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TMI Blog2014 (10) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... a manufacturing process for pharmaceuticals and biopharmaceuticals. It also provides consulting and customer support services for high value applications. Return of income for the year under consideration was filed by it on 31.10.2007 declaring total income of Rs. 35,14,99,517. During the year under consideration, the assessee had entered into the following international transactions with its Associated Enterprises (AE). International Transactions (as mentioned in 92CE report) Purchase of raw materials & components Rs.27,25,69,199 Purchase of spares Rs.12,75,88,068 Sale of filtration systems Rs.25,90,68,493 Receipt of Commission, Consultancy & Service charges Rs. 9,38,77,028 Income of R&D Division Rs.66,16,525 Income from Software Division Rs.54,68,198 Purchase of lab equipment Rs.4,83,607 4. During the course of assessment proceedings, reference u/s. 92CA was made by the AO to the TPO to determine the arm's length price (ALP) of the above mentioned transactions. In the TP study report submitted by the assessee, all the international transactions were aggregated by the assessee at the enterprise level and TP analysis was made by applying the Transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated Service income > Rs. 25 cr. were excluded. - Companies whose R&D or related Service revenues are less than 75% of the total operating revenues were excluded. - Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded. - Companies who have less than 25% of the sales as export sales were excluded. - Companies who have persistent losses for the period under consideration were excluded. -Companies having different financial year ending (i.e. not March 31, 2006) or data of the company does not fall within 12 month period i.e. 01-04-2005 to 31-03-2006, were rejected. -Companies that are functionally different from that of taxpayer were excluded. 8. Applying the above filters/criteria, the following four comparables were selected by the TPO:- 1. Agile Electric Technologies Pvt. Ltd. 2. IDC (India) Ltd. 3. Celestial Labs Ltd. 4. Oil Field Instrumentation (India) Ltd. 9. When the above 4 comparables proposed by the TPO were confronted to the assessee, the latter raised its objections against each of the said comparables. After taking into consideration the objections raised by the assessee, the TPO excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy, telecommunication and consumer technology markets and therefore the Company is functionally not comparable with the appellant. It is further submitted that the appellant Company is engaged in scientific research which cannot be compared with the market research and market analysis. To support the contention the appellant relied on the decision of the Honourable ITAT Mumbai, in the case of Tevapharm Pvt Ltd v. Addl.CIT ( ITA No.6623/Mum/2011) and therefore it is submitted that the above Company should be excluded from the comparables. Having heard the contention of the appellant, on perusal of Para 3 of the order the Honourable ITAT Mumbai, in the case of Tevapharm Pvt Ltd. (supra), it is noticed that the Honourable ITAT distinguished the function of the above company with R&D services as under: "IDC (India) Limited (IDC): IDC primarily undertakes research and survey services for products. IDC research documents cover areas like Enterprise Management Applications, Broadband, Internet and eBusiness, Mobile usage, IT Service Exports and Continuous Market Review of Computing and Peripheral Products. Such research reports provide market forecasts, competitive analyses, vendor pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research & development services rendered by it and therefore, the above Company is not functionally comparable with the appellant. To support the arguments the appellant relied on the decision of the Honourable ITAT Mumbai in the case of M/s. Tevapharm Pvt Ltd (supra). Having heard the contention of the appellant, and on perusal of the finding given by the Transfer Pricing Officer, it is an undisputed fact that the above Company is predominantly engaged in mud logging services which have been treated as comparable to the R&D services carried out by the appellant. The Honourable ITAT Mumbai while deciding the above comparable in the decision quoted (supra) held that "the extracts of the functional profile of Oil Field from its website as given above and the information in the annual report of Oil Field on the nature of assets employed such as outer shell of mud logging units, sensors and other instruments clearly demonstrate the disparity between Oil Field's and Assessee operations. As discussed earlier the functional profile of assessee is in nature of providing - Contract Research and testing services. Oil field does not carry out any of these stipulated activities and accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot be considered as comparable functionally with that of the assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard". The facts of the case are similar to the decision of the Honourable ITAT Mumbai and therefore the Assessing Officer is directed to exclude the above Company from the comparables." 13. After having held that neither the 2 entities selected by the assessee nor the 3 entities selected by the TPO were actually comparable, the ld. CIT(A) found it appropriate to accept the assessee's alternative contention that the arm's length price of the relevant international transactions in its case may be computed on the basis of following 8 comparables selected by the Mumbai Bench of the Tribunal in the case of Tevapharm (P) Ltd. v. Addl. CIT (supra) :- Sl.No. Name of the Company Margin % 1. M/s. Vimta Labs Limited 27.44% 2. M/s. Alhpageo (India) Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the proviso to Rule 10B(4). 