TaxTMI 
TaxTMI 
TaxTMI 
2013 (9) TMI 266
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....iced that the assessee had entered into various international transactions with its associated enterprises, a reference was made by the AO to the TPO u/s 92CA(1) of the Act for determining the arm's length price (ALP) of the said transactions. The said international transactions included clinical trial services provided by the assessee company to its overseas associates enterprises for which a total amount of Rs. 11.88 crores had been received during the year under consideration. In the TP study report filed by the assessee, the details of various functions performed, assets employed and risks assumed in the clinical study management and monitoring services were furnished by the assessee as under : (a) The functions performed for this activity are: 1. Receipt of preliminary data and methodology for conducting research activities in India. In clinical research terms, the assessee provides Pfizer Inc with phase-II and phase-III of research and trial services. 2. Evaluation of hospitals and agencies with whom the activity can be outsourced. &....
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....re and analyse the data generated in the course of such clinical trials and studies. (b) Clause 2 of the agreement provides for the obligations of the assessee company under the agreement. It provides that for the purpose of organizing and conducting the clinical trials and assessee shall enter into a clinical study agreement with institutions such as hospitals and the principal investigator of the institution in a prescribed form, which would contain the payment terms. The assessee is liable to compile, store and analyse the data received by it from the investigators and institutions conducting the trial and the same is to be furnished to Pfizer Inc after analysing the results. The agreement specifically provides that the assessee shall be responsible for data management and analysis services to the overseas entity. In this regard the assessee is required to submit a progress report of the results of the work carried out by it in pursuance to this agreement at regular intervals in respect of each specific project. (c) Clause 5 provides that all information obtained by the assessee in the course of providing the services would be ....
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....er Globle, Research and Development group which was functionally divided into two groups - the clinical study management and monitoring group and the bio metri group. He also noted that the clinical trials were undertaken through hospitals and such other agencies having the infrastructure to conduct such trials. 5. After taking note of the relevant facts including the nature of activities carried on by the assessee, an effort was made by the TPO to identify the companies that are closely comparable to the activities carried on by the assessee and accordingly three such companies were identified by him, namely, Quintilis Spectral India P. Ltd., Siro Clinipharm P. Ltd. and Neeman International Asia Ltd. The copies of the balance sheets of these three companies were provided by the TPO to the assessee seeking its explanation as to why the markup should not be determined on the basis of margin earned by the said companies in the year 2002. The assessee raised a preliminary objection in this regard by stating that for the purpose of determining the arm's length price, the data that was not available to it at the time of complying with the TP Regulations should not be considered. The TP....
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.... making an operating loss. As the assessee is a captive service provider, it cannot be compared with a loss making entity. NIS Sparta Ltd. Accepted Vimta Labs Ltd. Accepted Water & Power consultancy services Accepted Quintiles Spectral India Pvt. Ltd. The assessee contends that this entity is engaged in high and clinical services which is reflected by the very high margins. As the loss making entity has been excluded, this company is also rejected. SIRCO Clinpharm Pvt. Ltd. Accepted The average operating profit on cost of the four comparable companies selected by him was worked out by the TPO at 18.04% as under : Companies 2001-2002 NIS Sparta Ltd. 9.07% Vimta labs Ltd. 27.04% Water & power consultancy services India Ltd. 19.03% SIRO Clinpharm Pvt Ltd. 17.14% Arithmetic mean 18.04% Since the operating profit margin of Siro Clinpharm P. Ltd. at 17.40% was lower than the average profit margin of 18.04% within the range of 5%, the AO adopted the operating profit margin of 17.14% as at arm's length and applied the same to benchmark the international transactions of the assessee with its AE relating to provision of clinical trial services. 7. From the working of....
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....ime of filing its return of income. The assessee also objected to the use of only the data of relevant financial year by the TPO for the purpose of comparability analysis and submitted that multiple year data including that of the immediately preceding two years should have been used. The learned CIT(Appeals), however, found these objections of the assessee to be unsustainable for the elaborate reasons given by him in the impugned order and overruled the same. As regards the comparability analysis, the assessee objected to the exclusion of three comparables by the TPO, viz. Neeman International Asia Ltd., Gilicon and Kitco. The assessee also made an attempt to show that its operating profit on cost was actually 11.66% as against 10% taken by the TPO. It was also submitted by the assessee that indirect expenses having been already included by it in the total expenses for the purpose of applying the markup of 10%, the TPO was not justified in taking the same into consideration separately for calculating the arm's length price of the relevant international transactions which resulted in wrong quantification of TP adjustment. The learned CIT(Appeals), however, did not find merit in any....
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....nbsp; iii. not considering payments to hospitals/institutions as pass-through costs; (e) Computing the operating margin of the said comparable using financial data of financial year 2001-02 only, instead of prior multiple year data; and (f) Not allowing the benefit of (+/-) 5% range option available to the appellant under the proviso to Section 92C(2) of the Act. It is prayed by the appellant that the entire adjustment of Rs. 1,40,39,000/- be deleted. 10. At the time of hearing before us, the learned counsel for the assessee has submitted that ground No. 1 raised in the appeal of the assessee is general seeking no specific decision from us. He has also not pressed ground No. 2(b), 2(c), 2(d)(iii) and 2e. The same are accordingly dismissed as not pressed. 11. In ground No. 2(a), the assessee has challenged the comparables selected by the AO for comparability analysis and in support of this ground, the learned counsel for the assessee submitted before us that the ....
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....ity during the financial year 2001-02 as well as the plant and machinery including laboratory equipment owned by it as on 31-03-2002. He submitted that although the Tribunal in that case has held that suitable adjustment should be made for the functional difference noted by it in the activities carried on by Siro Clinpharma P. Ltd., no such adjustment can actually be made or quantified in the case of functional difference. He contended that since the activities carried on by Siro is different from the activities of the assessee as found by the Tribunal in the case of Zydus Altana Healthcare (P.) Ltd. (supra), the case of Siro cannot be taken as comparable due to the functional difference and the same should be excluded for the purpose of comparability analysis. 12. As regards the exclusion of Gilicon by the TPO, the learned counsel for the assessee invited our attention to the copy of Director's report of the said company placed at page No. 405 of its paper book to show that the said company was mainly in the consultancy business during the financial year 2001-02 and there was thus functional similarity between the said company and the assessee. He also invited our attention to th....
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....hat if interest income earned by the said company on bank deposit is excluded from the net profit, there was an operating loss for both the financial years 2000-01 and 2001-02. He also invited our attention to the profit & loss account of the said company for the financial years 1998-99 and 1999-2000 placed at page No. 574 of the paper book to show that after excluding the interest income, there was operating loss for both these years also. He contended that Kitco thus was a consistently loss making company and the same was rightly excluded for the purpose of comparability analysis. 16. As regards Siro, the learned DR relied on the order of the TPO and that of the learned CIT(Appeals) in support of the Revenue's case that Siro has been rightly included for the purpose of comparability analysis. As regards the decision of the Tribunal in the case of Zydus Altana Healthcare (P.) Ltd. (supra) relied upon by the learned counsel for the assessee in this regard, he submitted that the matter has been ultimately sent back by the Tribunal in the said case to the file of the AO for making adjustment. He urged that the same course may be followed even in the present case. 17. We have consid....
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....s of the said company being mainly that of consultancy business, there is a functional similarly with the assessee-company. He has also drawn our attention to the business profile of the said company placed at Pg. No. 427 of his Paper Book to point out that the principal activity carried on by the said company during the relevant year was that of consulting engineers and advisors. However, as pointed out by the ld. DR from the P&L A/c of the said company for the year ended on 31-03-2002, placed at Pg. No. 421 of the Paper Book, there was opening and closing stock of work-in-progress of consultancy contract shown. Further, the details of establishment expenses of the said company available at Page No. 424 of the Paper Book show that the consultancy work was substantially sub-contracted by Gilicon. Moreover, Gilicon is in the business of consulting engineers and advisors which is functionally different from the business of the assessee of providing clinical trial services. Keeping in view all these facts borne out from the record, we are inclined to agree with the contention of the ld. DR that Gilicon is not only functionally different from that of the assessee company but even the b....
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....nt business model adopted by the said company after taking into consideration all the relevant facts and after giving the assessee an opportunity of being heard. Ground No. 2(a) is accordingly treated as Partly Allowed. 21. In Ground No. 2(d)(i), the assessee has challenged the action of the authorities below in recomputing the operating profit by estimating notional indirect cost at 5% thereby altering the cost base. 22. The ld. Counsel for the assessee submitted that in the calculation submitted by the assessee before the TPO showing operating profit charged to AE as markup for clinical trial services at 10%, direct cost incurred in relation to the said services was shown at Rs.1080.25 lakhs. He submitted that the said cost was actually total cost incurred by the assessee including direct cost as well as indirect cost but the AO wrongly assumed the same as only the direct cost and added separately indirect cost at the rate of 5% of the direct cost relying on the terms of the agreement. He invited our attention to the breakup of the total cost of Rs.1080.25 lakhs given on page No. 58 and 59 of his paper book to show that the same was inclusive of direct cost of Rs.794.77 lakhs a....
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....d to be correct, the AO is directed not to add separately indirect cost @ 5% of the direct cost for the purpose of Transfer Pricing exercise. Ground No. 2(d) is accordingly treated as allowed for statistical purposes. 25. In Ground No. 2(d)(ii), the assessee has challenged the action of the authorities below in including notional interest in the cost base while working out the arm's length price. 26. The ld. Counsel for the assessee submitted that interest free deposit was paid by the assessee to landlord for acquiring its business premises and the notional interest attributable to the said deposit was included in the indirect cost to be recovered from AE along with the markup. He invited our attention to the relevant details given on page No. 58 and 59 to show that such notional interest of Rs.16.01 lakhs was included by the assessee in the indirect cost forming part of the total cost of Rs.1085.25 lakhs. He contended that since this amount of interest did not represent actual expenditure incurred by the assessee, the total cost actually incurred by the assessee in connection with services rendered to the AE was 1064.24 lakhs and not Rs.1085.25 lakhs and since the fees charged b....
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.... the instant case since the appellant has not acquired these assets but these formed part of the written down value of the assets of the business of the appellant company in the earlier accounting year, no restriction of the allowability of the depreciation amount can be imposed in terms of said proviso. The action of the Assessing Officer in this respect is therefore not correct and hence cannot be sustained." Accordingly the CIT(A) has allowed the depreciation on the Ankleshwar unit. The issue in that year was that the Unit was closed prior to 30.09.1999 and the A.O. has restricted depreciation to 50% of the eligible amount as the same was not put to use for more than 180 days during the year. In that context the CIT(A) has observed that the first proviso does not apply to the facts of the case. However, during the year the entire unit was not put to use but since the same is forming part of the block of assets of the machinery of the entire company's other unit being used, examination of use of individual assets does not arise. In the case of M/s. Swati Synthetics Ltd. the Coordinate Bench in ITA No. 1165/Mum/2006 has examined the entire case laws on the issue and observed as un....
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....) where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the depreciable assets by the assessee during the previous year exceeds the aggregate of the amounts stated in section 50 of the Act and where any block of assets ceases to exist for the reason that all the assets in that block are transferred during the previous year." 15. After considering the above, the ITAT held in para 7.16 as under: - "7.16 In the case under consideration the admitted facts are that the division of Surat had been closed but the block of assets of the closed unit, (the division of Surat) along with other assets of the block were used for the purpose of business in earlier years. The year under consideration is not the first year of the assets acquired. The assets of closed unit still remained exist/part of the block of assets. The assets did not fall under any of the above exceptional three conditions. The said block of assets was used for the purpose of business during the year. Under the circumstances the assets of the said closed unit amounts to use for the purpose....
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....gh Court, the asset in question was not at all put to use. We therefore, find the decision relied upon the ld. DR is of no assistance to the plea of the DR. Respectfully following the decisions of the Tribunal referred to above, we hold that the assessee was entitled to claim depreciation and the Assessing Officer directed to allow the same." 17. This order was upheld by the Hon'ble Bombay High Court in ITA No. 598 of 2009 dated 28th July 2009 by following the judgement in the case of Whittle Anderson Ltd. v. CIT 79 ITR 613 and in the case of CIT v. G.N. Agarwal (Individual) 217 ITR 250. In view of this, since the assets have become part of the block of assets the assessee is entitled to depreciation. The learned D.R.'s reliance on the decision of CIT v. McDowell Company Ltd. 224 CTR 22 is not directly applicable here. In the above said case the stand of the Revenue was that machinery in respect of R&D Section was related to the fast food unit, which was closed and therefore was not entitled to any depreciation because there is no actual usage of the machinery. The stand of the assessee, on the other hand, was that the machinery was used in respect of fast....