AI Drafter 
TaxTMI 
TaxTMI 
2018 (3) TMI 1874
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....ated 29-03-2016 passed u/s. 143(3) read with section 144C(1) of the Act in pursuance to the order of learned Transfer Pricing Officer, Mumbai (hereinafter called "the TPO") passed u/s. 92CA(3) of the 1961 Act. The assessee filed objections with DRP which were disposed of by DRP vide orders dated 26-12-2016. The AO, thereafter, in pursuance to directions of DRP passed an assessment order dated 31.01.2017 u/s. 143(3) r.w.s. 144C(13) of the 1961 Act, wherein the additions to the tune of Rs. 3,80,43,714/- were made by the AO vide TP Adjustments w.r.t. international transactions entered into by the assessee with its AE. 2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:- "General 1. erred in assessing total income of the Appellant at Rs. 3,89,37,370/- as against returned income of Rs. 8,93,660/- General ground on Transfer Pricing. 2. erred in making transfer pricing adjustment of Rs. 3,80,43,714 in relation to the international transaction of provision of contract research and development services, stability testing and databas....
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....eject matrix; Inappropriate acceptance of non-comparable company 11. erred in accepting Aurigene Discovery Technologies Ltd. a non-comparable company as per the Appellant, by stating that the functions of research related to drug discovery is comparable to the business activities of the Appellant; Calculation error in margins of comparable companies 12. erred in wrongly calculating the operating profit margins of following comparable companies and not providing detailed margin calculation of the same: Biocon Limited; and Syngene International Ltd 13. erred in not following DRP directions wherein DRP had directed to calculate the margins correctly after providing an opportunity to the Appellant: Working capital adjustments 14. erred in not providing an adjustment to Appellant in relation to differences of working capital employed by the Appellant vis-o=-vis comparable companies. Risk adjustments 15. erred in not providing an adjustment to Appellant in relation to differences of risk assumed by the Appellant vis-o-vis comparable companies: Levy of interest under section 234B of....
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....t Chemsys Ltd. shall not be included in the final set of comparables. 2) On analyzing the annual report & financial statements of Vimta Labs Limited, it is found that the said company is Into continuous losses or it is a loss making company. Hence, you are hereby show caused as to why loss making company namely Vimta Labs Limited [submitted by you vide submission dated 09/12/2015] shall not be excluded from the final set of comparables. 3) On careful reading of the director's report to the shareholders in the case of Dolphin Medical services Limited, it has been found that during the year under consideration the company has suffered huge losses due to many intrinsic and extrinsic reasons, which is an extraordinary situation for the company. Hence, you are hereby show caused as to why the said company shall not be excluded from the final set of comparables. 4) On studying the Accept/Reject matrix submitted through Transfer Pricing Study Report, it has found that you have excluded Suven Lifesciences Ltd., Sl. No. 7170, on account of insufficient segment information. However, segmental information of the said company shows operating margin @ 73.86%. You ....
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.... 5. IDMA Laboratories Ltd. Reason for acceptance the company is engaged in the business of analytical and industrial testing which is a comparable services to the assessee and assessee had inadvertently done a typographical error in accept reject matrix where the above company was rejected. Reason for rejection: The submission of assessee has been perused, however the same is not acceptable as the company is functionally not comparable to assessee's business. The said company is engaged into business of quality control testing and trading in products. Hence rejected. Nevertheless, the assessee has considered the said company as non comparable services in its accept-reject matrix in its TP study Report vide Sr. No. 3675. 6. Jubilant Chemsys Ltd. Reason for rejection: The assessee submitted that the company is engaged In non-comparable activity. Further, it had inadvertently done a typographical error in accept reject matrix where the above company was mentioned as engaged In comparable activity. Reason for acceptance: The submission of assessee has been perused, however the same is not acceptable as th....
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....vised as the expense has been shown separately for R&D amounting to Rs. 3304.91 lakhs. Reason for acceptance: The submission of the assessee has been perused but not accepted. This company was analysed by this office and the analysis Is provided hereunder: The company has Identified the following 3 segments as reportable segments: * Manufacturing (CRAMS) * Services (DDDSS) * Research and Development Manufacturing (CRAMS) is into Bulk Drugs & Intermediates under contract services products are developed and produced on an exclusive basis under contract manufacturing services. Hence, this segment Is considered as functionally comparable and not Service (DDDSS) as submitted by the assessee. Further, as submitted by the Assessee that R & D expenses need to be reduced from other segment, in response to same it is pertinent to note that the R&D is a separate segment (as per the audited financial statements) and hence the expenses incurred thereon cannot be reduced from any other segments. Further, since the assessee could not provide reasons as to how the amalgamation affects the profitability and how is not comparable to assessee the extra ordinary events cannot be reason....
