TMI Blog2013 (7) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... eal are as under: 2. The DCIT/the DRP erred in making an addition/upward adjustment of ₹ 9,06,35,400/- to the sales (international transactions mainly consisted of sale of bulk drugs and chemicals) made to the AEs on the application of TP regulations of the Act resulting in enhancement of the taxable total income without assigning proper reasons and justification. 14. The DCIT/the DRP erred in sustaining the disallowance of the depreciation on opening WDV aggregating to ₹ 3,97,21,857/- based on the earlier assessment years proceedings without assigning proper reasons and justification and ought ot have appreciated that the earlier assessment proceedings has not become final. 15. The DCIT/the DRP erred in disallowing the ESOP expenses amounting to ₹ 14,91,000/- as capital in the computation of taxable total income without assigning proper reasons and justification. 3. The ld. A.R of the assessee further submitted that in assessment year 2007-08, the assessee is in appeal against the order of the ld. CIT(A) confirming the order of the TPO/Assessing Officer in sustaining the addition of ₹ 1,00,76,210/- by upward revision of the Arm s Length Pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entering into such transactions. 7. The assessee, vide letter dated 16.9.2010, gave the following reply: 7. A record of uncontrolled transactions taken into account for analyzing their comparability with the international transactions: Not Applicable. 8. A record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transactions : Nil. 9. A description of the methods considered for determining the arm's length price in relation to each international transaction or class of transaction, the method selected as the most appropriate- method was applied in each case: In the report under section 92E filed in Form 3CEB the method adopted to justify the transfer price of bulk drugs to M/S.Shasun USA Inc. and M/S. Shasun Pharma Solutions UK was Resale Price Method and for purchase from M/S. Shasun USA Inc. and M/S. Shasun Pharma Solutions UK was Cost Plus Method. The provisions of Transfer Pricing were introduced into the statute by the Finance Act 2001 to be operative w.e.f. 01.04.2002. These provisions are contained in Chapter X the title of which is Special Provision relating to avoidance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer pricing study was conducted in the case of AEs to whom the assessee sold its products. This cannot be held as a bench marking analysis with respect to the sales made by the assessee to its AEs who are its customers. According to the TPO, what was noted was that the sale to AEs be analysed for ALP. Hence, in his view, the method adopted by the assessee and its submission on the same do not serve the purpose and rejected the same. 10. Thereafter the TPO observed that since the assessee made sales of same product to AEs as well as non-AEs, a detailed comparison was undertaken. Comparable Uncontrolled Price (CUP) Method is the most appropriate method in conditions such as that has a direct comparison to the controlled price was available with the assessee s third party transactions. He, therefore, viewed the CUP was preferred and adopted rejecting the Resale Price Method adopted by the assessee. He further noted that in the CUP exercise the price charged on non-AEs was taken wherever available and in case it was not available, the earliest proceeding non-AE transaction price was taken for comparison. According to the TPO, this resulted in identifying 73 instances covering 11 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,33,897/-) from/to M/s SPS Ltd., UK. On a reference to the TPO, he examined the TP issues and passed a TP order in which an upward adjustment of Rs. 9,06,35,400/- to the sales made to AEs was proposed. While doing so, the methods adopted by the assessee 'Resale Price Method' and 'Cost Plus Method were rejected by the TPO on the ground that ALP can not be determined on the basis of comparing sales made by the assessee to its AEs as customers. The TPO has adopted comparable uncontrolled price CUP method as the most appropriate method, as it was found that the assessee made sales of same products to AE as well as non-AE. This analysis revealed that in 73 instances covering 11 product types, sales to AEs were made prices lesser than those of non-AEs. The short billed amount worked out to Rs. 9,06,35,400/- Objection No.1 The assessee's objection that TPO erred in disregarding the functions performed, assets employed and risks assumed by the assessee and its AE and In rejecting its Resale Price Method, is too general and it was not demonstrated as to these factors effect the sale prices to AE and to non-AE. The TPO has given valid reasons for rejecting the method s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as under: 1.1 Facts as submitted to the Assessing Officer During the FY 2007-08, the Assessee exported drugs and pharmaceuticals to Shasun US, which is responsible for marketing and distribution in the US market. The Assessee selected Resale Price Method as the most appropriate method to substantiate the arm's length nature of international transactions. Shasun India earned gross profit margins in excess of its AEs and thus Shasun India's international transactions in the nature of exports were concluded to satisfy the arm's length principle from an Indian