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TMI Blog2010 (4) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... ional 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as less than 95 per cent of the arm s length price determined under section 92CA(3). Ld. CIT(A) after detailed discussion held that the adjustment of Rs. 16,23,251 as made by the Transfer Pricing Officer (TPO) under section 92CA(3) was unjustified. Being aggrieved by the order of ld. CIT(A), the department is in appeal before us on the following ground : "On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred deleting the addition made under section 92CA(2) of the Act amounting to Rs. 16,23,251 by completely ignoring the facts involved and by incorrect application of the case of Aztec Software Technology Services Ltd. v. ACIT [2007] 107 ITD 141." 4. Brief facts pertaining to this issue are that the assessee, a joint venture between Cadila Healthcare Ltd., and Byk Gulden Lomberg GmbH Germany (BGL), both holding 50 per cent of the share capital in the assessee-company, was 100 per cent export oriented unit engaged in the manufacture of pharmaceutical intermediates exclusively for the Byk Gulden. The assessee also provided clinical research services on new molecules emerging from the research pipeline of the Byk Gulden. The Transfer Pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its transmission to the associate entity. The assessee submitted that for carrying out these functions, whatever cost was incurred, the assessee charged mark up of 5 per cent over the same from its associated entity. The total expenditure incurred by the assessee including setting up of infrastructure facilities for providing these activities was as under : Type of expenses Amount (Rs. in lakhs) Personnel expenses 31.92 Travelling expenses 16.32 Office rent and electricity 22.18 Others 31.74 Total 101.16 The TPO examined the copy of the research and development services entered into with its overseas associate entity and from the various terms of the research agreement, reproduced at pages 3 and 4 of the TPO s order, observed that the assessee was functioning as full fledged research organization providing all the necessary services. He noted that the agreement also restrained the assessee from publication, in any form, any information, relating to the research. Further, all data results and inventions generated by the assessee belonged exclusively to the overseas company. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar to it. Since the assessee contended that it was neither comparable to contact research organisation nor to general service provider, the TPO did not accept the assessee s contention. She examined the balance sheet of three clinical trial service providers and also of following technical service providers, the functioning of which were similar to the assessee : ( a )NIS Sparts Ltd. ( b )Vimta Labs Ltd. ( c )Water Power Consultancy Services India Ltd. The TPO concluded as under : "The average operating profit margin of the four comparable companies works out to 18.38 per cent which is calculated as follows : Companies 2001-02 NIS Sparts Ltd. 9.07% Vimta Labs Ltd. 27.04% Water Power Consultancy Services India Ltd. 19.03% Arithmetic mean 18.38% Thus, it is seen that the clinical trial service providers are considered, the margin to be applied is 17.14 per cent. On the other hand, if the general service providers are considered, the margin to be applied is 18.38 per cent. Hence, the lesser of the two operating profit margin, i.e., 17.14 per cent is applied to benchmark inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that the TPO did not follow the guidelines laid down under rule 10B for determining the arm s length price relating to comparable uncontrolled price method. He accordingly, allowed the assessee s appeal. 6. Ld. D.R. submitted that the main issue in the present appeal is whether mark up percentage over cost being 5 per cent is correct or not. He referred to page 158 of PB, wherein, Research and Development Service Agreement is contained and pointed out that as per recital, the assessee was established in order to manufacture pharmaceutical products in India and perform research and development work under agreements to be separately entered into between Byk Gulden and Zydus Byk and Cadila and Zydus Byk. Further, he pointed out that in the recitals, it is also mentioned that the assessee with its R D Division, was entrusted to perform certain research and development service work on a contract research basis on behalf of Byk Gulden (BGL). Thus, he pointed out that the assessee was to perform research and development work for BGL in its R D Division. He referred to article 12 contained at page 160 of BP, in which, it is stated that the subject-matter of agreement is the perfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party. Therefore, there had to be approval, as required by the agreement, of the Steering Committee to this effect. Ld. CIT(A) has not considered this aspect and merely relied on the submissions made by the assessee. 6.1 Ld. D.R. referred to the details of reimbursement by Byk to the assessee contained at pages 152 and 153 of PB and pointed out that as per the break up, the assessee, inter alia, made the payment of the following charges : "1. Peak Flow Meter : Rs. 2,90,505 2. Budesonide inhalers : Rs. 1,76,757 3. Clinical Trails Exps. : Rs. 1,73,445 4. Investigator s Meeting : Rs. 1,13,986 5. Printing cost of CRF s and daily diaries for Cielesonide study Rs. 88,633 6. Ciclesonide trials : Rs. 84,800 7. Printing cost of patient information sheet : Rs. 47,438 8. Laboratory charges : Rs. 11,875" This clearly indicates that the assessee had full-fledged infrastructure facilities for c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r service providers engaged in the skilled industry providing technical services and engineering services. In reply to ld. D.R. s submissions that the assessee had made payment for laboratory charges etc. as reproduced earlier, in the submissions of ld. D.R., he pointed out that payment to hospital was for clinical test of molecules. He pointed out that the assessee neither did any R D work itself nor through Third party but only coordinating between Byk Gulden and hospitals for providing necessary information. He submitted that the assessee was mainly engaged in the manufacturing activities which is evident from the fact that the turnover was Rs. 24.46 crores on account of export intermediates whereas the expenditure of R D was only to the extent of Rs. 1.01 crores. 8. We have considered the rival submissions and perused the record of the case. The assessee-company had been established as a joint venture between Byk Gulden and Cadila Healthcare Ltd. Byk Gulden Lomberg GmbH (BGL) is a German Company and is engaged in the research, development, manufacture and distribution of pharmaceutical product focusing in particular on the treatment of gastro intestinal disorders and respir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd its effectiveness over Indian patients was to be examined by carrying out clinical trial in Phase II Phase III part of the research activity. These clinical trials could be carried out only after obtaining necessary permission from the competent authorities and for that purpose, the assessee was entrusted with the job. Thus, the major part of the research activity was Phase-I in which molecules per se was generated not Phase II and Phase III, where only clinical trials were to be carried out. 9. Having considered the functional aspects relevant to it, we have to examine whether the comparable cases, as selected by TPO, were substantially similar to the assessee s function or not. SIRO Clinpharm Pvt. Ltd. was engaged in conducting clinical trial services. Pages 259 to 267 of PB contain annual Report of SIRO Clinpharm Pvt. Ltd. The income from research activity carried out by the said company for the financial year 2001-02 was at Rs. 1,47,30,035 and as per the fixed asset schedule, it had plant and machinery including laboratory equipments aggregating to Rs. 94,50,182 as on 31-3-2002. Thus, it was an organization which was mainly doing the clinical research activity and, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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