RANBAXY LABORATORIES LTD Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This appeal was admitted on the following two substantial questions of law:-

(2.) The aforesaid questions have cropped for consideration under the following circumstances. The appellant is a company incorporated under the Companies Act, 1956 engaged in the business of manufacture and sale of pharmaceutical products, such as, patented and/or generic drugs and medicines. For the relevant previous year, the return of income of the appellant was filed on 29 th October, 2004 declaring an income of Rs. 330,64,05,014/-. The appellant entered into certain international transactions with its Associated Enterprises (AEs) in the various overseas foreign jurisdictions, viz., (a) Sale of Active Pharmaceutical Ingredients (API) and spare parts;(b) Sale of dosage formulations: (c) Provision of technical assistance and know-how, etc. The transfer pricing in respect of the said international transactions was carried out by M/s RSM Advisory Services Pvt. Ltd, Chartered Accountants, who issued the certificate in Form 3CEB on the basis of Transfer Pricing study of documentation maintained as per section 92D of the Act read with rule 10D of the Income-Tax Rules, 1962. The international transactions were certified to be at arm?s length, based on the study carried out. A certificate from a Chartered Accountant in Form 3CEB was appended alongwith the return of income. It is the case of the appellant that the Assessing Officer in the course of scrutiny assessment required the appellant to, inter alia, explain as to whether, in terms of provisions of Section 92 of the Act, transfer price of the various international transaction?, entered into by the appellant during the relevant previous year, were at arm?s length. In response thereto, the appellant vide letter dated 24 th March, 2005 submitted before the Assessing Officer complete transfer pricing documentation alongwith the details and an elaborate note justifying that the international transactions? were at arm?s length having regard to the Transfer Pricing provisions. The Assessing Officer, accepted the transfer price of the international transactions? entered into by the appellant as being at arm?s length. The Assessing officer in the assessment completed under Section 143(3) of the Act recorded his finding, in this regard, as follows:- in response to the above, the assessee has filed a note alongwith its letter dated 24 th March, 2005 and has also produced a copy of transfer pricing document prepared by M/s RSM Advisory Services Pt. Ltd. The assessee has also produced copies of audited accounts of the above AEs for the year 2003 as well as documents/information maintained in support of the Transfer Pricing. After going through the report filed in for No. 3CEB, transfer pricing documents and other details/information furnished, it is observed that M/s RSM Advisory Services Pte. Ltd. after analyzing the comparable data compiled from EXTL & Hoovers Online and doing functional, assets and risks analysis, have reached to the conclusion that as compared to the other prescribed methods, in case of the assessee, TNMM is the Most Appropriate Method. The net margins realized by the uncontrolled comparable companies were identified on similar type of transactions applying the TNMM method. On comparison of the transfer prices charged by the assessee from its Associated Enterprises and net margins thereon, in respect of these international transactions, it is observed that the prices charged by the assessee on international transactions with its Associated Enterprises (AE) were at arm?s length. I have also observed that the declared margins/profits as per the books, are higher than the profits/margins computed as per the Most Appropriate Method and, therefore, I hold that the assessee was in compliance of the Transfer Pricing Provisions and the prices charged during the previous year relevant to the assessment year 2004-05 from its AE in respect of goods and services were at arm?s length and, therefore, no further adjustment is required . The assessment was completed on 30 th March, 2005 under Section 143(3) of the Act at book profit of Rs.398,48,42,660/- under section 115JB of the Act and at an income of Rs.363,45,44,931/- under regular provisions of the Act as against income of Rs.330,64,05,614/- returned by the appellant, i.e. after making additions/disallowances amounting to Rs.32.81 crores. Thereafter, notice dated 9 th March, 2007 was issued by the Commissioner of Income-Tax, Delhi-V, New Delhi (CIT) under Section 263 asking to show cause why the assessment completed under Section 143(3) of the Act be not revised on the grounds that the same was erroneous and prejudicial to the interests of Revenue with regard to determination of arm?s length price of international transactions with AEs. It was stated in the show cause notice that the assessment was erroneous and prejudicial to the interests of the Revenue on the following grounds:-

(3.) The CIT (A) however did not countenance the aforesaid submissions of the appellant and passed orders dated 29 th March, 2007 holding that assessment completed under Section 143(3) of the Act was erroneous and prejudicial to the interests of the Revenue on account of (i) non-reference of the case to TPO,(ii) taking overseas AEs of assessee as tested party and (iii) non consideration of findings of audit of Central Excise Department. The assessment was set aside on the three grounds as aforesaid. The assessing officer was directed to refer the case to the TOP for determination of arm?s length price. Being aggrieved by the aforesaid order, the appellant filed an appeal before the Tribunal. The Tribunal vide order dated 22 nd January, 2008 upheld assumption of jurisdiction under Section 263 of the Act by the Commissioner of Income-Tax, Delhi-V, New Delhi.