A.K. Garodia, Accountant Member - This appeal is filed by the assessee which is directed against the assessment order passed by the A.O. on 16-10-2012 under Section 143(3) r.w.s 144 C of the IT Act and in this assessment order, the AO has simply decided the issue on the basis of direction of Dispute Resolution Panel (DRP), Ahmedabad dated 25-9-2012.
2. The grounds raised by the assessee are as under:—
"On the facts and in the circumstances of the case and in law, the Assessing Officer ('AO') grossly erred, in conformity with the directions of Hon'ble Dispute Resolution Panel ('DRP'), Ahmedabad under section 144C(5) of the Income-tax Act, 1961 ('the Act'), in making the upward transfer pricing adjustment of Rs. 15,87,39,602/- in respect of appellant's international transaction of sale of medical kits (comprising generic pharmaceutical products, hospital supplies and disposables) to its associated enterprise ('AE') Missionpharma A/S, Denmark ('MPAS'). The appellant submits that no transfer pricing adjustment is warranted in its case and wishes to raise the following sub-grounds of appeal, which are without prejudice to each other:
i. |
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The Hon'ble DRP/Ld. TPO/Ld. AO erred, in law and in facts, by not accepting the economic analysis carried out by the Appellant in accordance with the provisions of the Act, read with the Rules, conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction, and holding that the Appellant's international transaction is not at arm's length. |
ii. |
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The Hon'ble DRP erred in upholding the transfer pricing adjustment made by the Ld. Transfer Pricing Officer ('TPO') without appreciating that Ld. TPO did not provide to the Appellant the material and information pertaining to the entire search process carried out by the Ld. TPO despite the Appellant's request for the same and thereby Ld. TPO blatantly violating the principles of natural justice. |
iii. |
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The Hon'ble DRP/Ld.TPO/Ld. AO erred, in law and in facts, by considering the transfer pricing comparison undertaken by the Appellant, using Indian wholesale pharmaceutical distributors, as defective and rejecting the comparables identified by the Appellant on unreasonable ground. |
iv. |
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The Hon'ble DRP/Ld.TPO/Ld. AO erred, in law and in facts, by considering the AE (i.e. MPAS), rather than Appellant, as the tested party. |
v. |
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The Hon'ble DRP/Ld.TPO/Ld. AO erred, in law and in facts, by considering IDA Foundation Netherlands (a 'not for profit organisation'), as comparable to the AE (i.e. MPAS) for the purpose of economic analysis. |
vi. |
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The Hon'ble DRP/Ld.TPO/Ld. AO erred, in law and in facts, in not considering and not making appropriate adjustments for functional, risk and economic differences between the AE (i.e. MPAS) and IDA Foundation Netherlands (a 'not for profit organisation'). |
vii. |
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The Hon'ble DRP/Ld.TPO/Ld.AO erred, in facts and in law, by not considering that fresh search process conducted by Ld. TPO is unsystematic, vague, erroneous and results into only one alleged comparable and thereby defies the statutory provisions including the proviso to section 92C(2) allowing the variation in arm's length price of upto ± 5%. |
viii. |
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The Hon'ble DRP/Ld.TPO/Ld. AO erred, in law and in facts, by not accepting that Appellant is a captive wholesale trader in generic pharmaceutical products as documented in Transfer Pricing Documentation Report submitted to Ld. TPO/DRP. |
ix. |
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The Hon'ble DRP/Ld.TPO/Ld. AO erred, in law and in facts, by attributing the excess profits retained at the level of the AE (i.e. MPAS), to the Appellant. |
x. |
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The Hon'ble DRP/Ld.TPO/Ld. AO erred, in law and in facts, in computing the amount of transfer pricing adjustment at Rs.15,87,39,602/-. |
xi. |
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The orders of the Hon'ble DRP/Ld.TPO/Ld. AO are untenable in law because they suffer from factually incorrect statements, observations and conclusions. |
Ground No. 2:
The Ld. AO erred in initiating penalty proceedings under Section 271(l)(c) of the Act.
Ground No. 3:
The appellant craves to add, alter, amend or delete all or any of the grounds of appeal before or during the course of hearing."
