TaxTMI 
TaxTMI 
2013 (1) TMI 60
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.... a. rejecting comparables from the set provided by the Appellant; b. including companies which are not functionally comparable; c. denying risk adjustment to the Appellant to account for differences between the risk profile of comparables and the Appellant; d. using current year's financial data (i.e. Financial Year 2006-07) as against average margin of 3 years of comparable companies; and e. denying (+/-) 5% range benefit available under proviso to Section 920(2) of the Income-tax Act, 1961 (the Act). The Appellant prays that the AO be directed to delete the aforementioned adjustment. 2. On the facts and circumstances of the case, and in law, the learned AO/DRP/TPO erred in making a notional addition of Rs. 9,83,383/- towards interest on perceived delay in collection of receivables from the associates enterprises. The Appellant prays that the aforementioned notional addition be deleted. 3. On the facts and circumstances of the case, and in law, the learned AO/DRP erred in treating network accesses charges (grouped under the head software ....
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....'s margin were at arm's length. During the course of the transfer pricing proceedings, the Transfer Pricing Officer (for short "TPO") directed the assessee to submit the margin of comparable companies using only the relevant year data (i.e., F.Y. 2006-07). In response to this, the assessee submitted 12 comparables out of which seven were claimed to be directly comparable and five companies having segmental data comparable to the assessee. The arithmetic mean of the operating profit/total cost (OP/TC) worked out at 14.13%. 4. The TPO observed that comparables selected by the assessee has not resulted into appropriate set of comparables as it has excluded many companies considered to be comparable for R&D and support services. The TPO in his search for comparables, identified new comparables, one of which was common to the assessee's set of comparables. The assessee in response to the show cause notice issued by the TPO as to why the eight new companies should not be selected, filed detail objections before the TPO with regard to the data and functional analysis, turnover, etc. The TPO rejected the assessee's contentions and finally included 19 comparable companies....
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....gainst adjustment made by the TPO at Rs. 34,81,318. 8. Before us, the learned Counsel, Mr. Kanchan Kaushal, representing the assessee, after referring to the facts and contentions raised before the TPO as well as the DRP, submitted that the inclusion of the two comparable companies viz. Celestial Labs Ltd. and Biocon Ltd., is wholly erroneous as they were functionally not comparable and rejection of other companies on the ground that they were diagnostic companies, were also not tenable as they were also involved in similar type of business activity i.e., testing and analytical services. Insofar as the two loss making companies i.e., ADS Diagnostic Ltd. and Max Neeman Medical International (Asia) Ltd. are concerned, it was submitted that these being loss making companies, therefore, the same are not being pressed by the assessee in this particular case. Regarding inclusion of 'Celestial Labs Ltd.', he submitted that company is engaged in the business of supporting pharmaceutical and biotechnology companies with customized I.T. solutions. The company is also involved in commercial production and marketing of enzymes and neutraceuticals. The main services rendered by the s....
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....h segment and joint venture segment. Insofar as enzyme & pharma segment is concerned, the same relates to Biocon Ltd. and joint venture segment is also separately identified segment of joint venture of Biocon Pharmaceuticals. The revenue of contract research segment is close to Clinigene International Ltd. and Syngene International Ltd. Regarding Clinigene International Ltd., he submitted that the company is wholly owned subsidiary of Biocon Ltd. and is engaged in discovering new bio markers and is discovering new diseases subsets and novel data based on pharma co-genomics. Thus, the functional performance and the nature of activity by Clinigene International Ltd. is different from assessee's business of testing and analytical services. He further highlighted that the related party transaction in the said case was approximately 38% of sales and the net worth of the company has been eroded in the past two years and turned negative. Based on this analysis, specifically having substantial related party transaction, he submitted that this company cannot be taken as comparable. Regarding another subsidiary Syngene International Ltd., he submitted that it is engaged in the customized....
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.... * Skoda Auto India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 319 (Pune) * Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 18 SOT 76 (Delhi) * Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.) * Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 15 SOT 49 11. Per Contra, the learned Departmental Representative regarding exclusion of three diagnostic companies by the TPO, referred to the business profile of the said companies from the records available in the assessee's paper book and submitted that the assessee is not at all a diagnostic company but conducts only lab research and analytical services. For e.g., in the case of Dolphin Medical Services, he submitted that the company is undertaking CT Scan, MRI, Colour Doppler, etc. From the Profit & Loss account of the said company, as appearing at Page-209 of the paper book, he submitted that no segmental details have been provided to bifurcate the revenues generated out of activities carried out by it and also the turnover of the said company is only Rs. 2.96 crores. Regarding Transgene Biotek Ltd., which ....
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....., the learned Counsel submitted that the said company was initially included because it was taken on the basis of three year data and was rejected by the assessee in the fresh research conducted after TPO's direction. The DRP has resorted to cherry picking to take the companies having very high profitability margin from the set of the comparables given either by the assessee or by the TPO. Regarding objection of the risk adjustment by the learned Departmental Representative, he submitted that the risk profile of the captive service provider and independent enterprise cannot be the same as the risk undertaken by the former is far less and, therefore, the profit also is not as high as that of those enterprise which take higher risk. 15. Regarding rejection of other diagnostic companies, he reiterated his submission that one of the major functions was research and analytical services, therefore, the same can be said to be comparable companies. 16. We have carefully considered the rival contentions of the parties, perused the material placed on record, as have been referred to at the time of hearing and also the orders of the TPO as well as the DRP. The only issue before us ....
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....clusion of the said companies being very heavy loss making companies. 17. The assessee is a fully owned subsidiary of Evonik Degussa GmbH and is providing support services viz. marketing promotion co-ordination and testing and analytical support services for Evonik Group of companies. Thus, the assessee is a kind of captive service provider to its AE. Insofar as the segmental data of the support services in connection with research and development, the assessee had shown the profit margin of 20.75% on the operating cost in relation to its international transactions. It was this profit margin, the TPO has rejected the assessee's comparables shown by the assessee in its T.P. report. 18. Since, the issue involved before us is inclusion and exclusion of certain companies, therefore, we proceed to analyze such comparables very briefly. Coming to the inclusion of Celestial Labs Ltd., it is seen that the said company is engaged in the business of supporting pharmaceutical and biotechnology companies with customised information technology solution. It is mainly engaged in the software development in drug designing tool, bio informatic service and data warehousing. More than 96% o....
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....en otherwise also, apparently it is seen that its functional profile is different with that of the assessee company. Thus, going by the segmental data of Biocon Ltd. with regard to contract research segment, we do not find any merit in the inclusion of the said company by the TPO in the set of comparables for determining the ALP in the case of the assessee. Hence, this company is directed to be excluded from the set of comparables. 20. Now, coming to the various diagnostic companies excluded by the TPO viz. Dolphin Medical Services Ltd., Transgene Biotek Ltd. and N.G. Industries Ltd., we find from the perusal of record produced before us, that not only the functional profile of these companies are different but the charecteristic of the services rendered are also different. For e.g., Dolphin Medical Services Ltd., as pointed out by the learned Departmental Representative, is engaged in diagnostic services like CT scan, MRI, colour Doppler, etc., which is entirely different from R&D, testing and analytical services performed by the assessee. These services cannot be compared with the business activity carried on by the assessee. In the case of Transgene Biotech, it is seen that i....
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....ercent per month for the period of delay beyond thirty days and accordingly he worked out the notional interest to be received by the assessee at Rs. 9,83,383. 25. Objection before the DRP by the assessee was rejected. 26. Learned Counsel Shri Kanchan Kaushal submitted that the assessee is a zero debt company and it does not have any borrowings from external sources, therefore, it is not required to pay any interest. There have been some situations that there has been delay in making the payments by the A.Es beyond the normal credit period, however, no interest has been charged for the reason that there is no interest cost to the assessee. Moreover, there is no such agreement between the assessee and the A.E. to charge interest on delayed payments. He, therefore, contended that charging of notional interest in the international transaction is wholly erroneous. Learned Counsel further pointed out that the assessee has been raising the bills on quarterly basis and the payment has thus received after the bills only. Therefore, the delay cannot be attributed purely on account of delayed payments made by the A.Es. Moreover, the business transaction has to be decided between the tw....
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....ficer rejected the said contention of the assessee on the ground that the assessee has not given the details of all the infrastructure installed. He held that mere nomenclature of 'software expenditure' shows that it relates to only as capital expenditure. 31. Learned Counsel for the assessee submitted before us that the payment has been made for e-mail infrastructure provided by the parent companies for providing communication facility between the personnel of the assessee with outside business partners. The parent companies have provided Virtual Private Network (VPM) which is a secured internet access network to various systems to be used by the employees of the assessee for day-to-day functioning. He submitted that the e-mail infrastructure are not owned by the assessee and the expenditures have been incurred for accessing the said infrastructure, therefore, the same is to be treated as revenue expenditure. 32. Learned Departmental Representative on the other hand relied upon the findings of the Assessing Officer as well as the direction of the DRP. 33. We have carefully considered the rival contentions of the parties, perused the material placed on record as we....