×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
These are the latest case laws decided by various Income Tax Appellate Tribunals (ITAT) of India on Income Tax which have been published recently. The case laws are open for discussion and we invite expert comments from our members on its applicability and effect on relevant issues.
11-04-2019, UCB India, Section 144C(5), 234B, 234D, Tribunal Mumbai
These appeals are filed by the assessee against respective orders of Assessing Officer passed pursuant to direction of Ld. Dispute Resolution Panel, u/s. 144C(5) of the Act, for the concerned assessment years.
2. One common issues raised in these appeals relate to Transfer Pricing adjustment on account of finished dosage form („FDFs‟) to overseas associated enterprises. Since facts are similar we are referring to facts and figures from assessment year 2010-11.
3. In assessment year 2010-11, the assessee raised a ground that AO erred in passing the final assessment order without providing sufficient opportunity of being heard.
4. At the outset Ld. Counsel of the assessee submitted that be shall not be pressing to the ground. Hence this ground raised is dismissed at not pressed.
5. Brief facts in this regard are being dealt with reference to facts of figures for AY 2010-11 as issue is, common The assessee new UCB India is wholly owned subsidiary of UCB, SA, Belgium. The assessee is engaged in the business of manufacturer and sale of prescription drugs.
6. During the relevant period, the assessee inter-alia entered into the international transaction of export of the FDFs Ucerax and Zyrtec to its AE. The assessee in its transfer pricing study report had benchmarked this international transaction using the TNMM at the segmental level as the most appropriate method using the Profit Level Indicator (PLI) of operating profits on operating cost. 23 comparables had been selected by the assessee and the arithmetic mean of the PLI was computed at 10.59% whereas the assessee's own PLI was 49.60%. Its PLI being higher than those of the comparables, the concerned international transaction of export of FDFs to its AE were claimed to be at arm's length.
7. However, the Transfer Pricing Officer was not satisfied with the above he rejected the benchmarking done by the assessee. The Transfer Pricing Officer observed as under:-
5.6 The assessee has given the working of PL1 of the assessee in annexure 7 of the TPSR which is as under :
5.7 Rejection of TNMM as MAM by TPO :
It is observed that the assessee had calculated OP/OC at entity level. The transaction cannot be compared at entity level as the Export of Finished Drugs to AE is only Rs.5,08 97,853/- . Whereas, the assessee has calculated OP/OC for total Export of Rs.33 Crores. Also in the Annual Accounts of the assessee there is are no such segmental accounts. Thus in the Annual Audited accounts the break up of the Export to AE and Non AE is not available. In the: Audited Annual Accounts the Segmental Results for Export and Local Sale is also not available. Therefore, the so called calculation of OP/OC taking into account the entire Export of Rs.33 Crores is also not reliable. Thus here the important issue is that the Assessee is trying to camouflage the OP/OC of the small Export to AE using OP/OC of the Total Export. Therefore, this method of Benchmarking is not acceptable as it is not giving a true picture.
On perusal of the TPSR it was observed that the assessee had benchmarkcd the Transaction of Import of API and Export of Finished Drugs using the same set of comparables. This method of benchmarking two different activities using the same set of comparables itself is incorrect. How can one compare the activity of Import of API with that of Export of Finished Products. The two activities are altogether different. In the TP5R the difference between the two activities is clearly mentioned in the TPSR. Therefore, assessee's this act of benchmarking, the Export of FOP using the same set of comparables is not acceptable.
8. The Transfer Pricing Officer, proceeded to compare margin earned by the UCB India from sale of these products in India. He rejected the assessee‟s submission that gross margin earned by the assessee from export to AE‟s is higher than gross margin earned from local sale. He proceeded to hold as under:
The assessec's submission has been considered It has already been mentioned above that the Finished Products Exported to AEs are of Superior Quality, they comply US FDA regulations. It is tact that the US PDA regulations are the toughest in the industry. So any drug which qualifies the US PDA has to be of extra ordinary quality. It has been submitted by employee of the assessee that Special Excipients are added to the Drugs which are exported. Thus, though the Quality of the Drugs Exported is very high as compared to drugs sold in India, the Price charged to AE is less than the Price at which it was sold to distributor in India. Therefore, the CUP is applied, taking the price at which the drugs are sold in India as ALP. Therefore, the transaction is not at Arm's Length. The difference in the price is as under: