filed in the financial year 2005-06 when SPIL was the actual owner of ANDA application. Therefore, both SPIL and SPARC 1 were made defendants of the orig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SPG FZE acquired ownership of the ANDA pursuant to the transfer of the entire pharmaceutical business of SPG BVI on 30 November 2008) to the Assessee company, the referenced IPR namely Pantoprazole which was part of the demerged undertaking, was transferred to the Assessee Company. 7. The learned counsel has also raised a question with regard to the extract of the Orange Book submitted during the course of the assessment proceedings and placed on record at pages 569 to 570 of the Paper Book - Compilation IV. It has been alleged that as per the extract of the Orange Book, the ownership of the ANDA is reflected in the name of SPG BVI and the date of ownership is reflected at 10th September, 2007 whereas the transfer of the ANDA to SPG BVI was only made on 28th October, 2007. As per the learned counsel, how could the date of ownership in the name of SPG BVI be 10th September, 2007 when the ANDA itself was acquired by SPG BVI under an agreement dated 28th October, 2007. In this regard, it is clarified that the Orange Book extract gives the ownership of the relevant ANDA as on the date when the search was taken (as reflected at the Bottom of the search report being 28th September 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation risk became a fact when the litigation with Pfizer surfaced. The AE was defending claim of USD 960 million which was substantially higher than the earnings that could be made from this product. The claim by Pfizer was ultimately settled for USD 550 million. (vi) The amount on account of settlement with Pfizer has been paid by the AE of the assessee-company out of its internal accruals and borrowings. (vii) In order to meet the commitment of making payment of settlement charges, SPG FZE raised a loan from Standard Chartered Bank. (viii) The document reflecting payment of infringement settlement claim by SPG FZE to Pfizer from its own bank account was also attached. The claim was eventually discharged on 13 August, 2013. Payment of USD 400 million from the bank account of the AE has already been compiled in paper book at pages 647of compilation IV. (x) The learned Counsel of the Revenue, time and again, pointed out that by way of a subsequent demerger of Therapeutic drug business of SPG FZE into SPIL with effect from 1st May, 2013 the entire liability has been shifted to SPIL thereby, effectively also transferring the aforesaid risks to the assessee-company. This fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE and dispatched to the ultimate distributor who distributed the products in their respective territories. 5. As can be seen that each of these activities are distinct and sequential and there is no overlapping or intertwined activity so as to justify application of PSM. 6. It is also submitted that each of the contract manufacturer and the distributor have received commensurate margins based on the FAR analysis undertaken. The entire residual profit belonged to the AE since it faced significant uncertainty and risks associated with the ongoing litigation. As can be seen from the fact pattern that ultimately the entire risks has devolved upon the AE wiping out its entire profit clearly demonstrates that the profit was clearly linked and attributable to the ownership of the ANDA and attendant risks associated with the commercialization of the product under PARA IV. 7. The learned DR has also highlighted that the distribution agreement entered into with Caraco was by SPIL and various clauses in the agreement were highlighted to bring out the proposition that ultimately it was SPIL which had performed the functions and been party to the distribution agreement. In this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adequately remunerated for the functions performed, assets deployed and risks assumed by each of them. 2. It is submitted that during the assessment proceedings, the assessee-company had furnished the FAR analysis and the tax department has not called for any other supporting for determination of FAR analysis. Hence, the same cannot be contested at the present stage. 75. Having heard the submissions made by the learned representatives of both sides and the averments made by them in their respective written Synopsis, before proceeding further, we must first understand the factual matrix qua the ownership of IPR/ANDA. 76. SPG BVI purchased the Technology to manufacture Pantoprazole Sodium from Sun Pharma Advance Research Company Ltd. (SPARC). SPARC was incorporated on 01.03.2006 as a research company. With effect from 28.02.2007, the appellant company demerged its Innovative Research and Development business to SPARC. This is supported by the order of the Hon'ble High Court of Gujarat exhibited at pages 475 to 518 of the paper book. On 28.10.2007, SPARC sold a basket of 38 Technologies to SPG including ANDA for Pantoprazole Tablet, the consideration of which was USD 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance SPIL agrees to dispatch at the cost of SPGI, the finished Product to SPGI or to its nominees within the time frames stipulated by SPGI from time to time as per the orders placed by SPGI and accepted by SPIL. SPIL further undertakes to supply the product with adequate packing and coverage to ensure that the Product reaches SPGI or its nominee adequately packed and acceptable as per CGMP guidelines. 