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TMI Blog2013 (2) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... ; the reference made by the AO to the Transfer Pricing Officer (TPO) u/s 92CA of the Income-tax Act for the determination of the ALP by rejecting the TP study made by the assessee; (b) the order of the TPO holding the assessee to be a Service Provider, working on Research and Development and not Software Development as claimed by the assessee; and (c) rejecting the assessee's comparables and conducting his own study and selection of comparables. 4. For the assessment year 2005-06, grounds No.1 and 2 are also against the rejection of TP study conducted by the assessee and upholding the transfer price study conducted by the Transfer Pricing Officer. 5. For the assessment year 2006-07, the grounds of appeal Nos1 and 2 are against the order of the DRP in upholding the draft assessment order in spite of it being passed - (1) in violation of principles of natural justice; (2) not fulfilling the conditions for making a reference u/s 92CA of the Income-tax Act; and (3) failing to demonstrate that the assessee's motive was to shift the profit outside India and in upholding the TPO's order in making the TP adjustment. 6. At the time of hearing, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp;(i) Mechanical Systems (j) Polymer and other material sciences (k) Or any other areas mutually agreed. 9. As per the services agreement dated 1.12.2003, it has to provide the following services to the party making such request - * Identify business opportunities for overseas customers business (of AE) for sourcing research & development/other services from GEITC (the assessee) in the following areas - (a) Controls & Software (b) Propulsion Rotating Equipment (c) Tier II engine (d) Diesel Engine COE (e) Loco Modernization & Requisition Systems (f) Drafting (g) Cooling systems (h) New Product Introduction (i) Remote Monitoring & Diagnostics (j) Cores Engineering (k) E-Engg-Analysis (l) Or any other areas to be mutually agreed. 10. From the perusal of above agreements, the TPO observed that the tax payer is doing the research and development activities and the end result is submitted through electronic media (via internet/networking) which is reported by the assessee as export of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investments including software tools are committed. 6. The general process employed in carrying out the said research and engineering services using computer aided technology includes - (a) Study the existing product capabilities/engineering/chemical/manufacturing process; understand the requirement for enhanced features/improved processes and work on modeling using software tools and deliver the desired results in the form of revised engineering design/drawings, analysis reports in the form of customized electronic data; (b) Collect existing data for the above purpose of analysis and building engineering models using simulation techniques and high-end software tools; (c) Primary and detailed designing using computer aided design tools; and (d) Testing the design at the actual environment. 11. In order to verify the exact nature of assessee's activities, the TPO also searched the web site of the tax payer and observed that the assessee is basically carrying out the research and development and engineering analysis with the aid of sophisticated labs/software in various fields of engineering. He, therefore, rejected the assessee's TP study ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the assessee claimed to be working, he held that the risk of success and failure is common to any R & D undertaking and, therefore, there is no difference in the risk level of the assessee and the comparables chosen by the TPO. As regards the assessee's contention that the assessee should be considered as ITES company as it is so treated by NASSCOM, he held that the comparable companies are to be identified on the basis of the functions carried out by the assessee and not on the basis of the category considered by NASSCOM. 14. Pursuant to the TPO's direction, the assessee also had done a fresh search with an emphasis primarily on the functions performed i.e IT enabled engineering services and research and development. It also considered the contemporaneously available data in the data base. On the basis of the said search, the assessee arrived at 10 comparables which are functionally similar to that of the tax payer and are in the software industry. The TPO however held that the assessee is again looking at only IT and ITES companies i.e who are predominately rendering software services and ITES, BPO services who are functionally dissimilar to that of the tax payer. However, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He submitted that the TPO, has, without any basis completely disregarded the detailed explanation provided by the assessee as being involved in Software Development and not as 'Research and Development'. According to the learned counsel for the assessee, the assessee is a software development company and, therefore, companies which are involved in the business of software development only are to be considered as comparables for the purposes of computing the ALP. 17. The learned DR however submitted that the assessee is engaged in contract research and development activity and derives income from foreign principals/associated enterprises and merely because the result of such research and development is delivered to its AE's in customized electronic data, it would not make the nature of services as software development. Thus according to him, the TPO has rightly treated the assessee as engaged in contract research and development, technical engineering services and accordingly selected the relevant comparables. 18. So the primary and basic question before us is to determine the nature of assessee's activities as it would determine the roadmap for making the search for and adoptin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is in violation of principles of natural justice. He submitted that the assessee has raised its objections before the DRP which only confirmed the order of the AO holding that assessee's objection to these comparables were considered by the TPO in the earlier assessment years. According to the ld. counsel for the assessee, Vimta labs and Celestial Labs are not at all comparable to the assessee for the following reasons : (1) They are diversified companies engaged in dissimilar activities like earning income from franchisee model and products. (2) No separate segment reporting is available in their annual report and even otherwise also, their margins cannot be adjusted to make them comparable with the assessee. (3) The assessee is working in risk free atmosphere, whereas Vimta Labs and Celestial Labs are facing various risks that cannot be quantified or adjusted. 