Shri Pharmaceuticals Limited , ... vs Assessee

Shri Pharmaceuticals Ltd., vs. Asst. Commissioner of Hyderabad Income-tax, Circle - 3(2), Hyderabad. PAN - AACCS8456P (Appellant) (Respondent)

Assessee by : Shri Girish Dave Revenue by : Shri D. Sudhakar Rao

Date of hearing 19-03-2015 Date of pronouncement 01-04-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by the assessee is directed against assessment order dated 10/12/2010 passed u/s 143(3) read with section 144C of the Act at the directions of Dispute Resolution Panel (DRP), Hyderabad pertaining to AY A.Y. 2007-08.

2. Briefly the facts are, assessee an Indian company is engaged in the business of manufacture and sale of various pharmaceutical products. Assessee is a subsidiary of Apotex Pharmachem Inc., Canada. For the AY under consideration, assessee filed its return of income on 27/10/07 declaring income of Rs. 12,55,16,567. During the assessment proceeding, AO noticing that assessee has entered into international transaction with its Associated Enterprise (AE) made a reference to the Transfer Pricing Officer (TPO) to determine Arm's Length Price (ALP). In course of proceeding before TPO, on perusing 2 ITA No. 2103/Hyd/2011 Shri Pharmaceuticals Ltd., Hyderabad

the report in form No. 3CEB, TPO noticed that assessee has entered into the following international transactions:

Sl. Classification Paid/ Amount involved No. Received (in Rs.) 1 Sale of finished Received 127,61,72,170 goods 2 Purchase of raw Paid 46,79,99,841 material 3 Purchase of lab Paid 8,22,060 materials

He further noticed that for establishing arm's length margin of the price charged, assessee has undertaken TP study through an external consultant by adopting Transaction Net Margin Method (TNMM) as the most appropriate method with operating profit to sales as the profit level indicator (PLI). He further noticed that as per the annual report, on net sales of Rs. 129.63 crores, assessee has incurred operating cost of Rs. 119.4 crores, which has resulted in operating profit of Rs. 10.09 crores on which the OP to sales works out to 7.78%. As is evident, the TPO did not accept assessee's TP study and accordingly rejected the same. After rejecting the TP study, TPO himself made analysis independently to determine ALP. In this process, after searching data bases, TPO selected eight comparables with average OP to sales of 17.47%. However, while computing arm's length margin, TPO applying the OP to cost ratio determined the ALP of the international transactions at Rs. 144.34 crores as against Rs. 127.61 crores. As a result, the shortfall of Rs. 16.73 crores was treated as the transfer pricing adjustment to be made to the ALP shown by assessee. As per the order passed by TPO, AO proposed a draft assessment order incorporating the TP adjustment of Rs. 16.73 crores. Against the draft assessment order, assessee filed objections before the DRP raising various grounds.

3. The DRP in an undated order disposed of the objections of assessee and in pursuance to the directions of DRP, the impugned 3 ITA No. 2103/Hyd/2011 Shri Pharmaceuticals Ltd., Hyderabad

assessment order was passed. Being aggrieved, assessee is before us raising a number of grounds.

4. However, at the outset, ld. AR submitted before us, though in course of hearing before the DRP assessee has filed elaborate written submissions on the merits of various issues raised against the determination of ALP as well as additional evidences, however, while disposing of the objections of assessee, DRP has totally ignored the submissions made on merits while selectively considering a part of it by incorporating the additional submissions. In this context, ld. AR drawing our attention to pages 34 to 46 of the paper book submitted before us, the submissions made on merit were totally ignored whereas additional submissions made at pages 49 to 51 of paper book were considered by DRP. Further, ld. AR submitted before us, assessee has adopted OP to sales as PLI which was also to certain extent accepted by TPO. However, while finally computing the arm's length margin, TPO has adopted OP to cost as PLI that too without giving any opportunity of being heard to assessee on the issue. Ld. AR submitted, as assessee was not afforded opportunity by TPO and further assessee's submissions on merits as raised before DRP was not at all considered there is gross violation of rules of natural justice. Ld. AR therefore requested that the matter may be remitted to the DRP for deciding afresh after considering all the submissions of assessee as submitted in the written submissions filed on 29/08/11.

5. Ld. DR, though, raised a doubt whether assessee at all has filed any written submissions on 29/08/11 considering the fact that the last date of hearing before the DRP was 09/08/2011, but, he nevertheless submitted, department has no objection if the matter is remitted back to DRP for fresh hearing on all the issues.

6. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. As can be seen, the grievance of the assessee is limited to the fact 4 ITA No. 2103/Hyd/2011 Shri Pharmaceuticals Ltd., Hyderabad

that submissions made before DRP on 29/08/11 on the merits of various issues raised against the determination of ALP by TPO has not at all been considered by DRP. On a perusal of the material on record, we find that though the DRP has considered part of the written submissions filed by assessee, which has been incorporated in the order of DRP, but, the submissions made by assessee on merits which were claimed to have been filed before DRP on 29/08/11 have not at all been considered. Furthermore, assessee's grievance that the TPO without giving assessee opportunity has changed PLI from operating profit to sales to operating profit to cost also needs to be addressed by DRP. It is worth mentioning, at the time of hearing before us, ld. AR pointed out that even while computing arm's length margin by adopting OP to cost ratio, TPO has made a mistake as the actual average OP to OC ratio of the comparable companies selected by TPO works out to 16.22% as against 22.44% calculated by TPO. In our view, this fact also requires examination. In the aforesaid factual background, we are inclined to remit the matter back to the file of DRP for deciding afresh after considering all the submissions of assessee as made in the written submissions filed on 29/08/11 and any further submissions to be made on behalf of assessee. It goes without saying, DRP should afford reasonable opportunity of being heard to assessee in the matter.

7. In the result, assessee's appeal is allowed for statistical purposes.

Pronounced in the open court on 1 st April, 2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 1 st April, 2015 5 ITA No. 2103/Hyd/2011 Shri Pharmaceuticals Ltd., Hyderabad

kv Copy to:-

1) Srini Pharmaceuticals Ltd., Plot No. 10C, Road No. 8, Film Nagar, Jubilee Hills, Hyderabad

2) ACIT, Circle - 3(2), Hyderabad

3) DRP, Hyderabad

4) Addl. CIT(Transfer Pricing), Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.

Description Date Intls 1. Draft dictated on Sr.P.S. 2. Draft placed before author Sr.P.S Draft proposed & placed before AM 3 the second Member 4 Draft discussed/approved by VP second Member 5 Approved Draft comes to the Sr.P.S. Sr.P.S./PS 6. Kept for pronouncement on Sr.P S. 7. File sent to the Bench Clerk Sr.P.S. 8 Date on which file goes to the Head Clerk 9 Date of Dispatch of order