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Otsuka Chemical (India) Pvt. Ltd., 861-862, Joshi Road, Karol Bagh, New Delhi. vs. DCIT, Circle-13(1), New Delhi.
May, 20th 2019
         IN THE INCOME TAX APPELLATE TRIBUNAL
           DELHI BENCH : FRIDAY I-2 : NEW DELHI

     BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
                         AND
        SMT. BEENA A. PILLAI, JUDICIAL MEMBER
                              ITA No.4093/Del/2016
                             Assessment Year: 2010-11

Otsuka Chemical (India) Pvt. Ltd.,        Vs DCIT,
861-862, Joshi Road,                         Circle-13(1),
Karol Bagh,                                  New Delhi.
New Delhi.

PAN: AAACO8042K


      (Appellant)                             (Respondent)

            Assessee by               :       Shri Hiren Mehta, CA
            Revenue by                :       Shri A. Srinivas Rao, Sr. DR

            Date of Hearing       :           21.02.2019
            Date of Pronouncement :           17.05.2019

                                          ORDER

PER R.K. PANDA, AM:

      This appeal filed by the assessee is directed against the order of the CIT(A)-44,

New Delhi, dated 29th February, 2016 relating to assessment year 2010-11.

2.    Facts of the case, in brief, are that the assessee, Otsuka Chemicals India Pvt.

Ltd. (OCIPL), is a company wherein Otsuka Chemical Company Japan (OCCJ) owns

92.05% of shares and 7.53% shares are held by Dhanuka Laboratories Ltd. Rest of the

shareholding is held by individuals and outsiders. OCIPL is engaged in manufacture /
                                                                     ITA No.4093/Del/2016


production of GCLE (Advance Cephalosporin Drug Intermediate) which is finally

used by customers for making advance stage of Anti-Biotic Bulk Drugs. The

Company is into only one business segment and is a single product company

manufacturing / producing GCLE. Certain By- Products also emerge / get produced in

the manufacturing process of GCLE. The assessee filed its return of income on 29th

September, 2010 declaring nil income. A reference u/s 92CA of the Act was made by

the Assessing Officer to the TPO for determining the ALP of the international

transactions entered into by the assessee.      The TPO, during the course of TP

assessment proceedings, observed that the assessee has entered into the following

international transactions with its AE:-

No.            Nature of transaction                 Method        Amount
1     Sale of finished goods GCLE                   CUP           27,83,68,478
2     Purchase of raw material (Raw GCLE)           CUP            2,66,97,330


3.    The assessee has used CUP method to benchmark the transactions. It was seen

that it has sold finished goods (GCLE) to both AEs and non-AEs. Finished GCLE has

been sold at an average FOB rate of Rs.49.57/- per Kg to AEs and at an average FOB

rate of Rs.3050/- per Kg to Non-AEs and hence the transaction of sale of finished

goods to AEs was found to be at arm's length.


4.    The TPO noted that the assessee during the year under consideration has

purchased raw GCLE from AE @ US $ 60 per Kg. and at the rates of 65, 65.50 and 70

from non-AEs as per the following details:-




                                            2
                                                                       ITA No.4093/Del/2016



Date         AE?    Particulars      Invoice no   Qty in Kg. Rate-USD Amount-USD
                                                  Type
28-10-2009   Non-AE Lupin Ltd        *09000951    2,010.00
                                                  CIF        65.00     1,30,650.00
13-11-2009   Non-AE Orchid Chemicals *09000952    2,520.00
                                                  CIF        70.00     1,76,400.00
26-12-2009   Non-AE Dhanuka Labs     *09001227    5,010.00
                                                  CIF        65.50     3,28,155.00
16-07-2009 AE         Otsuka India   RAW GCLE CIF 9,090.00   60.00     266,97,330



5.    He, however, noted that the date of transactions are not same and there are

fluctuations in price of GCLE over a period of time. Hence, the assessee was asked to

give comparable CUP data of Raw GCLE price at the same time when the same has

been purchased from the AE. However, the same could not be furnished. In absence of

the same, the prices of finished GCLE were examined on the relevant dates viz. the

dates of purchase of raw GCLE from AE and non-AEs. It was seen that there were few

transactions exactly on the relevant dates so the search was widened to find sale prices

of finished GCLE to non-AEs during the period from a date 10 days before the

relevant date to a date 10 days after the relevant date. The Assessing Officer, applying

the ratio of FG/RM i.e., finished goods by raw material, calculated the average rate of

55.67 per Kg. and took the same as arm's length price and, accordingly suggested an

adjustment of Rs.19,26,657/-. The assessee intimated that it does not intend to file

objections before the DRP and accordingly requested that final assessment order may

be passed in the case.        The Assessing Officer, accordingly made adjustment of

Rs.19,26,657/- to the total income of the assessee on account of transfer pricing

adjustment.









