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TMI Blog2012 (11) TMI 1094X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO') erred in making an addition of Rs. 8,41,59,983 to the total income of the Appellant on account of adjustment in the arm's length price of the international transaction entered by the appellant with its associated enterprises. 4. The learned AO/TPO erred in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules'), conducting a fresh economic analysis for the determination of the arm's length price for the impugned international transaction, and holding that the Appellant's international transaction is not at arm's length. 5. The learned AO/TPO erred in law and in facts, in determining the arm's length margin using only financial year 2006-07 data which was not available in the public domain at the time of complying with the transfer pricing documentation requirements. 6. The learned AO/TPO erred in rejecting certain companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). 7. The learned AO/TPO erred, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation development : Analytical research is undertaken screening potential drug candidates, to aid in the development of drug synthesis. The various activities involved include: development of analytical method, innovator/competitor sample analysis, prototype formulation development, product specialization development, etc. * Scale up/Manufacturing of samples : Product of pilot batches for stability and bio-equivalence study under a manufacturing plant environment. * Stability Testing : Long-term studies, where the product is stored at room temperature and humid conditions, to assess expiry date and storage conditions for pharmaceutical products. * Bio-equivalence study : A series of comparative tests designed to establish therapeutical equivalence between test and reference (innovator) products. * Regulatory filings/submissions : Results from bio-equivalence study and stability testing are documented in prescribed manner for dossier preparation and submission to various regulatory agencies to obtain approval. 5. In support of the claim of the assessee that the consideration received by it from its AE was at arms' length, the assessee filed Transfer Pricing ["TP"] stud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined the ALP as follows:- "The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Based on this, the arms length price of the research and development services rendered by the taxpayer is computed as under: Arithmetc mean PLI : 39.49% on cost Less Working Capital Adjustments : 0.41% on cost Arm's length Margin : 39.08% on cost Operating Cost Rs. 32,48,39,378/- Arm's Length Margin 39.08% of the Operating Cost Arm's Length Price (ALP) @139.08% of operating cost Rs. 45,17,86,607/- 6.4.1 Price Received vis-à-vis the Arms Length Price: The price charged by the taxpayer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price (ALP) @139.08% of operating cost Rs. 45,17,86,607/- Price shown in the international transactions Rs. 36,76,26,624/- Shortfall being adjustment u/s 92CA Rs. 8,41,59,983/- The above shortfall of Rs. 8,41,59,983/- is treated as transfer pricing adjustment u/s 92CA." 9. The adjustment suggested by the TPO was adopted by the AO in the draft order of assessment. Against the draft assessment order, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data for the F.Y.2004-05, the income from clinical trial of Neeman Medicals International (Asia) Ltd. for F.Y. 2004-05 was Rs. 4.51 crores with a cost of Rs. 4.38 crores, resulting in a profit before tax of Rs. 16.83 lakhs. The assessee therefore pleaded that Neeman Medicals International (Asia) Ltd. should not be rejected as comparable on the ground that it was consistently making losses. 11. The ld. counsel for the assessee submitted that if the comparables chosen by the TPO are rejected for the reasons given above and even if IDC India Ltd., Mindtree Ltd. (segmental data) and Neeman Medicals International (Asia) Ltd. are considered as comparables, operating margin on cost would be 9.95% as per the following details:- The table below shows that the arithmetic mean margin would be 9.95% on: * Including companies erroneously rejected by the TPO (i.e., Neeman) in the comparables set * Excluding companies erroneously selected by the TPO (i.e., Celestial Labs, Oil Field and EIL) Sl. No. Company name Unadjusted Operating Margins on Cost (%) 1 Alpha Geo India Limited 38.21% 2 Vimta Labs Limited 27.45% 3 IDC India Limited 15.84% 4 Mindtree Limited (Seg) 14.98% 5 N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has also set-up a moder R&D Laboratory to carry out pharmaceutical product development and provide analytical research and stability testing services to its associated enterprises." 