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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI J P BOAZ & SHRI AMIT SHUKLA
ORDER अिमत शु�ला : �या. स.: PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the assessee against Final Assessment order dated 15.10.2012, passed under section 143(3) r.w.s. 144C(13), in pursuance of directions given by the Dispute Resolution Panel (DRP), Mumbai under section 144C(5) vide order dated 28.02.2012. The assessee in its appeal has raised following grounds:- 1. “On the facts and in the circumstances of the case, and in law, the learned Assessing Officer has erred, in conformity with the directions of Hon'ble Dispute Resolution Panel ('DRP'), Mumbai under section 144C(13) of the Income-tax Act, 1961, and the order of the Transfer Pricing Officer u/s. 92CA(3), in rejecting 2 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) Comparable Uncontrolled Price (CUP) method adopted by the appellant in respect of international transactions entered into by the appellant and applying Transactional Net Margin method (TNMM).
2. Without prejudice to Ground no. 1, on the facts and in the circumstances of the case, and in law, the learned Assessing Officer has erred, in conformity with the directions of Hon'ble Dispute Resolution Panel ('DRP'), Mumbai under section 144C(13) of the Income-tax Act, 1961, and the order of the Transfer Pricing Officer u/s. 92CA(3), in adding the negative margin of the appellant (-20.07%) to the positive margin of comparable companies (10.99%) and thereby adopting Arm's Length Margin of 31.06% (20.07%+10.99%) of operating costs. Instead, it should be only 10.99% of operating cost.
3. Without Prejudice to Ground no.1 and 2 above, on the facts and in the circumstances of the case, and in law, learned Assessing Officer has erred, in conformity with the directions of Hon'ble Dispute Resolution Panel ('DRP'), Mumbai under section 144C(13) of the Income-tax Act, 1961, and the order of the Transfer Pricing Officer u/s. 92CA(3), in applying the margin of 31.06% on the total cost without excluding from the total cost-expenses already disallowed by the learned Assessing Officer.
4. Without prejudice to Ground no.1, 2 and 3 above, on the facts and in the circumstances of the case, and in law, the learned Assessing Officer has erred, in conformity with the directions of Hon'ble Dispute Resolution Panel ('DRP'), Mumbai under section 1 44C( 13) of the Income-tax Act, 1961, and the order of the Transfer Pricing Officer u/s. 92CA(3), in determining the proportionate Arm's Length Price of international transactions entered into by appellant at Rs,10,12,64,747/- as against the actual revenue received Rs. 5,49,70,581/- and thereby making an addition of Rs 4,62,94,166/-.
5. On the facts and in the circumstances of the case, and in law, learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in disallowing Software and Licensing expenses Rs10,91,131/- by treating them as capital expenditure.
6. Without prejudice to Ground no 5, on the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in not allowing depreciation u/s 32 on Software and Licensing expenses of Rs.10,91,131/- treated as capital expenditure by the Assessing Officer.
7. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in disallowing lease rent Rs.1,83,95,052/- in spite of specific direction by the Honourable Dispute Resolution Panel to delete the proposed addition.
3 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International)
8. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in disallowing 50% of Postage and Courier expenses of Rs. 58,65,470/- in spite of specific direction by the Honourable Dispute Resolution Panel to delete the proposed addition.
9. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in disallowing 50% of Printing and Stationery expenses of Rs 30,08,194/- in spite of specific direction by the Honourable Dispute Resolution Panel to delete the proposed addition. 10. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in disallowing 50% of the Travelling expenses of Rs 23,33,502/- incurred wholly and exclusively for the purpose of its business, merely on surmises and conjectures. 11. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in disallowing 50% of the Telephone and Communication expenses of Rs 14,74,748/- incurred wholly and exclusively for the purpose of its business, merely on surmises and conjectures. 12. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in making an addition of Rs 40,39,826/- in respect of Advances received in the course of business. 13. On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ACIT (OSD) — 10(1), Mumbai, has erred in not allowing set off of following brought forward business loss and unabsorbed depreciation against the business income as assessed by him”.
At the outset, Ld. Counsel for the assessee submitted that, grounds no. 1, 2, 7, 8, 9 & 13 are not pressed, accordingly, these grounds are treated as dismissed as not pressed.
Ground no. 3 & 4, relates to transfer pricing adjustment made by the TPO for sum of Rs.4,62,94,166/-.
The brief facts qua the Transfer Pricing adjustment are that, the assessee company is engaged in providing the clinical research, centralized laboratory services to its Subsidiary companies. During
4 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) the year under consideration the assessee has entered into the following international transactions with its Associated Enterprises:-
Sl. Name of the Nature of Transaction Amount Method No. Associate Enterprise (Fees received for) INR used 1 IGate Clinical Centralized Research Research Diagnostics Fees 1,44,23,982 CUP International Inc. 2 IGate Clinical Data Analysis and 61,99,643 CUP Research Management Fees International Inc. 3 IGate Clinical Project 3,43,46,956 CUP Research Management International Inc.
The TPO rejected the CUP method followed by the assessee and applied transactional net margin method (TNMM) for benchmarking the arm’s length price (ALP) of the international transaction entered into by the assessee. The assessee’s negative margin of (-)20.07% was converted into positive margin of 10.99% after computing the arm’s length margin of 31.06% of the total cost incurred by the assessee and thereby determining the ALP of the AE transaction at Rs.10,12,64,747/-. This operating margin of positive 10.99% has been accepted by the assessee for which there is no dispute before us. The only grievance of the assessee before us is that, the proportionate arm’s length price has been wrongly calculated by the TPO as he has applied the margin on the entire operating cost and not in respect of transaction with AE only. The total operating revenue of the assessee was Rs.806,893,349/-, out of which revenue from associated enterprise was only Rs.5,49,70,581/-, therefore, any benchmarking should have been restricted to this revenue only. Apart from that, the Ld. Counsel before us submitted that, while applying margin of 10.99% of the cost, the expenses which has already been disallowed by the AO should have been reduced from the operating cost by the AO,
5 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) otherwise, it will amount to double addition. The details of such expenses disallowed by the AO are as under:- Nature of Expenses Amount Rs. a) Software and Licensing expenses 10,91,131/- b) Travelling expenses 11,66,751/- c) Telephone & Communication expenses 7,37,374/- Total 29,95,256/- 5. As regards the application of arm’s length margin arrived at by the TPO on the entire operating cost, the Ld. Counsel submitted that, now it is a well settled proposition that, ALP margin had to be determined in respect of international transaction with the AE and not for the entire sales or operating cost. In support of his contention, he has given a list of 19 decisions, wherein, it has been unanimously held that transfer pricing adjustment should be restricted to the value of international transactions only and it could not be made on the entire turnover. The list of such decision are as under:-
6 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) He submitted that, if adjustment is made only in respect of transaction with the AE then aggregate proportionate working would be in the following manner:
“Total Operating Costs Rs.9,68,85,789/- Revenue from Associated Enterprises Rs.5,49,70,581/- Total Revenue Rs.8,06,84,349/- Therefore, Proportionate Operating Cost in respect of revenue from Associated Enterprises (A*B/C) Rs.6,60,08,689/- Add: Arm’s Length Margin (@ 10.99% of above) Rs.72,54,355/- Arm’s Length Price of revenue From Associated Enterprises (D + E) Rs.7,32,63,044/- Adjustment to be made (F – B) Rs.1,82,92,463/-”
Thus, sum and substance of assessee’s submission is that, firstly, the TP adjustment should be made in respect of transaction with the AE and secondly, the expenses which has already been disallowed by the AO should be reduced from the operating cost.
On the other hand, Ld. CIT DR submitted that, the entire transfer pricing analysis of the assessee was erroneous. In the course of T P proceedings, assessee had pleaded that CUP method should be applied, even though assessee had originally adopted TNMM in its Transfer Pricing Study Report. The TPO has rejected the assessee’s contention for application of CUP and had applied TNMM which now is not disputed by the assessee. After benchmarking the margin with 5 comparables, he arrived at arm’s length price margin of 31.06% and since assessee had shown a negative margin of (-) 20.07%, therefore, positive margin of 10.99% was worked out for making the adjustment. He further submitted that, once TNMM has been applied, then it has to be taken on 7 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) entity level, because the margins of the comparables as well as of the assessee should be taken after considering the entire costs or entire sales, otherwise the margin itself will become distorted. Secondly, if TNMM has to be applied on part of the transaction i.e. transactions with the AE then in such cases, there would always be an internal Comparable by way of transactions with other parties and in all such cases, there would be no requirement for benchmarking it with external comparables, therefore, the whole premise where TNMM is applied only for the AE transaction will not give correct picture. However, regarding deduction of expenses, which has already been disallowed by the AO from the operating cost, he submitted that, this contention of the assessee can be accepted and AO may be directed to examine the same. If it leads to double addition, then same should be excluded.
We have heard the rival contentions and also perused the relevant finding given in the impugned orders qua the issue of transfer pricing adjustment. So far as the applicability of TNMM method as a most appropriate method for benchmarking the arm’s length price of the international transaction with the AE the same is not in dispute. The assessee had disclosed operating loss of (-) 20.07% of the costs which has been rejected by the TPO and after carrying out the comparability analysis with the external comparables, he has arrived at an Arm’s Length Margin of 36.01% and, thereby the resultant adjustment by way of Arm’s length margin was computed at 10.99%. This arm’s length margin of 10.99% has not been disputed before us, therefore, to this extent the TPO‘s determination of positive margin of 10.99% has attained finality qua this year. The sole issue which has been raised before us by the assessee is that, the Transfer Pricing adjustment under section 92 should have been made in respect of the transaction made with the AE only and not in respect of the entire transaction including Non-AE also. The total operating revenue of the assessee
8 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) was Rs.8,06,84,349/- and total operating cost was Rs.9,68,85,789/-. As against this, the revenue from AE is Rs.5,49,70,581/-. The proportionate operating cost in respect of a revenue from the AE was thus, Rs.6,60,08,689/-. If Arm’s Length Margin of 10.99% is applied to this sum then same would be Rs.72,54,355/-. If such an ALP of Rs.72,54,355/- is applied to revenue from AE, then it would be worked out to Rs.7,32,63,044/-. The adjustment to be made, then would be at Rs.1,82,92,463/-. If any addition at all on account of Transfer Pricing adjustment is made then, same should have been made from the AE transactions and not for the entire revenue or total operating cost. This proposition as submitted by the Ld. Counsel is squarely covered by series of decisions, the list of which has already been incorporated somewhere above by us.
8. Now, coming to the argument of Ld. DR, we find that in the case of S B & T International Ltd in for AY 2008-09 vide order dated 20.01.2016, similar plea was raised by the Ld. CIT DR, which has been dealt by us in the following manner:-
“6. We have heard the rival contentions qua the issue, whether the adjustment on account of margins of the comparables should be made at the entity level or only with regard to the transactions with the AE. Provisions of section 92 provides that any income arising from an international transaction shall be computed having regard to the ALP'. Thus, the ALP has to be on international transaction and not in relation to assessees entire sales or turnover. The second proviso to section 92C, though brought in statute by the Finance Act, 2009, w.e.f. 1st October 2009, provides that "if the variation between ALP so determined and the price at which international transaction has actually been undertaken shall be deemed to be the ALP', however, the same is indicative of the preposition that the ALP is to be determined only on international transaction. This, inter-alia, means that the statute itself provides that the adjustment arising out of ALP should be with regard to international transaction and not on the entire turnover of the assessee. The transfer pricing mechanism revolves around international transaction where it has to be seen whether 9 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) such transactions are at arm's length price or not. The presumption is that transactions with the independent parties are always at arm's length price, however, it is with regard to related parties i.e., A.Es, only one has to see whether such a transaction is at arm's length. The profit margin from the international transaction with the A.E. has to be seen in relation to the uncontrolled transaction with the independent parties. What is to be compared is the international transactions of the assessee with its related parties and not for its entire transaction with non-related parties also. Therefore, ALP has to be seen only with regard to international transaction with A. Es and not o n the entire turnover/sales.
As regards contentions raised by the Ld. CIT DR that there is no segmental information with regard to the AE and non-AE transaction, therefore such an adjustment cannot be restricted to AE transaction only, we are unable to appreciate his argument firstly, there has been consistent view that the adjustment if at all, should be made on the international transactions and not at the entity level i.e. with the non-AE transactions also; and Secondly, the international transactions with the AE if have been duly reported, then what is required to be seen, whether such a transactions with the related party are at arm’s length price or not and same cannot be benchmarked on the basis of the entire transaction at entity level. The deeming fiction created in the transfer pricing provision has to be restricted to the transactions with the related party, because only such transaction has to be judged on the arm’s length principle. Thus, we agree with the contention of the Ld. Counsel that the benefit of benchmarking should be done only on AE transaction not on the entire turnover. Accordingly, the AO / TPO is directed to benchmark the margin of the comparable companies only with the transaction with the AE and not for the entire turnover at entity level. Thus, we agree with the contention of the Ld. Counsel that adjustment if at all is required to be made then the same should be made in respect of transactions with the AE only accordingly, the TPO is directed to make the adjustment only with respect to transaction with the AE and not for the entire revenue as costs.
As regards, another plea raised by the Ld. Counsel, that whatever disallowances which has been made by the AO under various heads should be reduced from the operating cost as it will amount to double addition. We agree in principle with such a contention and therefore, whatever may the outcome of the 10 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) disallowances in our order which has been challenged before us in ground no.5, 6, 10 & 11, the same should be given effect and whatever stands confirmed should be directed to be reduced from the operating cost.
In ground no. 5 & 6, the assessee has challenged the disallowances of software and license of Rs.10,91,131/- and alternatively, it has been claimed that if the same is treated as capital expenses, then depreciation under section 32 should be directed to be allowed.
The assessee has paid subscription charges, mostly for software and website data amounting to Rs.10,91,132/- and these expenses have been claimed to be of recurring and periodical charges. The AO disallowed the claim as assessee could not submit any details and accordingly, he treated the said expenditure as capital in nature.
Before the DRP, the assessee furnished some of the invoices contending that, these are purely revenue in nature. The AO had raised objections on admission of such additional evidences and submitted that, despite various opportunities the assessee could not submit these evidences and, in any case, these are towards annual maintenance contract and annual subscription fees and license fees, which are capital in nature.
The DRP too accepted the AO’s action for treating the said expenses as capital in nature.
After considering the rival submission and on perusal of the details of software expenses, which for the sake of ready reference are reproduced here in below:-
11 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) ITA No.7588/M/2012 Sr. Vendor Name Purpose Amount Remarks no. 1 Dataformatics Consultancy Pvt Ltd Lisence 17,522 Win server Lisence 2 Antraweb Technologies AMC for Tally Pvt Ltd support 19,656 Tally software 3 Fiona Infosystems Ltd. Renewal Charges 36,208 Yearly Antivirus Renewal 4 S A A Software-Yearly Total 609898 Renewal software subs- Subscription Charges Less Cription Agreement and Prepaid 312000 3,12,000 invoice Attached Agreement and Reversal of prepaid of invoice Attached FY 2006-07 6,50,525 5 Tax Print Corporation TDS software 2,080 TDS Other ETDS Software For AY 2008-09 upgrade 6 Tax Print Corporatin Salary and TDS 33,800 Salary TDS Calculation Software for AY Software AY 2008-09 2008-09 Including tally Linking charges Etc 7 Prepaid Reversal Reversal of pre- 19,338 Paid Medra Dictonery Sub- Scription Charges Accounted in FY 2006-07 1,091,130 It can be seen that, some of the expenditures are periodical and recurring in nature, which cannot be held to be capital in nature. Because these expenditures are part and parcel for running of and maintenance of computer programmes essential for business. However, all these details and bills and vouchers along with the nature of expenditures have not been examined properly by the AO as well as by the DRP, therefore, in the interest of justice, we feel that the issue of software expenses should be remitted back to the file of the AO and should be decided afresh after considering these bills and vouchers and also the nature of expenses. It is clarified that if payment is recurring in nature purely for software then same cannot be disallowed as capital. In case some of the expenditures are treated as capital then, needless to say that AO will allow deprecation of such expenditure. Thus, with this direction, ground no. 5 and 6 are treated as allowed for statistical purposes.
12 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International)
In ground no. 10, the assessee has challenged the disallowance of travelling expenses of Rs.11,66,755/- being 50% claim of Rs.23,33,502/-, the AO has disallowed these expenses on the ground that no business is procured from the foreign countries, therefore, considered as business expenditure.
Ld. DR submitted that, assessee had not submitted any details for availing claim of such on expenditures and therefore same cannot be allowed.
On the other hand, Ld. Counsel had submitted that percentage of foreign travelling expenses on total turnover for various assessment years were the following manner: AY 2005-06 AY 2006-07 AY 2007-08 AY 2008-09 Total Turnover 11,188,211 47,212,811 46,816,254 80,684,349 Foreign Travel Expenses 3,356,896 1,557,593 4,125,682 2,333,502 % of foreign travel To 30% 3% 9% 3%
After considering the relevant finding given in the impugned orders, we find that AO has disallowed 50% of various expenditures debited in the profit and loss account on the ground that, assessee could not furnish the break-up and the necessary supporting evidences. Accordingly, he disallowed 50% of the entire expenditure. Even before us, the entire details have not been furnished. However, looking to the fact that foreign travelling expenses has been recurring expenditure in all the assessment years and in this year, the percentage is only 3% of the total turnover, therefore, in the interest of justice, we feel that the disallowance made should be restricted to 25% of the total expenditure debited on account of travelling expenses. Thus, the assessee gets part relief on this score. Similarly, on ad-hoc disallowance of telephone and communication, the same was made 50% on total expenditure claimed at Rs.14,76,748/- on the ground that relevant details have not been furnished. Since similar
13 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International) position is continuing at the stage of the Tribunal also, therefore, like in the travelling expenses, we direct the AO to disallow 25% of the total expenditure debited on this head. Thus, assessee gets part relief on this score also.
Now, coming to Rs.40,39,826/- being advances received in the course of business, the AO has made the addition on the ground that, the assessee has not furnished any details with regard to the advances received. Before the DRP, the assessee submitted that it has required advances from the customers for programme for Appropriate Technology Health and other items like service tax refund, etc. Before the DRP, additional evidences were filed, however, the DRP on the basis of objections raised by the AO has rejected the assessee’s submission.
Before us, the Ld. Counsel submitted that, the confirmation along with ledger account were furnished, however, the same has not been considered, therefore, matter needs to be reconsidered by the AO.
Ld. DR, on the other hand, relied upon the order of the AO as well as of the DRP.
After considering the relevant finding given in the impugned order, and also the material placed before us, we are of the opinion, that the matter should be restored back to the file of the AO to consider evidences filed by the assessee in this regard, because these advances have not only been confirmed by the customers but also supported by the copy of ledger account which is already part of the record. Accordingly, this matter should be examined afresh and be decided in accordance with the law.
In the result, ground no. 12 is treated as allowed for statistical purposes.
14 डाइय�नोसच� लाइफ सायनसेस �ाइवेट �ल�मटेड DiagnoSearch Life Sciences Private Limited (Previously known as iGATE Clinical Research International)
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 7th March, 2016.
Sd/- Sd/- (जे पी बोस) (अिमत शु�ला) लेखा सद�य �याईक सद�य (J P BOAZ) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 7th March, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -40/concerned___/DRP-II, Mumbai. 4) The Commissioner of Income Tax- concerned___, Mumbai. 5) िवभागीय �ितिनिध “के”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “K” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /