2021 (10) TMI 908 - AT - Income Tax

Transfer pricing adjustments on account of Location Savings and Imputation of mark-up on pass through costs - Comparable selection - HELD THAT - As decided in own case 2017 (6) TMI 1357 - ITAT BANGALORE we find that the orders of the TPO and DRP are not sustainable as suffer from serious defect of considering the location saving as basis of adjustment - computation of the location saving by the TPO is purely based on some articles and not on the basis of actual cost in the US in comparison to India - price/cost as computed by the TPO is not based on actual data but on presumption of accepting the article on the subject as the comparable cost. Since the functional comparability of the companies selected by the assessee has not been examined by the TPO as well as no steps were taken to find out the other comparables of the assessee for determination of ALP therefore, the issue of determination of ALP and consequential adjustment, if any, is required to be examined and adjudication afresh at the level of TPO/A.O. Needless to say that the assessee is receiving its price in foreign currency therefore the comparable uncontrolled price shall also have at least 75% of their revenue in foreign currency otherwise the price received from domestic market may not be acceptable when the assessee is receiving its 100% revenue in foreign exchange. Accordingly, the matter is set aside to the record of the TPO/A.O. for adjudication of the same afresh. Adjustment on account of recovery of expenses (investigator's fee) from AE - TPO alleged that the assessee is deploying considerable resources and time to in finding and appointing investigators and therefore. should have charged a mark-up on the costs incurred - HELD THAT - In this case, the assessee coordinated between the individual investigator and Paraxel International GmbH Germany. The contention of the assessee is that assessee has not undertaken any risk and all risk was taken over by Paraxel International GmbH Germany and relied on the Addendum dated 19.9.2007 - assessee acted as coordinator and facilitator in selecting the investigator so as to conduct clinical trial. Selection of the investigator demonstrates that clinical trial is important task in the whole work undertaken by the assessee. The assessee invested considerable time and resources in this. The plea of assessee is that assessee has not received any amount as fee for doing this coordinator and facilitator job. In our opinion, this is an inter-group services provided by the assessee to its parent company and assessee must charge some fee as it would have, had the services been provided to a third party. Contention of the ld. AR is that remuneration for these services has already been included in the provision of clinical trial services and no separate fee is charged for coordinating and facilitating with the investigators - As per OECD guidelines, this is an intra-group services provided by the assessee to its parent company for which the assessee is entitled to remuneration. The parent company derived economic or commercial benefit from the services offered by the assessee company for which the assessee has to be suitably remunerated. More so, the assessee would not have rendered this kind of services to unrelated party.The assessee only 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 - as 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. In the present case, in the immediate earlier AY 2012-13, the assessee has shown investigator payment with mark-up and in this year on the basis of Addendum entered by the parties as discussed earlier, made the investigator payment as pass through costs and claimed as reimbursement without any profit element, which is against the agreed norms in the earlier years which cannot be effected and accepted as genuine agreement. Accordingly, we are of the opinion that this intra-group services rendered by the assessee to the parent company cannot be considered as reimbursement of expenses or pass through costs. It is separate services in itself for which the assessee needs to determine the ALP which the assessee failed to do so. The assessee has provided services for which the TPO is justified in marking up the services so as to make TP adjustment. The various case laws relied on by the ld. AR are different on its own facts, which cannot be applied to the facts of the present case. Hence the TPO/AO correctly ascertained the ALP of this transaction and made adjustment on this count. The same is sustained. This ground of the assessee is dismissed.

Issues Involved:

1. Transfer Pricing (TP) Adjustment towards Location Savings.
2. Treatment of Alleged Location Savings as an International Transaction.
3. Methodology for Determining Arm's Length Price (ALP) under Section 92C(1).
4. Presumption of Location Savings Advantage Accruing to the Appellant.
5. Consideration of Location Savings in Comparable Companies' Margins.
6. Computation Errors in Adjustment on Account of Location Savings.
7. Adjustment on Account of Recovery of Expenses (Investigator's Fee) from Associated Enterprises (AEs).
8. Application of Mark-up on Investigator Fees Recovered.

Issue-wise Detailed Analysis:

1. Transfer Pricing (TP) Adjustment towards Location Savings:

The TP adjustment towards location savings amounting to ?21,69,17,701 was challenged. The TPO alleged that conducting clinical trials in India resulted in location savings for AEs due to lower regulatory and investigatory costs compared to developed countries. The TPO relied on a non-contemporaneous article to compute location savings and proposed an adjustment by splitting the alleged savings between the AE and the appellant.

2. Treatment of Alleged Location Savings as an International Transaction:

The appellant argued that the alleged location savings should not be treated as an international transaction under Section 92B of the Act. The Tribunal previously held that location savings are relevant for cross-border transactions but should not be the sole basis for determining ALP. The Tribunal emphasized that location savings should be considered only for examining and investigating transactions, not for direct ALP adjustments.

3. Methodology for Determining Arm's Length Price (ALP) under Section 92C(1):

The appellant contended that the TPO did not follow any prescribed method under Section 92C(1) for determining ALP. The Tribunal concurred, noting that the TPO's computation was based on presumptions and non-verified articles rather than actual data. The Tribunal directed the TPO/AO to re-examine and adjudicate the issue afresh using proper comparability analysis and reliable data.

4. Presumption of Location Savings Advantage Accruing to the Appellant:

The appellant argued that the TPO and DRP erred in presuming that location savings advantage accrues to the appellant. The Tribunal noted that location savings are available to all parties in a competitive market and should not be presumed to confer unique advantages to the appellant. The Tribunal directed the TPO/AO to re-evaluate the functional comparability of companies selected by the appellant.

5. Consideration of Location Savings in Comparable Companies' Margins:

The appellant argued that location savings, if any, are already embedded in the margins of comparable companies considered for benchmarking. The Tribunal agreed, stating that if local comparables are available, the benefits of location savings are captured in the ALP determined. The Tribunal directed the TPO/AO to consider this aspect while re-evaluating the issue.

6. Computation Errors in Adjustment on Account of Location Savings:

The appellant highlighted several computation errors by the TPO, including reliance on unverified information, non-contemporaneous data, and incorrect use of the Profit Split Method. The Tribunal found merit in these arguments and directed the TPO/AO to rectify these errors during re-adjudication.

7. Adjustment on Account of Recovery of Expenses (Investigator's Fee) from Associated Enterprises (AEs):

The TPO made an adjustment of ?5,45,30,838 on account of recovery of expenses (investigator's fee) from AEs, applying a mark-up of 15.27%. The appellant argued that these were pass-through costs reimbursed on a cost-to-cost basis without any profit element. The Tribunal noted that the appellant acted as a coordinator and facilitator, and the entire risk of clinical trials was borne by the AEs and third-party investigators.

8. Application of Mark-up on Investigator Fees Recovered:

The Tribunal observed that the appellant received a mark-up on its internal costs for coordination and facilitation activities. However, the TPO's imposition of a mark-up on pass-through costs was deemed inappropriate. The Tribunal directed the TPO/AO to exclude pass-through costs from the mark-up computation and consider only the value-added costs incurred by the appellant.

Conclusion:

The Tribunal set aside the orders of the lower authorities and remitted the issues to the TPO/AO for fresh adjudication, directing them to follow the Tribunal's observations and rectify the identified errors. The appeal was partly allowed for statistical purposes.

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