21. The learned counsel for the assessee has drawn our attention to the methods prescribed for determining the ALP in Rule 10B of IT Rules and submitted that as per the TPO, TNMM method is most appropriate method. He submitted that as provided under rule 10B(e) of Income-tax Rules, for computing the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side effects associated with increasing doses, and, if possible, to gain early evidence on their effectiveness. (2) Vimta Labs maintains a database of 20,000 healthy male and female volunteers to conduct clinical trials. (3) It has so far conducted over 600 bio-availability and bioequivalence studies and clinical trials involving more than 120 drugs. (4) It has a state of the art barrier maintained animal facility designed to conduct experiments using rodents, rabbits and beagle dogs. (5) It has entered the scheme of Clinical reference laboratory services in 1999 and offers more than 600 laboratory tests for clinical programs and also provides diagnostic services such as lipid profile, diabetes, kidney, anemia, HIV and hepatitis tests etc., (6) It works on franchisee model; (7) It focuses on analytical studies to check water and food quality, and on testing for effectiveness and drugs to meet the requirements under the various standard organization, such as Bureau of Indian Standards , FDA etc. and other statutory agencies. (8) The services provided by Vimta Labs comprises of site assessments, environmental audits, environmental impa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onally different from the assessee because of the following features : (a) Celestial Labs is into development and manufacture and distribution of bio and IT products; (b) Development and manufacture of molecules and enzymes ; (c) Clinical research and trial business; (d) On line portal for live ayurvedic consultation and trading of herbal products - Sanjivini; (e) Contract manufacturing of pharmaceutical products such as creams, lotions, tablets, syrups and capsules.; (f) SAP implementation services; and (g) It has already been licenced 55 herbal products for manufacturing. Some of the products include Bioliv syrup, Cel-digest syrup etc. 26. He submitted that it is evident from the annual report of Celestial Labs for the assessment year 2006-07, that it is a product driven company. He submitted that Mumbai bench of this Tribunal in the case of Tevapharm (P.) Ltd. v. Addl. CIT [2012] 50 SOT 150 (Mum.) (URO) has considered the fact that the activities undertaken by the Celestial Labs are in the nature of providing host of IT related services and some trading activity which is not comparable to the assessee therein and, therefore, ough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble, he submitted that the assessee is into contract 'Research and Development' as in the case of Vimta and Celestial Labs and, therefore, they are comparable companies. 31. As regards the reliance by the learned counsel for the assessee on the decision of the Tribunal in the case of Tevapharm (P.) Ltd. (cited Supra) for exclusion of Celestial Labs from the list of comparables, the ld. DR submitted that the same is distinguishable on facts as in the said case it was directed to be excluded on the ground that Tevapharm was a pharmaceutical company whereas Celestial was dealing with IT related services where as in the case before us, the assessee was also dealing with IT related services as well as engineering services. Hence, according to the DR, even applying the decision of the Tribunal in the case of Tevapharma, Celestial is comparable to the assessee on the basis of its functions. 32. Having heard both the parties and having considered their rival contentions and the material on record, we find that there is no dispute as regards the most appropriate method to be adopted for computing the ALP. The TNMM has been considered as the most appropriate method. We have already held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate that under TNMM only broad functional and product comparability is to be considered as net margins are less influenced by differences in products and functions. 34. As per the principles of comparability, controlled and uncontrolled transactions are regarded as comparable if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. However, in reality, two transactions are seldom completely alike. To be comparable does not mean that the two transactions are necessarily identical, but that either none of the differences between them could materially affect the arm's length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. It is important to note that the type and attributes of the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price ("CUP") method is used for arms' length pricing; the resale price, cost-plus methods generally require a lesser degree of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial company is only partly true. As the TPO has mentioned, it is into multi-disciplinary research services. It provides contract and research testing services in other areas like analytical testing and environment monitoring and impact assessment. While the assessee has totally ignored these activities of the company, the TPO has not examined as to whether these services are significant enough to consider the activity of this company as 'technical consultancy & engineering services and R & D. The contention that the company has significant investments in both tangible and intangible assets does not, by itself, make the company dissimilar. After all as noted by the TPO, even the R&D centre of the assessee is reported to have filed for more than 185 patents and has been granted quite a few of them. Unless it is analyzed as to how these intangible assets are valued, it may not be appropriate to conclude that the company is dissimilar in this regard. (iii) Also, this company fails the filter adopted by the TPO, viz., employee cost less than 25%. As the employee cost for the company is less than 25% in all the three years under consideration, it should be excluded from the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted or whether such risks are not amenable for adjustment at all, as claimed by the assessee. In view of all the above, the issue of comparability of Vimta Labs is remanded back to the AO/TPO with a direction that the comparability may be analyzed in the light of the observations made above. 37. Now let us examine the correctness or otherwise of the comparables adopted by the TPO for all the three assessment years. Though the assessee has not specifically advanced arguments for exclusion of the comparables raised in its grounds of appeal for the assessment year 2004-05 and 2005-06, it is necessary to consider the appropriateness of the action of the TPO for the said years also as the detailed reasoning for the said selection/ adoption are mentioned therein. For the purposes of convenience and ease of comparison the details of the final list of comparables adopted by the TPO and their margins for the three assessment years are tabulated hereunder : 2004-05 2005-06 2006-07 (1) Alphangeo India Ltd. 56.25 26.73 -- (2) Vimta Labs Ltd., 61.7 75.93 57.80 (3) Lurgi Labs Ltd., 18.9 -6.90 -- (4) Celestial Labs Ltd., -- -- 48.15 (5) Geometric Ltd., 29.39 20.34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails, it can be seen that the assessee is not adopting a uniform approach for objecting to the comparables proposed by the TPO. As regards Lugri Labs, it appeals against its adoption in A.Y 2004-05 while it accepts the decision of TPO for A.Y 2005-06. As regards Vimta Labs, it appeals against its adoption in A.Ys 2004-05, 2005-06, & 2006-07 while it does not even object to the proposal of TPO for its adoption in A.Y 2008-09. Such cherry picking by the assessee cannot be allowed. Uniformity and consistently in approach is essential for both the Revenue as well as the assessee alike unless the circumstances warrant otherwise. The objections of the assessee to Lurgi Labs and Vimta Labs was that they are functionally different. There is evidently no change in the functional activities of Lurgi in A.Y 2004-05 and 2005-06. Likewise Vimta Labs also has been in Pharmaceutical industry doing research and development in all the relevant AYs. In fact, it is the case of the assessee that from A.Y 2006-07, it has been reclassified as 'Drugs, medicines and allied products' and hence is not comparable at all. Then it is not clear as to how it can be adopted as a comparable for A.Y 2008-09 when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the 10A deduction/exemption should be allowed from its source i.e 10A unit itself and accordingly the said deduction/exemption should be allowed at the time of calculation of business income itself. Thus according to him, 10A profit will not at all enter the computation of business income and the same should be allowed before arriving at the gross total income and before setting off of losses, whether 10A losses or non 10A losses. He submitted that in the case of the assessee, if sec. 10A deduction/exemption is allowed at source itself, then there will be no business profit left against which the loss of non-10A units and brought forward losses of 10A units can be set off and, therefore, the said losses will be eligible to be carried forward to the subsequent years. In support of its above contentions, the assessee has placed reliance upon the following decisions : (1) CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 (2) Hindustan Uniliver Ltd. v. Dy. CIT [2010] 325 ITR 102 (3) CIT v. TEI Technologies [IT Appeal No.4025/2012 (Delhi, HC)] 48. The learned DR, however supported the orders of the authorities below. 49. Having heard both the parties and having cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch and Development activity, the assessee has also raised ground of appeal No.4 against the order of the Assessing Officer making TP adjustment to the ALP on account of interest on external commercial borrowings. 54. The brief facts of the case are that the assessee had obtained two commercial borrowings from its AE's (GE India & Pacific Mauritius Ltd.) These were obtained under long term loan agreements entered in 2001 and interest rates of such ECBs were fixed @ 7.5% and 8.49% which was determined based on business and economic circumstances at the time of entering into loan agreement and these ECBs were not renegotiated on a year to year basis. According to the assessee, the interest rates and the loan agreements were in accordance with ECB guidelines issued by the Government of India. The AO made a reference to the TPO u/s 92CA of the Income-tax Act for determination of the ALP of interest on ECB. The TPO made the adjustments to the ALP on account of interest on ECB and the AO proposed the addition in the draft assessment order. The assessee raised objections before the DRP. DRP, however, confirmed the draft assessment order and the assessee is in second appeal before us. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate is depending upon the credit rating of the borrowings and also on the prices and economic conditions prevailing at the time of advancing the loan. The assessee has obtained the loans in the year 2001 and the issue has been considered by the TPO for the assessment years 2004-05 and 2005-06 and also for the assessment year 2008-09. After considering the assessee's submissions, the TPO accepted the rate of interest fixed in the loan agreements. In view of rules of uniformity and consistency we are of the opinion that the same approach is to be adopted this year also. 58. In view of the above, as the Assessing Officer for the assessment year 2002-03 onwards up to the assessment year 2008-09 except for the assessment year 2006-07 has accepted the rate of interest as fixed in the loan agreement, we hold that the TP adjustment on account of the interest on external commercial borrowings for this assessment year is not called for. 59. In the result, the assessee's ground of appeal No.4 for the assessment year 2006-07 is allowed. 60. In addition to the above, the assessee has also raised ground No.5 against exclusions/deduction of telecommunication expenses of Rs. 3,25,98,610/- fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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