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TMI Blog2015 (11) TMI 1697X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Aliasger Rampurwala and Ms. Chandani Shah Revenue : Shri N.K. Chand ORDER PER SAKTIJIT DEY, J.M. These cross appeals are against the order dated 30th January 2008, passed by the learned Commissioner (Appeals)-32, Mumbai, for the assessment year 2003-04. 2. We first proceed to dispose of assessee s appeal in ITA no.3729/Mum./2008, for the assessment year 2003 04. In this appeal, the assessee in total has raised nine grounds as per the concise grounds of appeal. 3. Ground no.1, is general in nature, hence, do not require any specific adjudication. 4. Regarding grounds no.3(b), 3(c)(ii), 3(c)(iii) and 6, the learned Counsel for the assessee, at the outset, submitted that he does not wish to press these grounds of appeal. Hence, in view of the submissions of the learned Counsel for the assessee, these grounds are dismissed as not pressed . 5. As far as grounds no.2 and 3(a) are concerned, they relate to addition on account of transfer pricing adjustment with regard to the international transactions between the assessee and its A.E. towards provisions of clinical study management and monitoring support services. 6. Briefly stated the facts relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Group India Ltd. ( ) 1.10% 2. Techcons Ltd. 2.55% 3. Vimta Labs Ltd. 26.08% 4. Choksi Laboratories Ltd. 35.32% 5. Syngene International Pvt. Ltd. 61.31% 6. SIRO Clinpham Pvt. Ltd. 26.77% Arithmetic Mean 25.15% 8. By applying the aforesaid arithmetic mean of the comparable companies to the total cost incurred by the assessee, ALP for the services rendered was determined at ₹ 26,60,49,000, as a result of which there was an upward adjustment to the ALP for an amount of ₹ 3,53,26,000. In terms with the order passed by the Transfer Pricing Officer, the Assessing Officer completed the assessment by incorporating the transfer pricing adjustment recommended by him. 9. Before the first appellate authority, the assessee challenged both selection as well as rejection of comparables by the Transfer Pricing Officer. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee further submitted, the Transfer Pricing Officer himself being satisfied that Vimta Labs Ltd. is engaged in diversified activities and functionally dissimilar to the assessee excluded it as a comparable in assessment year 2005-06. A copy of the order passed by the Transfer Pricing Officer was also placed on record. He, therefore, submitted that these three companies are required to be excluded from list of comparables. 13. The learned Departmental Representative strongly objecting to the contention of assessee s counsel submitted, SIRO Clinpharm Pvt. Ltd. was held as a comparable by the Tribunal in assessee s own case for the assessment year 2002-03 in ITA no.3098/Mum./2006 dated 8th March 2013. In this context, he drew our attention to Para-17 of the order. As far as Choksi Ltd. and Vimta Laboratory Ltd. are concerned, the learned Departmental Representative submitted that both these companies were part of assessee s own transfer pricing study, hence the contention of the assessee to exclude them should not be accepted. The learned Departmental Representative referring to the clinical support services agreement between the assessee and the A.E. submitted, the readin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is out sourcing it. The learned Counsel for the assessee submitted, as the Tribunal has itself recorded the finding that business model of SIRO Clinpharm Pvt. Ltd. is different from the assessee, the principle laid down by the Hon'ble Delhi High Court would apply. 15. As far as the allegation of the learned Departmental Representative that the assessee in its transfer pricing study, has included Choksi Ltd. and Vimta LabS Ltd. as comparable, the learned Counsel for the assessee submitted, at the time of preparation of transfer pricing study, sufficient data was not available in public domain. Therefore, assessee had included them as comparable. However, subsequently, on the basis of data available in public domain, if it is found that these two companies are not functionally similar, the assessee cannot be precluded from objecting to selection of these companies. He, therefore, submitted that these companies cannot be considered as comparable. 16. We have considered the submissions of the parties, perused the orders of the Departmental Authorities and the material available on record. As could be seen, the issue in dispute in the aforesaid grounds relates to selection o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect with uncontrolled transaction. In this context, it is relevant to refer to the observations of the Hon'ble Delhi High Court in the referred judgment as under:- 20. In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be, of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asses a wide spectrum of services that use Information Technology based delivery. Such services could include rendering highly technical services by qualified technical personnel, involving advanced skills and knowledge, such as engineering, design and support. While, on the other end of the spectrum ITeS would also include voice-based call centers that render routine customer support for their clients. Clearly, characteristics of the service rendered would be dissimilar. Further, both service providers cannot be considered to be functionally similar. Their business environment would be entirely different, the demand and supply for the services would be different, the assets and capital employed would differ, the competence required to operate the two services would be different. Each of the aforesaid factors would have a material bearing on the profitability of the two entities. Treating the said entities to be comparables only for the reason that they use Information Technology for the delivery of their services, would, in our opinion, be erroneous. Finally, Hon ble Court appreciating the functional difference between a company which renders the services by itself and a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case with the assessee. While the assessee is out sourcing its clinical research trial activities, the comparable company is doing the activity itself. Thus, the business model of the assessee and comparable company are not same. Though, learned Departmental Representative has raised serious objection with regard to exclusion of this company by submitting that assessee itself in its transfer pricing study has selected this company, but, in our view that cannot be the sole criteria to retain this company as a comparable if it is ultimately found that the company is not at all a comparable. We find merit in the submissions of the assessee that on the basis of limited data available in public domain when the transfer pricing study was prepared the assessee has selected this company as a comparable. However, when complete data relating to this company subsequently came to the public domain, it was found that this company is not a comparable. In our view, the aforesaid explanation of the assessee deserves to be accepted. We, therefore, direct the Assessing Officer to exclude this company as comparable. 19. As far as Vimta Lab Ltd. is concerned, apart from the fact that business model ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Co ordinate Bench of the Tribunal in assessee s own case cited supra, it is seen that the Tribunal while deciding identical issue, held as under: 24. We have considered the rival submissions and also perused the relevant material on record. We agree in principle with the contention of the ld. Counsel for the assessee on this issue that if the indirect cost was already included by the assessee in the total cost of ₹ 1080.25 Lakhs incurred in relation to the services provided to its AE for applying the mark up of 10%, there is no justification in adding indirect cost @ 5% of the direct cost separately as done by the authorities below relying on the terms of the relevant agreement. However, as submitted by the ld. DR, the stand taken by the assessee about inclusion of indirect cost of ₹ 285.48 Crores in the total cost of ₹ 1080.25 Lakhs based on the break-up given on Pg.Nos. 58 59 of the Paper Book requires verification as there is no reference to any such details furnished by the assessee in the order of the authorities below nor there is any finding given on verification of such details. Since the ld. Counsel for the assessee also has no objection in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a that the most appropriate method for computing the arm's length price is re sale price method, if otherwise it is applicable to the particular international transaction and is in conformity with the relevant statutory provisions. The learned Counsel for the assessee drawing a parallel between the assessee s case and the case of Mattel Toys India Pvt. Ltd. v/s CIT, ITA no.2476/Mum./2008, dated 12th June 2013, submitted, in the referred case also though the assessee had selected TNMM as the most appropriate method but considering the nature of transaction between the assessee and its A.E., the Tribunal allowed assessee s claim with regard to adoption of re sale price method as the most appropriate method even at the second appellate stage. He submitted, as per the relevant provisions contained under the Income Tax Act, and the rules, the most appropriate method in case of this particular transaction between the assessee and its A.E. is re sale price method as the assessee simply imports the goods from its A.E. and sells them to customers in India. For the aforesaid proposition, he relied upon a number of decisions of the Tribunal as well as Hon'ble Jurisdictional High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative further submitted that the assessee in relation to import of FDFs has also received advertisement and market expenses which suggest that it is creating marketing intangible by incurring substantial expenses on marketing. Referring to certain OECD guidelines, the learned Departmental Representative submitted, as enquiry into marketing functions is a factual enquiry this issue cannot be entertained at this stage. He submitted, though the Transfer Pricing Officer has not dealt with the issue of advertisement and marketing expenses incurred by the assessee separately but still this has to be kept in mind while taking a decision as to whether or not the assessee has made value addition to the products imported for re sale / distribution. He, therefore, submitted, the additional ground should not be entertained. 32. In the rejoinder, the learned Counsel for the assessee submitted though the assessee in its transfer pricing study might have rejected RSPM as the most appropriate method keeping in view the data available in public domain at the relevant time, but, if subsequently enough data have come into the public domain to consider RSPM as the most appropriate method, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained under section 92C r/w rule 10B, it is clear that the arm's length price in relation to a particular international transaction has to be determined by following any one of the most appropriate methods prescribed therein. Therefore, the first stage is selection of most appropriate method. For doing so all relevant details relating to a particular transaction between the assessee and its A.E. are required to be gone into. In the present case, there is no dispute to the fact that all relevant details including documentary evidence pertaining to import of FDFs from the A.E. are available on record of the Departmental Authorities. Therefore, as far as selection of most appropriate method is concerned, the primary facts are available on record. Therefore, the issue as to what is the most appropriate method is a purely legal issue which can be decided by analyzing the nature of transaction on the basis of primary facts available on record before the Assessing Officer / Transfer Pricing Officer. As far as selection of comparables and comparability analysis is concerned, it is at the secondary stage after selection of most appropriate method. Therefore, in our view, as far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must afford reasonable opportunity of being heard to the assessee in the matter. With the aforesaid observations, we allow the additional ground for statistical purposes. 34. In view of our aforesaid decision, the issue raised in grounds no.4 and 5, have become redundant. However, the assessee is at liberty to raise these issues before the Assessing Officer / Transfer Pricing Officer or before the appellate forum depending upon the decision to be taken by the Assessing Officer / Transfer Pricing Officer with regard to selection of most appropriate method. 35. In ground no.7, the assessee has challenged disallowance of depreciation claimed on assets of Ankleshwar plant. 36. Briefly stated the facts are, in the course of assessment proceedings, the Assessing Officer noticed that assessee has claimed depreciation on assets of Ankleshwar plant which has closed down its operation. He, therefore, called upon the assessee to explain why the claim of depreciation should not be disallowed. Though, the assessee submitted that once the assets form part of the block, it losses its individual character, hence, depreciation on such individual asset cannot be disallowed but the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xploitation of commercial premise. Though, the assessee submitted its explanation in support of its claim but the Assessing Officer rejecting the submissions of the assessee treated the amount received from sub leasing of the office premise as business income. The learned Commissioner (Appeals) also confirmed the view of the Assessing Officer by observing that in the assessment year 2002 03, similar view was expressed by the first appellate authority. The learned Counsel for the assessee submitted before us that issue in dispute stands squarely covered in its favour not only by the decision of the Tribunal in assessee s own case for the assessment year 2002 03 but by the Hon'ble Jurisdictional High Court in assessee s own case for assessment year 2000 01 and 2001 02. 43. The learned Departmental Representative has not controverted the aforesaid factual position. 44. We have considered the submissions of the parties and perused the material available on record. On a perusal of the order of the co ordinate bench of the Tribunal in ITA no.3098/Mum./2006, dated 8th March 2013, it is very much clear that the issue whether the income received from sub leasing of office premise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of proceedings before the Transfer Pricing Officer, though the assessee objected to selection of aforesaid company as a comparable on the ground that it is a wholly owned subsidiary of Biocon India Ltd. and as per the disclosure made by the company itself, it has related party transaction but the Transfer Pricing Officer overruling the objections of the assessee selected this company as a comparable. The first appellate authority while deciding assessee s appeal on the issue of selection of this company as a comparable after considering the submissions of the assessee as well as the facts and material on record, found that the company has considerable related party transaction which is evident from the note to the financial statements of the company. He, therefore, accepting assessee s contention, excluded Syngin International Pvt. Ltd. from the list of comparable. 50. The learned Departmental Representative submitted before us, the related party transaction of the company is not to the extent that it cannot be considered as a comparable. In this context, he referred to the annual report of the company placed in assessee s paper book and submitted that the related party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the fact that in the earlier years, the first appellate authority has allowed such expenses. While doing so, he also observed that no new product has either been developed by the assessee or introduced in the market in the year under consideration so as to treat the expenditure as capital in nature. 56. At the outset, the learned Counsel for the assessee submitted that the issue is squarely covered in assessee s favour in its own case for the assessment year 2002 03, in ITA no.3180/Mum/2006 order dated 18th December 2008. 57. The learned Departmental Representative has not controverted the aforesaid factual position. 58. On a perusal of the order passed by the co ordinate bench of the Tribunal, as placed before us by the learned Counsel for the assessee, we find that the Tribunal, while considering identical issue in assessment year 2002 03, allowed assessee s claim upon considering the fact that against similar disallowance made in assessment year 2001 02, the assessee preferred appeal before the learned Commissioner (Appeals) who allowed assessee s claim. However, the Department did not challenge the decision of the learned Commissioner (Appeals) by preferring appeal b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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