3.1 SPGI's Technical Assistance, SPGI shall supply on a continuing basis all necessary information relating to the manufacturing of the Products, including, but not limited to product specifications, packaging and labelling practices and processes regarding the production of Products, and such other information as SPGI deems to be reasonable and necessary, From time to time, SPGI at its own expense may send a representative to visit SPIL to provide such technical knowledge as shall be mutually agreed to by SPGI and SPIL 3.2 Intellectual Property Representation: Except for the rights expressly under the terms of the Agreement this Agreement does not transfer any intellectual property rights, specifically with respect to the Products from SPGI to SPIL. SPGI represents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm to the product specifications communicated by SPGI to SPIL. SPGI shall notify SPIL of any non-conforming manufactured Products within sixty days after receipt of Products or within sixty (60) days after any hidden defects are discovered. Any notification or non-conformance under this section shall include proof of non-conformity/defect. SPIL may, at its discretion, have the defective Product tested at any other reputable laboratory and SPGI shall accept the report thereof. In case of a disputed result by such laboratory, the Product will be tested with an independent laboratory reasonably acceptable to both parties whose result shall be binding on both parties. SPIL shall replace all non-attributable to SPIL. SPIL shall also bear reimburse to SPGI the cost of freight and insurance for such non-conforming Products Upon SPIL's instructions, SPGI shall destroy or return to SPIL of SPIL's cost, all non-conforming Finished Products. 4.6.4 SPIL agrees to invoice and dispatch at SPGI's cost and risk, the finished products to SPGI or its nominees as specified by SPGI according to the orders placed by SPGI and instructions given by SPGI and accepted by SPIL. 5.1 SPGI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar to trade names connected with the products as mentioned in Appendix A. 7.1.7 SPIL shall not sub-contract or delegate to any other persons, firm or body corporate the whole or any part of the manufacture, of the Products or assign this Agreement or any part thereof or deal in any manner whatsoever with the rights, benefits or obligations created hereunder without the prior consent in writing by SPGI. 78. Appendix-A of this agreement reads as under:- No. NAME OF THE PRODUCT BULK PRODUCT (Active Ingredient) 1 Pantoprazole Sodium Delayed Release Tablets 20Mg., 40mg. Pantoprazole Sodium 2 Amifostine Inj. 500mg. Amifostine 79. Copy of Orange Book reflected title of ANDA of Pantoprazole Sodium with SPG BVI is exhibited at pages 569 570 of the paper book which conclusively proves that the ANDA rights were with SPG BVI. 80. Adverting to the allegations of ld. Shri Shrivastava that these arrangements by the assessee is a brutal form of tax evasion , the Hon'ble Supreme Court in the case of Vodafone Int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... When it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structures. In the application of a judicial anti-avoidance rule, the. Revenue may invoke the substance over form principle or piercing the corporate veil test only after it is able to establish on the basis of the facts and circumstance surrounding the transaction that the transaction in question is a sham or tax avoidant. (vi) The legal position of any company incorporated abroad is that its powers, functions and responsibilities are governed by the law of its incorporation. Though it may be advantageous for parent and subsidiary companies to work as a group, each subsidiary will look to see whether there are separate commercial interests which should be guarded. Whether the parent company has power over the subsidiary depends on the facts of each case. In the case of multinationals their subsidiaries have a great deal of autonomy in the country concerned except where subsidiaries are created or used as a sham. The directors of the subsidiary under their articles are the managers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... division of profits that independent enterprises would have expected to realise from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to, be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the combined profits ). References to profits should be taken as applying equally to losses. See paragraphs 2.124-2.131 for