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2012 (11) TMI 1094

y dissimilar with that of assessee need to be deselected from final list. - As already seen in the earlier part of this order, if the six companies (including IDC India Ltd. and Mindtree Ltd.) is taken as comparables, the operating margins on cost (unadjusted) is 10.22%. The assessee's operating margin on cost is 13.17% which is much above the arithmetic mean of the comparables. In the given circumstances, we are of the view that the price at which the assessee rendered services to its AE has to be considered as at arms' length and no adjustment on account of arms' length price (ALP) ought to have been made. We accordingly hold that the addition made by the Assessing Officer by way adjustment to ALP deserves to be deleted. - IT APPEAL NO. 918 (BANG.) OF 2011 - Dated:- 23-11-2012 - SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER For the Appellant : Shri Chavali Narayan, C.A. For the Respondent : Shri S.K. Ambastha, CIT-I(DR) ORDER N.V. Vasudevan, Judicial Member - This is an appeal against the order dated 24.08.2001 of the Deputy Commissioner of Income-tax, Circle 11(1), Bangalore [hereinafter referred to as the "Assessing Officer (AO)] pa .....

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ed by overlooking the Appellant's objections on the subject and in concluding that the working capital adjustment has been correctly computed. 11. The learned AO/TPO erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables. 12. The learned AO/TPO erred in computing the arm's length price without giving benefit of +/- 5 per cent under the proviso to section 92C of the Act. Each of the ground is referred to separately, which may kindly be considered independent and without prejudice of each other. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law." 3. The assessee is a company. It is engaged in the business of providing contract pharmaceuticals Research & Development services to Apotex Pharmaceuticals Holdings Inc. ["APHI"], a corporation incorporated under the laws of Canada. The assessee is a wholly owned subsidiary of APHI. The transaction by which the assessee pr .....

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n of 15.60%. COMPARABLES OF THE APPELANT Sl. No. List of comparable companies Margin % Reason for rejection by the TPO 1 Alphageo (India) Ltd. 30.31% Accepted as a comparable 2 Choksi laboratories 32.00% Company having <25% export earnings 3 Dolphin Medical services 13.89% Company having <25% export earnings 4 Medinova Diagnostics 3.87% Company having <25% export earnings 5 N G Industries 31.01% Company having <25% export earnings 6 Neeman Medicals International (Asia) Ltd. (-) 13.28% Because of continuous losses 7 Vimta Labs Ltd. 69.37% Accepted as a comparable 8 ADS Diagnostics Ltd. (-) 14.17% Functionally different 9 Pfizer Ltd. (-) 0.03% Functionally dissimilar 10 Transgene Biotek (-) 0.03% Functionally dissimilar Average Margin as per TP Study 15.60% 7. The TPO rejected the comparables given by the assessee for the reasons given in the chart given above (see Column 4 of the Chart). As can be seen from the chart given above, the TPO accepted that Alphageo (India) Ltd. and Vimta Labs Ltd. were comparables, but in respect of other 8 comparables chosen by the assessee, the TPO rejected the same for the reasons given in the chart given above. The TPO on his own selected .....

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.Y. 2007-08, wherein the Mumbai Bench of the Tribunal in the case of an assessee who was engaged in providing contract research for pharma industries, had considered the comparability of 5 of the comparables chosen by the TPO viz., Engineers India Ltd., IDC India Ltd., Oil Field Instrumentation, Celestial Labs & Mindtree Ltd. and have taken the view that these companies cannot be taken as comparables for determining the ALP in the case of a company providing contract research & development. The ld. counsel for the assessee submitted that following the aforesaid reasoning given by the Mumbai Bench of the Tribunal, the aforesaid companies should be excluded from the list of comparables adopted by the TPO. It was further submitted that one of the comparables chosen by the assessee viz., Neeman Medicals International (Asia) Ltd. was rejected by the TPO on the ground that the said company was a consistently loss making company. It was pointed out by the ld. counsel for the assessee that the assessee filed application dated 13.2.2012 before the TPO pointing out that in page 9 of the TPO's order, the TPO had mentioned that M/s. Neeman Medicals International (Asia) Ltd. is into .....

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he ld. DR, on the other hand, submitted that Neeman Medicals International (Asia) Ltd. made loss during the previous year relevant to A.Y. 2007-08 and on that ground itself, the rejection of the said company as a comparable by the TPO should be accepted. 14. We have given a careful consideration to the rival submissions. It is not in dispute that the nature of services rendered by the assessee and the nature of services rendered by Tevapharm (P.) Ltd. (supra) which was the subject-matter of the decision by the Mumbai Bench of ITAT in ITA No. 6623/Mum/2011 are identical. For the sake of reference, the nature of services rendered by M/s. Tevapharm Pvt. Ltd. is given in para 3 of the aforesaid order which is as follows:- "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. Ratiophar .....

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efforts in developing technologies and strengthening its R&D division. The division is continuously pursuing developmental activities both in-house and in collaboration with other R&D Institutes like IOCL (R&D), IIP, IICT, BPCL (R&D) etc. The developmental activities started earlier have resulted in the commercialization of a number of technologies." As rightly contended on behalf of the Assessee the research and development is not a profit centre. It is part of the research and development done in the course of rendering other professional services. We fail to see as to how this company 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. (Emphasis supplied) ** ** ** 3. IDC (India) Limited (IDC) :IDC primarily undertakes research and survey services for products. IDC research documents cover areas like Enterprise Management Applications, Broadband, Internet and eBusiness, Mobile Usage, IT Service Exports and Continuous Market Review of Computing and Peripheral Products. Such research r .....

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so 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 Detector, etc. The extracts of the functional profile of Oil Field from its website as given above and the information in the annual report of Oil Field on the nature of assets employed such as outer shell of mud logging units, sensors and other instruments clearly demonstrate the disparity between Oil Field's and Assessee's operations. As discussed earlier the functional profile of Assessee is in the nature of providing -Contract Research a .....

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UITE" 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 and 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 bio-technology area, the company has signed the Technology transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organization) to manufacture and market initially two Enzymes, Alpha Amylase and Alkaline Protease in India and overseas. The company is planning to set-up a biotechnology facility to manufacture industrial enzymes. This facility would also include the research laboratories for carrying out further R & D activities to develop new candidates' drug molecules and license them to In .....

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-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. The application of these set-vices will come in use for the following industries: - Automotive - Communication Systems - Consumer Appliances and Computer Peripherals - Industrial Systems - Medical Electronics - Storage and Computing Systems Thus it is clear that Mindtree is engaged in providing diversified set of services under its R&D segment for various industries. Hence it is not comparable to the f .....

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