Brief of the Case
ITAT Bangalore held In the case of M/s. Agila Specialties Pvt. Ltd vs. DCIT that when the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to adopt internal comparable. The reason is that the various factors having bearing on the quality of output. assets employed, input cost etc. continue to remain by and large same in case of an internal comparable.The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable.
Facts of the Case
The assessee company is engaged in the business of manufacture and marketing of pharmaceutical products, besides product development and has a well-diversified portfolio of products across product group. For the AY 2010-11 the assessee filed its return of income on 14.10.2010 declaring a loss of Rs. 376,181,078, claiming a refund of Rs 1,025,499. During the course of assessment proceedings, the international transactions entered into by the Assessee were referred by the Assessing Officer to the Transfer Pricing Officer [TPO] for determination of arm’s length price [ALP] under section 92CA of the Income-tax Act, 1961.
Simultaneously, the assessment proceedings were initiated under section 143(2) . The AO issued a draft assessment order dated 28.02.2014 u/s. 143(3) r.w.s. 144C(1), wherein the total income of the assessee was proposed to be computed at a loss of Rs 256,046,157 under normal provisions of the Act, after making various additions /disallowances to the returned income.The AO make addition of Rs. 105,063,004 on account of adjustment following the order pased by TPO and disallowance of Rs. 15,064,297 on account of sec.40(a)(i).
Contention of the Assessee
The ld counsel of the assessee submitted that the sale of formulations being one of the segments, the assessee has adopted internal TNMM and the arm’s length analysis is at 8.80% in the case of AE and 8.51% in the case of non-AE. It was submitted that assessee is engaged in the manufacturing and supply of generic products in the nature of sterile injectable for AEs as well as non-AEs. The primary pharmaceutical segment of the Assessee is the manufacturing segment wherein the functions involved in the manufacturing for both AEs as well as for non-AEs are the same. The total income earned by the Assessee from the sale of formulations to the AEs and non-AEs is Rs 654,419,099. Out of this value of transactions with AE is Rs. 341,551,315 and with non AE is Rs. 312,867,784.
The ld. counsel for the assessee relied on the Third Member decision in the case of M/s. Technimont ICB Pvt. Ltd. v. Addl. CIT in ITA No.4608/Mum/2010. He further submitted that in the subsequent year i.e., AY 2011-12 the TPO has accepted internal comparability.
Contention of the Revenue
The ld counsel of the revenue supported the order of DRP.
Held by DRP
The DRP partially upheld the assessment of Rs.66,771,307 made by the AO to the income of the assessee. The DRP upheld the TPO’s action of rejecting segmental data/allocation keys pertaining to transactions related to AE/ non-AE treating it as unreliable, thereby rejecting the internal TNMM applied by the assessee.
Held by ITAT
IT(TP)A 214/B/2015 (Assessee’s appeal)
The TPO had applied external TNMM on entity level and on this issue, the Third Member decision of the Mumbai Bench of the Tribunal in the case of M/s. Technimont ICB Pvt. Ltd. v. Addl. CIT in ITA No.4608/Mum/2010 for AY 2005-06, order dated 17.7.2012 is relevant. In this decision it was held that the underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output. Assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable.
Following the above decision, we are of the opinion that TPO had erred in choosing an external comparable, when there was an internal comparable uncontrolled transaction which the assessee had taken in its TP study.
Accordingly appeal of the assessee allowed.