TaxTMI 
TaxTMI 
2011 (12) TMI 284
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....3,56,80,542 to the income of the appellant by holding that its international transaction of 'Contract Research and Testing Services' does not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). In doing so the Ld. DRP has grossly erred in agreeing with the Transfer Pricing Officer's (Ld. TPO) action of: 2.1 disregarding the arm's length price ('ALP') and the methodical benchmarking process carried out by the appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule IOD of the Income-tax Rules, 1962 ('Rules'); 2.2 not allowing the use of multiple year data as prescribed under Rule 1OB(4) of the Rules read with the OECD TP Guidelines, and determining the arm's length price on the basis of financial information of the comparables for the year ended March 31, 2007 identified pursuant to a fresh search for comparables performed during the assessment proceedings. The AO/TPO/Ld. DRP erred in rejecting the contemporaneous documentation maintained by the appellant as required under the Indian TP regulations; 2.3&....
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....elopment and provide analytical research and stability testing services to its associated enterprises. 4. During the year under consideration, the assessee had international transactions with following AEs: 1. M/s. Mehpa AG 2. M/s. Merckle GmbH 3. M/s. Ratiopharm GmbH 4. M/s. Ratiopharm Inc. 5. M/s. Laboratorie ratiopharm SA 6. M/s. Ratiopharm BV 7. M/s. Ratiopharm UK Ltd. 8. M/s. Ratiopharm Schweiz AG 9. M/s. Ratiopharm international Gmbh, Germany 5. The dispute in this appeal is with regard to the Arm's Length Price (ALP) of the international transaction of rendering contract testing and Research Services by the Assessee to it's Associated Enterprises (AE's) viz., Mepha AG, Merckle GMBH and Ratiopharma GMBH. The Assessee received a sum of Rs. 39.80 Crores for rendering the above services to its AEs. The breakup of the sum received is as under: (a) Contract Testing : Rs. 12.89 crs. (b) Pharmaceutical Product Development : Rs. 23.28 crs. (c) Analytical Research/Testing : Rs. 3.63 crs ....
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.... were consistently loss making and therefore cannot be taken as comparable. According to the TPO, after excluding the above two companies, there remained only 8 comparable companies. In view of the inadequacy of a reasonable number of comparables and the broad level of comparability allowed under the TNMM, the TPO identified a fresh set of 8 comparables (which includes 2 common comparable with that of assessee), which companies according to the TPO perform functions broadly comparable to the activities of the assessee. The details of PLI of remaining 8 comparables are as under: S. No. Name of the Comparable Company PL1 (%) 1. M/s. Engineers India Ltd(Seg.) 45.16 2. M/s. Alphagea (India) Ltd* 38.21 3. M/s. Agile Electric Technologies Pvt Ltd 6.58 4. M/s. Vimta Labs Ltd* 27.44 5. M/s. IDC (India) Ltd 15.89 6. M/s. Oil Field Instrumentation (India) Ltd 76.46 7. M/s. Celestial Labs Ltd 58.35 8. M/s Mindtree Ltd.(Seg) 14.90 Arithmetic Mean 35.37 *These 2 comparables are common to the set of assessee as well as department. The above arithmetic mean of the PLI of the abov....
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....more comparables, selection is to be made of companies, which are functionally comparable and therefore, the comparable set needs to expand to include companies similar to all types of R&D Services. The TPO also pointed out that the assessee's set of comparables also included engineering service (M/s Alphagec (India) Ltd) comparable, Therefore, similarly the TPO was also justified in including companies having similar type of functions. The TPO was also of the view that while applying the TNMM, functional similarity of comparables is not restricted to include companies within the same industry, in the event of inadequate comparable companies. In this regard the TPO also referred to the OECD TP guidelines which permits comparison even where the comparable is not in the same industry as that of the tested party, where there is inadequate comparable companies. b. In the comparables identified by the TPO, Engineers India Ltd. Was a public sector undertaking. According to the TPO, Public sector undertakings were also in the market for earning profits, similar to private companies and therefore, these companies are also considered as comparable and cannot be discarded on acc....
