Nektar Therapeutics (India) Private Limited, Hyderabad V. Dy.CIT, Circle 16(1), Hyderabad

ITA 421/HYD/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4623 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 23-05-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 12-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J SIRI KUMAR
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Transfer pricing; International transaction; Working capital adjustments; Bad and doubtful debts
• Section: 143(3); 234B; 144

Judgement Text

ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 1 OF 14 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.421/HYD/2014 (ASSESSMENT YEAR: 2009-10) M/S. NEKTAR THERAPEUTIC (INDIA) PRIVATE LIMITED HYDERABAD PAN: AACCN1489R VS DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(1) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI R. VIJAYARAGHAVAN FOR REVENUE : SHRI J. SIRI KUMAR, DR O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y 2009-10 AGAIN ST THE ORDER OF THE AO DATED 10.01.2014 PASSED U/S 143 (3) R.W.S. 92CA(3) AND 144C OF THE I.T. ACT. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, WHICH IS IN THE BUSINESS OF RESEARCH AND DEVELOPMEN T SERVICES IN RELATION TO BIO-ANALYTICAL AND FORMULATION DEVELOPM ENT, FURNISHED ITS RETURN OF INCOME FOR THE A.Y 2009-10 ON 30.09.2 009 DECLARING TOTAL INCOME OF RS.2,97,67,240. DURING THE ASSESSME NT PROCEEDINGS U/S 143(3) OF THE ACT, THE AO NOTICED T HAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS AE AND THEREFORE, FOR THE PURPOSE OF DETERMINATION OF THE ALP OF THE DATE OF HEARING: 23.05. 201 8 DATE OF PRONOUNCEMENT: 03.08.2018 ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 2 OF 14 SAID TRANSACTIONS, THE CASE WAS REFERRED TO THE TPO U/S 92CA OF THE ACT. THE TPO PASSED AN ORDER DATED 22.01.2013 A ND IN ACCORDANCE WITH THE SAME, A DRAFT ASSESSMENT ORDER WAS PASSED. THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP, W HICH WAS ALLOWED IN PART, AND IN ACCORDANCE WITH THE DIRECTI ONS OF THE DRP, THE FINAL ASSESSMENT ORDER WAS PASSED. AGAINST THE FINAL ASSESSMENT ORDER, THE ASSESSEE IS IN SECOND APPEAL BEFORE US BY RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THAT THE ORDER OF THE DEPUTY COMMISSIONER OF IN COME TAX, CIRCLE 16(1), HYDERABAD (HEREINAFTER REFERRED TO AS 'AO') IN PURSUANCE OF THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS 'DRP') , HYDERABAD IN SO FAR AS IT IS PREJUDICIAL TO THE APP ELLANT, IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE. 2. TRANSFER PRICING ADJUSTMENTS 2.1 GENERAL GROUNDS 2.1.1 THE ASSESSMENT ORDER PASSED BY THE LEARNED AO UNDER SECTION 143(3) READ WITH SECTION 144C AND REA D WITH THE ORDER PASSED BY THE LEARNED TRANSFER PRICI NG OFFICER (HEREINAFTER REFERRED TO AS 'TPO'), UNDER S ECTION 92CA(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER RE FERRED TO AS 'THE ACT') IS BAD IN LAW AND VOID AB-INITIO. 2.1.2 THAT THE LEARNED DRP / AO ERRED BY NOT ACCEPT ING THE PRICE OF INTERNATIONAL TRANSACTION OF CONTRACT RESEARCH & DEVELOPMENT SERVICES OF RS. 18,91,47,004 SHOWN BY THE APPELLANT AND DETERMINING THE ARM' S LENGTH PRI CE (HEREINAFTER REFERRED TO AS 'ALP') AT RS.19,93,79,3 60 AND THEREBY MAKING TRANSFER PRICING ADJUSTMENT OF RS.1,02,32,356 TO THE TOTAL INCOME OF THE APPELLANT . 2.1.3 THAT THE LEARNED DRP/AO ERRED IN REJECTING TH E ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE INCOME TAX AC T, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') READ WI TH THE INCOME-TAX RULES, 1962 (HEREINAFTER REFERRED TO AS 'THE RULES') AND CONSEQUENTLY MAKING ADJUSTMENT UNDER SECTION 92CA OF THE ACT TO THE TOTAL INCOME OF THE APPELLANT. ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 3 OF 14 2.2 GRANT OF WORKING CAPITAL ADJUSTMENT 2.2.1 BASED ON THE FACTS AND THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LEARNED AO/DRP/TPO ERRED IN NO T GRANTING THE WORKING CAPITAL ADJUSTMENT TO THE NET PROFIT MARGINS OF THE COMPARABLE COMPANIES AS PROVIDED UND ER RULE 10B(L)(E) READ WITH RULE 1 10B(2)(B). 2.2.2 BASED ON THE FACTS AND THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE LEARNED DRP/AO/TPO ERRED IN NO T ALLOWING WORKING CAPITAL ADJUSTMENT TO THE MARGINS OF THE COMPARABLE COMPANIES BY IGNORING THE FACT THAT THE APPELLANT IS A CAPTIVE SERVICE PROVIDER AND FURNISH ED THE QUANTUM OF WORKING CAPITAL ADJUSTMENT. 2.3 FILTERS 2.3.1 THE LEARNED AO/DRP ERRED IN CONFIRMING THE TP O'S STAND IN REJECTING FUNCTIONALLY COMPARABLE COMPANIE S BY APPLYING DIMINISHING REVENUE/ PERSISTENT LOSSES FIL TER FOR THE PERIOD UNDER CONSIDERATION. 2.4 COMPARABLES 2.4.1 THE LEARNED AO/DRP ERRED IN CONFIRMING THE TP O'S SELECTION OF SUVEN LIFE SCIENCES LIMITED AS A COMPA RABLE COMPANY, EVEN THOUGH, IT IS FUNCTIONALLY DISSIMILAR TO THE APPELLANT. 2.4.2 WITHOUT PREJUDICE TO GROUND NO. 2.4.1, THE LE ARNED AO/DRP ERRED IN NOT ALLOCATING UNALLOCATED RESEARCH & DEVELOPMENT EXPENSES WHILE COMPUTING THE SEGMENTAL PROFITABILITY OF SUVEN LIFE SCIENCES LIMITED TO ARR IVE AT THE ARM'S LENGTH PRICE. 2.4.3 THE LEARNED AO/ DRP ERRED IN REJECTION OF JUB ILANT BIOSYS LIMITED AS A COMPARABLE COMPANY SELECTED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY ON THE GROU NDS OF DIMINISHING REVENUE FILTER AND PERSISTENT LOSS FILT ERS. 2.4.4 THE LEARNED AO/DRP ERRED IN ACCEPTING THE INCORRECT MARGINS OF THE FOLLOWING COMPARABLE COMPA NIES AS COMPUTED BY THE TPO, WHILE DETERMINING THE ALP: 2.4.4.1 TCG LIFESCIENCES LTD 2.4.4.2 MANIPAL ACUNOVA LIMITED 2.4.4.3 CHOKSI LABORATORIES LTD. 2.4.5 THE LEARNED AO/DRP ERRED IN CONFIRMING THE TP O'S STAND IN CONSIDERING THE PROVISION FOR BAD AND DOUB TFUL DEBTS AND BAD DEBTS AS NON-OPERATING EXPENSES FOR T HE ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 4 OF 14 PURPOSE OF MARGIN COMPUTATION OF THE COMPARABLE COMPANIES. 