DCIT, BANGALORE vs. M/S FMC INDIA PVT. LTD.,, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ B ” BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T. (T.P) A. No.431/Bang/2012 (Assessment Year : 2007-08) Dy. Commissioner of Income Tax, Circle 11(3), Bangalore. …. Appellant. Vs. M/s. FMC India Pvt. Ltd., Embassy Star, 8 Palace Road, High Grounds, Bangalore-560 052. ….. Respondent. PAN AAACF 4579 N C.O.No.30/Bang/2015 (In IT(TP)A No.431/Bang/2012) (By Assessee) Assessee / C.O. By : Shri Padamchand Khincha, C.A. Revenue By : Dr. P.K. Srihari, Addl. CIT (D.R) Date of Hearing : 23.3.2015. Date of Pronouncement : 10.4.2015. O R D E R Per Shri Jason P. Boaz : This appeal by the Revenue and Cross Objections by the assessee are directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.24.1.2012 for Assessment Year 2007-08. 2. The facts of the case, briefly, are as under :-

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 2 2.1 The assessee company, a subsidiary of FMC Agricultural Product International AG Switzerland, is engaged in the business of manufacture and processing of pesticides by importing the same from its Associated Enterprises (‘AE’). In addition, the assessee is also engaged in trading and providing research and development services to its AEs. For Assessment Year 2007-08, the assessee filed its return of income on 30.10.2007 declaring income of Rs.8,53,36,458. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny. 2.2 The Assessing Officer observed that the assessee had entered into international transactions in excess of Rs.15 Crores and therefore with the approval of the CIT-I, Bangalore made a reference to the Transfer Pricing Officer (‘ TPO’) to determine the arms length price (‘ALP’) thereof, as per the provisions of section 92CA of the Act. In the year under consideration, the total operating revenues from R&D Services provided to its AE was Rs.2,69,52,315 with operating costs at Rs.2,22,63,590. The operating profit was Rs.46,88,725 and the operating profit as a percentage of operating revenue was 21.06%. In its T.P. Study, the assessee adopted TNMM as the Most Appropriate Method (‘MAM’) and selected 8 companies as comparables. The arithmetic mean of these comparable companies was computed at 7.49%. Since the assessee’s profit margin (OR/OC) of 21.06%, from the provisions of R&D Services, was higher than that of the comparables computed at 7.49%, the assessee assumed the value of international transactions relating to R&D Services Segment to be at arm’s length. The TPO adopted TNMM in the MAM. However, out of the 8 comparable companies selected

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 3 by the assessee, the TPO rejected 6 of these companies, retaining only two of them. In addition thereto, the TPO selected four more companies as comparables. The TPO’s final list of comparable companies are as under :- S.No. Comparable Company OP/TC in % 1 Alphageo (India) Ltd. 38.21 2 Agile Electric Technologies Pvt. Ltd. 6.58 3 Vimta Labs 27.44 4 IDC (India) Ltd. 15.89 5 Oil Field Instrumentation (India) Ltd. 76.46 6 Celestial Labs Ltd. 58.35 Average 37.15

The TPO vide order under Section 92CA of the Act dt.5.4.2010 has proposed a T.P. Adjustment of Rs.35,82,199 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2007-08. The Assessing Officer determined the income of the assessee at Rs.8,89,18,657 which included the T.P. Adjustment of Rs.35,82,179 under Section 92CA of the Act vide assessment order passed under Section 143(3) of the Act dt.11.1.2011. 2.3 Aggrieved by the order of assessment for Assessment Year 2007-08 dt.11.1.2011, the assessee preferred an appeal before the CIT (Appeals) – IV, Bangalore. The learned CIT(A) in his order held that out of the 6 comparable companies chosen by the TPO, three of them i.e. Oil Field Instrumentation India Ltd., Celestial Bio Labs, Ltd., and Agile Electric Technologies Pvt. Ltd. cannot be treated as comparable to the assessee as they are functionally different and accordingly directed the Assessing Officer to exclude the aforesaid companies from the

