TEVAPHARM INDIA P.LTD ( FORMELRY KNOWN AS RATIOPHARM INDIA P.LTD),MUMBAI vs. ASST CIT CIR 10(3), MUMBAI

2. At the outset, the Ld. Counsel for the assessee, Mr. Dhanesh Bafna submitted that, ground Nos. 2, 3 & 4 are not pressed and accordingly, these grounds are dismissed as not pressed.

At the outset, Mr. Dhanesh Bafna, submitted that here in this case the transfer pricing issue revolves around inclusion of 4 comparables by the TPO. Out of these 4 comparables, 3 comparables are directly covered by the 4 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 order of the Tribunal for the assessment year 2007-08 in decided vide order dated 23.12.2011. He further pointed out that if these 3 comparables are removed then average arithmetic mean of the comparables would fall within ± 5% range of arms length price.

Brief facts qua the Transfer Pricing Adjustment are that, the assessee company was formerly known as (Ratiopharm India P Ltd.) and is engaged in the business of providing following categories of services to its AE:-  Contract Testing and Research Services - Stability Testing; - Pharmaceutical Product Development; and - Analytical R & D and API Research Activities;  Business Development and Procurement Services and - Business Development; and - Pharmaceutical Technical(Procurement/Sourcing);  Pharmacovigilance Related Support Services. During the relevant financial year, the assessee reported following international transactions with its AE in Form 3CEB:- S. Transaction FY 2007-08 Method FY 2006-07 No. adopted by assessee Business development and 3,36,96,649 1 Procurement Services (Receipt) 2,02,84,887 TNMM 2 Contract Research and Testing Services (Receipt) 44,75,99,531 TNMM 39,80,98,772 3 Pharmacovigilance Related Support Services (Receipt) 23,23,561 TNMM NA 4 ECB Loan Interest (Payment) 86,15,111 CUP 2,18,14,215 Reimbursement of personnel, 5 travel Expenses, Recovery of Interest on Security Deposit. Recovery of Depreciation and Interest on the car (Receipt) 1,91,71,387 CUP 1,80,36,874 Total 49,79,94,477 47,16,46,510 5 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 The assessee, in its Transfer Pricing Study Report, had benchmarked the second nature of transactions, that is, provision of contract research and testing services by adopting TNMM as Most Appropriate Method (MAM) and PLI as operating profit to total cost. For benchmarking the transaction, the assessee has carried out detailed search process and had identified 9 comparable companies with the following PLI of the financial year 2007-08:- S. Name of the Comparable Company Updated PLI No. for FY 2007-08 % 1 Alphageo (India) Ltd. 40.27 2 Choksi Laboratories Ltd. 29.95 9.24 3 Dolphin Medical Services Ltd. 4 Medinova Diagnostic Services Ltd. 4.47 5 N G Industries Ltd. 21.56 6 Vimta Labs Ltd. 15.84 7 TCG Lifesciences Ltd. 29.97 12.74 8 Neeman Medical Int. (Asia) Ltd –Clinical Research 9 Pfizer – Services 13.63 Arithmetic Mean 19.74 Assessee 16.22 Hence it was reported that, assessee’s profit margin is at ALP.

However, Ld. TPO undertook fresh comparability analysis and introduced 4 additional comparable companies and rejected one comparable company selected by the assessee on the ground that, it has significant related party transaction (RPT) of 36.70%. The final list of comparables of the TPO with its PLI margin was as under:- S. Name of the Comparable PLI (%) Remark No. Company 1 Alphageo (India) Ltd. 40.27 Common 2 Choksi Laboratories Ltd. 29.23 Common 3 Dolphin Medical Services Ltd. 6.77 Common 4 Medinova Diagnostic Services Ltd 4.15 Common 5 N G Industries Ltd. 21.56 Common 6 Pfizer – Services 13.64 Common 7 Vimta Labs Ltd. 15.82 Common 8 TCG Lifesciences Ltd. 29.97 Common 6 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 9 Mindtree Ltd. (Seg.) 7.07 Department 10 Transgene Biotek Limited – Diagnostic Segment 25.97 Department 11 IDC (India) Ltd. 15.45 Department 12 Celestial Labs Ltd. 87.83 Department Arithmetic Mean 28.81 Assessee 16.22 Accordingly, upward adjustment of Rs.33,30,68,622/- was made on the ‘contract research and testing services’. The Ld. DRP has confirmed the adjustment made by the TPO.

Before us, the Ld. Counsel submitted that in the AY 2007-08 similar adjustments on account of provision of contract research and testing were made based on by and large same set of comparable companies by the TPO. The Tribunal in AY 2007-08 vide its order dated 23.12.2011 has rejected these comparables selected by TPO namely, Celestial Labs Ltd., IDC (India) Ltd and Mindtree Ltd. (Seg.). He also informed that in the subsequent year, that is, in the AY 2009-10, the DRP itself has excluded these comparables following the order of the ITAT. Thus, so far as these three comparables are concerned, following the earlier precedence, same should be excluded. As regards Transegene Biotek Ltd. Diagnostic segment he submitted that, this comparable has IPR worth Rs.99.6 crores whereas, the assessee is operating as a cost plus company and, therefore same cannot be taken as a comparable.

On the other hand, Ld. CIT DR, Mr. N.K. Chand submitted that, the services rendered by the assessee are high end services which involve providing high level research work, business development, technical services and various 7 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 high end support services to its AE in the field of pharmaceuticals. Thus, the very nature of services undertaken by the assessee involves creation of IPR. The assets employed are for high end activities. Hence huge intangibles are created during the course of rendering of services to the AE which leads to creation of IPR to the AE. Thus, the submission of the ld. Counsel regarding Transegenic Biotek cannot be sustained. He further pointed out that Transgene Biotek Limited was a comparable chosen and included by the assessee in the earlier year as in that year its margin was at 10.78% and now in this year assessee is pleading for exclusion because in this year margin is 25.97%. Therefore, the assessee cannot pick and choose the comparable from year to year basis. The TPO in the present case had selected the comparables which are by and large on the same line of activities carried out by the assessee and any comparability analysis under TNMM, the comparison is to be seen on a broader spectrum and elasticity has to be given while analyzing the comparables. The Tribunal in the earlier year while adjudicating on the impugned comparables has gone into deep analysis and if such parameters are adopted for such a deep analysis, then probably all the other comparables including those comparables which are not in dispute will also stand in the same footing and have to be excluded. Thus, he submitted that the Tribunal order cannot be followed blindly and broad analysis has to be seen for this year. Finally, he strongly relied upon the finding and observation of the DRP.

In rejoinder, the Ld. Counsel submitted that it is true 8 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 that M/s Transgene Biotek Limited was included by the assessee but in this year the said company was rejected in the accept/reject matrix itself. Therefore, no further FAR analysis was carried out. In any case, he submitted that even if the three comparables which are covered by the earlier and subsequent order of the Tribunal and DRP are taken into account and are excluded, then also the average profit margin of the final comparables will fall within the ± 5% range of ALP.

After considering the rival submissions and on perusal of the impugned orders, we find that neither the TPO nor the DRP has given any finding on FAR analysis of the 4 comparables chosen by the TPO. The only reason given by the TPO is that these comparables are also under the R&D services and since, under the TNMM broad similarity has to be seen, therefore, it has to be included in the comparability list. It is true that under the TNMM broad parameters of transactions and functions are to be seen, but the scrutiny on FAR analysis has to be done vis-à-vis the comparable companies. We find that the Tribunal in assessee’s own case in the AY 2007-08, so far as three comparables are concerned which are subject matter of dispute before us, viz., Celestial Labs Ltd., IDC (India) Ltd. and Mindtree Ltd. (Segmental), has threadbare analyzed the functions and other comparability parameters of the assessee vis-a-vis the comparable companies and has given a concrete conclusion for exclusion. The Tribunal first of all has analyzed the services and functions carried out by the assessee and, thereafter have analyzed the various 9 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 comparables for accepting and rejecting the same. The relevant findings of the Tribunal with regard to these comparables are as under:-

From the above finding of the Tribunal with regard to 15 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 the aforesaid three comparables, it is amply clear that detail analysis has been done and then a concrete finding has been arrived at, as to why these three companies cannot be taken as comparables for benchmarking the assessee’s transaction. Thus, respectfully following the earlier years’ precedence, we hold that these three comparables viz., Celestial Labs Ltd., IDC (India) Ltd. and Mindtree Ltd. (Segmental), should be removed from the comparability list and we accordingly direct the AO/TPO to exclude the same.

So far as the inclusion of M/s Transgene Biotek Limited, we are not entering into merits of the said comparable because no strong reasons have been given by the assessee as to why same was included in the comparability list in the assessment year 2007-08 and why it has been excluded in this year. Since the Ld. Counsel has submitted that, if the three comparables are excluded then the arithmetic mean of the final comparable would be 20.82% and in that case, the resultant arithmetic mean will fall ± 5% range, therefore, we direct the TPO/AO to examine the working of ± 5% margin range, after excluding the three comparables from the final list of comparables. Thus, with this direction ground no.1&5 is partly allowed and ground No.6 is treated as allowed.

In ground No. 7 and 8, the assessee has challenged the disallowance of ‘Microsoft License fee’ by treating it as capital expenditure.

Brief facts qua the issue are that, the assessee has debited an amount of Rs.41.95 lakhs under the head “Annual 16 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 Software License Fees”. During the course of the assessment proceedings, the assessee was required to furnish the details of the said expenditure along with copies of bills/invoices. In response, the assessee vide letter dated 13.10.2011 had furnished the party-wise details along with the amount and the purpose for which the payment was made. However, the AO initially noted that no bills and invoices were enclosed. He further noted that, the major expense has been incurred for making the payment to one party namely, M/s Nirmal Computers, the details of which were as under:- Sr. Name Amount Purpose No. 01 Nirmal Computers 31,54,666 Desktop Pro Lic/ SA Pack OVL 02 Nirmal Computers 62,400 MS Win 2003 Svr Std R2 OVL 03 Nirmal Computers 21,146 Ms Exchange 2003 Std Svr OVL 04 Nirmal Computers 84,586 M/s Share point server software 33,22,798 TOTAL He observed that, these payments relate to Microsoft product licenses which are one time licenses taken for Microsoft products for existing desktop, laptops and servers. From the perusal of the copies of the bills (which were later on furnished by the assessee), he observed that, these licenses are not annual licenses but are one time license. Accordingly, he treated the same as capital expenditure. However, he allowed deprecation @ 60% and accordingly, net amount of Rs.13,29,119/- was added.

The Ld. DRP has confirmed the said addition/disallowance.

On the other hand, Ld. DR submitted that assessee was using unofficial software earlier and whenever A computer is bought there is already preloaded software. The software license fee is not an annual payment, it is a onetime payment and the advantage runs into number of years. Therefore, it is enduring in nature. If the computer is bought along with 18 तेवाफाम� इं�डया �ाइवेट �ल�मटेड M/s Tavapharm India Pvt Ltd. (Formerly known as Ratiopharm India P Ltd) IT(TP)A 7584/Mum/2012 software for the first time then how software which has been purchased onetime can be treated as revenue expenditure. If any license of software is made on annual basis and thereafter it is renewed then it can be reckoned as revenue expenditure but not on onetime license fee payment.

We have heard the rival submissions and perused the relevant material on record. We find that, assessee has made payment for procurement of Microsoft Licenses and the license cost was apportioned for period of 3 years and this was the first year in which the amount of Rs.33,22,798/- was incurred. Three types of licenses were taken which were used for Server, Desktop computers, laptops etc. the details of these license given before the authorities below were as under: “1.4 Under Item No.1 of invoice, 250 official Microsoft Enterprises 6 licenses were been taken for Pro Desktop listed Licenses / SA Pack MVL. It is for the most current versions of MS Office Professional Windows Desktop, including of Windows NI Workstation and the BackOffice Client Access for the existing Desktop Computers and Laptops, which were procured and installed in the earlier years and used in the Research & Analytical Labs, Development Labs and offices.