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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI A.K. GARODIA
Per Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the assessee against the order of AO passed in consequence to the directions of the DRP inter alia on the following grounds:-
“Based on the facts and circumstances of the case and in law, Apotex Research Private Limited respectfully craves leave to prefer an appeal against the order passed by Deputy Commissioner of Income-tax -11 (1) (' AO') in pursuance of the directions issued by Dispute Resolution Panel ('DRP'), Bangalore dated 31 August 2010
IT(TP)A No.1286/Bang/2010 Page 2 of 10 under section 253 of the Income-tax Act, 1961 ('Act') on the following grounds:
On the facts and circumstances of the case and in law:
1. The order of the learned AO and direction of the Hon'ble DRP are based on incorrect interpretation of law and therefore are bad in law.
2. The learned AO has erred in assessing the total income at NIL as against returned loss of Rs.4,81,22,829/- computed by the Appellant. .
3. The learned AO/ Transfer Pricing Officer ('TPO') erred in making an addition of Rs. 47,407,690 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 disregarding the economic analysis undertaken by the Appellant without proper justification and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction.
5. The learned AO / TPO erred by violating the principle of natural justice in not providing any opportunity of being heard and in not even issuing a show cause notice to the Appellant just prior to passing the transfer pricing order. The Hon'ble DRP, in turn, has erred in law in concluding that the infirmity that crept in due to the lack of opportunity is cured by the DRP providing the necessary opportunity to the Appellant.
6. The learned AO / TPO erred in determining the arm's length margin using only financial year 2005-06 data which was not available in the public domain at the time of complying with the transfer pricing documentation requirements.
7. The learned TPO erred in conducting the comparable search process using only the Prowess database, thereby disregarding the robustness and exhaustiveness of a search conducted on both Prowess and Capitaline databases (two widely recognised databases for obtaining publicly available financial information). The Hon'ble DRP, in turn, has erred in upholding
IT(TP)A No.1286/Bang/2010 Page 3 of 10 the action of the learned AO / TPO without specifically addressing this contention.
8. The learned AO / TPO erred in rejecting certain comparable companies on' account of persistent operating losses on one hand and accepting certain super profit making companies on the other hand.
9. The learned AO / TPO erred in rejecting certain companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months).
10. The learned AO / TPO erred in rejecting certain companies for not having foreign exchange earnings (and in some cases for having foreign exchange earnings less than 25% of the revenues).
11. The learned AO / TPO erred in applying 'service income lesser than Rs. 1 crore as a comparability criterion in the fresh economic analysis conducted by the learned TPO.
12. The learned AO / TPO erred, in accepting! rejecting certain companies using unreasonable comparability criteria.
The learned AO / TPO erred, in not making suitable adjustments to account for differences in the working capital of the Appellant vis-a-vis the comparables. The Hon'ble DRP, in turn, has erred by overlooking the Appellant's objections on the subject and in concluding that the Appellant has not indicated in what manner the working capital adjustment has to be given or in what way not giving the working capital adjustment has affected the arm's length price.
The learned AO / TPO erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis- a-vis the comparables.
The learned AO/TPO erred in computing the arms length price without giving benefit of +/- 5 percent 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.
IT(TP)A No.1286/Bang/2010 Page 4 of 10
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.”
During the course of hearing, the ld. counsel for the assessee has filed the following additional grounds:-
“ ADDITIONAL GROUND OF APPEAL
16. Without prejudice to the ground no. 7, the learned TPO/AO has erred in law/facts by selecting the following companies as comparables to Appellant even though these are functionally different. • Alpha Geo India Limited • Vimta Labs Limited • Celestial Labs Limited
17. Without prejudice to ground No. 7, the learned TPO/AO has erred in law/facts by not objectively selecting the following companies as comparables to Appellant even though these companies satisfy the comparability criteria, while undertaking the search process. • Choksi Laboratories Ltd • Neeman Medical International Ltd • Research Support International Ltd • TCG Lifesciences Ltd • Pfizer Limited The Appellant submits that during the transfer pricing proceedings for AY 2006-07, the learned Transfer Pricing Officer ("TPO')
IT(TP)A No.1286/Bang/2010 Page 5 of 10 erroneously disregarded the economic analysis undertaken by the Appellant without proper justification and conducted a fresh economic analysis, without giving an opportunity of being heard, for determination of arm's length price ("ALP") using only Prowess database. In this regard, the Appellant submits that the Appellant has undertaken a fresh economic analysis on Prowess database including other widely used databases (i.e. Capitaline Neo and ACE TP databases) to identify comparable companies engaged in contract R&D services in support of the arm's length nature of transaction with its AE and accordingly, has identified five comparable companies. Therefore, the Appellant submits that the learned TPO has erred in law/facts by not considering certain companies which otherwise comparable to the Appellant and given this, the Appellant should be given an opportunity to benchmark the impugned transaction using the fresh search process. (Detailed economic analysis is enclosed as Attachment 1) The Petitioner further submits that the above additional ground is being filed by way of abundant caution. The additional ground raise issue which is fundamental to the appeal and the non-admission and non-adjudication of the same would result in an incomplete appreciation and adjudication of the matter. The Petitioner submits that the failure to raise this ground at an earlier stage 'is neither wilful nor wanton but due to the reasons stated above. No prejudice would be caused to the Respondent by reason of the above additional grounds being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon'ble Tribunal. The Petitioner states and submits that the issues raised in the additional ground above are legal issues and arise out of the order of the lower authorities. Reliance is based on the decisions of the Honble Supreme Court in the case of Jute Corporation of India vs. CIT (187 ITR 688) and National Thermal Power Corporation vs CIT (229 ITR 383); decision of full Bench of the Bombay High Court in the case of Ahmadabad Electricity Co. Ltd. (199 ITR 351) and decision of Chandigarh Special Bench in the case of DCIT vs. Quark Systems (P.) Ltd. (IT Appeal No 100 (CHD,) of 2009). In the above circumstances the Petitioner prays that this Hon'ble Tribunal be pleased to:
IT(TP)A No.1286/Bang/2010 Page 6 of 10 i. Admit and adjudicate the above additional ground, ii. Pass any other order that may be required in the circumstances of the case and render justice. Since additional grounds relate to the TP issue, we adjudicate the same along with the grounds raised on merits on the TP issue.
The assessee is engaged in contract pharmaceutical research and development services. During the impugned financial year, the assessee had international transactions as per section 92B of the Income Tax Act, 1961 [the Act] and therefore, the matter was referred to TPO in order to determine the ALP of the international transactions.
During the course of hearing, the ld. counsel for the assessee has invited our attention to the consolidated chart filed by him with the submission that in the TP study, assessee has taken 6 comparables and all the comparables were outrightly rejected by the TPO and the TPO has finally taken the following 3 comparables: (1) Alpha Geo India Ltd. (2) Celestial Labs Ltd. (3) Vimta Labs Ltd.
The ld. counsel for the assessee further contended that all these 3 comparables are functionally different, therefore they cannot be considered as good comparables for determination of the arm's length price (ALP) of the international transactions.
IT(TP)A No.1286/Bang/2010 Page 7 of 10
With regard to Alpha Geo India Ltd., it was contended on behalf of the assessee that this comparable does not meet the basic comparability criterion of functional similarity which renders seismic services and does not provide any pharmaceutical R&D services. It also fails “atleast 25% earning from exports filter” applied by the TPO himself. The profile of Alpha Geo India Ltd. is available at page 386 of the compilation of the assessee, according to which the company provides the following services:-
- Designing and preplanning of 2D and 3D services - Seismic data acquisition in 2D and 3D - Seismic data processing/reprocessing/special processing - Seismic data interpretation - Generation, evaluation and ranking of prospectus - Reservoir analysis - Topographic surveys with GPS/RTK - Tape transcription - Digitisation of hard copies of maps, seismic sections and well logs into CGM/SEGY/LAS formats - Third party QC for acquisition and processing
Since the profile of this company is not similar to the assessee's profile, this company cannot be called a good comparable for determining the ALP. Therefore, we are of the view that this company has to be excluded from the list of comparables on account of functional difference.
IT(TP)A No.1286/Bang/2010 Page 8 of 10
With regard to Celestial Labs Ltd., it was contended on behalf of the assessee that this company provides software products/services and bioinformatics services. Profile of this company is available at page 470 of compilation, according to which, the company has developed a de novo drug design tool “CELSUITE” to drug discovery in finding the lead molecules for drug discovery and protected the IPR by filing under the copy right/patent act. As per turnover given at page 486, the turnover from bioinformatics services, data warehousing and mining, software development, product and services was 1022.18 lakhs in the FY 2005-06.
Since this company is also functionally different from the assessee company, it can also not be compared as a good comparable. Accordingly, this company has to be excluded from the list of comparables.
So far as Vimta Labs Ltd. is concerned, it was further contended that this company is also functionally different, as it focusses on element that effect the total health of people i.e., food, water, drugs, clinical diagnostics and environment. However, Apotex (the assessee) is engaged in product research & development services pertaining to pharmaceutical products only. This company also offers wide spectrum of services and in the absence of proper revenue/segmental break-up, the company should not be considered as a comparable. The bifurcation of revenue is not available and for reference, our attention was invited to page 496, where the profile and services of this company was mentioned and from a careful perusal of these details of profile and services, we are of the view that this IT(TP)A No.1286/Bang/2010 Page 9 of 10 company is also functionally different, therefore cannot be taken as a good comparable. We accordingly direct the TPO/AO to exclude this company from the list of comparables.
Now all the 3 comparables which have been taken by the TPO as comparables for determining the ALP are not found to be good comparables and are excluded from the list of comparables, resulting no comparable for determining the ALP. Under these circumstances, the matter has to go back to the AO/TPO to determine the ALP after bringing some more comparables which are similar to the profile of assessee. The assessee himself has suggested the following 5 comparables which are functionally similar to the profile of the assessee, according to the assessee: (1) Research Support International Ltd. (2) Neeman Medical International Ltd. (3) Pfizer Ltd. (Seg.) (4) Choksi Laboratories Ltd. (5) Tata Life Sciences Ltd.
Though assessee has contended that these comparables are functionally similar and can be called to be good comparables, but it requires a proper verification by the TPO. Accordingly, we restore the matter to the AO/TPO to examine these comparables and if they are found to be good comparables, they can be considered for determining the ALP of the international transactions. The TPO is also at liberty to search more
IT(TP)A No.1286/Bang/2010 Page 10 of 10 comparables which are similar to assessee's profile in order to determine the ALP of international transactions.
Accordingly, the appeal of the assessee stands allowed for statistical purposes.
Pronounced in the open court on this 22nd day of February, 2017.