M/S. PFIZER LTD.,MUMBAI vs. ACIT RG. - 8(2), MUMBAI

We first proceed to dispose of assessee’s appeal in ITA no.3729/Mum./2008, for the assessment year 2003–04. In this appeal, the assessee in total has raised nine grounds as per the concise grounds of appeal.

Regarding grounds no.3(b), 3(c)(ii), 3(c)(iii) and 6, the learned Counsel for the assessee, at the outset, submitted that he does not wish to press these grounds of appeal. Hence, in view of the submissions of the learned Counsel for the assessee, these grounds are dismissed as “not pressed”.

Briefly stated the facts relating to the issue are, the assessee company is engaged in manufacturing and sale of pharmaceutical products. As as per the share holding pattern Pfizer Inc., holds 40% of the equity share capital in the assessee company and rest of the share capital is held by others. Thus, the assessee and Pfizer Inc., are Associate Enterprise (A.E) of each other. Though, during the year, the assessee entered into a number of international transactions with its A.E. However, we will deal with the facts relating to international transactions which are in dispute in the present appeal.

As far as Clinical study Management & Monitoring Support Services (CSMM) is concerned, the assessee for bench marking the arm’s length margin of the transaction adopted Transaction Net Margin Method (TNNM) as the most appropriate method with OP/OC as Profit Level Indicator (PLI). By adopting this method, assessee had selected six companies as comparable. By considering preceding three years’ financialS average operating margin of comparables was found to be 12.61% as against assessee’s margin of 11.11%. Hence, the price charged was considered to be within arm’s length. The Transfer Pricing Officer observed, the role played by the assessee in the transaction

Before the first appellate authority, the assessee challenged both selection as well as rejection of comparables by the Transfer Pricing Officer. The learned Commissioner (Appeals) after considering the submissions of the assessee, upheld selection of SIRO Clinpharm Pvt. Ltd., Vimta Labs Ltd. and Choksi Laboratory Ltd. However, the learned Commissioner (Appeals) accepted assessee’s contention with regard to Syngene International Pvt. Ltd. on the ground that it has predominantly related party transaction. Further, the learned Commissioner (Appeals) also upheld the rejection of four comparables selected by the assessee. As a result of partial relief granted by learned Commissioner (Appeals), the transfer pricing adjustment was reduced to ` 2,01,87,000. Being aggrieved, the assessee is in appeal before us.

Challenging the selection of SIRO Clinpharm Pvt. Ltd., the learned Counsel for the assessee submitted this company is undertaking clinical research trial itself unlike the assessee. Therefore, the business model of this company being different from the assessee, it cannot be considered as comparable. He submitted if a company is not functionally similar in all respect and its business model is different it cannot be considered as a comparable. In this context, he specifically referred to the judgment dated 10th August 2005, of Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. v/s CIT, of 2015.

As far as Vimta Laboratory Ltd. and Choksi Ltd. are concerned, the learned Counsel for the assessee advancing similar arguments

The learned Departmental Representative strongly objecting to the contention of assessee’s counsel submitted, SIRO Clinpharm Pvt. Ltd. was held as a comparable by the Tribunal in assessee’s own case for the assessment year 2002-03 in ITA no.3098/Mum./2006 dated 8th March 2013. In this context, he drew our attention to Para-17 of the order. As far as Choksi Ltd. and Vimta Laboratory Ltd. are concerned, the learned Departmental Representative submitted that both these companies were part of assessee’s own transfer pricing study, hence the contention of the assessee to exclude them should not be accepted. The learned Departmental Representative referring to the Pfizer Limited 8 clinical support services agreement between the assessee and the A.E. submitted, the reading of the agreement as a whole would suggest that assessee has not merely acted as a facilitator between the A.E. and the hospital which are carrying out clinical research. It was submitted the assessee is not simply outsourcing its activities to the hospitals but clearly monitors it. In every stage of the clinical trial, there is interaction between the doctors and assessee’s personnel. Therefore, there is a value addition by the assessee. Taking us through various clauses of the agreement, the learned Departmental Representative submitted, there is continuous interface between the assessee and the hospital as far as the clinical research trial is concerned. Referring to the confidentiality and the indemnity clauses, he submitted, they indicate that the patent and IPR of the products are coming to the A.E. Therefore, it cannot be said that assessee is merely acting as a facilitator. It was submitted no two companies will be having exactly similar function, therefore, if the functions of the companies are broadly similar they can be considered as comparable. Referring to the order of the Transfer Pricing Officer, the learned Departmental Representative submitted, Transfer Pricing Officer has included both high margin and low margin companies even though they are not functionally similar. He submitted when the assessee has no issue with low margin companies which are not functionally similar

