GLENMARK EXPORTS LTD, MUMBAI v. ACIT 5(1), MUMBAI

ITA 8611/MUM/2011 | 2007-2008
Pronouncement Date: 26-07-2013 | Result: Partly Allowed

Appeal Details

RSA Number 861119914 RSA 2011
Bench Mumbai
Appeal Number ITA 8611/MUM/2011
Duration Of Justice 1 year(s) 7 month(s) 5 day(s)
Appellant GLENMARK EXPORTS LTD, MUMBAI
Respondent ACIT 5(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 26-07-2013
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted K
Tribunal Order Date 26-07-2013
Date Of Final Hearing 11-07-2013
Next Hearing Date 11-07-2013
Assessment Year 2007-2008
Appeal Filed On 21-12-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH M UMBAI BEFORE S/SHRI B.R.MITTAL (JM) AND RAJENDRA SINGH(AM ) . . ./I.T.A. NO.8611/MUM/2011 ( / ASSESSMENT YEAR : 2007-08) M/S GLENMARK EXPORTS LTD. B/2 MAHALAXMI CHAMBERS 22 BHULABHAI DESAI ROAD MUMBAI-400026 / VS. ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 5(1) MUMBAI. ./ ./PAN/GIR NO. : AACG3619C ( ' / APPELLANT) .. ( (' / RESPONDENT) ./I.T.A. NO.8861/MUM/2011 ( / ASSESSMENT YEAR : 2007-08) ASSTT. COMMISSIONER OF INCOME TAX CIRCLE 5(1) MUMBAI. / VS. M/S GLENMARK EXPORTS LTD. B/2 MAHALAXMI CHAMBERS 22 BHULABHAI DESAI ROAD MUMBAI-400026. ./ ./PAN/GIR NO. : AACG3619C ( ' / APPELLANT) .. ( (' / RESPONDENT) ' / ASSESSEE BY : SHRI VIJAY MEHTA (' * /RESPONDENT BY : SHRI AJEET KUMAR JAIN * - / DATE OF HEARING : 1.7.2013 * - /DATE OF PRONOUNCEMENT : 26.7.2013 / O R D E R PER B.R.MITTAL JM: THESE CROSS-APPEALS ARE FILED BY THE ASSESSEE AND THE DEPARTMENT AGAINST THE ORDER OF LD. CIT(A) DATED 25.10.2011 FOR THE ASSESS MENT YEAR 2007-08. 2. IN THE APPEAL FILED BY THE ASSESSEE THE ASSESSE E HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT APPEALS) HAS ERRED IN NOT ACCEPTING THE APPELLANT'S CONTENTI ON THAT NO TRANSFER PRICING ADJUSTMENT IS REQUIRED TO BE MADE IN CASE OF THE APPELLANT. I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 2 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN DIRECTING THE TPO/AO TO WORK OUT TRANSFER PRICING ADJUSTMENT IN CASE OF THE APPELLANT BY TAK ING ARITHMETIC MEAN OF OPERATING MARGINS OF LYKA EXPORTS LIMITED AND MEGAF INE PHARMACHEM (P) LIMITED AS THE MARGIN TO ARRIVE AT ALP. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT ( APPEALS) HAS ERRED IN HOLDING THAT THE APPELLANT'S FUNCTIONA L PROFILE IS THAT OF A NON-MANUFACTURING EXPORTER. 4 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN NOT ACCEPTING THE FACT THAT THE APPELL ANT ACTED AS ONLY CHANNEL OR PASS-THROUGH ENTITY IN THE TRANSACTION OF EXPORTS B Y GLENMARK PHARMACEUTICALS LIMITED (GPL) TO GLENMARK LMPEX LLC RUSSIA (GIR). 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN HOLDING THAT THE APPELLA NT UNDERTOOK INTERNATIONAL TRANSACTION IN THE FORM OF EXPORTS TO GIR. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT (APPEALS) HAS ERRED IN HOLDING THAT THE APPELLA NT IS SUBJECT TO THE PROVISIONS OF CHAPTER X OF THE I.T. ACT 1961. 7. WITHOUT PREJUDICE TO ANY OF THE GROUNDS RAISED ABOV E THE LEARNED CIT (APPEALS) HAS ERRED IN EXCLUDING SHELESHA PHARM ACHEM PRIVATE LIMITED FROM THE SET OF COMPARABLES FOR DETERMINATI ON OF THE MEAN OPERATING MARGIN OF COMPARABLE ENTITIES. 3. SUBSEQUENTLY THE ASSESSEE HAS FILED ADDITIONA L GROUNDS OF APPEAL ON 17.12.2012 AND 1.1.2013 AS UNDER: ADDITIONAL GROUND TAKEN ON 17.12.2012 : 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S ERRED IN LAW AND IN FACTS IN NOT ADOPTING COMPARABLE UNCONTROLLE D PRICE METHOD (CUP) INSTEAD OF TRANSACTION NET MARGIN METHOD (TNM M) FOR DETERMINATION OF ARM'S LENGTH PRICE (ALP) OF THE INTERNATIONAL TR ANSACTION WITH THE ASSOCIATED ENTERPRISES (AE'S). ADDITIONAL GROUND TAKEN ON 01.01.2013 : 1. THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACTS IN NOT GRANTING THE BENEFIT OF ADJUSTMENT IN RESPECT OF WORKING CAPITAL REQUIREMENT AND OTHER DIFFERENCES WHILE COMPUTING THE MARGIN UNDER THE TR ANSFER PRICING PROVISION. 4. THE DEPARTMENT IN ITS APPEAL HAS TAKEN THE FOLLO WING GROUNDS OF APPEAL: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW WAS THE LD. CIT(A) HAS ERRED IN REJECTING THE SET OF THREE COMPARABLES USED BY THE TRANSFER PRICING OFFICER IN BENCHMARKING THE INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE AND THEREBY LIMITING THE COMPARABILI TY ANALYSIS TO THREE COMPANIES FURNISHED BY THE ASSESSEE I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 3 AND IN DIRECTING THE AO/TPO TO COMPUTE THE ARM LENGTH PRICE ON THE BASIS OF NEW COMPARABLE SET CONSISTING OF TWO NEW C OMPANIES?' 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW WAS THE LD. CIT(A) HAS ERRED IN HOLDING THA T THE AMENDED PROVISION TO SECTION 92C(2)IS APPLICABLE TO A.Y.200 9-10 ONWARDS WITHOUT APPRECIATING THE FACT THAT THE AMENDMENT IS APPLICA BLE IN RELATION TO ALL CASES IN WHICH PROCEEDINGS ARE PENDING BEFORE THE T RANSFER PRICING OFFICER (TPO) ON OR AFTER 1.10.2009? 3. WHETHER ON THE FACTS CIRCUMSTANCES AND IN THE LAW THE LD CIT (A) HAS ERRED IN DIRECTING THE A. O. /TPO TO GRANT THE BENEFIT OF SECOND PROVISO TO SECTION 92(C) OF 5% MARGIN TO THE ASSESSEE WITHOUT APPRECIATING THAT IN VIEW OF THE PROVISO TO SECTION 92C(2) IT IS CLEAR THAT THE +/- 5% VARIATION IS ALLOWED ONLY TO JUSTIFY THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION AND NOT FOR THE ADJUS TMENTS?. 5. AT THE TIME OF HEARING THE LD. AR SUBMITTED THAT GROUNDS NO.1 3 4 5 6 AND THE ADDITIONAL GROUND FILED ON 17.12.2012 AS M ENTIONED ABOVE ARE NOT PRESSED FOR. 6. IN VIEW OF ABOVE THE GROUNDS OF THE ASSESSEE S APPEAL VIZ GROUNDS NO.1 3 4 5 6 AND THE ADDITIONAL GROUND TAKEN ON 17 .12.2012 AS MENTIONED ABOVE ARE DISMISSED. 7. THE LD. AR SUBMITTED THAT REMAINING GROUNDS OF APPEAL I.E. GROUND NO.2 READ WITH GROUND NO.7 AND ALSO ADDITIONAL GROUND O F APPEAL FILED ON 1.1.2013 AS MENTIONED HEREINABOVE RELATE TO ONLY ONE ISSUE I.E. TRANSFER PRICING ADJUSTMENT. THE LD. AR ALSO SUBMITTED THAT GROUND N O.1 OF THE APPEAL TAKEN BY THE DEPARTMENT IS CONNECTED WITH GROUND NO.2 AND 7 OF THE APPEAL OF THE ASSESSEE. BOTH THE REPRESENTATIVES OF THE PARTIES SUBMITTED THAT THE ABOVE GROUNDS CAN BE DISPOSE OF TOGETHER. 