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 4 list of comparables. The learned CIT(A) disposed off the assessee's appeal by the impugned order dt.24.1.2012 allowing the assessee partial relief. Revenue’s Appeal in IT(T.P) A. No.431/Bang/2012 for A.Y. 2007-08. 3. Aggrieved by the order of the CIT (Appeals) – IV, Bangalore dt.24.1.2012 for Assessment Year 2007-08, the Revenue is in appeal before this Tribunal raising the following grounds :- “1. The order of the learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT (Appeals) was not justified in allowing relief to the assessee and deleting the additions made by the Assessing Officer under Section 92CA of the I.T. Act, 1961, without appreciating the facts and circumstances under which the adjustment was made by the Assessing Officer based on the TPO’s order. 3. The learned CIT (Appeals) has erred in holding that the TPO should exclude M/s. Oilfield Instrumentation India Ltd., as a comparable as it is functionally different from that of the tax payer. 4. The learned CIT (Appeals) has erred in holding that the TPO should exclude M/s. Celestial Labs as a comparable as it is functionally different and has high profit margins form that of the tax payer. 5. The learned CIT (Appeals) has erred in holding that the TPO should not include uncontrolled comparables having any unrelated party transactions even up to 25%. 6. The learned CIT (Appeals) has erred in holding that the assessee is eligible for a standard deduction of 5% from the Arm’s Length Price under the proviso to section 92C(2) of the IT Act. 7. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed in so far as the above mentioned issues are concerned and that of the Assessing Officer be restored. 8. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal.” 4. The Grounds at S.Nos.1, 2, 7 & 8 of Revenue’s appeal are general in nature and therefore no adjudication is called for thereon.

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 5 5. Transfer Pricing Issues. 5.1 In the Grounds raised at S.Nos.3 to 5, Revenue submits that it is aggrieved by the impugned orders of the learned CIT(A) in excluding M/s. Oil Field Instrumentation India Ltd., Celestial Labs, Ltd., and Agile Electric Technologies Pvt. Ltd. from the list of comparables on the grounds that the these companies are functionally different and that the third company also has Related Party Transactions (‘RPT’). 5.2 The relevant findings of the learned CIT(A) while excluding these three companies form the list of comparables is extracted hereunder from the impugned order of the learned CIT(A) :- 5.2.1 At para 2.7 (pages 14 & 15) in respect of M/s. Oilfield Instrumentation India Ltd., the learned CIT(A) held as under :- “Having heard the contention of the appellant, and on perusal of the finding given by the Transfer Pricing Officer, it is an undisputed fact that the above company is predominantly engaged in mud logging services which have been treated as comparable to the R&D services carried out by the appellant. The Hon'ble ITAT Mumbai while deciding the above comparable in the decision quoted (supra) held that “the extracts of the functional profile of Oil Field form its website as given above and the information in the annual report of Oil Field on the nature of assets employed such as outer shell of mud logging units, sensors and other instruments clearly demonstrate the disparity between Oil Field’s and assessee's operations. As discussed earlier the functional profile of assessee is in nature of providing – Contract Research and testing services, Oil field does not carry out any of these stipulated activities and accordingly oil field ought not to be considered a comparable.” IN the case of the appellant also the contract research and development services undertaken by the appellant are similar to M/s. Tevapharm Pvt. Ltd. which cannot be compared with the functional profile of Oil Field Instrumentation India Limited. Accordingly, the contentions of the appellant are found acceptable. The Assessing Officer is therefore directed to exclude the above company form the comparables.”

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 6 5.2.2 At para 2.7 (pages 16 & 17) in respect of M/s. Celestial Labs Ltd., the learned CIT(A) held as under :- “ Having heard the contention of the appellant, one thing is clear that the nature of the operation of the company is ambiguous which has even been acknowledged by the Transfer Pricing Officers by selecting the company as comparable to the software development services in some of the cases and also as comparable to the R&D services in other cases. The Hon'ble ITAT Mumbai in the case of M/s. Tevapharm Pvt. Ltd. (supra) held that “according to the learned D R Celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the assessee, the discovery is in relation to a software for discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molecule to treat cancer using bio informatics tools for which parenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the assessee, there has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the assessee in this regard.” The facts of the case are similar to the decision of the Hon'ble ITAT Mumbai and therefore the Assessing Officer is directed to exclude the above company form the comparables.” 5.2.3 At para 2.7 (page 18) in respect of M/s. Agile Electric Technologies Pvt. Ltd., the learned CIT(A) held as under :- “ Having heard the contention of the appellant, there is no justification to retain the comparables which have related party transactions considering the fact as per sub-Rule (3) of Rule 10B an uncontrolled transaction shall be comparable to an international transaction and according to clause (a) of Rule 10A, the “uncontrolled transaction means a transaction between enterprise other than Associate Enterprise”. Hence, the controlled transactions cannot be considered for the comparability analysis. The Hon'ble ITAT, Bangalore in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT (26 SOT 226) held that in view of Rule 10A(a), a company having related party transactions cannot be considered as comparable company. This view also finds support from the decision of Hon'ble ITAT Delhi in the case of Mentor Graphics (Noida) Pvt. Ltd. Vs. DCIT in ITA No.1969/D/2006, contrary to that in the case of Sony India (P) Ltd., the Hon'ble ITAT, New Delhi held that “we are further of the view that an entity can be taken as

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 7 uncontrolled if its related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant influence the profitability of comparables. For the purpose of comparison, what is to be judged is the impact of the related party transactions vis-à-vis sales and not profit since profit of enterprise is influenced by large number of other factors” according to the provisions of the Income Tax Act and Income Tax Rules, there is no requirement of minimum number of comparables. Even one comparable is sufficient to determine arm’s length price of international transactions under the Transactions Net Margin Method. This view has been upheld by the Hon'ble ITAT, Delhi in the case of Haworth (India) Pvt. Ltd. (2011-TII-64-ITAT-Del-TP). Once it is possible to find out even one ideal comparable, there is no need to apply the filter to include the comparables which have related party transactions. However, in the circumstances where it is not possible even to find out one comparable out of the comparables selected based on the FAR analysis without any related party transactions. In such a situation, it will be necessary for the TPO to apply a suitable filter in regard to the related party transactions to identify such comparables, margins of which are not influenced by the related party transactions. However, in the present case, even after excluding the comparables which have related party transactions, more than one comparable are available to determine the arm’s length price. Therefore, it is not appropriate to retain the above company as comparable. Further, the above company was excluded as comparable form the R&D services in the case of M/s. Tevapharm Pvt. Ltd. (supra) holding that “we have seen the relevant document and find that the same refers to acquisition by the said company of component manufacturing line along with testing and validation lab and building. The same report says that the acquisition would enable the company to become a full service supplier by offering gamut of services by moving from service provider to manufacturer exporter. The plea of the ld. D.R. in this regard therefore cannot be accepted.” The Assessing Officer is accordingly directed to exclude the above company from the comparable.”

5.2.4 The learned CIT(A) has rejected the aforesaid three companies from the list of comparables based on functional differences vis-a-vis the assessee also relying on the decision of the ITAT, Mumbai Bench in the case of Tevapharm India Pvt. Ltd. in ITA No.6623/Mum/2011 for Assessment Year 2007-08 wherein these three companies were rejected as comparables in respect of an R&D Service Provider. Before us, no material

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 8 evidence has been brought on record by revenue to justify the inclusion of these three companies in the list of comparables. 5.2.5 We also find that co-ordinate benches of this Tribunal in the cases of Apotex Research Pvt. Ltd. V DCIT in ITA No.918/Bang/2011 dt.23.11.2012 for Assessment Year 2007- 08 and in Millipore India Pvt. Ltd. in IT(TP)A No.689/Bang/2012 dt.4.7.2014 for Assessment Year 2007-08, after considering the functional profile of M/s. Oil Field Instrumentation India Ltd. and M/s. Celestial Bio Labs Ltd. held that these two companies cannot be treated as comparables for an R&D Service Provider. 5.2.6 In this view of the matter, following the findings in the decision of the Tribunal Benches in the cases of Tevapharm India Pvt. Ltd. (supra), Apotex Research Pvt. Ltd. (supra) and Millipore India Pvt. Ltd. (supra), we hold that these three companies viz. Oil Field Instrumentation India Ltd., Celestial Bio Labs, Ltd., and Agile Electric Technologies Pvt. Ltd. are functionally different from the assessee in the case on hand and therefore cannot be treated as comparables. We are, therefore, in agreement with the finding of the CIT (Appeals) in respect of the exclusion of these three companies from the list of comparables and consequently direct the Assessing Officer / TPO to exclude these three companies from the list of comparables. 5.2.7 It is seen from the impugned order that the learned CIT(A) has rejected M/s. Agile Electric Technologies Ltd. as a comparable for having RPT. A co-ordinate bench in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 reported in 21 ITR (Trib) 514 has held

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 9 that a company having RPT in excess of 15% of turnover should be excluded from being a comparable. In the case on hand from the details on record, it is reported that this company has RPT of about 62.38% on turnover and therefore following the decision of the co-ordinate bench in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we hold that the learned CIT(A) was correct in rejecting M/s. Agile Electric Technologies Pvt. Ltd. as a comparable for this reason also. Consequently, the grounds raised at S.Nos.3 to 5 of Revenue’s appeal are dismissed. 6.1 In Ground No.6, Revenue challenges the decision of the learned CIT(A) in holding that the assessee is eligible for standard deduction of 5% from the ALP under the proviso to section 92C(2) of the Act. 6.2 The Income Tax Act, 1961 has been amended with retrospective effect from 1.4.2002 by the introduction of a clarificatory amendment in which Section 92C(2A) was inserted by Finance Act, 2012. This new section mandates that if the arithmetical mean price falls beyond +/- 5% from the price charged in the international transactions, then the assessee does not have any option referred to in Section 92C(2) of the Act. Thus, as per the above amendment, it is clear that the +/- 5% variation is only to justify the price charged for international transactions and not for adjustment purposes. The aforesaid amendment brought about by Finance Act, 2012 has settled the issue and accordingly the 5% standard deduction benefit is not allowable to assessees. In this view of the matter, the decision of the learned CIT(A) in the impugned order on this issue is reversed. Consequently, Ground No.6 raised by Revenue is allowed.

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 10 7. In the result, Revenue’s appeal for Asst. Year 2007-08 is partly allowed. 8. ORDER ON THE PETITION FOR CONDONATION OF DELAY IN FILING THE CROSS OBJECTIONS (C.O. No.30/Bang/2015) 8. The facts of the matter, briefly, are as under :- 8.1 The impugned order of the CIT (Appeals) – IV, Bangalore for Assessment Year 2007-08 dt.24.1.2012 was admittedly served on the petitioner on 24.1.2012. Revenue filed its appeal before this Tribunal on 28.3.2012 and the information pertaining to the filing of Revenue’s appeal was intimated to the petitioner on 5.12.2014. In these circumstances, the petitioner ought to have filed the C.O. on or before 30 days from the receipt of notice i.e. on or before 4.1.2015, but the same was filed on 17.3.2015; thereby leading to a delay of 72 days in filing the C.O. 8.2 Along with the C.O., the petitioner has filed a petition for condonation of delay in filing the C.O. accompanied by an Affidavit dt.13.3.2015 sworn to by the Managing Director of the Petitioner company. The learned Authorised Representative submitted that as put forth in the petition, the key management personnel of the petitioner company in the period Nov.,2014 to Feb.,2015 were pre-occupied in activities related to the acquisition of Cheminova, a MNC based out of Denmark. On receipt of the notice for hearing on 24.2.2015, the petitioner appointed the present authorised representatives and in fresh consultations with them filed the C.Os belatedly by 72 days. It is submitted that the said delay in filing the C.O. was

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 11 neither deliberate nor intentional, but was due to a bona fide and reasonable cause and prayed that the said delay of 72 days in filing the C.O. be condoned. 8.3 We have heard the rival contentions of the learned Authorised Representative and learned Departmental Representative and have perused and carefully considered the petition for condonation of delay of 72 days in filing of the C.O. and the accompanying Affidavit of the petitioner. On an appreciation of the facts of the matter, as brought out above at paras 8.1 and 8.2 (supra), we are of the considered view that the reasons adduced by the petition for the delay of 72 days in filing the C.O. indicate that the said delay was neither deliberate nor intentional, but was due to bona fide reasons and reasonable cause, and that in these circumstances this is a fit case for condonation of the delay of 72 day. We accordingly condone the delay of 72 days in filing the C.O. by the petitioner and admit the C.O. for adjudication. 9.0 The Grounds raised in C.Os filed by the assessee are as under :- “ 1. The order of the learned CIT (Appeals) – IV, Bangalore to the extent prejudicial to the respondent is bad in law. 2. The learned CIT (Appeals) – IV, Bangalore has erred in confirming the action of the Assessing Officer and Transfer Pricing Officer in : a. rejecting the comparables and transfer pricing analysis undertaken by the respondent on unjustifiable grounds; and b. rejecting Agrima Consultants International Limited, Neelam Medical International (Asia) Limited (new name – Max Neema Medical International Limited) and Research Support International Limited (new name – Evotec India Pvt. Ltd.) selected by the Respondent as comparables on unjustifiable grounds. 3. The learned CIT (Appeals) – IV, Bangalore has erred in confirming the action of the Assessing Officer and Transfer Pricing Officer in : a. performing fresh transfer pricing analysis; and

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 12 b. performing the transfer pricing analysis without making proper adjustment for enterprise level, transactional level differences and risk differentials between the Respondent and the comparable companies. PRAYER 4. On an overall consideration of the facts of the case, and the law applicable, the ALP as determined by the Transfer Pricing Officer, as adopted by the Assessing Officer and as modified by the CIT (Appeals) to the extent being prejudicial to the respondent being not correct is to be quashed and the figures as determined and returned by the respondent being correct are to be accepted.” 10. The Grounds in C.O. at S.Nos.1, 2 (a), 3 and 4 being general in nature and not being specifically urged before us, no adjudication is called for thereon and these grounds are accordingly dismissed as infructuous. 11. In respect of the Ground No.2(b), the learned Authorised Representative has only raised the issue of inclusion of Max Neema Medical International Ltd., based on the decision of the co-ordinate bench of the ITAT, Bangalore in the case of Apotex Research Pvt. Ltd. in ITA No.918/Bang/2011dt.23.11.2012. It was submitted by the learned Authorised Representative that there would be no necessity for adjudication on the inclusion of this company as a comparable in the event the Bench, while adjudicating revenue’s appeal, upholds the action of the learned CIT(A) in the impugned order in rejecting M/s. Oil Field Instrumentation India Ltd., Celestial Bio Labs, Ltd., and Agile Electric Technologies Pvt. Ltd. from the list of comparables. In this event, the learned Authorised Representative submits, the T.P. Adjustment of Rs.35,82,199 would not survive, as is evident as per the order passed by the Assessing Officer giving effect to the impugned order of the learned CIT(A). Since we have upheld the order of the learned CIT(A) on the exclusion of M/s. Oil Field Instrumentation

ITA No.431/Bang/2012 C.O. No.30/Bang/2015 13 India Ltd., Celestial Bio Labs, Ltd., and Agile Electric Technologies Pvt. Ltd. from the list of comparables at paras 5.2.4 to 5.2.6 of this order (supra) and in the light of the above submissions by the learned Authorised Representative, we find there is no requirement for us to adjudicate on the inclusion / exclusion of M/s. Max Neema Medical International Ltd., in the list of comparables. This Ground is therefore dismissed as infructuous. 12. In the result, Revenue’s appeal for Assessment Year 2007-08 is partly allowed and the assessee's C.O. is dismissed. Order pronounced in the open court on 10th April, 2015.

Sd/- Sd/- (RAJPAL YADAV) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore