TaxTMI 
TaxTMI 
2015 (3) TMI 706
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....ire any specific adjudication. 3. The two issues 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 ....
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.... on scientific research and development for a period of three assessment years 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 activ....
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....od of four months : Provided further that no approval shall be refused unless the appli cant has been given an opportunity 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 st....
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....ty etc., for undertaking scientific research and development of its own. The Assessing Officer referred to the fixed assets schedule 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 ....
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....ects 4. Treatment and follow up period : 24 months 5. Number of investigator sites : 2 active + 1 back up site 6. Expected study start : May, 2005 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....
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.... in strict confidence any confidential information obtained from the other party and will not reveal, publish or otherwise disclose it to any third party without the disclosing party's prior 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 asse....
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....ific research and devel opment and is not on the basis of any investment in capital. In this regard, attention was drawn to the memorandum explaining the provisions of Finance (No. 2) Bill, 1996 whereby the 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....
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....ees of selected research and development centres/hospitals. Upon approvals from these authorities, the clinical research project commences, ongoing project review with emphasis on patient safety is important and is performed 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 cease....
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.... particular the Assessing Officer took the following objections : ". . . Similarly, as per the agreement, the services aforesaid were to be provided to the client and the data/information generated in the process was required to be transferred 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 dev....
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....ons of section 80-IB(8A) of the Act, there is no requirement that the scientific research and development carried out should be by the assessee himself and that Contract Research Organisation (CRO's) are not entitled to the benefit of this section. 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 particula....
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....d by the Co-operative Society. The Reserve Bank of India has also has a part to regulate the banking activity of such Co-operative Society. The Assessing Officer, was therefore, not to enter this area and deny the benefit of deduction to the assessee. (c) 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 Commissione....
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....the question for consideration was the allowability of deduction under section 85C of the Income-tax Act, 1961. The deduction under section 85C was allowed on royalty, commission etc., received by an assessee from a company which is not an Indian company. The agreement 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 technic....
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....haustive. 24. It was pointed out that the Revenue allowed the claim of the assessee up to assessment year 2007-08 and it is for the first time in 2008-09 such an issue has been raised by the assessee. It was submitted by learned counsel for the assessee that looked at from any 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 appropriat....
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....far as the requirement of rule 18DA(1)(c) of the Rules are concerned, it has been the contention of the Revenue that the infrastructure facilities such as laboratory facilities, prototype facilities etc., should be owned by the assessee. In this regard, we find that the deduction under 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 tha....
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....ss. Patents, if any of the related research is filed by the respective clients at their respective country as per the final outcome of a particular research study. 6. Details of technology developed and transferred to other parties during each of the last three completed accounting years giving names of parties 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 sponso....
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.... operations in 2002. The assessee was incorporated with an objective of rendering services relating to undertaking clinical trials on behalf of pharmaceuticals, biotechnology and healthcare companies. The assessee has its units at Bangalore, Mumbai and Ahmedabad, which conduct clinical trials at various locations across India. 34. The assessee 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....
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....ment on the basis of actual expenditure incurred by the respective parties, no benchmarking is required." 39. The Transfer Pricing Officer by letter dated August 12, 2011, called upon the assessee to furnish the following : (a) Copies of invoices raised by the associated enterprises (Quintiles Transnational Corporation, USA and Quintiles Limited, UK) in the assessee's favour and 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 benefi....
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....ated monthly cost is calculated by averaging the YTD monthly costs. QTRN charges out its departmental operating costs as the manage ment fees. Each Department's costs are allocated to the units somewhat differently. Departmental operating expenses are allocated as follows : Legal-The department provides estimates and 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 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 t....
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....r, the Transfer Pricing Officer has narrated the nature of services rendered for which the management fee was paid. It should be mentioned here that the nature of services as given by the Transfer Pricing Officer in his order does not tally with the nature of services as narrated by the assessee in reply to the show cause notice of the Transfer Pricing Officer. The Transfer Pricing Officer has thus proceeded on a wrong basis regarding the nature of services. 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 f....
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....associated enterprise. The existing facts and circumstances amply show that the services even if any rendered by the associated enterprise were mere duplication of the functions being carried out by the taxpayer on his own and independently. The taxpayer did not get any economic value from the alleged services rendered by the associated enterprise. Thus the arm's length price of the management fee paid is treated as Rs. nil due to inadequacy of the taxpayer's 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....
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....g Officer failed to appreciate submission dated Septem ber 6, 2011 and October 21, 2011, and evidence filed along with the said letters, wherein the assessee had clearly detailed the functions undertaken by the associated enterprises for the benefit of the group entities. The assessee being a part of the group also received benefit from such services. The assessee had submitted the details and description of services rendered by the associated enterprises. The assessee had further broken down services into specific functions which were provided by its 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 ....
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....nce legal services rendered by the associated enterprise are not repetitive. Mere payment of legal fees to third party and cost allocation to associated enter prises under legal services was not tantamount that there is duplication of services. The assessee submitted that the dissimilarity of services availed of by the assessee from third party and associated enterprises must also be considered. 6. The assessee brought to the notice of the Dispute Resolution Panel that under an inter-company service agreement, a participant gets an ability to avail high quality services 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 nece....
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....uying, distribution and marketing ; services in staff matters such as recruitment and training are ordinarily considered as intra-group services because they are the type of activities that independent enterprises would be willing to pay for or to perform for themselves. Hence a charge can be made for the above services." 11. The assessee claimed that the cost of services is allocated among group companies deriving benefits from the above services without any mark-up. Relevant principles contained in the OECD guidelines were given as below : "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 establis....
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....t which the associ ated enterprise has spent on its behalf has been once again reimbursed by way of reimbursement of expenses. 10.6 This panel has carefully considered the submissions of the assessee and the reasoning of the Transfer Pricing Officer and is of the view that the expenses that have been allocated by the associated enterprise is only a payment for duplicated services and no third party would be willing to pay a charge on the expenses incurred by UL Inc., towards global HR, global finance etc. once again in an another form. In these circumstances the action of the Transfer Pricing Officer 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 ....
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....b) 44 (Hyd) ; wherein the principle that in the cases of services rendered intra group, the Transfer Pricing Officer cannot determine the arm's length price at nil and treat the entire payment to the associated enterprise as transfer pricing adjustment. 49. It was also submitted by learned counsel for the assessee that on the basis of wrong facts, wrong conclusions have been arrived at by the Transfer Pricing Officer and the Dispute Resolution Panel and on this ground itself, the addition made has to be deleted. 50. The learned Departmental representative relied on the order of the Transfer Pricing Officer and Dispute 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 t....
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....e as nil and made the addition of entire payments made by the assessee. On such an approach, the Tribunal held it was incumbent upon the Transfer Pricing Officer to work out the arm's length price of the relevant transactions by following some authorised method and the entire cost borne by the assessee cannot be disallowed by taking the arm's length price at nil keeping in view the facts and circumstances of the case and the relevant details furnished by the assessee. The Tribunal also relied on the decision of the hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., I. T. A. No. 1068/2011 dated March 29, 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 ....
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....39;s length price is concerned, we have already reproduced in the earlier part of this order that the transfer pricing study done by the assessee in support of the arm's length price. We are of the view that the transfer pricing study so done by the assessee does not give out any comparable instances of similar transactions between the unrelated parties. As far as the determination of the arm's length price under the Act is concerned, the provisions lay down that the assessee has to adopt one of the methods laid down in section 92C(1) of the Act. The assessee has to substantiate the price that is paid to its associated enterprise 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 ....