8. IN THE LIGHT OF ABOVE WE CONSIDER NECESS ARY TO STATE THE RELEVANT FACTS. THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF EXPORTING PHARMACEUTICAL PRODUCTS. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING I NCOME ZERO . THE AO HAS STATED THAT THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRU TINY AND ON PERUSAL OF 3CEB IT IS SEEN THAT DURING THE RELEVANT ASSESSMENT YEAR THE ASSESSEE ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTE RPRISES EXCEEDING THE VALUE OF INTERNATIONAL TRANSACTION OF RS.15 00 00 000/-. HENCE REFERENCE U/S 92CA(2) OF THE INCOME TAX ACT 1961 (THE ACT) WAS MADE TO THE TR ANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF ARMS LENGTH PRICE (ALP) AS PER BOARDS INSTRUCTION. I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 4 9. THE TPO VIDE ITS ORDER DATED 28.10.2010 DET ERMINED THE ALP FOR ADJUSTMENT AMOUNTING TO RS.2 92 23 457/-. SINCE THE ADJUSTM ENT WAS PROPOSED BY THE TPO A SHOW CAUSE LETTER WAS ISSUED TO THE ASSESSEE AS T O WHY THE ALP AS DETERMINED BY THE TPO SHOULD NOT BE MADE TO THE TOTAL INCOME OF THE A SSESSEE. THE ASSESSEE FILED ITS WRITTEN SUBMISSIONS DATED 15.11.2010 WHICH THE AO HAS STATED AT PAGES 2 TO 7 OF THE ASSESSMENT ORDER. WE CONSIDER IT PRUDENT TO STATE THE RELEVANT EXTRACT OF THE SAID WRITTEN SUBMISSION. 9.1 THAT THE ASSESSEE COMPANY; M/S GLENMARK PHARMA CEUTICALS LTD (HEREINAFTER IN SHORT REFERRED TO AS GPL) AND GLENMARK IMPEX RUS SIA (HEREINAFTER IN SHORT REFERRED TO AS GIR) ARE ASSOCIATED ENTERPRISES (AES) BELONGING TO THE GLENMARK PHARMACEUTICAL GROUP. GPL IS THE PARENT COMPANY OF BOTH ASSESSEE AND GIR WHICH IS MANUFACTURING PHARMACEUTICAL PRODUCTS. GPL OWNS ALL THE PATENTS FOR DRUGS DEVELOPED BY IT. DURING THE FINANCIAL YEAR 2006-07 RELEVANT TO THE ASSESS MENT YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD EXPORTED PHARMACEUTICAL PRODUC TS AMOUNTING TO RS.24.47 CRORES TO GIR. THIS IS A ONLY INTERNATIONAL TRANSACTION MADE BY THE ASSESSEE COMPANY IN THE FINANCIAL YEAR UNDER CONSIDERATION. ALL PRODUCTS EXPORTED BY THE ASSESSEE COMPANY TO GIR WERE MANUFACTURED BY GPL. THAT NO OTHER PROD UCT OF ANY OTHER PARTY WERE EXPORTED BY THE ASSESSEE COMPANY TO GIR. AS PER THE FACT IT IS STATED THAT GPL INTENDED TO EXPORT PHARMACEUTICAL PRODUCTS TO GIR . THE REQUIRED REGISTRATION AND PERMISSIONS TO SUPPLY PHARMACEUTICAL PRODUCTS TO RU SSIA WERE NOT AVAILABLE WITH GPL BUT THE SAME WERE AVAILABLE WITH THE ASSESSEE CO MPANY. THEREFORE GPL APPROACHED TO THE ASSESSEE COMPANY TO SEEK ITS ASSISTANCE FO R EXPORTING THE PHARMACEUTICAL PRODUCTS TO GIR IN RUSSIA. AN AGREEMENT DATED 1 .4.2000 WAS ENTERED INTO BETWEEN GPL AND THE ASSESSEE COMPANY IN WHICH IT WAS AGREED AS UNDER : I) THAT ASSESSEE HAS AGREED TO ASSIST GPL TO SUPP LY PHARMACEUTICAL PRODUCTS (MANUFACTURED BY GPL) IN RUSSIA TO GIR; (II) THAT GPL WILL SUPPLY TO THE ASSESSEE ITS PHA RMACEUTICAL PRODUCTS AT THE SAME RATE AS THE EXPORT PRICES TO GIR; (III) THAT ASSESSEE SHALL ARRANGE TO SHIP GPL TH E PHARMACEUTICAL PRODUCTS TO RUSSIA; (IV) THAT GPL SHALL REIMBURSE THE ASSESSEE THE EX PENSES INCURRED BY THE ASSESSEE IN RESPECT OF AFORESAID TRANSITIONS IN TERMS OF THE AFORESAID AGREEMENT GPL SUPPLIED ITS PHARMACEUTICAL PRODUCTS TO THE ASSESSEE AT THE SAME RATE AS THE FINAL EXPO RT PRICE TO GIR AND ALSO REIMBURSED ALL COSTS INCURRED BY THE ASSESSEE IN CO URSE OF EXPORTS TO GIR. I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 5 IT IS RELEVANT TO STATE THAT THE MAJOR EXPENSES IN CURRED BY THE ASSESSEE AND REIMBURSED BY THE GPL ARE AS UNDER : ITEM OF EXPENSES AMOUNT (RS.) ADVERTISEMENT 1 70 589.00 DEPRECIATION 1 27 552.00 EXCHANGE RATE LOSS 1 34 94 4 46.00 FREIGHT CHARGES 1 45 69 432.50 INSURANCE PREMIUM 2 10 000.00 OFFICE EXPENSES 8 09 910.01 RENTAL OFFICE PREMISES 17 39 995.22 SALES PROMOTION EXPENSES 9531. 507.78 TOUR EXPENSES 13 14 525.29 9.2 ON BEHALF OF THE ASSESSEE IT WAS CONTENDED T HAT PURCHASE COST OF THE ASSESSEE UNDER THE AGREEMENT IS EQUAL TO THE FIN AL EXPORT PRICES TO GIR IT IS OBVIOUS THAT GIR WILL NOT PAY ANYTHING OVER AND ABOVE SUCH EXPORT TO THE ASSESSEE. IN OTHER WORDS THE ASSESSEE CANNOT RECOVER ANY PROFIT MARGI N FROM GIR BECAUSE PURCHASE COST OF THE ASSESSEE IS FIXED UNDER THE AGREEMENT AS EQU AL TO THE EXPORT PRICE OF GIR. GIR WOULD PAY ONLY THE SALES CONSIDERATION EQUAL TO EXP ORT PRICE PRE-DECIDED WITH GPL AND NOTHING MORE TO THE ASSESSEE. HENCE THE ASSESSEE WAS ONLY ASSISTING GPL IN EXPORTING TO RUSSIA AND THE ASSESSEE DID NOT ON ITS OWN EXP ORTED TO GIR. IT WAS ALSO STATED THAT REIMBURSEMENT OF ABOVE MENTIONED EXPENSES SHOW S THAT THE GPL CARRIED OUT THE FOLLOWING FUNCTIONS : (I) MARKETING; (II) SALES; (III) SHIPPING; (IV) INSURANCE IT WAS FURTHER CONTENDED THAT REIMBURSEMENT OF AB OVE MENTIONED EXPENSES ALSO SHOWS THAT GPL ASSUMED THE FOLLOWING RISKS : I) MARKET RISK (GPL SUPPLIES TO THE ASSESSEE AT THE EX PORT PRICE. SO ANY FALL IN EXPORT PRICE HAS TO BE BORNE BY GPL). II) INVENTORY RISK (GPL HAS TO REIMBURSE ANY COSTS INCU RRED BY THE ASSESSEE ON INVENTORY LOSS). III) FOREIGN EXCHANGE FLUCTUATION RISK IV) COMMERCIAL RISK I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 6 V) ENTREPRENEURIAL RISK 9.3 DURING THE TRANSFER PRICING PROCEEDINGS THE AS SESSEE STATED ABOVE FACTS. IT WAS STATED THAT AS PER AGREEMENT THE ASSESSEE PROVIDE D SERVICES OF SHIPPING GPL PRODUCTS TO GIR IN RUSSIA. ALL COSTS AND RISKS PERTAINING TO EXPORTS TO GIR WERE BORNE BY GPL. THAT THE ASSESSEE DOES NOT OWN ANY DISTRIBUTORSHI P RIGHTS OF THE PRODUCTS MANUFACTURED BY GPL. HENCE THE ASSESSEE ACTED N EITHER AS A SERVICE PROVIDER TO GIR NOR AS A DISTRIBUTOR OF GIR. IT IS GPL WHICH ACTE D AS EXPORTER TO GIR THROUGH THE ASSESSEE WHICH WAS A CONDUIT ENTITY. THE ASSESSEE ALSO CONTENDED THAT GPL OWNS ALL