a discussion of how to measure the profits to be split. It then splits those combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. See paragraphs 2.132 -2.145 for a discussion/6f how to split the combined profits. C. 2 Strengths and weaknesses 2.109 The main strength of the transactional profit split method is that it can offer a solution for highly integrated operations for which a one-sided method would not be appropriate. For example, see the discussion of the appropriateness and application of profit split methods to the global trading of financial instruments between assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mple function and that is manufacturing of Pantoprazole Tablets. Except for this, there is no significant unique contribution by SPIL. For such simple functions as per OECD guidelines for transaction profit split method typically would not be appropriate of the functional analysis of that party. 87. The relevant agreement which is placed on record and has been dealt elsewhere clearly establishes that the appellant company SPIL is nothing but a contract manufacturer of SPG BVI; Now let us examine the relevant provisions of the Act read with Rules. Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C the arm's length price in relation to an international transaction -[or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:- (d) profit split method, which may be applicable mainly in international transactions -[or specified domestic transactions] involving transfer or unique intangibles or in multiple international transactions [or specified domestic transactions] which are so interrelated that they cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; 88. PSM is applicable when the international transaction involved transfer of unique intangibles (in the case in hand there is no such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring and sales of the drug Pantoprazole and ending with the out of court settlement and the payment of settlement compensation of USD 506 million. The settlement is based on the cumulative profits earned by the AE till the date of settlement here is no dispute and it has been accepted by both the lower authorities that after the out of court settlement of the litigation the assessee group has suffered losses which were based on the aggregate of profits earned by the group over all the year. With the settlement based on aggregate of yearly profits then even if the Profit Split Method is applied than the set off of each year losses has to be given for the corresponding year. The undisputed compensation being settled on the base of all yearly profits made by the AE during the exclusivity period PSIV1 cannot be worked by divorcing the business realities. The contention of revenue that it is not concerned with the settlement which is past event is untenable. Even if the PSM is applied the relatable losses which were so apparent by::the time assessment was framed cannot be given a go by on unsustainable revenue stand. In such eventuality even the ALP offered by assesse as a contract manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the denial of weighted deduction u/s. 35(2AB) on trademark charges, overseas product registration charges. 96. An identical issue was considered by the Bench in assessee's own case in ITA Nos. 2076 2067/Ahd/2013 wherein the Bench has followed the findings of the Co-ordinate Bench in ITA No. 1589/Ahd/2011 and the same reads as under:- 34. We find that an identical issue was considered by the Co-ordinate Bench in assessee's own case in ITA No. 1589/Ahd/2011 qua ground No. 3 wherein the Bench has followed its earlier decision in ITA No. 2430/Ahd/2009. The findings thereon read as under:- Ground No. 4 relates to the disallowance of trademark registration and overseas product registration charges u/s. 35(2AB). 11. On perusing the details of R D expenditure, the A.O found that the assessee has claimed weighted deduction @ 150% on- (a) Trademark Registration Charges : 2,42,56,296/- (b) Overseas Product Registration Charges : 2,00,00,508/- 12. The assessee was asked to justify its claim. Assessee filed a detailed reply justifying its claim of weighted deduction. It was explained that the expenditure incurred for product registration although named as Prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35(2AB) on expenses incurred on Corporate Advertisement. 99. The issue is identical to the issues raised vide ground No. 6 (supra). For similar reasons, we direct the A.O. to allow the weighted deduction. Ground No. 7 is allowed. 100. Ground No. 8 relates to the denial of weighted deduction u/s. 35(2AB) on revenue expenditures. 101. Once again, the issues are same as raised vide ground No. 6 herein above. For our detailed discussion therein, we direct accordingly. Ground No. 8 is allowed. 