M/s. Albany Molecular Research Hyderabad Research Center (P) Ltd., Hyderabad V. ACIT, Circle-1(1), Hyderabad

ITA 1717/HYD/2012

• Counselvise Citation: 171722514 RSA 2012
• Duration Of Justice: 2 year(s) 7 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 06-07-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 29-11-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G V HEMALATHA DEVI
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1717/HYD/2012 ASSESSMENT YEAR: 2008-09 M/S ALBANY MOLECULAR RESEARCH HYDERABAD RESEARCH CENTRE (P) LTD., HYDERABAD PAN AAFCA1469D VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 1(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI Y. RATNAKAR REVENUE BY : SMT. G.V. HEMALATHA DEVI DATE OF HEARING : 06-07-2015 DATE OF PRONOUNCEMENT : 15-07-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE FI NAL ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SECTIO N 92CA AND 144C(5) OF THE ACT IN COMPLIANCE TO THE DIRECTION OF DISPUTE RESOLUTION PANEL (DRP) FOR THE AY 2008-09. 2. BRIEFLY THE FACTS ARE, ASSESSEE AN INDIAN COMPAN Y WAS INCORPORATED ON 25/01/2015. IT IS A WHOLLY OWNED SU BSIDIARY OF ALBANY MOLECULAR INC., WHICH HAS ITS H.O. IN USA. ASSESSEE PROVIDES RESEARCH AND DEVELOPMENT SERVICES TO ITS PARENT COM PANY, WHICH IS ITS ASSOCIATED ENTERPRISES (AE). FOR THE YEAR UNDER CON SIDERATION, AS PER THE 3CEB REPORT, REVENUE ASSESSEE FROM INTERNATIONA L TRANSACTIONS WITH AE ARE AS UNDER: 2 ITA NO. 1717 /HYD/2012 M/S ALBANY MOLECULAR RESEARCH HYDERABAD RESEARCH CE NTRE PVT. LTD. PROVISION OF R&D SERVICES RS. 13,01,48,579 PAYMENT OF INTEREST RS. 1,09,10,570 REIMBURSEMENT OF EXPENSES RS. 58,20,583 FOR THE IMPUGNED AY, ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 1,66,44,650. IN COURSE OF ASSES SMENT PROCEEDING, AO NOTICING THAT ASSESSEE HAS ENTERED INTO INTERNAT IONAL TRANSACTIONS WITH ITS AE MADE A REFERENCE TO TPO FOR DETERMINING ARMS LENGTH PRICE (ALP). IN COURSE OF PROCEEDING BEFORE HIM, TP O WHILE EXAMINING THE TP STUDY OF ASSESSEE NOTICED THAT ASSESSEE AS P ER THE TP REPORT HAS CHOSEN ITSELF AS TESTED PARTY AND APPLYING THE TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT TO OPERATING COST, HAS UNDERTAKEN A SEARCH IN THE DATA BASES TO FIND OUT COMPARABLES WHICH RESULTED I N SELECTION OF SIX COMPANIES AS COMPARABLES. AS THE MARGIN OF COMPARAB LE COMPANIES WERE WITHIN THE TOLERANCE BAND NO ADJUSTMENT TO ALP WAS MADE. TPO AFTER EXAMINING THE TP REPORT, NOTICED CERTAIN DISC REPANCIES, WHICH BROADLY ARE, USE OF MULTIPLE YEAR DATA WHILE ARRIVI NG AT THE MARGIN OF THE COMPARABLE COMPANIES IN STEAD OF CURRENT YEAR D ATA, INAPPROPRIATE FILTERS WERE USED FOR SELECTING COMPA RABLES, SEARCH PROCESS IS FAULTY ETC. ACCORDINGLY, TPO REJECTED TP STUDY OF ASSESSEE. AFTER REJECTING TP STUDY OF ASSESSEE, TPO UNDERTOOK SEARCH PROCESS HIMSELF AND SELECTED FOLLOWING FOUR COMPANIES AS COMPARABLES WITH AVERAGE ARITHMETIC MEAN OF 26.24%: 1. BIOCON LTD. (CONTRACT RESEARCH) 2. CHOKSI LABORATORIES LTD. 3. VIMTA LABS 4. GVK BIOSCIENCES PVT. LTD. BY APPLYING THE ARITHMETIC MEAN OF 26.24% TO THE OC OF RS. 12,68,66,638 ALP OF THE INTERNATIONAL TRANSACTION W AS DETERMINED AT RS. 16,01,56,444 TO THE PRICE CHARGED BY ASSESSEE T OWARDS INTERNATIONAL TRANSACTION WITH AE INCLUDING THE AMO UNT RECEIVED TOWARDS REIMBURSEMENT AMOUNTING TO RS. 13,59,69,162 . THE RESULTANT 3 ITA NO. 1717 /HYD/2012 M/S ALBANY MOLECULAR RESEARCH HYDERABAD RESEARCH CE NTRE PVT. LTD. SHORTFALL OF RS. 2,41,87,282 WAS TREATED AS ADJUSTM ENT TO BE MADE U/S 92CA OF THE ACT. IN PURSUANCE TO THE ORDER PASSED B Y TPO, AO PROPOSED A DRAFT ASSESSMENT ORDER INCORPORATING TP ADJUSTMENT RECOMMENDED BY TPO. ASSESSEE FILED OBJECTIONS BEFOR E LD. DRP AGAINST THE SAID ASSESSMENT ORDER BY RAISING VARIOU S ISSUES. 3. LD. DRP THOUGH REJECTED ASSESSEES CONTENTIONS W ITH REGARD TO THE COMPARABILITY ANALYSIS UNDERTAKEN BY TPO INCLUD ING SELECTION OF COMPARABLES BUT DRP ISSUED CERTAIN DIRECTIONS TO TP O, SUCH AS, NOT TO INCLUDE FOREX FLUCTUATION WHILE COMPUTING NET MA RGIN UNDER TNMM, NOT TO INCLUDE REIMBURSEMENT IN ALP DETERMINATION E TC. AS A RESULT OF THE DIRECTIONS OF DRP, ADJUSTMENT TO BE MADE TO ALP WAS ULTIMATELY QUANTIFIED AT RS. 1,00,71,055 AS PER THE FINAL ASSE SSMENT ORDER. BEING AGGRIEVED OF SUCH ADDITION MADE ON ACCOUNT OF TP AD JUSTMENT, ASSESSEE IS BEFORE US. 4. THOUGH, ASSESSEE HAS RAISED AS MANY AS 10 GROUND S CONTESTING THE TP ADJUSTMENT OF RS. 1,00,71,055, BUT, AT THE T IME OF HEARING BEFORE US, LD. AR RESTRICTED HIS SUBMISSIONS TO REJ ECTION OF TWO COMPARABLES, VIZ; DOLPHIN MEDICAL SERVICES LTD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. THE SUM AND SUBSTANCE OF T HE ARGUMENT OF LD. AR IS BOTH THESE COMPANIES BEING FUNCTIONALLY S IMILAR TO ASSESSEE, THERE IS NO JUSTIFICATION IN EXCLUDING THESE TWO CO MPANIES FROM THE LIST OF COMPARABLES. LD. AR SUBMITTED, AS PER THE SERVIC E AGREEMENT ENTERED INTO BETWEEN ASSESSEE AND ITS AE, ASSESSEE IS ENTITLED TO RECEIVE THE COST WITH MARK UP OF 20% TOWARDS SERVI CES RENDERED TO AE, WHEREAS, AS PER THE TP STUDY, MARGIN OF THE CO MPANIES SELECTED BY ASSESSEE BEING LESS