TMI Blog2011 (12) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee as above afresh. Capital Gain - Sale of Car - closing block under Income Tax was having WDV balance - AO: claim by letter not admissible - Held That:- Appellate Tribunal has however the power to entertain any claim. We are of the view that the claim of the assessee deserves examination by the AO - IT APPEAL NO. 6623/MUM./2011 - - - Dated:- 23-12-2011 - N.V. VASUDEVAN, R.K. PANDA, JJ. Harrish Arora, Bipin Pawan and Arun Saripalli for the Appellant. B. Jayakumar for the Respondent. ORDER N.V. Vasudevan, Judicial Member This is an appeal by the assessee against the order dated 24/8/2011 of ADCIT, 10(3), Mumbai (the AO) passed under section 143(3) r.w. 144C(13) of the Income Tax Act, 1961 (the Act). 2. Gr. No. 1 and 2 raised by the Assessee reads as follows: That on the facts and circumstances of the case, and in law; 1. That the Assessment Order passed in pursuance to the directions issued by the Learned Dispute Resolution Panel (Ld. DRP') is a vitiated order as the Ld. DRP erred both on facts and in law in confirming the addition made by the Ld. Assessing Officer ('AO') to the appellant's income without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, M/s IDC (India) Limited, M/s Oil Field Instrumentation Limited, M/s Celestial Labs Limited and M/s Mindtree Limited) which are functionally not comparable to the appellant. Ld. DRP has erred in making an incorrect comparison of the functions undertaken by the comparables vis- -vis those performed by the appellant 3. The Assessee is a company engaged in the business of providing contract research, business development, pharma and technical services and contract testing services. Merckle GMBH, Germany is a pharmaceutical producer and contract manufacturer of proprietary and generic medicines. Ratiopharm GMBH, Germany is a 100% subsidiary of Mercke, GMBH and is engaged in the business of development, manufacture and distribution of generic pharmaceutical products. Ratiopharm International GMBH, Germany is a 100% subsidiary of Ratiopharm GMBH. The Assessee is 100% subsidiary of Ratiopharm International GMBH and it was originally known as Ratiopharm India Private Ltd. The assessee was set up in December, 2000 to provide pharma technical services, including services related to sourcing and development of ingredients to be used as raw materials to Mepha, Merckie and the ratiopha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealised by it on the basis of operating profit to Total cost (OP/TC) for conducting the comparability analysis. This has been referred to as Profit Level Indicator (PLI) in the submissions of the Assessee as well as the Transfer Pricing Officer's order u/s. 92CA(3) of the Act. The Assessee identified 10 comparables. 6. The assessee's PLI was 16.03%, whereas the arithmetic mean of the PLI of 10 comparables was 8.09%, which was as under: S. No. Name of the Comparable Company PLI (%) 1. Vimta Labs Ltd 27.44 2. Alphagea (India) Ltd 38.21 3. Choksi Laboratories Ltd. 34.96 4. Dolphin Medical Services Ltd. 10.76 5. Medinova Diagnostic Services Ltd. 5.83 6. N G Industries Ltd. 18.23 7. Max Neemari Medical Intl. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as department. The above arithmetic mean of the PLI of the above comparables was 35.37%. The TPO therefore called upon the Assessee to show cause as to why the ALP of the transaction should be determined by applying the above Arithmetic Mean of 35.37%. 8. In response to the above, assessee made detailed submissions vide letters dated 16.7.2010 and 28.7.2010 objecting about the set of 8 comparables and the gist of submissions was as under: Functionally incomparable, like engineering service companies etc. are included Public sector companies are also included. Year on year variation in profits of comparables. 9. The TPO was of the view that the above contentions of the assessee were not acceptable because as per TP report, assessee had selected 10 comparables, which includes M/s. Alphageo (India) Ltd. Activity of M/s. Alphageo (India) Ltd. had been shown as consultancy in the field of oil and gas exploration. As can be seen even the assessee has selected the comparable companies not exactly into R D services but functionally similar and hence, it cannot object to department selecting functionally similar companies. 10. Thereafter, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the comparable is not in the same industry as that of the tested party, where there is inadequate comparable companies. b. In the comparables identified by the TPO, Engineers India Ltd. Was a public sector undertaking. According to the TPO, Public sector undertakings were also in the market for earning profits, similar to private companies and therefore, these companies are also considered as comparable and cannot be discarded on account of Public sector undertakings. c. Year to year variations in profits is not a criterion for determining comparability. Since, the companies are engaged in R D services in the current year, the same can be taken as comparable, Thus, assessee's arguments of not considering department's comparables were rejected by the TPO. 11. The TPO took into consideration the comparables identified by the Assessee except the two loss making companies already referred to in the earlier part of this order. The TPO accepted that all the companies identified by the Assessee as comparable were functionally comparable with the Assessee (except the two companies which were loss making). The TPO accordingly determined the ALP of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 transactions was determined by adopting PLI of 26.43% as under:- S. No. Particulars As per assessee (Form 3CEB) ALP determined by Department. 1. Sales value of R D services provided to the AE 398,098,771 43,37,79,313 2. Operating Expenses (TC) 343,098,405 343,098,405 3. Operating Profit (OP) 55,000,366 9,06,80,908 4. OP/TC 16.03 26.43 5. Difference between ALP of Sales and value of international transaction (Rs. 43,37,79,313 - ₹ 39,80,98,771) 6. Application of +/- 5% range: (105%* ₹ 43,37,79,313) = 455,468,279 (95%* ₹ 43,37,79,313) = 412,090,348 Thus, the ALP of the transaction was determined at ₹ 43,37,79,313/- as against the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search and Development Services, which is also the frame work of the services rendered by the assessee. Besides, as rightly pointed out by the TPO, since the assessee has adopted the TNMM method, functional similarity is not restricted to include companies within the same industry in the event of inadequate comparable companies. The assessee's objection on inclusion of Public Sector Undertakings is also not relevant in that Public Sector Undertakings also function on similar principles as any other company and they are also in the market for earning profits. The assessee's objection on obtaining of additional information is not borne by the provisions of the Income-tax Act. There is nothing in the Income-tax Act which prevents the TPO from obtaining additional information from any source. Further, we do not find any infirmity in this action of the TPO as the assessee was finally confronted with all the information obtained. Moreover, it is seen that the TPO in working of the arithmetic mean of 26.43% has considered all of the assessee's comparables excepting the 2 loss making comparables. Thus, the assessee's objection primarily seems to be on the identification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facility provided or to be provided to any one or more of such enterprises. Sec. 92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its group companies in Germany whereby the Assessee provided services in the form of contract testing and research services was an international transaction attracting the provisions of Sec. 92 of the Act. Sec. 92C provides the manner of computation of Arm's length price in an international transaction and it provides: (1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. (2) For the purposes of sub-rule (1), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the comparable relied upon by the TPO and whether the difference between ALP and the Price adopted by the Assessee would be less than 5% plus or minus contemplated by the second Proviso to Sec. 92C(2) of the Act and consequently there would be no need to make any adjustment to the price adopted by the Assessee in respect of the international transaction entered into with its AE. There are other incidental grounds raised by the Assessee in its appeal and we will deal them also. 18. The issue raised by the Assessee in Gr. No. 2.1 is with regard to the action of the AO in disregarding the Transfer Pricing Study Report of the Assessee and proceeding to conduct a fresh search. In this regard, the submission of the learned Counsel for the Assessee was that u/s. 92C(3) of the Act, the AO can determine the ALP only on fulfilment of the conditions laid down therein. In this regard, it was argued that the AO has not disputed that the TNMM is the most appropriate method of determining ALP in this case and therefore the conditions of Sec. 92C(1) of the Act stood satisfied. It was next pointed out by the learned counsel for the Assessee that in accordance with Section 92C(2) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO in his order also. 20. It was the submission of the learned counsel for the Assessee that in a situation where none of the conditions laid down in Sec. 92C(3) are satisfied, there was no reason to fall back upon some other data at all. In other words it was the submission that the condition precedent for the AO to make adjustment to the ALP as determined by the Assessee was that the AO should be satisfied with regard to the existence of conditions mentioned in Sec. 92C(3) of the Act. It was his submission that since, no such satisfaction is discernible either from the order of the TPO or the order of the AO, (both draft and fair assessment orders) the ALP adopted by the Assessee should be accepted. 