9911796707
TMI Blog2021 (10) TMI 908X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 at least 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. Adjustment on account of recovery of expenses (investigator's fee) from AE - TPO alleged that the assessee is deploying considerable resources and time to in finding and appointing investigators and therefore. should have charged a mark-up on the costs incurred - HELD THAT:- In this case, the assessee coordinated between the individual investigator and Paraxel International GmbH Germany. The contention of the assessee is that assessee has not undertaken any risk and all risk was taken over by Paraxel International GmbH Germany and relied on the Addendum dated 19.9.2007 - assessee acted as coordinator and facilitator in selecting the investigator so as to conduct clinical trial. Selection of the investiga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as discussed earlier, made the investigator payment as pass through costs and claimed as reimbursement without any profit element, which is against the agreed norms in the earlier years which cannot be effected and accepted as genuine agreement. Accordingly, we are of the opinion that this intra-group services rendered by the assessee to the parent company cannot be considered as reimbursement of expenses or pass through costs. It is separate services in itself for which the assessee needs to determine the ALP which the assessee failed to do so. The assessee has provided services for which the TPO is justified in marking up the services so as to make TP adjustment. The various case laws relied on by the ld. AR are different on its own facts, which cannot be applied to the facts of the present case. Hence the TPO/AO correctly ascertained the ALP of this transaction and made adjustment on this count. The same is sustained. This ground of the assessee is dismissed. - IT(TP)A No.2634/Bang/2017 - - - Dated:- 7-10-2021 - Shri N.V. Vasudevan, Vice President And Shri Chandra Poojari, Accountant Member For the Appellant : Shri Danesh Bafna, CA For the Respondent : Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e competitive advantage to its customer; d) disregarded the fact that, the Appellant does not own any intangible asset, i.e. in as much the advantage (if any) is available to the Appellant the advantage is also available to third parties competing in the market; and e) did not consider the fact that given the large number of service providers in India providing similar services, under arm'slength conditions, the Appellant would not be able to earn an additional return on account of location savings, as it would be make the Appellant uncompetitive. 5. Without prejudice to Ground No. 4, the Ld. AO /TPO and the Hon'ble DRP erred in disregarding the fact that, location savings, if at all, is already embedded in the margin of the comparable companies considered for benchmarking the transaction for provisions of facilitation and coordination services for clinical trials which was held to be at arm's length. 6. Without prejudice to the Ground Nos. 4 5, even if adjustment on account of location savings is to be upheld, the Ld. TPO/ AO and the Hon'ble DRP, while computing the adjustment on account of locations savings, erred in: a) relying on unver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.254/Bang/2016 292/Bang/2017 dated 16.6.2017 wherein it was held as under: 8. We have considered the rival submissions as well as the relevant material on record. The TPO proceeded to make assessment on the basis of location saving available to the assessee being doing its research and trial activity in India in comparison to US. There is no dispute that location saving is one of the primary factors of all cross border trade which includes exports and imports of articles, goods and services. Low cost of the location includes benefit in respect of low cost labour, low cost of raw-material, low fuel cost as well as location advantage being near to raw material and other supplies apart from the comparable infrastructure cost and available facilities. Though the low cost of regulatory and other compliance are also relevant factor adding to the location saving however the location savings and conditions are available to all parties irrespective the transaction is between the related party or unrelated party. Therefore if the comparable uncontrolled price is available then the location saving or condition cannot be itself the basis for determination of ALP and consequential adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the DRP, we are at the outset, unable to apprehend as to under which existing Transfer Pricing provisions enunciated in our Income-tax Act or the Income-tax Rules, such a transaction has been reckoned as separate international transaction which warrants separate benchmarking especially when the overall profit margin of the entire transaction with the AE under the TNMM vis-a-vis the comparables has been accepted. No provision or precedence has been referred by the Revenue authorities, whether our existing Transfer Pricing provisions suggest any such kind of an adjustment or is there any settled judicial principle that location costs requires to be adjusted while measuring the allocation of the profits of the Group entities/associated enterprises operating in. different tax jurisdiction and such a location cost advantages needs to be factored in while determining the Arm's Length Price. The locational savings alludes to a concept of a location specific advantage with reference to specific market features and/or factors of production that enables MNE to achieve improved financial outcome from the provision of the same product or services relative to alternative locations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the clothes. Further to this restructuring, the clothes will be manufactured by the affiliate in Country B under a contract manufacturing arrangement. The arrangement does not involve the use of any significant intangible owned by or licensed to the affiliate or the assumption of any significant risks by the affiliate in Country B. Once manufactured by the affiliate in Country B, the clothes will be sold to the enterprise in Country A which will on-sell them to third party customers. Assume that this restructuring makes it possible for the group formed by the enterprise in Country A and its affiliate in Country B to derive significant location savings. The question arises whether the location savings should be attributed to the enterprise in Country A, or its affiliate in Country B, or both (and if so in what proportions); 9.151 in such an example, given that the relocated activity is a highly competitive one, it is likely that the enterprise in Country A has the option realistically available to it to use either the affiliate in Country B or a third party manufacturer. As a consequence, it should be possible to find comparables data to determine the conditions in which a thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangible would need to be taken into account in the determination of the arm's length remuneration for the sub-contracted services. In appropriate circumstances (e.g. if' there are significant unique contributions such as intangibles used by both the enterprise in Country X and its subsidiary in Country Y), the use of a transactional profit split method may be considered . Thus, under OECD, the locational saving costs has been recognized only when there is either reallocation of activities or business restructuring whereby MNE Group, Multinational Enterprises reallocates some activities or business to a place where costs are lower than the location where such activities or business was initially performed. Whether under various circumstances, locational savings may arise or not and whether under the TP analysis such an adjustment can be made has been elaborately dealt in the examples explained in para 9.150 to 9.153. 18. The key factor which is required to looked into while considering the location cost advantage to an entity working in low cost jurisdiction is that, whether there are suitable local comparable data to determine the conditions in which third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP of a transaction with a related party in a low cost jurisdiction. If good local comparables are available then the benefits of locational savings can be said to have been captured in the ALP so determined. However, if good local parties are not available, or whether the overseas AE is chosen as a tested party, then the problem of capturing the benefit of location savings would remain an issue for determination the ALP. The Indian Chapter has also aligns with the position advocated by BEPS 'Action 8' Report. However under the BEPS also such an adjustment is not required to be made separately if reliable local market comparables are available. In case, reliable local market comparables are not present, then various aspects have been highlighted for making the adjustment. But, whether such an Action Plan as enunciated in the BEPS Guidelines has been captured in our present TP provision? Till now, at least nothing has been brought on record before us, that the Action Plan as enunciated in the BEPS has been captured in our current TP laws/provisions. Therefore, the manner in which the TPO or DRP have made the adjustment is not at all justified sans any specific provision or g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e resorting to any kind of adjustment of the ALP. It is also not clear whether the TPO has treated the location saving as an independent international transaction or it is just an adjustment on the determination of profit of the assessee. If it is an independent international transaction, then it needs to be benchmarked with uncontrolled transaction by carrying out comparability analysis under prescribed methods. On the other hand, if it is an adjustment on the profit of the assessee, then the TPO has to demonstrate that firstly, the profit margin of the assessee, under TNMM is incapable of determining the Arm's Length Prices and in the case of the assessee there are no independent local comparables in India to carry out the comparability analysis for determining of the ALP. Such an arbitrary adhocism for making such huge adjustment in the profit sans any Transfer Pricing analysis under the prescribed provisions cannot be sustained. Hon'ble Delhi High Court in Li and Fung India (P.) Ltd (supra) too has observed that. Tax authorities should base their conclusions on specific facts and not on vague generalities, such as significant risks , functional risks , enterprise r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and remit the issue to the TPO/AO for fresh adjudication with similar directions as in the above referred order of the Tribunal. 8. Grounds 7 to 8 by the assessee are as follows:- 7. On the facts and circumstances of the case and in law, the Ld. Hon'ble DRP erred in upholding the action of the Ld. AO /TPO in making an adjustment of ₹ 5,45,30,838 on account of recovery of expenses (investigator's fee) from AE. In doing so, the Ld. TPO / Ld. AO erred in: a) disregarding the fact that the Appellant merely acts as a coordinator and facilitator for the performance of clinical trials and that the reimbursement of investigator fees do not represent any functions performed so as to consider it for profitability purposes; b) disregarding the fact that the payments made to the investigators by the Appellant are charged by AE on an as-is basis to the Sponsor, which are reimbursed subsequently; and c) disregarding the fact that there is no profit element in the hands of AE in relation to such recoveries. 8. Without prejudice to the Ground No. 7, even if adjustment on account of recovery of expenses from AEs is to be upheld, the Ld. TPO erred in i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial services receipts. The situation remains the same in this assessment year also. If there was any change, it would have been brought out by the taxpayer in the submissions made or in the TP study. lnfact, there is no mention of the change in position adopted in the TP report. 11. As far as the argument of the taxpayer that pass-through is the norm in the Parexel Group and hence Parexel India should not be treated separately, the TPO holds it wrong. The taxpayer has not brought out the difference in environment, if any, between the earlier assessment year and this assessment year. There has been no policy change at the Global level also. Hence the arguments of the taxpayer cannot be accepted and were rejected. 