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.... 343,098,405 343,098,405 3. Operating Profit (OP) 55,000,366 9,06,80,908 4. OP/TC 16.03 26.43 5. Difference between ALP of Sales and value of international transaction (Rs. 43,37,79,313 - Rs. 39,80,98,771) 6. Application of +/- 5% range: (105%* Rs. 43,37,79,313) = 455,468,279 (95%* Rs. 43,37,79,313) = 412,090,348 Thus, the ALP of the transaction was determined at Rs. 43,37,79,313/- as against the value of transaction at Rs. 39,80,98,771/-. Accordingly, an adjustment of Rs. 3,56,80,542/- (Rs. 43,37,79,313/- minus Rs. 39,80,98,771/-) was proposed to the value of the international transaction in respect of providing R&D services to its AEs. 12. The AO accepted the report of the TPO in its draft assessment order. The DRP accepted the draft assessment order proposed by the AO. The relevant observations of the DRP in this regard were as follows: "1.4 In course of the proceedings before us, the arguments made before the Assessing Officer were reiterated. Citing specific instances, argument was reemphasized that 6 comparables selected by the TPO are functionally not comparable with the....
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.... Income-tax Act which prevents the TPO from obtaining additional information from any source. Further, we do not find any infirmity in this action of the TPO as the assessee was finally confronted with all the information obtained. Moreover, it is seen that the TPO in working of the arithmetic mean of 26.43% has considered all of the assessee's comparables excepting the 2 loss making comparables. Thus, the assessee's objection primarily seems to be on the identification of comparables by TPO. This is not acceptable as the provisions of law do not prohibit the TPO from verifying and searching comparables other than those of assessee. Moreover, in the method followed i.e. TNMM, a strict conformity of business is not a precondition. 1.6 In so far as TPO asking for updated Pit for the Financial Year involved is concerned, this is also in conformity with the provisions of Law. Furthermore, the provision of +/- 5% in respect of ALP is not a provision for a deduction of 5% while making adjustment. This claim has not been accepted by the Revenue while making such adjustments in the past years in other cases as well. 1.7 Premised on the foregoing, we find the TP adjustment in ....
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....gard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined 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. (3) Where during the course of any proceedin....
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....h 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 international transaction. (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevaili....
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....rd, the submission of the learned Counsel for the Assessee was that u/s. 92C(3) of the Act, the AO can determine the ALP only on fulfilment of the conditions laid down therein. In this regard, it was argued that the AO has not disputed that the TNMM is the most appropriate method of determining ALP in this case and therefore the conditions of Sec. 92C(1) of the Act stood satisfied. It was next pointed out by the learned counsel for the Assessee that in accordance with Section 92C(2) of the Act read with Rule 10B(i)(a) of the Rules provides guidance in relation to the manner of application of the most appropriate method chosen by the assessee. Rule l0B(2)(1) provides guidance regarding the comparability of an international transaction with an uncontrolled transaction which shall include specific characteristics of the property transferred, functions performed, assets employed and risk assumed by the respective parties, contractual terms, and conditions prevailing in the market in which the respective parties to the transaction operate. It was submitted that the Assessee's functional and risk profile was a limited risk contract research service provider. It was submitted that the....
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....cepted. 21. We have considered this submission and are of the view that the same cannot be accepted. u/s. 92C(3) of the Act, the AO has power to determine ALP on the basis of material or information or document in his possession. The report of the TPO is material, information or document in possession of the AO. The TPO has disputed the ALP as determined by the Assessee in its Transfer Price Study Report. According to the TPO the price charged or paid in the international transaction has not been determined in accordance with sub-sections (2) of Sec. 92C of the Act. The TPO has disputed the manner in which the ALP has been arrived at by the Assessee. His complaint is that the same is not in accordance with Rule 10-B(1)(d), Rule 10-B (2) and (3) of the Rules in as much as the comparable identified by the Assessee were inadequate and that under the TNMM method broad level of comparability is allowed. The correctness of this finding is another matter and will be dealt with while dealing with the other grounds of appeal of the Assessee. Though there is no specific finding in this regard in the order of the AO, the fact that the AO has made a reference to the TPO for determination of....
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.... removing ADS On removing ADS and Neeman PLI% (OP/TC) PLI (OP/TC) PLI% (OP/TC) 1 Alphageo (India) Ltd. 38.21 38.21 38.21 2 Vimta Labs Ltd. 27.44 27.44 27.44 3 Choksi Laboratories Ltd 34.96 34.96 34.96 4 Dolphin Medical Services Ltd 10.76 10.76 10.76 5 Medinova Diagnostic Services Ltd. 5.83 5.83 5.83 6 NG Industries Ltd. 18.23 18.23 18.23 7 Transgene Biotek Ltd. - Diagnostic 10.78 10.78 10.78 8 Pfizer Limited - Services 6.46 6.46 6.46 9 Neeman Medical International (Asia) Ltd. -46.80 -46.80 10 ADS Diagnostic Ltd. - Diagnostic -24.97 Arithmetic Mean 8.09 11.76 19.08 From the above table, it can be seen that if ADS Diagnostic is rejected, the OP/TC of comparable companies is 11.76% as against 16.03% of the assessee. Further, without prejudice, if both Neeman and ADS Diagnostic are rejected, the arithmetic mean is 19.08 as against 16.03% of the Assessee and accordingly on applying the 5% range as provided in proviso to Section 92C(2), the assessee's transact....
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....ored under conditions of high heat and humidity. Merckle, as a part of the pharmaceutical product development process, undertakes various testing activities mandated by regulatory authorities, including stability testing. Merckle has outsourced stability testing services to with the following objectives: ♦ Benefiting from great pool of talented and well educated people; and ♦ Cost savings for the group. The functions performed and risks assumed by assessee vis-à-vis Merckle in respect of provision of stability testing have been descried below. (a) Human Resource ('HR') function. Assessee mainly recruits scientists with MSC and BSC degrees. Candidates holding PhD, M Pharm and B. Pharm degrees are considered for higher level positions. The tem comprises of 19 Full Time Equivalents ('FTE's), including a Manager, Deputy Manager, Senior Research Scientist, Research Scientist, Research Associates, Trainees and Lab Attendants. Assessee provides training for specific functions to fresh/new employees. (b) Test samples and relevant information. Merckle provides all the essential information, particularly testing ....
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....sp; Benefiting from great pool of talented and well educated people; and ♦ Cost savings for the Group. In this regard assessee and ratiopharm have entered into an arrangement whereby assessee is engaged to provide PPD services. In the performance of the above activities, assessee seeks to comply with Current Good Manufacturing Practices ('GMP') and Good Laboratory Practices ('GLP') standards. The provision of these services involves three departments at assessee's facility at Goa, i.e., Analytical Development, Quality Control and Pharmaceutical Development. (a) Analytical Research Development Analytical research is undertaken for screening Potential drug candidates, to aid in the development of drug syntheses, support formulation studies, monitor the stability of Active Pharmaceutical Ingredients (APl') and formulations, and test final products for release. The quality of analytical data is a key factor in the success of a drug development program. (b) Quality Control Quality control department comprises of three parts viz ; wet laboratory, instrumentation and microbiology department. Quality control department is....
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....umed in the transaction, as we are of the view that that may not be required nor has comparison been done on those factors by the TPO. The fresh comparable cases selected by the TPO and their functions are as set out below: 1. Engineers India Ltd. (EIL) is engaged in a diverse set of activities viz., providing a full suite of engineering and related technical services for petroleum refineries and other industrial projects. It provides a complete range of services needed to conceptualise, design, engineer and construct projects to meet the specific requirements of its clients. Its association with the clients extends beyond the commissioning of their plants through monitoring operation of each plant and accumulating feedback on performance. Lumpsum Turnkey projects from concept to commissioning is an area into which EIL has entered in a big way. Further, EIL operates in the refining sector involving in activities such as Motor Spirit Quality Up-gradation projects, Up-gradation of refineries, Pipeline projects. Also, EIL's engineering services are in the nature of modeling the plant buildings (i.e. refineries, LNG plants and SPM projects) mainly in the nature of architec....
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....s Market Review of Computing and Peripheral Products. Such research reports provide market forecasts, competitive analyses, vendor profiles, and information on customer requirements and buying patterns. Further, the areas of research include Communication Services Broadband Business, Network Services, IP based services, residential small business and wireless communications. The products and services of IDC consist of the following: - Customised Services: IDC delivers strategic and tactical research, and consulting services to support the development and implementation of business strategies of ICT builders and providers. These projects are customised to address the client's specific business problem. The uniquely qualified, multi-disciplinary experts help you develop business strategies, fine tune product development and pricing, define and implement marketing goals, asses competitive forces, and evaluate joint ventures and acquisitions. - Standard research reports: These research documents cover everything in hardware-PCs, peripherals, servers, software services and key industry issues. The research reports provide market intelligence, forecasts, competitive....