102. Ground No. 9 relates to the claim of deduction of remuneration received from partnership firm for determination of book profit u/s. 115JB. 103. Facts in issue are that the appellant company has claimed to have (received remuneration of ₹ 40.12 crores from partnership firm Sun Pharma Industries (SPI) which was deducted while working out profit u/s, 115JB ofthe Act. It was claimed by the assessee that remuneration was nothing but an appropriation of the profit of the firms which should be deducted by treating the same as part of exempt income to which provision of Section 10 of the Act applies. This contention of the assessee did not find any favour with the A.O. who refus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents. For the purpose of normal computation, the entire computation mechanism and the relevant classifications as provided in the computation machinery are to be given effect to. Therefore, for computation of the book profits u/s. 115JB, the profit and loss as understood under normal commercial and business parlance is required to be considered. It is the say of the ld counsel that all items in the profit and loss account will derive their meaning from an accounting and commercial point of view and not from a tax point of view. The ld. Senior Counsel emphasized on the fact that remuneration is one of the methods of allocation of profits between partners. The ld. counsel concluded by saying that remuneration from partnership firm is covered by Section 10(2A) as referred in Clause (ii) to Explanation to Section 115JB and accordingly ought to be reduced why determining book profits. 109. Per contra, the ld. G.C. Shrivastava for revenue vehemently stated that Section 115JB of the Act is a complete code in itself. Since a specific explanation is provided u/s. 115JB for excluding income to which Sections 10, 11 or 12 of the Act applies, would show that unless specifically excluded und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t firstly the profit and loss account of the company should be in accordance with the relevant provisions of the Companies Act. Secondly, only specified items have to be added back as provided in various clauses to Explanation 1 and reduced by specific items provided thereon. The only specific amount of income which has to be reduced is the income to which provisions of Sections 10, 11 or 12 apply, if any such amount is credited to the Profit and Loss account and Section 10(2A) defines such income as the share of profit of a partner from the partnership firm, the language is clear and unambiguous and needs no other insertion or deletion. The remuneration to partner may have the colour of appropriation of profit of a partnership firm as held by the Hon'ble Supreme Court and Hon'ble High Courts in various decisions relied upon by the ld. Senior Counsel but as mentioned elsewhere, Section 115JB is a complete code in itself. Therefore, if the remuneration is credited by the appellant company in its Profit and Loss account then the same could be reduced it specifically provided under the Explanation to Section 115JB of the Act which we find missing from the relevant provisions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax-1 v. Gujarat State Fertilizers Chemicals Ltd. [2013] 358 ITR 323 (Guj.) where this court has held in paragraph Nos. 6 to 6.5 this court has observed as under: 6. So far as the fourth question is concerned, it pertains to addition of ₹ 1,14,43,0407- under Section 115JB of the Act being the expenditure estimated on earning of dividend income under Section 14A of the Act. 6.1 The Assessing Officer on referring to the said provision of Section 115JB(2) of the Act added the said amount considering that any amount of expenditure relatable to the income exempted under Section 10 of the Act shall need to be added in the profit shown in the 'Profit and Loss Account'. 6.2 When the matter travelled to the CIT (Appeals), since it deleted the addition of ₹ 1,14,43,040/- while deciding the question No. 1, it consequently deleted such addition under section 115JB of the Act on the ground that this would not serve any purpose. 6.3 the Tribunal decided the said issue as follows: 94. We have considered the rival submissions and we find that similar issue was raised by Revenue as per ground No.3 above in respect of regular assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der- 25. While scrutinizing the return of income, the A.O found that the assessee has sold raw materials/products to sister concern at lower rates. Assessee was asked to explain the transactions with its sister concern, Sun Pharmaceutical Industries. Assessee filed a detailed reply giving exhaustive list of all the raw materials/products being sold to its sister concern vis-a-vis third parties along with the rates and quantity sold. The A.O was of the firm belief that the assessee has been selling products to its sister concern at a rate lower than sold to third parties. The A.O observed that since the assessee is holding 95% share in its sister concern and the sister concern is claiming 100% deduction u/s. 80-IB on its profits. Therefore, in effect the assessee is indulged in diversion of profit and avoidance of tax by suppressing the sale price. The A.O accordingly made an addition of ₹ 21,25,278/-. 