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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 ..... , JUDICIAL MEMBER For the Appellant : Shri Chavali Narayan, C.A. For the Respondent : Shri S.K. Ambastha, CIT-I(DR) ORDER N.V. Vasudevan, Judicial Member This is an appeal against the order dated 24.08.2001 of the Deputy Commissioner of Income-tax, Circle 11(1), Bangalore [hereinafter referred to as the Assessing Officer (AO)] passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [ the Act ]. 2. The grounds of appeal raised by the assessee read as follows:- On the facts and circumstances of the case and in law: 1. The order of the learned AO and directions of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law. 2. The learned AO has erred in assessing the total income at ₹ 7,96,29,650 as against returned income of ₹ 16,12,489 computed by the Appellant. 3. The learned AO/Transfer Pricing Officer ('TPO') erred in making an addition of ₹ 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal in accordance with the law. 3. The assessee is a company. It is engaged in the business of providing contract pharmaceuticals Research Development services to Apotex Pharmaceuticals Holdings Inc. [ APHI ], a corporation incorporated under the laws of Canada. The assessee is a wholly owned subsidiary of APHI. The transaction by which the assessee provided contract research services to its Associated Enterprise [ AE ] was an international transaction and the provisions of section 92 of the Act were applicable. The income from such transactions had to be determined having regard to the arms' length price. 4. The typical activities performed by the assessee are listed as under (the following functions are performed by the assessee after Apotex Inc. identifies the product to be developed and before the final product is manufactured and exported by Apotex Inc.) :- Analytical research/testing and formulation 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 formu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 Neeman Medicals International (Asia) Ltd. (-) 13.28% Because of continuous losses 7 Vimta Labs Ltd. 69.37% Accepted as a comparable 8 ADS Diagnostics Ltd. (-) 14.17% Functionally different 9 Pfizer Ltd. (-) 0.03% Functionally dissimilar 10 Transgene Biotek (-) 0.03% Functionally dissimilar Average Margin as per TP Study 15.60% 7. The TPO rejected the comparables given by the assessee for the reasons given in the chart given above (see Column 4 of the Chart). As can be seen from the chart given above, the TPO accepted that Alphageo (India) Ltd. and Vimta Labs Ltd. were comparables, but in respect of other 8 comparables chosen by the assessee, the TPO rejected the same for the reasons given in the chart given above. The TPO on his own selected the following as comparables including th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO in the draft order of assessment. Against the draft assessment order, the assessee filed objections before the DRP. The DRP accepted the view of the TPO and the addition proposed in the draft assessment order. In accordance with the directions of the DRP, the AO passed the fair assessment order making the impugned addition on account of adjustment to ALP suggested by the TPO. Against the addition so made by the TPO, the assessee has filed the present appeal before the Tribunal. 10. We have heard the submissions of the ld. counsel for the assessee and the ld. DR. The ld. DR primarily relied on the order of the TPO. The ld. counsel for the assessee, on the other hand, brought to our notice the decision of the Mumbai Bench of the ITAT in the case of Tevapharm Private Ltd. vide order dated 23.12.2011 in ITA No.6623/Mum/2011 for the A.Y. 2007-08, wherein the Mumbai Bench of the Tribunal in the case of an assessee who was engaged in providing contract research for pharma industries, had considered the comparability of 5 of the comparables chosen by the TPO viz., Engineers India Ltd., IDC India Ltd., Oil Field Instrumentation, Celestial Labs Mindtree Ltd. and have taken th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Neeman Medical International (Asia) Limited - 46.73% Average 9.95% 12. It was submitted that the assessee's operating margin on cost was 13.17% which was more than the arithmetic mean as given in the above table. The ld. counsel therefore submitted that the adjustment made to the ALP should be deleted. It was also submitted that when the assessee makes a specific claim that Neeman Medicals International (Asia) Ltd. should not be rejected as comparable for certain reasons and if the TPO does not give reasons as to why the claim of the assessee cannot be accepted, then it is to be presumed that the TPO has accepted the claim of the assessee. It was thus submitted that for the above reasons, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment 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 plants through monitoring operation of each plant and accumulating feedback on performance. Lumpsum Turnkey projects from concept to commissioning is an area into which EIL has entered in a big way. Further, EIL operates in the refining sector involving in activities such as Motor Spirit Quality Up-gradation projects, Up-gradation of refineries, Pipeline projects. Also, EIL's engineering services are in the nature of modeling the plant buildings, (i.e., refineries, LNG plants and SPM projects) mainly in the nature of architectural activities. The learned D.R. however pointed out that EIL also does Research and Development and in this regard drew our attention to page-183 of the paper book. (Annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 comparable to the functional profile of the assessee and accordingly ought not to be considered a comparable. (Emphasis supplied) 4. Oil Field Instrumentation (India) Limited (Oil field): Oil Field is the largest Mud Logging services provider in India. Oil Field offers Mud Logging services with real time data acquisition and monitoring of data with alarm on critical parameters, data storage option, computerized logs and web enabled transmission. Important parameters measured are Total Depth, Rate of Penetration, Weight on Hook, Heave, Weight on Bit, Rotation per minute, Stand Pipe Press, Stroke per minute, Mud Flow, Conductivity, Total Gas, Chromatographic analysis and H2S etc. Oil Field provides Customized Mud logging solutions for Exploratory, Developmental, Deepwater and CBM drilling locations. Oil Field is engaged in supply of equipment and renderin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ayurvedic portal dedicated to B28 C market with online live consulting with our Ayurvedic consultants. It provides excellent platform for trading of herbal products, with identification of raw herbs, scientific data, market trade data, monographs, policy, laws, good manufacturing practices, DNA finger printing etc. It facilitates contacts with suppliers, manufacturers and dealers of herbal Pharma industry. The activities undertaken Celestial Labs are in the nature of providing host of IT related services and some trading activity which is not comparable to the Assessee. Hence it is clear that it is not comparable to the functional profile of the Company and accordingly ought not to be considered a comparable. (Emphasis supplied) The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard. (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, Industrial Automation, Automotive and Avionics, Storage and Systems etc. The relevant extract has been provided below for ready reference: The diversified focus in the R D Services Business into various verticals such As Communication, Industrial Automation, Automotive and Avionics. Storage and Systems, Semi Conductor, Wireless and Consumer Electronics had shown results in 2006-07 as well As per the website of the company, the services in this segment consist of the following departments: IP Led Services - The department offers research that focuses on creating long term technology innovation and licencable intellectual properties with applicability across industry groups. Semiconductor and Hardware Engineering - The department provides product realization and feasibility services, as welt as high-speed interface design, help ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 4.05 crores and the expenditure before tax was ₹ 4.38 crores. Thus, Neeman Medical International (Asia) Limited is not a consistently loss making company. To apply the filter of consistent loss making company, it is necessary that the loss should be consistent whereas in the case of Neeman Medical International (Asia) Limited, the losses are not consistent as can be seen from the above. We also find that the assessee's application u/s. 154 of the Act, in this regard has not been rejected by the TPO. We are therefore of the view that Neeman Medical International (Asia) Limited which is otherwise functionally comparable, should be considered for the purpose of comparability. 18. As already seen in the earlier part of this order, if the six companies (including IDC India Ltd. and Mindtree Ltd.) is taken as comparables, the operating margins on cost (unadjusted) is 10.22%. The assessee's operating margin on cost is 13.17% which is much above the arithmetic mean of the comparables. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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