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TMI Blog2018 (6) TMI 468X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:- 1.1 " In the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in giving direction to exclude M/s. Celestial Labs Ltd. from the comparables for determining the ALP on the sole ground that said company has abnormal profit level indicator." 1.2 " In the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that functional analysis of M/s. Celestial Labs Ltd. reveals that it is involved in similar functional activity as the assessee", 1.3 " In the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that M/s .Tonira Pharma Ltd. is to be included in the final set of comparables for determining the arithmetical mean without appreciating that it is a functionally different company." 2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the assessing officer be restored. 3. "The appellant craves leave to amend or alter any of the grounds or add a new ground which may be necessary. " 3. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks Ltd. 17.48% Arithmetic Mean 13.45% The TPO found above comparables as not exactly comparables to the assessee and thus, the assessee was directed by TPO to conduct a fresh search of comparables which were arrived at by the assessee as detailed hereunder:- Sr. No. Name of Comparable Cost plus mark-up FY 2007-08 1 Dolphin Medical Services Ltd. 15.56% 2 Fortis Clinical Research Ltd. 20.55% 3. Research Support Inti. P. Ltd. 8.35% 4. Vimta Labs Ltd. 14.62% 5. Wintac Ltd. -0.50% Arithmetic Mean 11.71% The TPO however was not satisfied with the fresh comparables identified by the assessee as they were found to be not exactly comparables and the TPO shortlisted following comparables:- Sr. No. Name of Comparable cost plus mark-up FY 07-08 1 Engineers India Ltd. (Seg.) 35.10% 2 Alphageo (India) Ltd. 40.52% 3 Agile Electric Technologies Pvt. Ltd. 6.05% 4 Vimta Labs Ltd. 19.67% 5 IDC (India) Ltd. 15.38% 6 Oil Field Instrumentation (India) Ltd:. 45.30% 7 Celestial Labs Ltd 87.94% 8 Mindtree Ltd. (Seg.) 8.35% Arithmetic Mean 32.29% The dispute now remaining between rival parties before us is with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price. As per the web-site of said company, the functional profile of M/s. Celestial Labs Ltd. is production and sale of biotechnological products having industrial implications. The appellant on the other hand is engaged in providing contractual product development services to its AE on cost plus markup basis. The functional profile of M/s. Celestial Labs Ltd. is therefore different from the tested party, warranting its exclusion from the set of comparables. Even otherwise, the abnormal profit margin of 87.94% reported by the said company, when none of the other selected comparables by the TPO reflect profit level indicator exceeding 30.07% requires its exclusion on account of existence of super normal profits. The decisions relied upon by the appellant in the written submission also support the claim of the appellant .that company showing extra-ordinary profit is required to be excluded from the comparables, I therefore exclude M/s. Celestial Labs Ltd. from the comparables for determining the ALP. The learned CIT(A) while directing inclusion Tonira Pharma Ltd. as a comparable to compute ALP of international transactions entered into by assessee with its AE held as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. as comparable on the grounds of super normal profits and different functional profile. Reference was drawn to Rule 10B(2) and 10B(3) of Income-tax Rules, 1962. our attention was also drawn to decision of Mumbai-trib. In the case of Wills Processing Services Private Limited v. DCIT reported in (2013) 30 taxmann.com 350(Mum.) . The learned DR also relied upon decision of Hon'ble Delhi High Court decision in the case of Chryscapital Investment Advisors (India) Private Limited v. DCIT reported in (2015) 56 taxmann.com 417(Delhi) . Our attention was drawn to decision of Hon'ble Delhi High Court decision in the case of Rampgreen Solution Pvt. Ltd. v. CIT reported in (2015) 60 taxmann.com 355(Del) . It was thus contended that learned CIT(A) has wrongly excluded Celestial Lab Ltd. on the grounds of super normal profits without doing exercise to find out reasons for material dissimilarities. It was submitted that the said company Celestial Labs Limited came out with IPO of 50 lakh of equity shares of Rs. 10 each at Rs. 60 per share (inclusive of share premium of Rs. 50 per equity share) during the relevant period. The prospectus issued by Celestial Labs Limited is placed in paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V. The assessee is mainly engaged in distribution of finished formulations imported from its AE. The assessee imports finished formulations from its AE for sale in domestic market and these formulations are in the nature of super speciality and temperature sensitive products for treating infertility, bed wetting etc.. The assessee also carries out product developmental services on contract basis for its AE . The international transactions reported by the assessee with its AE are as under:- Sr. No. Name of the AE Nature of transaction Amount (Rs.) Method used 1 Different AEs Purchase of finished Goods 139,345,778 TNMM 2 Different AEs Sale of finished Goods 647,821 TNMM 3 Ferring International Centre S.A. Interest on Early Payment 29,21,609 TNMM 4 Ferring International Centre S.A. Provision of product development service 2,30,94,302 TNMM The dispute has arisen between rival parties with respect to the international transaction of product development services rendered by assessee to its AE Ferring International Centre S.A., Switzerland for which an amount of Rs. 2,30,94,302/- was charged by the assessee. . The assessee had a contract with its AE and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified company, It has been providing customized enterprise solutions, bioinformatics services to health and life science sector, like gene sequence comparison and analysis, prediction modeling, design and development of Drug Molecules; and development of industrial enzymes. The Department of Science and Industrial Research (DSIR), Ministry of Science and Technology, New Delhi has recognized the company's research and development center. CELESTIAL is in contact with IICT, CCMB IMTECH and Osmania University, the premier research institutions at Hyderabad for its chemical technology, molecular biology and microbiology collaborative research projects. PRESENT EXPANSION The expansion has been planned: ° To scale up the contract research and Project management services dedicated to health and life science sector by increasing infrastructure and resources. ° To develop Drug molecules, perform clinical trials and provide licensing for global production ° To manufacture and market Enzymes with the proven and improved technology by leveraging the expertise in fermentation process CELESTIAL during its expansion plan, has scaled up its service operations w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial bioactive compounds or drug molecules. CELESTIAL LABS has developed CELSUITE- a drug design tool, which facilitates molecular modeling; active site prediction and ligand build up, the important features of a drug discovery process. Starling with molecular coordinates of the test candidate, the CELSUITE predicts the potential of the ligand molecules, builds virtual drug, screens out unfavourables, and predicts toxicity through a logical and rational process. The visualizer displays the result molecules on the screen in a variety of representation and colours. CELSUITE will be licensed individually once it is integrated with toxicity prediction module and also it will used by Celestial to offer the drug molecule development related services to pharma and biotech companies, globally. BioProducts {Drug Molecule Development) CELESTIAL LABS, based on its in silico expertise, has developed 2 molecules to treat Leucoderma / Vitiligo, tanning, wrinkles and multiple cancer. Purification of these cloned molecules is under active progress paving the way for rapid development of the final products and licensing. These molecules have been filed for the IPR protection in 2005. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng plant & machinery providers to help the company establish and scale-up of manufacturing processes. Consumption of the proposed enzymes to be manufactured is shared mainly by detergents, textiles, food and pharmaceutical industries in India, currently with an import of 70% of these enzyme products. Services Celestial has been providing customized enterprise solutions, bioinformatics services to health and life science sector, like database preparation and management, gene sequence comparison and analysis, prediction modeling, design and development of Drug Molecules. Further the services are being strengthened by applying suitable resources and infrastructure. Business Strategy The business plan of the company is essentially based on scaling up the service operations such as ERF implementations, project management services, bioinformatics services, etc., already in place; the production and supply of the biotechnological products, which have very significant industrial implications, especially in pharmaceutical sector. The plan envisages a thorough groundwork in terms of building up of a technology base through relevant stakeholders and collaborators, lurther suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue Expenditure write off 6.76 9.15 11.44 30.87 55,55 Deferred Revenue Expenditure write off (Product Development) 31.10 Preliminary expenses w/o 0.01 0.01 0.01 0.01 0.01 Total :""*' - " 254.31 288.21 353.31 521.63 664.57 Profit Before Depreciation 109.52 85.33 149.49 285.44 357.61 Depreciation 12.73 18.55 26.92 17.5 25.53 Profit Before Tax 96.79 66.78 122,57 267.94 : 332.08 Provision for Taxation 11.18 5.26 9.65 0.00 1.49 Provision for Deferred Tax 0.00 0.00 20.00 2.98 2.35 Profit After Tax . 