M/s. Pioneer Overseas Corporation India Branch, Hyderabad V. DCITDDIT, New Delhi

CO 254/DEL/2015

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 3702 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 6 month(s) 4 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 13-04-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 20-07-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 09-10-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Working capital adjustments

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2, NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.2934/DEL/2013 ASSESSMENT YEAR : 2007-08 DDIT, CIRCLE- 2(1), NEW DELHI. VS. PIONEER OVERSEAS CORPORATION INDIA BRANCH, 3 RD FLOOR, BABUKHANS MILLENIUM CENTRE, 6-3-1099/1100, RAJ BHAWAN ROAD, SOMAJIGUDA, HYDERABAD. PAN : AAACP6547N (APPELLANT) (RESPONDENT) C.O. NO.254/DEL/2015 (IN ITA NO.2934/DEL/2013) ASSESSMENT YEAR : 2007-08 PIONEER OVERSEAS CORPORATION INDIA BRANCH, 3 RD FLOOR, BABUKHANS MILLENIUM CENTRE, 6-3-1099/1100, RAJ BHAWAN ROAD, SOMAJIGUDA, HYDERABAD. VS. DDIT, CIRCLE- 2(1), NEW DELHI. PAN : AAACP6547N (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI H. K. CHOUDHARY, CIT-DR ASSESSEE BY : SHRI DEEPAK CHOPRA, ADV. SHRI HARPREET AJMANI, ADV. SHRI ROHAN KHARE, ADV. DATE OF HEARING : 16-01-2018 DATE OF PRONOUNCEMENT : 13-04-2018 2 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 O R D E R PER R. K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE AND THE CROSS OBJE CTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 14.03 .2013 OF THE CIT(A)- XX, NEW DELHI RELATING TO ASSESSMENT YEAR 2007-08. FOR THE SAKE OF CONVENIENCE, THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.2934/DEL/2013 (BY REVENUE) : 2. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER : - (I) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN REJECTING VENUS DIAGNOSTICS AS COMPARABLE AS IT IS INTO DIAGNOSTICS BY RELYING ON THE DECISION OF ITAT IN THE CASE OF M/S EVONIK DEGUSSA INDIA PVT. LTD. (ITA NO.7653/MUM/2011). (II) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN REJECTING SYNGENE INTERNATIONAL LTD. AS COMPARABLE AS IT IS INTO DIAGNOSTICS BY RELYING ON THE DECISION OF ITAT IN THE CASE OF M/S EVONIK D EGUSSA INDIA PVT. LTD. (ITA NO.7653/MUM/2011). (III) THE APPELLANT PRAYS FOR LEAVE TO ADD, AMEND, MODIFY OR ALTER ANY GROUNDS OF APPEAL AT THE TIME OR BEFORE THE HEARING OF THE APP EAL. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A COMPANY AND FILED ITS RETURN OF INCOME ON 31.10.2007 DECLARING NIL INCOME AFTER CLAIMING INCOME TO THE TUNE OF RS.25,98,34,000/- AS EXEMPT BEING AGRIC ULTURAL INCOME. THE ASSESSEE IS A WORLD LEADER IN AGRICULTURAL PRODUCTS . THE INDIAN BRANCH CARRIES OUT RESEARCH AND PRODUCTION. RESEARCH DONE BY PION EER FACILITIES WORLDWIDE CREATES A LARGE POOL OF AGRICULTURAL PRODUCTS THAT ARE DISEASE RESISTANT AND GIVE SUPERLATIVE PERFORMANCE IN DIVERSE CLIMATIC AND SOI L CONDITIONS. RESEARCH 3 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 INFORMATION AND MATERIALS ARE DOCUMENTED AND PRESER VED BY PIONEER TO ENSURE AVAILABILITY OF MATERIALS AND INFORMATION FOR PRODU CING PARENT SEEDS AS REQUIRED. THE INFORMATION MATERIAL MAY ALSO BE USED FOR DEVEL OPING NEW HYBRIDS. THE ASSESSEE PRODUCES DEVELOPED PARENT SEEDS THAT ARE C APABLE OF HYBRID PRODUCTION AND ARE GROWN AND MULTIPLIED IN PRODUCTION FIELDS T O OBTAIN ADEQUATE QUANTITIES OF PARENT SEEDS FOR PRODUCING/GROWING SUFFICIENT QU ANTITIES OF THE DESIRED HYBRID. THE MULTIPLIED PARENT SEEDS ARE SUPPLIED T O PHI SEEDS LIMITED. PHI SEEDS LIMITED USES THE PARENT SEEDS SUPPLIED BY PIO NEER OVERSEAS CORPORATION, INDIA BRANCH TO GROW HYBRID SEEDS FOR SUPPLY TO FAR MERS. THE PARENT SEEDS ARE CROSSED IN THE DESIRED COMBINATION THROUGH AGRICULT URAL OPERATIONS TO OBTAIN HYBRID SEEDS. THE QUANTITIES OF PARENT SEEDS USED TO GROW THE HYBRIDS ARE CONSUMED TO GROW HYBRID SEEDS. THE FARMERS IN TURN USE THE HYBRID SEEDS TO GROW CROPS. DURING THE YEAR THE PRICING OF THE PAR ENT SEEDS SUPPLIED BY THE ASSESSEE TO PHI SEEDS LIMITED DEPENDS UPON THE TYPE OF PARENT SEEDS SUPPLIED. THE PRICING IS DONE ON COST PLUS BASIS TAKING INTO ACCOUNT THE PRICES OF COMPARABLE PRODUCTS, MARKET PROJECTIONS AND PRICING POLICIES ADOPTED BY THE MANAGEMENT FROM TIME TO TIME. THE PRICES ARE CHARG ED ON A PER KILOGRAM BASIS. THE PRICE/SALE VALUE MAY BE ADJUSTED FOR YIELD AND QUALITY VARIATIONS IN CASE THE SEEDS SUPPLIED DO NOT PERFORM AND/OR QUALITY EXPECT ATION. 4. THE ASSESSING OFFICER REFERRED THE MATTER TO THE TPO FOR DETERMINATION OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS UNDERTAKEN BY THE 4 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 ASSESSEE WITH ITS AES U/S 92CA(1) OF THE I.T. ACT, 1961. DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, THE TPO OBSERVED THAT AS SESSEE UNDERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS :- S.NO. INTERNATIONAL TRANSACTION METHOD SELECTED VALUE OF TRANSFER 1 SALE OF PARENT SEEDS TNMM 299,174,903 2 SALE OF SEEDS BILLED TO HEAD OFFICE TNMM 307,894 3 SEED CONDITIONING AND STORAGE SERVICES TNMM 10,352,840 4 PURCHASE