INTELLECTUAL PROPERTY RIGHTS IN THE PHARMACEUTICAL PRODUCTS EXPORTED TO GIR. GIR MANUFACTURED AND PACKED THOSE PHARMACEUTICAL PRODU CTS AND NO REPACKING WAS DONE BY ASSESSEE. THAT THE PRODUCTS WERE SHIPPED TO G IR IN THE SAME PACKING WHICH WAS ORIGINALLY DONE BY THE GPL. THEREFORE THERE WAS NO VALUE ADDITION OF ANY KIND DONE BY THE ASSESSEE COMPANY. THE ASSESSEE ALSO CONTEND ED THAT GPL EARNED OPERATING PROFIT MARGIN OF 51.27% ON EXPORTS TO GIR AND HENC E NO PROFITS HAD BEEN SHIFTED FROM INDIA TO RUSSIA IN COURSE OF THE SAID TRANSACTIONS . HOWEVER GPL ALSO EXPORTED TO INDEPENDENT PARTIES IN UKRAINE TAJIKSTAN AND OTHER COUNTRIES THE SAME PRODUCTS WHICH WERE EXPORTED BY IT THROUGH THE ASSESSEE TO GIR AT PRICE LESSER THAN THE PRICE CHARGED FROM GIR. HENCE THE PRICE ON WHICH PHARMACEUTICALS PRODUCTS WERE SOLD TO GIR BY GPL THROUGH THE ASSESSEE WERE AT ALP. HOWEVER TPO AS KED THE ASSESSEE TO SHOW CAUSE AS TO WHY PROPER ADJUSTMENT SHOULD NOT BE MADE TO EXPO RT VALUE OF THE TRANSACTION WITH GIR BY APPLYING AVERAGE MARGIN OF COMPARABLE COMPA NIES. 9.4 IN RESPONSE TO SAID SHOW CAUSE NOTICE THE ASS ESSEE EXPLAINED BEFORE THE TPO THAT THE ASSESSEE COULD NOT BE CATEGORIZED AS AN EX PORTER TO GIR. ALL COSTS AND RISKS IN RESPECT OF EXPORT TO GIR WERE BORNE BY GPL AND TH E ASSESSEE ONLY ASSISTED GPL IN EXPORTS. THAT GPL REIMBURSED ALL COSTS TO THE ASSESSEE. THAT IN ABSENCE OF ANY COSTS OR RISKS BORNE BY THE ASSESSEE IT COULD NOT BE EXPECTED TO REALIZE ANY PROFITS FROM THE ACTIVITY OF EXPORT TO GIR. HAD THE ASSESSEE BO RNE ENTREPRENEURIAL RISKS ORDINARILY BORNE BY A DISTRIBUTOR OR EXPORTER OF GOODS THE A SSESSEE SHOULD HAVE RECOVERED APPROPRIATE PROFITS COMMENSURATE WITH THE RISKS BOR NE BY IT. IN ABSENCE OF ANY SUCH RISK BORN BY THE ASSESSEE IT CANNOT BE EXPECTED TO RECOVER ANY PROFIT FROM EXPORT TO RUSSIA. THE EXPORT PRICE OF PRODUCTS EXPORTED TO GIR WAS PRE-DECIDED BEFORE GPL SUPPLIED SUCH PRODUCTS TO THE ASSESSEE. HENCE PRO DUCT COST OF EXPORTED PRODUCT IN THE HANDS OF THE ASSESSEE WAS EQUAL TO THE EXPORT PRICE ON WHICH SUCH PRODUCTS WERE EXPORTED TO GIR. THE ASSESSEE ALSO EXPLAINED THAT OTHER COMPANIES WHICH EXPORT PHARMACEUTICAL PRODUCTS OUT OF THE INDIA ARE NOT CO MPARABLE TO THE ASSESSEE BECAUSE OF I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 7 FOLLOWING FUNCTIONAL DIFFERENCES BETWEEN THE TYPICA L EXPORTER/DISTRIBUTOR AND THE ASSESSEE (WHICH ONLY ACTED AS AN INTERMEDIARY OR A CHANNEL ENTITY) S.NO. CHARACTERISTICS GEL TYPICAL EXPORTERS 1 DOES THE ENTITY ACT AS AN INTERMEDIARY OR CHANNEL ENTITY ACTS AS AN I NTERMEDIARY OR CHANNEL ENTITY FOR EXPORTS OF GPL DO NOT ACT AS INTERMEDIARY OR CHANNEL ENTITY 2 DOES THE ENTITY EXPORTS ON BEHALF OF SOME ONE OR DOES IT EXPORTS ON ITS OWN BEHALF EXPORTS ON BEHALF OF GPL EXPORTS ON ITS OWN BEHALF 3 WHO BEARS THE COSTS INCURRED DURING THE ACTIVITY OF EXPORTING? GPL REIMBURSES ALL COSTS INCURRED BY GEL DURING THE ACTIVITY OF EXPORTS SO GPL (NOT GEL) BEARS ALL COSTS INCURRED DURING THE ACTIVITY OF EXPORTING. THE TYPICAL EXPORTER BEARS ALL THE COSTS INCURRED DURING THE ACTIVITY OF EXPORTING 4 WHAT FUNCTIONS ARE CARRIED OUT BY THE ENTITY? GEL DOES NOT CARRY OUT ANY FUNCTIONS BECAUSE THE COSTS INCURRED BY IT IN VARIOUS ACTIVITIES ARE BORNE BY GPL THE TYPICAL EXPORTER CARRIED OUT ALL THE FUNCTIONS REQUIRED TO BE DONE FOR EXPORTING. 5 WHO BEARS THE RISK ARISING FROM THE ACTIVITY OF EXPORTING? GPL REIMBURSES ALL COSTS (INCLUDING FOREIGN EXCHANGE LOSS) INCURRED BY GEL DURING THE ACTIVITY OF EXPORTS . SO GPL(NOT GEREL) BEARS ALL RISKS ARISING FROM THE ACTIVITY OF EXPORTING T HE TYPICAL EXPORTER BEARS ALL THE RISKS ARISING FROM THE ACTIVITY OF EXPORTING 6 WHAT IS HE COST OF GOODS EXPORTED? THE EXPORT PRICE OF GOODS EXPORTED TO GI RUSSIA IS PRE-DECIDED. GPL THEN SUPPLIES GOODS TO GEL AT A COST WHICH IS EQUAL TO THE EXPORT PRI CE OF GOODS EXPORTED TO GI RUSSIA. THIS IS SO BECAUSE GEL IS ONLY A CHANNEL ENTITY THROUGH WHICH GPL IS ONLY A CHANNEL ENTITY THROUGH WHICH GPL EXPORTS TO GI RUSSIA. THE ACTUAL COST OF GOODS EXPORTED TO GI RUSSIA IS BOOKED BY GPL. THE ACTUAL COST OF GOODS EXPORTED IS BOOKED 9.5 ON BEHALF OF THE ASSESSEE IT WAS ALSO CONTENDED THAT UNDER RULE 10B OF THE INCOME TAX RULES 1962 THE COMPARABILITY OF INTER NATIONAL TRANSACTION WITH UNCONTROLLED TRANSACTION SHOULD BE JUDGED WITH REFE RENCE TO THE FOLLOWING: (I) SPECIFIC CHARACTERISTIC OF THE PROPERTY TRANSFER TO SERVICES PROVIDED IN EITHER TRANSACTION; AND I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 8 (II) THE FUNCTIONS PERFORMED AND THE RISKS ASSUMED BY TH E RESPECTIVE PARTIES TO THE TRANSACTION IN VIEW OF SAID PROVISIONS OF RULE 10B(2) OF THE INCOME TAX RULES DUE TO VAST DIFFERENCE IN NATURE OF SERVICES PROVIDED BY THE AS SESSEE TO GPL AND IN THE FUNCTIONS PERFORMED AND THE RISK ASSUMED BY THE ASSESSEE AS C OMPARED TO OTHER COMPANIES WHICH EXPORTED PHARMACEUTICAL PRODUCTS OUT OF INDIA THE ASSESSEE COMPANY CAN NOT BE COMPARED TO SUCH COMPANIES. 9.6 THE ASSESSEE DURING THE COURSE OF PROCEEDINGS BEFORE TPO REFERRED THE FOLLOWING THREE COMPARABLE COMPANIES AND STATED THA T THE OPERATING MARGIN EARNED BY GPL FROM EXPORT TO RUSSIA IS 51.27% AS AGAINST THE OPERATING MARGIN OF 11.94% EARNED BY COMPARABLE COMPANIES. THE SAID COMPANIES ARE LISTED BY THE TPO AT PAGE 5 OF HIS ORDER AS UNDER : S.NO. COMPANY NAME OM(%) 1 DR.REDDY LABORATORIES LTD 5.41% 2 IPCA LABORATORIES LTD. 13.28% 3 STRIDES ACROL ABS LIMITED 17.14% MEAN 11.94% 9.7 IN VIEW OF ABOVE IT WAS CONTENDED THAT SINCE OPERATING MARGIN OF 51.27% DECLARED BY GPL FROM EXPORT TO GIR IS MUCH HIGHER THAN THE OPERATING MARGIN OF THE COMPARABLE COMPANIES THE EXPORT SALE PRICE BOOKED BY THE ASSESSEE COMPANY MIGHT BE CONSIDERED AT ARMS LENGTH AND NO ADJUSTMENT T O THE EXPORT SALE PRICE BOOKED BY THE ASSESSEE COMPANY IS PROPOSED. HOWEVER THE TPO AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE AND ABOVEMENTIONED THREE COMPARAB LE COMPANIES HAS STATED THAT THE ASSESSEE