TaxTMI 
TaxTMI 
2015 (3) TMI 706
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....sues that need to be adjudicated in this appeal relate to : (a) the claim of the assessee for deduction under section 80-IB(8A) of the Income-tax Act, 1961 in ground No. 2 ; and (b) the ground raised in ground No. 3 challenging the addition made by the Assessing Officer and confirmed by the Dispute Resolution Panel on account of determination of the arm's length price (ALP) in respect of an international transaction, namely, payment of management fee by the assessee to its associated enterprise (AE) of a sum of Rs. 1,82,77,397. 4. We shall first take up for consideration the claim of the assessee for deduction under section 80-IB(8A) of the Act. The facts with regard to the claim of the assessee for deduction under section 80-IB(8A) are as follows : The assessee is a company. As per the memorandum of association of the assessee, the assessee was incorporated for the purpose of commercial scientific research and development and in particular (a) to undertake clinical research of an international standard by follo....
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....s and subject to satisfactory performance of that company on periodic review extend the said approval for a further period of three assessment years so that the total period of approval is for ten consecutive assessment years, beginning from the initial assessment year. Rule 18DA. Prescribed conditions for deduction under sub-section (8A) of section 80-IB.-(1) Any company carrying on scientific research and development shall be eligible for deduction specified in sub-section (8A) of section 80-IB, if such company :- (a) is registered in India ; (b) has its main object the scientific and industrial research and development ; (c) has adequate infrastructure such as laboratory facilities, qualified manpower, scale-up facilities and prototype development facilities for undertaking scientific research and development of its own; (d) has a well formulated research and development programme comprising of time bound research and development projects with proper mechanism for selection and review of the projects or programme ; (e) is engaged exclusively in scientific research and development activities leading to technology development, improvement of technology and transfer of techno....
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.... of being heard." 5. The assessee filed before the Assessing Officer the details of the receipts from carrying on scientific research and development. The assessee gave copies of the contract with the clients for rendering scientific, research and development. At page 4 of the paper book, we find a copy of the work order given by Jassen L.P. to the assessee for carrying out clinical research in respect of a product "Risperdal" and "Consola" which are drugs used for treatment of schizophrenia. The assessee has to carry out phase-IV. It requires to be stated here that Good Clinical Practices (hereinafter referred to as "GCP") in India issued by Directorate of Health Services and Chairman, DTAB gives definition of what is Clinical Trial, Human/Clinical Pharmacology Trials, Clinical Research Organization (CRO), Monitor, Protocol and other similar terminologies which are used in Good Clinical Practices. Human/Clinical Pharmacology trials, exploratory trials, confirmatory trials are phase-I and phase-II and III of clinical trial. Phase-IV of clinical trial is study performed after marketing of the pharmaceutical product. The first three phases however, are trials conducted in order to d....
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....e of the assessee as on March 31, 2008. According to the Assessing Officer the break-up of plant and machinery showed that the assessee owned mostly communication and related equipment and data-processing equipment consisting of computer/ laptop and software. According to the Assessing Officer there was no category of assets in the schedule to indicate that the assessee had infrastructure to undertake activity in the nature of scientific research and development in terms of rule 18DA(1)(c) of the Rules. The Assessing Officer confronted the assessee on his findings as above and called upon it to provide explanation. 8. The assessee submitted before the Assessing Officer that the research and development activity carried out by the assessee was mainly people oriented and that the requisite quality and qualified man power is employed by the assessee. That the assessee carries out the operations from its infrastructure facility at different location in Bangalore, Mumbai and Ahmedabad (where it has office space) in addition to the sites in hospitals. The assessee uses the facilities/infrastructure of various sites in hospitals across the country for conducting clinical research by way ....