OF AGRICULTURAL EQUIPMENT - RICE SEEDERS TNMM 20,997 5 REIMBURSEMENT OF EXPENSES PAID/PAYABLE -- 1,59,152 6 REIMBURSEMENT OF AGRICULTURAL RESEARCH AND HYBRID DEVELOPMENT EXPENSES RECEIVED/RECEIVABLE -- 75,668,065 7 REIMBURSEMENT OF OTHER EXPENSES RECEIVED/RECEIVABLE -- 60,350 5. HE OBSERVED THAT THE ASSESSEE PRODUCES PARENT SE ED AND SELLS THEM TO ITS AE PHI SEEDS LTD. AND TO PIONEER OVERSEAS CORPORATI ON USA (POC). THE ASSESSEE HAS USED TNMM AND PLI OF NET OPERATION PRO FIT MARGIN BASED ON SALES (NPM). DURING THE YEAR THE ASSESSEE ALSO IMP ORTED AGRICULTURAL EQUIPMENTS-RICE SEEDERS FROM ITS AE FOR PRODUCTION FUNCTION. SINCE THE IMPORT OF EQUIPMENT WAS INEXTRICABLY LINKED TO MAIN ACTIVI TY OF PRODUCTION OF PARENT SEEDS, THE COST OF EQUIPMENT HAS BEEN CLAIMED AS OP ERATING EXPENSE AND CLUBBED WITH PRODUCTION FUNCTION UNDER TNMM. THE ASSESSEE HAS ALSO PAID SEED PROCESSING AND STORAGE SERVICES TO ITS AE, THESE TR ANSACTIONS HAVE ALSO BEEN AGGREGATED UNDER TNMM. THE ASSESSEE HAS STATED THA T IT HAS EARNED NPM MARGIN OF 86.67% FROM SALE OF PARENT SEEDS AS COMPA RED WITH 18 COMPARABLES 5 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 COMPANIES WHOSE AVERAGE ARITHMETIC NPM MARGIN USING THREE YEAR DATA IS 11.90%. 6. REGARDING REIMBURSEMENT OF AGRICULTURAL RESEARCH EXPENSES, ASSESSEE HAS STATED THAT THE RESEARCH UNIT OF POC INDIA CARRIES OUT RESEARCH AND THE ENTIRE COST OF RESEARCH IS REIMBURSED BY POC ON A COST TO COST BASIS. IT WAS CLAIMED BY THE ASSESSEE THAT POC INDIA DOES NOT PROVIDE ANY SERVIC ES TO ITS GROUP COMPANIES. THE ENTIRE RESEARCH DATA IS POOLED AND SHARED BY AL L RESEARCH UNITS OF POC WORLDWIDE. THE ASSESSEE STATED THAT POC INDIA HAS FULL/UNRESTRICTED ACCESS TO RESEARCH DATA POOLED BY OTHER COMPANIES ON A FREE O F COST BASIS. AS THE TRANSACTIONS RELATING TO R&D AGRICULTURAL RESEARCH DO NOT INVOLVE PROVISION OF ANY SERVICES, ASSESSEE CLAIMED THAT TRANSACTIONS RE LATING TO REIMBURSEMENT OF R&D RESEARCH EXPENSES ARE AT ARMS LENGTH. 7. THE TPO OBSERVED THAT TRANSFER PRICING APPROACH OF THE ASSESSEE WAS THE SAME AS IN THE PREVIOUS YEAR. ALTHOUGH THE ASSESSE E HAS SHOWN REIMBURSEMENT RECEIVED BY POC FROM ITS AE IN THE ENTITY LEVEL TNM M BUT IN REALITY THE TRANSACTION RELATING TO REIMBURSEMENT OF COST INCUR RED IN RESEARCH ACTIVITY HAS NOT BEEN BENCHMARKED. THE TRANSACTIONS RELATING TO RECEIPT OF REIMBURSEMENT FOR AGRICULTURAL R&D WAS EXAMINED SEPARATELY. HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN THE TRANSFER PRICING APPROACH A DOPTED BY IT. IT WAS EXPLAINED BY THE ASSESSEE THAT IT CARRIED