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.... passed u/s. 144C(5) of the Act granted certain relief which finally led to the assessment order dated 31-01-2017 passed under section 143(3) read with section 144C(13) of the Act which led to TP additions to the tune of Rs. 3,80,43,714/- by way of adjustment to arm lengths price of international transaction entered by assessee with its AE. 5. Aggrieved by the assessment order dated 31.01.2017 passed by the AO u/s. 143(3) r.w.s. 144C(13) of the 1961 Act, the assessee has come in second appeal before Tribunal and has raised as many as 17 grounds which are reproduced at para 2 of this order. 6. Ground No. 1 to 5 - It is prayed by learned Counsel for the assessee that ground No. 1 to 5 are general in nature and does not require separate adjudication. The learned CIT DR did not objected to the dismissal of these grounds bearing number 1 to 5 being general in nature. After hearing both the sides, we are of the considered view that these grounds of appeal from 1 to 5 being general in nature does not require separate adjudication and hence as conceded by the learned counsel for the assessee, these grounds bearing number 1 to 5 stood dismissed. We order accordingly. 7. Ground N....
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....the financial year. It was observed that the assessee is engaged in business of contract R & D as well analytical testing(primarily in contract R & D) while the comparable is engaged in business of providing analytical and industrial testing services, which led to upholding of rejection of this comparable IDMA by the DRP. Now, the assessee is before the tribunal. Both Ld. counsel for the assessee and learned CIT DR has submitted their detailed arguments before us. It is the say of learned counsel for the assessee that its only due to typographic error this company was reflected as rejected company in accept/reject matrix in TP study. It is also say of the learned counsel that as much as 39.55% of the revenue of the assessee for relevant financial year is from stability studies and testing services, while it is the say of the Revenue that there was no error committed by the assessee in the rejection of this company IDMA in TP study and this company IDMA was rightly rejected as comparable and also this is the say of the Revenue that miniscule portion of revenue is derived from stability studies and testing services by the assessee during the relevant financial year as its contract fo....
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....ssessee is directed to provide all necessary details and information to substantiate its claim of IDMA being comparable with the assessee. The AO/TPO to provide proper opportunity of being heard to the assessee in accordance with principles of natural justice. This ground of appeal No. 6 is allowed for statistical purposes. We order accordingly. 8. Ground No. 7-Rejection of Dolphin Medical Services Limited(hereinafter called "Dolphin") as comparable by Revenue:- The assessee included Dolphin Medical Services Limited as comparable in its Transfer Pricing Study Report with OP/OC weighted average margin of 17.45% while the OP/OC margin for AY 2012-13 was 8.17%. The TPO observed that this company 'Dolphin' had suffered huge losses due to many intrinsic and extrinsic reasons, which is an extraordinary situation for the said company. The assessee submitted in response to show cause notice before the TPO that on operating profit level, this company Dolphin has not incurred losses but has earned profit margin of 8.17%. The TPO observed that this company is engaged in two business divisions namely medical and software division. The Medical division consists of income from diag....
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.... said audited financial statements, it is stipulated as under:- "28. The company's sole business segment is to provide research and development services and the Company considers such activities to constitute a single business segment in the context of AS-17 'Segment Reporting'. Similarly, the Company considers Europe as its only geographical segment. The company considers business segment as its primary segment and geographical segment based on the location of customers as the secondary segment. Since the company comprises a single business segment and a single geographical segment, disclosures relating to the primary and secondary segments have not been presented." Thus, on perusal of audited financial statement of the assessee, it is observed that it is only engaged in providing R & D services which is the sole segment in which the assessee is operating. The bifurcation of revenue is not given in segment reporting while claim of the assessee is that around 39.55% revenue is from stability studies and testing services which required verification. There are contrarian facts as averred by rival parties and requires proper investigation by the AO/....
