AGILENT TECHNOLOGIES INDIA PRIVATE LIMITED,DISTRICT CENTRE JASOLA vs. THE DEPUTY COMMISSIONER OF INCOME TAX, DELHI

On facts and circumstances of the case and in law, the Ld. AO/ Learned Transfer Pricing Officer ("Ld. TPO") erred on facts and in law in enhancing the income of the Appellant by INR 113,467,375/- pertaining to distribution segment that do not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in: 2.1. erroneously rejecting the arm's length price ('ALP") as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ("Rules"); 2.2. conducting a fresh comparability analysis based on the application of erroneous additional / revised filters in determining the ALP for the Appellant and rejecting the filters applied by the Appellant in its TP documentation; 2.3. erroneously including certain companies in the final comparable set that are functionally dissimilar as compared to the functional profile of the Appellant; 2.4. committing factual/computational errors while computing the operating margins of certain comparable companies; 2.5. committing computational errors while computing the adjustment in the distribution segment; 2.6. disregarding judicial pronouncements in India and international guidance while undertaking the TP adjustment. Other Grounds

On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A and section 271AA of the Act.

2 Further, the TPO examined comparables of Distribution Segment selected by the appellant assessee in its TP Study. Out of 8 comparables selected for Distribution Segment by the appellant assessee in its TP Study, the TPO rejected 1 comparable based on the reasoning detailed on page 47- 48 of in the order passed under section 92CA(3) of the Act. The TPO thereafter, picked up 10 new comparables in the final list of 17 comparables as detailed on page 48-50 of the order passed under section 92CA (3) of the Act. Due to new comparables, the TPO proposed the adjustment of Rs.22,90,44,906/- under the head ‘Distribution Segment’.

3 In the draft assessment order, the AO made three adjustments; (i) Rs.8,33,180/- under the S segment, (ii) Rs.16,50,678/- under the MSS segment and (iii) Rs.11,34,67,375/- under the Distribution Segment. Agilent Technologies India Pvt. Ltd. 5 3.4 Aggrieved with the draft assessment order, the assessee preferred objections before the Ld. Dispute Resolution Penal (‘DRP’) who allowed part relief. In pursuance of the directions of the Ld. DRP, the AO, in the final assessment order, restricted the comparables to 11 instead of 17 in final set of comparables for Distribution Segment (page 23-24 of the final assessment order), which resulted consequential adjustment of Rs.11,34,67,375/- for Distribution Segment. As per directions of the Ld. DRP, other adjustments proposed in the draft assessment order under the heads S and MSS were not done in the final assessment order.

Before us, the Ld. Authorized Representative (‘AR’) drew our attention to the list of final comparables for the Distribution segment. Out of the list of final comparables for the Distribution segment, the Ld. AR of the appellant assessee requested for exclusion of three comparables; namely, i. Fulford (India) Ltd. (‘Fulford India’) ii. Carestream Health India Pvt. Ltd. (‘Carestream India’) iii. Nureca Limited (‘Nureca’) Fulford (India) Ltd. 5. The Ld. AR prayed for exclusion of Fulford India from the list of final comparables on the reasoning that it was functionally dissimilar as it was engaged in the business of manufacturing & trading of pharmaceuticals, whereas the appellant assessee was only distributor/ trader of the Life Sciences Products, etc. of the Agilent Group. It was further submitted that Agilent Technologies India Pvt. Ltd. 6 the Fulford India was engaged mainly in therapeutic areas i.e. Dermatology, antihistamines, antibiotics and Oncology. The Ld. AR further submitted that Fulford India dealt only in Pharma products and those Pharma products were quite different from the products of Agilant Group dealt in by the appellant assessee. He drew our attention to the page No. 4 of the Tribunal order in the case of Fulford India ITA No. 338/Mum/2014 AY 2009-10 as under: - “4. Shri P.J. Pardiwala appearing on behalf of the assessee submitted that the assessee is engaged in the business of manufacturing and distribution of pharmaceutical products in India. The assessee does not have its own manufacturing facility; thus, the assessee engages third party for manufacturing of pharmaceutical products. The business of assessee can be divided in four segments, viz: (i) Tolling: Import of APIs from AEs and converting the same into formulations by using services of third party viz. Gland Pharma. (ii) Tolling: Import/purchases of APIs from third party (non-AE) and thereafter, converting the APIs into formulations using third party manufacturing facility under the supervision of the assessee.