OUT R&D ACTIVITIES IN RELATION TO DEVELOPMENT OF HYBRID SEEDS. THE RESEARCH WORKS CARRIED OUT BY PO C INDIA BRANCH ARE FOR THE 6 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 INTERNAL USE OF POC GROUPS AND ARE NOT SOLD OUTSIDE THE GROUP. THE ENTIRE RESEARCH ACTIVITY IS POOLED TOGETHER AND IS SHARED BY ALL THE GROUP WORLDWIDE. IT WAS SUBMITTED THAT ALL POC ENTITIES HAVE ACCESSED T O SUCH RESEARCH POOL. THE PROVISIONS OF ARTICLE 7(3) OF THE INDO US DTAA WAS BROUGHT TO THE NOTICE OF THE TPO. THE ASSESSEE ALSO GAVE DETAILED REASONS W ITH RESPECT TO SELECTED COMPARABLE COMPANIES INDIVIDUALLY TO STATE THAT NON E OF THE COMPANIES CONSIDERED ARE COMPARABLE COMPANIES AS THE SAID COM PANIES ARE PERFORMING DIFFERENT FUNCTIONS. 8. THE TPO CONSIDERED THE DTAA/OECD MODEL, THE PROV ISIONS OF RULE 10B(4) AND 10D(4) AND VARIOUS JUDICIAL PRONOUNCEMEN TS. HE OBSERVED THAT THE DIFFICULTY IN OBTAINING DIRECT COMPARABLES FOR THE PURPOSE OF BENCHMARKING NICHE SEGMENTS LIKE AGRICULTURAL R&D HAS BEEN HIGHL IGHTED IN THE ORDER FOR A.Y. 2006-07. HOWEVER, A BROAD BASED SEARCH WAS CARRIED OUT BY HIM IN THE PROWESS DATABASE TO IDENTIFY THE COMPARABLE COMPANIES WHO W ERE CARRYING OUT SIMILAR CONTRACT R&D SERVICES. 9. THEREAFTER, THE TPO SELECTED THE FOLLOWING COMPA RABLES WHOSE AVERAGE PROFIT MARGIN WAS 34.61% :- PIONEER OVERSEAS CORPORATION ANNUAL ANNUAL ANNUAL ANNUAL ANNUAL ANNUAL RS.CRORE MAR - 07 MAR - 07 MAR - 07 MAR - 07 MAR - 07 MAR - 07 COMPANY NAME INC_NON_FIN _SERVICES/IN C_SALES*100 SALES PBIT/IN C_SALES *100 PBIT /EXP_TOT AL*100 OP/OI OP/OE SCITECH CENTRE 100 3.65 4.11 3.48 -9.73 -8.78 CONTRACT R&D 7 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 RESEARCH DABUR RESEARCH FOUNDATION 100 41.76 44.76 47.39 6.49 6.49 CONTRACT R&D RESEARCH I M C LTD. 88.05 54.89 12.9 13.43 13.5 15.94 CONTRACT R&D RESEARCH I D C (INDIA) LTD. 100 13.38 13.68 14.88 13.97 16.23 CONTRACT R&D RESEARCH TEG LIFESCIENCES LTD. 100 48.2 22.24 23.4 14.04 16.34 CONTRACT R &D RESEARCH VENUS DIAGNOSTICS LTD. 100 1.02 24.51 27.17 24.51 32.47 CONTRACT R&D RESEARCH CHOKSI LABORATORIES LTD. 100 9.11 24.15 26.7 29.92 42.7 CONTRACT R&D RESEARCH GREAT OFFSHORE LTD. 100 537.33 36.73 48.95 36.78 58.17 CONTRACT R&D RESEARCH SYNGENE INTERNATIONAL LTD. 100 128.2 40.12 62.41 38.97 63.87 CONTRACT R&D RESEARCH BIOTECH CONSORTIUM INDIA LTD. 82.15 4.25 60.24 49.33 39.82 66.17 CONTRACT R&D RESEARCH TRANSGENE BIOTEK LTD. 73.68 3.42 39.77 62.1 41.4 70.65 CONTRACT R&D RESEARCH AVERAGE 29.38 34.48 22.70 34.61 10. THE TPO ACCORDINGLY MADE AN UPWARD ADJUSTMENT O F RS.2,61,88,694/- BY OBSERVING AS UNDER :- 9.1 THE ARMS LENGTH PRICE OF THE REMUNERATION PAY ABLE TO THE ASSESSEE IS COMPUTED IN THE MANNER BELOW : COSTS INCURRED IN RESEARCH ACTIVITY RS. 75,66 8,000/- ARMS LENGTH PRICE (134.61.% OF THE COSTS) RS.10 1,856,694/- DIFFERENCE IN RS. TERMS FROM THE ALP RS. 26,188 ,694/- 9.2 PROVISO TO SEC.92C(2) PERMITS A MAXIMUM VARIANC E OF 5% FROM THE ARMS LENGTH PRICE. IN THIS CASE THE VARIANCE BEING 34.6 % EXCEEDS 5% THRESHOLD. THE ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSA CTION OF PERFORMING CONTRACT RESEARCH SERVICES TO THE HEAD OFFICE IS, THEREFORE, DETERMINED AT RS.101,856,694/-. NO ADVERSE INFERENCE IS DRAWN IN RESPECT OF OTHER INTE RNATIONAL TRANSACTIONS. 11. BEFORE THE LD. CIT(A), THE ASSESSEE OBJECTED TO THE APPROACH OF THE TPO MAINLY ON THE GROUND THAT THE BENEFIT OF R&D ACTIVI TIES ACCRUES ONLY TO THE ASSESSEE AND NOT TO THE AE. IT WAS STATED THAT ANY BENEFIT ARISING OUT OF THE RESEARCH ACTIVITY TO ITS AE IS ONLY INCIDENTAL IN N ATURE. THE ASSESSEE STATED THAT 8 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 IT HAS MAINTAINED ITS TP DOCUMENTATION AND THERE WA S NO REASON TO UNDERTAKE AN INDEPENDENT ANALYSIS OF THIS TRANSACTION ALONE SINC E R&D OPERATIONS ARE PART OF THE CULTIVATION ACTIVITIES AND COVERED IN COMPANY-W IDE ANALYSIS. IT WAS SUBMITTED THAT THE APPROACH ADOPTED BY THE TPO IS I NCORRECT AS R&D IS A NOT A SEPARATE BUSINESS OPERATION OR PROFIT CENTRE OF THE ASSESSEE AND THUS COMPARING IT WITH THE R&D COMPARABLES IS AGAINST THE PRINCIPL ES OF TRANSFER PRICING. THE ASSESSEE ALSO RAISED OBJECTIONS ON THE COMPARABLES USED BY THE TPO WHICH UNDERTAKE RESEARCH WORK IN INDUSTRIES OTHER THAN AG RI-GENETIC AND CANNOT BE COMPARED AS THEY WOULD DIFFER BECAUSE OF DYNAMICS R ELATED TO EACH INDUSTRY AND FUNCTIONS PERFORMED BY THEM. INVOKING THE WITHOUT PREJUDICE ARGUMENT, THE ASSESSEE ASKED FOR RISK ADJUSTMENT, WORKING CAPITAL ADJUSTMENTS, RECTIFICATION OF THE MARGIN OF COMPARABLES CONSIDERED BY THE TPO, US E OF TURNOVER FILTER, USE OF MULTIPLE YEAR DATA AND AVAILABILITY OF +/- 5% AS PE R PROVISO TO SECTION 92C(2) OF THE I.T. ACT. 12. BASED ON THE ARGUMENT ADVANCED BY THE ASSESSEE, LD. CIT(A) HELD THAT VENUS DIAGNOSTICS LTD. AND SYNGENE INTERNATIONAL LI MITED CANNOT BE CONSIDERED AS COMPARABLES AND, THEREFORE, TO BE REJ ECTED. 13. AGGRIEVED WITH SUCH ORDER OF THE LD. CIT(A), TH E REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 14. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. THE G RIEVANCE OF THE REVENUE IS 9 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 REGARDING THE ORDER OF THE LD. CIT(A) IN REJECTING VENUS DIAGNOSTICS LTD. AND SYNGENE INTERNATIONAL LIMITED AS COMPARABLES. 15. SO FAR AS VENUS DIAGNOSTICS LTD. IS CONCERNED, WE FIND THE LD. CIT(A) WHILE CONSIDERING THE SAME AS NOT COMPARABLE HAS HE LD THAT THE SAID COMPANY IS OPERATING AS DIAGNOSTIC CENTRE WHICH IS EVIDENT FRO M THE ANNUAL REPORT OF THE COMPANY. SINCE IT IS NOT ENGAGED IN THE PROVISION OF RESEARCH SERVICES, HE HELD THAT THE SAME CANNOT BE CONSIDERED AS COMPARABLE. WHILE DOING SO, HE HAS NOT RELIED ON THE DECISION OF THE MUMBAI BENCH OF THE T RIBUNAL IN THE CASE OF M/S EVONIK DEGUSSA INDIA PVT. LTD. VIDE ITA NO.7653/MUM /2011 AS MENTIONED BY THE REVENUE IN THE GROUNDS OF APPEAL. IN FACT, LD. CIT(A) HAS RELIED ON THE DECISION IN THE CASE OF M/S EVONIL DEGUSSA INDIA PV T. LTD. AND HAS ACCEPTED TCG LIFESCIENCES LIMITED AS A COMPARABLE TO THE ASS ESSEE AND HAS NOT REJECTED VENUS DIAGNOSTICS LTD. AS COMPARABLE BY RELYING ON THE DECISION OF EVONIL DEGUSSA INDIA PRIVATE LIMITED (SUPRA). THEREFORE, THE GROUNDS RAISED BY THE REVENUE IS A FRIVOLOUS ONE. EVEN OTHERWISE ALSO WH EN VENUS DIAGNOSTICS LTD. IS OPERATING AS DIAGNOSTIC CENTRE AND NOT ENGAGED I N PROVISION OF RESEARCH SERVICES, THEREFORE, WE CONCUR WITH THE FINDING GIV EN BY THE LD. CIT(A) THAT THE SAID COMPANY CANNOT BE CONSIDERED AS COMPARABLE. N OTHING CONTRARY WAS BROUGHT TO OUR NOTICE BY THE LD. DR AGAINST THE FIN DING OF THE LD. CIT(A) THAT THE COMPANY IS OPERATING AS DIAGNOSTIC CENTRE AND NOT E NGAGED IN PROVISION OF 10 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 RESEARCH SERVICES FOR WHICH THE SAME CANNOT BE CONS IDERED AS COMPARABLE. WE, THEREFORE, DO NOT FIND ANY INFIRMITY IN THE ORDER O F THE LD. CIT(A) ON THIS ISSUE. 16. SO FAR AS REJECTION OF SYNGENE INTERNATIONAL LI MITED AS COMPARABLE IS CONCERNED, WE FIND THE LD. CIT(A) WHILE HOLDING THE SAME TO BE NOT COMPARABLE HAS OBSERVED THAT THE SAID COMPANY IS ENGAGED IN CO NTRACT AND RESEARCH SERVICES IN THE FIELD OF SYNTHETIC CHEMISTRY, MOLECULAR BIOL OGY AND CUSTOM SYNTHESIS. WE FIND THE MUMBAI K BENCH OF THE TRIBUNAL IN THE CA SE OF M/S EVONIK DEGUSSA INDIA PRIVATE LIMITED (SUPRA) VIDE ORDER DATED 21.1 1.2012 HAS OBSERVED AS UNDER :- 19. INSOFAR AS SYNGENE INTERNATIONAL LTD., TH IS COMPANY IS AGAIN 99% SUBSIDIARY OF BIOCON LTD. AND IS ENGAGED AS A CUSTO M RESEARCH SERVICE PROVIDER IN THE DRUG DEVELOPMENT PROCESS FROM DISCOVERY TO SUPPLY O F DEVELOPMENT COMPOUNDS. FROM ANNUAL REPORT, IT IS SEEN THAT THE COMPANY HAS TWO SETS OF INCOME ONE FROM CONTRACT RESEARCH FEES AND SALE OF COMPOUNDS. HOWE VER, IN THE ABSENCE OF SEGMENTAL INFORMATION REGARDING CONTRACT RESEARCH AND MANUFAC TURING ACTIVITIES, IT IS DIFFICULT TO ANALYSE ITS MAIN REVENUE AND PROFIT MARGIN FROM THE CONTRACT RESEARCH WORK. EVEN OTHERWISE ALSO, APPARENTLY IT IS SEEN THAT ITS FUNC TIONAL PROFILE IS DIFFERENT WITH THAT OF THE ASSESSEE COMPANY. THUS, GOING BY THE SEGMENTAL DATA OF BIOCON LTD. WITH REGARD TO CONTRACT RESEARCH SEGMENT, WE DO NOT FIND ANY ME RIT IN THE INCLUSION OF THE SAID COMPANY BY THE TPO IN THE SET OF COMPARABLES FOR DE TERMINING THE ALP IN THE CASE OF THE ASSESSEE. HENCE, THIS COMPANY IS DIRECTED TO B E EXCLUDED FROM THE SET OF COMPARABLES. 17. SINCE SYNGENE INTERNATIONAL LIMITED HAS TWO SET S OF INCOME I.E. INCOME FROM CONTRACT RESEARCH FEES AND SALE OF COMPOUNDS A ND SINCE SEGMENTAL DETAILS ARE NOT AVAILABLE, THEREFORE, IN ABSENCE OF ANY CON TRARY MATERIAL BROUGHT TO OUR NOTICE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER O F THE LD. CIT(A). ACCORDINGLY, THE SAME IS UPHELD AND THE GROUNDS RAISED BY THE RE VENUE ARE DISMISSED. 11 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 C.O. NO.254/DEL/2015 (BY ASSESSEE) : 18. THE GROUNDS OF CROSS OBJECTION RAISED BY THE AS SESSEE READ AS UNDER :- GROUND NO.1: THAT ON THE FACTS OF THE CASE, THE OR DER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) ['ID. CIT(A)']/ ASSESSING OF FICER ('AO)/ TRANSFER PRICING OFFICER (TPO) IS BAD IN LAW. GROUND NO.2: THE ID. CIT(A)/ AO / TPO ERRED IN RE-C HARACTERISATION OF THE BUSINESS WHEREIN R&D FUNCTION WHICH IS VERTICALLY INTEGRATED TO THE RESEARCH UNIT OF ASSOCIATE ENTERPRISE INCIDENTAL TO MAIN BUSINESS OF CULTIVATI ON OF PARENT SEEDS HAS BEEN CONSIDERED AS A SEPARATE AND DISTINCT ACTIVITY OF P ROVISION OF SERVICES TO ASSOCIATE ENTERPRISES. GROUND NO.3: THAT THE ID. CIT(A)/ ASSESSING OFFICER / TPO HAVE ERRED IN: GROUND NO. 3.1: IGNORING THE FACT THAT RESEARCH UNI T IN INDIA OF POC, USA IS NOT A PERMANENT ESTABLISHMENT OF (PE) AND IT IS SPECIFICA LLY COVERED UNDER EXCLUSIONARY CLAUSE OF ARTICLE 5(3)(E) OF THE INDO-US DOUBLE TAX AVOIDANCE TREATY. GROUND NO. 3.2: IGNORING THE FACT THAT THE RESEARCH ACTIVITIES CARRIED OUT BY THE APPELLANT ARE PREPARATORY AND AUXILIARY TO ITS MAIN BUSINESS AND IT CANNOT BE TREATED AS A PE OF POC, USA. GROUND NO.4: WITHOUT PREJUDICE TO GROUND NO. 3, THE ID. CIT(A) ERRED IN LAW IN DIRECTING THE AO TO TAX NOTIONAL INCOME AS FEES WHI CH PE SHOULD HAVE CHARGED TO THE HEAD OFFICE FOR CARRYING OUT RESEARCH ON ITS BEHALF EVEN THOUGH FEES FOR SUCH SERVICES HAS BEEN SPECIFICALLY EXEMPTED BY THE SECOND SENTEN CE OF PARAGRAPH (3) OF ARTICLE 7 OF THE INDO US DTAA GROUND NO.5: THAT THE ID. CIT(A)I AO/ TPO HAVE ERRE D IN LAW AND ON FACTS OF THE CASE BY: GROUND NO. 5.1: REJECTING MULTIPLE-YEAR DATA ADOPTE D BY THE APPELLANT AND DETERMINING THE ARM'S LENGTH MARGIN USING DATA PERT AINING ONLY TO FINANCIAL YEAR ('FY') 2006-07, WHICH WAS NOT AVAILABLE TO THE APPE LLANT AT THE TIME OF COMPLYING WITH THE INDIAN TP DOCUMENTATION REQUIREMENTS. GROUND NO. 5.2: NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS-A-VIS COMPARABLE COMPANIES. GROUND NO. 5.3: SELECTING THE COMPARABLES WITHOUT H AVING REGARD TO THE FUNCTION PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED WHICH I S IN COMPLETE DEFIANCE OF RULE 10B(2) OF I.T. RULES, 1962. GROUND NO. 5.4: CONSIDERING A COMPANY NAMELY TCG LI FESCIENCE LTD. AND CHOKSI LABORATORIES LTD. TO THE FINAL SET OF COMPARABLES W ITHOUT CONSIDERING THE ARGUMENTS OF THE APPELLANT ON FUNCTIONAL DISSIMILARITIES OF T HESE COMPANIES .. GROUND NO. 5.5: WITHOUT PREJUDICE TO THE ABOVE GROU NDS, THE MARGINS EARNED BY POC AT AGGREGATED LEVEL FOR BOTH RESEARCH AND PRODUCTIO N ACTIVITY IS MORE THAN WHAT IS REQUIRED TO BE ACHIEVED AT ARM'S LENGTH. GROUND NO.6: THE ID. TPO HAS ERRED IN LAW IN NOT GR ANTING THE BENEFIT OF +/ - 5 PERCENT VARIANCE AS PER PROVISO TO SECTION 92C(2). GROUND NO.7: THE LD. AO HAS ERRED IN LAW AND ON FAC TS AND CIRCUMSTANCES OF THE CASE, IN INITIATING THE PENALTY PROCEEDINGS UNDER S ECTION 271(1)(C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, FO REGO OR OTHERWISE MODIFY THE GROUNDS AT THE TIME OF HEARING. 12 ITA NO.2934/DEL/2013 C.O. NO.254/DEL/2015 THIS CROSS APPEAL IS WITHIN TIME AS THE GROUND OF A PPEAL FILED BY LD. AO WAS RECEIVED ON SEPTEMBER 10, 2016. 19. ALTHOUGH THE ASSESSEE HAS FILED A NUMBER OF GRO UNDS IN THE CROSS OBJECTION AS MENTIONED ABOVE, HOWEVER, LD. COUNSEL FOR THE ASSESSEE DID NOT ARGUE ANY OF THESE GROUNDS. IN ABSENCE OF ANY ARGU MENT BY THE LD. COUNSEL FOR THE ASSESSEE ON THE GROUNDS RAISED IN THE CROSS OBJ ECTION, THE CROSS OBJECTION FILED BY THE ASSESSEE IS DISMISSED AS NOT PRESSED. 20. IN THE RESULT, THE APPEAL FILED BY THE REVENUE AS WELL AS CROSS OBJECTION FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 13 TH APRIL, 2018. SD/- SD/- (AMIT SHUKLA) ( R. K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 13-04-2018. SUJEET COPY OF ORDER TO: - 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT 4) THE CIT(A) 5) THE DR, I.T.A.T., NEW DELHI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, NEW DELHI