TaxTMI 
TaxTMI 
2011 (11) TMI 398
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....f 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 services in certain specific area (viz. agriculture and....
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....,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 same should be accepted as proper. 8. The Transfer Pricing Officer (TPO) however was of the view that the comparable cases which were referred to by the assessee in its Transfer pricing were ....
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....asis 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. It was further submitted that the services provided by the comparable cases identified by the TPO were high end services, whereas the services performed by the assessee were in the nature of low end services. It was also submitted that two of the....
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....s 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 activity 121,156,439 Profit markup on cost 7.09% Arm's Length profit mark up 16.28% Arm's length profit (Rs.) 19,719,483 Arm's Length price (Rs.) 140,875,922 Difference between transaction value and arms length price (adjustment value) 11,125,027 The same was adopted b....
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....escription 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 - Analytical testing of building materials, drugs, food, water, etc. 3. Syngene International Pvt. Ltd. - Research in the field of synthetic chemistry and molecular biology. - Sale of products arising from research activity. 4. Vimta Labs Ltd. - Clinical trails - Environmental Monitoring and impact assessment. - &n....
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.... 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 is considered as comparable, then even Clingene International Pvt. Ltd. ought to have been included as a comparable in determining the arm's length price. After including Clingene International Pvt. Ltd. as comparable (alongwith the correct profit margins of the ten companies considered by the learned TPO in order dated March 20, 2006), the arithmetic mean of the profit margins of all eleven companies would stand reduced to 11.71%. Since the profit margin from the Assessee's contract research and support services activity was 7.08% on cost, the transaction value the Asssessee's international transa....
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....d 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 & Technology Centre 1.13 Manu Consultants Ltd. 1.05 Raptakos, Brett Test Laboratories Ltd. 1.16 Arithmetic Mean 1.08 The Assessee's Operating Cost to Asset 2.46 Chart-2: Ratio of Operating Costs to Assets of the 4 comparable companies identified by the TPO: Name of the Company Operating cost/Assets Alpha Geo Ltd. 0.46 Vimta Laboratories 0.91 Choksi Laboratories Ltd. 0.35 Syngene International Pvt. Ltd. 1.02 Arithmetic Mean 0.69 The Assessee's Operating Cost to Asset 2.46 15. Finally it was submitted that even if all contentions of the Assessee are rejected and it is held that the comparable identified by the TPO are comparable with that of the Assessee functionally, even then in terms of Rule 10B(3) of the Rules, adjustments to the profit margin....
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....ons 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 the further finding of the CIT(A) that the Assessee was performing low end services is also not correct. In this regard the Assessee pointed out to the findings of the TPO in her order as to how the functions performed by the Assessee were high end. It was also submitted by her that the process of selection of comparable as adopted by the Assessee as well as the TPO were identical viz., selection of data from "prowess" and "capitalline", keeping in mind the nature of service rendered by the Assessee to its AE viz., contract research and corporate support services. It was her submission that there is always an element of subjectivity in the process of selection of comparable on the basis of functional similarity. It has to be seen to what extent the comparable functional similarity adopted by the TPO is arbitrary. It was her subm....
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....esearch 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 comparability factor of the 4 comparable identified by the TPO on his own but has only held that the same are not comparable without assigning his own reasons. 21. The learned counsel for the Assessee reiterated submissions as were made before the CIT(A). With regard to Clingene International Pvt. Ltd., it was submitted by him that they were in the business of undertaking contract research for others and their results were comparable with that of the Assessee. 22. We have considered the rival submissions. It is not in dispute before us that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO, the nature of services performed by the Assessee whether it is low end or high end service and whether the TPO....
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....rofit 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 realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the internationa....
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....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 arising from, such transactions in the open market, such variation should be capable of being quantified and suitable adjustment made to eliminate the material effect of such differences. 24. We will first take up for consideration one of the plea of the Assessee before CIT(A), which was accepted by the CIT(A) to include Clingene as a comparable (along with other companies considered in the TPO's order) for benchmarking the Assessee's international transaction. It is not in dispute 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 Private Limited - one of the companies considered by the learned TPO as comparable. The operating profit margin of Clingene International Pvt. Ltd was (-) 33.97% of its operating cost. It was the plea of the Assessee that if Syngene International Pvt. Ltd is considered as co....
