TaxTMI 
TaxTMI 
2010 (4) TMI 883
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....issioner of Income-tax, Transfer Pricing-II, Mumbai in the following manner :- Particulars Amount (Rs.) Fees charged for services 1,02,26,857 Total costs incurred by the assessee 1,01,16,193 Markup @ 17.14% on the same 17,33,915 Arm's length price for the services 1,18,50,108 16,23,251 This adjustment was made because the fees charged by the assessee-company in respect of clinical trial services was less than 95 per cent of the arm's length price determined under section 92CA(3). Ld. CIT(A) after detailed discussion held that the adjustment of Rs. 16,23,251 as made by the Transfer Pricing Officer (TPO) under section 92CA(3) was unjustified. Being aggrieved by the order of ld. CIT(A), the department is in appeal before us on the following ground :- "On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred deleting the addition made under section 92CA(2) of the Act amounting to Rs. 16,23,251 by completely ignoring the facts involved and by incorrect application of the case of Aztec Software & Technology Services Ltd. v. ACIT [2007] 107 ITD 141." 4. Brief facts pertaining to this issue are that the asses....
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....inly limited to following functions : (a)Making initial contacts with doctors and hospitals to convince them to participate in the exercise. (b)Obtaining the permission of the drug controller of India and the permission of the ethics committee of the hospitals. (c)Monitoring the process and ensuring adherence to protocols already given by the associate entity. (d)Collection of data from the doctors and hospitals and its transmission to the associate entity. The assessee submitted that for carrying out these functions, whatever cost was incurred, the assessee charged mark up of 5 per cent over the same from its associated entity. The total expenditure incurred by the assessee including setting up of infrastructure facilities for providing these activities was as under : Type of expenses Amount (Rs. in lakhs) Personnel expenses 31.92 Travelling expenses 16.32 Office rent and electricity 22.18 Others 31.74 Total 101.16 The TPO examined the copy of the research and development services entered into with its overseas associate entity and from the various terms of the research agreement, reproduced at pages 3 and 4 of the TPO's order,....
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....e skilled industry such as technical services and engineering services. The TPO provided list of 27 cases. The assessee pointed out that since these companies were engaged in providing general technical and business consultancy services, they were not functioning similar to it. Since the assessee contended that it was neither comparable to contact research organisation nor to general service provider, the TPO did not accept the assessee's contention. She examined the balance sheet of three clinical trial service providers and also of following technical service providers, the functioning of which were similar to the assessee : (a)NIS Sparts Ltd. (b)Vimta Labs Ltd. (c)Water & Power Consultancy Services India Ltd. The TPO concluded as under :- "The average operating profit margin of the four comparable companies works out to 18.38 per cent which is calculated as follows : Companies 2001-02 NIS Sparts Ltd. 9.07% Vimta Labs Ltd. 27.04% Water & Power Consultancy Services India Ltd. 19.03% Arithmetic mean 18.38% Thus, it is seen that the clinical trial service providers are considered, the margin to be applied is 17.14 per cent. On the othe....
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..... He observed that the comparable cases selected by the TPO were altogether in different line of business which had nothing to do with the clinical trial support services as provided by the assessee. He observed that the TPO did not follow the guidelines laid down under rule 10B for determining the arm's length price relating to comparable uncontrolled price method. He accordingly, allowed the assessee's appeal. 6. Ld. D.R. submitted that the main issue in the present appeal is whether mark up percentage over cost being 5 per cent is correct or not. He referred to page 158 of PB, wherein, Research and Development Service Agreement is contained and pointed out that as per recital, the assessee was established in order to manufacture pharmaceutical products in India and perform research and development work under agreements to be separately entered into between Byk Gulden and Zydus Byk and Cadila and Zydus Byk. Further, he pointed out that in the recitals, it is also mentioned that the assessee with its R&D Division, was entrusted to perform certain research and development service work on a contract research basis on behalf of Byk Gulden (BGL). Thus, he pointed out that the asses....
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....oratories, investigators etc." He submitted that ld. CIT(A) has not examined the above Article. He pointed out that the assessee's case is that the assessee was not performing R&D itself but through third party. Therefore, there had to be approval, as required by the agreement, of the Steering Committee to this effect. Ld. CIT(A) has not considered this aspect and merely relied on the submissions made by the assessee. 6.1 Ld. D.R. referred to the details of reimbursement by Byk to the assessee contained at pages 152 and 153 of PB and pointed out that as per the break up, the assessee, inter alia, made the payment of the following charges : "1. Peak Flow Meter : Rs. 2,90,505 2. Budesonide inhalers : Rs. 1,76,757 3. Clinical Trails Exps. : Rs. 1,73,445 4. Investigator's Meeting : Rs. 1,13,986 5. Printing cost of CRF's and daily diaries for Cielesonide study Rs. 88,633 6. Ciclesonide trials : Rs. 84,800 7. Printing cost of patient information sheet : Rs. 47,438 8. Laboratory charges : Rs. 11,875" This clearly indicates that the assessee had ....
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....on, therefore, she considered other service providers engaged in the skilled industry providing technical services and engineering services. In reply to ld. D.R.'s submissions that the assessee had made payment for laboratory charges etc. as reproduced earlier, in the submissions of ld. D.R., he pointed out that payment to hospital was for clinical test of molecules. He pointed out that the assessee neither did any R&D work itself nor through Third party but only coordinating between Byk Gulden and hospitals for providing necessary information. He submitted that the assessee was mainly engaged in the manufacturing activities which is evident from the fact that the turnover was Rs. 24.46 crores on account of export intermediates whereas the expenditure of R&D was only to the extent of Rs. 1.01 crores. 8. We have considered the rival submissions and perused the record of the case. The assessee-company had been established as a joint venture between Byk Gulden and Cadila Healthcare Ltd. Byk Gulden Lomberg GmbH (BGL) is a German Company and is engaged in the research, development, manufacture and distribution of pharmaceutical product focusing in particular on the treatment of gastr....
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....lecules were generated by BGL and its effectiveness over Indian patients was to be examined by carrying out clinical trial in Phase II & Phase III part of the research activity. These clinical trials could be carried out only after obtaining necessary permission from the competent authorities and for that purpose, the assessee was entrusted with the job. Thus, the major part of the research activity was Phase-I in which molecules per se was generated not Phase II and Phase III, where only clinical trials were to be carried out. 9. Having considered the functional aspects relevant to it, we have to examine whether the comparable cases, as selected by TPO, were substantially similar to the assessee's function or not. SIRO Clinpharm Pvt. Ltd. was engaged in conducting clinical trial services. Pages 259 to 267 of PB contain annual Report of SIRO Clinpharm Pvt. Ltd. The income from research activity carried out by the said company for the financial year 2001-02 was at Rs. 1,47,30,035 and as per the fixed asset schedule, it had plant and machinery including laboratory equipments aggregating to Rs. 94,50,182 as on 31-3-2002. Thus, it was an organization which was mainly doing the clini....