26. Assessee carried the matter before the ld. CIT (A) but without any success. Before us, the ld. counsel for the assessee stated that an identical issue was considered by the Tribunal in earlier assessment years in ITA No. 1193/Ahd/2008 and has decided the issue in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the addition of ₹ 21,25,278/-. Ground No. 9 is allowed. 124. Respectfully following the same, we direct the A.O. to delete the addition of ₹ 2,75,07,070/-. Ground No. 11 is allowed. 125. Ground No. 12 relates to the disallowance of ₹ 62,15,78,070/- made u/s. 37 of expenses incurred on behalf of Sun Pharmaceutical Industries. 126. An identical issue was considered by the Bench in assessee's own case in ITA No. 1589/Ahd/2011 and ITA No. 2430/Ahd/2009. The relevant part of ITA No. 2430/Ahd/2009 has been extracted in ground No. 11 of this appeal. For similar reasons, we direct the A.O, to delete the disallowance of ₹ 62,15,78,070/-. 127. Ground No. 13 relates to the addition on account of re-characterizing remuneration as alleged royalty income from the partnership firm SPI for use of Trademark, Brand and Technology amounting to ₹ 40.12 crores. 128. During the course of the appellate proceedings before the First Appellate Authority, it was noticed that the assessee has given all present and future Trademarks/ Brands to the partnership firm SPI for a token consideration of ₹ 1 only. The FAA further noticed that the assessee has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the payment of remuneration was not allowed in the hands of the partnership firm SPI because the recipient which is the assessee company does not fit into the definition of whole time working partner being a legal person and not a natural person. However, such disallowance of remuneration did not affect the partnership firm SPI since its income was exempted u/s. 80-IB of the Act. 132. The assessee company also did not offer the remuneration of ₹ 40.12 crores taking shelter behind the provisions of Section 28(v) of the Act. Thus neither the firm nor the appellant company have paid any taxes on such amount and yet the amount of ₹ 40.12 crores came to the appellant company and, therefore, it is nothing but royalty and accordingly the ld. CIT (A) concluded by holding that the assessee has received ₹ 40.12 crores from SPI as consideration for permitting usages of all present and future trademarks/brands for a period of five years and the same has to be taxed as royalty. 133. Aggrieved by this, the assessee is before us. 134. The ld. Senior Counsel assailed the observations of the First Appellate Authority. It is the say of the ld. counsel that in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-characterized by the First Appellate Authority. Ground No. 13 is allowed. 137. Ground No. 14 relates to the reduction of; unrealized export proceeds of ₹ 67,216/- from export turnover for the purpose of deduction u/s. 10B. 138. An identical issue was considered by the Bench in assessee's own case in ITA No. 1558/Ahd/2006 qua ground No. 3 of that appeal. The relevant findings read as under:- Ground No. 3 relates to the reduction of unrealized export proceeds of ₹ 638.82 lacs from export turnover for the purpose of deduction u/s. 80HHC. 6. The ld. Counsel stated that an identical issue has been considered by the Tribunal in assessee's own case for A.Y. 2001-02 wherein the issue has been set aside to the files of the A.O. The ld. counsel prayed for a similar direction should be given for the year under consideration also. The ld, D.R. did not object to this. We find that an identical issue was considered by the Tribunal in assessee's own case for A.Y. 2001-02 at Para 6 on page 12 of IT A Nos. 3289 3434/Ahd/2003 and at Para 6.3 the Tribunal had directed the A.O to apply the provisions of section 155(13) of the Act and decide the issue, afresh. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be equated with routine repairs and spares and, therefore, treated the amount of Rs, 10,17,500/- as capital expenditure. 144. Insofar as the purchase of 6300 Ltrs glass line reactor from Nile Ltd. amounting to ₹ 5,60,000/- and purchase of Cylinder Vertical Flat Storage Tank ₹ 1,47,500/- and HOPE Cylinder Vertical Vessel Tank Rs. l,51,500/- are concerned, the First Appellate Authority came to the conclusion that these expenditures were incurred for the replacement bottom body of reactor in Plant-1 and for effluent treatment system and they are not independently able to produce any article or thing. 145. The assessee is in appeal against the addition of ₹ 10,17,500/- and the revenue in appeal against the deletion of ₹ 8,59,000/- in ITA No. 3420/Ahd/2014 qua ground No. 7 of that appeal. 146. Before us, the ld. counsel for the assessee reiterated that the purchase of extruded 800 ml Thermobarrel Stainless Steel from Northern Lipid Inc has not created any new asset, It was only replacement of old extruder, therefore, the ld. CIT(A) erred in treating ₹ 10,17,500/- as capital expenditure. Insofar as the deletion of ₹ 8,59,000/- is concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed. 150. Ground No. 16 relates to the disallowance of provision for leave encashment u/s, 43B of the Act amounting to ₹ 39,98,673/-. 