TaxTMI 
TaxTMI 
2013 (9) TMI 266
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....income of Rs. 97,59,23,000/-. After having noticed 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 ....
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....the testing of the healthcare products in India, and to compile, store 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 ob....
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....he activities of the clinical research were conducted by the assessee through Pfizer 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 ....
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....mpany's balance sheet. Hence the same is rejected as a comparable. Kitco Ltd. This entity is 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....
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....enging the use of data for the comparability analysis which was not available in the public domain when the TP study was made by the assessee at the time 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 rel....
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....g the cost base of the Appellant; ii. including notional interest in the cost base; and 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....
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....ted in paragraph No. 9 that Siro Clinpharpa P. Ltd. was actually engaged in conducting clinical trial services having regard to the substantial income generated from the research activity 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 ma....
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..... He invited our attention to the profit & loss account of the said company placed at page No. 543 of the paper book and the details of income given on page No. 548 of the paper book to show that 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 b....
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.... could be ascertained. In this regard, the ld. Counsel for the assessee has relied on the copy of Director's Report of the said company at Pg. No. 405 of his Paper Book to point out that the business 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 ....
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....the purpose of comparability analysis. We, however, direct the AO to allow appropriate adjustment in the case of Siro which is included for the purpose of comparability analysis on the ground of different 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 ....
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.... the file of the AO to verify from the relevant record, the stand taken by the assessee that indirect cost of Rs. 285.48 Lakhs was already included in the total cost of Rs. 1080.25 Lakhs and if the same is found 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 represen....
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.... No. 14 to 17 of its order. 14. We have considered the issue. As seen from the orders of the A.O. and the CIT(A) for A.Y. 2000-01 the CIT(A) has allowed depreciation by giving a finding that "in 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....
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....f the Act . (2) An Asset not exclusively used for the purposes of the business or profession but used other then business purposes as provided in section 38(2) of the Act. (3) 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 ....
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.... that the same is not applicable to the facts of the present case. In the present case, the assessee has already used the asset for the purpose of business. The asset has already entered the block of assets. In the case before the Hon'ble Bombay High 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 ....
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....rities. Accordingly, the order of the ld. CIT (Appeals) is set aside on this issue and the matter is restored to the file of Assessing Officer for fresh adjudication after examining the lease deed and any other material in this regard to ascertain whether the lease was on month to month basis. If the case of assessee does not fall within the exception, then the assessee shall be considered to be a deemed owner of the property. Consequently, the income would be assessee under the head 'Income from House Property'. With these observations, this ground raised by the assessee is partly allowed. As submitted by the ld. Counsel for the assessee, AO has already passed the order giving effect to the order of the Tribunal for AY. 1996-97 on 27-12-2005 and a perusal of the copy of the said order placed at Pg. 50 of the assessee's Paper Book shows that after the necessary verification as directed by the Tribunal, the AO has brought to tax the relevant income in the hands of the assessee under the head 'Income from House Property'. Keeping in view the said order passed by the AO for AY. 1996-97 giving effect to the order of the Tribunal, the Tribunal has decided the....