INTERNATIONAL SPECIALITY PRODUCTS (INDIA) P LTD,MUMBAI vs. ASST CIT 15(2)(1), MUMBAI

First issue pertains to transfer pricing adjustment in respect of provision for corporate support services to Associated Enterprises (AEs) amounting to Rs. 1,07,31,614/-.

Second issue raised is transfer pricing adjustment in respect of research and development services to AEs amounting to Rs. 32,14,036/-.

During the year under consideration the assessee has taken seven comparables in order to benchmark transaction taken OP/OC has profit level indicator as under :-

Against the above, the assessee submitted its objection before learned DRP and finally post DRP direction, following comparables were selected :-

Now against the above order, assessee is in appeal before us.

We have heard both the counsel and perused the records. Learned Counsel of the assessee contended that the comparables R Systems International Ltd. selected by the assessee, which has been rejected should be included as comparable. He submitted that that this has been so held by several decisions of the ITAT. He also submitted that exclusion of comparable Excel Infoways Ltd. is also upheld by the ITAT in various decisions. Learned counsel pleaded that once these propositions of the assessee are accepted, margin earned by the assessee falls within the arm’s length range 3%.

Learned Counsel of the assessee contended that R Systems International Ltd. has been rejected as comparable by the TPO/DRP on the ground that the said company follows different accounting period viz it follows ‘December’ year- end. Learned counsel referred to the decision of DRP for the proposition that R Systems International Ltd. was excluded as the comparable as result for the accounting period could not be determined to a reasonable degree of accuracy from the quarterly audited results are not available. Learned counsel contended that the details pertain to 1.4.2013 to 31.3.2014 are now available and these data can be used and result can be extrapolated based on quarterly

As regards plea rejection of Excel Infoways Ltd., learned counsel submitted that this comparable has highly fluctuated margin. He submitted that it has shown drastic fluctuations ranging from 232.08% in F.Y. 2010-11 to 27.17% in A.Y. 2014-15. In this regard learned counsel submitted following chart :-

Learned Counsel of the assessee further submitted that from the financial statement of this company it is seen that its revenue from the ITeS segments has been diminishing over the years, and thus the company fails the 5 International Specialty Products (India) Pvt. Limited TPO’s own filter of peculiar economic circumstances. Learned counsel submitted the following revenue trend of Excel Infoways Ltd. :- Particulars AY 2014-15 AY 2013-14 AY 2012-13 AY 2011-12 AY 2010-11

In this regard learned counsel submitted that TPO in his own order has rejected ‘Trijal Industries Ltd.’ since there was a drop in business activities. Learned counsel further submitted that this comparable has unreliable employee cost because they are in different business model. That there is no separate segment for ITeS. That the company has diversified into new areas such as construction and development of property. Learned Counsel of the assessee referred to following case laws wherein, Excel Infoways has been excluded as comparable :-  Baxter India Private Limited, v/s. ACIT reported in [2017] 85 taxmann.com 285 (Delhi Trib) for the Assessment Year 2012-13

Upon careful consideration, as regards the plea of learned counsel of the assessee for inclusion of R. Systems International Ltd., we find ourselves in agreement with the submission made. The said comparable has been rejected only on the ground that it follows different accounting period and learned DRP has observed that such comparable has to be excluded as the result cannot be compared with degree of accuracy as quarterly audited results are not available. Now it is the contention of learned counsel that the details required in this case pertaining to 1.4.2013 to 31.3.2014 are now available and these data can be used and result can be extrapolated. The case laws referred by learned counsel in this regard also support the proposition that this comparable can be accepted as comparable on the facts of this case.

As regards rejection of Excel Infoways Ltd., we find ourselves in agreement with the submission of learned Counsel of the assessee. As evident from the submissions, the said comparable has hugely fluctuating margin also. Its revenue is declining in to a great extent. Furthermore, assessee’s plea is that the comparable has unreliable employees cost. That there is no separate segment for ITeS. That the company has diversified into new areas such as construction and development of property. These distinguishing features show that this entity is not a good comparable in the present case. This proposition is also supported by the case laws referred by learned counsel as above.

Accordingly, as regards the issue of corporate support services, we accede to the request of the learned Counsel of the assessee and direct that R. Systems International Ltd. be included as comparable in terms of our direction as above and Excel Infoways Ltd. should be rejected.

Learned TPO shall accordingly make computation afresh after giving the assessee proper opportunity of being heard.

Learned DRP upheld the same. Against the above the Revenue is in appeal. We have heard both the counsel and perused the records.

Learned Counsel of the assessee submitted that the assessee’s grievance will be addressed by excluding selection of Syngene International Ltd. as comparable. He submitted that various Benches of the ITAT have excluded the same and Hon'ble Bombay High Court has also confirmed this. Learned counsel contended that this comparable is not appropriate since this is engaged in different business activity. It is engaged in contract research and manufacturing services. Its segmental information is not available. This is necessary because it performed research and manufacturing activities. That its revenues are earned on hybrid revenue model and the same is not comparable. He submitted that in following case laws, it has been held that Syngene has two streams of income viz. from contract research fees and sale of compounds, however segmental analysis is not available in the annual report and hence is functionally not comparable. In this regard learned counsel submitted following details of case laws :-

Learned counsel contended if the above comparable is excluded margin shall come to 14.83%, hence, learned counsel pleaded that this comparable has to be rejected.

Upon careful consideration, we note that as regards transfer pricing adjustment in respect of research and development, learned Counsel of the assessee has confined the argument that the assessee’s grievance will be addressed by excluding selection of Syngene International Ltd. as comparable. It is the claim of the assessee that Syngene International Ltd. is engaged in different business activity. That it is engaged in contract research and manufacturing services. That its segmental information is not available. Hence, results of research and manufacturing activities cannot be separately identified and compared. Learned counsel has also placed reliance upon the case laws where it has been agreed that in the absence of segmental analysis, this is not a good comparable. Accordingly, we accept the contention of learned counsel and direct that Syngene International Ltd. should be taken out of comparable. The TPO shall make computation afresh accordingly after giving the assessee proper opportunity of being heard.

In the result assessee’s appeal is partly allowed.