The learned Counsel for the assessee in the rejoinder through, accepted the fact that in its own case for the assessment year 2002- 03, the Tribunal has retained SIRO Clinpharm Pvt. Ltd. as a comparable, but referring to the observations made by the Tribunal he submitted, the Bench has recorded a finding that business model of two companies are different as SIRO Clinpharm Pvt. Ltd., is doing such activities on its own whereas, the assessee is out sourcing it. The learned Counsel for the assessee submitted, as the Tribunal has itself recorded the finding that business model of SIRO Clinpharm Pvt. Ltd. is different from the assessee, the principle laid down by the Hon'ble Delhi High Court would apply.

We have considered the submissions of the parties, perused the orders of the Departmental Authorities and the material available on record. As could be seen, the issue in dispute in the aforesaid grounds relates to selection of three comparables viz. Choksi Ltd., Vimta Lab Ltd. and SIRO Clinpharm Pvt. Ltd. As far as SIRO Clinpharm Pvt. Ltd. is concerned, the main plank of assessee’s argument is the business model of this company is different from the assessee as this company itself conducts research trials whereas the assessee out–sources the entire activity. Though the learned Departmental Representative referring to the service agreement between the assessee and A.E. has stated before us that the assessee cannot be considered to be acting

Thus, keeping in view the principle laid down by the Hon'ble Delhi High Court as above, in our view, SIRO Clinpharm Pvt. Ltd. cannot be considered as a comparable to the assessee as the business model of this company is not only different but it is not functionally similar to the assessee in all respect as this company renders the services on its own without outsourcing, unlike the assessee. Though, it may be a fact that Tribunal in the preceding assessment year has accepted this Pfizer Limited 15 company as comparable to the assessee, but the Tribunal did not had the benefit of principle laid down by the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra). In view of the aforesaid, respectfully following the decision of the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra), we direct exclusion of this company as a comparable.

As far as Choksi Ltd. is concerned, it is seen that this company is also doing clinical research trial activity without outsourcing to others. Therefore, the business model of the assessee is different. On a perusal of the judgment of the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra), it is seen that the Hon'ble Delhi High Court held M/s. Vishal Enterprise not comparable to the assessee as it was out sourcing its activities. Hence, the business model is different. Reverse is the case with the assessee. While the assessee is out sourcing its clinical research trial activities, the comparable company is doing the activity itself. Thus, the business model of the assessee and comparable company are not same. Though, learned Departmental Representative has raised serious objection with regard to exclusion of this company by submitting that assessee itself in its transfer pricing study has selected this company, but, in our view that cannot be the sole criteria to retain this company as a comparable if it is ultimately found that the company is not at all a comparable. We find merit in Pfizer Limited 16 the submissions of the assessee that on the basis of limited data available in public domain when the transfer pricing study was prepared the assessee has selected this company as a comparable. However, when complete data relating to this company subsequently came to the public domain, it was found that this company is not a comparable. In our view, the aforesaid explanation of the assessee deserves to be accepted. We, therefore, direct the Assessing Officer to exclude this company as comparable.

As far as Vimta Lab Ltd. is concerned, apart from the fact that business model of this company is different from assessee as demonstrated by the learned Counsel for the assessee, from the material on record it is also seen that the Transfer Pricing Officer himself in assessment year 2005-06, has rejected this company as comparable by observing that not only it is engaged in diversified activity but the business model is different. We, therefore, hold that this company cannot be considered as comparable.

In ground no.3(c)(i), the assessee has challenged estimating indirect cost at 5% notionally while computing the margin.

Briefly stated the facts are, in the course of proceedings before him, the Transfer Pricing Officer on verifying the records noticed that assessee had shown cost on clinical support services under various

The learned Counsel for the assessee submitted before us, identical issue came up for consideration before the Tribunal in assessee’s own case for the assessment year 2002–03 in ITA no.3098/Mum./2006, dated 8th March 2013. Referring to the findings of the Tribunal in Para–24 of the order, he requested for remitting the matter to the Assessing Officer for necessary verification in terms of the said direction.

