TMI Blog2013 (1) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... he former company cannot be included at all for the preliminary reason that its related party transaction is approximately 38% of its sales, therefore, it cannot be held to be a fit case for comparison of a controlled transaction with an uncontrolled transaction. Insofar as Syngene International Ltd., this company is again 99% subsidiary of Biocon Ltd. and is engaged as a custom research service provider in the drug development process from discovery to supply of development compounds. From annual report, it is seen that the company has two sets of income - one from contract research fees and sale of compounds. However, in the absence of segmental information regarding contract research and manufacturing activities, it is difficult to analyse its main revenue and profit margin from the contract research work. Thus its functional profile is different with that of the assessee company, hence this company is directed to be excluded from the set of comparables. Various diagnostic companies excluded by the TPO viz. Dolphin Medical Services Ltd., Transgene Biotek Ltd. and N.G. Industries Ltd., that not only the functional profile of these companies are different but the characteristic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for communication between employees of the assessee and outside business partners. Such facilities of secured internet facilities, facilitates the day-to-day business operation of the assessee and does not bring into an existence any enduring benefit or creation of a new asset to the assessee. It is not a capital software expenditure as held by the Assessing Officer even though the same has been classified under the head "software expenditure". Thus,such an expenditure is purely revenue in nature and is allowable under section 37(1) - IT Appeal No. 7653 (Mum.) of 2011 - - - Dated:- 21-11-2012 - B. Ramakotaiah And Amit Shukla, JJ. Kanchan Kaushal, Prasad Pardiwala and Dipesh Gada for the Appellant. Ajeet Kumar Jain for the Respondent. ORDER Per Bench - The present appeal preferred by the assessee, is directed against the final impugned assessment order dated 13th September 2011, which has been passed in pursuance of the directions given by the Dispute Resolution Panel-I (for short "DRP"), Mumbai, under Section 144C of the Income Tax Act, 1961 for the quantum of assessment for the assessment year 2007-08. Following grounds have been raised by the assessee: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly, testing and analytical support services. During the year, the assessee had following international transactions with its Associate Enterprise (in short "A.E"). S. No. Nature of Transaction Amount for A.Y. 2007-08(Rs.) 1. Provision of support services 8,99,77,540 2. Provision of support services in connection with research and development 6,32,42,198 3. Payment for network access 12,60,835 4. Payment of seminar/training fees 3,05,007 5. Recovery of expenses 4,10,904 Total:- 15,51,96,484 3. The assessee had prepared separate segment for the transaction of rendering R D support services and marketing support services. For its R D support services, the assessee had shown profit margin on operating cost at 20.75%, as per its segmental account. It has benchmarked its international transaction under 'Transactional Net Marginal Method' (in short "TNMM") as most appropriate method. In its Transfer Pricing Study report for comparability analysis, the assessee has initially identified 16 comparable companies wherein the arithmetic m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Level Indicator (%) 1. Choksi Laboratories Ltd. 33.78% 2. Vimta Labs Ltd. 25.26% 3. Dolphin Medical Services Ltd. 8.31% 4. N.G. Industries Ltd. 18.10% 5. Transgene Biotek Ltd. Diagnostic 22.68% 6. GVK Biosiences P. Ltd. 26.68% 7. Tog Lifesicences Ltd. 26.06% 8. A D S Diagnostic Ltd. - Diagnostic -24.96% 9. Max Neeman Medical International (Asia) Ltd. -46.73% Arithmetic mean (Arm's length mark-up) 9.94% Assessee's margin 20.75% 6. The DRP, however, after calling for the remand report from the TPO, arrived at final set of six companies wherein the arithmetic mean was arrived at 33.63%. The list of such six companies were as under:- S.no. Name of the Company Profit Level Indicator (%)/OP-TC 1. Choksi Laboratories Ltd. 33.78% 2. Vimta Labs Ltd. 25.26% 3. TCG Lifescience 26.06% 4. Celestial Labs Ltd. 58.35% 5. GVK Bioscience ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent from the assessee and the same is not comparable. In support of his contention that Celestial Labs Ltd. functionally comparable to testing and analytical services, he relied upon the decision of a co-ordinate bench of the Tribunal rendered in Tevapharm (P.) Ltd. v. Addl. CIT [2012] 50 SOT 150. 9. Regarding inclusion of 'Biocon Ltd.', wherein segmental data of contract research segment was taken by the TPO, he submitted that Biocon Ltd. is doing contract research work for Biocon Group and subsidiary and is functionally not comparable to the business of the assessee. After referring to the Pages-428 and 453 of the paper book, which are the part of the annual report of Biocon Ltd., he pointed out that the company is engaged in the manufacture of biotechnology products and further it is organized into two business segments i.e., enzymes and active pharmaceutical ingredients. Regarding segmental selection by the TPO, he submitted that contract research segment is not available in annual report of Biocon Ltd., on stand alone but the same has been identified in the consolidated annual report of Biocon Ltd. In the said consolidated annual report, the contract research segment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. He proceeded to referred to the entire business profile and activities carried out by these diagnostic company. Thus, he submitted that three diagnostic companies should be included while taking list of comparables and two company viz. Celestial Labs Ltd. and Biocon Ltd. should be excluded. Once this exercise is taken and their arithmetic mean of the finally selected companies is worked out then the arithmetic mean will come to 22.98% which is quite near assessee's margin of 20.75% and if benefit of safe harbour of +/- 5% is given, then no adjustment is called for. Besides raising the aforesaid contentions, the learned Counsel for the assessee submitted that both the authorities i.e., DRP and the TPP has denied the risk adjustment to the assessee on account of difference between risk profile of the comparables and the assessee. He submitted that there is a difference in this profile with the companies dealing with principal to principal basis to its customers and the companies which are captive service provider, set up by its parent company. He pointed out that there are various risk profile like market risk, credit risk services, liability risk, R D risk, etc., which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue from sale of products is less than 4%. Therefore, the said company has rightly been included. Moreover, he submitted that there is no segmental report of this company as the turnover is less than Rs. 50 crores. Regarding inclusion of 'Biocon Ltd.', he submitted that in T.P. report, the assessee has itself taken this company as a comparable company, therefore, why the assessee is now objecting to inclusion of such company. He, thus, strongly relied upon the directions of the DRP and the order of the Assessing Officer. 13. On the issue of risk adjustment, he submitted that this issue has neither been raised before the TPO nor has been decided by the DRP. Therefore, this is a plea taken before the Tribunal for the first time. Even otherwise also, he submitted that in the T.P. report, the assessee has not made any kind of risk adjustment. Therefore, the plea of risk adjustment cannot be given now after the DRP's direction. He submitted that in the case of captive service provider, which are mostly dealing with single customer, there is always a very high risk because once such a customer is lost, the entire business gets affected. The credit risk is also very much in the case of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vimta Labs Ltd. 25.26% Accepted Both by the assessee as well as by the TPO 5. Dolphin Medical Services Ltd. 8.31% Rejected By the TPO on the ground that the company is engaged in diagnostic services to which assessee has objected to. 6. Max Neeman Medical International Ltd. (-)46.73% Rejected By the TPO on the ground that the company is engaged in diagnostic services to which assessee has objected to. 7. ADS Diagnostic Ltd. - Diagnostic (-)24.96% Rejected By the TPO on the ground that the company is engaged in diagnostic services to which assessee has objected to. 8. Transgene Biotek Ltd. - Diagnostic segment 22.68% Rejected By the TPO on the ground that the company is engaged in diagnostic services to which assessee has objected to. 9. N.G. Industries Ltd. 18.10% Rejected By the TPO on the ground that the company is engaged in diagnostic services to which assessee has objected to. 10. Celestial Labs Ltd. 58.35% Accepted New comparable introduced by the TPO on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in development of specific type software services and products. Thus, Celestial Labs Ltd. which is mainly a software development company and engaged in bio informatic services cannot be said to be functionally comparable with that of the assessee and, therefore, it cannot be included for comparability analysis in the set of comparables taken by the TPO. Accordingly, we uphold the contentions of the assessee that the said company cannot be included. 19. Regarding inclusion of Biocon Ltd., insofar as contract research segment taken by the TPO is concerned, we find merits in the contentions of the learned Counsel that its contract research segment relates to two subsidiary of Biocon Ltd. i.e., Clinigene International Ltd. and Syngene International Ltd. The former company cannot be included at all for the preliminary reason that its related party transaction is approximately 38% of its sales, therefore, it cannot be held to be a fit case for comparison of a controlled transaction with an uncontrolled transaction. On this ground alone, the data of the said company cannot be included for comparability analysis. Insofar as Syngene International Ltd., this company is again 99% subsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to include these three companies for the purpose of comparability analysis is hereby rejected. 21. In view of our aforesaid findings, only four set of companies which has been accepted by both the TPO as well as the assessee viz. Choksi Labs Ltd., Vimta Lab Ltd., G.V.K. Biosciences P. Ltd. and TCG Lifescience Ltd., should be included for the purposes of comparability analysis and the arithmetic mean of the PLI of these final set of companies by taking operating profit of the total cost should be taken for the purpose of determining the ALP. 22. Regarding the plea of risk adjustment on account of difference between the risk profile of the comparables and the assessee, we find that neither the TPO nor the DRP has dealt with the assessee's contentions/objections. Therefore, in the interest of justice, we are of the considered opinion that the matter needs to be restored back to the file of the TPO, who will examine the assessee's contentions on this score and decide the issue afresh in accordance with the law after providing due and effective opportunity of representing the case to the assessee. We order accordingly. Ground no. 1, is thus, partly allowed. 23. In ground no.2, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.E. beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. From the summary of payment submitted by the learned Counsel, it is seen that the billing is done on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the A.Es only. Moreover, the T.P. adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the A.Es, is uncalled for on the facts of the present case and is, accordingly, deleted. 29. In ground no.3, the assessee has challenged the Assessing Officer's action of treating network access charges as capital expenditure. 30. The Assessing Officer on perusal of accounts found that the assessee has debited a sum of Rs. 12,60,835, in the Profit Loss account under the head 'software expenses' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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