We have heard both parties and have perused the material available on the record. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. CIT-DR that none of two comparables on this earth will be 100% similar. Undisputedly, more than 99% of revenue of Fulford India in the relevant year is from wholesale trading of medicines only. Fulford India passes all the filters. The case law relied upon by the Ld. Counsel, being factually different, is not relevant here. The Ld. Counsel did not demonstrate any factual inaccuracy in the financials of Profit & Loss account of Fulford India. Further, it is worth mentioning here that the Ld. Counsel has not brought any material on the record to Agilent Technologies India Pvt. Ltd. 8 contradict the finding of the AO/TPO. In view of the above, we hold that the AO is justified in including Fulford India in the list of final comparables for Distribution segment. We therefore, hold that Fulford India has been validly included in the list of final comparables by the AO/TPO. Carestream Health India Pvt. Ltd. and Nureca Limited: 8. The Ld. AR submitted that these two comparables had failed RPT filters. To augment his submission, the Ld. AR, placing emphsasis on annual reports of these comparables, drew our attention to the RPT/Sales of these comparables as under: - (i) Carestream India: Financial Year RPT Filter (RPT/Sales) 2017-18 63.74% 2018-19 71.17% 2019-20 71.76%

1 Further, the Ld. AR submitted that Nureca was functionally dissimilar and thus was not a suitable comparable as it was engaged in the business of trading of home and healthcare wellness products. It was submitted that products dealt in by the Nureca were quite different than those of appellant assessee. Thus, he prayed for exclusion of these two comparables as these failed RPT filters. Further, the Ld. AR also contended that Carestream India Agilent Technologies India Pvt. Ltd. 9 dealt in pharma products which were quite different than the products of Agilent Group.

Per contra, the Ld. CIT-DR submitted that the issue of RPT failure had never been raised by the appellant assessee either before the TPO/AO or DRP; therefore, this issue/parameter had not been examined by Authorities below. The Ld. CIT-DR, drawing our attention to page No. 703 of the PB-I and page No. 27 of the DRP directions, submitted that neither the TPO nor the Ld. DRP had ever verified the RPT filters of these two comparables as the appellant assessee had never raised this issue before. Further, the Ld. CIT, drawing our attention to the financials of Nureca, submitted that this comparable did not fail in RPT Filters. He also drew our attention to the fact that the PB did not contain any financial of Nureca for FY 2019-20/AY 2020- 21. To the argument of Ld. AR that there were product dissimilarities dealt in by comparables and the appellant assessee, the Ld. CIT-DR submitted that TNMM and Rules 10B of Income Tax Rules were in respect of transactions/functional similarities and not products similarities. However; looking the facts in entirety, he prayed for remanding the issue of failure of RPT Filters by these two comparables to the AO/TPO for verifications as the issue of failure of RPT Filters had been raised for the first time before the Tribunal. Agilent Technologies India Pvt. Ltd. 10 10. We have heard both parties and have perused the material available on the record. Before us, the Ld. AR, with the help of financials of both comparables has tried to make out a case that these comparables do not pass RPT filters. Whereas the Ld. CIT-DR, with the help of order/Directions of Authorities below and various pages of PBs has emphasized on the fact that this issue has never been raised by the appellant assessee either before the TPO/AO or DRP; therefore, these comparables have never been examined from this angle. After careful consideration of material on the record and facts in entirety, we find force in the argument of the Ld. CIT-DR that these two comparables; Carestream Health India Pvt. Ltd. and Nureca Limited are required to be examined afresh only that whether these two comparables pass RPT Filters. If yes, then these/anyone shall remain in the final set of comparables. However, at this stage, we are not offering any comment on merit/demerit of these two comparables. We set aside the finding of the AO with respect to these two comparables; Carestream Health India Pvt. Ltd. and Nureca Limited and remit the issue of failure of RPT Filters of these comparables back to the file of the AO/TPO for deciding their inclusion or exclusion on the basis of RPT Filters and pass order accordingly in accordance with law after providing adequate opportunity of being heard to the appellant assessee. Ordered accordingly. The appellant assessee, no doubt, shall cooperate in remitted proceedings before the AO/TPO. Further, we direct the AO/TPO to examine the issue of functional similarities of these Agilent Technologies India Pvt. Ltd. 11 comparables as well and decide their inclusion or exclusion on the basis of RPT Filters and functional similarities afresh. 11. In the result, the appeal of the assessee is allowed for statistical purposes.