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TMI Blog2018 (8) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... cience is undertaking not only drug discovery, but is also involved in development of new drugs. Therefore, these activities are clearly functionally distinguishable. - these differences cannot be overlooked nor can there be adjustment made for these differences. Therefore, we direct the AO to exclude this company from the list of comparables. Decided partly in favor of assessee. - ITA No. 421/Hyd/2014 - - - Dated:- 3-8-2018 - Smt. P. Madhavi Devi, Judicial Member And Shri B. Ramakotaiah, Accountant Member For Assessee : Shri R. Vijayaraghavan For Revenue : Shri J. Siri Kumar, DR ORDER Per Smt. P. Madhavi Devi, J. M. This is assessee s appeal for the A.Y 2009-10 against the order of the AO dated 10.01.2014 passed u/s 143(3) r.w.s. 92CA(3) and 144C of the I.T. Act. 2. Brief facts of the case are that the assessee company, which is in the business of research and development services in relation to bio-analytical and formulation development, furnished its return of income for the A.Y 2009-10 on 30.09.2009 declaring total income of ₹ 2,97,67,240. During the assessment proceedings u/s 143(3) of the Act, the AO noticed that the assessee has entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable companies as provided under Rule 10B(l)(e) read with Rule 1 10B(2)(b). 2.2.2 Based on the facts and the circumstances of the case and in law, the Learned DRP/AO/TPO erred in not allowing working capital adjustment to the margins of the comparable companies by ignoring the fact that the Appellant is a captive service provider and furnished the quantum of working capital adjustment. 2.3 Filters 2.3.1 The Learned AO/DRP erred in confirming the TPO's stand in rejecting functionally comparable companies by applying diminishing revenue/ persistent losses filter for the period under consideration. 2.4 Comparables 2.4.1 The Learned AO/DRP erred in confirming the TPO's selection of Suven life sciences limited as a comparable company, even though, it is functionally dissimilar to the Appellant. 2.4.2 Without prejudice to ground no. 2.4.1, the Learned AO/DRP erred in not allocating unallocated research development expenses while computing the segmental profitability of Suven life sciences limited to arrive at the arm's length price. 2.4.3 The Learned AO/ DRP erred in rejection of Jubilant Biosys Limited as a comparable company sele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal . 3. At the time of hearing, the learned Counsel for the assessee submitted that the assessee does not wish to press ground of appeal No.2 which is general in nature and also other grounds of appeal except for the Ground Nos. 2.2, 2.3 and 2.4. 4. As regards Ground No.2.2, brief facts are that while computing the ALP of the international transaction, the assessee requested for working capital adjustment and relied on the provisions of Rule 10B(1)(e)(iii) of the Rules. The assessee submitted that there exists differences in the debtors and creditors of the assessee as well as the comparables selected by the Department; which are materially affecting their net profit margin. The assessee carried out the working capital adjustment at 5.39% but the TPO did not accept the same by observing that the exact details of the debtors, inventories and the creditors is not available and that according to the OECD guidelines of 2010, working capital benefit cannot be given automatically, but can be given only in a situation, where there is a greater chance of increasing the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the TPO without discussing as to why the assessee s contentions cannot be accepted. Therefore, we deem it fit and proper to set aside the issue to the file of the DRP for reconsideration of the issue in accordance with Rules and precedents on the issue and thereafter, the DRP is directed to pass a speaking order thereon. Ground of appeal No.2.2 is accordingly treated as allowed for statistical purposes. 8. As regards Ground of appeal No.2.3, the learned Counsel for the assessee, except for placing reliance on the said ground, did not advance any specific argument on any of the filters, leave alone the diminishing revenue/persistent losses filter. It has been held by various Benches of the Tribunal that for determination of ALP, companies which are functionally comparable to the assessee only have to be adopted and in such analysis, companies incurring persistent losses or having diminishing revenue during the earlier years, cannot be taken as comparables to the assessee. In view of the same, we do not see any reason to interfere with the order of the AO. Therefore, Ground of appeal No.2.3 is rejected. 9. As regards Ground of appeal No.2.4.2 which is against non-allocatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has a well equipped pilot lab for performing these services. According to the assessee, the services rendered by Suven Life Sciences under the DDDSS are entirely different from the activities of the assessee as enumerated above. According to him, the services under drug discovery involve not only testing but also developing new drugs. He referred to the 20th Annual Report of Suven Life Sciences wherein at page 2 of its report, it has been reported that the lifeblood of its business is R D and there is nothing or nothing else and that they have to continuously create new innovation that leads people do something they did nt think they could do the day before. It is also mentioned that they are consistently spending more than 20% of the revenue on the risk/reward bearing drug discovery activity to develop new drugs for unmet medical needs in Central Nervous System arena that are affecting many millions of elderly population. Thus, according to the learned Counsel for the assessee, the activity of Suven Life Sciences is much more complicated than the activities of simple testing of drugs undertaken by the assessee. He also drew our attention to Page No.392 of the Pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-operating expenses, we find that the TPO has considered the provision for doubtful debts as part of operating expenses, only when the said expenses are incurred every year for the last three years upto and including the financial year 2008-09 and that where these expenses are incurred at almost consistent level in terms of its ratio with the turnover. Further, TPO also did not consider bad debts as operating expenditure for the reason that the bad debts are exceptional items. 14. Rebutting this findings of the TPO, the learned Counsel for the assessee, submitted that the provisions for bad and doubtful debts has been reduced from the sundry debtors and has been included in the operating and other expenses. He submitted that while computing the margins of the comparables also, similar treatment should be given to the provision for bad and doubtful debts for determination of ALP. He has drawn our attention to page No.382 of the paper book, which is the annual report of Choksi Laboratories Ltd wherein the bad debts written off of ₹ 10,49,481 crores has been reported. Therefore, according to him, the provision for bad and doubtful debts and the bad debts written off have t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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