                                              3
                                                                              ITA No.4093/Del/2016


6.    In appeal, the ld.CIT(A) upheld the action of the Assessing Officer by observing

as under:-

     "3.3 Decision

     I have carefully considered the assessment order, transfer pricing order, written
     submission and oral arguments of the Ld AR.

     Ld AR has explained that in present case, the AE of the appellant has been
     taken as tested party and the AE of the appellant has sold similar goods from
     Japan to India to the appellant as well as to third party. Ld AR has explained
     that TPO has wrongly considered the sale by the parent company i.e. AE to
     third party as the transactions of the AE. However, this fact will not change the
     position that the price of raw GCLE has wide fluctuation with the date.
     Therefore, it was relevant to consider nearby dates for the rate of raw GCLE
     sold to non-AE.

     As the TPO has observed the fluctuation, it was asked the appellant to provide
     the prices of raw GCLE at which were sold to independent third party by AE
     for nearby purchase dates of the appellant. In absence of instances exact date
     of purchase by the appellant from its AE, the TPO has considered the data
     during 10 days prior to invoice and 10 days after invoice. On the basis of
     finished goods by raw material ratio it was concluded that the cost of raw
     GCLE should be 54.58 US$ instead of 60 $ charged by the AE. The appellant
     has objected that instead of +/-10 days the period should be taken +/-20 days
     or +/-30 days and provided such data. The average of +/-20 days and +/-30
     days came to 55.75 and 55.58 US$ and average of these two rates came 55.67
     and the Ld TPO has applied this rate for computing arm's length price.

     Main arguments of the Ld AR that under CUP the prices have to be compared
     and not the ratios. I have considered this argument carefully, I agree with the
     findings of the TPO that he has not compared with the ratio but trying to find
     out the prices of raw GCLE at the near date of the transactions. While doing
     so, he has applied the ratio of FG/RM (finished goods/raw material). Applying
     this ratio also infact it is the only cost which has been at any profit while
     taking this ratio. In absence of the data relating to purchase price of third party
     in India for raw GCLE on similar date it is proper to apply ratio to obtain such
     data in absence of wide fluctuation in cost of GCLE. Therefore, this argument
     of the Ld AR is rejected.

     Second argument of the Ld AR is that the Ld TPO has rejected the CUP as the
     most appropriate method. I do not agree with this argument. The TPO has not
     rejected CUP per say but only modified the price for independent party at near
     date of actual transaction by applying the ratios. Therefore, the said ratio of


                                               4
                                                                          ITA No.4093/Del/2016


     FG/RM (finished goods/raw material) has been properly applied to arrive at
     the market rate as per CUP. Accordingly, this argument is also rejected.

     Considering the entire facts and circumstances of the case and the market rate
     of raw GCLE near to purchase date has rightly been computed at US$ 55.67
     per kg and the same should be taken as arm's length price. Accordingly,
     adjustment made by the TPO in ALP is hereby confirmed. These grounds of
     appeals are dismissed.

     4. As a result, appeal is dismissed."


7.    Aggrieved with such order of the CIT(A), the assessee is in appeal before the

Tribunal by raising the following grounds:-


       "1. That on the facts and circumstances of the case and in law, the
       Order passed by Hon'ble CIT (A) is contrary to the facts and bad in
       law.

       2. That on the facts and circumstances of the case and in law,
       Hon'ble CIT (A) erred and was not justified in confirming the addition
       of Rs. 19,26,657/- on account of transfer pricing adjustment on the basis
       of order passed by Ld. TPO U/s 92CA(3) on the following grounds

       a)    rejecting the direct evidence in form of sales invoices showing
       sales of Raw GCLE by AE to the assessee and to non-related parties.

       b)    arriving at the price of Raw GCLE by applying the ratio FG/RM
       (Finished Goods / Raw Material) by alleging that there is difference in
       dates of transactions between AE with assessee and AE with non-
       related parties, thereby comparing the profits and not prices.

       c)    rejecting the CUP by upholding the order of TPO stating that,
       TPO has not rejected CUP but only modified the price for independent
       parties at near date of the actual transactions by applying the ratios
       FG/RM (Finished Goods / Raw Material), whereas the Ld TPO had
       rejected the CUP applied by the assessee.