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....0,301 OP/OC% 26.63% -10.04% -1.45% 8.87% The assessee submitted that these variations in profits are normal in competitive business environment and same cannot be considered as a reason for rejecting the said company Vimta as comparable. The assessee submitted that this company is not a persistent loss making entity since it is not incurring operating losses for continuous period of three previous years and company cannot be rejected on the grounds that it has incurred losses in current year. The assessee also drew attention to Rule 10B(4) of Income-tax Rules, 1962. It was also submitted that profit as mentioned in rule 10B(4) will also include losses within its purview. It was also submitted that the comparables as detailed below selected by the TPO also suffered from high fluctuation in profit margins and the same should also then be rejected: Particulars AY 2013-14 AY 2012-13 AY 2011-12 AY 2010-11 Aurigene Discovery Technologies Limited 50.27% 40.92% 18.69% 18.83% Jubiliant Chemsys Limited -5.72% 28.25% 16.16% 21.61% Suven Lifesciences Limited 67.83% 20.35% 5.36% 6.26% The DRP rejected Vimta as not ....
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....nical Research Industry causing inordinate delays in receiving the approvals. Further, the Company had to accept cancellation of some of the studies due to withdrawal by the Customers as they did not want to proceed further resulting in steep decline in top line. It was an aberration. Adding to this, the input costs have gone up significantly resulting in low EBIDTA as compared to previous year." Perusal of the above reasons clearly reveals that these are normal business risks attached to this industry to all players and merely because Vimta has incurred operating losses in the year under consideration, the same cannot be rejected as comparable. The functional profile of Vimta is comparable with the assessee as we have elaborated above and in our considered view, we do not find any justification for exclusion of Vimta as comparable. Thus, we hold that Vimta activities/functions are comparable to the assessee company and the same should be included as comparable. The assessee succeeds on this ground. We order accordingly. 10. Ground No. 9 Rejection of SPAN Diagnostics Limited as comparable by Revenue:- The assessee included SPAN Diagnostics Limited as comparable in its Tran....
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....inadvertent clerical error in TP study in accept/reject matrix w.r.t. two companies namely IDMA and SPAN which has been already been adjudicated by us in preceding para's of this order while deciding the inclusion of those comparables and this ground does not require separate adjudication. This ground stood dismissed. We order accordingly. 12. Ground No. 11 is regarding inclusion of comparable Aurigene Discovery Technologies Limited by TPO which as per assessee is non comparable company. The TPO observed that the assessee has excluded this company appearing in S. No. 677 of TP study from the final set of comparables with the remarks non comparable services while the broad analysis of the nature of activities undertaken showed that the said company Aurigene is functionally similar. The assessee in response to show cause submitted that the said company's risk profile is different from that of the assessee. The TPO observed that the said company Aurigene is engaged in undertaking research relating to drug discovery for its customers i.e. contract R & D and hence the said company is functionally comparable. The assessee filed objections with DRP. The assessee submitted befor....
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.... no doubt meritorious for Auriegene exclusion but requires verification by authorities below. We are of considered view that this matter needs to be restored to the file of AO/TPO to reconsider this comparable on merits after hearing the assessee. The AO/TPO shall give proper opportunity of being heard to the assessee before re-adjudicating this issue in set aside de novo proceedings. This ground is allowed for statistical purposes. We order accordingly. 13. Ground No. 12 and 13 This ground of appeal raised by the assessee pertain to an error in computation of margins by the TPO/AO w.r.t. Biocon Limited and Syngene International Limited while there is no quarrel so far as inclusion of these two comparables are concerned. The assessee has computed margins w.r.t. these companies @19.94% and 25.34% respectively while the AO/TPO computed the same @ 25.66% and 29.62% respectively. The assessee raised this issue with DRP and contended that the TPO while calculating the margin of Biocon has not considered the unallocated income/expenses and the correct operating margin should be done post allocation of unallocated income/expenses in the segmental account and after considering the sa....
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....rdingly. 17. With respect to ground No. 17, it is prayed by the assessee that it is concerning the levy of penalty under section 271(1)(c) of the Act and its adjudication at this stage is premature and hence the same should be dismissed. The learned CIT DR did not objected to the dismissal of this ground. After hearing both the parties, we dismiss this ground of appeal bearing number 17 as premature at this stage. We order accordingly. 18. In the Result, the appeal of the assessee stood partly allowed as indicated above. Order pronounced in the open court on 09-03-2018. ============= Document 1 Sr. No Nature of Transaction Name of the AE and Country of the AE Amount of Transaction with whom it is Method used by Assessee to determine ALP transacted 1 Provision of contract Actavis Iceland 247,538,905 TNMM R&D services to AEs 2 Provision of contract R&D services to AES Actavis Malta 8,256,315 TNMM 3 Provision of contract R&D services to AEs Actavis U.K. 6,231,374 TNMM 4 Provision of contract R&D services to AEs Actavis Elizabeth 1,150,323 TNMM Document 2 Particul....