transfer pricing perspective. In response to the show cause notice, the Assessee submitted facts and reasons why CUP method proposed to be selected by the TPO is erroneous. The Assessee made a detailed submission emphasizing on how selecting CUP method as MAM would be inappropriate, without considering the requirement of high degree of comparability in products, functions performed, contractual terms, characteristics and volume of the transactions in determining the arm's length price of Assessee's exports to AE. Differences in the AE transactions and the CUP selected by the TPO, as submitted, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions relating to export of drugs and pharmaceuticals to Shasun US. Without prejudice to the above submissions, Shasun India also submitted that the benefit of safe harbour of 5 per cent deduction as per proviso to Section 92C(2) should be granted to the Assessee. 15. Referring to page Nos.3 4, Objection No. 1 and Objection No.2, of the order of the DRP, the ld. A.R of the assessee submitted that the DRP has not dealt with the submissions of the assessee and while passing its order, absolutely no reasons have been given by the DRP for rejecting the submissions of the assessee. Hence, it was his first prayer that the matter may be remanded back to the DRP for passing a detailed order dealing with the submissions of the assessee as to why they are not acceptable. 16. Further, the ld. A.R of the assessee submitted that during the course of hearing, the DRP called for a remand report from the TPO who submitted his report on 8.8.2012, a copy of which is placed at page 21 of paper book 1 filed by the assessee before the Tribunal. He submitted that the DRP has not taken into consideration the said remand report of the TPO while arriving at its conclusion. The DRP has taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferences, functions and level of market, and development order vs. commercial order substantiating why CUP method cannot be adopted as the most appropriate method were made before the DRP and the same has been verified and accepted by the TPO in the remand report. It was submitted that therefore, the assessee requested the DRP to give due consideration to the submissions and the TPO s remand report and accordingly delete the adjustments in relation to Shasun India s International transactions of export of Pharma products to its AEs. He further submitted that in the rejoinder to the remand report the assessee itself accepted the TPO s finding in the remand report for addition of ₹ 8,10,218/- in respect of product 6-Bromo-5-methoxy-1h-indazola. 18. The ld. A.R thereafter referred to the TPO s order dated 21.1.2013 for assessment year 2009-10, placed at pages 225 to 228 of the paper book 1, and submitted that in the said order the TPO accepted the Resale Price Method for determining the ALP of the international transactions with the AEs in the identical set of facts for sales made to the same parties and held that no adjustment was called for to the ALP of the assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Chennai Bench of the Tribunal in the case of Trimex Industries Pvt. Ltd in I.T.A.No. 2117/Mds/2001, a copy of which is placed at pages 1 to 17 of Additional paper book, wherein the Tribunal has held that volume is an important fact in every trade and occasional sale cannot be compared with regular sale. Further, relying on the decision of the Mumbai Bench of the Tribunal in the case of Welspun Zuchhi Textile Pvt. Ltd in I.T.A.No. 898/Mum/2010, a copy of which is placed at pages 18 to 33 of additional paper book, the ld. A.R submitted that the Tribunal has held in that case that CUP cannot be used in case of geographical differences. Further relying on the decision of the Delhi Bench of the Tribunal in the case of Ranbaxy Laboratories Ltd, 110 ITD 428, a copy of which placed at pages 34 to 69 of additional paper book, submitted that the Tribunal has held that differences in geographies significantly affect transfer pricing and needs to be adjusted for. He further relied on the decision of the Mumbai Bench of the Tribunal in the case of Dufon Laboratories Pvt. Ltd. in I.T.A.No. 1172/Mum/2007, a copy of which is placed at pages 238 to 246 of the paper book No.2, and sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) Pvt. Ltd in I.T.A.No. 5307/Mum/2008, a copy of which is placed at pages 130 to 142 of the additional paper book, and submitted that in those cases the Tribunal has held that there ought to be uniformity in the treatment and consistent approach should be followed if facts remain the same. 22. The ld. CIT/DR vehemently argued in support of the order of the TPO/AO as well as that of the DRP. He submitted that the TPO has rightly rejected the Resale Price Method adopted by the assessee for determining the ALP of its transactions with AEs. He submitted that Rule 10B(1)(b)(i) provides that Resale Price Method, by which, the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an un-related enterprise, is identified. Thus, he submitted that the Resale Price method, according to the above rule, was to be applied where a distributor purchases for resale from a manufacturer. He submitted that in the present case the assessee is a manufacturer of the product and the AE is the distributor and therefore, the Resale Price Method cannot be adopted in the case of the assessee for determining the ALP