5. The Learned CIT(A) is not justified in ignoring the comparable companies chosen by the Appellant and directing the Respondent to blindly adopt the comparables approved in another case reported Tevapharm (P.) Ltd. v. Addl. CIT (2012) 50 SOT 150 (Mum-ITAT). 6. The Learned CIT(A) is not justified in rejecting the contention of the Appellant as regards adjustment towards the risk and working capital by adducing untenable reasons. 7. The lower income tax authorities are not justified in treating foreign-exchange gain/loss and the provisions for bad debts as non-operating income. 8. The Learned CIT(A) is not justified in rejecting the claim of the Appellant as regards the bandwidth of +/-5% under Section 92C(3) as it then existed." 18. At the time of hearing before us, the ld. counsel for the assessee has not pressed grounds No.V(6) to V(8) raised in the appeal of the assessee. Accordingly these grounds are dismissed as not pressed. 19. As regards the other grounds raised in the appeal of the assessee as well as in the appeal of the revenue on the transfer pricing issue, which are mainly relating to inclusion/exclusion of the entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) in page 13 of his impugned order that this difference in the functions performed by the said three entities of the assessee was accepted even by the TPO in para 5.5.2 of his order. 21. Keeping in view all the observations/findings recorded by the ld. CIT(A), which have remained uncontroverted/unrebutted by the representatives of both the sides at the time of hearing before us, we find no infirmity in the impugned order of the ld. CIT(A) rejecting both the comparables selected by the assessee as well as the three comparables selected by the TPO. We also find it appropriate on the part of the ld. CIT(A) to have accepted the alternative contention of the assessee that the arm's length price in the facts and circumstances of the case could appropriately be determined on the basis of eight comparables selected by the Tribunal in the case of Tevapharm (P.) Ltd. (supra), which involved similar facts and circumstances. 22. Although the ld. DR has contended before us that Tevapharm (P.) Ltd. is not functionally similar to the assessee company, we are unable to accept his contention in the absence of anything brought on record to show any functional difference between Tevapharm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the remuneration was paid only to one out of five directors of the company. This fact is irrelevant as far as the allocation of expenses is concerned. Whatever remuneration was debited should be allocated among the units so that true and correct profits of both the undertakings are arrived. (d) The assessee has replied that allocation would be negligible because of the low sales of EOU when compared to the total sales of the company. The company has stated that the EOU is run by minimum number of employees with minimum risks. This submission is factually wrong. The EOU made substantial turn over during the year as it made 23% of the total turnover of the company. Further the EOU made huge profit and the assessee had claimed huge deductions of Rs. 5,11,78,238 u/s 10B of IT Act. Hence allocation had to be done to arrive at true and correct profits among the divisions as mentioned above." 26. For the reasons given above, the AO held that the director's remuneration was liable to be allocated among the domestic unit and EOU in the ratio of turnover i.e., 77:23. Accordingly, the director's remuneration to the extent of Rs. 44,47,467 was allocated by him to the EOU u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence brought on record to support and substantiate this contention. As rightly contended by the ld. DR, the involvement of the only working director in the affairs of the EOU in the facts and circumstances of the case was inevitable, especially when both its domestic unit and EOU were managed by the assessee company. As regards the contention of the ld. counsel for the assessee that the working prepared and furnished by the assessee while computing the segmental details without allocation of the director's remuneration having been accepted by the TPO, the AO was not justified in taking a different stand while computing the profit of the EOU while computing deduction u/s. 10B; we are unable to accept the same for the reasons more than one. Firstly, the working furnished by the assessee giving segmental details, was for specific purpose and it was prepared by the assessee and appreciated by the TPO in the context of TP analysis. The issue under consideration relating to computation of deduction permissible u/s. 10B, however is entirely different. Secondly, the segmental details were furnished by the assessee for the enterprise as a whole and there was no bifurcation made on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenditure incurred by the assessee on redesigning and remodeling of its building by replacing the floors, relocating the walls and redesigning the entire layout of the building was capital in nature. 33. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that although a similar expenditure incurred by the assessee in A.Y. 2004-05 on civil works was held to be capital expenditure by the Tribunal vide its order passed in ITA No.738/Bang/2010, the nature of expenditure incurred in A.Y. 2004-05 was specifically found to be that of redesigning and remodeling of the building, maintaining of internal roads, etc. The exact nature of expenditure during the year under consideration, however, is not clear either from the order of the AO or from the order of the CIT(Appeals). Even the details furnished by the assessee in the paperbook are not sufficient to ascertain the exact nature of expenditure incurred by the assessee on civil works so as to decide whether the same are capital in nature or revenue. We therefore find it fair and appropriate and in the interest of justice to restore this issue to the file of the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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