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Comparable Selected in TP study should be functionally same & not necessarily to be identical

Punjab & Haryana High Court held In the case of CIT vs. M/s DSM Anti Infectives India Ltd. that the filter used by the TPO while selecting comparable is to select companies who are using Penicillin-G as raw material irrespective of the extent of usage of the same.
Brief of the Case

Punjab & Haryana High Court held In the case of CIT vs. M/s DSM Anti Infectives India Ltd. that the filter used by the TPO while selecting comparable is to select companies who are using Penicillin-G as raw material irrespective of the extent of usage of the same. The Tribunal’s conclusion that the companies would be appropriate comparables irrespective of the percentage of use of PEN-G by them since companies selected should be functionally comparable and not identical is a possible view.

Facts of the Case

During the assessment year 2005-06, the assessee entered into various international transactions with its associated enterprises. The assessee adopted transactional net margin method contending that it is the most appropriate method for determining the ALP. As comparables, the respondent selected six companies, namely, Amol Drug Pharma Limited, Avinash Drugs Limited, Ind-Swift Laboratories Limited, JK Pharmachem Limited, Kopran Limited and Torrent Gujarat Biotech Limited. These companies rejected by TPO on various grounds in his transfer pricing study. After going through a detailed selection process, the TPO selected as comparables three companies namely, Aurobindo Pharma Ltd., Nectar Life Sciences Ltd. and Standard Pharmaceuticals Ltd. The filters used by TPO includes selection of only those companies as comparables who are using Penicillin-G as raw material and rejection of companies who having negative net worth.

Contention of the Assessee

The learned counsel for the assessee contended that the CIT (A) had wrongly rejected Torrent Gujarat Biotech Limited as a comparable. It was submitted that Torrent Gujarat Biotech Limited ought not to be rejected on the ground that its use of PEN-G was only 7.60% of its total sale.

Contention of the Revenue

The ld counsel of the revenue contended that the Tribunal has erred in including Standard Pharmaceuticals Limited as this company was not an appropriate comparable in view of its relatively negligible use of PEN-G as compared to its total use of raw material or sales.

He further contended that Torrent Gujarat Biotech Limited did not fulfill the last of the said filters/criteria of not being a company having a negative net worth. She contended that Torrent Gujarat Biotech Limited had made a reference under the Sick Industrial Companies (Special Provisions) Act, 1985 which itself indicated that it had a negative net worth.

Held by CIT (A)

The CIT (Appeals) held only Nectar Life Sciences Limited to be the appropriate comparable and rejected Aurobindo Pharma Limited and Standard Pharmaceuticals Limited as comparables. Also it did not accept the contention of the assessee that Torrent Gujarat Biotech Limited also to be considered a comparable.

Held by ITAT

ITAT directed the TPO to include two companies naming M/s Torrent Gujarat Biotech Limited and M/s Standard Pharmaceuticals Limited as comparables for the purpose of determining the arms length price (ALP) in respect of the international transaction.

Held by High Court

It was held by tribunal that Torrent Gujarat Biotech Limited not to be rejected on the ground that it’s use of PEN-G was only 7.60% of its total sale. ITAT pointed out two main factors. One factor is that the filter applied by the TPO of selecting only companies using PEN-G as raw material did not specify the extent of use of PEN-G as compared to the total sales of the company. The TPO himself had obviously not considered the extent of use of PEN-G which is evident from the fact that the TPO considered Standard Pharmaceuticals Limited to be one of the comparables, although this company’s usage of PEN-G was only 5.23% of its total sales.

ITAT also included Standard Pharmaceuticals Limited as a comparable on the ground that company to be considered as an appropriate comparable irrespective of its percentage of use of PEN-G to the total raw material. We noted that the TPO had himself considered Standard Pharmaceuticals Limited to be a comparable.

The contention of the revenue that Torrent Gujarat Biotech Limited has negative net worth , accordingly it cannot be comparable is first time raised before high court, it was not raised below authorities. Prima facie at least there is nothing to indicate that at the relevant time, namely, financial year 2004-05 Torrent Gujarat Biotech Limited had a negative net worth. If the issue is raised before the authorities, while giving the matter appeal effect or in any other proceedings, it would be decided in accordance with law.

TPO himself took by selecting Standard Pharmaceuticals Limited where use of PEN-G was only 5.23% as against the 7.60% use of PEN-G by Torrent Gujarat Biotech Limited. The Tribunal’s view was more than just a probable one.

Accordingly, appeal of the revenue dismissed.

Categories: Income Tax
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