IRFAN SAADA T KHAN, J. The instant matter was referred by the Income Tax Appellate Tribunal (ITAT) under the provisions of Section 136(1) of the Income Tax Ordinance, 1979 (Repealed Ordinance) for consideration of following question of law:-- "Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the assessing officer has rightly applied section 79 of the Income-tax Ordinance, 1979 and thereby confirming the additions in the three assessment years under reference?"
2. Mr. lqbal Salman Pasha, Advocate has appeared on behalf of the applicant and at the very outset stated that the issue under discussion has already been decided by the Hon'ble Supreme Court of Pakistan in the case of Messrs Squibb Pakistan (Pvt.) Ltd. and another v. Commissioner of Income Tax and another (2017 SCMR 1006 ). He therefore stated that the question proposed in the instant matter may therefore be answered as per the observations given by the Hon'ble Supr eme Court in negative i.e. in favour of the applicant and against the department.
3. Mr. Ameer Bux Metlo, advocate for the department though has conceded that the issue with regard to transfer pricing in respect of the additions made under section 79 of the Income Tax Ordinance, 1979 (Repealed Ordinance) has been decided by the Hon'ble Supreme Court of Pakistan but according to him, certain facts obtaining in the instant matter are different hence he has prayed that this case has to be decided on the basis of facts obtaining in the instant matter and he has requested that the additions made by the assessing authority in the assessment years 1989-90 to 1991-1992 may be upheld.
4. We have heard both the learned counsel at some length and have also perused the record.
5. The appellant is a pharmaceutical company who filed its returns of income tax for the assessment years 1989-90 to 1991-92 by declaring incomes of Rs.47639080, 40250419 and 18722258 respectively . The Assessing Officer (A.O.) after proceeding with the matter under section 62 of the Repealed Ordinance assessed the incomes of the assessee through his assessment orders by making additions of Rs.34982815, Rs.119190098 and Rs.80851459 respectively , under Section 79 of the repealed Ordinance. The matter went to the Commissioner (Appeals) who upheld the additions made by the A.O. Being aggrieved with the order of the Commissioner (Appeals), appeals were preferred before the ITAT, who deleted the additions in respect of raw materi al Piroxicam for the assessment years 1990-91 and 1991-92 and also deleted the additions made in respect of the raw material Doxycycline for the assessment years 1989-90 and 1990-91. However , the additions made on account of raw material Doxycycline was confirmed in the assessment year 1991-92. The additions made on account of raw material Pyrantal Pamoate in all the three years were also confirmed. Thereafter the applicant moved applications under Section 136(1) of repealed Ordinance by requiring from the ITAT to refer as many as six questions to this Court. However , the learned ITAT deemed it expedient to refer only one question to this Court, which is reproduced above. It would not be out of place to mention that no application under Section 136(2) of the repea led Ordinance was filed by the applicant.
6. Record reveals that additions made under Section 79 of the repealed Ordinance by the A.O. were mainly due to the fact he found that the raw materials imported by the appellant from its parent company were at much higher rate than the rate prevailing in the international market for the similar raw material.
7. Before proceeding further , it would be advantageous if the observations of the Hon'ble Supreme Court are discussed and reproduced:- "Coming to the facts of the case; the Income Tax Officer relied upon the accounts provided by the resident companies compared to their previous years and the detail import(s) of ingredients for its pharmaceutical from the non-resident associate concerns as furnished by the assesses compared with the prices of imports of parallel companies from other sources, duly certified by the Assistant Drugs Controlle r, and Pakistan and Syngenta Pakistan at a higher price, thereby reducing the profits that would have otherwise accrued to them and have adjusted the tax payable accordingly . What the Income Tax Officer(s) failed to show was that the course of business was so arranged between the closely connected resident and non-resident that the business transacted between them produced to the resident less than the ordinary profits which might have been the differences in the import prices without giving any precise details regarding the parallel cases upon which he placed reliance nor did he provide any prima facie justification that the pricing method adopted (if any) by him was the most apt in the peculiar facts and circumstances of the case. The reason cited by the Income Tax Officer , that the raw material imported by parallel companies from other sources fulfill the requirements, as laid down in the Drugs Act, 1976 and cleared by the Assistant Drugs Controller , is not to our mind sufficient to establish prima facie transfer mispricing.
