2018 (3) TMI 1874 - AT - Income Tax

Appeal partially allowed, remanded for further investigation & re-evaluation emphasizing detailed functional analysis & fair opportunity.

Actavis Pharma Development Centre Private Limited Versus The Deputy Commissioner of Income Tax, Ward 15 (1) (1), Mumbai.

The Tribunal partly allowed the appeal, remanding several issues to the AO/TPO for further investigation and re-evaluation. The Tribunal stressed the ... TP Adjustment - Rejection of IDMA Laboratories Limited as comparable - HELD THAT:- IDMA is engaged in quality control testing and some trading activities. However, the sale of product in statement of profit and loss (pb/395) is nil while Revenue has originated mainly from sale of services. There are contrarian facts as averred by rival parties and requires proper investigation by the AO/TPO including analysis of revenue derived and functions performed, risk involved and assets deployed, and in the fitness of the matter, we are inclined to set aside this issue regarding functional analysis of IDMA as comparable with the assessee to the file of the AO/TPO to properly investigate this comparable before arriving at the decision. The assessee is directed to provide all necessary details and information to substantiate its claim of IDMA being comparable with the assessee. AO/TPO to provide proper opportunity of being heard to the assessee in accordance with principles of natural justice. This ground of appeal No. 6 is allowed for statistical purposes. Rejection of Dolphin Medical Services Limited(hereinafter called 'Dolphin') as comparable - On perusal of audited financial statement of the assessee, it is observed that it is only engaged in providing R & D services which is the sole segment in which the assessee is operating. The bifurcation of revenue is not given in segment reporting while claim of the assessee is that around 39.55% revenue is from stability studies and testing services which required verification. There are contrarian facts as averred by rival parties and requires proper investigation by the AO/TPO including analysis of revenue derived and functions performed, risk involved and assets deployed, and in the fitness of the matter, we are inclined to set aside this issue regarding functional analysis of Dolphin as comparable with the assessee to the file of the AO/TPO to properly investigate this comparable before arriving at the decision including considering extra ordinary events such as impact of declaration of bank accounts being NPA and extraordinary expenses incurred by this company Dolphin. Assessee is directed to provide all necessary details and information to substantiate its claim of Dolphin being comparable with the assessee before the AO/TPO in set aside proceedings. The AO/TPO to provide proper opportunity of being heard to the assessee in accordance with principles of natural justice. This ground of appeal No. 7 is allowed for statistical purposes. Rejection of Vimta Labs Limited as comparable by Revenue - There are normal business risks attached to this industry to all players and merely because Vimta has incurred operating losses in the year under consideration, the same cannot be rejected as comparable. The functional profile of Vimta is comparable with the assessee as we have elaborated above and in our considered view, we do not find any justification for exclusion of Vimta as comparable. Thus, we hold that Vimta activities/functions are comparable to the assessee company and the same should be included as comparable. The assessee succeeds on this ground. Rejection of SPAN Diagnostics Limited as comparable by Revenue - SPAN is not doing any contract R & D or analysis/testing for other companies. The assessee on the other hand is mainly engaged in contract R & D for generic APIs and is also engaged in analysis and testing for its AE. The DRP unfortunately has not given any finding on the functional analysis of this company SPAN. These prima-facie findings of ours need to be verified by the authorities below and assessee is required to rebut these prima-facie findings, which may require investigation into facts. Thus, this issue is restored to the file of the AO for necessary verifications and de-novo determination after considering our preliminary findings. Inclusion of comparable Aurigene Discovery Technologies Limited by TPO - It is claimed by the assessee that the said Aurigene holds proprietary rights over intangibles and is engaged in drug discovery on partnership basis. Thus, revenue model of Aurigene is claimed by assessee to be different then the revenue model of the assessee. The assessee is claimed to be engaged in to contract R & D for generic API and operates on cost plus basis. This is claimed to be low risk area and rewards associated are also comparatively low vis-a-vis Aurigene who it is claimed is into high risk high award revenue model basis with its customers. These contentions of the assessee