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....functional profile of Assessee is in the nature of providing - Contract Research and testing services. Oil field does not carry out any of these stipulated activities and accordingly Oil field ought not to be considered a comparable. 5. Celestial Labs Limited (Celestial Labs): According to assessee Celestial Labs as a comparable has been cheery picked by the TPO. Celestial Labs is a diversified company operating in varied fields such as rendering IT services encompassing application development and maintenance, production support, EERP, data warehousing, SAP implementation. Celestial Labs also is into manufacturing and trading of products such as ERP package for manufacturing and has a product 'Sanjivani' which is a portal for live ayurvedic consultation. The company is also engaged in the distribution of herbal ayurvedic products. SAP Services: Celestial delivers SAP consulting, SAP implementation and post-SAP implementation services for its customers. Celestial is engaged in implementing SAP for customers from initial planning, design and implementation to maintenance and ongoing optimization. Celestial helps the company align IT Solutions with business strate....
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....tes' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh." According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software for discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard. 6. Mindtree Limited - R&D Se....
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....egment for various industries. Hence it is not comparable to the functional profile of the Company and accordingly ought not to be considered a comparable. 27. It can be seen from the above discussion that the 6 fresh companies selected by the TPO are found to be not comparable functionally with that of the Assessee. As we have already seen the functional comparability has to be done as laid down in Rule 10-B (2) of the rules which lays down the manner in which comparison has to be made. It lays down that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely :- (a) the specific characteristics of the property transferred or services provided in either transaction ; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; ....
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.... of the comparable identified by the Assessee are ignored, still the ALP adopted by the Assessee would be within the (+) or (-) 5% range as contemplated by the proviso to Section 92C of the Act. Consequently Gr. No. 2.4 of the grounds of appeal is also held to be academic not calling for adjudication. As Celestical Labs, a comparable identified by the TPO, is held to be functionaly not comparable with the functions performed by the Assessee, the grievance projected in Gr. No. 2.6 does not require any adjudication. So also Gr. No. 2.8 praying for a (+) (-) of 5% as standard deduction while computing ALP. 29. For the reasons given above, the addition made by the AO by way of adjustment to the ALP is directed to be deleted. Gr. No. 1 and 2 are allowed as indicated in the earlier paragraphs. 30. The grounds of appeal No. 3 & 4 raised by the assessee reads as follows: "3. The ld. DRP erred in disallowing repairs of Rs. 1,38,707.82 towards mural, by treating it as being capital in nature. 4. The ld. DRP further erred on fact and in law by wrongly considering an amount of Rs. 20,89,500/- towards computer hardware as disallowance (even though such expenditure was already capita....
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....d 23/2/06, which is a bill raised by the person who created the hand paint Mural. The fact that this was installed in the canteen wall is also not disputed. We are of the view that going by the purpose for which the hand painted Mural art work was done and fixed to the wall it cannot be said that an advantage of an enduring nature accrued to the assessee. The expenditure was only to preserve and maintain an existing asset. Consequently the addition made by the AO is directed to be deleted. Ground No. 3 is allowed. 34. As far as Ground No. 4 is concerned the facts that the assessee purchased a Sisco catalyst Switches worth to Rs. 20,29,500/- and adding 2% CST the cost was Rs. 21,31,290/-. This amount was capitalized as fixed asset acquired during the year. In fact in Annexure-8 to the balance sheet the details of fixed assets acquired during the year have been listed and this item of asset duly appears in the said list. It appears that the AO as well as the DRP did not notice this aspect and proceeded to hold that the sum of Rs. 20,89,500/- is towards purchase of hardware for system (7 items of Rs. 2,98,500/- each). We are of the view that the order of the AO should be set aside ....
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....0,000 Honda CRV 17,00,956 10,18,671 6,82,285 8,75,000 1,92,715 Profit on sale of Assets 3,42,715 Shown in other income Sch.10 Tata Indica 4,32,641 1,18,974 3,13,667 2,65,000 (45,667) Loss on sale of Assets (48,667) Shown in Misc. Expenses under Sch.13 25,84,271 15,88,319 9,95,952 12,90,000 2,94,048 Out of the above, for the first car the Profit of Rs. 150,000 was reduced from the Income Tax and corresponding Capital gains for this Car of Rs. 105,046 was offered in the Income Tax as this block of 50% depreciation item became NIL. But for the 2nd Car, as the closing block under Income Tax was having WDV balance, the net profit on the Sale of Rs. 192,715 which was shown in the other income was not reduced from the income (pls. refer the Computation of Income) but for the 3rd car the loss of Rs. 48,667/- was not added back to the income. Hence, the net claim of deduction of Rs. 144048/- fro....