2.5 INCORRECT COMPUTATION OF MARGIN OF APPELLANT 2.5.1 BASED ON THE FACTS AND THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE DRP/AO ERRED IN CONFIRMING THE ACTION OF THE TPO IN CONSIDERING THE FOREIGN EXCHAN GE LOSS AS OPERATING. 2.6 USE OF MULTIPLE YEAR DATA 2.6.1 THE LEARNED AO/DRP ERRED IN REJECTING THE MUL TIPLE YEAR ANALYSIS FOR COMPUTING THE OPERATING MARGINS EARNED BY THE ALLEGED COMPARABLE COMPANIES. 2.5 RISK PROFILE FOR CAPTIVE SERVICE PROVIDER 2.5.1 THE LEARNED AO/DRP/TPO OUGHT TO HAVE APPRECIATED THAT MARGINS EARNED BY THE APPELLANT (B EING A CAPTIVE SERVICE PROVIDER) WERE REFLECTIVE OF THE FUNCTIONS PERFORMED AND PROPORTIONATE WITH THE RISKS ASSUMED WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE CONTRACT RESEARCH & DEVELOPMENT SERVICE BUSINESS OF THE APPELLANT. 2.5.2 THE LEARNED AO/DRP/TPO ERRED IN DISREGARDING THE DIFFERENCES IN RISK PROFILE OF THE APPELLANT AN D THE ALLEGED COMPARABLE COMPANIES SELECTED BY HIM, BY NO T ALLOWING THE RISK ADJUSTMENT CLAIMED BY THE APPELLA NT 2.5.3 WITHOUT PREJUDICE TO GROUND NO. 2.5.2, THE LE ARNED AO/DRP ERRED IN NOT GRANTING AN ADJUSTMENT OF 1 PER CENT WHICH WAS GRANTED BY THE JURISDICTIONAL TRIBUN AL IN CASE OF HELLOSOFT INDIA PRIVATE LIMITED (ITA NO. 645IHYD/2009), WHICH IS BINDING ON THE LEARNED AO I DRP I TPO. 3. THE LEARNED DRP ERRED IN LAW AND ON FACTS BY SUMMARILY REJECTING THE APPELLANT'S OBJECTIONS AND DISREGARDING THE MATERIAL PLACED ON RECORD THEREBY NOT FOLLOWING THE PROCEDURE LAID DOWN U/S L44C(5), 1 44 C(6) & L44C(7) OF THE ACT. 4. THE LEARNED AO/DRP ERRED IN COMPUTATION OF INTER EST LIABILITY UNDER SECTIONS 234B AND 234C. 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, SUBSTITUTE AND/OR MODIFY IN ANY MANNER WHATSOEVER A LL OR ANY OF THE FOREGOING GROUNDS OF APPEAL AT OR BEF ORE THE HEARING OF THE APPEAL. ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 5 OF 14 3. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE DOES NOT WISH TO PRESS GROUND OF APPEAL NO.2 WHICH IS GENERAL IN NATURE AN D ALSO OTHER GROUNDS OF APPEAL EXCEPT FOR THE GROUND NOS. 2.2, 2 .3 AND 2.4. 4. AS REGARDS GROUND NO.2.2, BRIEF FACTS ARE THAT W HILE COMPUTING THE ALP OF THE INTERNATIONAL TRANSACTION, THE ASSESSEE REQUESTED FOR WORKING CAPITAL ADJUSTMENT AND RELIED ON THE PROVISIONS OF RULE 10B(1)(E)(III) OF THE RULES. THE ASSESSEE SUBMITTED THAT THERE EXISTS DIFFERENCES IN THE DEBT ORS AND CREDITORS OF THE ASSESSEE AS WELL AS THE COMPARABLE S SELECTED BY THE DEPARTMENT; WHICH ARE MATERIALLY AFFECTING THEI R NET PROFIT MARGIN. THE ASSESSEE CARRIED OUT THE WORKING CAPITA L ADJUSTMENT AT 5.39% BUT THE TPO DID NOT ACCEPT THE SAME BY OBS ERVING THAT THE EXACT DETAILS OF THE DEBTORS, INVENTORIES AND T HE CREDITORS IS NOT AVAILABLE AND