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TMI Blog2017 (6) TMI 1357X X X X Extracts X X X X X X X X Extracts X X X X ..... has been introduced in the statute and are applied for determination of ALP. Therefore the location savings and advantages are very much relevant in the cross border transaction but for limited purpose of carrying out exercise of examination and investigation of the transaction and not as a basis for determining the ALP and consequently adjustment. We find that the Mumbai Bench of the Tribunal in the case of Watson Pharma Pvt. Ltd. Vs. DCIT [ 2015 (1) TMI 699 - ITAT MUMBAI] has dealt with this aspect and held that when the local comparables are available then instead of going to the location saving as a basis of adjustment, the TNMM shall be preferred. The orders of the TPO and DRP are not sustainable as suffer from serious defect of considering the location saving as basis of adjustment. Further we find that the computation of the location saving by the TPO is purely based on some articles and not on the basis of actual cost in the US in comparison to India. Therefore the price/cost as computed by the TPO is not based on actual data but on presumption of accepting the article on the subject as the comparable cost. Since the functional comparability of the companies select ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise for performing clinical trials in India. 2.1 On the facts and circumstances of the case and in law, the Ld. TPO/ AO erred in treating the alleged location savings to the Appellant as an international transaction as per Section 92B of the Income-tax Act, 1961 ('Act'). 2.2 Without prejudice to Ground No. 2.1, the Ld. TPO/AO did not follow any of the method prescribed by the Act. 2.3 On the facts and circumstances of the case and in law, the TPO/AO and the Hon'ble DRP erred in presuming that location savings advantage accrues to the Appellant. In doing so: a. the Ld. TPO/AO disregarded the fact that, Appellant as well as the Associated Enterprises ('AEs') operated in a perfectly competitive market and the services of the Appellant do not confer any unique competitive advantage to the AEs, that (i) would not be available to the AEs from other potential service providers in India; or (ii) would not be equally available to the competitors of the AEs; b. the Ld. TPO/AO and the Hon'ble DRP has not considered the fact that whether the concept of location savings is applicable in a particular case has to be determined based on eco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eged location savings be deleted. The Appellant submits that each of the above grounds of appeal are without prejudice to each other. The Appellant craves leave to add to, alter, omit or substitute any or all of the above grounds of appeal, at any time before or at the time of the appeal. 3. The only issue raises in these appeals by the assessee is regarding determination of Arm's Length Price (ALP) and consequently Transfer Pricing Adjustment made by the Transfer Pricing Officer (TPO) and confirmed by the DRP. 4. The assessee is a subsidiary of Parexel International Holdings BV, Netherlands. The assessee company is registered as clinical research agency and is engaged in providing clinical research services in India. The group and parent company of assessee are also clinical research organizations based in USA UK respectively and are assigned the work of conducting clinical trials by sponsoring pharmaceutical companies. The Associated Enterprise (AE) in turn, have outsourced the work of clinical trial and research services in India to the assessee. The assessee has been compensated at cost plus 15% mark up charges for the work and services done on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... location rent and not on full amount of cost saving. The Assessing Officer/TPO did not accept the contentio~ and explana_tion of the assessee and proceeded to apply the location saving split between the assessee and AE. The Assessing Officer/TPO worked out the location saving of ₹ 29,78,341 per clinical trial in respect of the clinical trial conducted in India in comparison to US. The difference of ₹ 29,78,341 was multiplied by the clinical trial site of the assessee i.e. 149. Accordingly the total cost saving was determined by the TPO/Assessing Officer at ₹ 44,37,72,734. The said saving was splitted in the ratio of 50:50 for determining the ALP and accordingly the TPO proposed an adjustment of ₹ 22,18,86,367. The assesses challenged the action of the TPO before the DRP. The DRP concurred with the view of the TPO and concluded that the location saving exists in the current business model of the assessee and therefore the decision of the TPO/A.O. was upheld. Further the DRP observed that the assessee has not discharged its primary onus by providing all the information which was called for by the TPO. 5. Before the Tribunal the learned Authorised Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of his contention. Further the TPO as well as DRP has given a finding that in the business model of the assessee the location saving do exist and therefore the TPO is justified in applying the method of profits splitting between assessee and AE. The case law relied upon by the learned Authorised Representative are not applicable in the case of the assessee because as per the learned Departmental Representative the business .and functions of Watson Pharma Pvt. Ltd. as well as Syngenta India Limited are altogether different from the assessee. He has referred to the paras 6 7 of the Tribunal order in the case of Watson Pharma Pvt. Ltd. Vs. DCIT (supra) and submitted that the said company apart from R D and trial also in the manufacture of products for AE. Similarly, in the case of Syngenta India Limited Vs. DCIT (supra), the said company is Agro based commodity and not functionally comparable with the assessee. He has relied upon the orders of the authorities below. 7. In rejoinder the learned Authorised Representative has submitted that the finding given by the Mumbai Bench of Tribunal in the cases of Watson Pharma Pvt. Ltd. Vs. DCIT (supra) as well as Syngenta India Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Watson Pharma Pvt. Ltd. Vs. DCIT (supra) has dealt with this aspect and held that when the local comparables are available then instead of going to the location saving as a basis of adjustment, the TNMM shall be preferred. Similar view was taken by the Tribunal in the case of Syngenta India Ltd. Vs. DCIT (surpa) in paras 17 to 20 as under: 17. We have heard the rival submissions and perused the relevant finding given in the impugned orders qua the issue of Transfer Pricing adjustment on account of locational savings. The TPO noted that, one unit of the assessee is captive manufacturer which is producing agro chemicals for sale to the world market by a Singapore based entity. Due to unique location of operating in India, the assessee company is able to generate cost savings on one or many of the factors of production for which assesscc should have been compensated with a better price . He has also referred to Draft UN Model and India's stand about the location advantage vis- -vis the labour cost and other factors of production and, therefore, asscssee should have received compensation for it from the AE. From the reading of the order of the TPO as well as the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at deriving location savings is put forward as a business reason for restructuring, the discussion at paragraphs 1.59-1,63 is relevant; 9.149 Where significant location savings are derived further to a business restructuring, the question arises of whether and if so how the location savings should he shared among the parties. The response should obviously depend on what independent parties would have agreed in similar circumstances. The conditions that would be agreed between independent parties would normally depend on the functions, assets and risks of each party and on their respective bargaining powers; 9.150 Take the example of an enterprise that designs, manufactures and sells brand name clothes. Assume that the manufacturing process is basic and that the brand name is famous and represents a highly valuable intangible. Assume that the enterprise is established in Country A where the labour costs are high and that it decides to close down its manufacturing activities in Country A and to relocate them in an affiliate company in Country B where labour costs are significantly lower, The enterprise in Country A retains the rights on the brand name and continues desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary. Clients continue to deal directly with the enterprise in Country X and are not necessarily aware of the sub- contracting arrangement. For some period of time, the well known enterprise in Country X can continue to charge its services at the original hourly rate despite the significantly reduced engineer costs. After a certain period of time, however, it is forced due to competitive pressures to decrease its hourly rate and pass on part of the location savings to its clients. In this case also, the question arises of which party/ies within the MNE group should be attributed the location savings at arm's length: the subsidiary in Country Y, the enterprise in Country X, or both (and if so in what proportions); and 9.153 In this example, it might be that there is a high demand for the type of engineering services in question and the subsidiary in Country Y is the only one able to provide them with the required quality standard, so that the enterprise in Country X does not have many other options available to it than to use this service provider. It might be that the subsidiary in Country Y has developed a valuable intangible corresponding to its technical know-how. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprises operating under the similar circumstances would allocate any retained net location savings. Guidelines farther states that, suitable comparability adjustment is to be made to account for location savings advantage giving rise to location savings, when function analysis shows that location savings are not passed on to customers or suppliers and there is no local market comparables then, adjustment can be made based on analysis of all the relevant facts and circumstances including functions performed, risk assumed and assets used of the relevant associated enterprises. However, before that, if reliable local market comparables are available which can be used to identify Arm's Length Prices, then specific comparability adjustment or location savings may not be required at all. The. guidelines, however, does not prescribe any formula or basis for adjustment._ The India Charter on latest 2016 Draft on OECD/G-20 BEPS, which highlights the view of the Indian Tax Administration accept that, where comparable uncontrolled transactions are available, then the comparability analysis and benchmarking by using the results/profit margin of such local comparable companies will de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B(3) to eliminate the material effect of a difference between the transactions which is being compared, then the onus is heavily upon the revenue to bring on record that, due to location savings, the comparability with the local comparables has failed to yield the Arm's Length results. The TPO has made the adjustment by comparing the cost per employee globally with cost of per employee in India. The method by which TPO has made the adjustment lacks merits because comparison of the employees of the AE working in the economic conditions at the location of the AE are completely different and cannot be benchmark factor at the outset. Here the tested party is SIL, i.e. assessee, which operates in a perfectly competitive market and in such a market; a manufacturer will have to pass on any location specific advantages to the customers to remain competitive. Otherwise it would not be able to earn more than what the third party comparable companies, in same geographical location, performing similar functions and assuming similar risk, would earn. In a nutshell, comparison of the transactions with an uncontrolled transaction is the key factor and primary requirement under our Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parison to India. Therefore the price/cost as computed by the TPO is not based on actual data but on presumption of accepting the article on the subject as the comparable cost. Since the functional comparability of the companies selected by the assessee has not been examined by the TPO as well as no steps were taken to find out the other comparables of the assessee for determination of ALP therefore, the issue of determination of ALP and consequential adjustment, if any, is required to be examined and adjudication afresh at the level of TPO/A.O. Needless to say that the assessee is receiving its price in foreign currency therefore the comparable uncontrolled price shall also have atleast 75% of their revenue in foreign currency otherwise the price received from domestic market may not be acceptable when the assessee is receiving its 100% revenue in foreign exchange. Accordingly, the matter is set aside to the record of the TPO/A.O. for adjudication of the same afresh in the light of our above observations. 10. In the result, the appeals are allowed .for statistical purpose. Order pronounced in the open court on the 16th day of June, 2017. - - TaxTMI - TMITax - Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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