TMI Blog2014 (10) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... in directing the AO to restrict the addition made on account of TP adjustment by applying the average OP/OC of the said comparables at 19.08% - the order of the CIT(A) is upheld partly the addition made by the AO/TPO on account of TP adjustment – Decided partly in favour of assessee. Deduction on profit derived from 100% EOU by allocating the expenditure on director's remuneration u/s 10B – Held that:- The assessee company had only one working director during the year under consideration to whom the remuneration of ₹ 1.93 crores was paid - the export turnover of the EOU during the year under consideration was ₹ 25.63 crores and the profit shown by the assessee of the EOU was ₹ 5.12 crores - it is difficult to accept the contention raised on behalf of the assessee that the only working director was not at all involved in the affairs of the EOU, especially when there is no evidence brought on record to support and substantiate this contention - the involvement of the only working director in the affairs of the EOU in the facts and circumstances of the case was inevitable, especially when both its domestic unit and EOU were managed by the assessee company - t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... systems that are built and configured to fit within a manufacturing process for pharmaceuticals and biopharmaceuticals. It also provides consulting and customer support services for high value applications. Return of income for the year under consideration was filed by it on 31.10.2007 declaring total income of ₹ 35,14,99,517. During the year under consideration, the assessee had entered into the following international transactions with its Associated Enterprises (AE). International Transactions (as mentioned in 92CE report) Purchase of raw materials components Rs.27,25,69,199 Purchase of spares Rs.12,75,88,068 Sale of filtration systems Rs.25,90,68,493 Receipt of Commission, Consultancy Service charges ₹ 9,38,77,028 Income of R D Division Rs.66,16,525 Income from Software Division Rs.54,68,198 Purchase of lab equipment Rs.4,83,607 4. During the course of assessment proceedings, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this segment were less than ₹ 1 crore and since reliable data of the comparable companies in this segment with turnover less than ₹ 1 crore was not available, the TPO did not carry out any separate TP study in respect of this segment and thereby accepted the price charged by the assessee to its AE as at arm's length. 7. In respect of R D service segment, the TP analysis was done by the AO by following the TNMM taking 'Operating Profit to Operating Cost' (OP/OC) as the Price Level Indicator (PLI) and applying the following filters/criteria for searching the comparables: Companies whose data is not available for the FY 2006-07 were excluded. Companies whose R D or related Service income ₹ 25 cr. were excluded. Companies whose R D or related Service revenues are less than 75% of the total operating revenues were excluded. Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded. Companies who have less than 25% of the sales as export sales were excluded. Companies who have persistent losses for the period under consideration were excluded. Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee for TP analysis in the TP study report and upheld the action of the TPO in rejecting the said two comparables. The ld. CIT(A), however, found merit in the submissions made on behalf of the assessee seeking exclusion of 3 comparables selected by the TPO and held that the 3 entities selected by the TPO could not be taken as comparables after discussing all the relevant aspects of the matter in paras 2.10.1 to 2.10.3 of his impugned order as under: 2.10.1 In respect of M/s. IDC (India) Limited, it is submitted that the Company is primarily undertaking research survey services for products and as per the information available in the website, the Company provides market intelligence, advisory services and events for the information technology, telecommunication and consumer technology markets and therefore the Company is functionally not comparable with the appellant. It is further submitted that the appellant Company is engaged in scientific research which cannot be compared with the market research and market analysis. To support the contention the appellant relied on the decision of the Honourable ITAT Mumbai, in the case of Tevapharm Pvt Ltd v. Addl.CIT ( ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant. This fact has even been admitted by the Transfer Pricing Officer, in Para 5.5.2 of its order, where he mentioned that the TPO could not find any Company which is exactly same or near similar to the tax payer in terms of the function . In such circumstances, the TPO was not justified in including the above Company in the comparables. Accordingly, the Assessing Officer is directed to exclude the above Company from the comparables. 2.10.2 In respect of Oil Field Instrumentation India Ltd., it is submitted that the Company is engaged in supply of equipment and rendering services mainly for geological operations for oil, gas and mineral exploration and is also engaged in mud logging services in India. It is submitted that mud logging services, are not similar to research development services rendered by it and therefore, the above Company is not functionally comparable with the appellant. To support the arguments the appellant relied on the decision of the Honourable ITAT Mumbai in the case of M/s. Tevapharm Pvt Ltd (supra). Having heard the contention of the appellant, and on perusal of the finding given by the Transfer Pricing Officer, it is an undisputed fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs by selecting the Company as comparable to the software development services in some of the cases and also as comparable to the R D services in other cases. The Honourable ITAT Mumbai in the case of M/s. Tevapharm Pvt Limited (supra) held that according to the learned D R Celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the assessee, the discovery is in relation to a software for discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no amendment to the definition of the term 'income' To include the amount computed under Chapter X. Further he is not justified in failing to appreciate that the charging or computation provision relating to income under the head profit gains of business or profession do not refer to or include the amounts computed under Chapter X. The Learned CIT(A) is not justified in failing to appreciate that there is no provision in Chapter X that indicate that the same would override the computation provisions of business income or the normal understanding of the term 'income'. 2. The Learned CIT(A) has failed to appreciate that the transfer pricing provisions will not apply to an income which is not required to be computed under the Income Tax Act. He is not justified in failing to appreciate that as the R D services' income of the Appellant being covered by Section l0B falling under Chapter III does not enter into computation process at all, the transfer pricing provisions cannot be applied. 3. Without prejudice to the above, the Learned CIT(A) is not justified in rejecting the transfer pricing study carried out by the Appellant. 4. The Learned CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced by us in the foregoing part of this order, which clearly shows that the three entities selected by the TPO were not functionally similar with the assessee company. For instance, M/s. IDC (India) Ltd. was found to be engaged primarily in providing services relating to market research and analysis, which is not similar to the work of scientific research development carried on by the assessee company. Similarly the other comparable selected by the TPO viz., Oilfield Instrumentation (India) Ltd. was found to be engaged in providing mud logging services, which was functionally different than that of the assessee company. M/s. Celestial Labs, the third comparable selected by the TPO was also found to be engaged in various activities such as bio-informatic services, software development services and the same accordingly were held to be not functionally similar. In support of his decision to exclude all these three comparables selected by the TPO from the list of final comparables, reliance was placed by the ld. CIT(A) on the decision of the Mumbai Bench of the Tribunal in the case of Tevapharm (P.) Ltd. (supra), wherein it was held that these three entities could not be compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EOU. The income of the EOU unit was eligible for exemption u/s. 10B of the Act. In the unit-wise accounts prepared and furnished by the assessee before the AO, the director's remuneration amounting to ₹ 1,96,43,615 was not allocated by the assessee among domestic unit and EOU. The explanation offered by the assessee in this regard was not found acceptable by the AO for the following reasons given in the assessment order: (a) The assessee stated that the domestic Unit (MIPL) is old one and it is involved in complex activities. The assessee claimed that the results of the that taxable unit were dependent on sale and cost factors and the whole time director was primarily responsible for the management of the domestic Unit( MIPL) and not the EOU unit. However the control and management of EOU vests with the same director and the EOU is not managed separately by some other person. (b) The assessee has stated that the activities of EOU are narrow and only few employees (Roughly20) are employed. It was further stated that it's a 100% captive unit of Millipore Corporation and it is under direct supervision and control of its holding company. The Millipore Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of authorities below in support of the revenue's case on this issue. He contended that there was no evidence brought on record by the assessee to show that the working director was exclusively involved in the affairs of domestic unit only and his involvement was not there in the export unit at all. He contended that both the units were managed by the assessee company and since there was only one working director, his involvement in the affairs of EOU unit was inevitable. He contended that the AO therefore was fully justified in allocating the expenditure incurred by the assessee on director's remuneration in the ratio of total turnover. 29. We have considered the rival submissions and also perused the relevant material on record. It is an admitted position that the assessee company had only one working director during the year under consideration to whom the remuneration of ₹ 1.93 crores was paid. It is pertinent to note here that the export turnover of the EOU during the year under consideration was ₹ 25.63 crores and the profit shown by the assessee of the EOU was ₹ 5.12 crores. Having regard to these facts and figures, we find it difficult to accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e building of EOU unit amounting to ₹ 23,04,834 and ₹ 6,34,119 respectively was claimed to be revenue expenditure allowable as deduction. In the course of assessment proceedings, the claim of the assessee for deduction on account of this expenditure was examined by the AO and on such examination, he treated the same as capital expenditure on the following grounds: (i) The assessee incurred huge volume of expenditure for extensive repair and refurnishing the work. (ii) The result of the expenditure ensures enduring benefit to the building because of new advantage added. (iii) As per sec.31(1) of the I.T. Act the deduction shall be allowed for the amount paid an account of 'current' repairs but not for mere repairs which have the effect of enduring benefit. (iv) The assessee has spent a big amount of ₹ 29,38,953/- for Civil works. The spending of big amount on civil work amounts to effacement of an old asset and creation of new look to the building. Accordingly treating the expenditure incurred on civil works amounting to ₹ 29,38,953 as capital in nature, the AO allowed depreciation only @ 5% and disallowed the balance amount. 32. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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