M/S. PAREXEL INTERNATIONAL CLINICAL RESEARCH PRIVATE LIMITED,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-5(1)(2), BENGALURU

This appeal by the assessee is against the order of the AO dated 26.9.2017 passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [“the Act”].

The first issue for consideration is with regard to TP adjustment towards location savings at Rs.21,69,17,701. “All of the grounds and/or sub-grounds of appeal mentioned herein are independent and without prejudice to one another.

In the TP order for the current year i.e. AY 2013-14, relying on the TP order for AY 2011-12, the TPO alleged that conducting the clinical trial in India by the AEs through the assessee resulted in location savings for the AEs since the regulatory and compliance cost as well as investigatory costs were significantly lower in India as compared to developed countries where AEs were located. Resultantly, the cost savings that accrue to the AE ought to be shared with the assessee in India.

To make the adjustment, the TPO relied upon a random non- contemporaneous article titled 'Clinical Trial Magnifier Vol. 1:6 Jun 2008' published on the website www.clinicaltrialmagnifier.com and computed location savings amounting to Rs. 29,11,647 per clinical trial. The TPO then multiplied the said alleged savings per clinical trial by the total number of clinical trials undertaken in India i.e. 149. Accordingly, the TPO arrived at a total cost savings of Rs. 43,38,35,403 (Rs. 29,11,647*149). The said purported savings were split in the ratio of 50:50 between the AE and the assessee and thereby, TPO proposed an adjustment of Rs. 21,69,17,701 on account of alleged location savings.

Aggrieved, the assessee filed objections before the DRP. The DRP vide order dated 18.09.2017 upheld the adjustments proposed by the TPO. Against this, the assessee is in appeal before us.

After hearing both the parties, we are of the opinion that similar issue came up for consideration before this Tribunal in the assessee’s own case for AYs 2011-12 to 2012-13 in IT(TP)A No.254/Bang/2016 & 292/Bang/2017 dated 16.6.2017 wherein it was held as under: “8. We have considered the rival submissions as well as the relevant material on record. The TPO proceeded to make assessment on the basis of location saving available to the assessee being doing its research and trial activity in India in IT(TP)A No.2634/Bang/2017 Page 5 of 38

The key factor which is required to looked into while considering the location cost advantage to an entity working in low cost jurisdiction is that, whether there are suitable local comparable data to determine the conditions in which third party would be carrying out such an activity which would be the measure of Arm's Length and if on such comparability analysis the price received or charged is comparable then no attribution on account of locational savings can be made. If comparable data are available where transaction is being tested or where the tested party is located, then the benefits of location savings can be said to have been captured in the ALP which has been determined. Now, in the OECD/G-20 "Based Erosion & Profit Shifting Project" (BEPS), New Guidelines on the concept of locational savings have been illustrated under "Action 8". These guidelines recommend that, while determining how the locational savings are to be shared between two or more Associated Enterprises then at the threshold it is necessary to consider, firstly, whether location savings exists; secondly, the amount of any net location savings; thirdly, the extent to which locational savings are either retained by a Member or Members of the MNE Group or are passed on to independent customers or suppliers; and lastly, where locational savings are not fully passed on to independent customers or suppliers, the manner in which independent enterprises operating under the similar circumstances would allocate any retained net location savings. Guidelines further states that, suitable comparability adjustment is to be made to account for location savings advantage giving rise to location savings, when function analysis shows that location savings are not passed on to customers or suppliers and there is no local market comparables then, adjustment can be made based on IT(TP)A No.2634/Bang/2017 Page 11 of 38 analysis of all the relevant facts and circumstances including functions performed, risk assumed and assets used of the relevant associated enterprises. However, before that, if reliable local market comparables are available which can be used to identify Arm's Length Prices, then specific Comparability adjustment or location savings may not be required at all. The guidelines, however, does not prescribe any formula or basis for adjustment. The India Chapter on latest 2016 Draft on OECD/G-20 BEPS, which highlights the view of the Indian Tax Administration accept that, where comparable uncontrolled transactions are available, then the comparability analysis and benchmarking by using the results/profit margin of such local comparable companies will determine the ALP of a transaction with a related party in a low cost jurisdiction. If good local comparables are available then the benefits of locational savings can be said to have been captured in the ALP so determined. However, if good local parties are not available, or whether the overseas AE is chosen as a tested party, then the problem of capturing the benefit of location savings would remain an issue for determination the ALP. The Indian Chapter has also aligns with the position advocated by BEPS 'Action 8' Report. However under the BEPS also such an adjustment is not required to be made separately if reliable local market comparables are available. In case, reliable local market comparables are not present, then various aspects have been highlighted for making the adjustment. But, whether such an Action Plan as enunciated in the BEPS Guidelines has been captured in our present TP provision? Till now, at least nothing has been brought on record before us, that the Action Plan as enunciated in the BEPS has been captured in our current TP laws/provisions. Therefore, the manner in which the TPO or DRP have made the adjustment is not at all justified sans any specific provision or guidelines.

In view of the above order of the Tribunal for AY 2011-12 & 2012-13 in assessee’s own case, taking a consistent view, we are inclined to set aside the orders of lower authorities and remit the issue to the TPO/AO for fresh adjudication with similar directions as in the above referred order of the Tribunal.

Grounds 7 to 8 by the assessee are as follows:- “7. On the facts and circumstances of the case and in law, the Ld. Hon'ble DRP erred in upholding the action of the Ld. AO /TPO in making an adjustment of Rs. 5,45,30,838 on account of recovery of expenses (investigator's fee) from AE. In doing so, the Ld. TPO / Ld. AO erred in: a) disregarding the fact that the Appellant merely acts as a coordinator and facilitator for the performance of clinical trials and that the reimbursement of investigator fees do not represent any functions performed so as to consider it for profitability purposes; b) disregarding the fact that the payments made to the investigators by the Appellant are charged by AE on an as-is basis to the Sponsor, which are reimbursed subsequently; and c) disregarding the fact that there is no profit element in the hands of AE in relation to such recoveries. 8. Without prejudice to the Ground No. 7, even if adjustment on account of recovery of expenses from AEs is to be upheld, the Ld. TPO erred in incorrectly applying a mark-up of 15.27% on such investigator fees recovered.”

The TPO observed that in the TP study there is an International Transaction under the head "recovery of expenses" amounting to Rs. 35,10,71,928. During the hearing, in reply to the query, the assessee stated that this is the money paid to the various doctors who conduct the Clinical trial in India for PICLPV. The TPO noted that the investigators' payments was reimbursed with a markup and it was part of the total clinical services receipts. Interestingly, in the relevant assessment year it is shown under the head 'recovery of expenses' and that too without any mark up. The TPO issued a show cause notice dated 16.09.2016 and the figure of 15.27% was arrived at on the basis of the assessee’s own admission of its profit percentage being at 15.27 10. The TPO after examining all the submissions made by the taxpayer was of the view that the assessee’s arguments are bereft of logic and proper evidences to back its claim. He observed that the whole Clinical trial hinges on the commitment and knowledge level of these investigators concerned. Without the right set of Investigators, no Clinical trial would achieve its objectives. Clinical trial is a very risky endeavor as it involves experimentation of unknown chemicals on the human body. Hence the investigator administering the clinical trial become the most important person in safeguarding the patient. Hence the Investigator needs to possess certain skill set, should have immense patience (as Clinical trials last for years together) and complete focus and dedication on the job. Any slip from his side will not only affect the life and limb of the patient but will harm the reputation of Parexel India and the Group as a whole. Hence, the selection of investigators is very important and this is the job of the Taxpayer. This is a very important job and cannot be done routinely. The taxpayer invests considerable time and resources on this. The same was recognized by the AE. The AE was not only reimbursing the investigator's costs but, considering the investment of time and resources involved and the importance of finding the right person for the job, was also providing a markup on these costs till the previous assessment year. Infact, in the previous assessment year, the investigators costs was part of the Clinical trial services receipts. The situation remains the same in IT(TP)A No.2634/Bang/2017 Page 16 of 38 this assessment year also. If there was any change, it would have been brought out by the taxpayer in the submissions made or in the TP study. lnfact, there is no mention of the change in position adopted in the TP report.

As far as the argument of the taxpayer that pass-through is the norm in the Parexel Group and hence Parexel India should not be treated separately, the TPO holds it wrong. The taxpayer has not brought out the difference in environment, if any, between the earlier assessment year and this assessment year. There has been no policy change at the Global level also. Hence the arguments of the taxpayer cannot be accepted and were rejected.