21. We have considered this submission and are of the view that the same cannot be accepted. u/s. 92C(3) of the Act, the AO has power to determine ALP on the basis of material or information or document in his possession. The report of the TPO is material, information or document in possession of the AO. The TPO has disputed the ALP as determined by the Assessee in its Transfer Price Study Report. According to the TPO the price charged or paid in the international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables would depend on acceptability of the fresh comparable selected by the TPO. If they are found to be not comparable then as a natural corollary the comparable given by the Assessee would alone stand for consideration. 23. As far as Gr. No. 2.4 with regard to rejection of two comparable cited by the Assessee in its T.P. Study/Report, we notice that even if both are rejected and if the fresh comparable cases cited by the TPO are found to be not comparable then the rejection of the loss making comparable selected by the Assessee will not make any difference as is revealed by the following chart: S. No. Name of the comparable company TP study comparables updated financial information On removing ADS On removing ADS and Neeman PLI% (OP/TC) PLI (OP/TC) PLI% (OP/TC) 1 Alphageo (India) Ltd. 38.21 38.21 38.21 2 Vimta Labs Ltd. 27.44 27.44 27.44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e financial year in which the international transaction has been entered into. Proviso to the said rules provides that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. We are therefore of the view that this objection of the Assessee does not find support in law. On facts it has not been shown as to how the data relied upon by the TPO was not relating to the financial year in which the international transaction has been entered into. We therefore do not find any substance in Gr. No. 2.5 raised by the Assessee. 25. With this background, we will take up for consideration, Gr. No. 2.6 2.7. The Functional analysis of the Assessee has first to be set out. The same is as follows: The following are the services rendered by the Assessee to the AEs. 1. Contract Testing and Research Services; and - Stability Testing; - Pharmaceutical Product Development and - Analytical Research/Testing. A. Stability Testing: Merckle has entered into a services arran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee carries out stability testing on the test samples at its Goa unit as per the prevailing ICH-guidelines and the testing instructions provided by Merckle. Assessee uses validated testing methods and testing procedures. If necessary, Assessee revalidates the methods specified by Merckle to the necessary extent, e.g., in the case of essential changes in equipment. Assessee makes the test results available to Merckle in the form of a test report, duly signed by an authorized person. ( e ) Quality Control and Monitoring Merckle is responsible for ensuring that that the testing instructions including specifications provided to L stability testing are consistent with the registration dossier of the corresponding medicinal product and its starting materials. Merckle also provides assessee with all documents necessary for safe handling of the test samples and the reference substances to be processed. Assessee ensures that the test samples are handled properly and disposed off. RIPL also ensures that its equipment is qualified, regularly serviced and calibrated. ( f ) Invoicing and payment Assessee charges on scientist man day rate. The scientific man day rate is deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as mixing, sifting, granulation, drying, size reduction, compression, coating, packing etc. to develop oral dosage forms based on different technologies. RIPL has a quality module system in relation to each scientific operation being carried out. The functioning of the department is also supported by standard operating procedures, qualified equipment, and adherence to GMP, so as to maintain a high degree of quality in operations. Analtical Research Testing of Medicinal Products Assessee also provides analytical research services to ratiopharm from a unit located at Mumbai. As discussed earlier, analytical research is undertaken to screen potential drug candidates, to aid in the development of drug syntheses, support formulation studies, monitor the stability of API and formulations, and test final products for release. The nature of analytical research services provided by assessee to ratiopharm includes development of analytical methods for API and formulations, evaluation of analytical methods, stability studies and physicochemical characterization of APIs. Functions Performed The associated enterprises, as a part of the pharmaceutical product development proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y can be compared with the Assessee who renders contract research and testing of drugs. We agree with the submission of the learned Counsel for the Assessee that this company is not functionally comparable with that of the Assessee. 2. Agile Electric Technologies Private Limited (Agile) Agile is engaged in the business of design and development of drawings for motors and other related activities. Agile also carries on the business of providing engineering and associated services. Besides, it is the owner of the Intellectual Property in the designs developed. Here again the function performed by this company cannot be compared with that of the Assessee. The learned D.R. however pointed out to page-318 of the paper book, which contains the Annual report of Agile Electric Technologies Pvt. Ltd. as on 31.3.2008 and submitted that they also do testing. We have seen the relevant document and find that the same refers to acquisition by the said company of component manufacturing line along with testing and validation lab and building. The same report says that the acquisition would enable the company to become a full service supplier by offering gamut of services by moving from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of Penetration, Weight on Hook, Heave, Weight on Bit, Rotation per minute, Stand Pipe Press, Stroke per minute, Mud Flow, Conductivity, Total Gas, Chromatographic analysis and H2S etc. Oil Field provides Customized Mud logging solutions for Exploratory, Developmental, Deepwater and CBM drilling locations. Oil Field is engaged in supply of equipment and rendering services mainly for geological operations for oil, gas and mineral exploration. Also as per the website of Oil Field, Oil Field provides Rig Instrumentation and services for drilling rigs like pressure indicators, diaphragms, drillers console, recorder, etc. It also provides accurate, timely and reliable drilling data. The website information also says that Oil Field's real time gas evaluation systems offer considerable accuracy that help in taking critical on site drilling decisions. It is rugged and field proven equipment, used in Exploration, Production and Refinery Sectors. Oil field provides Gas Detection like Hydrocarbon Detector, Carbon Dioxide Detector, Hydrogen Sulphide Detector, Higher Hydrocarbons Detector, Nitrogen Detector, Sulphur Dioxide Detector, Oxygen Detector, Carbon Monoxide Detector, Hydrogen Det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices and some trading activity which is not comparable to the Assessee. Hence it is clear that it is not comparable to the functional profile of the Company and accordingly ought not to be considered a comparable The learned D.R. however drew our attention to page-389 of the paper book which is an extract from the Directors report which reads as follows: The Company as developed a de novo drug design tool CELSUITE to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if right/patent act. (Apprised and funded by Department of Science an d Technology New Delhi) Based on our in silico expertise (applying bio-informatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favourable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial biotechnology area, the company has signed the Technology transfer agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices - The department offers research that focuses on creating long term technology innovation and licencable intellectual properties with applicability across industry groups. Semiconductor and Hardware Engineering - The department provides product realization and feasibility services, as welt as high-speed interface design, helping its clients assess the right electronic architectures and design high-speed hardware interfaces. It helps its customers at any stage of ASIC/SoC development from concept to silicon. These services offered on an individual as welt as on a turnkey basis. Software Engineering - The department set of skills spanning from embedded software to application software needed for product realization. This, coupled with hardware engineering capabilities, enables the company to work as a one-stop shop for software product development needs. Video Surveillance Solutions - The department provides a range of licensable components that enable OEMs, large system integrators, and distributors to introduce products like surveillance manager, intelligent video encoders, video decoders, and intelligent Digital Video Recorders (DVR)s quickly into the market. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the material effects of such differences. None of the parameters laid down in the rules have been considered by the TPO either in the matter of comparison or adjustment to be made where comparison is possible after making adjustments. Since the comparable adopted by the Assessee have not been disputed by the TPO as not comparable, the same is accepted. We may also add that Research and Development services rendered as a profit centre is different from own Research and Development in connection with business carried on by an Assessee. The TPO has proceeded to compare such companies which do research not as profit centre but as part of some other activity say manufacture or market research. Such an approach in our view cannot be accepted on the facts of the present case. Another reason given by the TPO for choosing fresh comparable is that the Assessee has chosen Alphageo (I) Ltd., which is in the field of consultancy in Oil and Gas exploration. On this approach of the TPO, we find that Alphageo (I)Ltd., was selected as a comparable by the Assessee as it was doing testing services on contract basis. The approach of the Assessee is acceptable in this regard and affords a broade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the DRP in its order dated 20/7/11 directed that except expenditure relating to purchase of a Mural for a sum of ₹ 1,38,702.82 and purchase of hardware for its systems amounting to ₹ 20,89,500/- should be allowed as deduction. The aforesaid two items of expenditure were considered as capital expenditure. The AO however, allowed depreciation on the aforesaid two items. Aggrieved by the aforesaid order of the AO the assessee has raised Ground No. 3 4 before the Tribunal. 32. As far as the expenditure on purchase of Mural of ₹ 1,38,702.82 is concerned the facts are that the aforesaid expenditure was incurred for the purpose of acquiring hand painted Mural art work which was fixed in the Canteen wall. It was submitted by the assessee that due to frequent dampers and damage to the wall in the canteen due to moisture frequent top up to the canteen wall was required. It was further submitted that the assessee was a Pharma related R D Industry and was required to maintain and up keep its facilities in a particular manner. It was contended that no new asset came into existence and the expenditure was only for preserving and maintaining an already existing asset. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions as per the appellant's Transfer Pricing documentation, and the addition made on account of the above grounds should be deleted. The appellant further prays that the claim of expenditure as repairs, as well as claim for reduction from income due to taxation of capital gain arising on sale of cars be allowed and that the expenditure which was already capitalised (and not claimed as revenue) should not be added to the income. 36. In para 3 of the direction issued by DRP-II, the AO was directed to allow/disallow the assessee's claim regarding profit on sale of assets of ₹ 1,44,048/-. The facts in this regard, as submitted by the Assessee, were that during the previous year, the Assessee sold 3 cars. Details of the gross value, accumulated depreciations, net block, sale proceeds and profit/loss on sale of each car was given. There was one car under the Block of 50% depreciation and opening income tax WDV was ₹ 44,954/- but under the Company Law, the opening block was NIL and accordingly the Book Profit on sale of ₹ 150,000/- was reduced from the profit (Income) and ₹ 105,046/- was offered for tax as capital gains. However, the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as revised on 26.6.2009. According to the AO, that revised return was not a valid return in the eyes of law as the same was filed after 31.3.2009. The claim for deduction of ₹ 1,44,048/- was made for the first time vide letter dt. 15 October, 2010. Even at that stage, no working for the same was furnished. In the P L A/c of assessee in Schedule 10 profit on sale of fixed assets was shown at ₹ 3,42,715/-. The assessee reduced only the sum of ₹ 1,50,000/- in the computation of income. Thus the figures are not reconciling with each other. The AO further held that that Supreme court in Goetze (India) Ltd v. CIT [2006] 284 ITR 323/157 Taxman 1 held that no deduction can be claimed by the assessee at the time of assessment otherwise than by way of revised return. The relief can not be allowed in any other way. Section 143(2) also provides that AO issues a notice u/s. 143(2) only to examine whether assessee claimed excessive loss or underpaid the taxes in any manner. Thus he can not entertain any additional claim in the course of hearing. The AO thus did not allow the claim of the Assessee. 38. Aggrieved by the order of the AO, the Assessee has raised the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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