HAS ENTERED INTO AGREEMENT WITH GPL A ND ASSESSEE HAS ALSO ENTERED INTO AGREEMENT WITH GIR RELATING TO INTERNATIONAL TRANS ACTION. THAT AS PER THE AGREEMENT THE RISK OF QUALITY PACKING MARKING QUALITY OF T HE GOODS INSURANCE OF THE GOODS ETC. LIES WITH THE SELLER I.E. ASSESSEE. THEREFORE T HE ASSESSEE HAS OWNED UP ALL THE RISK BY THIS CONTRACT DATED 26.1.2007. HE HAS STATED THAT IN THE CONTRACT NOWHERE IT IS MENTIONED THAT RISK OF THE NORMAL EXPORTER WOULD NOT LIE WITH THE VENDOR BUT IT WILL LIE WITH ANY THIRD PARTY OR GPL. THE TPO HAS STATED T HAT THE ASSESSEE SHOULD HAVE RECOVERED THE EXPORT CONSIDERATION WITH MARK-UP. T HE TPO HAS ACCEPTED THE LIST OF THREE ABOVE COMPARABLE COMPANIES TO BENCH MARK THE TRANSACTION AND HAS HELD THAT THE BENCH MARK-UP OF 11.94% SHOULD HAVE BEEN REC OVERED AS A MARK-UP ON THE COST I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 9 OF ASSESSEE FOR INTERNATIONAL TRANSACTION WITH ITS AE. THE TPO HAS MADE THE COMPUTATION OF ALP AS UNDER : COST OF ASSESSEE(A) RS.24 47 52 569 ARMS LENGTH MARK - UP(B) 11.94% ARMS LENGTH PRICE OF EXPORT ( C ) RS.27 39 76 026 ADJUSTMENT REQUIRED (D) =(C - A) RS.2 92 23 457/ - HENCE THE TPO SUGGESTED THE AO TO MAKE THE ADJUST MENT OF RS.2 92 23 457/- ON ACCOUNT OF DETERMINATION OF ALP OF THE AFORESAID I NTERNATIONAL TRANSACTION. 9.8 IN VIEW OF ABOVE THE AO WHILE MAKING THE ASSES SMENT ORDER ASSESS THE INCOME OF THE ASSESSEE AT RS.2 92 23 457/- BY MAKING ADJU STMENT AS SUGGESTED BY THE TPO AS MENTIONED HEREINABOVE. BEING AGGRIEVED ASSESS EE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 10. THE ASSESSEE MADE ITS SUBMISSIONS ON THE ABOVE LINES AS MADE BEFORE THE AO/TPO. 11. THE LD. CIT(A) HAS STATED THAT THE ASSESSEE HAD THE PERMISSION TO EXPORT AND SALE PHARMACEUTICAL PRODUCT TO RUSSIA. THEREFOR E WHEN THE TRANSACTIONS BEING ROUTED THROUGH THE ASSESSEE THE PHARMACEUTICAL PR ODUCTS WHICH WERE MANUFACTURED BY GPL HAVE BEEN EXPORTED TO GIR IN RUSSIA. THE LD. CIT(A) HAS STATED THAT THE ASSESSEE HAD INCURRED THE EXPENDITURE UNDER FOLLOWING HEADS : ITEM OF EXPENSES AMOUNT (RS.) ADVERTISEMENT 1 70 589.00 DEPRECIATION 1 27 552.00 EXCHANGE RATE LOSS 1 34 94 446.00 FREIGHT CHARGES 1 45 69 432.50 INSURANCE PREMIUM 2 10 000.00 OFFICE EXPENSES 8 09 910.01 RENTAL OFFICE PREMISES 17 39 995.22 SALES PROMOTION EXPENSES 9531. 507.78 TOUR EXPENSES 13 14 525.29 TOTAL 3 00 96 454.80 I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 10 THE LD. CIT(A) HAS STATED THAT FROM THE ABOVE TABLE OF EXPENSES IT CAN BE SEEN THAT THE ASSESSEE HAS UNDERTAKEN THE ACTIVITIES OF ADVERTIS EMENT SHIPMENT FOR WHICH THE CONCERNED CHARGES HAS BEEN PAID THAT ASSESSEE HAS UNDERTAKEN THE INSURANCE ACTIVITIES HAS RENTED OFFICE AND HAS INCURRED OFF ICE EXPENSES AND FURTHER HAS UNDERTAKEN TOURS AND SALES PROMOTION FUNCTIONS. IT INDICATES THAT THESE EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE COMPANY WHICH ARE IN DICATIVE OF THE UNDERTAKING OF FUNCTIONS AND RISKS PERTAINING TO THE EXPORT ACTIVI TY OF THE ASSESSEE. IT IS A DIFFERENT MATTER ALTOGETHER THAT THESE EXPENSES HAVE BEEN RE IMBURSED BY GPL TO THE ASSESSEE BUT THERE IS NO DENIAL TO THE FACT THAT THESE FUNC TIONS WERE UNDERTAKEN BY THE ASSESSEE. THAT LD. CIT(A) HAS STATED THAT REIMBURSEMENT OF E XPENSES DONE BY THE GPL TO THE ASSESSEE WHICH IS ON ACCOUNT OF VARIOUS FUNCTION S THAT ASSESSEE HAS PERFORMED IS WITHOUT ANY MARK-UP. THE LD. CIT(A) FURTHER STATED THAT THE ASSESSEE HOLDS THE PERMISSION AND RIGHTS TO EXPORT PHARMACEUTICAL PROD UCT TO RUSSIA. THEREFORE THE ASSESSEE DID POSSESS ASSETS IN THE SHAPE OF SUCH PE RMISSION AND RIGHT FOR THE EXPORT BESIDES HAVING THE ASSETS IN THE SHAPE OF OFFICE WHICH IT IS MAINTAINING AND THE PERSONNEL WHO ARE WORKING WITH THE ASSESSEE COMPANY . THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE DID NOT EMPLOY ANY ASSETS FOR SU CH EXPORT ACTIVITY UNDERTAKEN BY IT. THE LD. CIT(A) HAS STATED THAT THE CONTENTION THAT THE ASSESSEE IS A CHANNEL ENTITY OR A PASS THROUGH ENTITY IS NOT THE FACT. HAD SUCH BEE N THE POSITION GPL SHOULD HAVE BEEN IN THE ORDINARY COURSE ABLE TO EXPORT ITS PRODUCT TO RUSSIA WHICH IT HAD NOT BEEN ABLE TO DO. IT IS ONLY WITH THE USE OF CRUCIAL ASSETS IN THE SHAPE OF PERMISSION AND THE EXISTENCE OF FUNCTIONING LEGAL ENTITY IN THE SHAPE OF THE ASSESSEE-COMPANY AND HAVING PERSONNEL TO UNDERTAKE FUNCTIONS AND RISKS THAT THE CONCERNED EXPORT TRANSACTION WAS FEASIBLE. 11.1 THE LD. CIT(A) HAS STATED THAT ON THE ONE HAN D IT IS THE FACT THAT THE ASSESSEE IS NOT A CHANNEL OR A CONDUIT OR A PASS THROUGH ENTITY ON THE OTHER SIDE IT IS ALSO THE FACT THAT IT IS NOT A COMPANY WHICH IS INTO MANUFACTURIN G OF PHARMACEUTICAL PRODUCT AND FURTHER IS INTO EXPORT OF THE SAME. HE HAS STATED THAT THE TPO IN ITS ANALYSIS AND BENCH MARKING HAD CONSIDERED THE ARITHMETIC MEAN OF OPERA TING MARGIN OF SUCH THREE COMPARABLES WHICH ARE NOT FOUND TO BE CORRECT A S THE SAID THREE COMPARABLES ARE INTO MANUFACTURING AND SALES AND EXPORT OF PHARMAC EUTICAL PRODUCTS AND THEY ARE NOT INTO NON-MANUFACTURING EXPORT ACTIVITY AS IS THE CASE OF THE ASSESSEE. THE LD. CIT(A) HAS ALSO STATED THAT THE ASSESSEE IN THE BENCH MARK ING HAD CONSIDERED GPL AND ITSELF AS A COMBINED ENTITY AND COMPARABLES WERE SEARCHED WHICH ARE INTO MANUFACTURING AND SALE OF PHARMACEUTICAL PRODUCTS. HE HAS STATED TH AT THE ASSESSEES SUCH BENCH MARK I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 11 HAS NOT FOUND TO BE ACCEPTABLE FOR THE REASONS GIVE N BY THE TPO IN HIS ORDER AND FOR THE REASONS THAT GPL AND THE ASSESSEE HAS COMBINED ENTITY CANNOT BE TAKEN ONLY AS GPL WHICH WOULD IN TURN RENDER THE ASSESSEE AS NO N EXISTENCE. IN VIEW OF THE ABOVE DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE L D. CIT(A) THE ASSESSEE SUBMITTED A SET OF THREE NEW COMPARABLES WHICH ARE NON-MANUFACT URING EXPORT ENTITIES. THE DETAILS OF WHICH ARE STATED BY THE LD. CIT(A) AT P AGE 9 OF THE IMPUGNED ORDER AS UNDER : S.NO. NAME F.Y. GROSS SALES IN CRORES OPERATING PROFITS % 1 LYKA EXPORTS LTD. 2006 - 07 6.91 4.34 2 MEGAFINE PHARMACHEM PVT.LTD. 2006 - 07 35.83 9.99 3 SHELESHA PHARMACHEM P.LTD. 2005 - 06 31.89 3.39 11.2 THE LD. CIT(A) HAS STATED THAT THESE ARE ADDI TIONAL EVIDENCES AND ACCORDINGLY FORWARDED THE DETAILS TO THE TPO TO GIVE HIS REMAN D REPORT. IT IS OBSERVED THAT TPO SUBMITTED REMAND REPORT. THE LD. CIT(A) HAS STATED THAT IT IS SEEN FROM THE REMAND REPORT THAT NOTHING ON MERITS OF COMPARABLE ENTITIE S HAVE BEEN MENTIONED EXCEPT BRIEF FACTUAL NARRATION OF WHAT WAS DONE BY THE ASSESSEE IN ITS TRANSFER PRICE STUDY REPORT AND HAS FURTHER MENTIONED THAT IN THE CASE OF SHELESHA PHARMACHEM PVT.LTD THE DATA FOR FY 2006-07 IS NOT AVAILABLE. THE LD. CIT(A) HAS STAT ED THAT THE ASSESSEE IN HIS SUBMISSIONS HAS MENTIONED THAT WHILE DOING THE BENCH MARK THE TPO IF HAD NOT ACCEPTED THE PROPOSITION OF THE BENCH MARKING DONE BY THE ASSES SEE SHOULD HAVE GIVEN SHOW CAUSE NOTICE ALONG WITH THE PROPOSITION OF COMPARABLES EN TITIES PROPOSED TO BE ADOPTED. IT IS FURTHER STATED THAT HAD OPPORTUNITY BEEN GIVEN THE ASSESSEE WOULD HAVE SUBMITTED SUCH NON-MANUFACTURING EXPORT ENTITIES AS COMPARABL E ON WITHOUT PREJUDICE BASIS. THAT THE TPO AS PER PROVISIONS OF SECTION 92C(3) OF THE ACT WAS REQUIRED TO BENCHMARK THE INTERNATIONAL TRANSACTION ON THE BASIS OF INFORMAT ION/DETAILS/MATERIAL AVAILABLE WITH HIM AND IN ACCORDANCE WITH THE PROVISIONS OF SECTION 92 C(1) AND 92C(2) OF THE ACT. THE LD. CIT(A) HAS STATED THAT WHEN THE ASSESSEES FUNCTIO N PROFILE IS THAT OF A NON MANUFACTURING EXPORTERS ITS INTERNATIONAL TRANSACT ION CANNOT BE BENCH MARKED CONSIDERING THAT AS COMPARABLE TO THE COMPANIES WH ICH ARE INTO MANUFACTURING OF PHARMACEUTICAL PRODUCTS AND SALES/EXPORTS THEREOF. ACCORDINGLY THE BENCH MARK ANALYSIS DONE BY THE TPO IS NOT FOUND TO BE PROPER . LD. CIT(A) HAS STATED THAT THE TPOS SUBMISSION THAT SUCH ADDITIONAL EVIDENCE SHOU LD NOT BE ADMITTED AT THE APPELLATE STAGE IS NOT FOUND TO BE ACCEPTABLE AS THE SAME ARE CONSIDERED. AS SUCH DETAILS SUBMITTED DURING THE COURSE OF APPELLANT PROCEEDIN GS WHICH ARE NECESSARY TO BE I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 12 CONSIDERED KEEPING IN VIEW THE FUNCTIONAL PROFILE O F THE ASSESSEE. IN CONCLUSION LD. CIT(A) HAS ADMITTED THE ADDITIONAL EVIDENCES SUBMIT TED BY THE ASSESSEE. 11.3 THE LD. CIT(A) FURTHER STATED THAT THE DATA I N RESPECT OF SHELESHA PHARMACHEM PVT.LTD FOR THE FINANCIAL YEAR 2006-07 IS NOT AVAI LABLE. HE HAS STATED THAT THE ASSESSEE HAS SUBMITTED BALANCE SHEET PROFIT AND LOSS ACCOUN T AND OPERATING PROFIT MARGIN OF THESE COMPARABLE FOR FINANCE YEAR 2006-07 BUT TH ERE IS NO INFORMATION AVAILABLE IN THE PUBLIC DOMAIN REGARDING THE OPERATING AND NON OPERATION EXPENSES. THEREFORE WHAT THE ASSESSEE HAS CONSIDERED AS OPERATING MARGI N IS ACTUALLY THE PROFIT BEFORE TAX THE LD. CIT(A) HAS STATED THAT SUFFICIENT DATA IN R ESPECT OF SHELESHA PHARMACHEM PVT.LTD IS NOT AVAILABLE TO ARRIVE AT A CORRECT OPERATING MARGIN OF THIS COMPARABLE AND ACCORDINGLY EXCLUDED THE SAME FROM THE SET OF COMP ARABLE FOR BENCH MARKING THE INTERNATIONAL TRANSACTION OF THE ASSESSEE. HOWEVE R THE LD. CIT(A) HAS STATED THAT FOR THE PURPOSE OF BENCH MARKING THE REMAINING SET OF TWO COMPARABLE VIZ. LYKA EXPORTS LTD AND MEGAFINE PHARMACHEM P.LTD ARE CONSIDERED AS A SET OF COMPARABLES WITH THEIR ARITHMETIC MEANS OF OPERATING PROFIT AS PROFIT LEV EL INDICATOR (PLI) FOR ARRIVING AT ALP OF THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION. THE LD. CIT(A) HAS STATED THAT TRANSACTION NET MARGIN METHOD ( TNMM) IS THE MOST APPROPRIATE METHOD AND WITH ARITHMETIC MEAN OF THEIR OPERATING MARGINS AS THE M ARGIN TO ARRIVE AT THE ALP OF THE INTERNATIONAL TRANSACTION TO WORK OUT THE QUANTUM OF ADJUSTMENT TO ARRIVE OF ALP OF THE INTERNATIONAL TRANSACTIONS IN QUESTION. THEREFORE LD.CIT(A) HAS DIRECTED THE TPO/AO TO WORK OUT THE QUANTUM OF ADJUSTMENT TO ARRIVE AT A LP ACCORDINGLY OF THE IMPUGNED TRANSACTION. HENCE THE ASSESSEE AS WELL AS THE DEPA RTMENT ARE IN APPEALS BEFORE THE TRIBUNAL. 12. DURING THE COURSE OF HEARING LD. AR AFTER SUM MARISING THE FACTS WHEREBY THE ASSESSEE HAD ASSISTED GPL TO EXPORT PHARMACEUTICAL PRODUCTS IN RUSSIA TO GIR SUBMITTED THAT TPO CONSIDERED THREE COMPANIES AN ALYSIS THE DETAILS OF WHICH ARE MENTIONED IN PARAS 9.4 TO 9.6 OF THIS ORDER ARE INTO MANUFACTURING SALES AND EXPORT OF PHARMACEUTICAL PRODUCTS AND WHEREAS THE ASSESSEE -COMPANY IS A NON-MANUFACTURER. HE SUBMITTED THAT ASSESSEE COMPANY ONLY ASSISTED I TS PARENT COMPANY GPL TO EFFECT EXPORT OF PHARMACEUTICAL PRODUCTS TO GIR. THAT IT REQUIRED REGISTRATION AND PERMISSION TO SUPPLY PHARMACEUTICALS PRODUCTS IN RUSSIA WHICH WERE NOT AVAILABLE WITH GPL BUT THE SAME WERE AVAILABLE WITH THE ASSESSEE. HE SUB MITTED THAT IN THE TRANSFER PRICING STUDY THE ASSESSEE-COMPANY STATED THAT THE OPERA TING MARGIN EARNED BY GPL FROM EXPORT TO RUSSIA WAS 51.27% AS AGAINST OPERATING M ARGIN OF 11.94% EARNED BY THE THREE COMPARABLE COMPANIES WHO WERE NOT ONLY IN TH E SALES AND EXPORTS OF I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 13 PHARMACEUTICALS PRODUCT BUT WERE ALSO IN MANUFACTU RING BUSINESS. THE LD. AR SUBMITTED THAT THE ASSESSEE THEREFORE SUBMITTE D THREE NEW COMPANIES WHO WERE COMPARABLE BEFORE FIRST APPELLATE AUTHORITY B ECAUSE TPO DID NOT ACCEPT THE COMBINE MARGIN OF 51.27% AS STATED INITIALLY BY THE ASSESSEE COMPANY. THE LD. AR SUBMITTED THAT THE LD. CIT(A) SOUGHT REMAND REPORT FROM TPO. HE SUBMITTED THAT THE LD. CIT(A) ACCEPTED TWO COMPANIES VIZ. LYKA EXP ORTS LTD AND MEGAFINE PHARMACHEM P.LTD AS COMPARABLES AND IGNORED THIRD COMPANY SH ELESHA PHARMACHEM PVT.LTD AS COMPARABLE ON THE GROUND THAT REQUISITE DATA WERE NOT AVAILABLE. HE SUBMITTED THAT IF THERE WAS A DOUBT THE TPO COULD HAVE ISSUED NOTICE U/S 133(6) OF THE ACT TO COLLECT DATA FROM THE ASSESSEE TO INCLUDE THIRD COMPANY AS WELL WHILE CONSIDERING THE ALP. HE SUBMITTED THAT TPO MAY BE DIRECTED TO COLLECT INFO RMATION TO WORK OUT THE CORRECT MARGIN TO ARRIVE AT ALP. THE LD. AR FURTHER SUBMIT TED THAT THE ASSESSEE HAS NOT INCURRED ANY RISK IN EFFECTING THE SAID EXPORT TRA NSACTION ON BEHALF OF GPL. HE SUBMITTED THAT NO WORKING CAPITAL WAS USED BY THE ASSESSEE AND ALL THE EXPENSES AS WELL AS MARKETING FUNCTIONS AND RISK PERTAINING TO SAID EXPORT ACTIVITY WAS CARRIED OUT BY GPL AND WHATEVER THE EXPENSES WERE INCURRED BY THE ASSESSEE COMPANY WERE REIMBURSED BY GPL TO IT. THE LD. AR SUBMITTED THAT IN EFFECTING THE ABOVE INTERNATIONAL TRANSACTIONS BY MAKING EXPORT TO GIR APPROPRIATE ADJUSTMENTS OF WORKING CAPITAL AS WELL AS ALL OTHER RISKS HAVE TO BE TAKEN INTO ACCOU NT WHICH ARE INCURRED BY OTHER TRADERS. THE LD. AR SUBMITTED THAT THERE WAS NO INVENTORY RISK AND DATA RISK WHICH HAS TO BE FACTORED IN ADJUSTMENT. HE SUBMITTED THAT NO RESER VES WERE EMPLOYED BY THE ASSESSEE EXCEPT THAT NAME OF THE ASSESSEE WAS USED BECAUSE THE ASSESSEE WAS HOLDING THE PERMISSION AND RIGHT TO EXPORT PHARMACEUTICAL PROD UCTS TO RUSSIA WHICH GPL DID NOT POSSESS. THE LD. AR BY PLACING RELIANCE ON THE D ECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DEMAG CRANES AND COMPONENTS (INDIA) PVT.LIMITED V/S DCIT IN ITA NO.120/PN/2011 (AY-2006-07) DATED 4.1.2012 SUBM ITTED THAT THE TRIBUNAL HAS HELD THAT IT IS THE DUTY OF THE TPO TO APPLY THE PROVIS IONS OF RULE 10B(1)(E) OF THE INCOME TAX RULES TO ESTABLISH THE ALP IN RELATION TO INTER NATIONAL TRANSACTION AS PER TNMM AND WORKING CAPITAL IS A FACTOR WHICH INFLUENCE THE PRI CE IN THE OPEN MARKET; THEREFORE THE NET PROFIT MARGIN OF THE BUSINESS SEGMENT OF THE AS SESSEE IN THAT CASE HAS TO BE CONSIDERED WHILE DETERMINING THE ARMS LENGTH OPER ATING MARGIN OF THE COMPARABLES. THE LD. AR SUBMITTED THAT THE MATTER MAY BE RESTORE D TO CONSIDER THE ALP AFTER CONSIDERING ALL THE ABOVE THREE NEW COMPARABLES SUBMITTED BEFORE THE FIRST APPELLATE AUTHORITY AND DUE ADJUSTMENT ON ACCOUNT O F WORKING CAPITAL AND THE OTHER RISKS BE CONSIDERED WHILE DETERMINING THE PROFIT MA RGIN IN RESPECT OF THE TRANSACTION UNDER CONSIDERATION. I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 14 13. ON THE OTHER HAND THE LD. DR SUBMITTED THAT IT IS A FACT THAT THE THREE COMPARABLES AS CONSIDERED BY THE TPO IN HIS ORDER DATED 28.10.2010 MENTIONED IN PARAGRAPH 9.6 OF THIS ORDER ARE NOT COMPARABLES W ITH THE ASSESSEE BUT THE SAID COMPARABLES WERE GIVEN BY THE ASSESSEE IN ITS TRANS FER PRICE ANALYSIS AND SAME WERE CONSIDERED BY THE TPO. THE LD. DR FURTHER SUBMIT TED THAT THE ASSESSEE FURNISHED THREE NEW COMPARABLES BEFORE THE FIRST APPELLATE AUTHORITY. HE SUBMITTED THAT THE LD. CIT(A) HAS RIGHTLY NOT CONSIDERED SHELESHA PHARMACH EM PVT.LTD AS FINANCIAL RESULT THEREOF WERE NOT AVAILABLE IN PUBLIC DOMAIN. HE SU BMITTED THAT ONUS IS ON THE ASSESSEE TO FURNISH THE DETAILS OF THE COMPARABLES AND TP O IS NOT UNDER AN OBLIGATION TO GATHER INFORMATION OF COMPARABLE COMPANIES U/S 133(6) OF THE ACT. THE LD. DR FURTHER REFERRED RULE 10(B)(E)(4) OF THE RULES AND SUBMITTE D THAT THE DATA OF THE CURRENT YEAR ARE TO BE USED UNLESS IT IS SHOWN THAT EARLIER DA TA HAS INFLUENCE ON THE DETERMINATION OF THE MARGIN TO THE TRANSACTION OF THE CURRENT YEA R. HE SUBMITTED THAT IT IS A FACT THAT TPO WHILE CONSIDERING THREE NEW COMPARABLES SUBMI TTED BY THE ASSESSEE BEFORE THE FIRST APPELLATE AUTHORITY HAD NOT EXAMINED THE ADJUSTMENT FOR WORKING CAPITAL BUT ONUS IS ON THE ASSESSEE TO DEMONSTRATE THE SAME BEF ORE TPO TO CONSIDER IT AND TO TAKE INTO ACCOUNT TO DETERMINE ALP. THE LD. DR SUBMITT ED THAT HE HAS NO OBJECTION IF THE MATTER IS RESTORED TO THE AO TO EXAMINE THE ALP AF RESH AFTER MAKING NECESSARY ADJUSTMENTS ON ACCOUNT OF WORKING CAPITAL AS PER R ULES. HOWEVER THERE IS NO GROUND RAISED BY ASSESSEE FOR CONSIDERING OTHER RISKS ADJU STMENT. 14. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW AND THE SUBMISSIONS OF THE LD. REPRESENTATIVES OF THE PARTI ES. WE HAVE ALSO GONE THROUGH THE CASES CITED BEFORE US (SUPRA). WE OBSERVE THAT TH E ASSESSEE FILED THE RETURN OF INCOME FOR THE ASSESSMENT UNDER CONSIDERATION DECLARING TO TAL INCOME OF RS. ZERO. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO ON P ERUSAL OF 3CEB FORM REVEALED THAT DURING THE ASSESSMENT YEAR UNDER CONSIDERATION THE ASSESSEE ENTERED INTO AN INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES VIZ GIR EXCEEDING RS.15 00 00 000/- AND ACCORDINGLY MADE A REFERENCE TO TPO FOR DETERMINATION OF ALP. THAT THE ASSESSEE CONTENDED THAT IT ASSISTED GPL TO SUPPLY PHARMACEUTICAL PRODUCTS IN RUSSIA TO GIR WHICH IS ALSO AN ASSOCIATED ENTERPRI SES BELONGING TO GLENMARK PHARMACEUTICAL GROUP. THE CONTENTION OF THE ASSES SEE IS THAT GPL SUPPLIED ITS PHARMACEUTICAL PRODUCTS TO THE ASSESSEE AT THE SAME RATE AS THE FINAL EXPORT PRICE TO GIR AND ALSO REIMBURSED COST INCURRED BY THE ASSESS EE. THE DETAILS OF THE SAID EXPENSES ARE MENTIONED HEREINABOVE IN PARA 9.1 HERE INABOVE. THE ASSESSEE CONTENDED I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 15 THAT IT ACTED ONLY AS A CONDUIT FOR EXPORT OF PHAR MACEUTICAL PRODUCTS OF GPL TO GIR AND ITS ROLE WAS OF ONLY RISK FREE SERVICES PROV IDED TO GPL IN THE TRANSACTIONS OF EXPORT BY GPL TO GIR BECAUSE GPL COULD NOT EXPORT PHARMA CEUTICAL PRODUCT TO GIR AS GPL WAS NOT REGISTERED AND DID NOT HAVE REQUIRED PERMI SSION TO SUPPLY PHARMACEUTICAL PRODUCTS TO RUSSIA BUT THE SAME WERE AVAILABLE WI TH THE ASSESSEE COMPANY. IT IS NOT IN DISPUTE THAT GPL OWNS INTELLECTUAL RIGHTS OF PHA RMACEUTICAL PRODUCTS TO EXPORT TO GIR. THERE IS ALSO NO DISPUTE TO THE FACTS THAT TH E PRODUCTS WERE SHIPPED TO GIR IN THE SAME PACKING WHICH WAS ORIGINALLY DONE BY GPL. HOWEVER THERE IS NO DISPUTE TO THE FACT ALSO THAT THE ASSESSEE ALSO ENTERED INTO AN A GREEMENT WITH GIR IN TERMS OF WHICH THE ASSESSEE PROVIDED SERVICES OF SHIPPING THE GP L PHARMACEUTICAL PRODUCT TO GIR IN RUSSIA. THEREFORE TPO CONSIDERED THAT AS PER THE AGREEMENT THE RISK OF QUALITY PACKING MARKING QUALITY OF THE GOODS INSURANCE O F THE GOODS ETC. LIE WITH THE ASSESSEE. HENCE THE ASSESSEE OWNED UP ALL RIS KS UNDER THE SAID AGREEMENT. IN VIEW OF ABOVE WE OBSERVE THAT TPO PROCEEDED TO MAKE PROFIT MARGIN OF THREE COMPANIES AND ARRIVED AT MEAN OF THE PROFIT MARGIN AT 11.94% THE DETAILS OF WHICH ARE GIVEN HEREINABOVE IN PARAS 9.6 AND 9.7 HEREINABOVE. TH US THE TPO SUGGESTED THE BENCH MARKUP ON THE COST OF THE ASSESSEE FOR THE ABOVE T RANSACTIONS AND SUGGESTED ALP ADJUSTMENT OF RS.2 92 23 457/-. IT IS A FACT THA T THE SAID ADJUSTMENT WAS RECOMMENDED BY TPO AND ACCORDINGLY ADDITION HAS BE EN MADE BY THE AO BY CONSIDERING THE ABOVE MENTIONED THREE COMPARABLES A S MENTIONED IN PARA IN 9.6 OF THIS ORDER. HOWEVER WE AGREE WITH THE LD. CIT(A) THAT THE ABOVE MENTIONED THREE COMPARABLES COMPANIES ARE (I) DR.REDDY LABORATORIE S LTD (II) IPCA LABORATORIES LTD. AND (III) STRIDES ACROLABS LIMITED ARE NOT COMPAR ABLES WITH THE ASSESSEE BECAUSE THE ABOVE MENTIONED THREE ENTITIES ARE NOT ONLY IN THE MANUFACTURING OF PHARMACEUTICALS PRODUCTS BUT ARE ALSO IN THE BUSINESS OF SALE/EXPOR TS OF PHARMACEUTICAL PRODUCTS AND WHEREAS ASSESSEE HAS ONLY ACTED ON BEHALF OF THE G PL TO EFFECT EXPORT OF THE PHARMACEUTICAL PRODUCTS TO GIR WHICH AT THE MOST IS IN THE NATURE OF TRADING. THEREFORE THE ASSESSEE HAS FUNCTIONED ONLY AS A TR ADER. AS OBSERVED HEREINABOVE THE ASSESSEE IS NOT ADDING ANY MARGIN ON THE PRODUCT S OLD IN SUCH TRADING ACTIVITY THOUGH THE ASSESSEE INITIALLY INCURRED THE EXPENDITURE TO UNDERTAKE ACTIVITY OF ADVERTISEMENT SHIPMENT INSURANCE AND TOURS AND ALSO USED ITS AS SETS /RIGHTS IN THE SHAPE OF PERMISSION AND REGISTRATION POSSESS BY IT. THERE IS NO DISPUTE THAT ALL EXPENSES INCURRED BY THE ASSESSEE HAVE BEEN REIMBURSED TO IT BY GPL. WE THEREFORE AGREE WITH LD. CIT(A) THAT IT CANNOT BE SAID THAT THE ASSESSEE DID NOT EMPLOY ANY ASSETS FOR SUCH EXPORT ACTIVITY UNDERTAKEN BY IT. IN VIEW OF THE ABOVE WE ARE OF THE CONSIDERED VIEW THAT THE LD. CIT(A) HAS RIGHTLY HELD THAT THE THREE COMPARABLES CONSIDERED BY TPO IN ITS I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 16 ORDER DATED 28.10.2010 AND TAKING OPERATING PROFIT MARGIN OF 11.94% IS NOT CORRECT AS THOSE COMPARABLE COMPANIES/ENTITIES ARE IN THE MANU FACTURING OF PHARMACEUTICAL PRODUCTS AND ARE ALSO IN THE SALES/ EXPORT OF TH E SAME WHEREAS THE ASSESSEE IS IN A NON-MANUFACTURING EXPORT ACTIVITIES. HENCE ON THE FACTS LD. CIT(A) HAS RIGHTLY CONSIDERED THE ADDITIONAL EVIDENCE AND TO SEEK REM AND REPORT FROM THE AO IN RESPECT OF THE THREE COMPARABLES ENTITIES FURNISHED BEFORE HIM BY THE ASSESSEE THE DETAILS OF WHICH ARE GIVEN IN PARAGRAPH 11.1 OF THIS ORDER. 15. WE OBSERVE THAT THE LD. CIT(A) HAS FINALLY CONS IDERED ONLY TWO COMPARABLES COMPANIES VIZ. LYKA EXPORTS LTD AND MEGAFINE PHA RMACHEM P.LTD AND HAS DIRECTED AO/TPO TO WORK OUT THE QUANTUM OF ADJUSTMENT BY CON SIDERING THEIR OPERATING PROFIT MARGIN TO ARRIVE AT ALP OF THE INTERNATIONAL TRANS ACTION IN QUESTION. DURING THE COURSE OF HEARING LD.AR SUBMITTED BEFORE US THAT EXCLUSIO N OF THIRD COMPARABLE COMPANY VIZ. SHELESHA PHARMACHEM PVT.LTD IS NOT JUSTIFIED AS THE ASSESSEE FURNISHED REQUISITE DATA VIZ BALANCE SHEET PROFIT AND LOSS ACCOUNT AND OPER ATING PROFIT MARGIN FOR FINANCIAL YEAR 2006-07 AND HAD NOT MERELY GIVEN THE NAME OF THE S AID COMPARABLE COMPANY AND NOT PUT ONUS ON THE TPO TO FIND OUT OTHER PARTICULARS. DURING THE COURSE OF HEARING LD. AR SUBMITTED THAT ASSESSEE FURNISHED COPY OF BALANCE SHEET PROFIT AND LOSS ACCOUNT TO CIT(A) AND WHEREAS THE LD. DR SUPPORTED THE ORDER OF THE LD. CIT(A) IN EXCLUDING THE SAID COMPANY VIZ. SHELESHA PHARMACHEM PVT.LTD ON T HE GROUND THAT THE FULL DETAILS OF THE CURRENT FINANCIAL YEAR WERE NOT MADE AVAILABLE AND TPO IS NOT BOUND TO GATHER THE INFORMATION AT THE TIME OF MAKING HIS STUDIES. HE SUBMITTED THAT ONUS IS ON THE ASSESSEE TO FURNISH THE RESULTS OF THE COMPARABLES WHICH THE ASSESSEE FAILED TO DO SO. THE LD. DR SUBSTANTIATED HIS SUBMISSIONS BY REFE RRING RULE 10(B)(E)(4) OF THE RULES. CONSIDERING THE ABOVE FACTS AND THE FACTS THAT LD.D R HAS AGREED TO RESTORE THE MATTER TO AO TO EXAMINE ALP AFRESH AFTER GIVING DUE ADJUSTME NTS OF WORKING CAPITAL AS PER RULES WE ARE OF THE CONSIDERED VIEW THAT WHEN THE REFERENCE IS MADE TO THE TPO AND THE TPO MAKES HIS ANALYSIS TO WORK OUT THE BENCH M ARK OF THE OPERATING PROFIT OF THE ASSESSEE IN RESPECT OF INTERNATIONAL TRANSACTIONS U NDERTAKEN BY IT ON THE BASIS OF SAID TWO COMPARABLE COMPANIES ON WHICH THERE IS NO DIS PUTE BETWEEN THE PARTIES. HOWEVER IN RESPECT OF 3 RD COMPARABLE CO. NAMELY M/S SHELESHA PHARMACHEM PRIVATE LIMITED REQUISITE INFORMATION IS NOT AVAILABLE AND THEREF ORE IT IS NOT RIGHTLY CONSIDERED TO DETERMINE ALP. 16. NOW THE QUESTION ARISES AS TO WHETHER ASSESSE E IS ENTITLED FOR ADJUSTMENT OF THE OPERATIVE PROFIT MARGIN ON ACCOUNT OF DIFFEREN CE IN THE WORKING CAPITAL AND OTHER DIFFERENCE BETWEEN ITSELF AND THE COMPARABLE COMPA NIES. WE OBSERVE THAT THE LD. I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 17 CIT(A) WHILE RESTORING THE MATTER TO THE AO TO DET ERMINE ALP HAS NOT STATED ABOUT THE APPROPRIATE ADJUSTMENTS TO BE GIVEN ON ACCOUNT OF WORKING CAPITAL AND OTHER RISKS PROFILE WHILE COMPUTING ALP. IT IS WELL SETTLED TH AT THE TPO WHILE ARRIVING AT THE PROFIT LEVEL INDICATOR OF THE COMPARABLE ENTITIES WITH THE APPROPRIATE LEVEL MARGIN OF THE ASSESSEE TO ARRIVE AT ALP OF THE INTERNATIONAL TR ANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO GIVE DUE ADJUSTMENTS ON ACCOUNT OF WORKING CAPITAL AS PROVIDED IN RULE 10B(2) OF THE RULES R.W.SECTION 92C(2) OF THE ACT. A SIMILAR ISSUE HAS ALSO BEEN CONSIDERED IN VARIOUS DECISIONS OF THE VARIOUS BEN CHES OF THE INCOME TAX APPELLATE TRIBUNAL. IN DEMAG CRANES AND COMPONENTS (INDIA) PV T.LIMITED (SUPRA) THE TRIBUNAL HAS CONSIDERED THE DECISION IN THE CASE OF E-GAIN COMMUNICATION (P.) LTD. V. ITO (2009) 118 ITD 243 AND STATED THAT WHEN TNMM IS APPLIED TO A CASE THE DIFFERENCES WHICH ARE LIKELY TO MATERIALLY AFFECT T HE PRICE COST CHARGED OR PAID IN OR THE PROFIT IN THE OPEN MARKET ARE TO BE TAKEN INTO CONS IDERATION WITH THE IDEA TO MAKE REASONABLE AND ACCURATE ADJUSTMENT TO ELIMINATE THE DIFFERENCES HAVING MATERIAL EFFECT. IT IS FURTHER STATED THAT IF THESE DIFFERENCES AR E NOT ELIMINATED OR REMOVED THE COMPARISON BECOMES UNSOUND AND UNRELIABLE . THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) PVT LTD (SUPRA) HAS STATED IN PARAGRAPH 22 THAT WORKING CAPITAL CONSTITUTES AN IT EM OF DIFFERENCE IN MATTERS OF COMPUTATION OF ARM'S LENGTH PRICE/NET MARGIN AND IT CONSTITUTES A SUBJECT MATTER OF ADJUSTMENT IN THE MATTERS RELATING TO ALP IN TRANSF ER PRICING. THE ABOVE OBSERVATIONS OF THE TRIBUNAL HAS BEEN SUBSTANTIATED BY RELYING ON T HE EARLIER DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF MENTOR GRAPHICS (NOIDA) (P.) LTD. V. DY. CIT (2007) 109 ITD 101 (DEL) AND STATED WORKING CAPITAL ADJUSTMENTS CONSTITUTE S ONE WHICH IS REQUIRED TO BE ADJUSTED FOR THE PURPOSE OF ESTABLISHING THE ALP. IT IS RELEVANT TO STATE PARA 27 OF THE SAID ORDER WHICH READS AS U NDER : 'IT IS A SIMPLE PRINCIPLE OF ECONOMICS THAT THE GRE ATER THE RISK THE GREATER THE EXPECTED RETURN (COMPENSATION). IF THERE ARE MATERI AL AND SIGNIFICANT DIFFERENCES IN THE RISK INVOLVED THEN THE COMPARABLES IDENTIFI ED ARE NOT CORRECT AS APPROPRIATE ADJUSTMENTS FOR DIFFERENCES IN SUCH CAS ES ARE NOT POSSIBLE. THEREFORE WHILE PERFORMING SEARCHES FOR POTENTIAL COMPARABLE COMPANIES NOT ONLY TURNOVER AND OPERATING PROFIT BUT FUNCTIONS PE RFORMED AND RISK PROFILE ARE ALSO TO BE CONSIDERED. HOWEVER IT CAN ALWAYS BE SH OWN ON THE GIVEN FACTS OF THE CASE THAT COMPARABLES FOUND ARE SIMILAR OR ALMOST S IMILAR TO THE CONTROLLED TRANSACTION AND NO ADJUSTMENTS ARE NEEDED. IT IS US EFUL TO SEE THE LEVEL OF INTANGIBLE ASSETS IN COMPARISON TO AN APPROPRIATE B ASE. DEPENDING ON FACTS OF THE CASE FINAL SET OF COMPARABLES MAY NEED TO ELIM INATE DIFFERENCES BY MAKING ADJUSTMENTS FOR THE FOLLOWING: (A) WORKING CAPITAL; (B) ADJUSTMENT FOR RISK AND GROWTH; (C) ADJUSTMENT OF R&D EXPENSES. I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 18 THE RISK NOT ONLY DUE TO HUMAN RESOURCES INFRASTRU CTURE AND QUALITY WHICH ARE NORMALLY TAKEN INTO ACCOUNT YET MORE SIGNIFICANT RI SKS LIKE MARKET RISK CONTRACT RISK CREDIT AND COLLECTION RISK AND RISK OF INFRIN GEMENT OF INTELLECTUAL PROPERTY ARE BEING IGNORED HERE. IN MOST OF THE COMPARABLE ANALY SIS CARRIED IN INDIA THE LATTER TYPE OF RISKS IS NOT BEING TAKEN INTO CONSID ERATION ALTHOUGH THESE CAN LEAD TO MAJOR DIFFERENCE IN MARKET VALUE OF TRANSACTIONS .' 17. CONSIDERING THE ABOVE CASES AND THE PROVISIONS OF RULE 10B(2) AND ( 3) OF THE RULES WE ARE OF THE CONSIDERED VIEW THAT DUE ADJUS TMENT OF THE WORKING CAPITAL ASSUMED BY THE ASSESSEE AS WELL AS THE COMPARABLE E NTITIES ARE TO BE CONSIDERED FOR DETERMINING THE ALP OF THE TRANSACTION. DURING THE COURSE OF HEARING LD. AR REITERATED BEFORE US THAT THE ASSESSEE HAD NOT ASSUMED ANY RIS K IN RESPECT OF MARKETING OF THE PRODUCT REALIZATION OF SALES PROCEEDS RISK OF QU ALITY ETC. SINCE THE SAID GROUND OF ADJUSTMENT OF OTHER RISK IS NOT BEFORE US WE REFR AIN TO GIVE ANY SUCH DIRECTION TO AO/TPO WHILE ARRIVING AT THE MARGIN OF PROFIT OF T HE ASSESSEE IN RESPECT OF TRANSACTION UNDER CONSIDERATION. 18. ACCORDINGLY WE ALLOW GROUND NO.2 READ WITH AD DITIONAL GROUND TAKEN BY THE ASSESSEE VIDE ITS LETTER DATED 1.1.2013 AS MENTIONE D HEREINABOVE FOR STATISTICAL PURPOSES BY RESTORING THE MATTER TO THE AO WITH TH E ABOVE DIRECTIONS I.E. TO COMPUTE THE ALP AFRESH IN RESPECT OF THE INTERNATIONAL TRAN SACTION OF THE ASSESSEE WITH THE ASSOCIATED ENTERPRISE (GIR). CONSEQUENTLY GROUND NO.7 OF THE APPEAL OF THE ASSESSEE AND GROUND NO.1 TAKEN BY THE DEPARTMENT ARE REJE CTED. 19. IN RESPECT OF GROUND NOS. 2 AND 3 OF THE APPEA L TAKEN BY THE DEPARTMENT THE ISSUE IS AS TO WHETHER ASSESSEE IS ENTITLED TO GE T STANDARD DEDUCTION FROM PROFIT MARGIN DETERMINED BY TPO OF 5% AS PER THE PROVISO T O SECTION 92C(2) OF THE ACT EVEN IF DIFFERENCE OF ALP OF THE INTERNATIONAL TRANSA CTION UNDERTAKEN BY THE ASSESSEE FALLS BEYOND 5% OF THE PRICE OF THE INTERNATIONAL TRAN SACTION AFTER THE AMENDMENT MADE BY THE FINANCE ACT 2012. 20. AT THE TIME OF HEARING IT WAS CONTENDED BY LD .DR THAT THE AMENDMENT HAS BEEN MADE BY FINANCE ACT 2012 BY INSERTING SUB-S ECTION (2A) TO SECTION 92C(2) WITH RETROSPECTIVE EFFECT FROM 1.4.2002 AND IF THE ARIT HMETIC MEAN OF THE PROFIT MARGIN OF THE COMPARABLE IS BEYOND 5% THE ASSESSEE IS NOT ENTI TLED FOR THE SAID 5% ADJUSTMENT AS IT IS NOT A STANDARD DEDUCTION. I.T.A. NO.8611/MUM/2011 I.T.A. NO.8861/MUM/2011 19 21. SINCE WE HAVE HELD HEREINABOVE TO REMIT THE MA TTER TO THE FILE OF THE AO TO MAKE A AFRESH STUDY BY CONSIDERING THE COMPARABLES AS STATED HEREINABOVE TO ARRIVE AT ALP OF THE TRANSACTION UNDER CONSIDERATION AND GIV E DUE ADJUSTMENTS AS PER RULE 10B OF THE RULES WE DO NOT CONSIDER IT NECESSARY TO DE CIDE THIS ISSUE AS TO WHETHER THE LD. CIT(A) HAS GIVEN DIRECTION TO ALLOW 5% DEDUCTION T O THE ASSESSEE CORRECTLY OR NOT. WE MAY STATE THAT AO WILL DECIDE THE ISSUE OF ADJUSTM ENT ON THE BASIS OF THE FRESH ANALYSIS AND WILL MAKE THE ADJUSTMENT AS PER LAW A S APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. HENCE GROUND NOS.2 AND 3 OF THE APPEAL TAKEN BY THE DEPARTMENT ARE ALLOWED FOR STATISTICAL PURPOSES. 22. IN THE RESULT APPEAL OF THE ASSESSEE AS WELL A S OF THE DEPARTMENT ARE ALLOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 26TH JULY 2013 * 1 2 26TH JULY 2013 * SD SD ( / RAJENDRA SINGH ) ( . . /B.R.MITTAL) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; 2 DATED 26 / 07/2013 . . ./ SRL SR. PS ! / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. (' / THE RESPONDENT. 3. 7 ( ) / THE CIT(A)- 4. 7 / CIT 5. 8 (: - : / DR ITAT MUMBAI 6. / GUARD FILE. / BY ORDER TRUE COPY (ASSTT. REGISTRAR) - : /ITAT MUMBAI