Various factors affect the price of a good and mere approval of some authority may mean that it (the good) has met the minimum specifications for the ingred ient laid down in law but does not necessarily mean that the said goods can be treated at par with the goods imported by the resident companies for the purposes of pricing. Therefore we do not find that the income Tax Officer had conducted a reasonable investigation or offered prima facie evidence based on an appropriate pricing metho d adopted by him, thereby showing transfer mispricing and resultant depletion in profits of the resident companies. Hence the burden never shifted to the resident taxpayers to prove that the pricing method adopted by the Income Tax Officer was not appropriate in the circumstances and that they (the residents) had duly conducted a comparability analysis of the pharmaceutic al ingredients in question in the light of which their transfer price was at arm's length. Therefore the Income Tax Officer erred in invoking section 79 of the Ordinance, 1979 and adjusting the profit of the resident companies."
8. In the present case it is noted that the A.O. has compared the price of the raw materials imported by the assessee from its parent company from the raw material imported by the other companies from other sources and thereafter made the additions in respect of the dif ference of the imported price of the raw materials.
9. In the present circumstances of the matter , the decision of the Hon'ble Supreme Court in our view squarely covers the issue in hand as in the present case also the A.O. has compared the rate of the imported raw materials of other pharmaceutical companies with that of the raw material imported by the present assessee from its parent company . It is noted that in the present case also while making the additions, the A.O. did not find force in the contention of the assessee and observed that the raw material imported by other companies were duly approved from concerned authorities and were available at cheaper price in the market. Hence according to A.O. purchase of the raw material at much higher price from the parent company attracts the provisio ns of Section 79 of the repealed Ordinance. It is further noted that in the present case also the A.O. has tabulated the difference in the import prices without giving any justification or without giving details about the other factors required for comparing the two raw materials as are necessary , for justifying the additions under section 79 of the repealed Ordinance.
10. An Arm's length transaction means the transaction entered between the parties based on equal footing. The A.O. made the additions by invoking Section 79 of the Ordinance about transfer pricing but had he made some exercise with regard to arm's length dealing of the parent company of the assess ee with other sister concerns of neighboring countries as to about at which price these raw materials were sold by the parent company to these sister concerns, then the position would have been totally different. However , it is noted that the A.O. who simply compared the raw material imported by assessee from its parent company with that of the raw material imported by other pharmaceutical company (majority of which are local companies) with the raw material imported by them either from China or India. In our view, this would not justify the additions made under section 79 of the Income Tax Ordinance as for invoking the said provision of law onus lies upon the department to prove arm's length transaction and to establish that the course of business was so arranged between the two companies that profits have been transferred by the subsidiary company by way of adopting the method of transfer pricing to its parent company .
11. In our view simply analyzing the difference in the imported price of the raw material by an internationally reputed company from its parent company with that of raw material imported by a local pharmaceutical company either from China or India would not justify the said addition. It is a common knowledge that the drugs of internationally reputed pharmaceutical companies are research based products, whereas the drugs available locally commonly known as "Meetoo" of that drug, which is not a research based product and could these two products be compared with each other . The answer to this question definitely would be in negative. Hence simply by observing that some other companies have imported a particular raw material duly approved by drug authorities, in our view, is not sufficient to establish transfer pricing or to justify the invoking of the provisions of Section 79 of the repealed Ordinance, as there are a number of other factors also which have to be kept in view .
12. We therefore, have come to the conclusion that in the instant case that since no proper home work was done by the A.O. before making the additions under Section 79 of the repealed Ordinance, which burden squarely lies upon him, therefore the additions made in the three assessment years pertaining to the years 1989-90 to 1991"92 are not found to be in accordance with law, hence the question referred to us by the ITAT under the provisions of Section 136(1) repealed Ordinance is answered in negative i.e. in favour of the applicant and against the department.
Let a copy of this order be sent to the Registrar IT AT for information and compliance.