151. As mentioned in earlier years decision by the Bench in ITA No. 2076 2067/Ahd/2013 that the Hon'ble Supreme Court is seized with an identical issue in the case of Exide Industries and, therefore, restore the issue to the files of the A.O. with a direction to decide the issue afresh after decision of the Hon'ble Supreme Court. Respectfully following the same, we direct accordingly. 152. Ground No. 17 relates to the disallowance made u/s. 14A read with Rule 8D. 153. A similar issue was considered by the Bench in A.Y. 2007-08 in ITA No. 2076 2067/Ahd/2013 and the relevant findings read as under:- 52. Coming to the disallowance made u/s. 14A by the First Appellate Authority, it is an undisputed fact that the assessee was having sufficient own funds for making the investment in the partnership firm. It is also true that the assessee was on a contractual obligation to look after the marketing and distribution activities of the firm SPI as partnership deed read along with the supplementary deed to earn remuneratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and brokerage paid for property for assisting helping R D unit employees ₹ 3,27,855/-. 159. At the very outset, the ld. Senior Counsel for the assessee brought to our notice that these issues have been considered and decided by the Bench in favour of the assessee and against the revenue in ITA No. 2067/Ahd/2013. We find force in the contention of the ld. Senior Counsel. The Co-ordinate Bench in ITA No. 2067/Ahd/2013 has decided the impugned issues as under:- 69. Ground No.1 relates to the deletion of the disallowance of ₹ 67,620/- claimed as weighted deduction u/s. 35(2AB) of the Act on gift expenses incurred for R D employees. 70. This issue has been decided in favour of the assessee and against the revenue by the Co-ordinate Bench in ITA No. 1592/Ahd/2011 qua Ground No.2 of that appeal. The relevant part reads as under:- Ground No. 2 relates to the weighted deduction u/s. 35(2AB) on account of gifts to R D employees on occasion of marriage. 44. We find that an identical issues has been decided in favour of the assessee and against the revenue in the case of Claries Lifesciences Ltd. 112 ITD 307 (Ahd.) which decision has been followed by the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation should not be allowed. In our considered opinion, once the basic conditions are duly satisfied, there is no bar for claiming higher depreciation. Moreover, this issue is now well settled in favour of the assessee and against the revenue by the Hon'ble Supreme Court in the case of ICDS Ltd. 350 ITR 527. We decline to interfere. Ground No. 4 is dismissed. 163. Ground No. 5 relates to the deletion of the addition of provision of Wealth Tax u/s. 115JB. 164. While computing the book profit u/s. 115JB of the Act, the A.O. added back the provision for Wealth Tax amounting to ₹ 9,09,336/-. Assesses strongly agitated this action of the A.O Claiming that Section 115JB is a deeming provisions and Explanation to Section 115JB (2) prescribed certain adjustments to be made to book profit its, whereby book profit is required to be increased by certain adjustments as mentioned in sub-clauses (a) to (i). It was strongly contended that no further addition is allowed other than those prescribed in that section. 165. The ld. CIT (A) was convinced with the submissions of the assessee and held that though there is a specific mention for the addition of Income Tax provisions f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al income. (b) The decision of the Tribunal Chettinad Cement Cororation Ltd. in ITA No. 1029/M/2005 is against the assessee. 174. Assessee strongly agitated the matter before the ld CIT (A) and reiterated its claim. 175. The assessee submitted details of year-wise profits generated in captive power plant. It was further contended that the decision relied upon by the A.O. is not relevant post the amendment brought to the provisions of section 80-IA (4) of the Act. It was brought to the notice of the ld. CIT (A) the earlier industrial undertaking was substituted undertaking from A.Y. 2002-03. The First Appellate Authority was convinced with the contentions of the assessee and directed the A.O. to allow the claim of deduction u/s. 80-IA (4) in respect of profits from captive power plant. 176. Aggrieved by this, the revenue is before us. 177. The ld. D.R. supported the findings of the A.O. and the ld. Senior Counsel reiterated what has been stated before the lower authorities. 178. We have given a thoughtful consideration to the orders of the authorities below and the reasons given by the A.O, as mentioned elsewhere. The details of year-wise profits generated in c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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