Further the TPO observed that the case laws cited have different facts and those are not of the jurisdictional courts. It is also very clear from the functional analysis of the taxpayer that it is performing agency function and for performing this function any independent entity would have definitely added a markup apart from recovering the costs. The taxpayer is using its resources for considerable time to find the investigators. The taxpayer pays salaries to these employees and other benefits and perks. When the resources of the taxpayer is being deployed for a considerable period of time, then an independent entity would definitely add a markup on the costs incurred. This is what the taxpayer was doing till last year and again as mentioned earlier, there is no change in the situation for the taxpayer to change his model. Hence it is concluded that the taxpayer doesn't fall in the category it is claiming to be in as per the OECD guideline quoted by him. Hence it is rejected. Considering all the facts and circumstances of the case, the TPO has decided the ALP of the 'recovery of expenses' of the Investigators fees to be at Cost plus markup of 15.27% as follows:- Issue ALP as determined ALP as per TPO by taxpayer Recovery of expenses 35,71,10,928 41,16,141,766

The DRP concurred with the findings of the TPO. Against this, the assessee is in appeal before us.

In this case, the contention of the AR is that the assessee entered into agreement with Parexel International GmbH, Germany, under which assessee merely acted as Coordinator and facilitator with no risk in rendering such services and the entire risk relating to such activity is borne by Parexel International GmbH, Germany group and third party investigator and this is cost to cost reimbursement by Parexel GmbH Germany and there is no question of any mark up towards ALP as done by the TPO. 15. Further in terms of clause 4.3 of the addendum to the agreement with AEs, pass through cost is defined as expenses which are ultimately payable by the Sponsor on a cost-to-cost basis as follows:- "4.3. Pass through cost, for the purposes of section 4.1.2 and section 4.2, shall mean costs including but not limited to investigators fee, drug charges, laboratory fees, legal & professional charges, translation cost, related travel & conveyance expenses, and any other expenses incurred by the PICRPL (Appellant) which are ultimately payable by the Sponsor on a cost to cost basis to PIC (AE) or any other contracting affiliate. The Parties agree that PICRPL will not load any margin on the recharge of such pass through cost. PICRPL shall maintain complete, accurate and up-to-date accounting records relating to such 'Pass through Costs' which cart be produced to PIC." (emphasis supplied) Accordingly, in the case of the assessee, pass through costs are those costs which are incurred on behalf of third parties i.e. Sponsors, and which are subsequently reimbursed by the AEs on a cost-to-cost basis. The assessee, while acting as an intermediary, makes payment to Investigators for undertaking the clinical trial activity as contracted to them. These payments made by the assessee are subsequently recovered from Parexel Group in accordance with the service agreement between the assessee and Parexel Group.

As per the Consolidated Financial Statement (`CFS') of the Group filed with the US regulatory authorities relevant for the current year, Parexel Group routinely subcontracts clinical trials to independent physician investigators on behalf of Sponsors. The related investigator fees are not reflected in the revenue or costs in the CFS of Parexel group, because these fees are reimbursed by the Sponsors on a "pass through basis," without risk or reward to Parexel Group. The relevant extract of the CFS of the AE (Form 10K) is reproduced hereinbelow:- “Reimbursement Revenue & Investigator Fees On the other hand, the Reimbursable out-of-pocket expenses are reflected in our Consolidated Statements of Income under “Reimbursable expenses," as we are the primary obligor for these expenses despite being reimbursed by our clients. In add ….. physician investigators in connection with clinical trials. The related investigator fees are not reflected in o… Reimbursable out-of-pocket expenses, or Direct costs, because these fees are reimbursed by the clients on a… The amounts of these investigator fees were $421.2 million, $250.8 million, and $185.5 million for the …..”.

It was submitted in light of the above, it can be clearly concluded that the payments received by the assessee are purely reimbursements for the expenses incurred on behalf of a third party and therefore, are a pass- through cost for the Group. Profit margin can be determined only vis-à-vis the value-added activities undertaken: 18. In order to appreciate the above proposition, it was submitted it will be very important to first understand the general clinical trial process, explained herein below:

It was submitted that the entire aforesaid process of conducting the clinical trial is undertaken by the Sponsor and the Parexel Group while Parexel India only arranges tor such clinical trial activity to be undertaken. The responsibility undertaken by each of the participant is detailed hereinunder:-

The ld. AR submitted It is very clear from the above table that he entire risk of conducting the clinical trial and its success/ failure lies with the Sponsor/ AEs and the assessee is insulated, in the sense that, irrespective of the success / failure of the trial, the assessee will be remunerated at a cost plus 15% mark-up. It will be necessary to appreciate that a clinical trial

Based on the aforesaid transaction flow and functional analysis, the assessee submitted the FAR of the assessee vis-à-vis the 'Investigators'.

It was submitted as seen from the above, the role of Parexel Group and Parexel India is to facilitate the end customer (i.e. the Sponsor) to undertake the clinical trials in line with the protocols and parameters set forth by the Sponsor. The actual clinical trials are undertaken by the investigators such as hospitals, physicians etc. Investigators undertake clinical trial activity, seek for requisite approvals from Ethic committee of their respective hospitals, enroll patients for the clinical trial, ensure that health of the volunteer patients is in accordance with the regulatory framework and then conduct clinical trials on them. Investigators takes the responsibilities that the Case Report Forms (CRFs) submitted to Parexel India is true, correct and accurately reflect the result of the study. These Investigators actually perform the clinical trial and assume the risk of the trial being conducted as per set protocols. Parexel India only undertakes co-ordination activities in this regard and there is no value addition by Parexel India.

While the assessee enters into an agreement with the Investigator, it so enters on behalf of and as an agent of the Sponsor.

It was submitted that the assessee neither has the capability nor is authorized to perform clinical trials on its own. The assessee’s

The following routine assets are owned by the assessee for the year ended 31 March 2013:

It was submitted that, on the other hand, all trial Investigators should possess appropriate qualifications, training and experience and should have access to such investigational and treatment facilities as are relevant to the proposed trial protocol as per Drugs and Cosmetics (IInd Amendment) Rules, 2005 - Schedule Y: Requirements And Guidelines For Permission to Import And / Or Manufacture Of New Drugs For Sale Or To Undertake Clinical Trials.

It was submitted it is also pertinent to note that these Investigators actually perform the clinical trial and assume the risk of the trial being conducted as per set protocols. It is the Investigator who is responsible for trial-related decisions. In fact, Schedule Y of the Drugs and Cosmetics (IInd Amendment) Rules, 2005 which is the key document that governs clinical research in India, provides that the "Investigator shall be IT(TP)A No.2634/Bang/2017 Page 23 of 38 responsible" for the conduct of the entire clinical trial activity. The relevant extract of the >aid rule is reproduced below: "The Investigator(s) shall be responsible for the conduct of the trial according In the protocol .and the GCP Guidelines and also for compliance as per the undertaking g is in Appendix VII. Standard operating procedures are required to be documented by the Investigators for the tasks performed by them. During and following a subject's participation in a trial, the investigator should ensure that adequate medical care is provided to the participant for any adverse events. Investigator(s) shall report all serious and unexpected adverse events to the Sponsor within 24 hours and to the Ethics Committee that accorded approval to the study protocol within 7 working days qt. their occurrence"

As opposed to the unlimited liability/ risks faced by the Investigators, the assessee merely provides support services to its AEs and operates in a 'risk insulated environment and is remunerated on cost plus basis.

Clause 5.1 of the agreement entered into with the AE provides that Parexel India will be indemnified fully against any liability arising on account of performance of services. The same is reproduced hereinbelow:- "PIC (AE) hereby irrecoverably undertakes to indemnify PISPL (Appellant) against any liability incurred by PISPL in any way arising out of the or in connection with the performance of the services hereunder. The clinical trials are herein, including immaterial assets arisen herein in connection with the services in the Agreement. -.hall remain the sole property of PIC" (emphasis supplied) 30. Accordingly, Parexel India is indemnified from any liability by the Parexel Group which occurs during the process of clinical trials. It will be relevant to note that the risks associated with service failures including non- performance to generally accepted regulatory standards is very high in any clinical trial activity. Any error/ mistake could result into regulatory non

Accordingly, it was submitted that the entire risk relating to the said activity is borne by Parexel Group and the third-party Investigator. Entire risk of initiating the clinical trial, obtaining regulatory approval from FDA, failure / success of such reversals is borne by the AE/ Sponsors, whereas the entire risk of conducting the clinical trial as per the set protocols on the Investigator. Rather, a negligible amount insurance expenses incurred by the assessee during the current year of Rs. 23,611. (for the year ended 31 March 2013(Pg.13 of the PB) indicates it does not carry any substantial risk.

