TMI Blog2013 (9) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... business of consulting engineers and advisors which is functionally different from the business of the assessee of providing clinical trial services - Gilicon is not only functionally different from that of the assessee company but even the business model adopted by the said company is different and the said company therefore cannot be included for the purpose of comparability analysis – Decided against the Assessee. As regards Kitco, if items of non-operating income are excluded from the profits before Income Tax of Rs. 13.67 Lakhs and Rs. 19.45 Lakhs of Kitco for the Financial Year 2000-01 & 2001-02, there was an operating loss incurred by Kitco in the Financial Year 2000-01 and 2001-02 - On the ground that the said entity making consistently operating loss could not be taken as comparable with the assessee company which is a captive service provider. Validity of recomputation the operating profit by estimating notional indirect cost at 5% thereby altering the cost base – Held that:- If the indirect cost was already included by the assessee in the total cost of Rs. 1080.25 Lakhs incurred in relation to the services provided to its AE for applying the mark up of 10%, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d closed unit amounts to use for the purpose of business in the year under consideration, therefore assessee is entitled for deprecation – Decided in favor of Assessee. Rental income - Classification of Head of Income - Income arising from Sub-leasing of property' is to be taxed in the hands of the assessee whether business income or house property income – Held that:- Assessee is a deemed owner u/s 27(iiib) where an immovable property is acquired on lease for a period of more than 12 years – Income assessable under head ‘Income from House Property’. - IT Appeal No. 3098 (Mum.) of 2006 - - - Dated:- 8-3-2013 - P.M. Jagtap And Vijay Pal Rao , JJ. For the Appellant : Bipin Pawar and Dhanesh Bafna. For the Respondent : Ajeet Kumar Jain. ORDER:- PER : P.M. Jagtap This appeal filed by the assessee is directed against the order of learned CIT(Appeals)-8, Mumbai dated 14-03-2006. 2. The main issue involved in this appeal relates to the addition of Rs. 1,40,39,000/- made by the AO and confirmed by the learned CIT(Appeals) on account of Transfer Pricing (TP) adjustment. 3. The assessee in the present case is a pharmaceutical company operating in India and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NIS Sparta Ltd., M/s Vimto Labs Ltd. and M/s Water and Power Consultancy Services India Ltd. According to the assessee, the average of their operating margin to cost was 8.35% considering the profit margin earned during the years 2000 and 2001 and its operating margin to cost being 10% in relation to its international transactions/involving provision of clinical study management and monitory services, the said transactions entered into were at arm's length . 4. The TPO required the assessee to furnish certain details and documents including the clinical trial services agreement entered into by it with Pfizar Inc. On perusal of the said agreement, he found certain clauses to be relevant and noted the contents thereof in his order as under: (a) In the recital of the agreement it is explained that the overseas associated enterprise is a research based healthcare company engaged in the discovery and development of innovative healthcare products and for this purpose organizes and arranges the conduct of clinical trial and studies involving the testing of its products in a number of countries around the world. It is explained that the assessee has the resources and expertise to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. (e) Clause 8 provides for the compensation that the assessee is entitled to under this agreement. It is stated that the assessee is entitled to be reimbursed on account of all direct expenses incurred by it in for the performance of its obligations under this agreement. The assessee is entitled to a fee calculated @ 5% of the direct costs towards indirect expenses incurred, which cannot be readily allocated to this activity of clinical trial and data management services. The assessee is further entitled to a fee of 5% of the direct costs as compensation for its activities. (f) Clause 10 of the agreement provides that any inventions or discoveries in relation to the healthcare products, made by the assessee in the course of its activities under this agreement would be assigned by it in favour of the overseas entity. The TPO also noted from the details furnished by the assessee that total expenses of Rs.10.80 crores were incurred by the assessee on clinical research department which were mainly inclusive of salary cost, training cost, office expenses, professional fees and investigation expenses. He also noted that the activities of the clinical research were cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of comparability analysis. 6. After overruling the preliminary objections raised by the assessee, the TPO proceeded to make the comparability analysis on the basis of comparables given by the assessee as well as the comparables selected by him. In this regard, he found that M/s Neeman International Asia Ltd. selected by him was a consistently loss making company and the same, therefore, was excluded by him on this count for the comparability analysis. Out of the remaining seven comparable cases, five given by the assessee and two selected by him, the TPO accepted only four companies as comparables for the following reasons given in his order : Companies Remarks Gilcon Project Services Ltd., This company is not found in the prowess database. From the balance sheet provided, very sketchy information relating to business of the assessee is available. It is seen that this entity is engaged in various joint venture activities, the details of which are not available in the balance sheet. It is also observed that the company is a partner in a partnership firm, but the profits of that firm has not been recognized in the company's balance sheet. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es rendered by the assessee company to its AE at Rs. 1328.68 lakhs. Since the fees actually charged by the assessee for such services was Rs.1188.28 lakhs, the difference of Rs. 140.39 lakhs was quantified by the TPO as TP adjustment which was added by the AO to the total income of the assessee in the assessment completed u/s 143(3). 8. Aggrieved by the order of the AO passed u/s 143(3), an appeal was preferred by the assessee before the learned CIT(Appeals) challenging, inter alia, the addition made by the AO on account of TP adjustment. During the course of appellate proceedings before the learned CIT(Appeals), various technical and legal issues were raised by the assessee challenging the validity of reference made by the AO to the TPO u/s 92CA(1) as well as that of the proceedings conducted by the TPO for determination of the arm's length price of the relevant international transactions. The learned CIT(Appeals), however, did not find merit in the contentions raised on behalf of the assessee on these issues and rejecting the same, he upheld the validity of reference made by the AO to the TPO u/s 92CA(1) as well as that of the order of the TPO passed u/s 92CA(3) of the Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs. 1,40,39,000/- to the international transaction of provision of clinical study management and monitoring support services. The appellant prays that the entire adjustment of Rs. 1,40,39,000/- be deleted. 2. Without prejudice to the above, in computing the adjustment, the CIT(A) erred on facts and in law in upholding the action of the AO on following grounds: (a) Disregarding the comparability analysis performed by the appellant selected comparables not functionally comparable to appellant's support activity and thereby considering the arm's length margin as 18.04% on cost; (b) Erred in using secret data not available in public domain by exercising powers under Section 133(6) of the Income Tax Act, 1961 (Act); (c) Not appreciating that none of the conditions prescribed in Section 92C(3) of the Act were satisfied; (d) Recomputing the operating margin of the appellant by: i. estimating notional indirect cost at 5% thereby altering the cost base of the Appellant; ii. including notional interest in the cost base; and iii. not considering payments to hospitals/institutions as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss account of the said company for the year ended 31st March, 2002 placed at page 372 of his paper book to show that substantial expenditure of Rs.12.43 lakhs was incurred on clinical trial expenses. He relied on the decision of coordinate bench of this Tribunal in the case of ITO v. Zydus Altana Healthcare (P.) Ltd . [2011] 44 SOT 132 (Mum.) for assessment years 2002-03 and 2003-04 and submitted that the activities carried on by the assessee in the said case in relation to clinical trials were similar to the case of the assessee in as much as the same were limited to coordination and facilitation of the clinical trials and while considering the case of Siro Clinpharma P. Ltd. which was selected by the TPO as comparable in that case, the Tribunal noted in paragraph No. 9 that Siro Clinpharpa P. Ltd. was actually engaged in conducting clinical trial services having regard to the substantial income generated from the research activity during the financial year 2001-02 as well as the plant and machinery including laboratory equipment owned by it as on 31-03-2002. He submitted that although the Tribunal in that case has held that suitable adjustment should be made for the function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 421 of the Paper Book to show that opening and closing work in progress of consultancy contract were shown. He also invited our attention to the schedule of establishment expenses of the said company placed at page No. 424 of the paper book to show that the consultancy work was sub-contracted by Gilicon going by the substantial expenditure on sub-contracting. He submitted that Gilicon thus was not only functionally different but even the business model adopted by the said company was different from that of the assessee company. 15. As regards Kitco, he invited our attention to page 10 of the TPO's report to point out that Kitco was rejected as comparable by the TPO after taking note of the fact that the said entity was making an operating loss. He invited our attention to the profit loss account of the said company placed at page No. 543 of the paper book and the details of income given on page No. 548 of the paper book to show that if interest income earned by the said company on bank deposit is excluded from the net profit, there was an operating loss for both the financial years 2000-01 and 2001-02. He also invited our attention to the profit loss account of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. DR that Siro should be included for the purpose of comparability analysis and what at the most can be done is to make certain adjustments on account of different business model adopted by the said company as has been directed by the Tribunal in the case of Zydus Altana Healthcare (P.) Ltd. (supra). Accordingly, we direct the AO/TPO to make such adjustments after taking into consideration the relevant facts and after giving the assessee an opportunity of being heard on this aspect. 18. As regards Gilicon, it is observed that the said company was excluded by the TPO for the purpose of comparability analysis inter-alia on the ground that sufficient information was not available on the basis of which the exact nature of business carried on by it could be ascertained. In this regard, the ld. Counsel for the assessee has relied on the copy of Director's Report of the said company at Pg. No. 405 of his Paper Book to point out that the business of the said company being mainly that of consultancy business, there is a functional similarly with the assessee-company. He has also drawn our attention to the business profile of the said company placed at Pg. No. 427 of his Paper Book to po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lakhs credited to the P L A/c on account of excess taxation provision written back. If all these items of non-operating income are excluded from the profits before Income Tax of Rs. 13.67 Lakhs and Rs. 19.45 Lakhs of Kitco for the Financial Year 2000-01 2001-02, we find that there was an operating loss incurred by Kitco in the Financial Year 2000-01 and 2001-02 and the TPO in our opinion was right in excluding Kitco from the comparability analysis on the ground that the said entity making consistently operating loss could not be taken as comparable with the assessee company which is a captive service provider. 20. For the reasons given above, we uphold the action of the authorities below in excluding Gilicon and Kitco and including Siro for the purpose of comparability analysis. We, however, direct the AO to allow appropriate adjustment in the case of Siro which is included for the purpose of comparability analysis on the ground of different business model adopted by the said company after taking into consideration all the relevant facts and after giving the assessee an opportunity of being heard. Ground No. 2(a) is accordingly treated as Partly Allowed. 21. In Ground No. 2(d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services provided to its AE for applying the mark up of 10%, there is no justification in adding indirect cost @ 5% of the direct cost separately as done by the authorities below relying on the terms of the relevant agreement. However, as submitted by the ld. DR, the stand taken by the assessee about inclusion of indirect cost of Rs. 285.48 Crores in the total cost of Rs. 1080.25 Lakhs based on the break-up given on Pg.Nos. 58 59 of the Paper Book requires verification as there is no reference to any such details furnished by the assessee in the order of the authorities below nor there is any finding given on verification of such details. Since the ld. Counsel for the assessee also has no objection in this regard, we restore this issue to the file of the AO to verify from the relevant record, the stand taken by the assessee that indirect cost of Rs. 285.48 Lakhs was already included in the total cost of Rs. 1080.25 Lakhs and if the same is found to be correct, the AO is directed not to add separately indirect cost @ 5% of the direct cost for the purpose of Transfer Pricing exercise. Ground No. 2(d) is accordingly treated as allowed for statistical purposes. 25. In Ground No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as Allowed for statistical purposes. 29. As regards the issue raised in Ground No.3 related to the assessee's claim for depreciation on assets located at Ankleshwar Plant, it is observed that the action of the AO in dis-allowing the said claim was upheld by the ld. CIT(A) relying on the order of his predecessor in assessee's own case of AY. 2001-02. As submitted by the ld. Counsel for the assessee, the order of the ld. CIT(A) for AY. 2001-02 on the similar issue was challenged by the assessee in an appeal filed before the Tribunal and the Tribunal vide its order dt. 18-03-2010 passed in ITA No. 8821/Mum/2004 has deleted the dis-allowance made by the AO and confirmed by the ld. CIT(A) on this issue for the following reasons in para No. 14 to 17 of its order. 14. We have considered the issue. As seen from the orders of the A.O. and the CIT(A) for A.Y. 2000-01 the CIT(A) has allowed depreciation by giving a finding that "in the instant case since the appellant has not acquired these assets but these formed part of the written down value of the assets of the business of the appellant company in the earlier accounting year, no restriction of the allowability of the deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for that year will be calculated on written down value in accordance with section 43(6) of the act by the increase opening WDV by the actual cost of any asset falling within that block, acquired during the previous year. Once an asset is included in the block of assets it's remained in block for its entire life. The end of asset i.e. to go out from block is only in accordance with the provisions of the Act. There are following three situations provided in the statutes when an individual asset of the block goes out of block:- (1) an asset is sold or discarded or demolished or destroyed during that previous year as provided in sections 43(6)(c)(i)(B) and 32(1)(iii) of the Act . (2) An Asset not exclusively used for the purposes of the business or profession but used other then business purposes as provided in section 38(2) of the Act. (3) where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the depreciable assets by the assessee during the previous year exceeds the aggregate of the amounts stated in section 50 of the Act and where any block of assets ceases to exist for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SRF Ltd. 21 SOT 122 (Delhi), (C) Unitex products Ltd. v. ITO , 22 SOT 429 (Mum.) 12. The ld. DR however submitted the user was a condition for allowing depreciation and in this regard relied to the decision of the Hon'ble Bombay High Court in the case of Dineshkumar Gulabchand Agarwal v. CIT , 267 ITR 768 (Bom). We have perused the aforesaid decision and are of the view that the same is not applicable to the facts of the present case. In the present case, the assessee has already used the asset for the purpose of business. The asset has already entered the block of assets. In the case before the Hon'ble Bombay High Court, the asset in question was not at all put to use. We therefore, find the decision relied upon the ld. DR is of no assistance to the plea of the DR. Respectfully following the decisions of the Tribunal referred to above, we hold that the assessee was entitled to claim depreciation and the Assessing Officer directed to allow the same." 17. This order was upheld by the Hon'ble Bombay High Court in ITA No. 598 of 2009 dated 28th July 2009 by following the judgement in the case of Whittle Anderson Ltd. v. CIT 79 ITR 613 and in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find merit in the contention of the ld. Counsel for the Assessee that a person is considered to be a deemed owner U/s. 27(iiib) where an immovable property is acquired on lease for a period of more than 12 years. However, there is an exception i.e., month to month tenancy. This aspect has not been examined by any of the authorities. Accordingly, the order of the ld. CIT (Appeals) is set aside on this issue and the matter is restored to the file of Assessing Officer for fresh adjudication after examining the lease deed and any other material in this regard to ascertain whether the lease was on month to month basis. If the case of assessee does not fall within the exception, then the assessee shall be considered to be a deemed owner of the property. Consequently, the income would be assessee under the head 'Income from House Property'. With these observations, this ground raised by the assessee is partly allowed. As submitted by the ld. Counsel for the assessee, AO has already passed the order giving effect to the order of the Tribunal for AY. 1996-97 on 27-12-2005 and a perusal of the copy of the said order placed at Pg. 50 of the assessee's Paper Book shows that after the n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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