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TMI Blog2018 (3) TMI 1874X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed for statistical purposes. Rejection of Dolphin Medical Services Limited(hereinafter called Dolphin ) as comparable - On perusal of audited financial statement of the assessee, it is observed that it is only engaged in providing R D services which is the sole segment in which the assessee is operating. The bifurcation of revenue is not given in segment reporting while claim of the assessee is that around 39.55% revenue is from stability studies and testing services which required verification. There are contrarian facts as averred by rival parties and requires proper investigation by the AO/TPO including analysis of revenue derived and functions performed, risk involved and assets deployed, and in the fitness of the matter, we are inclined to set aside this issue regarding functional analysis of Dolphin as comparable with the assessee to the file of the AO/TPO to properly investigate this comparable before arriving at the decision including considering extra ordinary events such as impact of declaration of bank accounts being NPA and extraordinary expenses incurred by this company Dolphin. Assessee is directed to provide all necessary details and information to subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities below. We are of considered view that this matter needs to be restored to the file of AO/TPO to reconsider this comparable on merits after hearing the assessee. Biocon Limited and Syngene International Limited - assessee has computed margins w.r.t. these companies @19.94% and 25.34% respectively while the AO/TPO computed the same @ 25.66% and 29.62% respectively - While for computing margin of Syngene International Limited, it was submitted that the TPO relied on data base from Prowess while the assessee relied on audited financial statements which was claimed to be more reliable. The DRP noted that the assessee has duly filed an rectification application before TPO and directions were issued by DRP to AO/TPO to examine this issue for computation of correct margins of the two comparable. We do not see any prejudice to the assessee by the aforesaid directions of DRP with which we concur. The directions of DRP to AO/TPO to examine this issue for computation of correct margins of the aforesaid two comparables namely Biocon Limited and Syngene International Limited stood confirmed. - I.T.A. No. 2224/Mum/2017 - - - Dated:- 9-3-2018 - C.N. Prasad, Member (J) And Ramit Ko ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP to TPO. Procedure under Section 92C(3) not followed 4. erred in arriving at the arms length price of the international transactions without appreciating the fact that none of the conditions set out in Section 92C(3) of the Act are satisfied; Rejection of economic analysis undertaken by Appellant 5. erred in rejecting the economic analysis undertaken by the Appellant in connection with its international transaction of provision of contract research and development services, stability testing and database maintenance services to AEs by the Appellant. Inappropriate rejection of comparable companies adopted by Appellant 6. erred in rejecting IDMA Laboratories Ltd. by stating that the functions of analytical and industrial testing undertaken by IDMA are not comparable to the business activities of the Appellant: 7. erred in rejecting Dolphin Medical Services Limited by stating that functions of equipment testing, providing diagnostic laboratories services and research are not comparable to the business activities of the Appellant: 8. erred in rejecting Vimta Labs Ltd. by stating that the said company has incurred continuous losses and also stating that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is engaged in the business of providing contract R D services in respect of generic APIs. The services also involved data base maintenance, statistical analysis and project management in respect of development of such generic APIs. The international transactions as reported by assessee in form No. 3CEB are as under:- The assessee was selected as tested party by the TPO based on FAR analysis as it did not owned any significant intangibles and its profitability can also be reliably ascertained. The assessee had selected net cost plus margin as Profit Level Indicator (PLI) which was submitted in the Transfer Pricing (TP) study report as under:- The assessee had selected the following comparables and the assessee had earned NCP of 13.01% which was claimed to be at arms length range of the comparable weighted arithmetic mean margin of 14.49%, which by the single year update margin of the comparables was 11.09% which fell within 5% as permissible range allowed to the assessee. The details of single year updated margin of the comparables submitted by the assessee are as under:- The TPO issued show cause notice vide order sheet entry dated 29-12-2015 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ologies shall not be considered in your final set of comparables. The TPO after going through the submissions of the assessee accepted the following as comparables:- Sr. No. Name of the Comparables Assessee‟s remarks TPO‟s Remarks Margin (%) 1. Aurigene Discovery Technologies Ltd. Reason for rejection: main business activity of the company is to undertake research relating to drug discovery for its customers and the risk profile of Aurigene Discovery Technologies Ltd. Vis- -vis the Assessee is different. Reason for acceptance: The assessee‟s agreement is for research and development and the comparable company is engaged in undertaking research relating to drug discovery for its customers (i.e. contract R. D). Accordingly, the said company is functionally comparable and hence selected as comparable for computing arms‟ length price. 