We have considered the submissions of the parties and perused the material available on record. On a perusal of the order passed by the Co–ordinate Bench of the Tribunal in assessee’s own case cited supra, it is seen that the Tribunal while deciding identical issue, held as under:–

The fact and issue being materially same, respectfully following the aforesaid decision of the Tribunal in assessee’s own case, we remit the matter back to the file of the Assessing Officer for deciding matter

The next issue on transfer pricing adjustment which arise for consideration is with regard to adjustment made to the arm's length price of international transaction involving import of finished direct formulation (FDF) for re–sale in India, which is raised in grounds no.4 and 5 of concise ground. However, subsequently, the assessee on 20th April 2010, has sought permission to raise following additional grounds related to this issue.

At the outset, we propose to deal with the issue whether additional ground can be entertained at this stage.

The learned Counsel for the assessee submitted before us, under an agreement with A.E. assessee imports FDFs from its A.E. and sells them to customers in India without making any value addition. It was submitted, the assessee simply acts as a distributor / trader of the Pfizer Limited 20 FDFs hence, the most appropriate method for computing the arm's length price is re–sale price method (RSPM). He submitted, though, the assessee in transfer pricing study has adopted TNMM as the most appropriate method but that will not preclude the assessee from raising the plea that the most appropriate method for computing the arm's length price is re–sale price method, if otherwise it is applicable to the particular international transaction and is in conformity with the relevant statutory provisions. The learned Counsel for the assessee drawing a parallel between the assessee’s case and the case of Mattel Toys India Pvt. Ltd. v/s CIT, ITA no.2476/Mum./2008, dated 12th June 2013, submitted, in the referred case also though the assessee had selected TNMM as the most appropriate method but considering the nature of transaction between the assessee and its A.E., the Tribunal allowed assessee’s claim with regard to adoption of re–sale price method as the most appropriate method even at the second appellate stage. He submitted, as per the relevant provisions contained under the Income Tax Act, and the rules, the most appropriate method in case of this particular transaction between the assessee and its A.E. is re–sale price method as the assessee simply imports the goods from its A.E. and sells them to customers in India. For the aforesaid proposition, he relied upon a number of decisions of the Tribunal as well as Hon'ble Jurisdictional High Court which are as under:–

As far as the issue whether the additional ground can be admitted at this stage, the learned Counsel for the assessee relying upon the decision of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. v/s CIT, [1997] 229 ITR 383 (SC), submitted when all the basic facts relating to assessee’s transaction with the A.E. in respect of import of FDFs are available on record, and the issue raised can be decided on the basis of such available material the additional ground can be entertained.

The learned Departmental Representative strongly opposing the contention of the assessee’s counsel submitted, while preparing the transfer pricing study, the assessee itself has rejected re–sale price method by giving certain reasons which are specifically mentioned in the transfer pricing study. In this context, he referred to the transfer pricing study submitted in the paper book. He submitted, the assessee while rejecting RSPM as most appropriate method has stated that reliable data is not available in public domain and it is difficult to find comparable. He, therefore, submitted, when the assessee itself has Pfizer Limited 22 admitted that reliable data is not available relating to comparables for applying RSPM in public domain, how, at the second appeal stage, additional ground can be entertained when basic facts relating to comparability analysis are not available. Referring to the decision of the Hon'ble Supreme Court in National Thermal Power Co. Pvt. Ltd. (supra), the learned Departmental Representative submitted, only when the basic facts relating to the issue raised in the additional ground are available on record before the Assessing Officer, then only it can be entertained. He submitted, as per the principle laid down by Hon'ble Supreme Court only pure question of law can be admitted as additional ground. He submitted, when the basic facts relating to comparables are not available on record, the additional ground raised by the assessee for selecting RSPM as the most appropriate method cannot be entertained as it requires examination of fresh facts relating to comparables.

The learned Departmental Representative further submitted that the assessee in relation to import of FDFs has also received advertisement and market expenses which suggest that it is creating marketing intangible by incurring substantial expenses on marketing. Referring to certain OECD guidelines, the learned Departmental Representative submitted, as enquiry into marketing functions is a factual enquiry this issue cannot be entertained at this stage. He

