TaxTMI 
TaxTMI 
2012 (11) TMI 1094
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....3. The learned AO/Transfer Pricing Officer ('TPO') erred in making an addition of Rs. 8,41,59,983 to the total income of the Appellant on account of adjustment in the arm's length price of the international transaction entered by the appellant with its associated enterprises. 4. The learned AO/TPO erred in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules'), conducting a fresh economic analysis for the determination of the arm's length price for the impugned international transaction, and holding that the Appellant's international transaction is not at arm's length. 5. The learned AO/TPO erred in law and in facts, in determining the arm's length margin using only financial year 2006-07 data which was not available in the public domain at the time of complying with the transfer pricing documentation requirements. 6. The learned AO/TPO erred in rejecting certain companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a peri....
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....d and exported by Apotex Inc.) :- • Analytical research/testing and formulation development : Analytical research is undertaken screening potential drug candidates, to aid in the development of drug synthesis. The various activities involved include: development of analytical method, innovator/competitor sample analysis, prototype formulation development, product specialization development, etc. • Scale up/Manufacturing of samples : Product of pilot batches for stability and bio-equivalence study under a manufacturing plant environment. • Stability Testing : Long-term studies, where the product is stored at room temperature and humid conditions, to assess expiry date and storage conditions for pharmaceutical products. • Bio-equivalence study : A series of comparative tests designed to establish therapeutical equivalence between test and reference (innovator) products. • Regulatory filings/submissions : Results from bio-equivalence study and stability testing are documented in prescribed manner for dossier preparation and submission to various regulatory agencies to obtain approval. 5. In support of the claim of the....
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.... 38.21% 3 Vimta Labs 27.44% 4 IDC India Ltd. 15.89% 5 Oilfield Instrumentation 76.46% 6 Celestial Labs 58.35% 7 Mindtree Ltd. 14.90% Average margin as per TP order 39.49% 8. The TPO applying the aforesaid margin of 39.49% determined the ALP as follows:- "The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Based on this, the arms length price of the research and development services rendered by the taxpayer is computed as under: Arithmetc mean PLI : 39.49% on cost Less Working Capital Adjustments : 0.41% on cost Arm's length Margin : 39.08% on cost Operating Cost Rs. 32,48,39,378/- Arm's Length Margin 39.08% of the Operating Cost Arm's Length Price (ALP) @139.08% of operating cost Rs. 45,17,86,607/- 6.4.1 Price Received vis-à-vis the Arms Length Price: The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price (ALP) @139.08% of operating cost Rs. 45,17,86,607/- Price shown in the internation....
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....as Rs. 4.40 crores, resulting in a loss of Rs. 0.59 crores. The said company was therefore excluded from comparability. In an application u/s. 154 of the Act filed by the assessee (dated 13.2.2012) before the TPO, the assessee pointed out that as per the annual report of Neeman Medicals International (Asia) Ltd. for the F.Y. 2005-06 which also contains financial data for the F.Y.2004-05, the income from clinical trial of Neeman Medicals International (Asia) Ltd. for F.Y. 2004-05 was Rs. 4.51 crores with a cost of Rs. 4.38 crores, resulting in a profit before tax of Rs. 16.83 lakhs. The assessee therefore pleaded that Neeman Medicals International (Asia) Ltd. should not be rejected as comparable on the ground that it was consistently making losses. 11. The ld. counsel for the assessee submitted that if the comparables chosen by the TPO are rejected for the reasons given above and even if IDC India Ltd., Mindtree Ltd. (segmental data) and Neeman Medicals International (Asia) Ltd. are considered as comparables, operating margin on cost would be 9.95% as per the following details:- The table below shows that the arithmetic mean margin would be 9.95% on: • Including c....
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....oducts. Ratiopharm International GMBH, Germany is a 100% subsidiary of Ratiopharm GMBH. The Assessee is 100% subsidiary of Ratiopharm International GMBH and it was originally known as Ratiopharm India Private Ltd. The assessee was set-up in December, 2000 to provide pharma technical services, including services related to sourcing and development of ingredients to be used as raw materials to Mepha, Merckie and the ratiopharm Group. The assessee has also set-up a moder R&D Laboratory to carry out pharmaceutical product development and provide analytical research and stability testing services to its associated enterprises." 15. It can thus be seen from the above that the activities of the assessee in the present case and that of Tevapharm Pvt. Ltd. are identical, i.e., both the companies carried out analytical research and stability testing services to its AEs. In the case of Tevapharm (P.) Ltd. (supra) the TPO had selected Engineering India Ltd., IDC India Ltd., Oil Field Instrumentation, Celestial Labs and Mindtree Ltd., as comparable. The Tribunal examined the comparability of these companies to a company engaged in contract Research & Development and came to the following con....
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....s cover areas like Enterprise Management Applications, Broadband, Internet and eBusiness, Mobile Usage, IT Service Exports and Continuous Market Review of Computing and Peripheral Products. Such research reports provide market forecasts, competitive analyses, vendor profiles, and information on customer requirements and buying patterns. Further, the areas of research include Communication Services Broadband Business, Network Services, IP based services, residential small business and wireless communications. The products and services of IDC consist of the following: - Customised Services: IDC delivers strategic and tactical research, and consulting services to support the development and implementation of business strategies of ICT builders and providers. These projects are customised to address the client's specific business problem. The uniquely qualified, multi-disciplinary experts help you develop business strategies, fine tune product development and pricing, define and implement marketing goals, assess competitive forces, and evaluate joint ventures and acquisitions. - Standard research reports: These research documents cover everything in hardware-PCs, peripherals,....
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....nsors and other instruments clearly demonstrate the disparity between Oil Field's and Assessee's operations. As discussed earlier the functional profile of Assessee is in the nature of providing -Contract Research and testing services. Oil field does not carry out any of these stipulated activities and accordingly Oil field ought not to be considered a comparable. (Emphasis supplied) 5. Celestial Labs Limited (Celestial Labs) : According to assessee Celestial Labs as a comparable has been cheery picked by the TPO. Celestial Labs is a diversified company operating in varied fields such as rendering IT services encompassing application development and maintenance, production support, EERP, data warehousing, SAP implementation. Celestial Labs also is into manufacturing and trading of products such as ERP package for manufacturing and has a product 'Sanjivani' which is a portal for live ayurvedic consultation. The company is also engaged in the distribution of Herbal Ayurvedic products. SAP Services: Celestial delivers SAP consulting, SAP implementation and post-SAP implementation services for its customers. Celestial is engaged in implementing SAP for customers f....
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....iotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set-up in Genome Valley at Hyderabad in Andhra Pradesh." According to the learned D.R. celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software for discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making a....
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.... - Medical Electronics - Storage and Computing Systems Thus it is clear that Mindtree is engaged in providing diversified set of services under its R&D segment for various industries. Hence it is not comparable to the functional profile of the Company and accordingly ought not to be considered a comparable." (Emphasis supplied) 16. We are of the view that in the light of decision of the Tribunal in the case of Tevapharm (P.) Ltd. (supra) referred to above, the aforesaid companies cannot be compared as comparables. The action of the TPO in considering the aforesaid companies as comparables of the functions performed by the assessee are therefore held to be not proper and these companies are excluded for the purpose of comparability. 17. Now we will consider the claim of the assessee that Neeman Medical International (Asia) Limited is not a consistently loss making company and therefore it should not have been excluded for comparability purposes on the said ground. In this regard, we find that the TPO does not dispute the fact that Neeman Medical International (Asia) Limited is functionally comparable with that of the assessee. The only reason given by the TPO for excludi....