are no doubt meritorious for Auriegene exclusion but requires verification by authorities below. We are of considered view that this matter needs to be restored to the file of AO/TPO to reconsider this comparable on merits after hearing the assessee. Biocon Limited and Syngene International Limited - assessee has computed margins w.r.t. these companies @19.94% and 25.34% respectively while the AO/TPO computed the same @ 25.66% and 29.62% respectively - While for computing margin of Syngene International Limited, it was submitted that the TPO relied on data base from Prowess while the assessee relied on audited financial statements which was claimed to be more reliable. The DRP noted that the assessee has duly filed an rectification application before TPO and directions were issued by DRP to AO/TPO to examine this issue for computation of correct margins of the two comparable. We do not see any prejudice to the assessee by the aforesaid directions of DRP with which we concur. The directions of DRP to AO/TPO to examine this issue for computation of correct margins of the aforesaid two comparables namely Biocon Limited and Syngene International Limited stood confirmed. Issues Involved:1. General grounds on total income assessment and transfer pricing adjustment.2. Reference to the Transfer Pricing Officer (TPO) and procedure under Section 92C(3).3. Rejection of economic analysis and comparable companies by the Appellant.4. Inadvertent clerical error in Transfer Pricing (TP) study.5. Inappropriate acceptance of non-comparable company.6. Calculation errors in margins of comparable companies.7. Working capital and risk adjustments.8. Levy of interest under section 234B.9. Levy of penalty under section 271(1)(c).Detailed Analysis:General Grounds on Total Income Assessment and Transfer Pricing Adjustment:The Tribunal dismissed grounds 1 to 5 as general in nature and not requiring separate adjudication. The appellant's total income was assessed at Rs. 3,89,37,370 against the returned income of Rs. 8,93,660. The Tribunal noted that these grounds did not necessitate specific adjudication.Reference to TPO and Procedure under Section 92C(3):The appellant argued that the reference to the TPO for determining the arm's length price was made without recording satisfaction as required by law. The procedure under Section 92C(3) was also not followed. However, these grounds were dismissed as they were general in nature.Rejection of Economic Analysis and Comparable Companies by the Appellant:- IDMA Laboratories Limited: The Tribunal found that there were conflicting facts regarding IDMA's comparability and directed the AO/TPO to re-examine the functional analysis of IDMA, considering the detailed financial statements and other relevant information.- Dolphin Medical Services Limited: The Tribunal noted that Dolphin's financial issues and functional differences required further investigation. The matter was remanded to the AO/TPO for a detailed analysis.- Vimta Labs Limited: The Tribunal held that Vimta's functional profile was comparable to the appellant and should be included as a comparable. The reasons for Vimta's losses were considered normal business risks.- SPAN Diagnostics Limited: The Tribunal found that SPAN's functional profile needed verification and remanded the issue to the AO for further investigation.Inadvertent Clerical Error in TP Study:The Tribunal noted that the clerical error in the TP study regarding IDMA and SPAN had already been addressed in the respective grounds and did not require separate adjudication.Inappropriate Acceptance of Non-Comparable Company:- Aurigene Discovery Technologies Limited: The Tribunal observed that Aurigene's revenue model and risk profile were different from the appellant's. The matter was remanded to the AO/TPO for re-evaluation of Aurigene's comparability.Calculation Errors in Margins of Comparable Companies:- Biocon Limited and Syngene International Limited: The Tribunal concurred with the DRP's directions to the AO/TPO to examine the computation of margins for these companies and confirmed the directions.Working Capital and Risk Adjustments:- Working Capital Adjustments: The appellant did not press this ground, and it was dismissed as not pressed.- Risk Adjustments: The appellant did not press this ground, and it was dismissed as not pressed.Levy of Interest under Section 234B:The appellant stated that this ground was consequential in nature. The Tribunal dismissed it as such, noting that it did not require adjudication.Levy of Penalty under Section 271(1)(c):The appellant argued that this ground was premature. The Tribunal dismissed it as premature at this stage.Conclusion:The appeal was partly allowed, with several issues remanded to the AO/TPO for further investigation and re-evaluation. The Tribunal emphasized the need for detailed functional analysis and proper opportunity for the appellant to present its case. The order was pronounced on 09-03-2018.