85.61 61.52 92.92 264.96 328.23 Perusal of the said profit and loss for the year ended 31st March 2006 of Celestial Labs Limited clearly shows that the profit after tax is Rs. 328.23 lacs on sales of Rs. 1022.18 lacs which gives Net profit Ratio of 32.11% for the year ended 31st March 2006. Similarly, for the year ended 31st March 2005, net profit ratio is 32.83%. The said company Celestial Labs Limited, thus, for the year ended 31-03-2005 and 31-03-2006 as per above profit and loss account does not have super normal profits . One of the reasons for deletion by learned CIT(A) is the super normal profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration before us. Thus, there is a need to further analyse the financial statements of Celestial Labs Limited. Thus, adopting PLI of 87.94% for the year under consideration of Celestial Labs Limited without deeper analysis of financial statements was not justified on the part of TPO/AO and hence we are setting aside the matter to the file of the AO/TPO for re-adjudication of the issue on merits de-novo in accordance with law. The AO/TPO are directed to provide proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The evidences filed by the assessee in its defence in de-novo proceedings shall be admitted by AO/TPO in the interest of substantial justice and thereafter adjudicated on merits in accordance with law. Keeping in view the relevant case laws which may be relied upon by the assessee. We order accordingly. Now, coming to the comparable Tonira Pharma Ltd. which was rejected by TPO but was directed to be included by learned CIT(A). The said company has negative PLI of (-) 16.90%. The audited financial statements of Tonira Pharma Limited is placed on record. As per audited financial sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s through innovative and cost-effective process routes to tap the market opportunities. (iv) Tonira is constantly involved in R & D lo achieve cost reduction through alternative process routes, manufacturing excellence and reduction in energy costs. (v) Tonira should also be able to provide dedicated facilities for CRAMS (Contract Research and Manufacturing services). (vi) It has also filed process patent application for three molecules. (vii)'Tonira has four Drug Master Files in CTD format. (viii) Tonira has a very well developed MIS and System of Internal Control, which helps the management to take informed and timely decisions. Opportunities and threats: All medium sized pharmaceutical companies which have succeeded in achieving manufacturing excellent over the years and have developed cost-effective synthesis routes have scope for partnering with, multinational companies for contract manufacturing and research services, i.e. CRAMS. With the state-of the art R & D Center and extensive manufacturing facilities, Tonira is gearing up to cash in the market opportunities Intense competition in the field has to be tackled with constant cost- reduction, proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue potentials to meet the challenges and exploit the growth opportunities ahead. Cautionary Statement: Statement in the Management Discussion and Analysis describing the Company's objectives, projections, expectations and estimates regarding future performance may be "forward looking statements" and are based on currently available information and current scenario. The management believes these to be true to the best of its knowledge at the time of preparation of this report. However, these statements are subject to certain future events and uncertainties, which could cause actual results to "differ materially from those that may be indicated in such statements." The extract of the financial performance of Tonira Pharma Limited for the financial year ended 31-03-2007 and 31-03-2008 are reproduced hereunder: We have observed that the TPO rejected the said company due to the said company having effluent treatment plant/waste disposal system which in our considered view is not a justified cause for its exclusion by TPO. Primarily all Industries in India requires pollution control clearances which is mandate of law and part of State Policy because environmental concerns ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as against a profit of Rs. 164.03 lacs in the previous year. After provision of exceptional items being payment towards duties, interest and penalty pertaining to prior period demand and loss on account of fire at Nanndesari Plant, the net loss for the year under report is Rs. 582.98 lac The total income during the year under report declined due to continued attachment of inventories of the Company's Ankleshwar plant by the Excise and Customs Department. The Excise and Customs Department also, for some period of time during the year under report, disallowed the clearances of finished goods from the Company's Ankleshwar plant. This Excise and Customs duty demand matter is still outstanding and the appeals of the Company before Hpn'ble Gujarat High Court and CESTAT is pending for disposal. Future Outlook: The Company has a Star Export House status assigned by KFTZ in Active Pharmaceuticals Ingredients (APIs) and exports its products mainly to Japan, Europe, South East Asia and South America apart from selling small quantities in the Domestic market. Company's Manufacturing facility at Nandesari was recently inspected and approved by US FDA and with this appro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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