In the rejoinder, the learned Counsel for the assessee submitted though the assessee in its transfer pricing study might have rejected RSPM as the most appropriate method keeping in view the data available in public domain at the relevant time, but, if subsequently enough data have come into the public domain to consider RSPM as the most appropriate method, the assessee cannot be precluded from raising its plea for considering RSPM as most appropriate method. It was submitted, as per the transfer pricing provisions, arm's length price has to be determined by applying the most appropriate method. Considering the nature of transaction, if it is found that RSPM is the most appropriate method even if the assessee had selected some other method the Assessing Officer / Transfer Pricing Officer is entitled to apply the correct method. In this context, he relied upon a decision of the Tribunal, Mumbai Bench, in ACIT v/s Chemtech Global Engineers Pvt. Ltd., ITA no.3590/Mum./ 2010, order dated 12th June 2013. He submitted, all basic and primary facts relating to the nature of Pfizer Limited 24 transaction involving import of FDFs between the assessee and its A.E. is already available on record before the Assessing Officer / Transfer Pricing Officer, therefore, the issue relating to selection of most appropriate method which is a purely legal issue can be entertained by way of additional ground. He submitted only after applicability of most appropriate method is decided, issue of selection of comparable will come which can be examined by the Transfer Pricing Officer by verifying the data available in public domain.

We have considered the submissions of the parties, perused the orders of the departmental authorities as well as the material available on record. We have also carefully applied our mind to the decisions relied upon by both the parties. At the outset, we propose to deal with the preliminary objection raised by the learned Departmental Representative opposing admission of additional grounds. It is the contention of the learned Departmental Representative that as the issue raised by the assessee in the additional ground is a mixed question of fact and law and not purely a question of law arising from the facts already on record it cannot be entertained. However, we are unable to accept the objection of the learned Departmental Representative. On a perusal of the order passed by the Transfer Pricing Officer under section 92CA, as well as other material on record, it is very much evident that the assessee has produced all relevant

In view of our aforesaid decision, the issue raised in grounds no.4 and 5, have become redundant. However, the assessee is at liberty to raise these issues before the Assessing Officer / Transfer Pricing Officer or before the appellate forum depending upon the decision to be taken by the Assessing Officer / Transfer Pricing Officer with regard to selection of most appropriate method.

Briefly stated the facts are, in the course of assessment proceedings, the Assessing Officer noticed that assessee has claimed depreciation on assets of Ankleshwar plant which has closed down its operation. He, therefore, called upon the assessee to explain why the claim of depreciation should not be disallowed. Though, the assessee submitted that once the assets form part of the block, it losses its individual character, hence, depreciation on such individual asset cannot be disallowed but the Assessing Officer mentioning that similar disallowance was made in assessment year 2000–01 disallowed depreciation relating to Ankleshwar plant at ` 32,87,058. The assessee challenged the disallowance before the first appellate authority.

The learned Commissioner (Appeals) also sustained the disallowance.

The learned Counsel for the assessee submitted before us, the issue in dispute is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the assessment year 2002–03 and of the Hon'ble Jurisdictional High Court in assessee’s own case for the assessment year 2001–02. Respective orders were also placed before the Bench.

The learned Departmental Representative has not controverted the aforesaid factual position.

We have considered the submissions of the parties and perused the material available on record. As far as the factual aspect of the issue is concerned, there is no dispute that assessee has claimed depreciation on block of asset which also includes assets of Ankleshwar plants. It is observed, when identical issue of disallowance of depreciation on the assets of Ankleshwar plants came up for consideration before the Tribunal, Mumbai Bench, in assessee’s own case for the assessment year 2002–03, the Tribunal in order dated 8th March 2013, in ITA no.3098/Mum./2006, allowed assessee’s claim by following its own order for the assessment year 2001–02 in ITA no.8821/Mum./2004. It is also relevant to observe, the Hon'ble Jurisdictional High Court dismissed Revenue’s appeal on the issue of claim of depreciation on plant and machinery of Ankleshwar Unit in for the assessment year 2000–01. In view of the aforesaid, we allow assessee’s claim of depreciation by deleting the addition made by the Assessing Officer.

The next issue, as raised in ground no.8, relates to the decision of the Departmental Authorities in treating the income from sub–

Briefly stated the facts are, the Assessing Officer noticing that the assessee has shown the amount received on sub–leasing of office premise as house property income called upon the assessee to explain why the income should not be treated as business income as the assessee is not the owner of the premise and further it is exploitation of commercial premise. Though, the assessee submitted its explanation in support of its claim but the Assessing Officer rejecting the submissions of the assessee treated the amount received from sub–leasing of the office premise as business income. The learned Commissioner (Appeals) also confirmed the view of the Assessing Officer by observing that in the assessment year 2002–03, similar view was expressed by the first appellate authority. The learned Counsel for the assessee submitted before us that issue in dispute stands squarely covered in its favour not only by the decision of the Tribunal in assessee’s own case for the assessment year 2002–03 but by the Hon'ble Jurisdictional High Court in assessee’s own case for assessment year 2000–01 and 2001–02.

The learned Departmental Representative has not controverted the aforesaid factual position.

We have considered the submissions of the parties and perused the material available on record. On a perusal of the order of the co– ordinate bench of the Tribunal in ITA no.3098/Mum./2006, dated 8th March 2013, it is very much clear that the issue whether the income received from sub–leasing of office premise is to be treated as income from house property or business income has been decided in favour of the assessee by following its own order for assessment year 2000–01 as well as earlier assessment year. It is further evident, the Hon'ble Jurisdictional High Court has approved such view of the Tribunal taken in assessment year 2000–01 and 2001–02 in and 6776/201. In view of such uncontroverted factual position, following the decision of the co–ordinate bench as well as jurisdictional High Court, we allow assessee’s claim of house property income in respect of sub–leasing of office premises.

The last issue in ground no.9 relates to levy of interest under section 234D of the Act.

At the outset, the learned Counsel for the assessee fairly submitted that the issue has been decided against the assessee by the Tribunal in assessee’s own case for the assessment year 2002–03.

In the result, assessee’s appeal is partly allowed.

The first ground relates to exclusion of Syngene International Pvt. Ltd., as a comparable by the learned Commissioner (Appeals) as far as international transaction relating to CSMM support services. In course of proceedings before the Transfer Pricing Officer, though the assessee objected to selection of aforesaid company as a comparable

The learned Departmental Representative submitted before us, the related party transaction of the company is not to the extent that it cannot be considered as a comparable. In this context, he referred to the annual report of the company placed in assessee’s paper book and submitted that the related party transaction has not exceeded 25%. He further submitted that the Transfer Pricing Officer has not applied related party transaction filter while selecting / rejecting comparables. However, the learned Departmental Representative fairly submitted the exclusion of this company will not have much impact on the profit margin.

Having considered the submissions of the parties, we are of the view that Syngene International Pvt. Ltd. has been correctly treated as uncomparable to the assessee. As could be seen from the material placed before us, it is wholly owned subsidiary of Biocon India Ltd. and having substantial related party transaction. This fact has not been controverted by the learned Departmental Representative with contrary evidence. Moreover, it is revealed from its annual report, it has two streams of income viz. from contract research fees and sale of compounds, however, segmental analysis is not available in the annual report which has been accepted by the co–ordinate bench of the Tribunal in Evonik Degussa India Pvt. Ltd. (supra). In the aforesaid

In ground no.2, the Revenue has challenged the decision of the learned Commissioner (Appeals) in allowing market research expenses of ` 54.14 lakh as business expenses.

Briefly stated the facts are, during the assessment proceedings, the Assessing Officer, while examining assessee’s claim of deduction on account of market research expenses amounting to ` 54.14 lakh, was of the view that it is in the nature of capital expenditure, hence, not allowable.

The learned Commissioner (Appeals), however, allowed assessee’s claim by considering the fact that in the earlier years, the first appellate authority has allowed such expenses. While doing so, he also observed that no new product has either been developed by the assessee or introduced in the market in the year under consideration so as to treat the expenditure as capital in nature.

At the outset, the learned Counsel for the assessee submitted that the issue is squarely covered in assessee’s favour in its own case for the assessment year 2002–03, in order dated 18th December 2008.

On a perusal of the order passed by the co–ordinate bench of the Tribunal, as placed before us by the learned Counsel for the assessee, we find that the Tribunal, while considering identical issue in assessment year 2002–03, allowed assessee’s claim upon considering the fact that against similar disallowance made in assessment year 2001–02, the assessee preferred appeal before the learned Commissioner (Appeals) who allowed assessee’s claim. However, the Department did not challenge the decision of the learned Commissioner (Appeals) by preferring appeal before the Tribunal. The Co–ordinate Bench, therefore, held that as the Revenue has failed to bring any material to show that the fact in the assessment year 2002– 03 is, in any way, different from the preceding assessment year, there is no reason to disallow assessee’s claim. Accordingly, Tribunal dismissed Revenue’s appeal on the issue. Considering the fact that in the preceding assessment year, similar expenditure has been allowed by the appellate authorities and there being no difference in facts in the impugned assessment year, we uphold the decision of the first appellate authority by dismissing the ground raised by the Department.

To sum up, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed. Order pronounced in the open Court on 06.11.2015