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TMI Blog2018 (3) TMI 1874X X X X Extracts X X X X X X X X Extracts X X X X ..... th section 144C(1) of the Act in pursuance to the order of learned Transfer Pricing Officer, Mumbai (hereinafter called "the TPO") passed u/s. 92CA(3) of the 1961 Act. The assessee filed objections with DRP which were disposed of by DRP vide orders dated 26-12-2016. The AO, thereafter, in pursuance to directions of DRP passed an assessment order dated 31.01.2017 u/s. 143(3) r.w.s. 144C(13) of the 1961 Act, wherein the additions to the tune of Rs. 3,80,43,714/- were made by the AO vide TP Adjustments w.r.t. international transactions entered into by the assessee with its AE. 2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:- "General 1. erred in assessing total income of the Appellant at Rs. 3,89,37,370/- as against returned income of Rs. 8,93,660/- General ground on Transfer Pricing. 2. erred in making transfer pricing adjustment of Rs. 3,80,43,714 in relation to the international transaction of provision of contract research and development services, stability testing and database maintenance services to AEs by the Appellant. Reference to TPO 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant, by stating that the functions of research related to drug discovery is comparable to the business activities of the Appellant; Calculation error in margins of comparable companies 12. erred in wrongly calculating the operating profit margins of following comparable companies and not providing detailed margin calculation of the same: Biocon Limited; and Syngene International Ltd 13. erred in not following DRP directions wherein DRP had directed to calculate the margins correctly after providing an opportunity to the Appellant: Working capital adjustments 14. erred in not providing an adjustment to Appellant in relation to differences of working capital employed by the Appellant vis-o=-vis comparable companies. Risk adjustments 15. erred in not providing an adjustment to Appellant in relation to differences of risk assumed by the Appellant vis-o-vis comparable companies: Levy of interest under section 234B of the Act 16. erred in levying interest amounting to INR 53,11,350 under section 234B of the Act: Levy of penalty under section 271(1)(c) of the Act 17. erred in initiating penalty under section 271(1)(c) of the Act; The respondent craves, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any namely Vimta Labs Limited [submitted by you vide submission dated 09/12/2015] shall not be excluded from the final set of comparables. 3) On careful reading of the director's report to the shareholders in the case of Dolphin Medical services Limited, it has been found that during the year under consideration the company has suffered huge losses due to many intrinsic and extrinsic reasons, which is an extraordinary situation for the company. Hence, you are hereby show caused as to why the said company shall not be excluded from the final set of comparables. 4) On studying the Accept/Reject matrix submitted through Transfer Pricing Study Report, it has found that you have excluded Suven Lifesciences Ltd., Sl. No. 7170, on account of insufficient segment information. However, segmental information of the said company shows operating margin @ 73.86%. You are hereby show caused as to why this company shall not be included in the final set of comparables for calculation of PLI. 5) It is also found that you have excluded Aurigene Discovery Technologies, St No. 677 from the final set of comparables, with remarks-Non comparables Services. However, the Broad analysis of the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed, however the same is not acceptable as the company is functionally not comparable to assessee's business. The said company is engaged into business of quality control testing and trading in products. Hence rejected. Nevertheless, the assessee has considered the said company as non comparable services in its accept-reject matrix in its TP study Report vide Sr. No. 3675. 6. Jubilant Chemsys Ltd. Reason for rejection: The assessee submitted that the company is engaged In non-comparable activity. Further, it had inadvertently done a typographical error in accept reject matrix where the above company was mentioned as engaged In comparable activity. Reason for acceptance: The submission of assessee has been perused, however the same is not acceptable as the company is functionally comparable to assessee 's business. The said Company is a wholly-owned subsidiary of Jubilant Life Sciences Ltd., a global pharmaceutical vertical engaged in collaborative research, development and manufacturing partnerships with global pharmaceutical companies. The company offers Medicinal Chemistry services in Drug Discovery Program for global pharmaceutical and bi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manufacturing (CRAMS) is into Bulk Drugs & Intermediates under contract services products are developed and produced on an exclusive basis under contract manufacturing services. Hence, this segment Is considered as functionally comparable and not Service (DDDSS) as submitted by the assessee. Further, as submitted by the Assessee that R & D expenses need to be reduced from other segment, in response to same it is pertinent to note that the R&D is a separate segment (as per the audited financial statements) and hence the expenses incurred thereon cannot be reduced from any other segments. Further, since the assessee could not provide reasons as to how the amalgamation affects the profitability and how is not comparable to assessee the extra ordinary events cannot be reason for rejections. Moreover, the amalgamation is effective from 1 January 2012 (i.e. only 3 months during the year under consideration) and hence cannot be considered as basis for extra-ordinary activity. Nevertheless, the assessee has considered the said company as comparable services in its accept-reject matrix in its TP Study Report vides Sr. No. 7170. 51.40 9. Synegene International Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Act, the assessee has come in second appeal before Tribunal and has raised as many as 17 grounds which are reproduced at para 2 of this order. 6. Ground No. 1 to 5 - It is prayed by learned Counsel for the assessee that ground No. 1 to 5 are general in nature and does not require separate adjudication. The learned CIT DR did not objected to the dismissal of these grounds bearing number 1 to 5 being general in nature. After hearing both the sides, we are of the considered view that these grounds of appeal from 1 to 5 being general in nature does not require separate adjudication and hence as conceded by the learned counsel for the assessee, these grounds bearing number 1 to 5 stood dismissed. We order accordingly. 7. Ground No. 6-Rejection of IDMA Laboratories Limited(hereinafter called "IDMA") as comparable by Revenue:- The assessee has claimed to be engaged in the business of providing contract R & D services in respect of generic APIs. The services provided also involves database maintenance, statistical analysis and project management in respect of development of such generic APIs. The assessee included IDMA as comparable in its Transfer Pricing Study Report with OP/OC wei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e us. It is the say of learned counsel for the assessee that its only due to typographic error this company was reflected as rejected company in accept/reject matrix in TP study. It is also say of the learned counsel that as much as 39.55% of the revenue of the assessee for relevant financial year is from stability studies and testing services, while it is the say of the Revenue that there was no error committed by the assessee in the rejection of this company IDMA in TP study and this company IDMA was rightly rejected as comparable and also this is the say of the Revenue that miniscule portion of revenue is derived from stability studies and testing services by the assessee during the relevant financial year as its contract for such services was entered only on 07-11-2011 with Actavis, Iceland, AE of the assessee company. We have perused the audited financial statement of the assessee for the financial year ended 31-03-2012 which is placed in paper book/page 114 and we have observed that at para 28 of the said audited financial statements, it is stipulated as under:- "28. The company's sole business segment is to provide research and development services and the Company cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded Dolphin Medical Services Limited as comparable in its Transfer Pricing Study Report with OP/OC weighted average margin of 17.45% while the OP/OC margin for AY 2012-13 was 8.17%. The TPO observed that this company 'Dolphin' had suffered huge losses due to many intrinsic and extrinsic reasons, which is an extraordinary situation for the said company. The assessee submitted in response to show cause notice before the TPO that on operating profit level, this company Dolphin has not incurred losses but has earned profit margin of 8.17%. The TPO observed that this company is engaged in two business divisions namely medical and software division. The Medical division consists of income from diagnostics, herbal and biotech services, which does not pertain to contract R & D and hence not functionally comparable to the assessee's business and hence this comparable was rejected by TPO. The assessee carried the matter before DRP and submitted that this company Dolphin is engaged in equipment testing, establishing, providing and maintaining diagnostic laboratories and setting up laboratories for medical investigations and research. The assessee further submitted that the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs as the secondary segment. Since the company comprises a single business segment and a single geographical segment, disclosures relating to the primary and secondary segments have not been presented." Thus, on perusal of audited financial statement of the assessee, it is observed that it is only engaged in providing R & D services which is the sole segment in which the assessee is operating. The bifurcation of revenue is not given in segment reporting while claim of the assessee is that around 39.55% revenue is from stability studies and testing services which required verification. There are contrarian facts as averred by rival parties and requires proper investigation by the AO/TPO including analysis of revenue derived and functions performed, risk involved and assets deployed, and in the fitness of the matter, we are inclined to set aside this issue regarding functional analysis of Dolphin as comparable with the assessee to the file of the AO/TPO to properly investigate this comparable before arriving at the decision including considering extra ordinary events such as impact of declaration of bank accounts being NPA and extraordinary expenses incurred by this company Dolph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) of Income-tax Rules, 1962. It was also submitted that profit as mentioned in rule 10B(4) will also include losses within its purview. It was also submitted that the comparables as detailed below selected by the TPO also suffered from high fluctuation in profit margins and the same should also then be rejected: Particulars AY 2013-14 AY 2012-13 AY 2011-12 AY 2010-11 Aurigene Discovery Technologies Limited 50.27% 40.92% 18.69% 18.83% Jubiliant Chemsys Limited -5.72% 28.25% 16.16% 21.61% Suven Lifesciences Limited 67.83% 20.35% 5.36% 6.26% The DRP rejected Vimta as not functionally comparable with the assessee as the assessee is engaged in the business of contract R & D activities of API and analytical testing while Vimta is a company engaged in pre-clinical and clinical analytical in the pharma and food segment and cell and molecular biology, food safety evaluation, etc. It was also observed by DRP that this company Vimta is also engaged in providing environment services like analysis of water, soil, air, waste, source emissions etc.. Thus, in the absence of information as to that Vimta also derived major chunk of revenues from contract R & D in respect of gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the same cannot be rejected as comparable. The functional profile of Vimta is comparable with the assessee as we have elaborated above and in our considered view, we do not find any justification for exclusion of Vimta as comparable. Thus, we hold that Vimta activities/functions are comparable to the assessee company and the same should be included as comparable. The assessee succeeds on this ground. We order accordingly. 10. Ground No. 9 Rejection of SPAN Diagnostics Limited as comparable by Revenue:- The assessee included SPAN Diagnostics Limited as comparable in its Transfer Pricing Study Report with OP/OC weighted average margin of-9.76% while the OP/OC margin for AY 2012-13 was 3.78%. The TPO observed that in accept/reject matrix of TP study, this company 'SPAN' was reflected as having non comparable functions vis-a-vis services rendered by the assessee. On being show-caused, the assessee submitted before TPO that this company 'SPAN' is engaged in the comparable activity and therefore comparable company. The assessee submitted that due to typographical error in accept reject matrix, the company was reflected as an rejected company. The TPO after perusal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables with the remarks non comparable services while the broad analysis of the nature of activities undertaken showed that the said company Aurigene is functionally similar. The assessee in response to show cause submitted that the said company's risk profile is different from that of the assessee. The TPO observed that the said company Aurigene is engaged in undertaking research relating to drug discovery for its customers i.e. contract R & D and hence the said company is functionally comparable. The assessee filed objections with DRP. The assessee submitted before DRP that the TPO cherry picked this company and without understanding true nature of services rendered by the assessee to its AE, it treated Aurigene as comparable. The assessee submitted that Aurigene is engaged in undertaking research relating to drug discovery for its customers while the assessee is not engaged in drug discovery. The assessee submitted that Aurigene has different risk profile and it works with established pharmaceutical and biotechnology companies in early stage collaborations to support drug discovery efforts by its partners. The assessee relied on information available on website of Aurige ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gene International Limited while there is no quarrel so far as inclusion of these two comparables are concerned. The assessee has computed margins w.r.t. these companies @19.94% and 25.34% respectively while the AO/TPO computed the same @ 25.66% and 29.62% respectively. The assessee raised this issue with DRP and contended that the TPO while calculating the margin of Biocon has not considered the unallocated income/expenses and the correct operating margin should be done post allocation of unallocated income/expenses in the segmental account and after considering the same margin will come to 19.94% and not 25.66% as computed by TPO. While for computing margin of Syngene International Limited, it was submitted that the TPO relied on data base from Prowess while the assessee relied on audited financial statements which was claimed to be more reliable. The DRP noted that the assessee has duly filed an rectification application before TPO and directions were issued by DRP to AO/TPO to examine this issue for computation of correct margins of the two comparable. We do not see any prejudice to the assessee by the aforesaid directions of DRP with which we concur. The directions of DRP to A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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