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2023 (3) TMI 504
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....ess of facilitating and coordinating clinical trial services for its Associated Enterprises (AE). 2.2. During the year under consideration, the assessee has earned a margin of 13.89% on cost (excluding pass through costs). The international transactions undertaken by the assessee were benchmarked using the Transactional Net Margin Method (`TNMM.) and adopting the Profit Level Indicator (PLI) of Operating Profit / Total Cost (OP/TC). 2.3. The assessee conducted a detailed search for comparable companies and arrived at a set of 5 companies whose arithmetic mean margin was computed as 9.81%. Since the assessee had earned a higher margin i.e., 13.89% than the comparable companies, the international transactions were determined to be at Arm's length. 2.4. During the assessment proceedings, the Ld. Transfer Pricing Officer (TPO) has considered the pass-through cost as a part of the assessee's cost-base and thereby recomputed the margin (operating profit/operating costs) of the assessee at 9.42% (refer Pg. no. 33 of TPO Order). 2.5. Further, the Ld. TPO also rejected the assessee's benchmarking analysis and conducted a fresh search for comparable companies. After c....
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....e interest of justice. We direct the Ld.TPO to verify the same and to consider this comparable, only if the RPT transaction fits within the relevant criteria of 25% as applied by the Ld.TPO. 6. Syngene International Ltd. 6.1 The Ld.AR submitted that, this comparable is engaged in providing contract research and manufacturing services. He submitted that this comparable has dedicated R&D centres, discovery services and development and manufacturing services. Development and manufacturing services includes manufacturing of molecules for clinical supplies and commercialization. 6.2 The Ld.AR referred to the annual report placed at pages 666 and 667 of the paper book wherein all the above details have been referred to. Further, he submitted that in the notes to the financial statement at page 743, this company also renders services in the stream of discovery chemistry and biology services, toxicology, pharmaceutical development, process development / manufacture of advanced intermediates, active pharmaceutical ingredients and bio-therapeutics. We therefore direct the Ld.TPO to exclude this company from the list. Accordingly, Ground no. 4 raised by assessee stands allowed par....
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....as follows: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely ;- (a) to (b)** ** ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, ....
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....ith Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that:....
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....e time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purp....
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.... to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little m....
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....fferences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 23. The aforesaid decision clearly lays down the proposition that working capital adjustment is to be given effect to while determining ALP while adopting TNMM method. Respectfully following the said decision, we allow this issue in favour of the assessee." Respectfully following the above, we direct the Ld.AO/TPO to compute the Working Capital Adjustment on actuals. The assesse....
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....ly relied on the Addendum filed by the assessee, wherein it was mentioned that it was only pass through costs. As discussed earlier, this Addendum is only a make believe story and the AO has right to go beyond this document to find out the real intention of the parties. We observe that the real intention to this Addendum is different from what it appears ex facie. Hence, we have to proceed on the basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or transactions have to be given effect even though they result in avoidance of tax liability, provided that they are genuine, bonafide and not colourable transaction." 9. Considering the fact that there is no change in facts and the nature of pass-through costs bein....
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....et base and risk profile and fails the filters applied by the Ld. TPO: a. Icon Clinical Research India Pvt. Ltd.: 5. b. Lambda Therapeutic Research Ltd; - C. Syngene International Ltd.: and d Cliantha Research Ltd. On the facts and in the circumstances of the case and in law, Ld. AO/Ld. TPO/ Hon'ble DRP erred in: a not granting working capital adjustment, and b. not granting risk adjustment. Document 2 On the facts and in the circumstances of the case and in law, Ld. AO/Ld. TPO/ Hon'ble DRP erred in treating recovery of pass through cost by the Appellant as operating in nature and disregarding the fact that the Appellant merely acted as a co-ordinator and facilitator for the performance of clinical trials and that the reimbursement of investigator fees do not represent any functions performed so as to consider it for profitability purposes and also that there is no profit element in the hands of the AE in relation to such recoveries. 7. On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO erred in levying interest under Section 234B and 234C of the Act. 8. On the facts and in the circ....
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....by the sponsor in consultation with CRO is also provided to the physicians. Inform Consent Form: The consent form is provided to the patients who would participate in the Clinical Trials. The patient is allowed to evaluate the consent form and accept it before any trials are done with the patients. This is translated into different languages (ie. the local language where the test have to be conducted). For this purpose, Parexel Clinical hires agencies who translate the documents. Case Report Form: A case report form is also prepared which contains the details of the entire case. Questionnaire: A detailed questionnaire is issued by the physician to the patients and they are asked to fill effects of the drug . (a) Obtaining Regulatory approvals: The clinical trial and testing services in India has to be Drugs Controller General of India ( DCGI) Office in India. The clinical trials are classified into Category A and Category B in India. Category A includes those clinical trials whose protocols are already approved by regulatory authorities of some of the recognized and developed countries, viz. USA, UK, Swit....
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....n carrying out the clinical trial diagnoses the reason for SAE and evaluates if it has occurred due to the intake of medicine. Any Serious Adverse event needs to be reported to DCGI within 14 calendar days of the incident. However, the same has to be reported immediately within 24 hours to sponsors and 7 working days to the ethical committee. In addition, information is reported to Parexel Group also so that the trials happening in other countries can be informed and for submission to various representative authorities in respective countries. There were few instances of SAE's reported by PI during the year. (b) Submission with DCGI and Ethical committee: The entire documents mentioned above are submitted with DCGI and Ethical committee for approval. Parexel Clinical obtains all the approvals before commencement of the trials. Import of drug samples: Parexel Clinical through various agencies imports the drug sample for distribution to various hospitals conducting the clinical trials. Site visit: The clinical research associates of Parexel Clinical visit the site office and initiate the site for commencing the enrolment of patients. There....
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....ly used for the purpose of carrying out its operations", Table 2: Assets owned by Parexel Clinical as on 31 March, 2016 S. No. Particulars of assets 1 Computers equipment 2 Office equipment 3 Furniture and fixtures 4 Leasehold improvements 5 Software Total Amount (Rs.) 2,87,96,695 1,10,11,396 4.83-359 11,18,649 15.44.569 4.29.54.668 5.3.2. Intangibles Parexel Clinical enjoys a non-exclusive, royalty free right to make use of trademarks and any other intellectual property owned by Parexel Group or its affiliates, to the extent necessary to support Parexel Clinical's operations. Parexel Group has the right to supervise Parexel Clinical's use of any such trademarks or other intellectual property to the extent reasonably necessary to preserve the utility of such trademarks or other intellectual property and their legal protection. Based on the audited financial statements for FY 2015-16 The amount represent the gross block of asset Parexel International Clinical Research Private Limited-Transfer pricing analysis and report Price Waterhouse & Co LLP Document 6 5.4. Risks assumed The risk....