THAT ACCORDING TO THE OECD GUIDEL INES OF 2010, WORKING CAPITAL BENEFIT CANNOT BE GIVEN AUTOMATICAL LY, BUT CAN BE GIVEN ONLY IN A SITUATION, WHERE THERE IS A GREATER CHANCE OF INCREASING THE COMPARABILITY LEVELS OF THE ASSESSEE . A PERUSAL OF THE BALANCE SHEET OF THE COMPARABLE COMPANIES LED T O THE CONCLUSION OF THE AO THAT THERE IS NO UNIFORMITY IN THE ITEMS UNDER THE RECEIVABLES AND PAYABLES, AS THESE ARE TH E CATEGORISED DIFFERENTLY IN DIFFERENT COMPANIES. HE, THEREFORE, OBSERVED THAT IN THE ABSENCE OF ANY CORRECT CHARACTERIZATION OF THE ELEMENT CONSTITUTING THE SAME, IT WOULD NOT BE FEASIBLE TO ACCEPT THE FIGURES ON THE FACE VALUE. FURTHER, HE OBSERVED THA T WHERE A COMPANY IS HAVING MULTIPLE SEGMENTS, IT IS DIFFICUL T TO PINPOINT AS TO WHICH PERTAINS TO WHICH SEGMENT AND THE ANOMALIE S INVOLVED IN THE WHOLE EXERCISE WOULD RESULT IN FACTUALLY INCORR ECT RESULTS. HE ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 6 OF 14 OBSERVED THAT THE OTHER LIABILITIES HAVE NOT BEEN I NCLUDED AND NO BREAK UP IS AVAILABLE IN THE AR (ANNUAL REPORTS) OF THE COMPARABLES, AS TO WHAT IT CONSTITUTES AND WHETHER SOME PART COULD BE INCLUDED OR NOT IS ALSO NOT KNOWN. THEREFO RE, HE REFUSED TO ALLOW THE BENEFIT OF WORKING CAPITAL ADJUSTMENT. THE DRP ALSO CONFIRMED THE ORDER OF THE TPO AND THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LEARNED COUNSEL FOR THE ASSESSEE HAS DRAWN O UR ATTENTION TO PAGE NO.105 OF THE PAPER BOOK, WHICH I S THE WORKING CAPITAL ADJUSTMENT AS COMPUTED BY THE ASSESSEE AND SUBMITTED BEFORE THE TPO AND ALSO TO PAGE 1 OF THE PAPER BOOK BEING THE COPY OF THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE DRP, WHEREIN THE ASSESSEE HAS GIVEN IN DETAIL THE PROCED URE FOR COMPUTATION OF WORKING CAPITAL ADJUSTMENT. HE SUBMI TTED THAT THOUGH THE ASSESSEE HAS GIVEN DETAILED SUBMISSIONS, NONE OF THE AUTHORITIES BELOW HAVE CONSIDERED THE SAME. THEREFO RE, HE PRAYED THAT THE AUTHORITIES MAY BE DIRECTED TO CONSIDER TH E SUBMISSIONS OF THE ASSESSEE AT LENGTH. 6. THE LEARNED DR, HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE TPO HAS GI VEN REASONS AS TO WHY THE WORKING CAPITAL ADJUSTMENT BENEFIT CA NNOT BE GIVEN FOR THE INTERNATIONAL TRANSACTION OF THE ASSESSEE. 7. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THOUGH THE TPO HAS GIVEN RE ASONS AS TO WHY THE WORKING CAPITAL ADJUSTMENTS CANNOT BE GIVEN TO THE ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 7 OF 14 ASSESSEE, THE ASSESSEE HAS FILED DETAILED SUBMISSIO NS ADDRESSING THE TPOS CONCERNS POINT BY POINT BEFORE THE DRP IN ITS GROUNDS OF OBJECTION IN ANNEXURE-3. BUT WE FIND THAT THE DRP H AS FAILED TO CONSIDER AND ADJUDICATE THE SAME. THE DRP HAS MEREL Y CONFIRMED THE ORDER OF THE TPO WITHOUT DISCUSSING AS TO WHY T HE ASSESSEES CONTENTIONS CANNOT BE ACCEPTED. THEREFORE, WE DEEM IT FIT AND PROPER TO SET ASIDE THE ISSUE TO THE FILE OF THE DR P FOR RECONSIDERATION OF THE ISSUE IN ACCORDANCE WITH RUL ES AND PRECEDENTS ON THE ISSUE AND THEREAFTER, THE DRP IS DIRECTED TO PASS A SPEAKING ORDER THEREON. GROUND OF APPEAL NO. 2.2 IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURP OSES. 8. AS REGARDS GROUND OF APPEAL NO.2.3, THE LEARNED COUNSEL FOR THE ASSESSEE, EXCEPT FOR PLACING RELIAN CE ON THE SAID GROUND, DID NOT ADVANCE ANY SPECIFIC ARGUMENT ON AN Y OF THE FILTERS, LEAVE ALONE THE DIMINISHING REVENUE/PERSIS TENT LOSSES FILTER. IT HAS BEEN HELD BY VARIOUS BENCHES OF THE TRIBUNAL THAT FOR DETERMINATION OF ALP, COMPANIES WHICH ARE FUNCTIONA LLY COMPARABLE TO THE ASSESSEE ONLY HAVE TO BE ADOPTED AND IN SUCH ANALYSIS, COMPANIES INCURRING PERSISTENT LOSSES OR HAVING DIMINISHING REVENUE DURING THE EARLIER YEARS, CANNO T BE TAKEN AS COMPARABLES TO THE ASSESSEE. IN VIEW OF THE SAME, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE AO. T HEREFORE, GROUND OF APPEAL NO.2.3 IS REJECTED. 9. AS REGARDS GROUND OF APPEAL NO.2.4.2 WHICH IS AG AINST NON-ALLOCATION OF UNALLOCATED RESEARCH AND DEVELOPM ENT EXPENSES WHILE COMPUTING THE SEGMENTAL PROFIT OF SUVEN LIFE SCIENCES LTD, ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 8 OF 14 WE FIND THAT SUVEN LIFE SCIENCE HAS BEEN ADOPTED BY THE ASSESSEE ALSO IN ITS TP STUDY AS A COMPARABLE, BUT DURING TH E TP PROCEEDINGS, ASSESSEE HAD ARGUED THAT THAT IT HAS B EEN WRONGLY CONSIDERED AS A COMPARABLE, AS IT WAS FUNCTIONALLY DIFFERENT. ACCORDING TO THE ASSESSEE, UNDER THE SEGMENTAL REPO RTING, SUVEN LIFE SCIENCES HAS IDENTIFIED THREE BUSINESS SEGMENT S I.E. (A) MANUFACTURING; (B) SERVICES AND; (C) RESEARCH & DEV ELOPMENT AND BUSINESS SEGMENT WAS CONSIDERED ERRONEOUSLY BY THE TPO FOR COMPARISON AND HAS ALSO ERRED IN COMPUTING THE OPER ATING MARGIN OF SUVEN LIFE SCIENCE, BY NOT CONSIDERING RESEARCH AND DEVELOPMENT SEGMENT EXPENDITURE WHICH WAS NOT APPOR TIONED TO ANY SEGMENT FOR APPORTIONMENT BETWEEN THE TWO SEGME NTS OF MANUFACTURING & SERVICES. THE TPO HOWEVER, DID NOT ACCEPT THE ASSESSEES CONTENTION. HE OBSERVED THAT THE COMPARA BLE HAS DESCRIBED R&D AS AN INDEPENDENT SEGMENT I.E. RESEAR CH AND DEVELOPMENT. THUS, ACCORDING TO HIM, THE EXPENDITUR E ON R&D NEED NOT BE APPORTIONED TO DRUGS DISCOVERY AND DEVE LOPMENT SUPPORT SERVICES (DDDSS) AND MANUFACTURING SEGMENT. HOWEVER, THE UNALLOCATED LOSS OF RS.73,31,47,000 WAS APPORTI ONED BETWEEN THE SEGMENTS ON THE BASIS OF REVENUE. THE DRP ALSO CONFIRMED THE ORDER OF THE TPO AND THE ASSESSEE IS IN APPEAL BEFO RE US. 10. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE UNDERTAKES R&D ACTIVITIES RELATING TO PHARMACEUTICALS AND BIOTECHNOLOGICAL PRODUCTS WHICH INCLUDE BIO-ANALYTICAL SERVICES; AND FORMULATION DEVELOPMEN T AND ANALYSIS. IT WAS SUBMITTED THAT UNDER THE BIO-ANALY TICAL SERVICES, THE ASSESSEE ASSISTS THE AE TO DEVELOP AND VALIDATE THE METHOD FOR MEASURING DRUGS IN ANIMAL AND HUMANS PLASMA/TISSUE SAMPLES ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 9 OF 14 AND AFTER THE DEVELOPMENT AND VALIDATION OF THE MET HODS, A WRITTEN REPORT SUMMARIZING THE FINDINGS IS SUBMITTE D TO ITS AE IN US, WHICH THEN REVIEWS THE FINDINGS AND ADOPTS THE SAME IF FOUND ACCEPTABLE. IT IS ALSO SUBMITTED THAT UNDER FORMULA TION DEVELOPMENT AND ANALYSIS, THE ASSESSEE UNDERTAKES F ORMULATION DEVELOPMENT IN SMALL DOSAGE FORMS FOR FURTHER RESEA RCH BY ITS AE UNDERTAKING IN US AND ONCE SUCH DOSAGE FORM HAS BEE N DEVELOPED AND ACCEPTED IN US, THEN THE ASSESSEE MAY PREPARE/TEST THE COMPOSITION THAT ARE SUITABLE FOR ADMINISTRATION TO ANIMALS/HUMANS. IT WAS SUBMITTED THAT THE ASSESS EE HAS A WELL EQUIPPED PILOT LAB FOR PERFORMING THESE SERVIC ES. ACCORDING TO THE ASSESSEE, THE SERVICES RENDERED BY SUVEN LIFE S CIENCES UNDER THE DDDSS ARE ENTIRELY DIFFERENT FROM THE ACTIVITIE S OF THE ASSESSEE AS ENUMERATED ABOVE. ACCORDING TO HIM, THE SERVICES UNDER DRUG DISCOVERY INVOLVE NOT ONLY TESTING BUT A LSO DEVELOPING NEW DRUGS. HE REFERRED TO THE 20 TH ANNUAL REPORT OF SUVEN LIFE SCIENCES WHEREIN AT PAGE 2 OF ITS REPORT, IT HAS BE EN REPORTED THAT THE LIFEBLOOD OF ITS BUSINESS IS R&D AND THERE IS N OTHING OR NOTHING ELSE AND THAT THEY HAVE TO CONTINUOUSLY CRE ATE NEW INNOVATION THAT LEADS PEOPLE DO SOMETHING THEY DID NT THINK THEY COULD DO THE DAY BEFORE. IT IS ALSO MENTIONED THAT THEY ARE CONSISTENTLY SPENDING MORE THAN 20% OF THE REVENUE ON THE RISK/REWARD BEARING DRUG DISCOVERY ACTIVITY TO DEVE LOP NEW DRUGS FOR UNMET MEDICAL NEEDS IN CENTRAL NERVOUS SYSTEM A RENA THAT ARE AFFECTING MANY MILLIONS OF ELDERLY POPULATION. THUS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE ACTIVI TY OF SUVEN LIFE SCIENCES IS MUCH MORE COMPLICATED THAN THE ACTIVITI ES OF SIMPLE TESTING OF DRUGS UNDERTAKEN BY THE ASSESSEE. HE ALS O DREW OUR ATTENTION TO PAGE NO.392 OF THE PAPER BOOK WHEREIN IT IS ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 10 OF 14 MENTIONED THAT SUVEN LIFE SCIENCES HAS BEEN GRANTED TOTAL OF 189 PATENTS IN CNS ARENA AND 10 INVENTIONS TILL MARCH, 2009. HE HAS ALSO DRAWN OUR ATTENTION TO PAGE NO.401 AND 402 OF THE PAPER BOOK TO DEMONSTRATE THAT THE SAID COMPANY HAD INCUR RED HUGE EXPENDITURE ON R&D AND BY USE OF TECHNOLOGY IN DRUG S DISCOVERY AND INNOVATIONS, IT WAS GENERATING NEW NOVEL LEADS FOR FURTHER DEVELOPMENT AND THEREFORE, IS NOT COMPARABLE TO THE ASSESSEE AND THUS, ACCORDING TO HIM, SUVEN LIFE SCIENCE HAS TO B E EXCLUDED FROM THE LIST OF COMPARABLES. 11. THE LEARNED DR HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 12. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE IS INTO SIMPLE DRUG TESTING, WHEREAS SUVEN LIFE SCIENCE IS UNDERTAKING NOT ONLY DRUG DISCOVERY, BUT IS ALSO INVOLVED IN DEVELOPMENT OF N EW DRUGS. THEREFORE, THESE ACTIVITIES ARE CLEARLY FUNCTIONALL Y DISTINGUISHABLE. THE TPO AS WELL AS THE DRP HAVE CHOSEN TO RETAIN SU VEN LIFE SCIENCES AS A COMPARABLE BECAUSE THE ASSESSEE ITSEL F HAS TAKEN THE COMPANY AS A COMPARABLE AND FURTHER BECAUSE, SU VEN LIFE SCIENCE IS ALSO INTO R&D. BUT AS SEEN FROM THE TP O RDER, THE SEGMENTAL DETAILS OF DRUG DISCOVERY ACTIVITY (DDDSS ) OF SUVEN LIFE SCIENCE HAVE BEEN CONSIDERED. BUT, SUVEL LIFE SCIEN CE IS ALSO INVOLVED IN THE COMPLEX AND COMPLICATED ACTIVITY OF R&D AND DRUG DISCOVERY FOR DISEASES IN CENTRAL NERVOUS SYSTEM (C NS) ARENA. THEREFORE, THE DIFFERENCE OF THESE ACTIVITIES HAVE TO BE CONSIDERED. WE FIND THAT THERE IS NO BIFURCATION OF EXPENDITURE AND REVENUE ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 11 OF 14 AMONGST DRUG TESTING AND DRUG DISCOVERY IN THE CASE OF SUVEN LIFE SCIENCES. THEREFORE, IN OUR OPINION, THESE DIFFEREN CES CANNOT BE OVERLOOKED NOR CAN THERE BE ADJUSTMENT MADE FOR THE SE DIFFERENCES. THEREFORE, WE DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. GROUND OF APPEAL NO.2 .4.1 IS THUS ALLOWED AND GROUND NO.2.4.2 IS NOT ADJUDICATED AT T HIS STAGE AS IT WOULD ONLY RESULT IN AN ACADEMIC EXERCISE. THE LEAR NED COUNSEL FOR THE ASSESSEE DID NOT ADVANCE ANY ARGUMENTS IN R ESPECT OF GROUND NO.2.4.3 AND THEREFORE, IT IS REJECTED AS NO T PRESSED. 13. FURTHER, AS REGARDS GROUNDS NO.2.4.4 AND 2.4.5 AND THE ASSESSEES CONTENTION THAT INCORRECT MARGIN HAS BEEN ADOPTED BY THE TPO WITH REGARD TO TCG LIFE SCIENCE LTD, MA NIPAL ACUNOVA LTD BY CONSIDERING THE PROVISIONS FOR BAD AND DOUBT FUL DEBTS AS NON-OPERATING EXPENSES, WE FIND THAT THE TPO HAS CO NSIDERED THE PROVISION FOR DOUBTFUL DEBTS AS PART OF OPERATING E XPENSES, ONLY WHEN THE SAID EXPENSES ARE INCURRED EVERY YEAR FOR THE LAST THREE YEARS UPTO AND INCLUDING THE FINANCIAL YEAR 2008-09 AND THAT WHERE THESE EXPENSES ARE INCURRED AT ALMOST CONSIST ENT LEVEL IN TERMS OF ITS RATIO WITH THE TURNOVER. FURTHER, TPO ALSO DID NOT CONSIDER BAD DEBTS AS OPERATING EXPENDITURE FOR THE REASON THAT THE BAD DEBTS ARE EXCEPTIONAL ITEMS. 14. REBUTTING THIS FINDINGS OF THE TPO, THE LEARNED COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE PROVIS IONS FOR BAD AND DOUBTFUL DEBTS HAS BEEN REDUCED FROM THE SUNDRY DEBTORS AND HAS BEEN INCLUDED IN THE OPERATING AND OTHER EX PENSES. HE SUBMITTED THAT WHILE COMPUTING THE MARGINS OF THE C OMPARABLES ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 12 OF 14 ALSO, SIMILAR TREATMENT SHOULD BE GIVEN TO THE PROV ISION FOR BAD AND DOUBTFUL DEBTS FOR DETERMINATION OF ALP. HE HAS DRAWN OUR ATTENTION TO PAGE NO.382 OF THE PAPER BOOK, WHICH I S THE ANNUAL REPORT OF CHOKSI LABORATORIES LTD WHEREIN THE BAD D EBTS WRITTEN OFF OF RS.10,49,481 CRORES HAS BEEN REPORTED. THERE FORE, ACCORDING TO HIM, THE PROVISION FOR BAD AND DOUBTFUL DEBTS AN D THE BAD DEBTS WRITTEN OFF HAVE TO BE TAKEN INTO CONSIDERATI ON AND SUITABLE ADJUSTMENT SHOULD BE MADE WHILE COMPUTING THE ALP. 15. THE LEARNED DR HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 16. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT EVERY COMPONENT WHICH IS LI KELY TO HAVE AN EFFECT ON THE OPERATING REVENUE OR THE OPERATING CO ST OF THE INTERNATIONAL TRANSACTION AND ALSO THE MARGIN OF TH E ASSESSEE AND THE COMPARABLES HAS TO BE LOOKED INTO AND SUITABLE ADJUSTMENT HAS TO BE MADE. THE ASSESSEE HAS DRAWN OUR ATTENTIO N TO THE FACT THAT THE ASSESSEE HAS REDUCED THE PROVISION OF BAD AND DOUBTFUL DEBTS FROM THE SUNDRY DEBTORS AND HAS ALSO CLAIMED THE SAME AS EXPENDITURE. SIMILARLY, IN THE CASE OF CHOKSI LABOR ATORIES LTD, THERE WAS A PROVISION FOR BAD AND DOUBTFUL DEBTS WH ICH WAS WRITTEN OFF AND CLAIMED AS AN EXPENDITURE DURING TH E RELEVANT A.Y. THUS, SUITABLE ADJUSTMENTS ON ACCOUNT OF SUCH TRANS ACTIONS HAVE TO BE MADE. THEREFORE, WE REMAND THE MATTER TO THE FILE OF THE TPO, WITH A DIRECTION TO ANALYSE THE IMPACT OF SUCH AN ENTRY ON THE MARGINS OF THE ASSESSEE AS WELL AS THE COMPARAB LES AND MAKE ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 13 OF 14 SUITABLE ADJUSTMENTS TO BRING THE COMPANIES ON PAR WITH EACH OTHER FOR DETERMINATION OF THE ALP. 17. IN THE RESULT, GROUND OF APPEAL NO.2.4.4 & 2.4. 5 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 18. AS REGARDS GROUND NO.2.5 WITH REGARD TO FOREX L OSS CONSIDERED BY THE TPO AND THE DRP AS OPERATING LOSS , WE FIND THAT THIS ISSUE IS COVERED AGAINST THE ASSESSEE BY VARIOUS DECISIONS OF THE TRIBUNAL. HOWEVER, THE LEARNED COU NSEL FOR THE ASSESSEE SUBMITTED THAT THE LOSS ARISING SUBSEQUENT TO THE DATE OF INVOICE SHOULD NOT BE CONSIDERED AS OPERATING REVEN UE. WE FIND SOME STRENGTH IN THE SAID ARGUMENT AND DEEM IT FIT AND PROPER TO REMAND THE ISSUE TO THE FILE OF THE AO FOR VERIFICA TION AND ONLY THE LOSS ARISING SUBSEQUENT TO THE DATE OF INVOICE, SHA LL NOT BE CONSIDERED AS OPERATING LOSS. THUS, GROUND OF APPEA L NO.2.5 IS ALSO TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 19. THE OTHER GROUNDS ARE NOT BEING ADJUDICATED AS NOT PRESSED BY THE ASSESSEE. 20. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD AUGUST, 2018. SD/- SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL ME MBER HYDERABAD, DATED 3 RD AUGUST, 2018. VINODAN/SPS ITA NO 421 OF 2014 NEKTAR THERAPEUT IC INDIA P LTD HYDERABAD. PAGE 14 OF 14 COPY TO: 1 M/S. NEKTAR THERAPEUTIC (INDIA) PRIVATE LIMITED,S Y. NO.101/02 LALGADI MALAKPET, GENOME VALLEY, SHAMEERPET, HYDERABAD 500078 2 DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(1), HYD ERABAD 3 DRP, 2 ND FLOOR, IT TOWERS, 10 - 2 - 3, AC GUARDS, HYDERABAD 500004 4 DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION), IT TOWERS, 10-2- 3, AC GUARDS, HYDERABAD 500004 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER