M/S. ELI LILLY & CO. (INDIA) PVT. LTD.,GURGAON vs. ACIT, GURGAON

This appeal, at the instance of the assessee, is directed against the assessment order dated 24.12.2013 passed u/s 143(3) r.w.s 144C of the I.T. Act.

The assessee is, essentially aggrieved by the TP Adjustments made in respect of the business support services rendered by the assessee to its AE’s, and raised the following grounds of appeal :-

The assessee is a wholly owned subsidiary of Eli Lilly Netherlands B.V. and engaged in the business of trading of formulations in the domestic market which is purchased from its AE’s and third parties. It is also into marketing and selling of life saving drugs formulations that find usage in the treatment of several disease segments ranging from Oncology, CNS, Cardiovascular, Cancer, Infectious diseases, Endocrine, etc. It filed its return of income on 30.09.2008 declaring taxable income of Rs. 19,61,38,326/-, which came to be assessed at an income of Rs. 20,06,38,580/- dated 24.12.2013 u/s 144C/143(3) of the Act and, hence this appeal by appellant company.

Ground No. 1 is general in nature and, therefore, does not require any adjudication.

Ground Nos.2 to 2.7 relate to an adjustment of Rs. 45,00,250 in the ‘international transactions’ of business support services, on the basis of an order passed under section 92CA(3) of the Act by the TPO. During the course of hearing, the learned counsel made his submission in support of grounds 2.1 and 2.2 of the Grounds of appeal. The facts in relation to the above ground are that for the relevant assessment year, the assessee had undertaken the following international transactions:

During the previous year, relevant to the A.Y. 2009-10, the assessee received an amount of Rs. 7,71,49,367/- for Business Support Services. The assessee sought to justify the consideration received for the international transactions entered into with the AEs to be at ALP. The assessee submitted a Transfer Pricing Report adopting operating profits to the total cost as its profit level indicator (hereafter ‘PLI’) for the transfer pricing studies. The assessee applied the Transactional Net Margin Method (hereafter 'TNMM'), which was considered to be the most appropriate method for the purposes of benchmarking the international transaction. The assessee's operating profit margin (i.e. operating profit/total cost) was computed at 9.82% and the assessee claimed that the same was comparable with other companies rendering Business Support Services. For the purposes of the transfer pricing study, the assessee chose 14 comparable entities and the result of the benchmarking analysis is as under: Sr. Name of the Company Weighted average No. OP/TC (%) 1 Cyber Media India Online Limited 8.43% 2 IDC (India) Limited 15.08% 3 Times Innovative Media Limited -2.21% 4 Educational Consultant Ind Limited 7.39% (Segment) (Technical assistance & HRD) 5 Capital Trust Limited -6.71% 6 Crisil Limited 21.41% 7 ICRA Management Consulting Services 4.04% Limited 8 Access India Advisor Limited 37.75% 9 Besant Raj International Limited -11.74% 10 ITDC Limited 10.29% 11 Saket Projects Limited 23.65% 12 In House Production Limited (Segment) 0.31% (Healthcare division) 13 Overseas Manpower Corpn. Limited 13.10% 14 Acquire Talent Services Limited -3.54% Average 8.37%

It was submitted that since, arithmetic average of the operating profit margins of the said comparables was computed 8.37%. According to the assessee, as the price charged in its international transactions is more than the said arithmetical mean price, the price charged in the international transactions is treated as at Arm’s length.

Further, TPO applied the following filters for selection of comparable companies in order to benchmark the international transaction of provision of business support services: i) Companies whose data is not available for FY 2008-09 are excluded ii) Companies whose Market/Business Support Service income < Rs. 1 Cr. are excluded iii) Companies whose revenue from Market/Business Support Services is less than 75% of total operating revenues are excluded. iv) Companies having more than 25% related party transactions of income are excluded v) Companies having different financial year ending (i.e. not March 31, 2009) or data of the company does not fall within 12 month period i.e. 01.04.2008 to 31.03.2009, are rejected vi) Companies that are functionally different from the taxpayer are excluded vii) Companies that are having peculiar economic circumstances are excluded.

The TPO applied the aforesaid criteria of acceptance/ rejection and accordingly, rejected following companies from the set of companies submitted by the assessee: Sr. Name of the Company Remarks of the TPO No. 1 Cyber Media India Online Limited Functionally not comparable 2 Times Innovative Media Limited Functionally not comparable 3 Educational Consultant Ind Functionally not Limited (Segment) comparable (Technical assistance & HRD) 4 Capital Trust Limited Functionally not comparable

Also, the TPO brought following companies in the final set of comparable companies which were rejected by the assessee in its transfer pricing study on account of functional dissimilarity: Sr. Name of the Company OP/TC (%) No. 1 Best Mulyankan Consultants Ltd. 9.91% 2 Basiz Fund Services Pvt. Ltd. 46.75% 3 Indus Technical & Financial 6.45% Consultants Ltd. 4 Immacs Management Services Ltd. 14.54% 5 Shristi Urban Infrastructure 8.66% Development Ltd. 6 Choksi Laboratories Ltd. 23.19% 7 Tata Consulting Services Ltd. 26.08% (Segment) 8 WAPCOS Ltd. (Segment) 23.60%

The final set of 9 comparable companies considered by the TPO in the impugned order, having an average operating profit margin of 18.85%, is as under:

Accordingly, the TPO computed an adjustment of Rs. 63,40,748/- to the total income of the assessee on account of difference in arm’s length price of provision of business support services by the assessee to its associated enterprises, as under: Operational Cost for Business Support 7,02,48,000 Service Segment Arm’s Length Price at a margin of 118.85% 8,34,89,748 Price received 7,71,49,000 Adjustment 63,40,748

Upon receiving the Draft Assessment Order forwarded by the Assessing Officer to assessee and served upon the assessee on 2nd March, 2013 under section 143(3) of the Act read with section 144C(1) of the Act, the assessee filed its objections to the same before the Dispute Resolution Panel-1, New Delhi (hereafter ‘DRP’) against the adjustment proposed by the Assessing Officer in its draft order. The DRP has discussed in detail, all the objections raised by the assessee and vide an order dated 05.09.2013 directed to include In House Production Limited and to exclude Tata Consulting Engineers Limited from the final set of comparables. As a result, the final set of 9 comparable companies having an average operating profit margin of 16.23%, is as under :-

Consequently, Assessing officer vide an order dated 24.12.2013 read with order of TPO under section 144C(10)/92CA(3) of the Act, made an addition of Rs. 45,00,250/- to the total income of assessee as under :-

In the above background, the assessee is in appeal against the final assessment order, inter alia on the ground that DRP/TPO erred in excluding Educational Consultant India Limited (EDCIL) (Technical assistance & HRD) (segment) from the final set of comparable companies. The TPO has held that EDCIL engaged in educational consultancy business and is not providing any services and therefore functionally not comparable to the appellant. Further, DRP in this regard has held as under: “According to the assessee EDCIL operates in three segments:

In pursuance to the above, the assessee submitted that this company is engaged in provision of support services in the following areas: “Student placement: The objective is to place international/NRIs/PIO in Indian Institutions, recognized by the Regulatory Bodies, Government of India.

Further, it was submitted that, as per the Annual Report of the company, it operates in three segments, namely, Technical Assistance, Institutional Development and Human Resources Development. It was also submitted that the ‘technical assistance’ and ‘human resource development’ segment of EDCIL is comparable to the services provided by it to its associated enterprise as these segment covers services including feasibility studies, training, management services, recruitment services, strategic consultancy, etc. It was therefore submitted that accordingly the assessee in its transfer pricing study has considered “Technical Assistance” and “Human Resource Development” segments of EDCIL as comparable to the assessee and TPO/DRP were incorrect in concluding that the same is not functionally comparable. A reference was also made to the order of DRP for assessment year 2008-09 whereby EDCIL had been included a comparable. The learned DR supported the action of exclusion of authorities below.

We have heard the rival submissions and, perused the material on record. In the present case, the assessee wants inclusion of EDCIL, a government company, in the final set of comparables adopted by TPO/DRP. The assessee inter-alia submitted that in the appellants own case for the assessment year 2008-09. DRP had directed the TPO to consider the aforesaid segment, namely, ‘Technical Assistance’ and ‘Human Resource’ as comparable to the assessee and since the business of EDCIL and assessee has remained unchanged from preceding years, EDCIL continues to be comparable to the assessee and there exists no legitimate reason to reject the company in the year under consideration. The assessee placed his reliance on the judgment of Hon’ble Supreme Court in the case of CIT vs. Excel Industries Limited 358 ITR 295, wherein their Lordships reiterated the law laid down in Radhasoami Satsang vs. CIT 193 ITR 321 to hold that, where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year. Having gone through the order dated 30.8.2012 for Assessment year 2008-09 in the case of appellant, it is stated that DRP has held in regard to the above comparable as under: “1 Educational Consultants India Ltd. (EDCIL)

For the foregoing reason and there being no change in the facts for the instant assessment year, the AO/DRP is directed to include EDCIL in the final set of comparable companies. Reliance in this regard is placed on the following observation of the Mumbai Bench of the Tribunal in the case of ACIT vs. NGC Network India (P) Ltd. 10 taxmann.com 140 wherein it has been held as under: “These comparables and the method of computation of arm’s length price has been accepted by the department in the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also.”

Thus, after including EDCIL in the final set of comparable companies considered by the TPO, the average operating profit to cost margin of the comparable companies works out to 14.98%, as under: Sr. Name of the Company OP/TC (%) No. 1 Best Mulyankan Consultants Ltd. 9.91% 2 IDC (India) Ltd. 10.46% 3 Basiz Fund Services Pvt. Ltd. 46.75% 4 Indus Technical & Financial 6.45% Consultants Ltd. 5 Immacs Management Services Ltd. 14.54% 6 Shristi Urban Infrastructure 8.66% Development Ltd. 7 Choksi Laboratories Ltd. 23.19% 8 In House Productions (Segment) 2.51% 9 WAPCOS Ltd. (Segment) 23.60% 10 Educational Consultant India Limited 3.80% (Technical assistance & HRD Segment) Average 14.98%

Since, the operating profit to cost of the appellant at 9.82% is within the +/-5% range of the average operating profit to cost ratio of the aforesaid 10 comparable companies at 14.98%, the international transaction of provision of business support services of assessee during the relevant year is considered to be at arm’s length and the adjustment made by the TPO in the impugned order is liable to be deleted, for this reason alone. The grounds are allowed to the extent discussed above.

As far as Ground No. 3 is concerned i.e. with regard to levy of interest under section 234C, it is held that interest under section 234C is leviable on the shortfall of advance tax as compared to the tax due on returned income.

In the result, the appeal of the assessee stands allowed.