In view of the above, the assessee submitted that it neither undertakes any functions nor assets nor any risks vis-à-vis the provision of clinical trial activity. It merely coordinates and facilitates the provision of clinical trial services to the Sponsors. Therefore, the profit margin of the services rendered by Parexel India should be determined taking into consideration only the cost incurred by the assessee for value added functions i.e., its own internal costs. Doing otherwise would result into a fallacy where the Appellant is being expected to earn a mark-up on costs incurred on behalf of third parties.

It was further submitted that it is an accepted principle that service providers need not apply a mark-up on pass through expenses which are recharged to third parties. This principle is fully supported by the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (OECD Guidelines) which provide that:-

To support the case of the assessee, reliance is placed on the decision of the Delhi Tribunal in Cheil Communications India Pvt. Ltd. vs. DCIT [ITA No. 712/De1/2010], wherein the Tribunal agreed that mark-up is to be applied on the cost incurred by the assessee in performing the IT(TP)A No.2634/Bang/2017 Page 26 of 38 agency functions and not on its gross spends. The Tribunal endorsed the OECD view that while applying TNMM, the cost to be considered is should be the costs incurred in relation to the value added activity i.e. only the cost relating to agency function. The relevant portion of the order is reproduced below:- " It is, thus, clear that the assessee has not assumed any risk on account 61 non-payment by its customers or associated enterprises. As per ITS 2009 Transfer Pricing Guidelines accepted by the OECD, when an AEs is acting only as an agent or intermediary in the provision of service, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves, and, in such a case, it may be not appropriate to determine ALP as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than that would be appropriate for the performance of the services themselves. In these type of cases, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark-up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function. In the light of ITS 2009 Transfer Pricing Guidelines, it would be clear that a mark-up is to be applied to the cost incurred bp the assessee company in performing its agency function and not to the cost of rendering advertising space on behalf of its AEs. Further, the method adopted by the assessee while submitting transfer pricing study based on net revenue has been accepted by the Department in earlier year and, therefore, there is no reason to depart from that stand already accepted by the Department in earlier year."

It was submitted that a similar view has also been upheld by the Mumbai Tribunal in FedEx Express Transportation and Supply Chain Services India Private Limited (Merged Federal Express India Private Limited) vs. DCIT [TS-423-ITAT-2014(Mum)-TP], wherein it was held as under:-

Further, in the case of Ness Technologies (India) Private Ltd. vs. DCIT (ITA No. 696/Mum/2016 and IT(TP)A No. loo6/Mum/2016) the Mumbai Tribunal has held that if the recovery of expenses did not involve any element of profit or mark-up in the hands of the AE, the mark-up on the recovery by the Assessee was not warranted. The relevant portion of the order is reproduced below:- "13.3 All this material clearly brings out a pertinent feature tint in the entire transaction involving payment of expenditure by the assessee, its recovery from the associated enterprises which-in turn recovers it from the end clients there is no involvement of any profit-element in the hands of the associated enterprises. Therefore. it would be wrong on the part of the income tax

The jurisdictional Tribunal in Tesco Hindustan Service Centre Pvt Ltd vs. DCIT (IT(TP)A No.1317/Bang/2010) has held that when a taxpayer acts solely as an agent for a group company it would be not be appropriate to charge mark-up on the cost of services acquired from an arms' length party. The relevant portion of the order is reproduced below:- "35. We have considered the rival submissions. As observed in the OECD commentaries referred to in the Circular of the Canada Customs and Revenue Agency, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; and a taxpayer who acts solely as an agent on behalf of the group to acquire services from an arm's length party. In the latter situation, the arm's length compensation would be limited to rewarding the agency role. In such a case, it would not be appropriate to determine an arm's length charge by referring to a mark-up on the cost of the services acquired from an arm's length party. Whether a taxpayer is providing a service or merely acting as an agent on behalf of the group is a question of fact."

In view of the above facts, analysis of the functions, assets and risks of the assessee and extracts of the OECD guidelines and Tribunal rulings, the assessee summarises its arguments as to why mark-up is not required to be charged on the investigator cost as follows:-

The TPO at para no. 7.6.3 of the transfer pricing order has alleged that the assessee is deploying considerable resources and time to in finding and appointing investigators and therefore. should have charged a mark-up on the costs incurred. In rebuttal, it is the submission of the assessee that it receives a mark-up of 15% all of its costs that are incurred to find and appoint investigators and also to perform other coordination and facilitation activities. All of such value-added costs (salary costs etc.) form a pint of its "Operating costs" in terms of the agreement entered into by the assessee with its AEs as under:- "4.1. In consideration of PICRPL's performance of Services under this Agreement, PIC agrees to pay PICRPL, on a monthly basis, an amount comprising of ….. 4.2. Operating Expenses, for the purposes of section 4.1.1, shall mean and refer to the operating cost of PICRPL in respect of PICRPL's activities of coordination and facilitation of clinical trials, including, but not limited to personnel costs, general and administration expenses, depreciation and amortization based on the financial statements of PICRPL. For avoidance of doubt, Operating Expenses shall not include any financing costs, extraordinary expenses, prior period cost, capital expenses and pass through cost."

Therefore, the allegation of the TPO that the assessee has not charged mark-up on such costs is completely baseless.

The TPO at para no. 7.6.2 has concluded that the assessee has been charging a mark-up on the investigator costs upto the preceding years and accordingly, a mark-up ought to be imputed in the current year as well.

It is submitted that just because the assessee was receiving a mark- up on the pass-through costs until the preceding year, it cannot be a basis to impute a mark-up in the current year as well. Adjustments are to be made based on transfer pricing principles and in the present case, no third party would have paid a mark-up on the costs, which are not incurred by the assessee to provide its intermediary functions. The assessee should not be expected to earn a margin based on the classification of costs as "internal" or "external' costs, but rather on a comparability including functional analysis (Para 2.93 of the OECD TP Guidelines).

In this regard, reliance is placed on the decision of the Hon'ble Mumbai Tribunal in the case of Dresser-Rand India (P) Ltd vs. Ad (11 CIT (2011) 13 taxmann.com 82 wherein it was held that the fact that the AE may have given some service on a gratuitous basis in the earlier period does not mean that it should continue to do so. Likewise, in the present case the fact that the AEs reimbursed the pass-through costs alongwith the mark-up in the preceding years does not lead to a conclusion that a mark- up should be charged in the current year also. Further, Article 265 of the Constitution of India provides that 'no tax shall be levied or collected except by the authority of law'. Accordingly, in the absence of any value-added function/FAR undertaken by the assessee qua the investigator functions, it should not be expected to earn a mark-up on the same, more so when the Parexel Group is not earning a mark-up on such costs.

During the course of the hearing, attention was drawn by the ld. DR to the service agreement entered into between the assessee and its AEs,

In so far as the other argument of the Ld. DR is concerned, qua the provision of services stated in the agreement i.e., coordination and facilitation services, it was submitted that clearly the assessee does not act as an agent for the AE. But, qua the appointment of Investigators and incurring related costs, the assessee has entered into such agreement "on behalf of the Sponsor" and is not responsible for their performance.

In view of the above discussions it was prayed that the transfer pricing adjustments on account of Location Savings amounting to Rs. 21,69,17,701 and Imputation of mark-up on pass through costs amounting to Rs. 5.45,30,838 be deleted. It is further the humble prayer that in case it is held that the investigator fees and other incidental costs are to be considered as a part of the operating expenses and operating revenue for benchmarking the transaction relating to provision of coordination and facilitation services (pursuant to set-aside as per the earlier years orders), there ought not to be a separate adjustment by way of imputation of mark- up on investigator and incidental costs as the same would result into double adjustment. A direction in this regard was also prayed for.

On the other hand, the ld. DR drew our attention to the following facts recorded by the Tribunal in IT(TP)A No.254/Bang/2016 & 292/Bang/2017 for the AYs 2011-12 & 2012-13 as under :-

Further he drew our attention to the clauses 4 to 4.4 of the Contractual Clinical Services Agreement dated 24.4.2006 as follows:- “CONSIDERATION 4.1 In consideration of the PISPL's performance of Services under this Agreement, PIC agrees to pay PISPL, on a monthly basis, a fee comprising of total operating cost incurred by PISPL as increased by 18% mark up on such operating cost. 4.2 Total operating cost as specified in clause 4.1 of the agreement shall include but not limited the following cost and expense that are necessary to carry out the services: • Personal Cost • Investigator fees • Laboratory and Pharma fees • Regulatory and Ethical Committee fees • Rent

We have considered the rival submissions. In this case, the assessee coordinated between the individual investigator and Paraxel International GmbH Germany. The contention of the assessee is that assessee has not undertaken any risk and all risk was taken over by Paraxel International GmbH Germany and relied on the Addendum dated 19.9.2007. However, the fact is that the assessee acted as coordinator and facilitator in selecting the investigator so as to conduct clinical trial. Selection of the investigator demonstrates that clinical trial is important task in the whole work undertaken by the assessee. The assessee invested considerable time and resources in this. The plea of assessee is that assessee has not received any amount as fee for doing this coordinator and facilitator job. In our opinion, this is an inter-group services provided

The assessee relied on the Addendum to Contract Clinical Trial Services Agreement. We have gone through the same. Vide this Addendum, the following clauses were replaced in Clause 4 (Consideration) :- “4.1. In consideration of PICRPL's performance of Services under this Agreement, PIC agrees to pay PICRPL, on a monthly basis, an amount comprising of 4.1.1. Service income which shall be Operating Expenses incurred by PICRPL as increased by 15% mark-up on such Operating Expenses for each year of this Agreement; and 4.1.2. Pass through cost (as defined below) incurred during each year of the Agreement. 4.2. Operating Expenses, for the purposes of section 4.1.1, shall mean and refer to the operating cost of PICRPL in respect of PICRPL's activities of coordination and facilitation of clinical trials, including, but not limited to personnel costs, general and administration expenses, depreciation and amortization based on the financial statements of PICRPL. For avoidance of doubt, Operating Expenses shall not include any financing costs,

Thus, new word ‘pass through cost’ was introduced to show the amount incurred by the assessee to be reimbursed by the parent company and called the investigation fees as part of pass through cost. The ld. AR argued that there is no investigation fees payable to assessee for the work done on behalf of parent company. In our opinion, the Addendum is w.e.f. 1.4.2012 wherein no date of execution is mentioned therein. The Addendum was solely made with an intention to evade payment of taxes and this is only a self-serving document by the assessee with the sole intention to evade taxes. Since both the parties were in a position to enter into this agreement being inter-related companies, that agreement cannot be given any credence which is a non-genuine and make believe story and it cannot be recognized as a true agreement and no benefit can be given on the basis of this agreement. Therefore, the lower authorities are justified in not giving any credence to this Addendum entered into by the assessee on the basis of which assessee has claimed that assessee is not entitled to receive any consideration for facilitating investigations. Further, it is to be noted that in the earlier years, investigator payments were IT(TP)A No.2634/Bang/2017 Page 37 of 38 reimbursed to the assessee with a mark-up. However, for the assessment year under consideration, it was treated as pass through cost under the head ‘recovery of expenses’ and there was no mark-up paid to the assessee. The assessee failed to explain why in this assessment year there was no mark-up on the investigator payments. The assessee only relied on the Addendum filed by the assessee, wherein it was mentioned that it was only pass through costs. As discussed earlier, this Addendum is only a make believe story and the AO has right to go beyond this document to find out the real intention of the parties. We observe that the real intention to this Addendum is different from what it appears ex facie. Hence, we have to proceed on the basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or transactions have to be given effect even though they result in avoidance of tax liability, provided that they are genuine, bonafide and not colourable transaction.

In the present case, in the immediate earlier AY 2012-13, the assessee has shown investigator payment with mark-up and in this year on the basis of Addendum entered by the parties as discussed earlier, made the investigator payment as ‘pass through costs’ and claimed as reimbursement without any profit element, which is against the agreed norms in the earlier years which cannot be effected and accepted as genuine agreement. Accordingly, we are of the opinion that this intra-group services rendered by the assessee to the parent company cannot be considered as reimbursement of expenses or pass through costs. It is IT(TP)A No.2634/Bang/2017 Page 38 of 38 separate services in itself for which the assessee needs to determine the ALP which the assessee failed to do so. The assessee has provided services for which the TPO is justified in marking up the services so as to make TP adjustment. The various case laws relied on by the ld. AR are different on its own facts, which cannot be applied to the facts of the present case. Hence the TPO/AO correctly ascertained the ALP of this transaction and made adjustment on this count. The same is sustained. This ground of the assessee is dismissed.

In the result, the appeal of the assessee is partly allowed for statistical purposes.