2017 (3) TMI 1666 - AT - Income Tax

Transfer pricing - Selection of comparables for international transaction of contract research and testing services - Held that - Celestial Labs is not functionally comparable to the assessee as it is also in the field of research in pharmaceutical products and should be considered as comparable - AO has not followed the directions of the DRP fully - assessee is permitted to raise all the legal and factual issues before the DRP and may also submit the order of the Tribunal before the DRP for its consideration - DRP shall decide this issue afresh - appeal filed by the assessee is treated as allowed, for statistical purpose

Issues Involved:

1. Exclusion of Pfizer Ltd. as a comparable.
2. Exclusion of Celestial Labs Ltd. as a comparable.
3. Inclusion of Celestial Labs Ltd. in the final set of comparables.
4. Claim of software license fees as revenue expenditure.

Detailed Analysis:

1. Exclusion of Pfizer Ltd. as a Comparable:

The revenue contested the exclusion of Pfizer Ltd. as a comparable, arguing that the related party transactions (RPT) filter and different accounting periods should not disqualify it. The Dispute Resolution Panel (DRP) excluded Pfizer Ltd. due to its RPT exceeding 90% and its different accounting period ending on 30th November. The Tribunal upheld the DRP's decision, emphasizing that the related party transactions were indeed more than 90%, and the different accounting period was a valid ground for exclusion as per the Bombay High Court's ruling in CIT v. PTC Software (I) (P.) Ltd. The Tribunal found the DRP's decision to be in accordance with Rule 10B(4) of the Income Tax Rules, 1962, which mandates that the accounting period of the comparable company should align with that of the assessee.

2. Exclusion of Celestial Labs Ltd. as a Comparable:

The revenue argued against the exclusion of Celestial Labs Ltd., claiming it was comparable to the assessee company. The DRP excluded Celestial Labs Ltd. on the grounds that its functional profile was different, as it was involved in diversified activities including IT services and trading of products. The Tribunal supported the DRP’s decision by referring to its earlier rulings for AYs 2007-08 and 2008-09, which had established that Celestial Labs Ltd. was not functionally comparable due to its varied operations and lack of segmental data adjustments.

3. Inclusion of Celestial Labs Ltd. in the Final Set of Comparables:

The assessee appealed against the inclusion of Celestial Labs Ltd. in the final set of comparables, emphasizing that the DRP's directions were not fully followed by the Assessing Officer (AO). The Tribunal directed the AO to strictly adhere to the DRP's directions, acknowledging the assessee's concern.

4. Claim of Software License Fees as Revenue Expenditure:

The assessee contested the AO's decision to capitalize software license fees instead of treating it as revenue expenditure, resulting in an addition to the total income. The DRP did not adjudicate this issue despite the assessee raising an objection. Both parties agreed to remand the issue back to the DRP for fresh adjudication. The Tribunal allowed this ground for statistical purposes, permitting the assessee to present all relevant legal and factual issues before the DRP.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal for statistical purposes. The decisions of the DRP regarding the exclusion of Pfizer Ltd. and Celestial Labs Ltd. were upheld, and the issue of software license fees was remanded back to the DRP for fresh adjudication.

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