9911796707
TMI Blog2013 (1) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... iocon Ltd - two subsidiary of Biocon Ltd. i.e., Clinigene International Ltd. and Syngene International Ltd. The former company cannot be included at all for the preliminary reason that its related party transaction is approximately 38% of its sales, therefore, it cannot be held to be a fit case for comparison of a controlled transaction with an uncontrolled transaction. Insofar as Syngene International Ltd., this company is again 99% subsidiary of Biocon Ltd. and is engaged as a custom research service provider in the drug development process from discovery to supply of development compounds. From annual report, it is seen that the company has two sets of income - one from contract research fees and sale of compounds. However, in the absence of segmental information regarding contract research and manufacturing activities, it is difficult to analyse its main revenue and profit margin from the contract research work. Thus its functional profile is different with that of the assessee company, hence this company is directed to be excluded from the set of comparables. Various diagnostic companies excluded by the TPO viz. Dolphin Medical Services Ltd., Transgene Biotek Ltd. and N.G. Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. The assessee is making the payment for using this e-mail infrastructure facilities for communication between employees of the assessee and outside business partners. Such facilities of secured internet facilities, facilitates the day-to-day business operation of the assessee and does not bring into an existence any enduring benefit or creation of a new asset to the assessee. It is not a capital software expenditure as held by the Assessing Officer even though the same has been classified under the head "software expenditure". Thus,such an expenditure is purely revenue in nature and is allowable under section 37(1) X X X X Extracts X X X X X X X X Extracts X X X X ..... testing and analytical support services. During the year, the assessee had following international transactions with its Associate Enterprise (in short "A.E"). S. No. Nature of Transaction Amount for A.Y. 2007-08(Rs.) 1. Provision of support services 8,99,77,540 2. Provision of support services in connection with research and development 6,32,42,198 3. Payment for network access 12,60,835 4. Payment of seminar/training fees 3,05,007 5. Recovery of expenses 4,10,904 Total:- 15,51,96,484 3. The assessee had prepared separate segment for the transaction of rendering R&D support services and marketing support services. For its R&D support services, the assessee had shown profit margin on operating cost at 20.75%, as per its segmental account. It has benchmarked its international transaction under 'Transactional Net Marginal Method' (in short "TNMM") as most appropriate method. In its Transfer Pricing Study report for comparability analysis, the assessee has initially identified 16 comparable companies wherein the arithmetic mean of the operating profit to the total cost worked out to 11.87% based on three years average. As against this, the assessee's operating pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Transgene Biotek Ltd. Diagnostic 22.68% 6. GVK Biosiences P. Ltd. 26.68% 7. Tog Lifesicences Ltd. 26.06% 8. A D S Diagnostic Ltd. - Diagnostic -24.96% 9. Max Neeman Medical International (Asia) Ltd. -46.73% Arithmetic mean (Arm's length mark-up) 9.94% Assessee's margin 20.75% 6. The DRP, however, after calling for the remand report from the TPO, arrived at final set of six companies wherein the arithmetic mean was arrived at 33.63%. The list of such six companies were as under:- S.no. Name of the Company Profit Level Indicator (%)/OP-TC 1. Choksi Laboratories Ltd. 33.78% 2. Vimta Labs Ltd. 25.26% 3. TCG Lifescience 26.06% 4. Celestial Labs Ltd. 58.35% 5. GVK Bioscience 26.68% 6. Biocon Ltd. (seg.) 31.63% Arithmetic Mean : 33.63% 7. These six comparables were arrived after rejecting diagnostic companies and loss making companies which were selected by the assessee and two new comparable companies were added viz. Celestial Labs Ltd. and Biocon Ltd. (segmental). Thus, after the direction of the DRP, the adjustment in ALP was enhanced to Rs. 68,47,532, as against adjustment made by the TPO at Rs. 34,81,318. 8. Before us, the learned Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionally not comparable to the business of the assessee. After referring to the Pages-428 and 453 of the paper book, which are the part of the annual report of Biocon Ltd., he pointed out that the company is engaged in the manufacture of biotechnology products and further it is organized into two business segments i.e., enzymes and active pharmaceutical ingredients. Regarding segmental selection by the TPO, he submitted that contract research segment is not available in annual report of Biocon Ltd., on stand alone but the same has been identified in the consolidated annual report of Biocon Ltd. In the said consolidated annual report, the contract research segment of Biocon Ltd. relates to two subsidiaries i.e., 'Clinigene International Ltd.' and 'Syngene International Ltd.' and it is a joint venture of Biocon Biopharmaceutical P. Ltd. After referring to Page-595 of the paper book which is consolidated annual report of Biocon Ltd., he pointed out that Biocon Ltd. shows following segment under the segmental information i.e., enzyme, pharma, contract research segment and joint venture segment. Insofar as enzyme & pharma segment is concerned, the same relates to Biocon Ltd. and joint ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our of +/- 5% is given, then no adjustment is called for. Besides raising the aforesaid contentions, the learned Counsel for the assessee submitted that both the authorities i.e., DRP and the TPP has denied the risk adjustment to the assessee on account of difference between risk profile of the comparables and the assessee. He submitted that there is a difference in this profile with the companies dealing with principal to principal basis to its customers and the companies which are captive service provider, set up by its parent company. He pointed out that there are various risk profile like market risk, credit risk services, liability risk, R&D risk, etc., which makes huge differences in the profit margin and most of these risks are not undertaken by the assessee. The companies, who are taking more risk will have more profits, therefore, the same cannot be compared with the assessee. In support of this