of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the total turnover of the assessee in assessment year 2008-09 was ₹ 456 crores out of which only ₹ 76 crores was to the AEs which comes to only 11% of sales made to AEs. Therefore, the argument of the assessee that due to large volume sales made to AEs they were charged lower prices by the assessee does not hold good. He further submitted that the assessee, before the TPO, has claimed that 5% discount on account of credit risk. The assessee has not produced any material to show that the assessee sold goods on credit to the AEs and therefore, the argument of the assessee cannot be accepted. He submitted that the assessee has claimed discount of 60.04% from the price to the non-AEs to compare the price at which the goods are sold to the AEs. He submitted that it is unbelievable that any enterprise will be making a profit margin of 60.04% and above, therefore, the claim of the assessee was not at all acceptable. He submitted that as the products sold by the assessee to the AEs as well as non-AEs were the very same, therefore, there was no justification for the assessee to sell the same products to AEs at lower rates than that charged to the non-AEs and therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty purchased or services obtained by an enterprise from its AE, which is thereafter resold or are provided to the unrelated enterprise. The ld. CIT/DR further submitted that the Tribunal also held that where the property is sold and not purchased by the Indian Enterprise from tis AE abroad then the Resale Price Method cannot be invoked in the hands of the assessee in India for determination of ALP. 28. The ld. A.R of the assessee has argued that the Tribunal in the case of Gharda Chemicals Ltd vs DCIT (supra) has held that the price charged by an Indian party from UK or Australia may be at much variance with that charged from USA. In such a scenario, no valid comparison can be made between the price charged by the assessee from other countries with that from USA, more particularly when the quantity exported to USA is on wholesale basis with that to other countries in small lots on retail basis. In internal CUP Method is not suitable in such circumstances. 29. We find that the Tribunal in that case has restored the matter back to the file of the TPO to determine the fresh ALP. Thus, we find that in the assessee s case also following the above decision of the Tribunal, the Resa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer observing that the assessee failed to prove the genuineness of its claim of additions to fixed assets in consecutive three earlier assessment years, the opening WDVs of the succeeding years have become final based on the closing WDVs of the preceding years. Therefore, the opening WDV of assessment year 2008-09 cannot be changed by disturbing the closing WDVs of earlier years which have become final. 33. The ld. A.R of the assessee submitted that in assessment year 2005-06, the ld. CIT(A), vide order dated 29.11.2012, at para 4.3 held that the additions to fixed assets amounting to ₹ 16.20 crores and out of which bills and invoices were furnished before the Assessing Officer during the assessment as well as the remand proceedings to the extent of expenditure of ₹ 15.73 crores and could not furnish bills and vouchers for assets amounting to ₹ 46.34 lakhs, thus the assessee would be eligible for depreciation to the extent of bills furnished for an amount of ₹ 15.73 cores as verified and accepted by the Assessing Officer. The ld. A.R, therefore, submitted that the matter should be restored back to the file of the Assessing Officer for adjudicating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees Stock Option Plan (ESOP) expenses which was classified under employee cost in Schedule 16 to the Profit Loss Account. The Assessing Officer observed that the same was not allowable as it was capital in nature. 5. On appeal, the DRP confirmed the action of the Assessing Officer on the ground that while incurring the ESOP expenses there was only increase in the capital account and there was no increase in revenue. Further, expenses by way of ESOP were not incurred due to any contractual obligation of the assessee as employer. It was a voluntary act, of course with an expectation of enduring intangible loyalty in future. 6. The ld. A.R of the assessee relied on the decision of the Chennai Bench of the Tribunal in the case of S.S.I. Ltd vs The Dy. CIT, [2004] 85 TTJ Chennai 1049 and submitted that the Tribunal has held as under: 40. ESOP was the order in those times. That was the medium through which the talent was attracted and castled. In a highly competitive field of cut-throat competition, the only way in which a company engaged in software development could attract and confidently retain talent to itself without being poached by others was ESOP. It was a known meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional or contingent as had been submitted by the Revenue. Pointing out to the Employees Stock Option Plan, the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by SEBI and the entire Employees Stock Option Plan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under section 263 of the Act. 8. Thus, he prayed that the expenditure on ESOP claimed by the assessee of ₹ 14,91,000/- should be allowed. 9. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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