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Apotex Research (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 11 (1) , Bangalore

2012 (11) TMI 1094 - ITAT BANGALORE

TPA - ALP determination - comparable selection - Held that:- Assessee is engaged in the business of providing contract pharmaceuticals Research & Development services, thus companies functionally 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 margi .....

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RATHVAJA 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)] passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 ["the Act"]. 2. The grounds of appeal r .....

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,41,59,983 to the total income of the Appellant on account of adjustment in the arm's length price of the international transaction entered by the appellant with its associated enterprises. 4. The learned AO/TPO erred in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules'), conducting a fresh economic analysis for the determination of the arm's length price .....

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ving accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). 7. The learned AO/TPO erred, in law and facts, by rejecting certain companies for having foreign exchange earnings less than 25% of the revenues. 8. The learned AO/TPO erred, in law and in facts, by incorrectly rejecting a comparable company on account of persistent operating losses on one hand and accepting certain super profit making companies on the other hand. 9. The lear .....

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ents 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 .....

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contract research services to its Associated Enterprise ["AE"] was an international transaction and the provisions of section 92 of the Act were applicable. The income from such transactions had to be determined having regard to the arms' length price. 4. The typical activities performed by the assessee are listed as under (the following functions are performed by the assessee after Apotex Inc. identifies the product to be developed and before the final product is manufactured and .....

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manufacturing plant environment. Stability Testing : Long-term studies, where the product is stored at room temperature and humid conditions, to assess expiry date and storage conditions for pharmaceutical products. Bio-equivalence study : A series of comparative tests designed to establish therapeutical equivalence between test and reference (innovator) products. Regulatory filings/submissions : Results from bio-equivalence study and stability testing are documented in prescribed manner for do .....

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uot;]. There is no dispute that TNMM was the most appropriate method and even the TPO has accepted the said method as the most appropriate method for determining the ALP in the case of assessee. 6. The Profit Level Indicator ["PLI"] was adopted by the assessee as operating profit on cost. The assessee in its TP study had chosen the following as comparables, giving an arithmetic mean of 15.60%. COMPARABLES OF THE APPELANT Sl. No. List of comparable companies Margin % Reason for rejectio .....

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) 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 .....

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er TP order 39.49% 8. The TPO applying the aforesaid margin of 39.49% determined the ALP as follows:- "The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Based on this, the arms length price of the research and development services rendered by the taxpayer is computed as under: Arithmetc mean PLI : 39.49% on cost Less Working Capital Adjustments : 0.41% on cost Arm's length Margin : 39.08% on cost Operating Cost ₹ 32,48,39,378/- Arm's Length .....

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hortfall of ₹ 8,41,59,983/- is treated as transfer pricing adjustment u/s 92CA." 9. The adjustment suggested by the TPO was adopted by the AO in the draft order of assessment. Against the draft assessment order, the assessee filed objections before the DRP. The DRP accepted the view of the TPO and the addition proposed in the draft assessment order. In accordance with the directions of the DRP, the AO passed the fair assessment order making the impugned addition on account of adjustme .....

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07-08, 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. Th .....

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he 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 loss for the F.Y. 2004-05 as its sales was ₹ 3.15 crores, whereas the total cost was ₹ 4.40 crores, resulting in a loss of ₹ 0.59 crores. The said company was therefore excluded from comparability. In an application u/s. 154 of the Act filed by the assessee (dated 13.2.2012) before the .....

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arable on the ground that it was consistently making losses. 11. The ld. counsel for the assessee submitted that if the comparables chosen by the TPO are rejected for the reasons given above and even if IDC India Ltd., Mindtree Ltd. (segmental data) and Neeman Medicals International (Asia) Ltd. are considered as comparables, operating margin on cost would be 9.95% as per the following details:- The table below shows that the arithmetic mean margin would be 9.95% on: Including companies erroneous .....

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e than the arithmetic mean as given in the above table. The ld. counsel therefore submitted that the adjustment made to the ALP should be deleted. It was also submitted that when the assessee makes a specific claim that Neeman Medicals International (Asia) Ltd. should not be rejected as comparable for certain reasons and if the TPO does not give reasons as to why the claim of the assessee cannot be accepted, then it is to be presumed that the TPO has accepted the claim of the assessee. It was th .....

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ature 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. Merc .....

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see 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 ratiopharm Group. The assessee has also set-up a moder R&D Laboratory to carry out pharmaceutical product development and provide analytical research and stability testing services to its associated enterprises." 15. It can thus be seen from the above that the activities of the assessee in the p .....

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ot;1. Engineers India Ltd. (EIL) is engaged in a diverse set of activities viz., providing a full suite of engineering and related technical services for petroleum refineries and other industrial projects. It provides a complete range of services needed to conceptualise, design, engineer and construct projects to meet the specific requirements of its clients. Its association with the clients extends beyond the commissioning of their plants through monitoring operation of each plant and accumulat .....

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d D.R. however pointed out that EIL also does Research and Development and in this regard drew our attention to page-183 of the paper book. (Annual Report of EIL) "EIL is making consistent 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 r .....

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ly 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 reports provide market forecasts, competitive analyses, vendor profiles, and information on customer requir .....

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client's specific business problem. The uniquely qualified, multi-disciplinary experts help you develop business strategies, fine tune product development and pricing, define and implement marketing goals, assess competitive forces, and evaluate joint ventures and acquisitions. - Standard research reports: These research documents cover everything in hardware-PCs, peripherals, servers, software services and key industry issues. The research reports provide market intelligence, forecasts, com .....

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ion (India) Limited (Oil field): Oil Field is the largest Mud Logging services provider in India. Oil Field offers Mud Logging services with real time data acquisition and monitoring of data with alarm on critical parameters, data storage option, computerized logs and web enabled transmission. Important parameters measured are Total Depth, Rate of Penetration, Weight on Hook, Heave, Weight on Bit, Rotation per minute, Stand Pipe Press, Stroke per minute, Mud Flow, Conductivity, Total Gas, Chroma .....

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mely 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 Dete .....

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ting services. Oil field does not carry out any of these stipulated activities and accordingly Oil field ought not to be considered a comparable. (Emphasis supplied) 5. Celestial Labs Limited (Celestial Labs) : According to assessee Celestial Labs as a comparable has been cheery picked by the TPO. Celestial Labs is a diversified company operating in varied fields such as rendering IT services encompassing application development and maintenance, production support, EERP, data warehousing, SAP im .....

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plementation to maintenance and ongoing optimization. Celestial helps the company align IT Solutions with business strategies. CelSanjivani Products: CelSanjivani is a part of Celestial Labs Ltd., an ISO 9001-2000 company working in this space of Bio-informatics and Gio-Technology. The goal is to become a primary market place for the herbal products providing quality products to the customers and industrial community. This is an Ayurvedic portal dedicated to B28&C market with online live con .....

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le 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. (Emphasis supplied) 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 fi .....

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tute, 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 fur .....

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y 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 comparabi .....

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oviding R&D Services for various industries like Communication, Industrial Automation, Automotive and Avionics, Storage and Systems etc. The relevant extract has been provided below for ready reference: "The diversified focus in the R&D Services Business into various verticals such As Communication, Industrial Automation, Automotive and Avionics. Storage and Systems, Semi Conductor, Wireless and Consumer Electronics had shown results in 2006-07 as well" As per the website of th .....

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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 .....

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age 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 functional profile of the Company and accordingly ought not to be considered a comparable." (Emphasis supplied) 16. We are of the view that in the light of decision of the Tribunal in the case of Tevapharm (P.) Ltd. (supra) referred to above, the aforesaid companies cannot be compared as comparables. .....

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not dispute the fact that Neeman Medical International (Asia) Limited is functionally comparable with that of the assessee. The only reason given by the TPO for excluding the aforesaid company in the list of comparables is that for the F.Y. 2004-05, this company made a loss. It is, however, noticed that from the profit & loss account of this company for the year ended 31.03.2006 which contains the figures of income & expenditure as on 31.03.2005 that income of this assessee was ₹ 4 .....

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