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2010 (4) TMI 883 - AT - Income TaxTP adjustment - determining the arm s length price - MAM selection - expenses incurred by the assessee which were reimbursed by the associated concern to the assessee - whether mark up percentage over cost being 5 per cent is correct or not? - whether the comparable cases, as selected by TPO, were substantially similar to the assessee s function or not? HELD THAT - SIRO Clinpharm Pvt. Ltd. was engaged in conducting clinical trial services. It was an organization which was mainly doing the clinical research activity and, therefore, when the TPO was adopting it as a basis for comparing the assessee s transaction then as per rule 10B(1)( a )( ii ), she was required to adjust in regard to differences. As per sub-clause ( iii ) of clause ( c ) of rule 10B, when cost method is adopted, the normal gross profit is required to be adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions. Therefore, 17.14 per cent mark up in the case of SIRO Clinpharm Pvt. Ltd. was required to be adjusted before it could be made applicable for determining the arm s length price in regard to international transaction entered into by the assessee. As details of expenses incurred by the assessee which were reimbursed by the associated concern to the assessee contained and pointed out that the assessee had incurred such expenses which were directly relatable to the research activity. We find the laboratory charges paid are Rs. 11,875 but the payments to hospital for initiating study is Rs. 7,54,050. This clearly shows that mainly the assessee has made the payment not for laboratory test but mainly to hospitals that carried out the clinical test on the patients. The assessee s infrastructure was only in the form of furniture, vehicle, office equipments and computers, which were used for general administration and it was not sufficient for carrying out the whole research activity. Therefore, the assessee was solely dependent on the data provided by the doctors in various hospitals. The main function of the assessee was to collate the data and transmit the same to Byk Gulden for which it was suitably reimbursed by Byk by mark up of 5 per cent over the cost. The assessee s functions were more like co-ordinator/facilitator rather than performing the function itself. Further, the assessee s submission that its profits were exempt under section 10B carries lot of substance because the assessee was, in no way, benefited by charging 5 per cent mark up as against 17.14 per cent fixed by TPO because, in any view of the matter, the profits were exempt. The assessee has also pointed out that the profits by the AEs have been subjected to tax in the respective overseas jurisdiction and, therefore, there is no necessity for the assessee to transfer the profits in any overseas jurisdiction. This aspect should not have been lost sight of while examining the issue. In view of above discussion, we do not find any infirmity in the order of ld. CIT(A) and, accordingly, we uphold the same.
Issues Involved:
1. Adjustment of Rs. 16,23,251 in relation to international transaction under section 92CA(3) of the Income-tax Act. 2. Determination of arm's length price for clinical trial services provided by the assessee. 3. Comparison of the assessee's functions with other clinical trial service providers and technical service providers. 4. Examination of the appropriateness of the Transactional Net Margin Method (TNMM) adopted by the assessee. 5. Justification of the 5% markup charged by the assessee over costs incurred. Issue-wise Detailed Analysis: 1. Adjustment of Rs. 16,23,251 in relation to international transaction under section 92CA(3) of the Income-tax Act: The Assessing Officer made an adjustment of Rs. 16,23,251 because the fees charged by the assessee-company for clinical trial services were less than 95% of the arm's length price determined under section 92CA(3). The Transfer Pricing Officer (TPO) determined the arm's length price for the services at Rs. 1,18,50,108, leading to an adjustment of Rs. 16,23,251. The CIT(A) held that the adjustment made by the TPO was unjustified, which led to the department's appeal. 2. Determination of arm's length price for clinical trial services provided by the assessee: The assessee, a joint venture between Cadila Healthcare Ltd. and Byk Gulden Lomberg GmbH Germany, provided clinical research services on new molecules. The TPO concluded that the clinical trial services were in the nature of services for which an independent third party would pay, and thus, the markup of 5% over cost was not at arm's length. The TPO compared the assessee's services with those of other clinical trial service providers and determined a markup of 17.14%. 3. Comparison of the assessee's functions with other clinical trial service providers and technical service providers: The TPO compared the assessee's functions with three clinical trial service providers: Quintiles Spectral India (P.) Ltd., SIRO Clinpharm Pvt. Ltd., and Neeman International Asia Ltd. The TPO also considered other service providers in the skilled industry, such as NIS Sparts Ltd., Vimta Labs Ltd., and Water & Power Consultancy Services India Ltd. The TPO concluded that the average operating profit margin of 18.38% should be applied, but chose the lesser margin of 17.14% for benchmarking the international transactions. 4. Examination of the appropriateness of the Transactional Net Margin Method (TNMM) adopted by the assessee: The assessee adopted TNMM to show that the transactions with Associated Enterprises were at arm's length. The CIT(A) noted that the assessee provided low-end support services and was not well-equipped or authorized to undertake clinical trial activities in India. The CIT(A) concluded that the comparables selected by the TPO were not appropriate without necessary adjustments. 5. Justification of the 5% markup charged by the assessee over costs incurred: The CIT(A) observed that the assessee's role was mainly limited to facilitation and coordination between BGL and third-party agencies/hospitals. The CIT(A) noted that the assessee did not have the necessary infrastructure and specialized facilities to undertake clinical trial activities. The CIT(A) concluded that the 5% markup charged by the assessee was justified, considering the nature of the services provided and the lack of infrastructure for conducting full-fledged clinical trials. Conclusion: The Tribunal upheld the CIT(A)'s order, concluding that the 5% markup charged by the assessee was justified and did not call for any adjustment. The Tribunal noted that the assessee's functions were more like a coordinator/facilitator rather than performing the function itself. The Tribunal also considered that the assessee's profits were exempt under section 10B, and there was no necessity for the assessee to transfer profits to any overseas jurisdiction. Therefore, the Tribunal dismissed the department's appeals.
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