THAN THE MARGIN OF 20% AS PE R THE SERVICE AGREEMENT, NO ADJUSTMENT TO ALP IS REQUIRED TO BE M ADE. LD. AR SUBMITTED, AS FAR AS REJECTION OF DOLPHIN MEDICAL S ERVICES LTD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. ARE CONCERNED, TP O AND THE DRP ARE NOT JUSTIFIED IN REJECTING THESE TWO COMPANIES AS COMPARABLES WITHOUT MENTIONING ANY DIFFERENCE IN FUNCTIONAL PR OFILE OF THOSE COMPANIES WITH ASSESSEE. LD. AR SUBMITTED, IN ASSES SEES OWN CASE 4 ITA NO. 1717 /HYD/2012 M/S ALBANY MOLECULAR RESEARCH HYDERABAD RESEARCH CE NTRE PVT. LTD. FOR AY 2006-07, ITAT IN ORDER DATED 19/04/2013 IN I TA NO. 1625/HYD/10 HAS HELD THAT DOLPHIN MEDICAL SERVICES LTD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. BEING FUNCTIONALL Y SIMILAR TO ASSESSEE ARE TO BE TREATED AS COMPARABLES. THUS, LD . AR SUBMITTED, SINCE THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE A SSESSEE REJECTION OF THESE TWO COMPANIES BY TPO AND THE DRP SHOULD BE REVERSED AND A DIRECTION MAY BE ISSUED TO COMPUTE ASSESSEES ALP AFTER INCLUDING THESE TWO COMPANIES IN THE LIST OF COMPARABLES. 5. LD. DR, ON THE OTHER HAND, SUBMITTED BEFORE US, FINANCIALS OF DOLPHIN MEDICAL SERVICES LTD. AND MEDINOVA DIAGNOST IC SERVICES LTD., IF EXAMINED, WOULD MAKE IT CLEAR THAT BOTH THESE CO MPANIES ARE BASICALLY INVOLVED IN PROVIDING DIAGNOSTIC SERVICE S, WHEREAS, ASSESSEE IS INTO RESEARCH ACTIVITIES, HENCE, THESE TWO COMPANIES CANNOT BE CONSIDERED AS COMPARABLES TO ASSESSEE. IN THIS CONTEXT, LD. DR DREW OUR ATTENTION TO THE P&L A/C OF THESE TWO C OMPANIES AS SUBMITTED IN THE PAPER BOOK SHOWING THE MAJOR RECEI PTS FROM DIAGNOSTIC SERVICES. LD. DR REFERRING TO THE ORDER PASSED BY ITAT IN ASSESSEES OWN CASE SUBMITTED BEFORE US, WHEN THE T RIBUNAL HAS DETERMINED THE MARGIN OF ASSESSEE AT 29.88% INAY 20 06-07UNDER THE SAME SET OF FACTS AND CIRCUMSTANCES, THERE IS NO RE ASON TO DISTURB THE FINDING OF TPO OR DRP WHEN IN THE YEAR UNDER CONSID ERATION MARGIN OF ASSESSEE HAS BEEN COMPUTED AT 26.24%. LD. DR, THERE FORE, SUBMITTED, ASSESSEES CONTENTION TO INCLUDE THE TWO COMPANIES REJECTED BY TPO SHOULD NOT BE ACCEPTED. 6. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. AS COULD BE SEEN FROM THE SUBMISSIONS OF LD. AR, TH E MAIN THRUST OF HIS ARGUMENT TO INCLUDE DOLPHIN MEDICAL SERVICES LT D. AND MEDINOVA DIAGNOSTIC SERVICES LTD. AS COMPARABLES IN THE IMPU GNED AY IS DUE TO THE FACT THAT IN CASE THESE TWO COMPANIES ARE IN CLUDED, ARITHMETIC MEAN OF THE COMPARABLE COMPANIES WOULD BE 16.70%, W HICH IS LESS THAN ASSESSEES MARGIN. TO BUTTRESS HIS CLAIM FOR I NCLUSION OF THE 5 ITA NO. 1717 /HYD/2012 M/S ALBANY MOLECULAR RESEARCH HYDERABAD RESEARCH CE NTRE PVT. LTD. AFORESAID TWO COMPANIES, ASSESSEE HAS PLACED STRONG RELIANCE ON THE ORDER OF ITAT IN ASSESSEES OWN CASE FOR AY 2006-07 . ON A PERUSAL OF THE ORDER PASSED BY THE COORDINATE BENCH IN ASSESSE ES CASE FOR AY 2006-07, THOUGH IT IS FOUND THAT THE COORDINATE BEN CH HAS GIVEN A CATEGORICAL FINDING THAT DOLPHIN MEDICAL SERVICES L TD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. ARE FUNCTIONALLY SIMILAR T O ASSESSEE, HENCE, CAN BE TREATED AS COMPARABLES. HOWEVER, ON PERUSAL OF THE FINDING OF THE COORDINATE BENCH AT PARA 25 OF THE ORDER UNDER REFERENCE, IT IS SEEN THAT THE AVERAGE MARGIN OF THE COMPARABLES EVE N AFTER CONSIDERING THESE TWO COMPANIES AS COMPARABLES WAS WORKED OUT AT 29.88%, WHICH IS MORE THAN THE MARGIN COMPUTED BY T PO FOR THE IMPUGNED AY. WHEN THIS FACTUAL POSITION WAS BROUGHT TO THE NOTICE OF LD. AR, HE SUBMITTED, ARMS LENGTH PRICE HAS TO BE COMPUTED FOR EACH YEAR TAKING INTO ACCOUNT THE MARGIN OF COMPARABLE C OMPANIES. IN OUR VIEW, SUCH ARGUMENT OF LD. AR, DOES NOT HOLD MUCH W ATER. ASSESSEE CANNOT ADJUST ITS PROFIT MARGIN BY TAKING INTO ACCO UNT THE PROFIT EARNED BY COMPARABLE COMPANIES. IT IS A FACT ON RECORD, TH E SERVICE AGREEMENT ENTERED WITH AE IN THE YEAR 2006 IS CONTI NUING IN THE IMPUGNED AY ALSO. THERE IS NOTHING ON RECORD TO IND ICATE THAT THERE IS MATERIAL CHANGE IN THE NATURE OF TRANSACTION WITH A E OR ANY EXTRAORDINARY CIRCUMSTANCES WHICH COULD HAVE HAD AN IMPACT ON THE PROFIT EARNING OF THE ASSESSEE. AT LEAST, NO SUCH F ACT OR MATERIAL HAS BEEN BROUGHT TO OUR NOTICE BY LD. AR. IN THESE CIRC UMSTANCES, THE ARMS LENGTH MARGIN WORKED OUT BY THE TRIBUNAL FOR SIMILAR INTERNATIONAL TRANSACTION AT 29.88% FOR AY 2006-07 CAN BE CONSIDERED AS A BENCH MARK FOR DETERMINING THE ARMS LENGTH PR ICE OF THE RELEVANT INTERNATIONAL TRANSACTION IN THE YEAR UNDE R CONSIDERATION. BY SIMPLY RELYING UPON THE PROFIT MARGIN OF COMPARABLE COMPANIES, ASSESSEE CANNOT ADJUST ITS PROFIT MARGIN. AS MARGIN S COMPUTED BY TPO FOR THE YEAR UNDER CONSIDERATION IS LESS THAN 2 9.88% WORKED OUT BY THE TRIBUNAL FOR AY 2006-07 AS ARMS LENGTH MARG IN, WE ARE UNABLE TO ACCEPT ASSESSEES CLAIM THAT THE TRANSFE R PRICING OR COMPARABILITY ANALYSIS HAS TO BE DONE AGAIN FOR THE YEAR UNDER 6 ITA NO. 1717 /HYD/2012 M/S ALBANY MOLECULAR RESEARCH HYDERABAD RESEARCH CE NTRE PVT. LTD. CONSIDERATION BY INCLUSION OF DOLPHIN MEDICAL SERVI CES LTD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. AS COMPARABLES. 6.1 ONE MORE REASON FOR NOT CONSIDERING THESE TWO C OMPANIES AS COMPARABLES IN THE IMPUGNED AY IS, ON PERUSAL OF TH E ANNUAL REPORT OF BOTH THE COMPANIES AS AT 31/03/2008, SUBMITTED IN P APER BOOK, REVEALS THAT THEY PROVIDE DIAGNOSTIC SERVICES. THE P&L ACCOUNT OF BOTH THESE COMPANIES SHOWS, THE MAJOR PART OF THE R ECEIPTS ARE FROM DIAGNOSTIC SERVICES AND NOT FROM R&D SERVICES. THUS , THESE TWO COMPANIES BEING PREDOMINANTLY INVOLVED IN DIAGNOSTI C SERVICES ARE FUNCTIONALLY DIFFERENT FROM ASSESSEE, HENCE, NOT CO MPARABLE AT LEAST FOR THE IMPUGNED YEAR. ON WHAT BASIS THE ITAT IN AY 2006-07 CONSIDERED THESE TWO COMPANIES AS COMPARABLES TO AS SESSEE ARE NOT KNOW TO US AS DATA RELATING TO AY 2006-07 OF THESE COMPANIES HAVE NOT BEEN PLACED BEFORE US. MOREOVER, AS COULD BE SE EN FROM THE OBSERVATION OF THE COORDINATE BENCH IN PARA 14 OF T HE ORDER PASSED FOR AY 2006-07, THE ASSESSEE WHILE CONTESTING THE DETER MINATION OF PROFIT MARGIN AT 41.49% BY TPO, IN FACT, RELIED UPON THE O RDER OF DRP FOR AY 2007-08 FIXING MARGIN AT 26.24%. THEREFORE, CON SIDERING THE FACT THAT ARMS LENGTH MARGIN IN ASSESSEES OWN CASE WA S FIXED AT 29.88% AND 26.24% FOR AYS 2006-07 AND 2007-08 RESPECTIVELY , AS AGAINST THE MARGIN DETERMINED FOR THE YEAR UNDER CONSIDERATION AT 26.24%, WE ARE UNABLE TO ACCEPT ASSESSEES PLEA FOR INCLUDING DOLP HIN MEDICAL SERVICES LTD. AND MEDINOVA DIAGNOSTIC SERVICES LTD. AS COMPARABLES JUST TO REDUCE THE PROFIT MARGIN OF ASSESSEE. ASSES SEES GROUND ON THE ISSUE, THEREFORE, IS DISMISSED. AS LD. AR HAS N OT ARGUED ON ANY OTHER ISSUE EXCEPT THE ISSUE RELATING TO REJECTION OF AFORESAID TWO COMPARABLES THE OTHER GROUNDS RAISED ON TRANSFER PR ICING ISSUES ARE TREATED AS NOT PRESSED, HENCE, DISMISSED. 7. AS FAR AS LEVY OF INTEREST U/S 234B AND 234C OF THE ACT IS CONCERNED, CHARGING INTEREST U/S 234B AND 234C BEI NG MANDATORY AND CONSEQUENTIAL, WE DO NOT FIND ANY REASON TO INT ERFERE WITH THE 7 ITA NO. 1717 /HYD/2012 M/S ALBANY MOLECULAR RESEARCH HYDERABAD RESEARCH CE NTRE PVT. LTD. INTEREST CHARGED. EVEN LD. AR HAS ALSO NOT ADVANCED ANY SPECIFIC ARGUMENT ON THIS ISSUE. ACCORDINGLY, THIS GROUND IS ALSO DISMISSED. 8. IN THE RESULT, ASSESSEES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 15 TH JULY, 2015. SD/- SD/- (P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 15 TH JULY, 2015 KV COPY TO:- 1) M/S ALBANY MOLECULAR RESEARCH HYDERABAD RESEARC H CENTRE (P) LTD., C/O VENUGOPAL & CHENOY, CAS., 4-1-889/16/2, TILAK ROAD, HYDERABAD 500 001. 2) ACIT, CIRCLE 1(1), HYDERABAD 3 DRP, HYDERABAD 4) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER