GE India Technology Centre Private Limited, Bangalore V. ACIT, Bangalore

ITA 487/BANG/2011

• Counselvise Citation: 48721114 RSA 2011
• Duration Of Justice: 1 year(s) 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 31-10-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 28-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITIDR
• Assessee Lawyers: N V VENKATARAMAN SR COUN SEL
• Keywords: Business income; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Retrospective amendment; Additional evidence
• Section: 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SMT. P MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.789/BAN G/2010 & ITA NOS.487 & 925/BANG/2011 (ASST. YEARS - 2004-05, 2005-06 AND 2006-07) GE INDIA TECHNOLOGY CENTRE PVT. LTD., BANGALORE. . APPELLANT PAN NO.AABCG 0559J. VS. THE DY.DIRECTOR OF INCOME-TAX, CIRCLE 11(3), BANGALORE. . RESPONDENT APPELLANT BY : SHRI N.V VENKATARAMAN, SR. COUN SEL & SHRI PAWAN SHARMA RESPONDENT BY : SHRI S.K AMBASTHA, CIT-I(DR) DATE OF HEARING : 31-10-2012 DATE OF PRONOUNCEMENT : -12-2012 O R D E R PER P MADHAVI DEVI, JUDICIAL MEMBER : THESE APPEALS ARE FILED BY THE ASSESSEE. THE RELEVA NT ASSESSMENT YEARS ARE 2004-05, 2005-06 AND 2006-07. THE APPEALS FOR THE ASSESSMENT YEARS 2004-05, 2005-06 ARE DIREC TED AGAINST THE ITA NOS.789/B/10, 487, & 925/B/11 2 ORDER OF THE COMMISSIONER OF INCOME-TAX - (APPEALS) - IV AT BANGALORE DATED 30.03.2010, WHILE APPEAL FOR THE AS SESSMENT YEAR 2006-07 IS AGAINST THE ORDER OF THE ASSESSING OFFIC ER PASSED IN ACCORDANCE WITH THE ORDER OF THE DRP. THE APPEALS ARISE OUT OF THE ASSESSMENTS COMPLETED U/S 143(3) OF THE INCOME-TAX ACT, 1961. 2. AS THE ISSUES INVOLVED IN ALL THE THREE APPEALS ARE COMMON, THE APPEALS WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON AND CONSOLIDATED ORDER. 3. FOR THE ASSESSMENT YEAR, 2004-05, GROUNDS NO.1 T O 7 ARE AGAINST (A) THE REFERENCE MADE BY THE AO TO THE TRANSFER P RICING OFFICER (TPO) U/S 92CA OF THE INCOME-TAX ACT FOR THE DETERM INATION OF THE ALP BY REJECTING THE TP STUDY MADE BY THE AS SESSEE; (B) THE ORDER OF THE TPO HOLDING THE ASSESSEE TO BE A SERVICE PROVIDER, WORKING ON RESEARCH AND DEVELOPMENT AND NOT SOFTWARE DEVELOPMENT AS CLAIMED BY THE ASSESSEE; AN D (C) REJECTING THE ASSESSEES COMPARABLES AND COND UCTING HIS OWN STUDY AND SELECTION OF COMPARABLES. ITA NOS.789/B/10, 487, & 925/B/11 3 4. FOR THE ASSESSMENT YEAR 2005-06, GROUNDS NO.1 A ND 2 ARE ALSO AGAINST THE REJECTION OF TP STUDY CONDUCTED BY THE ASSESSEE AND UPHOLDING THE TRANSFER PRICE STUDY CONDUCTED BY THE TRANSFER PRICING OFFICER. 5. FOR THE ASSESSMENT YEAR 2006-07, THE GROUNDS OF APPEAL NOS1 AND 2 ARE AGAINST THE ORDER OF THE DRP IN UPH OLDING THE DRAFT ASSESSMENT ORDER IN SPITE OF IT BEING PASSED - 1) IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE; 2) NOT FULFILLING THE CONDITIONS FOR MAKING A REFERENC E U/S 92CA OF THE INCOME-TAX ACT; AND 3) FAILING TO DEMONSTRATE THAT THE ASSESSEES MOTIVE W AS TO SHIFT THE PROFIT OUTSIDE INDIA AND IN UPHOLDING THE TPOS ORDER IN MAKING THE TP ADJUSTMENT. 6. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE, IN ADDITION TO THE ORAL ARGUMENTS ADVANCED, HAS ALS O FILED WRITTEN SUBMISSIONS STATING THAT THE GROUNDS NO.1 AND 2 FOR THE ASSESSMENT YEAR 2006-07 AND GROUNDS NO.1 TO 7 FOR THE ASSESSME NT YEAR 2004- 05 AND GROUNDS NOS.1 AND 2 FOR THE ASSESSMENT YEAR 2005-06 ARE GENERAL GROUNDS AND, THEREFORE, ARE NOT BEING DEALT WITH. FURTHER, WE FIND THAT ISSUES/GROUNDS RAISED BY THE ASSESSEE IN THESE GROUNDS ARE COVERED BY THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE ITA NOS.789/B/10, 487, & 925/B/11 4 CASE OF M/S AZTECH SOFTWARE & TECHNOLOGY SERVICES L TD., WHICH HAS BEEN CONFIRMED BY THE JURISDICTIONAL HIGH COURT IN ITA NOS.826 & 827/2007 DATED 10 TH JULY, 2012 AND, THEREFORE, THESE GROUNDS ARE NOT ADJUDICATED. 7. THE COMMON GRIEVANCE IN ALL THE THREE YEARS IS A GAINST THE FINDING OF THE TPO THAT THE ACTIVITIES OF THE ASSES SEE IN THE INTERNATIONAL TRANSACTIONS ARE IN THE NATURE OF SE RVICE PROVIDER WORKING FOR RESEARCH AND DEVELOPMENT AND NOT SOF TWARE DEVELOPMENT AS CLAIMED BY THE ASSESSEE. WE SHALL DEAL WITH THIS ISSUE FIRST. 8. ACCORDING TO THE ASSESSEE, IT HAS ENTERED INTO I NTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES FOR EX PORT OF CUSTOMIZED ELECTRONIC DATA, COMPUTER SOFTWARE AND A NY OTHER TANGIBLE ARTICLES OR THINGS AS A RESULT OF RESEARCH ACTIVITY. THEREFORE, THE ASSESSEE WHILE CONDUCTING ITS TP STU DY HAS ADOPTED/CHOSEN THE COMPARABLES WHICH ARE ALL IN THE FIELD OF DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE. THE ASSESSING OFFICER MADE A REFERENCE TO THE TRANSFER PRICING OF FICER U/S 92CA OF THE ACT FOR DETERMINATION OF THE ALP (ARMS LENGTH PRICE). DURING THE PROCEEDINGS U/S 92CA OF THE INCOME-TAX A CT, THE TPO ITA NOS.789/B/10, 487, & 925/B/11 5 OBSERVED THAT THE ASSESSEE IS PROVIDING CONTRACT SE RVICES OF RESEARCH AND DEVELOPMENT AND OTHER SERVICES IN VARI OUS FIELDS OF ENGINEERING. AS PER THE SERVICE AGREEMENT DATED 13. 6.2001, ASSESSEE HAS TO PROVIDE THE FOLLOWING SERVICES TO THE PARTY MAKING SUCH REQUEST. IDENTIFYING BUSINESS OPPORTUNITIES AND CARRY OUT RE SEARCH AND DEVELOPMENT/OTHER SERVICES IN THE FOLLOWING SERVICE S : - A) CHEMISTRY AND CATALYSIS B) CHEMICAL ENGINEERING AND MATHEMATICAL MODELING C) ENGINEERING MECHANICS D) ELECTRONICS SYSTEMS E) INDUSTRIAL ELECTRONICS F) INFORMATION TECHNOLOGY & E-COMMERCE G) METALLURGY & CERAMICS H) MANUFACTURING & BUSINESS PROCESS I) MECHANICAL SYSTEMS J) POLYMER AND OTHER MATERIAL SCIENCES K) OR ANY OTHER AREAS MUTUALLY AGREED. 9. AS PER THE SERVICES AGREEMENT DATED 1.12.2003, IT HAS TO PROVIDE THE FOLLOWING SERVICES TO THE PARTY MAKING SUCH REQUEST - IDENTIFY BUSINESS OPPORTUNITIES FOR OVERSEAS CUSTOM ERS BUSINESS (OF AE) FOR SOURCING RESEARCH & DEVELOPMEN T/OTHER SERVICES FROM GEITC (THE ASSESSEE) IN THE FOLLOWING AREAS A) CONTROLS & SOFTWARE B) PROPULSION ROTATING EQUIPMENT C) TIER II ENGINE D) DIESEL ENGINE COE E) LOCO MODERNIZATION & REQUISITION SYSTEMS F) DRAFTING G) COOLING SYSTEMS H) NEW PRODUCT INTRODUCTION I) REMOTE MONITORING & DIAGNOSTICS ITA NOS.789/B/10, 487, & 925/B/11 6 J) CORES ENGINEERING K) E-ENGG-ANALYSIS L) OR ANY OTHER AREAS TO BE MUTUALLY AGREED. 10. FROM THE PERUSAL OF ABOVE AGREEMENTS, THE TPO O BSERVED THAT THE TAX PAYER IS DOING THE RESEARCH AND DEVELO PMENT ACTIVITIES AND THE END RESULT IS SUBMITTED THROUGH ELECTRONIC MEDIA (VIA INTERNET/NETWORKING) WHICH IS REPORTED BY THE ASSES SEE AS EXPORT OF CUSTOMIZED ELECTRONIC DATA. THE TPO, THEREFORE, AS KED THE ASSESSEE TO FURNISH THE DETAILS OF FAR ANALYSIS IN RESPECT OF EACH AGREEMENT WITH AES. IN REPLY TO THE SAME, THE ASSES SEE FILED A LETTER DATED 29.9.2006 AND MADE THE FOLLOWING SUBMISSION A S REGARDS THE NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE, T AX PAYER - 1. GEITC IS A PRIVATE LIMITED COMPANY INCORPORATED IN JUNE, 1999 IN THE STATE OF KARNATAKA. GEITC IS ENG AGED IN THE BUSINESS OF EXPORTING CUSTOMIZED ELECTRONIC DATA, COMPUTER SOFTWARE, ARTICLES OR THINGS GENERATED FRO M RESEARCH ACTIVITIES USING COMPUTER AIDED TECHNOLOGY IN SEVERAL AREAS OF TECHNOLOGY TO OTHER GE COMPANIES OUTSIDE INDIA, AND IT IS A CAPTIVE R & D AND ENGINE ERING SERVICE PROVIDER TO GE. 2. ALL THE RESEARCH AND SOFTWARE DEVELOPMENT ACTIVITIE S ARE CARRIED OUT AT THE JOHN F.WELCH TECHNOLOGY CENTRE (JFWTC) IN VARIOUS LABORATORY/DEVELOPMENT CENTERS A S UNDER A) ELECTRONIC SYSTEM LABORATORY B) CHEMICAL ENGINEERING & MODELING CENTER ITA NOS.789/B/10, 487, & 925/B/11 7 C) MANUFACTURING AND BUSINESS PROCESS LABORATORY D) INFORMATION TECHNOLOGY CENTRE E) ELECTRICAL SYSTEMS & TECHNOLOGY LABORATORY F) INDUSTRIAL ENGINEERING LABORATORY G) ADVANCED MECHANICAL ENGINEERING LABORATORY 3) GEITC EMPLOYS VARIOUS QUALIFIED SCIENTISTS AND RESEARCHERS AND ENGINEERS TO CARRY OUT RESEARCH AND SOFTWARE DEVELOPMENT ACTIVITY IN HIGH IMPACT TECHNOLOGY AREAS SUCH AS ELECTROMAGNETIC ANALYTICS, COLOR TECHNOLOGY, ADDITIVE TECHNOLOGY ETC. 4) THE SCIENTISTS AND ENGINEERS ENGAGED TO CARRY OUT THE SAID ACTIVITY ARE EQUIPPED WITH HIGHLY ADVANCED SOFTWARE DEVELOPMENT TOOLS AND ALSO SOPHISTICATED EQUIPMENTS SUCH AS NMR, HIGH END ANALYTICAL EQUIPMENT, HIGH END IT SERVERS, HPC NODES, CLEAN ROOM EQUIPMENT ETC. THE SCIENTISTS AND ENGINEERS EMPLOYED BY THE COMPANY ARE HIGHLY QUALIFIED AND COMPANY IS HAVING MORE THAN 600 PHDS AND 1000 MASTERS, WHO ARE QUALIFIED IN THE VARIOUS AREAS OF HIGH IMPACT TECHNOLOGY. 5) THE KIND OF PROGRAMS AND PROJECTS THAT ARE PROVIDED BY THE OVERSEAS GE AFFILIATE COMPANIES CAN BE CATEGORIZED AS NPI (NEW PRODUCT INTRODUCTION) PROJECTS, PRODUCTS ENHANCEMENT PROGRAMS; PRODUCTIVITY PROGRAMS AND RTS (READY TO SERVE) PROGRAMS. INPUTS ALONG WITH THE CLEAR DELIVERABLES ARE DISCUSSED BEFORE THE BEGINNING OF THE FINANCIAL YEA R AND APPROPRIATE INVESTMENTS INCLUDING SOFTWARE TOO LS ARE COMMITTED. 6) 6)THE GENERAL PROCESS EMPLOYED IN CARRYING OUT THE SAID RESEARCH AND ENGINEERING SERVICES USING COMPUT ER AIDED TECHNOLOGY INCLUDES A) STUDY THE EXISTING PRODUCT CAPABILITIES/ENGINEERING/CHEMICAL/MANUFACT URING PROCESS; UNDERSTAND THE REQUIREMENT ITA NOS.789/B/10, 487, & 925/B/11 8 FOR ENHANCED FEATURES/IMPROVED PROCESSES AND WORK ON MODELING USING SOFTWARE TOOLS AND DELIVER THE DESIRED RESULTS IN THE FORM OF REVISED ENGINEERING DESIGN/DRAWINGS, ANALYSIS REPORTS IN THE FORM OF CUSTOMIZED ELECTRONIC DATA; B) COLLECT EXISTING DATA FOR THE ABOVE PURPOSE OF ANALYSIS AND BUILDING ENGINEERING MODELS USING SIMULATION TECHNIQUES AND HIGH-END SOFTWARE TOOLS; C) PRIMARY AND DETAILED DESIGNING USING COMPUTER AIDED DESIGN TOOLS; AND D) TESTING THE DESIGN AT THE ACTUAL ENVIRONMENT. 11. IN ORDER TO VERIFY THE EXACT NATURE OF ASSESSEE S ACTIVITIES, THE TPO ALSO SEARCHED THE WEB SITE OF THE TAX PAYER AND OBSERVED THAT THE ASSESSEE IS BASICALLY CARRYING OUT THE RESEARCH AND DEVELOPMENT AND ENGINEERING ANALYSIS WITH THE AID OF SOPHISTICA TED LABS/SOFTWARE IN VARIOUS FIELDS OF ENGINEERING. HE, THEREFORE, R EJECTED THE ASSESSEES TP STUDY ADOPTING THE COMPARABLES WHO AR E IN THE FILED OF DEVELOPMENT OF COMPUTER SOFTWARE HOLDING THAT TH EY ARE FUNCTIONALLY DIFFERENT. HE, THEREFORE, PROCEEDED T O RE-DETERMINE THE ALP BY CONDUCTING THE SEARCH ON THE DATABASE PROWE SS FOR FRESH COMPARABLES. THE SEARCH WAS MADE FOR BUSINESS LINE TECHNICAL CONSULTANCY AND ENGINEERING SERVICES AND RESEARCH & DEVELOPMENT. BASED ON THE SAID SEARCH, THE TPO HA S SHORT LISTED THE FOLLOWING EIGHT COMPANIES :- ITA NOS.789/B/10, 487, & 925/B/11 9 1) ALPHAGEO INDIA LTD. 2) BIOTECH CONSORTIUM INDIA LTD. 3) CLINIGENE INTERNATIONAL PVT. LTD. 4) GEOLOGGING INDUSTRIES LTD. 5) LURGI INDIA CO. LTD. 6) MAHINDRA ACRES CONSULTING ENGINEERING LTD. 7) SUNIL HITECH ENGINEERS LTD. 8) VIMTA LABS LTD. 12. OUT OF THESE EIGHT COMPANIES, THE TPO REJECTED BIOTECH CONSORTIUM INDIA LTD., CLINIGENE INTERNATIONAL PVT. LTD., GEOLOGGING INDUSTRIES LTD., MAHINDRA ACRES CONSULTI NG ENGINEERING LTD. AND SUNIL HITECH ENGINEERS LTD., O N THE GROUND THAT THESE COMPANIES HAVE NO FOREX EARNINGS AND HEN CE ARE NOT CATERING TO OVERSEAS MARKET SEGMENT. HE, THEREFOR E, ACCEPTED ONLY THE FOLLOWING THREE COMPANIES AS COMPARABLES. 1) ALPHAGEO INDIA LTD. 2) LURGI INDIA CO. LTD. 3) VIMTA LABS LTD. 13. HE FOUND THAT THE NET PROFIT OF VIMTA LABS WAS 61.7%, LURGI INDIA CO. LTD. WAS 18.9% AND ALPHANGEO INDIA LTD. WAS 56.25% AND THE AVERAGE MARGIN OF THE COMPARABLES WA S 45.6% AS COMPARED TO THAT OF THE ASSESSEE AT 16.26%. THEREF ORE, HE ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE PROPOSING TO MAKE THE TRANSFER PRICING ADJUSTMENT U/S 92CA OF THE ACT. THE ASSES SEE HOWEVER, SUBMITTED ITS OBJECTIONS VIDE LETTERS DATED 20.11.2 006 AND ITA NOS.789/B/10, 487, & 925/B/11 10 24.11.2006. THE ASSESSEE VIDE LETTER DATED 5.12.20 06 FILED A SUMMARY OF ITS OBJECTIONS STATING THAT THE COMPARAB LES ADOPTED BY THE TPO DID NOT SATISFY THE FAR ANALYSIS WITH THAT OF THE ASSESSEE. THE TPO, HOWEVER HELD THAT THE ASSESSEE IS PROVIDIN G RESEARCH AND DEVELOPMENT SERVICES AND NOT COMPUTER SOFTWAR E DEVELOPMENT SERVICES AS CLAIMED BY THE ASSESSEE AN D THAT THE DELIVERY MODEL CANNOT BE CONFUSED WITH THE FUNCTION S AND THAT THE SERVICE AGREEMENTS OF THE ASSESSEE WITH ITS AFFILIA TES AS WELL AS THE INFORMATION AVAILABLE FROM THE WEBSITE DO NOT SPEAK OF SOFTWARE DEVELOPMENT AND, THEREFORE, THE ENTERPRISES DEVELOP ING SOFTWARE CANNOT BE USED AS COMPARABLES. AS REGARDS THE RIS K FREE ENVIRONMENT IN WHICH THE ASSESSEE CLAIMED TO BE WOR KING, HE HELD THAT THE RISK OF SUCCESS AND FAILURE IS COMMON TO A NY R & D UNDERTAKING AND, THEREFORE, THERE IS NO DIFFERENCE IN THE RISK LEVEL OF THE ASSESSEE AND THE COMPARABLES CHOSEN BY THE T PO. AS REGARDS THE ASSESSEES CONTENTION THAT THE ASSESSE E SHOULD BE CONSIDERED AS ITES COMPANY AS IT IS SO TREATED BY N ASSCOM, HE HELD THAT THE COMPARABLE COMPANIES ARE TO BE IDENTI FIED ON THE BASIS OF THE FUNCTIONS CARRIED OUT BY THE ASSESSEE AND NOT ON THE BASIS OF THE CATEGORY CONSIDERED BY NASSCOM. ITA NOS.789/B/10, 487, & 925/B/11 11 14. PURSUANT TO THE TPOS DIRECTION, THE ASSESSEE A LSO HAD DONE A FRESH SEARCH WITH AN EMPHASIS PRIMARILY ON THE FUNC TIONS PERFORMED I.E IT ENABLED ENGINEERING SERVICES AND R ESEARCH AND DEVELOPMENT. IT ALSO CONSIDERED THE CONTEMPORANEOU SLY AVAILABLE DATA IN THE DATA BASE. ON THE BASIS OF THE SAID SEA RCH, THE ASSESSEE ARRIVED AT 10 COMPARABLES WHICH ARE FUNCTIONALLY SIMILAR TO THAT OF THE TAX PAYER AND ARE IN THE SOFTWARE INDUSTRY. TH E TPO HOWEVER HELD THAT THE ASSESSEE IS AGAIN LOOKING AT ONLY IT AND ITES COMPANIES I.E WHO ARE PREDOMINATELY RENDERING SOFTW ARE SERVICES AND ITES, BPO SERVICES WHO ARE FUNCTIONALLY DISSIMI LAR TO THAT OF THE TAX PAYER. HOWEVER, AS SOME OF THE COMPARABLES OFFERED BY THE TAX PAYER NOW, ARE HAVING ENGINEERING SERVICES, THE TPO ACCEPTED THE SAME AS COMPARABLES ALONG WITH THOSE PROPOSED B Y THE TPO AND THEREAFTER PROCEEDED TO DETERMINE THE ALP BY A DOPTING THE TNMM AS THE MOST APPROPRIATE METHOD. AS REGARDS THE RISK FREE ENVIRONMENT CLAIMED BY THE ASSESSEE, HE OBSERVED TH AT THE RISK PREVAILING ON BOTH THE COMPARABLES AND THE ASSESSEE IS IDENTICAL. THE TPO THEN PROCEEDED TO DETERMINE THE ALP AND MAD E THE ADJUSTMENT OF RS.22,24,27,024/- U/S 92CA OF THE ACT . BASED ON THE SAME, THE AO ALSO MADE THE ADJUSTMENT TO THE RE TURNED INCOME OF THE ASSESSEE. ITA NOS.789/B/10, 487, & 925/B/11 12 15) AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE CIT(A) REITERATING THE SUBMISSIONS MADE BY IT BEFOR E THE AO. THE CIT(A) AGREED WITH THE COMPARABLES FINALLY ADOPTED BY THE TPO AND TP ADJUSTMENT TO THE ALP BUT HOWEVER DIRECTED T HE AO TO ALLOW THE WORKING