TaxTMI 
TaxTMI 
2011 (11) TMI 398
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....gth Price of the International Transactions of the assessee company, without appreciating the facts of the case." 3. The assessee is a company. It is hereinafter referred to as MHPL or Assessee. MHPL is a wholly owned subsidiary of Monsonto Company, USA, (hereinafter referred to as MTC) in India. MTC is stated to be a leading provider of agricultural products to farmers and offers seeds improved through biotechnology with one or more traits. It is stated to be renowned all over the world for its technology-based solutions in the agricultural field. MHPL acts as a holding company for various downstream investments of the Monsanto group in India. As a group holding company of Indian ventures, MHPL provides certain support/steward services to various downstream ventures in India. 4. MTC entered into a Support Agreement with MHPL dated January 1, 2001. Since the said agreement was valid only for a period of one year, a fresh agreement was executed by the contracting entities (effective from April 1, 2002) ('the Support Agreement'). The Support Agreement envisages provision of following services by MHPL. Contract Research Services: - Provide contract research se....
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....Operating income Op Exps. OP OP% 1. Amtrac Management Services 31/3/2003 1,458,960 1,475,680 (16,720) -1. 3% 2 Dabur Research Foundation 31/3/2003 179,997,656 168,718,427 11,279,229 6.69% 3. Hinduja Group India Ltd. 31/3/2003 48,002,686 48,455,982 2,059,326 4.25% 4. ICI India Research & Technology Centre 31/3/2003 46,933,379 46,864,594 68,785 0.15% 5. Manu Consultants Ltd. 31/3/2003 667,500 659,327 8,173 1.24% 6. Raptakos, Brett Test Laboratories Ltd. 31/3/2003 8,987,642 8,336,961 650,681 7.80% Average 3.17% The operative margin of the assessee was worked out at 7.09% of the total cost. According to the Assessee the operative margin was higher than the average OPM of comparable companies i.e. 3.17% and accordingly, having regard to the provisions of Section 92(3), the consideration being received by MHPL for rendering support services to MTC meets with the arm's length principle. The assessee thus claimed that the international transaction with its AE was at Arms Length Price and the s....
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....re examined companies engaged in services such as consultancy, business consultancy, general services, technical and engineering, consultancy and contract research were examined in 'prowess' and 'çapitaline' database and on the basis of the same, identified the following four companies. The companies alongwith their business activities was as follows (i) Alpha Geo India Ltd. : This company was engaged in analysis of data relating to seismic for oil companies (ii) Vimta Labs Ltd. : They are engaged in providing inspecting, testing and analysis services in connection with water, food, drug, chemical, petro products, mineral & water and contract research (iii) Chokshi Laboratories Ltd.: The company was a commercial testing house engaged in testing of various products and offers services in the field of pollution control. (iv) Syngene International Pvt. Ltd.: This company was formed for providing contract research services to overseas customers in the field of synthetic chemistry and molecular biology. 9. The assessee submitted before the TPO that the comparable cases identified by the TPO are not engaged in similar activities as that of the assessee. ....
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.... Analysis of hybrid seeds to ascertain pests resistant. The assessee also outsourced some of these studies (f) Discovery of gene and its evaluation (g) Laboratory Testing of genes, studying gene expression on a crop and whether seeds of such crop contained gene as per requirement. (h) Assessee has a 25,000 Sq.ft. lab space and 10,000 sq. ft. of green house space. Pt has also has a well stocked library of technical journal and research reports. For the above reasons, the TPO held that the type of services rendered by the assessee was more comparable to the type of services rendered by the comparables identified by her. Thereafter the TPO worked out the arithmetic mean of the four companies identified by her and also six companies identified by the assessee and arrived at 18.22%. This was later rectified as there were apparent mistakes in such calculation to16.28%. An addition on account of adjustment to ALP was determined by the TPO as follows: Particulars As per revised calculation Revenue from support services including contract research services. 129,750,895 Profit from the above activity 8,594,456 Cost of the above a....
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....t Monsanto USA Market risk No Yes Research risk No Yes Price/ margin risk (due to cost overruns etc.) No Yes Bad debt risk No Yes Third party liability risk in relation to research results. No Yes In the light of the above description of the risk assumed and functions performed by the Assessee in respect of the international transaction, the Assessee gave a description of the nature of functions and risks assumed by the four companies chosen as comparable by the TPO. A comparative analysis of the activities of the said additional companies ( based on information available in the annual accounts and official websites of the companies) vis-à-vis the activity of the assessee, was given by the Assessee in the form of the following table: S.No. Name of company Activity of identified company The assessee's activity 1. Alphageo (India) Ltd. - Acquiring and processing seismic data - Provides seismic survey services to oil companies and government, in relation to oil exploration projects. Provision of research support and facilitation services. 2. Choksi Laboratories &....
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....he same/ similar activity as the four additional companies selected by the TPO, viz., : 1. Clingene International Private Limited 2. Panacea Biotec Limited. ('Research and development' segment) 3. I D C (India) Limited 4. CRISIL Limited ('Information segment' pertaining to the company's research activity) 5. ICRA Limited ('Information segment' pertaining to the company's research activity) 13. It was brought to the notice of the learned CIT(A) that the Assessee had submitted before the AO vide letter dated March 24, 2006 requesting the learned AO to include Clingene International Pvt. Ltd. as a comparable (along with other companies considered in the TPO's order) for benchmarking the Assessee's international transaction. It was pointed out that as per the annual report of Clingene International Pvt. Ltd. for FY 2002-03 the said company was engaged in similar activity as Syngene International Pvt. Ltd. - one of the companies considered by the learned TPO as comparable. It was highlighted that the operating profit margin of Clingene was (-) 33.97% of its operating cost. Thus, it was prayed that if Syngene i....
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....5% of Arm's Length Price 12,85,74,225 Since the Transaction value falls within 5% range, the Assessee's price should be accepted as at Arm's Length. 14. Without prejudice to the above contentions and in the alternative the Assessee pointed out that in terms of Rule 10B(1)(e)(i) of the rules, the TNMM can be applied by taking three criteria viz., the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise can be computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. The Assessee point out that if cost to Asset ratio is taken in respect of the companies identified by it and that identified by the TPO, the Assessee's cost to asset ratio is much higher. The following charts were given to demonstrate the above proposition: Chart-1: Ratio of Operating Costs to Assets of the comparable companies identified by the Assessee: Name of the Company Operating cost/Assets Amtrac Management Services Ltd. 0.57 Dabur Research Foundation 1.47 Hinduja Group India Ltd. 1.10 ICI India Research & Tech....
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....ble and ignored Clingene International Pvt. Ltd. As comparable. The CIT(A) held that had Clingene International Pvt. Ltd. been considered as comparable then the arithmetic mean would of all comparables selected by the TPO and the Assessee would be only 11.71% and applying the safe harbour rules in terms of Second Proviso below Sec.92C(2) of the Act, the difference in price between the one adopted by the Assessee and the ALP determined by including Clingene International Pvt. Ltd. Would be within + or - 5% range calling for no adjustment to the price adopted by the Assessee in respect of the international transaction. For the above reasons, the CIT(A) deleted the addition made by the AO. 17. Aggrieved by the order of the CIT(A), the Revenue has preferred the present appeal before the Tribunal. We have heard the submissions of the learned D.R. and the learned counsel for the Assessee. 18. The learned D.R. submitted that the findings of the CIT(A) that the TPO did not take into account the functional dissimilarity between the comparable cases relied by the Assessee and the comparable cases identified by the TPO on her own study, is not correct. It was submitted by her that th....
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....s against a profit of Rs. 8.4 million in the previous year. This is due to the completion of the diabetes study for Surromed Inc. and the continuation of the self-sponsored diabetic study. This study has enrolled two research partners viz., Strand Genomics and IISC and the progress has generated several potentially high value patents for Clingene International Pvt. Ltd. in the area of new biomarker for Diabetic Nephrology. The company is also in the process of setting up a Human Pharmacology unit to carry out Phast-1 to Phase-3 clinical trial and BAVBE studies. Necessary application for establishment of the same have been filed and the facility is expected to be operational by September, 2003." Based on the above remarks of the directors the learned D.R. submitted that firstly Clingene International Pvt. Ltd. was doing its own research and had suffered loss during the previous year due to self-sponsored research and therefore functionally it should not be regarded as comparable or in the alternative suitable adjustment ought to be made to the result of loss before benchmarking the same as comparable. 20. It was also submitted by her that the CIT(A) has not considered the c....
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....ined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. 10B. Determination of arm's length price under section 92C.-(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d) ** ** ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin r....
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....ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 23. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. In terms of Rule 10B(3) of the Rules an uncontrolled transaction shall be considered as comparable if none of the differences between the controlled and uncontrolled transactions materially affects the price or cost charged or paid in, or the profit arising from, such transactions in the open market. If there is scope for variation in the price or cost charged or paid in, or the profit ar....