12. Further the TPO observed that the case laws cited have different facts and those are not of the jurisdictional courts. It is also very clear from the functional analysis of the taxpayer that it is performing agency function and for performing this function any independent entity would have definitely added a markup apart from recovering the costs. The taxpayer is using its resources for considerable time to find the investigators. The taxpayer pays salaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to such 'Pass through Costs' which cart be produced to PIC. (emphasis supplied) Accordingly, in the case of the assessee, pass through costs are those costs which are incurred on behalf of third parties i.e. Sponsors, and which are subsequently reimbursed by the AEs on a cost-to-cost basis. The assessee, while acting as an intermediary, makes payment to Investigators for undertaking the clinical trial activity as contracted to them. These payments made by the assessee are subsequently recovered from Parexel Group in accordance with the service agreement between the assessee and Parexel Group. 16. As per the Consolidated Financial Statement (`CFS') of the Group filed with the US regulatory authorities relevant for the current year, Parexel Group routinely subcontracts clinical trials to independent physician investigators on behalf of Sponsors. The related investigator fees are not reflected in the revenue or costs in the CFS of Parexel group, because these fees are reimbursed by the Sponsors on a pass through basis, without risk or reward to Parexel Group. The relevant extract of the CFS of the AE (Form 10K) is reproduced hereinbelow:- Reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude larger scale clinical trials conducted on patients afflicted by a target disease to test the safety and efficacy of the drugs. FDA review : After the successful completion of the above stages, the FDA scrutinizes data from all phases of development to confirm that the sponsor has complied with regulations and the drug or biologic is safe and effective for the specific use under study. Post-marketing surveillance and Phase IV study : Federal regulation requires sponsor to collect and periodically report to the FDA additional safety and efficacy data on the drug. The AE, depending upon the requirements of the Sponsor outsources certain part!, of the assignment to its various affiliates. In case a trial is required to be undertaken in India, Parexel India will be given the assignment of coordinating and facilitating the clinical trial in India. 19. It was submitted that the entire aforesaid process of conducting the clinical trial is undertaken by the Sponsor and the Parexel Group while Parexel India only arranges tor such clinical trial activity to be undertaken. The responsibility undertaken by each of the participant is detailed hereinunder:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uns over several years. Irrespective of such huge risks involved in the entire process, the assessee operates in a risk-free environment. 21. Based on the aforesaid transaction flow and functional analysis, the assessee submitted the FAR of the assessee vis- -vis the 'Investigators'. Functions undertaken by Parexel India and Investigator: 22. It was submitted as seen from the above, the role of Parexel Group and Parexel India is to facilitate the end customer (i.e. the Sponsor) to undertake the clinical trials in line with the protocols and parameters set forth by the Sponsor. The actual clinical trials are undertaken by the investigators such as hospitals, physicians etc. Investigators undertake clinical trial activity, seek for requisite approvals from Ethic committee of their respective hospitals, enroll patients for the clinical trial, ensure that health of the volunteer patients is in accordance with the regulatory framework and then conduct clinical trials on them. Investigators takes the responsibilities that the Case Report Forms (CRFs) submitted to Parexel India is true, correct and accurately reflect the result of the study. These Investigators actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire clinical trial activity. The relevant extract of the aid rule is reproduced below: The Investigator(s) shall be responsible for the conduct of the trial according In the protocol .and the GCP Guidelines and also for compliance as per the undertaking g is in Appendix VII. Standard operating procedures are required to be documented by the Investigators for the tasks performed by them. During and following a subject's participation in a trial, the investigator should ensure that adequate medical care is provided to the participant for any adverse events. Investigator(s) shall report all serious and unexpected adverse events to the Sponsor within 24 hours and to the Ethics Committee that accorded approval to the study protocol within 7 working days qt. their occurrence 28. As opposed to the unlimited liability/ risks faced by the Investigators, the assessee merely provides support services to its AEs and operates in a 'risk insulated environment and is remunerated on cost plus basis. 29. Clause 5.1 of the agreement entered into with the AE provides that Parexel India will be indemnified fully against any liability arising on account of performance of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s need not apply a mark-up on pass through expenses which are recharged to third parties. This principle is fully supported by the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (OECD Guidelines) which provide that:- When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost-plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of the services but rather un the costs of the agency function itself or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of renting advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he credit recipient without a mark-up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function. In the light of ITS 2009 Transfer Pricing Guidelines, it would be clear that a mark-up is to be applied to the cost incurred bp the assessee company in performing its agency function and not to the cost of rendering advertising space on behalf of its AEs. Further, the method adopted by the assessee while submitting transfer pricing study based on net revenue has been accepted by the Department in earlier year and, therefore, there is no reason to depart from that stand already accepted by the Department in earlier year. 36. It was submitted that a similar view has also been upheld by the Mumbai Tribunal in FedEx Express Transportation and Supply Chain Services India Private Limited (Merged Federal Express India Private Limited) vs. DCIT [TS-423-ITAT-2014(Mum)-TP], wherein it was held as under:- The Assessee's role was confined to making of the payments and to get the entire re-imbursements of the costs. It is the Jeena company who had charged for its service, and the Assessee has merely pass through such cost. In other words, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for a group company it would be not be appropriate to charge mark-up on the cost of services acquired from an arms' length party. The relevant portion of the order is reproduced below:- 35. We have considered the rival submissions. As observed in the OECD commentaries referred to in the Circular of the Canada Customs and Revenue Agency, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; and a taxpayer who acts solely as an agent on behalf of the group to acquire services from an arm's length party. In the latter situation, the arm's length compensation would be limited to rewarding the agency role. In such a case, it would not be appropriate to determine an arm's length charge by referring to a mark-up on the cost of the services acquired from an arm's length party. Whether a taxpayer is providing a service or merely acting as an agent on behalf of the group is a question of fact. 39. In view of the above facts, analysis of the functions, assets and risks of the assessee and extracts of the OECD guidelines and Tribunal rulings, the assessee summarises its arguments as to why ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses and pass through cost. 41. Therefore, the allegation of the TPO that the assessee has not charged mark-up on such costs is completely baseless. 42. The TPO at para no. 7.6.2 has concluded that the assessee has been charging a mark-up on the investigator costs upto the preceding years and accordingly, a mark-up ought to be imputed in the current year as well. 43. It is submitted that just because the assessee was receiving a markup on the pass-through costs until the preceding year, it cannot be a basis to impute a mark-up in the current year as well. Adjustments are to be made based on transfer pricing principles and in the present case, no third party would have paid a mark-up on the costs, which are not incurred by the assessee to provide its intermediary functions. The assessee should not be expected to earn a margin based on the classification of costs as internal or external' costs, but rather on a comparability including functional analysis (Para 2.93 of the OECD TP Guidelines). 44. In this regard, reliance is placed on the decision of the Hon'ble Mumbai Tribunal in the case of Dresser-Rand India (P) Ltd vs. Ad (11 CIT (2011) 13 taxmann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), there ought not to be a separate adjustment by way of imputation of markup on investigator and incidental costs as the same would result into double adjustment. A direction in this regard was also prayed for. 48. On the other hand, the ld. DR drew our attention to the following facts recorded by the Tribunal in IT(TP)A No.254/Bang/2016 292/Bang/2017 for the AYs 2011-12 2012-13 as under :- 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 of the AE. The financials of the assessee are reproduced by the TPO as under: Operating Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is that assessee has not undertaken any risk and all risk was taken over by Paraxel International GmbH Germany and relied on the Addendum dated 19.9.2007. However, the fact is that the assessee acted as coordinator and facilitator in selecting the investigator so as to conduct clinical trial. Selection of the investigator demonstrates that clinical trial is important task in the whole work undertaken by the assessee. The assessee invested considerable time and resources in this. The plea of assessee is that assessee has not received any amount as fee for doing this coordinator and facilitator job. In our opinion, this is an inter-group services provided by the assessee to its parent company and assessee must charge some fee as it would have, had the services been provided to a third party. The contention of the ld. AR is that remuneration for these services has already been included in the provision of clinical trial services and no separate fee is charged for coordinating and facilitating with the investigators. As per OECD guidelines, this is an intra-group services provided by the assessee to its parent company for which the assessee is entitled to remuneration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anges to the fees shall be communicated between the parties in writing and such written communication shall be considered as addendum to this agreement. Any taxes leviable in India on the above fees shall be borne by PIC. Further, PIC may withhold taxes to the extent required to do so as applicable in its jurisdiction. 4.5 Sponsor, for the purposes of section 4.3, shall mean and refer to a customer / 'company who have entered into a contract with PIC for the provision of Clinical Services. 4.6. Investigator, for the purposes of section 4.3, shall mean and refer to a physician, medical doctor, medical consultant, or a hospital, which has entered into an investigation contract with PICRPL and/or Sponsor to administer pharmaceutical drugs for the purposes of clinical research trials. 4.7. PIC shall pay the remuneration on the basis of invoices duly issued by PICRPL within 3o (thirty) days after the end of the month. PICRPL shall maintain true and accurate books of accounts and records reflecting the services and cost incurred in connection therewith. PIC may from time to time request for the detailed breakup of cost incurred and PICRPL agrees to provide details as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or transactions have to be given effect even though they result in avoidance of tax liability, provided that they are genuine, bonafide and not colourable transaction. 53. In the present case, in the immediate earlier AY 2012-13, the assessee has shown investigator payment with mark-up and in this year on the basis of Addendum entered by the parties as discussed earlier, made the investigator payment as pass through costs and claimed as reimbursement without any profit element, which is against the agreed norms in the earlier years which cannot be effected and accepted as genuine agreement. Accordingly, we are of the opinion that this intra-group service ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
