M/s. Invitrogen Bioservices India Private Limited, Bangalore V. Assistant Commissioner Of Income Tax, Circle- 3(1)(1), Bangalore

ITA 2587/BANG/2019

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7219 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 01-09-2021
• Assessment Year: 2015-2016
• Appeal Filed On: 20-12-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Tax effect
• Section: 143(3); 92D; 234B; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER IT ( TP ) A NO . 2587/BANG/2019 ASSESSMENT YEAR : 2015 - 16 INVITROGEN BIOSERVICES INDIA PVT. LTD., GROUND FLOOR, FIRST TECHNOLOGY, PLACE 3 EPIP, WHITEFIELD, BANGALORE 560 066. P AN: AABCI 3134K VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI DARPAN KRIPLANI, CA RESPO NDENT BY : SHRI PRADEEP KUMAR , . C IT (DR)(ITAT ), BENGALURU. DATE OF HEARING : 01 . 0 9 .2021 DATE OF PRONOUNCEMENT : 06 .0 9 .202 1 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE ASSESSING OFFICER PASSED U/S. 143(3) R.W.S. 144C(13 ) OF THE INCOME-TAX ACT, 1961 [THE ACT] DATED 31.10.2019 FOR THE ASSES SMENT YEAR 2015-16. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: - THE GROUNDS MENTIONED HEREIN BY THE APPELLANT ARE WITHOUT PREJUDICE TO ONE ANOTHER. 1. THAT THE ORDER OF THE LEARNED ASSISTANT COMMISSIONE R OF INCOME-TAX, CIRCLE - 3(1)(1), BENGALURU (LEARNED AO ') TO THE EXTENT PREJUDICIAL TO THE APPELLANT, IS BAD IN LAW, CONTRARY TO IT(TP)A NO. 2587/BANG/2019 PAGE 2 OF 7 THE FACTS AND CIRCUMSTANCES OF THE CASE AND IS LIAB LE TO BE QUASHED. 2. THAT THE DISPUTE RESOLUTION PANEL - I (LEARNED DRP' ) ERRED IN NOT APPRECIATING THAT THE ORDER OF THE LEARNED ASSI STANT COMMISSIONER OF INCOME TAX, TRANSFER PRICING - 1(3) (2), BENGALURU (LEARNED TPO') PASSED UNDER SECTION 92CA OF THE INCOME-TAX ACT, 1961 (`THE ACT') IS CONTRARY TO LAW AND THUS LIABLE TO BE QUASHED. 3. THAT ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED AO/ LEARNED TPO ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT OF INR 12,255,203 TO THE APPELLANT'S INT ERNATIONAL TRANSACTION I.E. INCOME FROM RESEARCH & DEVELOPMENT (`R&D') SERVICES. 4. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AN D IN LAW, WITH RESPECT TO ADJUSTMENT TO THE TRANSFER PRICE OF THE R&D SEGMENT, THE LEARNED DRP/ AO/ TPO ERRED IN: 4.1. REJECTING THE TRANSFER PRICING (`TP') DOCUMENTATION MAINTAINED BY THE APPELLANT UNDER SECTION 92D OF TH E ACT, IN GOOD FAITH AND WITH DUE DILIGENCE. 4.2. REJECTING THE COMPARABILITY ANALYSIS CARRIED OUT BY THE APPELLANT IN THE TP DOCUMENTATION AND IN CONDUCTING A FRESH COMPARABILITY ANALYSIS FOR THE R&D SEGMENT BASED ON THE APPLICATION OF ADDITIONAL FILTERS IN DETERMINING THE ARM'S LENGTH PRICE. 4.3. USING DATA, WHICH WAS NOT CONTEMPORANEOUS, AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF PREPARING THE TP DOCUMENTATION. 4.4. DISREGARDING CERTAIN FILTERS APPLIED BY THE APPELLA NT IN SELECTION OF THE COMPARABLE COMPANIES IN THE TP DOCUMENTATION. 4.5. APPLYING/ MODIFYING THE FOLLOWING FILTERS WHILE UNDERTAKING COMPARABILITY ANALYSIS: IT(TP)A NO. 2587/BANG/2019 PAGE 3 OF 7 REJECTION OF COMPANIES WHOSE SERVICE TO SALES INCOM E IS LESS THAN 75% OF TOTAL OPERATING REVENUE; AND COMPANIES OF DIFFERENT FINANCIAL YEAR ENDING OR DAT A OF THE COMPANY DO NOT FALL WITHIN 12 MONTH PERIOD I.E. 01.04.2014 TO 31.03.2015. 4.6. INCLUDING THE FOLLOWING COMPANIES EVEN THOUGH THEY FAIL THE TEST OF COMPARABILITY: AURIGENE DISCOVERY TECHNOLOGIES LTD. RUBICON RESEARCH PVT. LTD. T C G LIFESCIENCES PVT. LTD. G V K BIOSCIENCES PVT. LTD. A E S LABORATORIES PVT. LTD. 4.7. COMPUTING INCORRECT OPERATING MARK-UP OF THE FOLLOWING COMPANIES BY NOT CONSIDERING CERTAIN EXPENSES AS OPERATING/ CONSIDERING CERTAIN ITEMS AS NON-OPERATING IN NATURE: RUBICON RESEARCH PVT. LTD. T C G LIFESCIENCES PVT. LTD. 4.8. THAT THE LEARNED DRP ERRED IN NOT APPRECIATING THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY THE APPELLANT IN A PROPER PERSPECTIVE . 4.9. NOT PROVIDING APPROPRIATE ADJUSTMENTS TOWARDS MATERIAL DIFFERENCES BETWEEN THE OPERATIONAL PROFIL E OF COMPARABLE COMPANIES AND THE APPELLANT. 5.0 THAT THE LEARNED AO ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234 C OF THE ACT. (TAX EFFECT : 6,335,269) 3. THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIAR Y OF LIFE TECH US. IT IS A 100% EXPORT ORIENT UNIT WITH COCHIN SP ECIAL ECONOMIC ZONE. IT COMMENCED COMMERCIAL OPERATIONS FROM 01.07.2005 ENG AGED IN THE OPERATIONS OF DISTRIBUTION, MANUFACTURING, INFORMAT ION TECHNOLOGY ENABLED SERVICES [ITESS] AND RESEARCH & DEVELOPMENT [R&D] A CTIVITY. THE IT(TP)A NO. 2587/BANG/2019 PAGE 4 OF 7 ASSESSEE HAS REPORTED INTERNATIONAL TRANSACTIONS IN RESPECT OF ITES, MANUFACTURING, DISTRIBUTION AND R&D. THE ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTIONS IN ITES SEGMENT AND R&D PROVIDED TO THE ASSOCIATED ENTERPRISES (AE) HAS BEEN DETERMINED BY THE ASSESSEE BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. THE OPERATING PROFIT TO OPERAT ING COST RATIO HAS BEEN TAKEN AS THE PROFIT LEVEL INDICATOR (PLI) IN TNMM A NALYSIS. 4. WITH REGARD TO R&D SEGMENT, THE ASSESSEE CONSIDE RED THREE COMPARABLES VIZ., CHOKSI LABORATORIES LTD., TEG LIF ESCIENCES LTD. AND VIMTA LABS LTD. THE TPO CONSIDERED THE FINAL SET OF FIVE COMPARABLES I.E., AURIGENE DISCOVERY TECHNOLOGY LTD., RUBICON RESEARC H PVT. LTD., TCG LIFESCIENCES PVT. LTD., GVK BIOSCIENCES PVT. LTD. A ND AES LABORATORIES PVT. LTD. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING, THE LD. AR FOR THE ASSES SEE PRESSED EXCLUSION OF ONLY TWO COMPARABLES I.E., RUBICON RESEARCH PVT. LTD. AND G V K BIOSCIENCES PVT. LTD. AS SUCH, ALL OTHER GROUNDS A RE DISMISSED AS NOT PRESSED. RUBICON RESEARCH PVT. LTD. 6. ACCORDING TO THE LD. AR, THIS COMPANY IS ENGAGE D IN IN-HOUSE RESEARCH AND DEVELOPMENT BUSINESS COMPRISING OF IN- HOUSE RESEARCH & DEVELOPMENT ACTIVITIES IN RELATION TO DRUG DELIVERY TECHNOLOGIES AND IT HAS NO REVENUE GENERATION FROM THIS ACTIVITY. ON THE O THER HAND, THE ASSESSEE IS ENGAGED IN DISTRIBUTION, MANUFACTURING, INFORMAT ION TECHNOLOGY ENABLED SERVICES [ITES], R&D ACTIVITY. THE ASSESSEE HAS RE PORTED INTERNATIONAL TRANSACTION IN RESPECT OF ITES, MANUFACTURING, DIST RIBUTION AND R&D. THE ALP OF R&D PROVIDED TO THE AE HAS BEEN DETERMINED B Y APPLYING THE TNMM STATING TO BE THE MOST APPROPRIATE METHOD. TH E OPERATING PROFIT TO IT(TP)A NO. 2587/BANG/2019 PAGE 5 OF 7 OPERATING COST RATIO HAS BEEN TAKEN AS THE PROFIT L EVEL INDICATOR (PLI) IN TNMM ANALYSIS. THE LD. AR SUBMITTED THAT RUBICON R ESEARCH PVT. LTD. HAS NOT UNDERTAKEN ANY CONTRACT R&D AND ITS INHOUSE RES EARCH CANNOT BE COMPARED WITH ASSESSEES R&D ACTIVITY. HE DREW OUR ATTENTION TO THE ANNUAL REPORT OF THIS COMPANY WHICH IS PLACED AT PA GE 509 OF PB UNDER THE HEAD TEXTUAL INFORMATION. 7. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT BEF ORE THE DRP THE ASSESSEE HAS NOT SUBSTANTIATED THE ABOVE FACTS. BE ING SO, THIS GROUND MAY BE DISMISSED. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. WE HAVE GONE THROUGH THE ANNUAL REPORT PRODUCED BY THE ASSESSEE AT PAGE 509 OF PB WHERE UNDER THE HEAD TEXTUAL INFORMA TION, IT IS CLEARLY MENTIONED THAT RUBICON RESEARCH PVT. LTD. IS ENGAGE D IN INHOUSE R&D BUSINESS WHICH COMPRISES OF IN-HOUSE RESEARCH & DEV ELOPMENT ACTIVITIES IN RELATION TO DRUG DELIVERY TECHNOLOGIES AND HAVING N O REVENUE GENERATION FROM THAT ACTIVITY. BEING SO, IT IS NOT APPROPRIAT E TO CONSIDER IT AS A COMPARABLE TO THE ASSESSEE COMPANY AS THERE IS FUNC TIONAL DISSIMILARITY. ACCORDINGLY THIS GROUND OF ASSESSEE IS ALLOWED. G V K BIOSCIENCES PVT. LTD. 9. THE LD. AR SUBMITTED THAT THIS COMPANY IS A DISC OVERY RESEARCH AND DEVELOPMENT ORGANIZATION PROVIDING BROAD SPECTRUM O F SERVICES, ACROSS THE R&D AND MANUFACTURING VALUE CHAIN. ITS CAPABILITIE S INCLUDE COLLABORATIVE RESEARCH, DISCOVERY SERVICES, CLINICAL DEVELOPMENT, CONTRACT MANUFACTURING, FORMULATIONS AND INFORMATICS. IT ALSO HOLDS A NUMB ER OF PATENTS AS PROVIDED IN ITS ANNUAL REPORT. ACCORDING TO THE LD. AR, IT IS A PRODUCT COMPANY WHICH IS HAVING INVENTORIES AS SEEN FROM PAGE 674 OF PB. THIS COMPANY UNDERTAKES VERY HIGH LEVEL RESEARCH WORK, WHICH CAN NOT BE COMPARED TO IT(TP)A NO. 2587/BANG/2019 PAGE 6 OF 7 THE ASSESSEE, WHICH IS A CAPTIVE SERVICE PROVIDER. FURTHER, THE TEXTUAL INFORMATION OF THIS COMPANY AT PAGE 738 OF PB SHOWS AS FOLLOWS:- SEGMENTS ARE IDENTIFIED TAKING INTO CONSIDERATION THE INTERNAL ORGANIZATION AND MANAGEMENT STRUCTURE AS WELL AS TH E DIFFERENTIAL RISK AND RETURNS OF THE SEGMENT. A. BASED ON THE COMPANY'S BUSINESS MODEL, CONTRACT RESEARCH SOLUTIONS HAVE BEEN CONSIDERED AS THE ONLY REPORTAB LE BUSINESS SEGMENT AND HENCE NO SEPARATE FINANCIAL DISCLOSURES ARE PROVIDED IN RESPECT OF ITS SINGLE BUSINESS SEGMENT. B. THE COMPANYS OPERATIONS ARE MANAGED FROM INDIA A ND INCLUDES SIGNIFICANT AMOUNT OF EXPORT SALES. ACCORD INGLY INFORMATION ON THE GEOGRAPHICAL SEGMENT IS DISCLOSE D IN NOTE 31. 10. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT GV K BIOSCIENCES PVT. LTD IS ENGAGED IN FARM RELATED RESEARCH AND THE ARG UMENT OF THE LD. AR FOR THE ASSESSEE IS THAT ASSESSEE IS ENGAGED IN CONDUCT ING R&D IN FARM RELATED EQUIPMENT, HOWEVER, THE ASSESSEE HAS NOT SU BSTANTIATED THE SAME BEFORE THE LOWER AUTHORITIES AND THEREFORE THIS GRO UND OF THE ASSESSEE HAS TO BE DISMISSED. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. AS SEEN FROM THE ANNUAL REPORT, THIS COMPANY IS A D ISCOVERY RESEARCH AND DEVELOPMENT ORGANIZATION PROVIDING BROAD SPECTRUM O F SERVICES, ACROSS THE R&D AND MANUFACTURING VALUE CHAIN. IT ALSO HOLDS A NUMBER OF PATENTS AS PROVIDED IN ITS ANNUAL REPORT. IT IS A PRODUCT COM PANY WHICH IS HAVING INVENTORIES AND UNDERTAKES VERY HIGH LEVEL RESEARC H WORK, WHICH CANNOT BE COMPARED TO THE ASSESSEE, WHICH IS A CAPTIVE SERVI CE PROVIDER. BEING SO, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM T HE LIST OF COMPARABLE COMPANIES IN THE R&D SEGMENT. IT(TP)A NO. 2587/BANG/2019 PAGE 7 OF 7 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF SEPTEMBER, 2021. SD/- SD/- ( N V VASUDEV AN ) ( CHANDRA POOJARI ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE, DATED, THE 6 TH SEPTEMBER, 2021. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.