Astrix Laboratories Limited,, Hyderabad v. Addl.CIT, Range-16,, Hyderabad

ITA 28/HYD/2013 | 2008-2009
Pronouncement Date: 28-09-2016 | Result: Partly Allowed

Appeal Details

RSA Number 2822514 RSA 2013
Assessee PAN AAFCA4120R
Bench Hyderabad
Appeal Number ITA 28/HYD/2013
Duration Of Justice 3 year(s) 8 month(s) 20 day(s)
Appellant Astrix Laboratories Limited,, Hyderabad
Respondent Addl.CIT, Range-16,, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 28-09-2016
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 28-09-2016
Date Of Final Hearing 21-09-2016
Next Hearing Date 21-09-2016
Assessment Year 2008-2009
Appeal Filed On 08-01-2013
Judgment Text
ITA NO 28 OF 2013 ASTRIX LABORATORIES LTD HYDERABAD PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH HYDERABAD BEFORE SMT. P. MADHAVI DEVI JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO.28/HYD/2013 (ASSESSMENT YEAR: 2008-09) M/S.ASTRIX LABORATORIES LTD HYDERABAD PAN: AAFCA 4120 R VS ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 16 HYDERABAD FOR ASSESSEE: MR. RAGHUNATHAN SAMPATH FOR REVENUE: SMT. S. NARASAMMA DR O R D E R PER SMT. P. MADHAVI DEVI J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2008-09. IN TH IS APPEAL THE ASSESSEE IS AGGRIEVED BY THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C OF THE I.T. ACT. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE E NGAGED IN THE BUSINESS OF MANUFACTURE OF ACTIVE PHARMACEUTICA LS INGREDIENTS AND ITS INTERMEDIATES FILED ITS RETURN OF INCOME FOR THE A.Y 2008-09 ON 29.09.2008 ADMITTING INCOME OF RS.12 36 37 010. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT THE AO OBSERVED THAT IN THE PREVIOUS YEAR RELEVANT TO A.Y 2 008-09 ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION S PERTAINING TO PURCHASE OF RAW MATERIAL AND SALE OF FINISHED GOODS . THEREFORE A REFERENCE WAS MADE TO THE TPO TO DETERMINE THE ARM S LENGTH DATE OF HEARING : 21.09.2016 DATE OF PRONOUNCEMENT : 28.09.2016 ITA NO 28 OF 2013 ASTRIX LABORATORIES LTD HYDERABAD PAGE 2 OF 8 PRICE (ALP) OF THE INTERNATIONAL TRANSACTION U/S 92 CA OF THE ACT. THE TPO VIDE ORDERS U/S 92CA(3) OF THE ACT DATED 21-10-2011 DETERMINED THE ALP OF THE INTERNATIONAL TRANSACTION S AT RS.33 91 00 000 AND IN ACCORDANCE WITH THE SAME TH E AO PROPOSED THE ADJUSTMENT IN THE DRAFT ASSESSMENT ORD ER. AGGRIEVED BY THE SAME THE ASSESSEE PREFERRED ITS OBJECTIONS BEFORE THE DRP WHICH GRANTED PARTIAL RELIEF TO THE ASSESSEE. IN AC CORDANCE WITH THE DIRECTIONS OF THE DRP FINAL ASSESSMENT ORDER W AS PASSED. AGAINST THE DENIAL OF RELIEF BY THE DRP THE ASSESS EE IS IN APPEAL BEFORE US. 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1) THE ORDER OF THE ASSESSING OFFICER U/S 143(3) R.W.S. 144C AND 92CA OF THE INCOME TAX ACT 1961 IS CONTRARY TO FACTS AND LAW. 2) THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ORDER OF TPO IN REDUCING THE OPERATING MARGIN OF THE TAX-PAYER BY A SUM OF RS.55 74 378/- BEING THE NET RENT REALIZED FROM LEASE OF FACTORY BUILDING S AND EQUIPMENT. 3) THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ADJUSTMENT OF RS.13 27 80 176/- UNDER SEC. 92CA OF THE ACT IN RESPECT OF SALES MADE TO ASSOCIATED ENTERPRISES BY DETERMINING ARM'S LENGTH PRICE (ALP) OF PROFIT LEVEL INDICATOR BEING OPERATING MARGIN(OPERATING PROFIT/OPERATING COSTS) AT 22.83% CONSIDERING COMPARABLES WITH A DIFFERENT BUSINESS PROFILE AND THUS REJECTING THE COMPARABLES AND BASIS ADOPTED BY THE TAX-PAYER U/S 92CA OF THE ACT 4) WITHOUT PREJUDICE TO GROUND 3 THE DRP ERRED IN NOT DIRECTING THE TPO I AO TO RECTIFY THE % AGE OF OPERATING MARGIN(S) CONSIDERED IN THE ALP WITH REGARD TO FOUR OF THE TPO SELECTED COMPARABLES ITA NO 28 OF 2013 ASTRIX LABORATORIES LTD HYDERABAD PAGE 3 OF 8 NAMELY NEULAND LABORATORIES LTD. THEMIS MEDICARE LTD. AARTI DRUGS LTD. AND NATCO PHARMA LTD. 5) WITHOUT PREJUDICE TO GROUND 3 THE DRP ERRED IN NOT DIRECTING THE TPO/AO TO RE-COMPUTE THE OPERATING MARGIN(S) BY EXCLUDING PROPORTIONATE UNALLOCATED COMMON EXPENDITURE IN RESPECT OF PARAS PHARMACEUTICALS LTD. AND SMS PHARMACEUTICALS LTD. 6) WITHOUT PREJUDICE TO GROUND 3 THE TPO ERRED IN INCLUDING PARAS PHARMACEUTICALS LTD. AND WYETH LTD. AS PART OF ALP THOUGH THEY DO NOT QUALIFY THE TPO'S OWN FILTER OF 75% OF TOTAL SALES SHOULD BE ACCOUNTED BY MANUFACTURED SALES. 7) WITHOUT PREJUDICE TO GROUND NOS. 2 TO 6 THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ORDER OF TPO IN NOT GRANTING THE BENEFIT OF THE (+/ -) 5% STANDARD DEDUCTION AS PER THE PROVISO TO SECTION 92C (2) OF THE ACT. 8) THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ORDER OF TPO BY HOLDING THAT TRANSACTIONS AS BETWEEN THE TAX-PAYER AND MYLAN LABORATORIES LIMITED (FORMERLY MATRIX LABORATORIES LIMITED) A RESIDENT COMPANY ARE DEEMED 'INTERNATIONAL TRANSACTIONS' REQUIRING COMPUTATION OF ARM'S LENGTH PRICE U/S 92C. 9) THE DISPUTE RESOLUTION PANEL ERRED IN CONFIRMING THE ORDER OF TPO FOR MAKING AN ADJUSTMENT BY WAY OF DISALLOWING MANAGEMENT FEE OF RS.1 12 36 000 AS WELL AS REIMBURSEMENT OF EXPENSES OF RS.L 05 33 943 (INCLUDING EFFLUENT TREATMENT CHARGES OF RS. 1 04 95 764/-) PAID TO A RESIDENT COMPANY U/S 92C OF THE ACT. 4. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE INFORMED THAT GROUND NO 1 IS GENERAL IN NA TURE HENCE NEEDS NO ADJUDICATION. ITA NO 28 OF 2013 ASTRIX LABORATORIES LTD HYDERABAD PAGE 4 OF 8 5. AS REGARDS GROUND NO. 2 AGAINST REDUCTION OF THE OPERATING PROFIT BY A SUM OF RS.55 74 378 BEING NET RENT REALIZED FROM LEASE OF FACTORY BUILDINGS AND EQUIPMENT HE S UBMITTED THAT THE ASSESSEE DOES NOT WISH TO PRESS THE SAME. GROUN D NO.2 IS THEREFORE REJECTED. 6. AS REGARDS GROUND NO.3 AGAINST THE ADJUSTMENT OF RS.13 27 80 176 U/S 92CA OF THE ACT IN RESPECT OF S ALES MADE TO AES BY ADOPTING THE OPERATING MARGIN AT 22.83% CONS IDERING THE COMPARABLES WITH DIFFERENT BUSINESS PROFILES THE L EARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS ADOPTED THE COMPANIES WHICH ARE ALSO INTO MANUFACTURE OF FORMUL ATIONS ALSO AS COMPARABLE TO THE ASSESSEE. HE SUBMITTED THAT THIS ISSUE HAD ARISEN IN THE CASE OF THE ASSESSEE IN THE EARLIER A .Y 2007-08 AND THE COORDINATE BENCH OF THIS TRIBUNAL IN ITA NO.218 1/HYD/2011 AND 312/HYD/2012 VIDE ORDER DATED 29.01.2016 HAS H ELD THAT IT IS ONLY THE BULK MANUFACTURING COMPANIES SUCH AS TH E ASSESSEE WHICH SHOULD BE CONSIDERED AS COMPARABLE TO THE ASS ESSEE. A COPY OF THE SAID ORDER IS FILED BEFORE US. HE ALSO SUBMITTED THAT THE TPO HAS HIMSELF ADOPTED THE FILTER OF THE TURNO VER OF RS.200 TO RS.400 CRORES AS COMPARABLE TO THE ASSESSEE WHEREA S THE TWO OF THE COMPANIES I.E. NATCO PHARMA LTD AND FRESENIUS KA BI ONCOLOGY LTD HAVE THEIR TURNOVER OF LESS THAN RS.10 0 CRORES AND THEREFORE THESE COMPANIES HAVE TO BE EXCLUDED FROM THE LIST OF COMPARABLES. THUS ACCORDING TO HIM ON THE BASIS O F THE ABOVE DECISION AND ALSO THE TPOS OWN FILTER EIGHT OF TH E COMPANIES ADOPTED BY THE TPO HAVE TO BE EXCLUDED FROM THE FIN AL LIST OF COMPARABLES. ITA NO 28 OF 2013 ASTRIX LABORATORIES LTD HYDERABAD PAGE 5 OF 8 7. AS REGARDS COMPARABILITY OF SMS PHARMACEUTICALS LTD IS CONCERNED THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE WERE EXTRA ORDINARY EVENTS OF AMALGAMATION OF SRINIVASA PHARMA LTD WITH SMS PHARMACEUTICALS LTD W.E.F. 1.04 .2007 AND ALSO THE AMALGAMATION OF PLANT ORGANICS LTD WITH SM S PHARMACEUTICALS LTD W.E.F. 1.1.2008 WHICH HAD AN EF FECT ON THE MARGIN OF THE SAID COMPANY. THEREFORE ACCORDING TO HIM THIS COMPANY ALSO HAS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. ASSESSEE HAS FILED A CHART SHOWING THE COMPANIES WHICH ARE TO BE EXCLUDED. THE LEARNED DR HOWEVER SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 8. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD WE FIND THAT THE TRIBUNAL IN THE ASSESSE ES OWN CASE FOR THE A.Y 2007-08 HAS CONSIDERED THE ISSUE OF COMPARA BILITY OF FORMULATION COMPANIES WITH THE ASSESSEE HEREIN AT L ENGTH AND AT PARA 16 OF ITS ORDER HAS HELD AS UNDER: 16. HAVING REGARD TO THE RIVAL CONTENTIONS AND MATE RIAL ON RECORD WE FIND THAT RULE 10D OF IT RULES ITSELF PR OVIDES THAT THE TPO HAS TO CONDUCT THE FAR ANALYSIS AND ADOPT SUCH COMPANIES AS COMPARABLE WHICH ARE IN SIMILAR BUSINESS AS THE ASSESSEE AND THAT OTHER COMPANIES MAY ALSO BE TAKEN INTO CONSIDE RATION PROVIDED THE ADJUSTMENT FOR DISSIMILARITIES IF ANY CAN BE MADE. THE COORDINATE BENCH OF THIS TRIBUNAL AT DELHI IN T HE CASE OF GLOBAL VANTEDGE PVT. LTD. V/S. DCIT (2010-TIOL-24-I TAT-DEL) HELD THAT IF A COMPANY ENGAGES IN A VARIETY OF DIFF ERENT CONTROLLED TRANSACTIONS THAT CANNOT BE APPROPRIATELY COMPARED ON AN AGGREGATE BASIS WITH THOSE OF AN INDEPENDENT ENTERP RISE THEN WHILE ANALYZING THE TRANSACTIONS BETWEEN INDEPENDEN T ENTERPRISES TO THE EXTENT THEY ARE NEEDED PROFIT A TTRIBUTABLE TO TRANSACTIONS THAT ARE NOT SIMILAR TO THE CONTROLLED TRANSACTIONS UNDER EXAMINATION SHOULD BE EXCLUDED FROM COMPARISO N. SIMILAR VIEW HAS BEEN EXPRESSED BY THE TRIBUNAL AT MUMBAI I N THE CASE OF IL JIN ELECTRONICS (I) P. LTD. V/S. ACIT (2010-TIOL -151-ITAT- MUM) AND ALSO IN THE CASE OF ACIT V/S. T TWO INTERN ATIONAL PVT. LTD.(2010- TIOL-166-ITAT-MUM). THUS FOR MAKING NEC ESSARY ADJUSTMENT IF SEPARATE SEGMENTAL ACCOUNTS ARE AVAIL ABLE THE TPO ITA NO 28 OF 2013 ASTRIX LABORATORIES LTD HYDERABAD PAGE 6 OF 8 OUGHT TO TAKE ONLY THE SEGMENTAL DETAILS OF THE COM PARABLE COMPANY. IN THE CASE BEFORE US THE TRANSFER PRICIN G OFFICER HAS TAKEN COMPANIES WHICH ARE INVOLVED IN BOTH THE ACTI VITIES ON THE GROUND THAT SUFFICIENT NUMBER OF COMPARABLES ARE NO T AVAILABLE. BUT FROM THE ORDER OF THE TPO WE FIND THAT EVEN A S PER THE FILTER ADOPTED BY THE TRANSFER PRICING OFFICER AT LEAST S IX COMPANIES ARE AVAILABLE FOR COMPARISON WHICH ARE INTO MANUFA CTURE OF ONLY BULK DRUGS AS IN THE CASE OF THE ASSESSEE. THEREFO RE WE HOLD THAT ONLY SUCH COMPANIES ARE TO BE ADOPTED FOR THE PURPO SE OF DETERMINATION OF ARM'S LENGTH PRICE. RESPECTFULLY FOLLOWING THE SAME WE DIRECT THE AO T O EXCLUDE THE COMPANIES WHICH ARE NOT IN THE MANUFACTURING OF BUL K DRUGS ALONE. 9. AS REGARDS NATCO PHARMA LTD AND FRESENIUS KABI ONCOLOGY LTD ARE CONCERNED WE FIND THAT THE TPO HA S HIMSELF ADOPTED THE TURNOVER FILTER OF RS.200 TO RS.400 CRO RES WHILE THESE TWO COMPANIES HAVE TURNOVER OF LESS THAN RS.100 CRO RES. THEREFORE WE DIRECT THE TPO TO EXCLUDE THE SAME FR OM THE FINAL LIST OF COMPARABLES. 10. AS REGARDS THE COMPARABILITY OF SMS PHARMACEUTI CALS LTD IS CONCERNED THOUGH THE ASSESSEE SUBMITTED THA T IT HAS TAKEN THE CONTENTION BEFORE THE DRP THAT THERE WERE THE E XTRA ORDINARY EVENTS OF AMALGAMATION IN THE SAID COMPANY WE FIND THAT THE DETAILS WERE NOT AVAILABLE BEFORE THE TPO OR DRP AN D NONE OF THE AUTHORITIES HAVE VERIFIED THE CONTENTION OF THE ASS ESSEE. THEREFORE WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE TO T HE FILE OF THE AO/TPO TO EXAMINE WHETHER THE EXTRA ORDINARY EVENTS HAVE OCCURRED IN THE CASE OF THE SAID COMPANY AND WHETHE R THEY HAVE ANY IMPACT ON THE FINANCIAL RESULTS OF THE SAID COM PANY FOR THE RELEVANT A.Y. THEREFORE COMPARABILITY OF THIS COMPA NY ALONE IS REMITTED TO THE FILE OF THE AO/TPO FOR RECONSIDERAT ION. ASSESSEE ITA NO 28 OF 2013 ASTRIX LABORATORIES LTD HYDERABAD PAGE 7 OF 8 SHALL BE GIVEN A FAIR OPPORTUNITY OF HEARING. GROUN D NO.3 IS ACCORDINGLY PARTLY ALLOWED FOR STATISTICAL PURPOSES . 11. AS FAR AS GROUNDS 4 TO 6 ARE CONCERNED WE FIND THAT THESE ARE ALTERNATIVE TO GROUND OF APPEAL NO.3. SIN CE WE HAVE ALREADY ALLOWED GROUND NO.3 ADJUDICATION OF THESE GROUNDS WOULD ONLY RESULT IN AN ACADEMIC EXERCISE. THESE GR OUNDS ARE ACCORDINGLY REJECTED. 12. GROUND NO.7 OF APPEAL IS REMANDED TO THE FILE O F THE AO FOR GIVING CONSEQUENTIAL RELIEF TO THE ASSESSEE IF ANY IN ACCORDANCE WITH THE AMENDED PROVISIONS I.E. PROVISI ON OF SECTION 92CA OF THE ACT. 13. AS REGARDS GROUND NO.8 AGAINST THE ORDER OF THE TPO IN HOLDING THAT THE TRANSACTION BETWEEN THE TAXPAYE R AND MATRIX LABORATORIES LTD IS AN INTERNATIONAL TRANSACTION RE QUIRING COMPUTATION OF ALP U/S 92CA OF THE ACT THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE ALSO HAD ARI SEN IN THE ASSESSEES OWN CASE FOR THE A.Y 2007-08 AND THE TRIB UNAL AT PARA 24 OF ITS ORDER HAS HELD AS UNDER: 24. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD WE FIND THAT FOR ASSESSMENT YEAR 2006-07 T HE COMMISSIONER INITIATED PROCEEDING UNDER S.263 ON TH E BASIS OF THE ASSESSMENT PROCEEDINGS/TPO'S ORDER FOR ASSESSME NT YEAR 2006-07 WHICH WAS CHALLENGED BEFORE THE TRIBUNAL A ND THIS TRIBUNAL VIDE ITS ORDER DATED 26.1.2015 CITED ABO VE AFTER CONSIDERING THE PROVISIONS OF S.92B OF THE ACT HAS HELD THAT FOR COMING WITHIN THE EXPRESSION 'INTERNATIONAL TRANSAC TIONS' AT LEAST ONE OF THE PARTIES SHOULD BE A NON-RESIDENT. IT WAS HELD THAT NEITHER THE ASSESSEE NOR MATRIX IS A NON-RESIDENT A ND THEREFORE THE TRANSACTIONS RELATING TO ACQUISITION OF KNOW-HO W AND DMF CANNOT BE CALLED AS INTERNATIONAL TRANSACTIONS UND ER S.92B OF THE ACT. SIMILAR VIEW HAS BEEN TAKEN BY COORDINATE BENC H OF THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2009-10 VIDE ITS ORDER DATED 25.3.2015 IN ITA NO.198/HYD/20 14 AND A ITA NO 28 OF 2013 ASTRIX LABORATORIES LTD HYDERABAD PAGE 8 OF 8 COPY OF THE SAID ORDER IS ALSO FILED BEFORE US. TAK ING DUE NOTE OF THESE DECISIONS OF THE COORDINATE BENCHES OF THIS T RIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEARS 2006-0 7 AND 2009- 10 IT IS HELD FOR THE ASSESSMENT YEAR UNDER CONSID ERATION AS WELL THAT THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE MATRIX LABORATORIES ARE NOT INTERNATIONAL TRANSACTIONS AND THE SAME ARE NOT AMENABLE TO TRANSFER PRICING ADJUSTMENT UNDER S .92B OF THE ACT. CONSEQUENTLY GROUNDS NO.5 TO 7 OF THE ASSESSE E ARE TREATED AS ALLOWED. RESPECTFULLY FOLLOWING THE SAME WE HOLD THAT THE T RANSACTION BETWEEN THE ASSESSEE AND MATRIX LABORATORIES LTD BO TH BEING DOMESTIC COMPANIES IS NOT AN INTERNATIONAL TRANSACT ION U/S 92B OF THE ACT DURING THE RELEVANT A.Y AND THE SAME ARE NOT AMENABLE TO THE PROCEEDINGS U/S 92C OF THE ACT. THUS GROUND S OF APPEAL NO. 8 & 9 ARE ALLOWED. 14. IN THE RESULT ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH SEPTEMBER 2016. SD/- SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD DATED 28 TH SEPTEMBER 2016. VINODAN/SPS COPY TO: 1 M/S. ASTRIX LABORATORIES LTD PLOT NO.564/A/22 R OAD NO.92 JUBILEE HILLS HYDERABAD 2 ADDL. CIT RANGE 16 AAYAKAR BHAVAN HYDERABAD 3 DRP HYDERABAD 4 DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION H YDERABAD 5 THE DR ITAT HYDERABAD 6 GUARD FILE BY ORDER