40.82 2. Biocon Ltd. (segment Contract research) Accepted Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary of Jubilant Life Sciences Ltd., a global pharmaceutical vertical engaged in collaborative research, development and manufacturing partnerships with global pharmaceutical companies. The company offers Medicinal Chemistry services in Drug Discovery Program for global pharmaceutical and biotech companies. Accordingly, the company is functionally comparable to assessee business and hence is considered as comparable. Nevertheless, the assessee has considered the said company as Engaged in comparable business activity in its accept-reject matrix in Its TP Study Report vide Sr. No. 4161. 26.41 7. Span Diagnostics Limited Reason for acceptance: the company is engaged in comparable activity and therefore comparable company. The assessee mentioned that it had inadvertently done a typographical error In accept reject matrix where the above company was rejected. Reason for rejection: The submission of assessee has been perused,however the same is not acceptable as the company is not functionally comparable to assessee's business. As apparent from the audited financial statements, the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. Moreover, the amalgamation is effective from 1 January 2012 (i.e. only 3 months during the year under consideration) and hence cannot be considered as basis for extra-ordinary activity. Nevertheless, the assessee has considered the said company as comparable services in its accept-reject matrix in its TP Study Report vides Sr. No. 7170. 51.40 9. Synegene International Ltd. Accepted Accepted. However, this margin as computed by the assessee was 25.34%, as computed by this office is 29.62% from the prowess database. 29.62 10. Vimta Labs Ltd. Reason for acceptance: The Company has earned a profit in AY 2010-11 and AY 2013-14 and incurred loss in AY 2012-13 and AY 2011-12. Accordingly, It can be construed that the variation in profitability is due to cyclical business reasons. Reason for rejection: The company has incurred losses in AY 2011-12 and AY 2012-13 (2 out of 3 years). However, it has earned profit in the 3rd year (i.e. AY 2013-14 Considering the huge fluctuation in the profitabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd hence as conceded by the learned counsel for the assessee, these grounds bearing number 1 to 5 stood dismissed. We order accordingly. 7. Ground No. 6-Rejection of IDMA Laboratories Limited(hereinafter called IDMA ) as comparable by Revenue:- The assessee has claimed to be engaged in the business of providing contract R D services in respect of generic APIs. The services provided also involves database maintenance, statistical analysis and project management in respect of development of such generic APIs. The assessee included IDMA as comparable in its Transfer Pricing Study Report with OP/OC weighted average margin of 16.32% while the OP/OC margin for AY 2012-13 was 12.58%. The TPO observed that in accept/reject matrix of TP study, this company 'IDMA' was reflected as having non comparable services vis-a-vis services rendered by the assessee. On being show-caused, the assessee submitted before TPO that this company 'IDMA' is engaged in the business of analytical and industrial testing which is comparable services to the assessee and due to typographical error in accept reject matrix, the company was reflected as an rejected company. This did not go well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t miniscule portion of revenue is derived from stability studies and testing services by the assessee during the relevant financial year as its contract for such services was entered only on 07-11-2011 with Actavis, Iceland, AE of the assessee company. We have perused the audited financial statement of the assessee for the financial year ended 31-03-2012 which is placed in paper book/page 114 and we have observed that at para 28 of the said audited financial statements, it is stipulated as under:- 28. The company's sole business segment is to provide research and development services and the Company considers such activities to constitute a single business segment in the context of AS-17 'Segment Reporting'. Similarly, the Company considers Europe as its only geographical segment. The company considers business segment as its primary segment and geographical segment based on the location of customers as the secondary segment. Since the company comprises a single business segment and a single geographical segment, disclosures relating to the primary and secondary segments have not been presented. Thus, on perusal of audited financial statement of the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this company is engaged in two business divisions namely medical and software division. The Medical division consists of income from diagnostics, herbal and biotech services, which does not pertain to contract R D and hence not functionally comparable to the assessee's business and hence this comparable was rejected by TPO. The assessee carried the matter before DRP and submitted that this company Dolphin is engaged in equipment testing, establishing, providing and maintaining diagnostic laboratories and setting up laboratories for medical investigations and research. The assessee further submitted that the business of the assessee is of providing stability testing services, database maintenance, statistical analysis, project management in respect of generic APIs and provides contract development support for off-patent APIs which already exists in the market which is comparable to the services provided by Dolphin. The assessee further submitted that Dolphin has not suffered any loss at operating profit level and had infact earned an healthy margin of 8.17% on operating cost. It was submitted that loss of ₹ 1.14 crores suffered at profit before tax level is mainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng services which required verification. There are contrarian facts as averred by rival parties and requires proper investigation by the AO/TPO including analysis of revenue derived and functions performed, risk involved and assets deployed, and in the fitness of the matter, we are inclined to set aside this issue regarding functional analysis of Dolphin as comparable with the assessee to the file of the AO/TPO to properly investigate this comparable before arriving at the decision including considering extra ordinary events such as impact of declaration of bank accounts being NPA and extraordinary expenses incurred by this company Dolphin. The assessee is directed to provide all necessary details and information to substantiate its claim of Dolphin being comparable with the assessee before the AO/TPO in set aside proceedings. The AO/TPO to provide proper opportunity of being heard to the assessee in accordance with principles of natural justice. This ground of appeal No. 7 is allowed for statistical purposes. We order accordingly. 9. Ground No. 8-Rejection of Vimta Labs Limited as comparable by Revenue:- The assessee included Vimta Labs Limited as comparable in its Transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was also submitted that the comparables as detailed below selected by the TPO also suffered from high fluctuation in profit margins and the same should also then be rejected: Particulars AY 2013-14 AY 2012-13 AY 2011-12 AY 2010-11 Aurigene Discovery Technologies Limited 50.27% 40.92% 18.69% 18.83% Jubiliant Chemsys Limited -5.72% 28.25% 16.16% 21.61% Suven Lifesciences Limited 67.83% 20.35% 5.36% 6.26% The DRP rejected Vimta as not functionally comparable with the assessee as the assessee is engaged in the business of contract R D activities of API and analytical testing while Vimta is a company engaged in pre-clinical and clinical analytical in the pharma and food segment and cell and molecular biology, food safety evaluation, etc. It was also observed by DRP that this company Vimta is also engaged in providing environment s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the above reasons clearly reveals that these are normal business risks attached to this industry to all players and merely because Vimta has incurred operating losses in the year under consideration, the same cannot be rejected as comparable. The functional profile of Vimta is comparable with the assessee as we have elaborated above and in our considered view, we do not find any justification for exclusion of Vimta as comparable. Thus, we hold that Vimta activities/functions are comparable to the assessee company and the same should be included as comparable. The assessee succeeds on this ground. We order accordingly. 10. Ground No. 9 Rejection of SPAN Diagnostics Limited as comparable by Revenue:- The assessee included SPAN Diagnostics Limited as comparable in its Transfer Pricing Study Report with OP/OC weighted average margin of-9.76% while the OP/OC margin for AY 2012-13 was 3.78%. The TPO observed that in accept/reject matrix of TP study, this company 'SPAN' was reflected as having non comparable functions vis-a-vis services rendered by the assessee. On being show-caused, the assessee submitted before TPO that this company 'SPAN' is engaged in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ene Discovery Technologies Limited by TPO which as per assessee is non comparable company. The TPO observed that the assessee has excluded this company appearing in S. No. 677 of TP study from the final set of comparables with the remarks non comparable services while the broad analysis of the nature of activities undertaken showed that the said company Aurigene is functionally similar. The assessee in response to show cause submitted that the said company's risk profile is different from that of the assessee. The TPO observed that the said company Aurigene is engaged in undertaking research relating to drug discovery for its customers i.e. contract R D and hence the said company is functionally comparable. The assessee filed objections with DRP. The assessee submitted before DRP that the TPO cherry picked this company and without understanding true nature of services rendered by the assessee to its AE, it treated Aurigene as comparable. The assessee submitted that Aurigene is engaged in undertaking research relating to drug discovery for its customers while the assessee is not engaged in drug discovery. The assessee submitted that Aurigene has different risk profile and it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for statistical purposes. We order accordingly. 13. Ground No. 12 and 13 This ground of appeal raised by the assessee pertain to an error in computation of margins by the TPO/AO w.r.t. Biocon Limited and Syngene International Limited while there is no quarrel so far as inclusion of these two comparables are concerned. The assessee has computed margins w.r.t. these companies @19.94% and 25.34% respectively while the AO/TPO computed the same @ 25.66% and 29.62% respectively. The assessee raised this issue with DRP and contended that the TPO while calculating the margin of Biocon has not considered the unallocated income/expenses and the correct operating margin should be done post allocation of unallocated income/expenses in the segmental account and after considering the same margin will come to 19.94% and not 25.66% as computed by TPO. While for computing margin of Syngene International Limited, it was submitted that the TPO relied on data base from Prowess while the assessee relied on audited financial statements which was claimed to be more reliable. The DRP noted that the assessee has duly filed an rectification application before TPO and directions were issued by DRP to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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