15. It can thus be seen from the above that the activities of the assessee in the present case and that of Tevapharm Pvt. Ltd. are identical, i.e., both the companies carried out analytical research and stability testing services to its AEs. In the case of Tevapharm (P.) Ltd. (supra) the TPO had selected Engineering India Ltd., IDC India Ltd., Oil Field Instrumentation, Celestial Labs and Mindtree Ltd., as comparable. The Tribunal examined the comparability of these companies to a company engaged in contract Research & Development and came to the following conclusion:- "1. Engineers India Ltd. (EIL) is engaged in a diverse set of activities viz., providing a full suite of engineering and related technical services for petroleum refineries and other industrial projects. It provides a complete range of services needed to conceptualise, design, engineer and construct projects to meet the specific requirements of its clients. Its association with the clients extends beyond the commissioning of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residential small business and wireless communications. The products and services of IDC consist of the following: - Customised Services: IDC delivers strategic and tactical research, and consulting services to support the development and implementation of business strategies of ICT builders and providers. These projects are customised to address the client's specific business problem. The uniquely qualified, multi-disciplinary experts help you develop business strategies, fine tune product development and pricing, define and implement marketing goals, assess competitive forces, and evaluate joint ventures and acquisitions. - Standard research reports: These research documents cover everything in hardware-PCs, peripherals, servers, software services and key industry issues. The research reports provide market intelligence, forecasts, competitive analysis, vendor profiles, information on customer requirements and buying patterns. The frequency of standard research offerings may be monthly, quarterly, half-yearly and yearly. Based on the above descriptions of activities undertaken by IDC it is clear that IDC engaged in providing market research and survey services which is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Labs as a comparable has been cheery picked by the TPO. Celestial Labs is a diversified company operating in varied fields such as rendering IT services encompassing application development and maintenance, production support, EERP, data warehousing, SAP implementation. Celestial Labs also is into manufacturing and trading of products such as ERP package for manufacturing and has a product 'Sanjivani' which is a portal for live ayurvedic consultation. The company is also engaged in the distribution of Herbal Ayurvedic products. SAP Services: Celestial delivers SAP consulting, SAP implementation and post-SAP implementation services for its customers. Celestial is engaged in implementing SAP for customers from initial planning, design and implementation to maintenance and ongoing optimization. Celestial helps the company align IT Solutions with business strategies. CelSanjivani Products: CelSanjivani is a part of Celestial Labs Ltd., an ISO 9001-2000 company working in this space of Bio-informatics and Gio-Technology. The goal is to become a primary market place for the herbal products providing quality products to the customers and industrial community. This is an Ayurv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software for discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore 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. (emphasis supplied) 6. Mindtree Limited - R&D Segment (mindtree) : Mindtree's R&D segment is engaged in providing domain-specific end-to-end R&D Services to help organizations meet their engineering needs. As per page 11 of the annual report, the segment is engaged in providing R&D Services for various industries like Communication, Industria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les. The action of the TPO in considering the aforesaid companies as comparables of the functions performed by the assessee are therefore held to be not proper and these companies are excluded for the purpose of comparability. 17. Now we will consider the claim of the assessee that Neeman Medical International (Asia) Limited is not a consistently loss making company and therefore it should not have been excluded for comparability purposes on the said ground. In this regard, we find that the TPO does not dispute the fact that Neeman Medical International (Asia) Limited is functionally comparable with that of the assessee. The only reason given by the TPO for excluding the aforesaid company in the list of comparables is that for the F.Y. 2004-05, this company made a loss. It is, however, noticed that from the profit & loss account of this company for the year ended 31.03.2006 which contains the figures of income & expenditure as on 31.03.2005 that income of this assessee was Rs. 4.05 crores and the expenditure before tax was Rs. 4.38 crores. Thus, Neeman Medical International (Asia) Limited is not a consistently loss making company. To apply the filter of consistent loss making comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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