3. It was submitted by the learned AR of the assessee that this issue is now squarely covered in favour of the assessee by the Tribunal's decision rendered in the assessee's own case for earlier two Assessment Years, i.e., A.Y. 2005-06 and 2006-07 as per the decision reported in Missionpharma Logistics (India) (P.) Ltd. v. Asstt. CIT [2013] 33 taxmann. com 479 (Ahd.). He submitted a copy of the Tribunal's decision. He further submitted that in paragraph 17 of the Tribunal's order, it was noted by the Tribunal that two issues are to be decided by the Tribunal, i.e, (1) Selection of the tested party, whether it should be the assessee or the 'AE'. (2) Selection of the comparables. He further submitted that regarding the first issue, i.e., Selection of tested party, it was held by the Tribunal that the assessee is least complex party as compared to the AE, and hence, the assessee should be selected as a tested party and regarding the second issue, i.e., selection of comparable, it was held by the Tribunal that IDA Foundation, Netherlands cannot be accepted as a comparable because this company is not working for profit motive and out of total 9 local comparables selected by the assessee, the Tribunal held that four comparables are to be accepted. He further submitted that in the present year, the assessee has adopted six local comparables as noted at page No.4 of the TPO order and out of this, serial No.1 and 5 being Aditya Medisales Ltd. and Shamrock Industrial Co. Ltd. are the same as accepted by the Tribunal in the earlier year. He further submitted that the margin percentage (OP/Cost) noted by TPO at page No.4 of his order is in fact gross profit margin on COGS and it can be seen at page 216 of the paper book. But for our purpose, we have to select operating margin on operating cost which is very low in respect of these comparables. For these two comparables at serial No.1 and 5, i.e., Aditya Mediasales Ltd. and Shamrock Industrial Co. Ltd., the operating profit margin on operating cost is 0.61% and 0.67%, respectively. He also submitted that the margin of the assessee company for the present year is 0.9433% as noted by DRP at page No.15 of its order. He further submitted that therefore in the light of this Tribunal order, these two comparables out of six comparables should be accepted and the profit margin reported by the assessee should also be accepted and the addition made by AO on the basis of DRP order should be deleted.
4. As against this learned D.R. of the Revenue supported the assessment order as well as DRP order but he could not point out as to how the issue in dispute is not covered in favour of the assessee by this Tribunal order in assessee's own case for earlier two years.
5. We have considered the rival submissions and we find that the DRP and TPO has adopted the AE as tested party and IDA Foundation Netherlands as comparable and on both these aspects, as per the Tribunal order in assessee's own case for earlier years, the assessee has to be accepted as a tested party and IDA Foundation, Netherlands cannot be accepted as a comparable. Out of six comparables noted by TPO at page No.4 of his order, the arithmetic mean was 3.44% and the same is within +5% range of the assessee's profit margin. Admittedly, out of these six comparables, two are common in the present year and earlier year and therefore, these two are acceptable as per learned A.R. In respect of this, it was pointed out by the Bench that for one of these two comparables, i.e., Aditya Mediasales Ltd., it was noted by the TPO in paragraph 6.7.5 of his order that this company is having a huge Related Party Transaction (RPT). When this was pointed out to learned AR of the assessee, it was submitted that even if this comparable is rejected, we are left with one comparable, i.e., Shamrock Industrial Co. Ltd. and the profit margin of this company is only 0.67% as per page 216 of the paper book which is less than the profit margin of the assessee company and hence, no ALP adjustment is called for. Regarding this company, i.e., M/s. Shamrock Industrial Ltd., the objection of the TPO in paragraph 6.5.2 was this that this company is manufacturer of pharmaceuticals and fine chemicals and is not having any export sale. As per the prowess data base extract of this company at page 381 and 388 of the paper book, for the period of 12 months ending in March, 2008, this company was having sales of 12 crores and out of the same, the entire sale was on account of trading turnover and there was no sale on account of industrial sale and therefore, this objection of the TPO that this company is having manufacturing activity is factually not correct in the light of this data of this company on the basis of Prowess data base extract. Therefore, this objection of the TPO and DRP regarding this company is not acceptable. Regarding other objection that the company is not having export turnover, this issue is squarely covered in favour of the assessee by the tribunal decision in the assessee's own case for earlier two years, therefore, we hold that this company is acceptable as a comparable. Because of this reason that out of 6 local comparables noted by the TPO at page No.4 of his order, one is acceptable, i.e. Shamrock Industrial Ltd. and one is not acceptable because of high RPT, i.e., Aditya Mediasales Ltd., we do not examine the acceptability of other comparables because whether the others are accepted or not accepted, it will not have impact on our decision because none of these comparables is having profit margin at the rate of higher than the profit margin of the assessee company. We, therefore, hold that the addition made by the AO on account of ALP as per TPO and as per DRP is not sustainable and hence, we delete the same. Ground No.1 is allowed. Ground No.2 is regarding initiation of penalty proceedings under Section 271(1)(c) of the IT Act and this ground is rejected as premature.
6. In the result, the appeal of the assessee is partly allowed. |