contentions, he relied upon the following case laws:- • E-Gain Communication (P.) Ltd. v. ITO [2008] 23 SOT 385 (Pune) • Skoda Auto India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 319 (Pune) • Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 18 SOT 76 (Delhi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer. 13. On the issue of risk adjustment, he submitted that this issue has neither been raised before the TPO nor has been decided by the DRP. Therefore, this is a plea taken before the Tribunal for the first time. Even otherwise also, he submitted that in the T.P. report, the assessee has not made any kind of risk adjustment. Therefore, the plea of risk adjustment cannot be given now after the DRP's direction. He submitted that in the case of captive service provider, which are mostly dealing with single customer, there is always a very high risk because once such a customer is lost, the entire business gets affected. The credit risk is also very much in the case of captive service provider. He highlighted that there can be hundreds of risk but the same has to be established and to be quantified by the assessee. Once there could not be any quantification, risk adjustment cannot be allowed. 14. In the rejoinder, regarding Biocon Ltd., the learned Counsel submitted that the said company was initially included because it was taken on the basis of three year data and was rejected by the assessee in the fresh research conducted after TPO's direction. The DRP has resorted to cherry p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By the TPO on the ground that the company is engaged in diagnostic services to which assessee has objected to. 9. N.G. Industries Ltd. 18.10% Rejected By the TPO on the ground that the company is engaged in diagnostic services to which assessee has objected to. 10. Celestial Labs Ltd. 58.35% Accepted New comparable introduced by the TPO on the ground that it is engaged in the research services. This has been objected by the assessee. 11. Biocon Ltd. - segment 31.65% Accepted New comparable introduced by the TPO on the ground that it is engaged in the research services. This has been objected by the assessee. Insofar as the companies listed at serial number 6 and 7 i.e., ADS diagnostic Ltd. and Max Neeman Medical International (Asia) Ltd. are concerned, the assessee has not pressed for the exclusion of the said companies being very heavy loss making companies. 17. The assessee is a fully owned subsidiary of Evonik Degussa GmbH and is providing support services viz. marketing promotion co-ordination and testing and analytical support services for Evonik Group of companies. Thus, the assessee is a kind of captive service provider to its AE. Insofar as the segmental d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roximately 38% of its sales, therefore, it cannot be held to be a fit case for comparison of a controlled transaction with an uncontrolled transaction. On this ground alone, the data of the said company cannot be included for comparability analysis. Insofar as Syngene International Ltd., this company is again 99% subsidiary of Biocon Ltd. and is engaged as a custom research service provider in the drug development process from discovery to supply of development compounds. From annual report, it is seen that the company has two sets of income - one from contract research fees and sale of compounds. However, in the absence of segmental information regarding contract research and manufacturing activities, it is difficult to analyse its main revenue and profit margin from the contract research work. Even otherwise also, apparently it is seen that its functional profile is different with that of the assessee company. Thus, going by the segmental data of Biocon Ltd. with regard to contract research segment, we do not find any merit in the inclusion of the said company by the TPO in the set of comparables for determining the ALP in the case of the assessee. Hence, this company is directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red back to the file of the TPO, who will examine the assessee's contentions on this score and decide the issue afresh in accordance with the law after providing due and effective opportunity of representing the case to the assessee. We order accordingly. Ground no. 1, is thus, partly allowed. 23. In ground no.2, the assessee has challenged the addition of Rs. 9,83,383, on account of notional addition towards interest on the amount receivable from the A.E. 24. The TPO observed that the assessee has given credit of thirty days in the invoices raised against the A.E. However, there has been delay in making the payment by the A.E. beyond the stipulated credit period and on such delayed payment, the assessee has not charged any interest. Accordingly, he computed the interest @ one percent per month for the period of delay beyond thirty days and accordingly he worked out the notional interest to be received by the assessee at Rs. 9,83,383. 25. Objection before the DRP by the assessee was rejected. 26. Learned Counsel Shri Kanchan Kaushal submitted that the assessee is a zero debt company and it does not have any borrowings from external sources, therefore, it is not required to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. In ground no.3, the assessee has challenged the Assessing Officer's action of treating network access charges as capital expenditure. 30. The Assessing Officer on perusal of accounts found that the assessee has debited a sum of Rs. 12,60,835, in the Profit & Loss account under the head 'software expenses'. In response to the show cause notice as to why the said expenditure may not be treated as capital in nature, it was submitted by the assessee that the expenditure have been incurred towards the payment made to the group entities towards e-mail infrastructure and network access charges. Since these expenditures were incurred for the purpose of smooth and efficient running of business, the same is to be treated as revenue in nature. The Assessing Officer rejected the said contention of the assessee on the ground that the assessee has not given the details of all the infrastructure installed. He held that mere nomenclature of 'software expenditure' shows that it relates to only as capital expenditure. 31. Learned Counsel for the assessee submitted before us that the payment has been made for e-mail infrastructure provided by the parent companies for providing communication faci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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