       3. That the Appellant craves leave to add, alter, amend, modify any
       of the ground during the course of appeal. "




                                             5
                                                                                ITA No.4093/Del/2016


8.        The ld. counsel for the assessee strongly objected to the order of the CIT(A).

He submitted that in order to benchmark the transactions, the assessee had used direct

evidence i.e., transactions entered into by the AE with unrelated parties for identical

goods. Transactions of sale of identical goods by the AE with unrelated parties were

available during the F.Y. 2009-10 and, therefore, the assessee used CUP (Internal

CUP) for benchmarking the transaction pertaining to sale of raw GCLE between

OCCJ and OCIPL. He submitted that during the impugned assessment year OCCJ

sold raw GCLE at an average CIF rate of US $ 60 per Kg., to assessee enterprise and

the comparable average CIF rate for sale of identical goods to unrelated parties was

66.58 per Kg. The ld. counsel for the assessee filed the following chart:-

        "Table: Sale of Raw GCLE by OCCJ to OCIPL (Assessee Enterprise) and to
        other enterprises during the Financial Year 2009-10 are tabulated below for
        comparison:-
     Particulars                     Quantity of Raw       Value of Raw       Average Rate per
                                     GCLE         sold     GCLE sold during   Kg. at which
                                     during F.Y. 2009-     F.Y. 2009-10 (in   goods were sold
                                     10 (in Kg.)           USD)               (in USD)
     Assessee Enterprise (OCIPL)     9,090                 5,45,000/-         60.00
     Other Enterprises               9,540                 6,35,205           66.58


8.1 However, average rate of USD 66.58 for sale of identical goods by AE to non-

related enterprises is calculated in table below.

Date of                                                     Rate in
Invoice     Particulars        Invoice no   Type Qty in Kg. USD        Amount-USD
Sales by AE to Others
28-10-2009 Lupin Ltd           *09000951    CIF    2,010      65.00     1,30,650.00
13-11-2009 Orchid Chemicals *09000952       CIF    2,520      70.00     1,76,400.00
26-12-2009 Dhanuka Labs        *09001227    CIF    5,010      65.50     3,28,155.00
Average rate of Sales by AE to
Others                                                        66.58


                                                  6
                                                                      ITA No.4093/Del/2016


9.    He submitted that a copy of confirmation from OCCJ stating that goods sold by

OCCJ to OCIPL and other third parties in India are identical in nature was submitted

before the TPO. The fact that goods being benchmarked and the comparables are

identical in nature was accepted by the TPO at the time of transfer pricing proceedings

and no doubts were raised by the TPO in this regard. He submitted that the TPO has

taken Sales Prices / Average Sales Prices of Finished GCLE near the date of purchase

of Raw GCLE which indirectly results in comparison of margins whereas CUP

Method is all about comparing prices of identical goods. Referring to para 2.10 of the

order of the TPO he submitted that he has made assumption that variation in price of

Raw GCLE will be almost in same proportion as the variation in price of finished

GCLE. He has incorrectly assumed that the prices of finished GCLE and raw GCLE

will move in same proportion. The ld. AR submitted that the price of GCLE will be

governed not only because of movement in price of raw material but it will also

depend on cost of other direct inputs like labour, power etc., and assuming it to be

linked only to movement of price of raw material was incorrect. He submitted that the

assessee company was incurring huge losses since it started production 2 years back

and that the Financial Year under consideration was the first profitable year of the

assessee. The assessee was able to earn profit during the year under consideration only

because of the fact that the AE purchased GCLE from Assessee at much higher prices

when compared to sale of identical goods to non-related parties. He submitted that the

assessee had to import raw GCLE from AE because of fire occurred at the plant of the

company at Kotputali, Rajsthan on 29th June 2009 and to fulfill the pending orders and
                                          7
                                                                         ITA No.4093/Del/2016


to retain the existing customers, the company had to import raw GCLE from its parent

company in Japan. To support Indian subsidiary at the time of accident, the parent

company supplied Raw GCLE at low / reasonable prices. He submitted that that this is

the only purchase made by the assessee from AE till date which strengthens the point

that the parent company OCCJ supplied goods to the assessee company at

low/reasonable prices when it was in great need to retain its existing customers and

avoid the contractual repercussions which otherwise would have been faced by OCIPL

had it not complied with the delivery schedule committed to its customers.

10.   Referring to the decision of the Mumbai Bench of the Tribunal in the case of

DCIT Vs. Isagro (Asia) Agrochemicals (P) Ltd. [2013] 31 taxmann.com 388 (Mum.)

he submitted that the Tribunal in the said decision held that that the CUP cannot be

rejected simply because of difference in dates of transactions with AE's & Non AE's.

Referring to the decision of the Ahmedabad Bench of the Tribunal in the case of Sabic

Innovative Plastic India (P) Ltd. Vs. DCIT [2013] 35 taxmann.com 177 (Ahmedabad -

Trib.), he submitted that the Tribunal in the said decision has held that:

   a) Where CIT(A)'s order upheld internal CUP but deals with margins instead of

      prices, it is an incorrect application of internal CUP and matter restored to

      CIT(A)'s file for fresh adjudication.

   b) Any application of any CUP (Comparable Uncontrolled Price) method

      involves dealing with prices of a product not the profit margin earned

      thereon.