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.... 7. Enrolment start date : November, 2005 Quintiles Research (Ind.) Pvt. Ltd., shall 1. Provide project management services in India for the start up period. 2. Regulatory document collection and submission to Indian regulatory authorities on behalf of the Indian collaborate of Acambis Plc. 3. Prepare and submit application for regulatory approval and follow up and make presentations to the drugs controller general, India (DCGI) and other concerned Government bodies, if required. 4. Prepare and submit an application for customs clearance of study drug. 5. Prepare and submit an application for export of biological samples outside India Director General of Foreign Trade (DGFT) 6. Familiarise with study protocol and other study related docu ments.....
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....ior written consent, except to the extent that such information already is publicity known through no fault of the receiving party, or unless required to do so by law or regulation. These confidentiality obligations shall remain in effect for ten years after the completions or terminations of this agreement. All data and information generated or derived by Quintiles as the result of services performed by Quintiles under this agreement shall be and remain the exclusive property of customer. Any inventions that may evolve from the data and information described above shall belong to customer and Quintiles agrees to assign its right in all such inventions and/or related patents to customer. . ." 12. According to the Assessing Officer as per the agreement once the assigned responsibilities as per the agreement are discharged, the data/ information generated in the process is transferred to the customer for its exclusive use. According to the Assessing Officer this clearly indicated that the assessee was not undertaking scientific research and development of its own as specified in rule 18DA(1)(c). 13. The Assessing Officer also referred to rule 18DA(1)(e) which provides that the asse....
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....e aforesaid provisions was introduced for the first time. The relevant portion of the said memorandum reads as follows (page 259 of 220 ITR (St.)) : "In order to promote research and development activities, the Bill proposes o provide for a five year tax holiday under section 80-IA of the Income-tax Act, to approved companies engaged in scientific and industrial research and development activities on commercial lines. This incentive shall be available to any company that has as its main objective, activities in the area of scientific and industrial research and development and which has been accorded approval by the prescribed authority. Secretary, Department of Scientific and Indus trial research shall be the prescribed authority for this purpose. . ." (c) Ownership of infrastructure not necessary : In this regard, the assessee pointed out before the Dispute Resolution Panel that it uses facilities and infrastructure of various hospitals across the country for conducting clinical research under valid agreements. The assessee pointed out that the hospitals carry out instructions given by the ass....
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....ormed by the assessee's in-house medical experts and ethics committee of the partic ipating hospitals. Appropriate interim filings of the project are submitted to the relevant regulatory authorities/client. Any clinical research projects are time bound and could be completed either within a year or spread over 2- 3 years, as the case may be. (e) Requirement to be satisfied only where applicable : use of the phrase "if any" : One of the prerequisites to claim the tax holiday under section 80-IB(8A) is that the assessee has as its main object the scientific and industrial research and development. Accordingly, a pharmaceutical or biotechnology company that manufactures and sells drugs developed by it may not qualify for the deduction under section 80-IB as its main object is not scientific and industrial research and development. In other words, if an assessee commercially exploits the results of its research for manufacture and production, its main object ceases to be scientific and industrial research and development. Therefore, the benefit of section 80-IB(8A) is typically available to entities carrying on contract research on behalf of other entities also. The condition rela....
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....ansferred for the exclusive use of the client. Therefore, it was evident that the assessee was not engaged exclusively in scientific research and development activities by them selves as specified in rule 18DA(1)(e). On the contrary, the assessee only provided certain services based on the requirement of the client and consequently there was no output generated that is owned or in respect of which the assessee can exercise rights. In any organisation whose main aim is to carry out scientific research, income arises from the sale of technology or IP rights arising from such activity. In this case the assessee does not have any right over the research product. Rather the assessee is only receiving fees for carrying out activities as per the requirement of the clients. Therefore, it was concluded that the income received was for providing certain specified services to the client and not as income arising from carrying out scientific research and development. Scientific research connotes any activity for extension of knowledge in the fields of natural or applied sciences as defined in section 43(4). Going by this definition the assessee by itself is not contributing to expansion of su....
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....on. In this regard, learned counsel for the assessee pointed out that the Legislature, whenever it thinks appropriate to confer the benefit of particular deduction to be given to an assessee only when the conditions are to be satisfied by the assessee on its own it would said so in specific words. Our attention was drawn to section 10(23FB) of the Act which defines "venture capital undertaking" to include a domestic company engaged in the business of research and development of new chemical entities in the pharmaceutical sector. Thus, the legislation did not intend to restrict the definition of research and development to new chemical or molecular entities. Similarly, under section 35(2AB)(1) of the Income-tax Act, expenditure on scientific research in relation to drugs and pharmaceuticals includes expenditure incurred on clinical drug trial. Thus, the legislation, wherever required, expressed its intention to restrict scope of particular deduction provision. It was submitted that section 80-IB(8A) of the Act is wide enough to cover even profits of business of scientific research and development carried out by a contract research organisation. 20. Our attention was also drawn to t....
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....Further, attention was also drawn to the decision of the hon'ble Supreme Court in the case of Gestetner Duplicators P. Ltd. v. CIT [1979] 117 ITR 1 (SC). The question for consideration in the aforesaid decision was as to whether the recognition granted to provident fund (PF) could be reviewed in the assessment proceedings. The hon'ble Supreme Court upheld the conclusion of the Tribunal that the provident fund maintained by the assessee satisfied the conditions laid down in rule 4(c) of Part-A of the Fourth Schedule. The hon'ble Supreme Court thereafter observed as follows (page 14) : "However, we would like to make some observations with regard to the true impact of the recognition granted by the Commissioner of Income-tax to a provident fund maintained in this behalf are that it was as far back as 1937 that the Commissioner of Income-tax had granted recognition to the provident fund maintained by the assessee under the relevant rules under the 1922 Act, that such recognition had been granted after the true nature of the commission payable by the assessee to its salesman under th....
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....eement under which royalty is paid should be approved by the Central Government. The Revenue took the stand that a person who made payment of royalty to the assessee was not a foreign company, and there was no agreement and no commercial or technical services were rendered. The hon'ble Bombay High Court, while confirming the order of the Tribunal allowing the claim of the assessee, found that an approval had been granted by the Central Government in respect of payment in question as required under section 85C of the Income-tax Act, 1961. The hon'ble Bombay High Court observed that the Central Government having granted the approval it must be held that the conditions under section 85(c) were fulfilled by the assessee. The hon'ble court observed that the Central Government was better equipped to decide whether or not the person making payment to foreign company and whether or not the services rendered were technical services. Reference was also made to the following two decisions for identical proposition : (e) CIT v. Bhaichand Amoluk Consultancy Pvt. Ltd. [1994] 208 ITR 1 (Bom). (f) Prudential Assurance Company Ltd. v. Director of Income-tax [2010] 324 ITR 381 (Bom). ....
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....angle the clam of the assessee for deduction cannot be denied. 25. The learned Departmental representative relied on the observation of the Assessing Officer in the order of assessment and the observation of the Commissioner of Income-tax (Appeals) on the issue. It was submitted by him that the deduction under section 80-IB(8A) of the Act is allowed only taking into consideration the risk involved in engaging oneself in scientific research and development. According to him, in a contract research there is no risk assumed by the assessee and therefore, there is no reason that the assessee should be entitled to any deduction at all. It was also submitted that the activities done by the assessee are more in the nature of co-ordination than scientific research and development. According to him, it would not be the intention of the legislation to allow deduction to CRO. According to him, it is not appropriate to submit that the approval given by the prescribed authority is conclusive and that the Assessing Officer cannot examine the fulfilment of condition for allowing deduction under section 80-IB(8A) of the Income-tax Act, 1961. Learned counsel for the assessee in his submissions had....
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....section 80-IB(8A) of the Income-tax Act is not dependent on capital investment. In this regard, we have already referred to the memorandum explaining the provisions of section 80-IB(8A) of the Act introduced by the Finance (No. 2) Bill, 1996. The memorandum clearly recognises that deduction is to an undertaking carrying out scientific research and development. In the light of the object of the provision, we are of the view that "expression of its own" found in rule 18DA(1)(c) qualifies the words scientific research and development and not the earlier part of the rule which refers to the existence of the infrastructure. We are therefore, of the view that this basis given by the Revenue authorities for denying the benefit of deduction under section 80-IB of the Act cannot be sustained. 28. With regard to the fulfilment of the conditions mentioned in rule 18DA(1)(e) of the Income-tax Act, we find that rule talks about transfer of technology developed by themselves. The question is as to whether the aforesaid expression should be construed to mean that the scientific research and development undertaken by the assessee should be on its own or even where such scientific research and dev....
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....arties and details of technology transferred (i.e., amount of royalties/premium/technology/transfer fee received). Though company is using its owned technology as well as knowledge bank in form of standard operating procedures (SOPs) for conduct of a research project of an international standard, ultimate research results of various research projects undertaken by the company were transferred by the company to the clients." 30. In the present case, it is not disputed that the entire receipts of the assessee are from contract research and not own research. It is also pertinent to mention that in the appendix to the form for approval to the renewal there is a specific column, namely, column Nos. 2 and 3 dealing with contract research. The said column seeks details of sponsorship fee (if any) name of the sponsors, if any. It is, thus clear that the forms contemplates a sponsor research (contract research) also as falling within the ambit of section 80-IB(8A) of the Income-tax Act, 1961. 31. It is also relevant to note that the prescribed authority after being fully conscious of the fact that the assessee is only a contract research organisation has still though it fit to grant sect....
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....see undertakes variety of clinical trials of phase II and III trials. It also undertakes trials for generic as well as new drugs. The overseas Quintiles group entities enter into contracts with pharmaceutical companies (sponsors) for undertaking global clinical trial studies through an identified scope of services under the global study contract which may be undertaken by various geographically or legally dispersed group entities including the assessee. 35. In conducting business by the assessee, its holding company provides certain support services which benefit the assessee and the Quintiles group companies across the globe. The assessee being part of the Quintiles group also receives benefit of such global sourcing. Some of such support activities, sourced by Quintiles group are in relation to legal support services like client contracts, employee contracts, integration support services, etc. ; human resource and learning and development services like networking online courses, salary planning, job grading, etc. ; finance support like providing need based support on finance/treasury matters, etc. ; corporate communication services like publishing internal brochures and videos, ....
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....nd also ledger account of "management fees" in the assessee's books of account for the financial year 2007-08. (b) Details and nature of management services rendered by associated enterprises. The quantification of such services and also the basis for such apportionment as the management services would have been rendered to various other Quintiles Research group entities also. In this regard, the justification as to how two independent parties would have quantified the services. (c) Copy of the agreements with associated enterprise(s) in respect of management fee. Also to establish that a service (i.e., a benefit) has actually been supplied for which management fee is paid by the assessee. (d) Quantification of such services in terms of actual expenditure incurred and commensurate benefits derived therefrom. 40. The assessee in reply to the show-cause notice of the Transfer Pricing Officer, by letter dated September 6, 2011, submitted the following : 1. Allocation of management fee -Copy of the agreement entered into between the assessee and QTC with respect of allocation of the management fee was enclosed as annexure 1. -Sample copies of invoices raised by QTC on the as....
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....s costs. Within a region each unit is charged based on net revenue. Quality Assurance-the department's costs excluding D and O insurance, are allocated to each CDS or EDLS unit based on net revenue. Facilities-the department's costs are allocated to the other QTRN Departments based on each department's per cent. of total costs. Then these costs are included in the other department's allocations. Human resources/benefits/learning and development-The depart ment provides estimates of time spent on each geographical region. the region gets that per cent. of the department's costs. Within a region, each unit is charged based on headcount. CEO Admin-the department's costs, excluding management fees to equity partners, are charged to the US units based on net revenue. Noregional estimates are used. Finance-Department provides estimates of time spent on each geographical region. The region gets that per cent. of the department's costs. Within a region, each unit is charged based on the net revenue. Business development-Allocated by net revenue. No regional esti mates are used. Commercialisation-Allocated by net revenue. No regional esti mates are used. ....
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....ices. The Transfer Pricing Officer also says that the assessee applied comparable uncontrolled price method. This is factually incorrect. As we have already mentioned, the assessee in its transfer pricing report did not choose any method. Apart from the above, the name of associated enterprise as given in the Transfer Pricing Officer's order is not correct and the Transfer Pricing Officer has referred to a company by name LMG, Denmark as the assessee's associated enterprise, but the associated enterprise concerned is QTC. The Transfer Pricing Officer thereafter has made a reference to OECD guidelines which mandates ascertaining nature of services rendered intra group and see whether independent parties would pay similar sum for similar services. The Transfer Pricing Officer in paragraph 3.4 at page 11 of his order, refers to the assessee having applied transactional net margin method as the most appropriate method (MAP), which again is factually incorrect. The Transfer Pricing Officer also says that the assessee has aggregated all transactions entered into with associated enterprise, which is factually incorrect. The final conclusions of the Transfer Pricing Officer are as ....
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....argument and the entire payment of management fee of Rs. 1,82,77,397 is treated as an adjustment under section 92CA. 3.6 Determination of arm's length price The arm's length price of management fee is determined as under using comparable uncontrolled price method. Management service fee paid Rs. 1,82,77,397 Arm's length price 0 Adjustment under section 92CA Rs. 1,82,77,397 Thus the above amount of Rs. 1,82,77,397 is treated as an adjustment under section 92CA." 45. The assessee filed objections before the Dispute Resolution Panel (DRP) to the draft assessment order passed by the Assessing Officer as follows : 1. The Transfer Pricing Officer has erroneously considered the facts of another taxpayer instead of the assessee in his order. Few of such instances were reproduced : (a) Paragraph 2.1.11 on page 4 of the order : "As per the details furnished, the management fee is paid by the taxpayer on the following accounts: -Resource allocation -Financing -Planning -Accounting -Tax information systems -Marketing -Administration -Treasury -Market development -Employee relations and training -Legal matters and -Public affairs" (b) P....
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....s associated enterprises. However, the Transfer Pricing Officer in his order has wrongly contended that the same is very general and is not clear. 3. The assessee also pointed out that sample email correspondences vide its submission dated October 21, 2011, to substantiate its contentions were filed. A few instances of' the services received by the assessee from its associated enterprises were listed for ready reference : * Centralised legal department of the associated enterprise had assisted the assessee in drafting the master service agreement with respect to services agreement between the assessee and the customers of the assessee. Drafting of such master service agreement would require technical knowledge for which any independent organisation would have hired a third party consultant/law firm. * Human resource team at the U. S. A. had supported the assessee in drafting various policies such as bonus policy, conducting training pro gram for the assessee employees, recruitment support services, formulation of various incentive schemes and computation of such incentive, salary planning etc. * The assessee had leveraged on the services obtain from the group centralised fi....
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....ces in the future as and when such a need arises without going through the hassle of locating and short listing prospective service providers. This anticipated and not so tangible benefit should also be taken into account while considering the benefits availed of under an intercompany service agreement, In support of its contention, the assessee placed reliance on paragraph 7.16 and paragraph 7.17 of the OECD guide lines. The OECD guidelines also recognises that under the above mentioned circumstances, management fees may also be justified for assurance to provide support services on short notice/call. It is not necessary that actual services need to flow. 7. The assessee submitted that all the benefit flows from the services of the associated enterprises need not flow instantaneously in the current year and may be reaped in the future. To quote an instance, training made available by the associated enterprises to the personnel of the assessee would have long-term impact on the service potential of the assessee. However, the benefits from the same cannot be accurately quantified nor can the benefits be said to be reaped in the same period. Similarly, marketing services including a....