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....ould not be proper as the operating expenses would be inclusive of own research as well as contract research. 25. To appreciate this contention, we have to have a look at the way Operating Profit has been arrived at both in the case of Clingene International Pvt. Ltd and Syngene International Pvt. Ltd, which are as follows: Clingene International Pvt. Ltd Particulars Amount F.Y.2002-03 Sales/Service Income (as per P & L A/c) 1,10,72,704 Total Operating Income 1,10,72,704 Profit Before Tax (as per P & L A/c.) (60,52,929) Add: Interest Expenses (as per P & L A/c.) 3,55,460 Operating Profits (56,97,469) Operating Costs 1,67,70,173 Operating Profit % on cost -33.97% Syngene International Pvt. Ltd Particulars Amount F.Y.2002-03 Total Income (as per P & L A/c) 26,17,97,528 Less: Non operating Income 5,50,695 Total Operating Income 26,12,46,861 Profit Before Tax (as per P & L A/c.) 8,21,85,579 Add: Interest Expenses (as per P & L A/c.) 12,92,903 Less: Non-operating income (as per P& L A/c) 5,50,695 Operating Profits ....
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.... downward adjustment to the operating profit margin of Synigene International Pvt. Ltd ought to have been given for the activity relating to sale of compounds. An upward adjustment ought to have been made for the expenses relating to own research having been considered while arriving at the operating profit margin. Thus the adjustment to be made to the operating profit margins of the two comparables of Synigene International Pvt. Ltd and Clingene International Pvt. Ltd would get neutralised (without going into actual details of quantification) and therefore their margins as claimed by the Assessee for arriving at the arithmetic mean of 11.71% after including all comparable companies considered by the TPO and the results of Clingene International Pvt. Ltd. is held to be proper and acceptable. In that view of the matter the difference between the profit margin from the Assessee's contract research and support services activity of 7.08% on cost being the transaction value the Assessee's international transaction meets with the arm's length principle by applying the safe harbor rule enshrined in the second proviso below Section 92C(2) of the Act which provides that if the variation bet....
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....mean of these 11 companies is as follows: Sr.No. Name of the Company Profit margin % on cost 1. Amtrac Management Services (-) 9.86% 2. Dabur Research Foundation 0.73% 3. Hinduja Group India Ltd. 5.79% 4. IDC India Limited 11.99% 5. ICI India Research and Technology Services. (-) 0.91% 6. Manu Consultants Ltd. 0.73% 7. Raptakos Brett Tests Laboratories Ltd. 8.54% 8. Alpha Geo Ltd. 47.56% 9. Vimta Laboratories 61.04% 10. Choksi Laboratories Ltd. 33.48% 11. Syngene International Pvt. Ltd. 71.12% Arithmetic Mean of all 11 companies 20.93% MHPL 18.87% 30. The TPO thereafter determined the ALP of the international transaction as follows: "18. From the aforesaid and the certificate provided, it is clear that the assessee has not put the AE in knowledge that the assessee has charged the AE on a basis actual cost plus more than 7% mark up. Accordingly, there is always the possibility of the AE asking the money back from the assessee in the subsequent years. Further more the AE's reply, it is inferred that the AE had paid to the assessee ass....
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....appellant was supposed, to charge cost plus 7%. Such charging was derived on the basis of budgeted cost. Since actual cost incurred by the appellant was less than the budgeted costs for the current year, its margin ultimately worked out to be 18.87%. The appellant also represented before TPO and filed confirmation before AO that excess sum charged is not refundable to its AE. In any event appellant had offered full margin of Rs. 2,25,70,303/- (18.87%) to tax. The TPO disregarded all these and did backward calculation. He began with amount charged by appellant to its AE (i.e. Rs. 14,22,06,270/-). From that he reduced the assumed margin of 7% and considered the resultant figure (Rs. 13,29,03,056/- as hypothetical cost against actual cost (Rs. 11,96,35,967/-). On this hypothetical cost base, the TPO applied the arm's length margin as computed by him leading to double topping of the layers on cost i.e first retaining the difference of Rs. 1,32,67,089/- as part of hypothetical cost base and again inflating the same by the margin applied. Such an action of TPO is not supported by any provision of the Act and therefore not tenable. Further, the appellant demonstrated that if margins as ca....
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....dditional made by the AO was rightly deleted by the CIT(A). Consequently, we find no merit in Gr.No.2 raised by the Revenue in its appeal and the same is dismissed. 33. Gr.No.1 raised by the Revenue reads as follows: "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing deleting the disallowance of interest of Rs. 15,15,000/- without appreciating the facts of the case." The Assessee had advanced an interest free loan of Rs. 2 crores to Monsanto India Ltd., a group company (MIL), during the previous year 2000-01 i.e. Assessment year 2001-02. The said sum was advanced for placing an interest-free security deposit of Rs. 2 Crores by MIL with the lessor in respect of flat taken in Mumbai on leave and license basis for providing accommodation to Mr. Sekhar Natrajan, the then Managing Director of MIL and who also was the South Asia Business Head of the Monsanto Group of companies. 34. According to the Assessee since it acts as the holding company for Monsanto group of companies in India, it was agreed that the Assessee would share the housing cost by providing the interest free security deposit which was to be placed with the land....