                                              8
                                                                        ITA No.4093/Del/2016


   c) Even in the case of 'internal CUP', the arm's length price to be adopted is the

      price, subject to admissible adjustments, at which the similar transactions are

      carried out between the assessee and an independent enterprise.

11.   He submitted that internal CUP has nothing to do with the margins earned by

the same enterprises from other transactions, as is the case before the Tribunal. He

submitted that the ld. CIT(A)'s reliance on the decision of a coordinate bench of this

Tribunal, in the case of Bayer Material Science Pvt. Ltd v. Addl. Commissioner of

Income Tax(134 ITD 582), is also no longer sustainable in law. He accordingly

submitted that the order of the CIT(A) be set aside and the addition made by the A.O.

12.   The ld. DR, on the other hand, heavily relied on the order of the CIT(A).

13.   We have considered the rival arguments made by both the sides and perused the

material available on record. We find the Assessing Officer in the instant case has

made addition of Rs.19,26,657/- by adjusting the price of purchase of raw GCLE from

60 US$ to 55.67 US $. We find the ld. CIT(A) upheld the action of the Assessing

Officer the reasons for which have already been reproduced in the preceding

paragraphs. It is the submission of the ld. counsel that the assessee has used direct

evidence i.e., the transactions entered into by the AE with unrelated parties for

identical goods according to which OCCJ sold raw GCLE at an average CIF rate of US

$ 60 per Kg., to assessee enterprise whereas similar goods were sold to unrelated

parties at US $ 66.58 per Kg. and, therefore, the internal Comparable Uncontrolled

Price (CUP)     method used by the assessee for benchmarking the transactions


                                          9
                                                                       ITA No.4093/Del/2016


pertaining to sale of raw GCLE is correct. It is also his submission that the TPO has

taken Sales Prices / Average Sales Prices of Finished GCLE near the date of purchase

of Raw GCLE which indirectly results in comparison of margins whereas CUP

Method is all about comparing prices of identical goods. We find force in the above

argument of the ld. counsel for the assessee. We find, the assessee, during the course

of TP assessment proceedings had filed the copy of the confirmation from Otsuka

Chemical Company, Japan, which has been taken as the tested party stating that goods

sold by OCCJ to OCIPL and other third parties in India are identical in nature. The ld.

counsel for the assessee submitted that this was accepted by the TPO at the time of

transfer pricing proceedings and no doubts were raised by the TPO in this regard. The

ld. DR could not controvert the above submission of the ld. counsel for the assessee.

We also find merit in the submission of the ld. counsel that the TPO has taken Sales

Prices / Average Sales Prices of Finished GCLE near the date of purchase of raw

GCLE which indirectly results in comparison of margins whereas CUP Method is all

about comparing prices of identical goods. We also find merit in the argument of the

ld. counsel that the TPO has incorrectly assumed that the price of finished GCLE and

raw GCLE will move in same proportion. In our opinion, the price of GCLE will be

governed not only because of movement in price of raw material but it will also

depend on cost of other direct inputs like labour, power etc., and assuming it to be

linked only to movement of price of raw material was incorrect. We further find merit

in the argument of the ld. counsel of the assessee that it was able to earn profit during

the year under consideration only because of the fact that the AE purchased GCLE
                                           10
                                                                         ITA No.4093/Del/2016


from the assessee at much higher prices when compared to sale of identical goods to

non-related parties. The submission of the ld. counsel for the assessee that because of

fire occurred at the plant of the company at Kotputali, Rajsthan on 29th June 2009 and

to fulfill the pending orders and to retain the existing customers, the company had to

import raw GCLE from its parent company in Japan who, in turn, supplied Raw GCLE

at low / reasonable prices also finds merit especially when this is the only purchase

that has been made by the assessee from AE till date. Therefore, we find merit in the

argument of the ld. counsel for the assessee that it is beyond doubt that the assessee

has never tried to pass on profits to its parent AE and, on the contrary, it had benefitted

by making sales of Rs.27.84 crores to parent company at higher rates. Further, in our

opinion, the internal CUP has nothing to do with the margin earned by the same

enterprises from other transactions. The various decisions relied on by the ld. counsel

for the assessee also supports its case. In this view of the matter, we set aside the order

of the CIT(A) and direct the Assessing Officer to delete the addition. The grounds

raised by the assessee are accordingly allowed.

14.    In the result, the appeal filed by the assessee is allowed.

        The decision was pronounced in the open court on 17.05.2019.

             Sd/-                                                        Sd/-

 (BEENA A. PILLAI)                                             (R.K. PANDA)
JUDICIAL MEMBER                                            ACCOUNTANT MEMFBER

Dated:17th May, 2019

dk

                                            11
                                          ITA No.4093/Del/2016




Copy forwarded to

1.   Appellant
2.   Respondent
3.   CIT
4.   CIT(A)
5.   DR
                         Asstt. Registrar, ITAT, New Delhi




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