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.... "The allocation might be based on turnover, or staff employed, or some other basis. Whether the allocation method is appropriate may depend on the nature and usage of the service. For example, the usage or provision of payroll services may be more related to the number of staff than to turnover, while the allocation of the stand-by costs of priority computer back-up could be allocated in proportion to the relative expenditure on computer equipment by the group members. . . . Depending upon the method being used to establish an arm's length charge for intra-group services, the issue may arise whether it is necessary that the charge be such that it results in a profit for the service provider. In an arm's length transaction, an independent enterprise normally would seek to charge for services in such a way as to generate a profit, rather than providing the services at a mere cost." Based on the above, it was submitted that the assessee has appropriately allocated the management fee and hence the same is at arm's length. 45. The Dispute Resolution Panel, however, did not find the above object....
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.... in considering the arm's length price as nil is upheld. Accordingly this ground is rejected." 46. It may be seen from the aforesaid observations of the Dispute Resolution Panel that a reference is made to a company by name UL Inc., U. S. A. This company is unrelated to the case. Further, the Dispute Resolution Panel has also referred to some services rendered by the associated enterprise which are in relation to trademark, technical know-how and royalty. It may be clarified that there was no such services rendered by the assessee to its associated enterprise. Thus, it can be said that there was no proper application of mind by the Transfer Pricing Officer as well as the Dispute Resolution Panel to the transfer pricing documentation and the evidence filed by the assessee in support of its claim that the management fee paid to associated enterprise was at arm's length. 47. In the appeal before us, learned counsel for the assessee while reiterating the manner in which the Transfer Pricing Officer and the Dispute Resolution Panel have passed the impugned orders without application of mind, first submitted that the final order of the Assessing Officer making addition by way o....
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....ispute Resolution Panel. Our attention was drawn to the decision of the Delhi Bench of the Tribunal in the case of Knorr Bremse India Pvt. Ltd. v. ACIT, I. T. A. No. 5097/Del/2011, order dated October 31, 2012, wherein the Tribunal took the view that the assessee had to show that the payments made for the services rendered to the associated enterprise could have been paid, had services been rendered between two independent enterprises. On facts, the Tribunal held that the assessee failed to prove the benefit that the assessee received from services rendered by the associated enterprise. 51. We have considered the rival submissions. As we have already seen, in its transfer pricing study the assessee in support of the payment made to associated enterprise was at arm's length did not choose any of the methods prescribed by the rules. The assessee took a stand that payments were on actual cost basis and were in the nature of reimbursement of costs of the associated enterprise. The assessee claimed that the payments were at arm's length. In response to the query of the Assessing Officer calling for the nature of services rendered in which management fee was paid, the assessee g....
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...., 2012 [2012] 345 ITR 241 (Delhi) wherein the court had to deal with a case where the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The Transfer Pricing Officer disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/brand had not benefited the assessee and so the payment was not justified. This was reversed by the Commissioner of Income-tax (Appeals) and the Tribunal on the ground that as the payment was genuine, the Transfer Pricing Officer could not question commercial expediency. On appeal by the Department, the hon'ble Delhi High Court held that the "Transfer Pricing Guidelines" laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage restructuring of legitimate business transactions except where (i) the economic substance of a transaction differs f....
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....ise as at arm's length within one of the methods so prescribed. As already noticed, the transfer pricing study of the assessee is not in tune with the provisions of section 92C of the Act. 56. In this regard in the case of Festo Controls P. Ltd. [2013] 22 ITR (Trib) 574 (Bang) this Tribunal has explained the payment of fees for intra group services in paragraph 16 of its order, as follows (page 585) : ". . . Multinationals have a long-standing practice of providing certain services from a central point to one or more affiliates. The parent company provides centralised services or one affiliate provides services on a central basis to several other affiliates. In these situations, cost contribution (or shared-service) arrangements can be constructed to charge the costs of the service providers to the affiliates that benefit from the services they provide. As the unique bundle of services provided may vary significantly between taxpayers, it may be difficult to find a comparable price for such services or to evaluate the benefit received. The tax authorities therefore regard the area of co....