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.... 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 8,29,27,815 Operating Costs 17,83,19,046 Operating Profit % on cost 46.51% Note: Clingene International Pvt. Ltd.'s income is only in the form of fee for contract research. Synegene International Pvt. Ltd.'s income of Rs. 26,17,97,528 comprises of Contract Research fee of Rs. 22,51,53,306 and Sale of compounds of Rs. 3,60,93,565. To that extent Synegene International Pvt. Ltd.'s income includes receipts from activities other than Contract Research also. 26. We will now consider the expenditure in the form of Contract Research and other operating expenses debited in the profit and loss account of both the above companies. Total expenditure debited in the Profit and Loss A/C. towards Contract Research and other operating expenses: Syngenie International Pvt. Ltd. Rs. 16,15,48,290 Clingene International Pvt. Ltd. &n....
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....eets 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 between the arm's length price determined by the TPO and price at which the international transaction has actually been undertaken by the Assessee being not excess of five per cent of the latter, the price at which the international transaction has actually been undertaken shall by the Assessee is held to be at arm's length. The order of the CIT(A) is upheld on this ground. In view of the above conclusion, the other issues with regard to comparability (whether the Assessee was performing low-end services and the comparable companies were performing high-end services etc.) and non-consideration of other factors laid down in Rule 10B(1)(e)(i) are not being considered. For the reasons given above, the order of the CIT(A) is upheld. 26.1 For the reasons given above, appeal being ITA No.3423/Mum/08 is dismissed. 27. ITA No.6558/Mum/2008 (Revenue's appeal for AY 04-05) Gr.No.2 raised by the revenue is identical to the only ground of appeal of the revenue in AY 03-04 which we have already decided. The said ground of a....
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....re the AE's reply, it is inferred that the AE had paid to the assessee assuming that it is being charged at cost plus 7%. Therefore, assuming that the assessee has actually received its remuneration at cost plus 7%, this office is deriving the assessee's cost and consequently the margins to be earned by the assessee based on the margins earned by comparables. The calculation of arm's length mark up is as hereunder: Amount recovered by the assessee from its AE for the services Rs.14,22,06,270 provided (the AE has confirmed that it has paid this amount of on a basis cost plus 7% so this amount is being treated as cost plus 7%) Rs. 14,22,06,270 Cost after mark down of 7% mark-up (Rs. 14,22,06,270 x100/107) Rs. 13,29,03,056 Arms length mark-up (as discussed earlier in the order) 20.98% over costs Arm's length mark-up (Rs. 13,29,03,056 x 20.93 / 100) Rs. 278,16,5610 Arm's length price (Rs. 13,29,03,056 + Rs. 2,78,16,610) Rs. 16,07,19,666 Adjustment to be made (Rs. 16,07,19,666 less Rs. 14,22,06,270) Rs. 1,85,13,396 19. In view of the aforesaid, it is held that the assessee should have charged a mark-up of 20.93% over cost whe....
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....nstrated that if margins as calculated by TPO were applied to actual cost base even the appellant's charges/price to AE would have fallen within limits prescribed u/s 92C(2). Therefore, I hold that no adjustment would be required on this count also. 7.21. In view of the foregoing, it is observed that the mark-up charged by the appellant was higher than that earned by the comparables selected by the appellant through a scientific screening process. Further, for the year under consideration, the appellant has earned an actual higher return 18.87% (as against the agreed mark up of 7%) and the excess consideration received by the assessee has not been refunded and is not refundable to its AE and was also offered to tax. This important aspect was not considered by the TPO / AO. Therefore, having regard to facts of the case and material on record, the price disclosed by the assessee as ALP is required to be accepted. Consequently, the addition of Rs. 1,85,13,396/- is directed to be deleted." 32. Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.2 before the Tribunal. The Learned D.R. and the learned Counsel for the Assessee adopted the same arguments that were advanced....
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....aced with the landlord in terms of the leave and license agreement between the lessor and MIL. Accordingly, the aforesaid sum was advanced by the Assessee pursuant to consent of the Board of Directors of both the companies i.e., Assessee and MIL 35. During the assessment year under consideration, the Assessee had borrowed working capital loan of Rs. 40,20,00,000 from MIL (amount outstanding as on March 31, 2004 was Rs. 13,48,00,000) and paid interest of Rs. 90,74,383 on the amounts borrowed from MIL The said loans were advanced at interest rate of 7.75% p.a. for the month of April 2003 and 7.5% p.a. for the period May 2003 to March 2004. According to the Assessee interest paid on working capital loan, corresponding proportionate to the interest free sum advanced, is allowable under Section 36(1)(iii) as the loan was provided for business purposes (i.e., placing the interest free security deposit for the accommodation of Monsanto's regional business head) and since there was no nexus between the funds borrowed from and lent to MIL. 36. The AO did not however agree with the contention of the Assessee and disallowed deduction of interest paid on working capital loan to MIL of Rs. 15....