2019 (2) TMI 1781 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee is a subsidiary of Apotex Holdings, undertakes manufacturing of Active Pharmaceutical Ingredients ('APIs') and intermediates (hereinafter collectively referred to as Pharmaceutical products) for Apotex Group. APIPL was engaged in manufacturing intermediate products for Apotex Inc. and Apotex Pharmachem lnc. APIPL also performs Research and Development activities ('R D activities') on behalf of Apotex Pharmachem Inc. The R D services are integral and is a prerequisite for undertaking manufacturing of any pharmaceutical products. The range of R D services typically provided by APIPL include development of synthetic chemical process in the field of active pharmaceutical Ingredient ('API'), development and preparation of Drug Master Files (DMF's), and analytical services like stability studies, validation studies, analytical method development , thus companies functionally dissimilar with that of assessee need to be deselected from final list. Working capital adjustment is required to be given on actual basis for the purpose of determining the ALP as the adjustment is required to be given which had a bearing on the profit and margin of the comparables. Undoubtedly the working capital receivable inventory, trade debtor and trade creditor, etc have the impact on the profit and margin and therefore with a view to bring the parity between the assessee and the comparables it is necessary to give adjustment to work out the average PLI of the comparables Denying the benefit u/s.10B - permission was not granted for two separate and independent activities - Deviation from the specification without a written prior approval - HELD THAT - The manufacturing of Active Pharmaceutical Ingredients (API) and intermediaries and carrying out of R D for the same AE as a contract service provider , are two distinct activities and therefore the assessee should have taken two distinct approval from the DC by filing two separate project reports for carrying out these two activities. Only one project report in respect of manufacture of API and others for chlorobenzene and other chemicals were submitted and therefore there was no independent permission for carrying out the R D activities of pharmaceuticals for AE. It is incumbent upon the DC for the purposes of granting the permission under the Act, to give specific things / article sought to be manufactured ( Rule 19) and also there is a statutory requirement to mention the area where the said manufacturing activity was sought to be carried out. In the present case, neither the separate activities / things / article sought to be manufactured were mentioned in the project report, nor a separate ear marked place was mentioned at the time of seeking the amendment to the order. Hence the argument of the assessee that the assessee is also entitled for deduction u/s.10B of the Act is incorrect and is liable to be rejected. Assessee is doing two activities and two activities are not permissible. In view of the above, this issue on Section 10B, raised by the assessee is required to be dismissed Deduction u/s 10A - business loss set off against such profit and gains of the undertaking - HELD THAT - As in the case of CIT Vs. Yokogawa India Ltd. 2011 (8) TMI 845 - KARNATAKA HIGH COURT held that as the income of sec. 10A unit has to be excluded at source itself before arriving at the gross total income, loss under non-section 10A unit cannot be set off against sec. 10A units u/s 72 of the Act. As the deduction u/s 10A of the Act has to be excluded from the total income of the assessee, the business loss being set off against such profit and gains of the undertaking as a whole could not arise. We uphold the impugned order of the ld CIT(A) in directing the AO to compute the deduction u/s 10A of the Act in the case on hand without setting off the business losses from non section 10A units against the income of 10A units.

Summary

Issues Involved:
1. Inclusion of M/S. Max Neeman Medical Intl. Ltd. as a comparable.
2. Provision of working capital adjustment.
3. Exclusion of Celestial Labs Ltd. and Oil Field Instrumentation (India) P. Ltd. as comparables.
4. Deduction under Section 10B of the Income Tax Act for R&D services.
5. Re-computation of margin for M/S. Vimpta Labs Ltd. excluding bank charges.
6. Levy of interest under Section 234B.
7. Reduction of credit for taxes deducted at source.

Detailed Analysis:

1. Inclusion of M/S. Max Neeman Medical Intl. Ltd. as a Comparable:
The Revenue contended that M/S. Max Neeman Medical Intl. Ltd. should not be included as a comparable due to its consistent losses over the past three years and significant expenses towards development. The Tribunal found that the TPO's finding was factually incorrect as the company had made profits at both the enterprise and segmental levels. However, the Tribunal remanded the issue to the DRP to examine the functional comparability of the company.

2. Provision of Working Capital Adjustment:
The Revenue challenged the DRP's direction to provide working capital adjustment, arguing that it would result in factually incorrect results due to multiple segments in companies and lack of precise characterization of receivables and payables. The Tribunal upheld the DRP's decision, stating that working capital adjustments are necessary to bring parity between the assessee and comparables, and cited precedents from the Bangalore bench of the Tribunal in support.

3. Exclusion of Celestial Labs Ltd. and Oil Field Instrumentation (India) P. Ltd. as Comparables:
The Tribunal examined the functional profiles of Celestial Labs Ltd. and Oil Field Instrumentation (India) P. Ltd. and found them not comparable to the assessee's activities. Celestial Labs Ltd. was involved in diversified activities including software development services and manufacturing of herbal products, while Oil Field Instrumentation was primarily engaged in mud logging services. The Tribunal directed the exclusion of these companies from the list of comparables.

4. Deduction under Section 10B of the Income Tax Act for R&D Services:
The Tribunal addressed the denial of deduction under Section 10B for R&D services. The Revenue argued that R&D services do not amount to manufacturing or producing articles or things and that the approval for R&D activities was not granted by the Development Commissioner. The Tribunal found that the initial approval by the Development Commissioner and subsequent ratification by the Board of Approval should relate back to the date of initial approval. However, the Tribunal held that the R&D activities and manufacturing activities are distinct and separate, and the assessee should have obtained separate approvals for each. The Tribunal dismissed the assessee's claim for deduction under Section 10B for R&D services.

5. Re-computation of Margin for M/S. Vimpta Labs Ltd. Excluding Bank Charges:
The Tribunal upheld the DRP's direction to exclude bank charges from the operating expenditure for re-computing the margin of M/S. Vimpta Labs Ltd., stating that bank charges are not related to the operations of the company.

6. Levy of Interest under Section 234B:
The Tribunal addressed the assessee's contention regarding the levy of interest under Section 234B. The Tribunal upheld the levy of interest, stating that it is consequential and mandatory under the Act.

7. Reduction of Credit for Taxes Deducted at Source:
The Tribunal addressed the assessee's grievance regarding the reduction of credit for taxes deducted at source. The Tribunal directed the AO to verify the claim and allow the credit as per law.

Conclusion:
The Tribunal partly allowed the appeals of both the Revenue and the assessee, providing specific directions on each issue. The Tribunal's decision emphasized the need for functional comparability in transfer pricing and the importance of obtaining proper approvals for claiming deductions under Section 10B. The Tribunal also upheld the principle of providing working capital adjustments to ensure parity between the assessee and comparables.