CAPITAL ADJUSTMENT AND DEPRECIATI ON ADJUSTMENT AND TO RE-COMPUTE THE TOTAL INCOME OF THE ASSESSEE ACCORDINGLY. AFTER MAKING THE SAID ADJUSTMENTS IN THE ORDER GIVI NG EFFECT TO THE ORDER OF THE CIT(A), THERE HAS BEEN NO ADDITION TO THE TOTAL INCOME OF THE ASSESSEE. HOWEVER ON THE ADOPTION OF THE COM PARABLES I.E VIMTA LABS LTD., ALPHANGEO INDIA LTD. AND LURGI IN DIA CO. LTD., THE ASSESSEE IS IN APPEAL BEFORE US. SIMILARLY FOR THE ASSESSMENT YEAR 2005-06 ALSO THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE ADOPTION OF VIMTA LABS AND ALPHANGEO INDIA LTD. AS COMPARABLES FOR MAKING THE TP ADJUSTMENTS. FOR THE ASSESSMENT Y EAR 2006-07, THE ASSESSEE IS AGGRIEVED BY THE ADOPTION OF VIMTA LABS LTD., AND CELESTIAL LABS LTD., AS COMPARABLES BY THE TPO AND AS CONFIRMED BY THE DRP. 16. THE LEARNED SR. COUNSEL FOR THE ASSESSEE, SHRI N.V VENKATARAMAN, WHILE REITERATING THE ASSESSEES SUB MISSIONS MADE BEFORE THE AUTHORITIES BELOW FOR ALL THE THREE YEAR S, SUBMITTED THAT THERE ARE NO ADDITIONS MADE ON ACCOUNT OF TP ADJUST MENTS FOR ITA NOS.789/B/10, 487, & 925/B/11 13 ASSESSMENT YEAR 2004-05 AND 2005-06 AND, THEREFORE, THE GROUNDS ARE ONLY ON ERRONEOUS INCLUSION OF CERTAIN COMPARAB LES AS THESE COMPARABLES HAVE BEEN ADOPTED BY THE TPO FOR THE AS SESSMENT YEAR 2006-07 ALSO WITHOUT GIVING ANY OPPORTUNITY OF HEARING AND ADJUSTMENT WAS MADE TO THE ALP. ON THE NATURE OF A SSESSEES ACTIVITIES, THE LEARNED COUNSEL FOR THE ASSESSEE SU BMITTED THAT THE ASSESSEE IS EXPORTING THE COMPUTER PROGRAMS, CUSTOM IZED ELECTRONIC DATA AND ENGINEERING ANALYSIS AND DESIGN S. HE SUBMITTED THAT THE TPO, HAS, WITHOUT ANY BASIS COM PLETELY DISREGARDED THE DETAILED EXPLANATION PROVIDED BY T HE ASSESSEE AS BEING INVOLVED IN SOFTWARE DEVELOPMENT AND NOT AS RESEARCH AND DEVELOPMENT . ACCORDING TO THE LEARNED COUNSEL FO R THE ASSESSEE, THE ASSESSEE IS A SOFTWARE DEVELOPMENT COMPANY AND, THEREFORE, COMPANIES WHICH ARE INVOLVED IN THE BUSINESS OF SOF TWARE DEVELOPMENT ONLY ARE TO BE CONSIDERED AS COMPARABLE S FOR THE PURPOSES OF COMPUTING THE ALP. 17. THE LEARNED DR HOWEVER SUBMITTED THAT THE ASSES SEE IS ENGAGED IN CONTRACT RESEARCH AND DEVELOPMENT ACTIVI TY AND DERIVES INCOME FROM FOREIGN PRINCIPALS/ASSOCIATED ENTERPRIS ES AND MERELY BECAUSE THE RESULT OF SUCH RESEARCH AND DEVELOPMENT IS DELIVERED TO ITS AES IN CUSTOMIZED ELECTRONIC DATA, IT WOULD N OT MAKE THE ITA NOS.789/B/10, 487, & 925/B/11 14 NATURE OF SERVICES AS SOFTWARE DEVELOPMENT. THUS A CCORDING TO HIM, THE TPO HAS RIGHTLY TREATED THE ASSESSEE AS EN GAGED IN CONTRACT RESEARCH AND DEVELOPMENT, TECHNICAL ENGINE ERING SERVICES AND ACCORDINGLY SELECTED THE RELEVANT COMPARABLES. 18. SO THE PRIMARY AND BASIC QUESTION BEFORE US IS TO DETERMINE THE NATURE OF ASSESSEES ACTIVITIES AS IT WOULD DET ERMINE THE ROADMAP FOR MAKING THE SEARCH FOR AND ADOPTING OF T HE COMPARABLES. 19. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FI ND THAT THE ASSESSEE IS A SERVICE PROVIDER FOR RESEARCH AND DEV ELOPMENT IN VARIOUS FIELDS OF ENGINEERING (INCLUDING COMPUTER S OFTWARE) AS ENUMERATED IN THE AGREEMENTS BETWEEN THE ASSESSEE A ND ITS ASSOCIATED ENTERPRISES REPRODUCED IN PARA 8 AND 9 A BOVE AND THE RESULT OF SUCH RESEARCH AND DEVELOPMENT IS BEING DE LIVERED TO THE CLIENTS/ASSOCIATED ENTERPRISE IN THE FORM OF CUSTOM IZED COMPUTER DATA THROUGH NETWORK,/INTERNET. THUS, EVEN AS PER THE ASSESSEES SUBMISSIONS, IT IS CONDUCTING THE RESEARCH AND DEVE LOPMENT THROUGH ITS MULTI-DISCIPLINARY R&D CENTRE JFWTC AND ITS ACTIVITIES ARE FOR SEVERAL STREAMS/AREAS INCLUDING INFORMATION TECHNOLOGY. ITA NOS.789/B/10, 487, & 925/B/11 15 THUS IT CAN BE SEEN THAT IT IS CATERING TO NEARLY A LL OF GES DIVERSE BUSINESS WORLDWIDE TOUCHING NEARLY EVERY SCIENTIFIC DISCIPLINE ACROSS THE SPECTRUM SUCH AS MECHANICAL ENGINEERING, ELECTRONIC AND ELECTRICAL AND METALLURGY, CATALYSIS AND ADVANCED C HEMISTRY, POLYMER SCIENCE AND NEW SYNTHETIC MATERIALS, POWER ELECTRONICS ETC. THEREFORE, AS RIGHTLY HELD BY THE TPO, THE AS SESSEE IS NOT INTO SIMPLE SOFTWARE DEVELOPMENT BUT IS ENGAGED IN RESEA RCH AND DEVELOPMENT IN TECHNICAL AND ENGINEERING SERVICES O N CONTRACT BASIS. THEREFORE, THE TPO HAS RIGHTLY REJECTED THE TP STUDY CONDUCTED BY THE ASSESSEE AND HAS RIGHTLY PROCEEDED TO SELECT HIS OWN COMPARABLES IN THE FIELD OF RESEARCH AND DEVELO PMENT AND REDETERMINE THE ALP. 20. THE NEXT QUESTION TO BE CONSIDERED BY US IS AS TO WHETHER THE COMPARABLES ADOPTED BY THE TPO ARE RELEVANT AND COMPARABLE TO THE ASSESSEE. FOR ASSESSMENT YEAR 2004-05, THE ASSESSEES OBJECTION IS TO THE ADOPTION OF VIMTA LABS, ALPHAG EO LABS, LURGI INDIA CO. LTD., WHILE FOR THE ASSESSMENT YEAR 2005 -06 AD 2006-07, THE ASSESSEES OBJECTION IS AGAINST THE ADOPTION OF CELESTIAL LABS AND VIMTA LABS AS COMPARABLES. BUT BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS ADVANCED ARGUMENTS CON TESTING THE ADOPTION OF VIMTA LABS, CELESTIAL LABS ONLY, AS THE Y HAVE RESULTED ITA NOS.789/B/10, 487, & 925/B/11 16 IN ADJUSTMENTS TO THE ALP FOR ASSESSMENT YEAR 2006- 07. IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE T HAT IN THE SHOW- CAUSE NOTICE ISSUED BY THE TPO, VIMTA LABS AND CELE STIAL LABS DID NOT FIND PLACE, BUT IN THE FINAL TP ORDER, THESE TW O COMPANIES HAVE BEEN CONSIDERED AS COMPARABLES AND THEIR MARGINS CO NSIDERED WHICH IS IN VIOLATION OF PRINCIPLES OF NATURAL JUST ICE. HE SUBMITTED THAT THE ASSESSEE HAS RAISED ITS OBJECTIONS BEFORE THE DRP WHICH ONLY CONFIRMED THE ORDER OF THE AO HOLDING THAT ASS ESSEES OBJECTION TO THESE COMPARABLES WERE CONSIDERED BY T HE TPO IN THE EARLIER ASSESSMENT YEARS. ACCORDING TO THE LD. COU NSEL FOR THE ASSESSEE, VIMTA LABS AND CELESTIAL LABS ARE NOT AT ALL COMPARABLE TO THE ASSESSEE FOR THE FOLLOWING REASONS : 1) THEY ARE DIVERSIFIED COMPANIES ENGAGED IN DISSIMILA R ACTIVITIES LIKE EARNING INCOME FROM FRANCHISEE MODE L AND PRODUCTS. 2) NO SEPARATE SEGMENT REPORTING IS AVAILABLE IN THE IR ANNUAL REPORT AND EVEN OTHERWISE ALSO, THEIR MARGINS CANNO T BE ADJUSTED TO MAKE THEM COMPARABLE WITH THE ASSESSEE. 3) THE ASSESSEE IS WORKING IN RISK FREE ATMOSPHERE , WHEREAS VIMTA LABS AND CELESTIAL LABS ARE FACING VARIOUS RISKS THAT CANNOT BE QUANTIFIED OR ADJUSTED. 21. THE LEARNED COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE METHODS PRESCRIBED FOR DETERMINING THE ALP I N RULE 10B OF IT RULES AND SUBMITTED THAT AS PER THE TPO, TNMM ME THOD IS ITA NOS.789/B/10, 487, & 925/B/11 17 MOST APPROPRIATE METHOD. HE SUBMITTED THAT AS PROVI DED UNDER RULE 10B(E) OF INCOME-TAX RULES, FOR COMPUTING THE ALP UNDER TNMM, THE TPO HAS TO CONDUCT FAR ANALYSIS I.E FUNCT IONS PERFORMED TAKING INTO ACCOUNT THE ASSETS EMPLOYED AND RISKS ASSUMED AND ONLY AFTER SUCH AN EXERCISE, COULD A CO MPARABLE BE SELECTED BY THE TPO. HE SUBMITTED THAT EVEN IF THE ASSESSEE IS TO BE CONSIDERED AS A RESEARCH AND DEVELOPMENT COMPANY , THE COMPARABLES HAVE TO BE OF THE SAME INDUSTRY IN WHIC H THE ASSESSEE IS INTO THE RESEARCH AND DEVELOPMENT I.E., THE FIEL D OF ENGINEERING AND TECHNOLOGY. HE SUBMITTED THAT BOTH VIMTA LABS AND CELESTIAL LABS ARE INTO THE RESEARCH AND DEVELOPMENT IN THE FIELD OF PHARMACEUTICALS WHICH IS ENTIRELY DIFFERENT FROM THE FIELD OF ENGINEERING AND TECHNOLOGY. 22. AS FAR AS ADOPTION OF VIMTA LABS IS CONCERNED, HE SUBMITTED THAT THE TPO HAS SELECTED VIMTA LABS FOR THE ASSESS MENT YEARS 2004-05 AND 2005-06 MERELY BECAUSE AT THAT TIME VIM TA LABS WAS CLASSIFIED IN PROWESS DATABASE UNDER THE HEADING TECHNICAL CONSULTANCY AND ENGINEERING SERVICES OR RESEARCH AND DEVELOPMENT. HE SUBMITTED THAT FOR THE ASSESSMENT YEAR 2006-07, HOWEVER, VIMTA LABS WAS RECLASSIFIED IN THE AFORESA ID DATABASE ITSELF AS DRUGS, MEDICINES AND ALLIED PRODUCTS. HE SUBMITTED THAT ITA NOS.789/B/10, 487, & 925/B/11 18 THERE WAS NO CHANGE IN THE BUSINESS ACTIVITIES OF V IMTA LABS FOR THE ASSESSMENT YEAR 2006-07 AS COMPARED TO THE ASSE SSMENT YEARS 2004-05 AND 2005-06 AND, THEREFORE, ITS RECLASSIFIC ATION IN THE DATABASE AS A DRUG COMPANY FOR THE ASSESSMENT YEAR 2006-07 SHOWS THAT VIMTA LABS WAS WRONGLY CLASSIFIED AS TE CHNICAL CONSULTANCY AND ENGINEERING SERVICES OR R & D FO R ASSESSMENT YEARS 2004-05 & 2005-06. HE FURTHER SUBMITTED THAT THE SUBSEQUENT CLASSIFICATION/RECLASSIFICATION CONTINUE S TILL DATE WHICH ALSO ESTABLISHES THAT RECLASSIFICATION TRULY DESCRI BED THE ACTIVITIES CARRIED OUT BY VIMTA LABS RIGHT FROM THE ASSESSMEN T YEARS 2004- 05 ONWARDS AND, THEREFORE, FOR THE ASSESSMENT YEAR 2006-07, VIMTA LABS DID NOT APPEAR IN THE SEARCH CRITERIA BU T THE TPO HAS CHERRY PICKED VIMTA LABS ONLY BECAUSE THE SAME WAS SELECTED IN THE ASSESSMENT YEARS 2004-05 AND 2005-06. 23. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SU BMITTED THAT EVEN AS PER THE FAR ANALYSIS, THE VIMTA LABS COULD NOT HAVE BEEN SELECTED AS A COMPARABLE FOR THE FOLLOWING REASONS : I) FUNCTIONS PERFORMED : 1) VIMTA IS A CLINICAL TRIAL COMPANY AND IS ENGAGE D IN CONDUCTING TESTING OF NEW PHARMACEUTICAL DRUGS ON HUMANS AND A NIMALS TO STUDY THE EFFECTS OF DRUGS, SIDE EFFECTS ASSOCIA TED WITH INCREASING DOSES, AND, IF POSSIBLE, TO GAIN EARLY E VIDENCE ON THEIR EFFECTIVENESS. ITA NOS.789/B/10, 487, & 925/B/11 19 2) VIMTA LABS MAINTAINS A DATABASE OF 20,000 HEALT HY MALE AND FEMALE VOLUNTEERS TO CONDUCT CLINICAL TRIALS. 3) IT HAS SO FAR CONDUCTED OVER 600 BIO-AVAILABILI TY AND BIOEQUIVALENCE STUDIES AND CLINICAL TRIALS INVOLVIN G MORE THAN 120 DRUGS. 4) IT HAS A STATE OF THE ART BARRIER MAINTAINED ANIMAL FACILITY DESIGNED TO CONDUCT EXPERIMENTS USING RODENTS, RABB ITS AND BEAGLE DOGS. 5) IT HAS ENTERED THE SCHEME OF CLINICAL REFERENCE LABORATORY SERVICES IN 1999 AND OFFERS MORE THAN 600 LABORATOR Y TESTS FOR CLINICAL PROGRAMS AND ALSO PROVIDES DIAGNOSTIC SER VICES SUCH AS LIPID PROFILE, DIABETES, KIDNEY, ANEMIA, HIV AND HEPATITIS TESTS ETC., 6) IT WORKS ON FRANCHISEE MODEL; 7) IT FOCUSES ON ANALYTICAL STUDIES TO CHECK WATE R AND FOOD QUALITY, AND ON TESTING FOR EFFECTIVENESS AND DRUGS TO MEET THE REQUIREMENTS UNDER THE VARIOUS STANDARD ORGANIZATI ON, SUCH AS BUREAU OF INDIAN STANDARDS , FDA ETC. AND OTHER STA TUTORY AGENCIES. 8) THE SERVICES PROVIDED BY VIMTA LABS COMPRISES OF SITE ASSESSMENTS, ENVIRONMENTAL AUDITS, ENVIRONMENTAL I MPACT STATEMENTS, RISK ASSESSMENTS AND WASTE MANAGEMENT FOR PROJECT EVALUATION TO PRIVATE AND PUBLIC CORPORAT IONS AND GOVERNMENT AGENCIES SUCH AS MINISTRY OF FOREST A ND ENVIRONMENT. IN VIEW OF THE HAZARDOUS NATURE OF CARRYING OUT THESE ASSESSMENTS, THE RISK ASSUMED IS SIGNIFIC ANTLY HIGH WHICH IS ALSO REFLECTED IN THE PRICING OF THESE AS SESSMENT STUDIES. II ASSETS EMPLOYED : VIMTA LABS HAS MADE SIGNIFICANT INVESTMENTS IN BOTH TANGIBLE AND INTANGIBLE ASSETS AND THE ASSET/SALE R ATIO FOR VIMTA LABS WORK OUT 2.89% AS OPPOSED TO 0.99% FOR T HE ASSESSEE. ITA NOS.789/B/10, 487, & 925/B/11 20 III. RISKS ASSUMED :- A) ENTREPRENEURIAL RISK: - THE ASSESSEE BEING A CAPTIVE SERVICE PROVIDER OPERATES ON A RISK FREE MODEL, WHEREAS VIM TA LABS IS ENTREPRENEURIAL COMPANY AND ASSUMED SIGNIFICANT RI SKS. B) LIABILITY RISK : DUE TO HUMAN INVOLVEMENT AND LIFE THREATENING NATURE OF THE ASSESSMENT AND CLINICAL RESEARCH/TRIA LS, THE RISK ASSUMED BY VIMTA LABS IS SIGNIFICANTLY HIGH WHICH IS REFLECTED IN THE PRICING FOR THE FACT THAT HUMANS ARE INVOLVED IN THE CLINICAL TRIAL/RESEARCH. THE LEARNED COUNSEL FOR THE ASSESSE E HAS RELIED UPON VARIOUS WEBSITES WHICH ARE IN PUBLIC DOMAIN TO DEMO NSTRATE THAT VIMTA LABS IS EXPERIMENTING ON HUMANS AND IT HAS COMPENSATED FOR THE DAMAGE CAUSED BY ITS EXPERIMENTS ON THE HUM ANS. C) REGULATORY RISKS : CHEMICAL TRAILS INDUSTRY IS INCREASINGLY BEING REGULATED AND PROFITABILITY OF PARTICIPANTS WOULD ALSO DEPEND UPON REGULATORY CHANGES. 24. IN ADDITION TO THE ABOVE, THE LEARNED COUN SEL FOR THE ASSESSEE SUBMITTED THAT THE TPO HAS HIMSELF ADOPTED THE FI LTER OF EMPLOYEE COST BEING LESS THAN 25% AS A FILTER FOR REJECTING VARIOUS COMPANIES SHORTLISTED BY THE ASSESSEE. HE SUBMITTED THAT THE TPO SHOULD FOLLOW UNIFORMLY THE SAME FILTER WHILE SEARCHING FO R AND ADOPTING THE COMPARABLES. HE SUBMITTED THAT VIMTA LABS FAI LS THE EMPLOYEE COST FILTER ADOPTED BY THE TPO AS EMPLOYEE COST OF THE ASSESSEE IS 32% IN 2004-05, 38% IN 2005-06 AND 42% IN 2006-07 AS AGAINST THE EMPLOYEE COST OF VIMTA LABS BEING 13 % IN 2004-05, 14% IN 2005-06 AND 16% IN 2006-07. AS THE EMPLOYEE COST OF VIMTA LABS IS LESS THAN 25% IN ALL THE THREE ASSES SMENT YEARS, ITA NOS.789/B/10, 487, & 925/B/11 21 ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, IT SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. 25. AS REGARDS THE ADOPTION OF CELESTIAL LABS AS A COMPARABLE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS ALSO FUNCTIONALLY DIFFERENT FROM THE ASSESSEE BECAUSE OF THE FOLLOWING FEATURES : A) CELESTIAL LABS IS INTO DEVELOPMENT AND MANUFACTURE AND DISTRIBUTION OF BIO AND IT PRODUCTS; B) DEVELOPMENT AND MANUFACTURE OF MOLECULES AND ENZYMES ; C) CLINICAL RESEARCH AND TRIAL BUSINESS; D) ON LINE PORTAL FOR LIVE AYURVEDIC CONSULTATION AN D TRADING OF HERBAL PRODUCTS SANJIVINI; E) CONTRACT MANUFACTURING OF PHARMACEUTICAL PRODUCTS SUCH AS CREAMS, LOTIONS, TABLETS, SYRUPS AND CAPSUL ES.; F) SAP IMPLEMENTATION SERVICES; AND G) IT HAS ALREADY BEEN LICENCED 55 HERBAL PRODUCTS FO R MANUFACTURING. SOME OF THE PRODUCTS INCLUDE BIOLIV SYRUP, CEL-DIGEST SYRUP ETC. 26. HE SUBMITTED THAT IT IS EVIDENT FROM THE ANNUA L REPORT OF CELESTIAL LABS FOR THE ASSESSMENT YEAR 2006-07, THAT IT IS A PRODUCT DRIVEN COMPANY. HE SUBMITTED THAT MUMBAI BE NCH OF THIS TRIBUNAL IN THE CASE OF TEVAPHARM PVT. LTD. V S. ACIT IN ITA NOS.789/B/10, 487, & 925/B/11 22 ITA NO. 6623 OF 2011 HAS CONSIDERED THE FACT THAT T HE ACTIVITIES UNDERTAKEN BY THE CELESTIAL LABS ARE IN THE NATURE OF PROVIDING HOST OF IT RELATED SERVICES AND SOME TRADING ACTIV ITY WHICH IS NOT COMPARABLE TO THE ASSESSEE THEREIN AND, THEREFO RE, OUGHT NOT TO BE CONSIDERED AS A COMPARABLE EVEN IN THIS CASE. AS REGARDS ASSETS EMPLOYED BY CELESTIAL LABS, THE LEARNED COUN SEL FOR THE ASSESSEE SUBMITTED THAT A) IT HAS INVESTED SIGNIFICANTLY IN ASSETS AND THE ASSETS/SALES RATIO FOR CELESTIAL LABS WORKS OUT TO BE 1.56 AS OPPOSED TO 0.96 FOR THE ASSESSEE. B) IT ALSO INVESTED IN DEVELOPING NEW PRODUCTS IN INTANGIBLE ASSETS AND ITS EXPENDITURE ON NEW DEVELOPMENT ACCOUNTS FOR 33% OF THE TOTAL ASSETS. C) THE CELESTIAL LABS OWNS SIGNIFICANT INTANGIBLE ASSE TS AND HAS APPLIED TO PROTECT THE IPR BY FILING THE COPYRIGHTS AND PATENTS FOR CELESUITE, VITILIGO AND MULTIPLE CANCER. D) AS PER THE WEBSITE CONTENT, CELESTIAL CURRENTLY OWN S THE FOLLOWING INTANGIBLE ASSETS:- COPY RIGHT/PATENT APPROVAL FOR DIFFERENT TOOLS AND PACKAGES UNDER INFORMATICS AND BIOINFORMATICS CATEGORY. E) NEW DRUG MOLECULES APPLICABLE FOR VITILOGO, PSORIAS IS, ACCELERATED WOUND HEALING, ANTI WRINKLES AND SKIN TANNING. F) 32 HERBAL FORMULATIONS IN THE DIFFERENT CATEGORY AR E UNDER PROCESS AND FILING WITH PATENT OFFICE. ITA NOS.789/B/10, 487, & 925/B/11 23 27. AS FAR AS RISKS ASSUMED BY CELESTIAL LABS ARE C ONCERNED, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT CEL ESTIAL IS A ENTREPRENEURIAL COMPANY AND ASSUMES SIGNIFICANT RIS KS AS OPPOSED TO ASSESSEE WHICH OPERATES IN A RISK FREE MODEL. H E SUBMITTED THAT BEING A PRODUCT-COMPANY DEALING IN MEDICAL PRODUCTS , CELESTIAL BEARS SIGNIFICANT PRODUCT LIABILITY RISKS AND IS AL SO SUBJECT TO CLINICAL TRIALS SEGMENT SUBJECT TO SAME RISKS AS VI MTA LABS. 28. THUS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, BOTH VIMTA LABS AND CELESTIAL LABS SHOULD BE EXCLUDED F ROM THE LIST OF COMPARABLES AND IF DONE SO, THE ASSESSEES MARGIN WOULD FALL WITHIN THE ALP OF THE COMPARABLE COMPANIES OR + 5% THEREOF AND NO ADJUSTMENT WOULD BE NECESSARY. 29. THE LEARNED DR HOWEVER, PLACED RELIANCE UPON TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE CIT(A) IN HIS ORDER FOR THE ASSESSMENT YEAR 2004-05 HAS DISCUSSED AT LENGTH THE NATURE OF THE ACTIVITIES OF THE ASSESSEE AND THE FUNCTIONS PE RFORMED TO HOLD THAT THE ASSESSEE WAS A SERVICE PROVIDER WORKING ON RESEARCH AND DEVELOPMENT AND ALSO DOING ENGINEERING ANALYSIS AND THE RESULTS OF WHICH ARE CAPTURED/COMPUTERIZED AND TRANSFERRED THROUGH ELECTRONIC MEDIA, WHICH ARE MERELY MEANS OF DELIVER Y TO THE AE. ITA NOS.789/B/10, 487, & 925/B/11 24 30. AS REGARDS THE ADOPTION OF VIMTA LABS AS A COMP ARABLE, HE SUBMITTED THAT THE ASSESSEE IS INTO CONTRACT RESEA RCH AND DEVELOPMENT AS IN THE CASE OF VIMTA AND CELESTIAL LABS AND, THEREFORE, THEY ARE COMPARABLE COMPANIES. 31. AS REGARDS THE RELIANCE BY THE LEARNED COUNSEL FOR THE ASSESSEE ON THE DECISION OF THE TRIBUNAL IN THE CAS E OF TEVAPHARM PVT. LTD. (CITED SUPRA) FOR EXCLUSION OF CELESTIAL LABS FROM THE LIST OF COMPARABLES, THE LD. DR SUBMITTED THAT THE SAME IS DISTINGUISHABLE ON FACTS AS IN THE SAID CASE IT WAS DIRECTED TO BE EXCLUDED ON THE GROUND THAT TEVAPHARM WAS A PHARMAC EUTICAL COMPANY WHEREAS CELESTIAL WAS DEALING WITH IT RELAT ED SERVICES WHERE AS IN THE CASE BEFORE US, THE ASSESSEE WAS AL SO DEALING WITH IT RELATED SERVICES AS WELL AS ENGINEERING SERVICES . HENCE, ACCORDING TO THE DR, EVEN APPLYING THE DECISION OF THE TRIBUNAL IN THE CASE OF TEVAPHARMA, CELESTIAL IS COMPARABLE TO THE ASSESSEE ON THE BASIS OF ITS FUNCTIONS. 32. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FI ND THAT THERE IS NO DISPUTE AS REGARDS THE MOST APPROPRIATE METHOD T O BE ADOPTED ITA NOS.789/B/10, 487, & 925/B/11 25 FOR COMPUTING THE ALP. THE TNMM HAS BEEN CONSIDERE D AS THE MOST APPROPRIATE METHOD. WE HAVE ALREADY HELD THAT THE ASSESSEE IS ENGAGED IN THE ACTIVITY OF RESEARCH AND DEVELOPM ENT AND TECHNICAL AND ENGINEERING SERVICES. FOR DETERMINING THE ALP UNDER THE TNMM METHOD, THE FAR ANALYSIS IS VERY ESSENTIAL AS IS PROVIDED UNDER RULE 10B OF THE INCOME-TAX RULES. AS PER THE SAID PROVISIONS, IT IS ESSENTIAL TO CONSIDER THE FU NCTIONS PERFORMED; ASSETS EMPLOYED AND RISKS ENCOUNTERED BY THE ASSESS EE COMPANY AS WELL AS THE COMPARABLE COMPANIES BEFORE EMBARKING U PON THE DETERMINATION OF THE ALP. SO IT IS ESSENTIAL TO CO NSIDER THE CORRECT NATURE OF FUNCTIONS OF THE ASSESSEE TO SEARCH FOR T HE COMPARABLES WHICH ARE ENGAGED IN THE SIMILAR FUNCTIONS. IT IS ALSO ESSENTIAL TO TAKE A NOTE OF THE DISSIMILARITIES BETWEEN THE FUNC TIONS PERFORMED BY THE ASSESSEE AND THE COMPARABLE COMPANIES BEFORE ADOPTING THE SAME AS COMPARABLES AND TO MAKE SUITABLE ADJUSTMENT S FOR THE SAID DISSIMILARITIES WHEREVER POSSIBLE. AS RIGHTLY POIN TED OUT BY THE TPO AND THE CIT(A)/DRP FOR THE RELEVANT ASSESSMENT YEARS, THE ASSESSEE IS NOT IN THE BUSINESS OF SOFTWARE DEVELOP MENT BUT IT IS IN THE BUSINESS OF RESEARCH AND DEVELOPMENT IN VARIOUS FIELDS OF ENGINEERING INCLUDING THE COMPUTER SOFTWARE. THE O UTCOME OF THE RESEARCH AND DEVELOPMENT CONDUCTED BY THE ASSESSEE IS DELIVERED TO THE CUSTOMERS/AE THROUGH ELECTRONIC MEDIA. THE MOD E OF DELIVERY ITA NOS.789/B/10, 487, & 925/B/11 26 OF RESULT OF RESEARCH AND DEVELOPMENT CANNOT DETERM INE THE NATURE OF THE FUNCTIONS/ACTIVITIES OF THE ASSESSEE. THERE FORE, THE TPO WAS RIGHT IN CONDUCTING SEARCH ON THE DATA BASE PROWES S USING THE WORD RESEARCH AND DEVELOPMENT. 33. NOW COMES THE QUESTION OF SELECTION OF COMPARAB LES. THE LEARNED COUNSEL FOR THE ASSESSEE HAS FORCEFULLY ARG UED THAT EVEN IF THE ASSESSEE IS TO BE CONSIDERED A RESEARCH AND DE VELOPMENT COMPANY, THEN THE COMPARABLES HAVE TO BE OF THE SAM E INDUSTRY IN WHICH THE ASSESSEE IS DOING RESEARCH AND DEVELOPMEN T. IF THIS ARGUMENT OF THE LEARNED COUNSEL FOR ASSESSEE IS ACC EPTED, THEN THE COMPARABLES SELECTED/SHORTLISTED BY THE ASSESSEE FR OM THE ITES INDUSTRY ARE ALSO LIABLE TO BE REJECTED AS THEY ARE NOT FROM THE SAME INDUSTRY. THUS, THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FUNCTIONS ARE SYNONYMOUS WITH OR ANALOGOUS TO THE INDUSTRY AND THE COMPARABLE COMPANIES HAVE TO BE FR OM THE SAME INDUSTRY FOR COMPARABILITY ANALYSIS UNDER TNMM IS N OT IN TUNE WITH THE PRINCIPLES ENUNCIATED BY THE GUIDELINES OF OECD OR UNITED NATIONS MANUAL WHICH ADVOCATE THAT UNDER TNM M ONLY BROAD FUNCTIONAL AND PRODUCT COMPARABILITY IS TO BE CONSIDERED AS NET MARGINS ARE LESS INFLUENCED BY DIFFERENCES IN P RODUCTS AND FUNCTIONS. ITA NOS.789/B/10, 487, & 925/B/11 27 34. AS PER THE PRINCIPLES OF COMPARABILITY, CONTRO LLED AND UNCONTROLLED TRANSACTIONS ARE REGARDED AS COMPARABL E IF THEIR ECONOMICALLY RELEVANT ATTRIBUTES AND THE CIRCUMSTAN CES SURROUNDING THEM ARE SUFFICIENTLY SIMILAR TO PROVIDE A RELIABLE MEASURE OF AN ARMS LENGTH RESULT. HOWEVER, IN REALITY, TWO TRA NSACTIONS ARE SELDOM COMPLETELY ALIKE. TO BE COMPARABLE DOES NOT MEAN THAT THE TWO TRANSACTIONS ARE NECESSARILY IDENTICAL, BUT THA T EITHER NONE OF THE DIFFERENCES BETWEEN THEM COULD MATERIALLY AFFEC T THE ARMS LENGTH PRICE OR, WHERE SUCH MATERIAL DIFFERENCES EX IST, THEN REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THEIR EFFECT. IT IS IMPORTANT TO NOTE THAT THE TYPE AND ATTRIBUTES OF THE COMPARABLES AVAILABLE IN A GIVEN SITUATION TYPICALL Y DETERMINE THE MOST APPROPRIATE TRANSFER PRICING METHOD. IN GENER AL, CLOSELY COMPARABLE PRODUCTS/SERVICES ARE REQUIRED IF THE CO MPARABLE UNCONTROLLED PRICE (CUP) METHOD IS USED FOR ARMS LENGTH PRICING; THE RESALE PRICE, COST-PLUS METHODS GENERA LLY REQUIRE A LESSER DEGREE OF PRODUCTS OR SERVICES COMPARABILITY AND MAY BE APPROPRIATE IF FUNCTIONAL COMPARABLES ARE AVAILABLE . THE TNMM REQUIRES ONLY BROAD FUNCTIONAL AND PRODUCT/SERVICES COMPARABILITY. IN MANY INSTANCES, IT WILL BE POSSIBLE TO USE IMPE RFECT COMPARABLES, E.G., COMPARABLES FROM ANOTHER INDUSTR Y SECTOR, ITA NOS.789/B/10, 487, & 925/B/11 28 POSSIBLY ADJUSTED TO ELIMINATE OR REDUCE THE DIFFER ENCES BETWEEN THEM AND THE CONTROLLED TRANSACTION. HENCE, THE CO NTENTION OF THE ASSESSEE THAT THE COMPARABLES HAVE TO BE OF R & D C OMPANIES FROM THE SAME INDUSTRY IS NOT APPROPRIATE FOR TNMM. 34. AS FAR AS ADOPTION OF VIMTA LABS AS A COMPARABL E IS CONCERNED, THE TPOS STAND IS THAT VIMTA LABS IS A LEADING PROVIDER OF MULTI-DISCIPLINARY CONTRACT RESEARCH AN D TESTING SERVICES. SO ALSO, THE ASSESSEE HAS A MULTI-DISCIP LINARY RESEARCH & DEVELOPMENT CENTRE. ALSO, THE COMPANYS FUNCTIONS, I.E., RESEARCH AND DEVELOPMENT ARE SIMILAR TO THAT OF THE TAX PAYE R IN ALL RESPECTS. 35. AS DETAILED IN EARLIER PARAS, THE OBJECTION OF THE ASSESSEE TO THE ADOPTION OF VIMTA LABS AS A COMPARABLE CAN BE S UMMARIZED AS UNDER :- (I) IT WAS SELECTED AS A COMPARABLE BY THE TPO IN A .Y 2004-05 MERELY BECAUSE IT WAS CLASSIFIED UNDER TECHNICAL C ONSULTANCY AND ENGINEERING SERVICES OR RESEARCH AND DEVELOPMENT IN THE DATABASE. HOWEVER, IT WAS RECLASSIFIED AS DRUGS, MEDICINES AND ALLIED PRODUCTS FOR A.Y 2006-07. HENCE, IT WAS SE LECTED AS A COMPARABLE BY THE TPO ONLY BECAUSE OF WRONG CLASSIF ICATION IN THE EARLIER YEARS. ITA NOS.789/B/10, 487, & 925/B/11 29 THE ISSUE OF REGARDING WRONG CLASSIFICATION OF THE COMPANY IN THE DATABASE HAS BEEN RAISED BY THE ASSESSEE FOR THE FIRST TIME BEFORE US. THERE IS NO MENTION OF THE SAME IN ANY OF THE DOCUMENTS IN OUR RECORD. WHETHER THE CHANGE IN CLASSIFICATION IS DUE TO WRONG CLASSIFICATION IN TH E EARLIER YEARS OR WHETHER THERE WAS A CHANGE IN FUNCTIONAL P ROFILE NECESSITATING SUCH A CHANGE IN CLASSIFICATION NEEDS TO BE EXAMINED. (II) AS PER THE FAR ANALYSIS, IT CANNOT BE SELECTED AS A COMPARABLE. IT IS A CLINICAL TRIAL COMPANY ENGAGED IN TESTING OF NEW PHARMACEUTICAL DRUGS AND WORKS ON FRANCHISEE MODEL. IT HAS SIGNIFICANT INVESTMENTS I N TANGIBLE AND INTANGIBLE ASSETS AND THE ASSETS/SALES RATIO IS SUBSTANTIALLY HIGHER. BEING AN ENTREPRENEURIAL COMP ANY, IT ASSUMES SIGNIFICANT RISKS AND ALSO HAS HIGH LIABILI TY RISK DUE TO HUMAN INVOLVEMENT AND LIFE THREATENING NATURE OF THE CLINICAL TRIALS. THE ASSESSEES CONTENTION THAT IT IS A CLINICAL TRI AL COMPANY IS ONLY PARTLY TRUE. AS THE TPO HAS MENTIONED, IT IS INTO MULTI-DISCIPLINARY RESEARCH SERVICES. IT PROVIDES CONTRACT AND RESEARCH TESTING SERVICES IN OTHER AREAS LIKE ANALYTICAL TESTING AND ENVIRONMENT MONITORING AND IMPACT ASSES SMENT. WHILE THE ASSESSEE HAS TOTALLY IGNORED THESE ACTIVI TIES OF THE COMPANY, THE TPO HAS NOT EXAMINED AS TO WHETHER THE SE SERVICES ARE SIGNIFICANT ENOUGH TO CONSIDER THE ACT IVITY OF ITA NOS.789/B/10, 487, & 925/B/11 30 THIS COMPANY AS TECHNICAL CONSULTANCY & ENGINEERIN G SERVICES AND R & D. THE CONTENTION THAT THE COMPANY HAS SIGNIFICANT INVESTMENTS IN BOTH TANGIBLE AND INTANGIBLE ASSETS DOES NOT, BY ITSELF, MAKE THE COMPANY DISSIMILAR. AFTER ALL AS NOTED BY THE TPO, EVEN THE R&D CENTRE OF THE ASSESSEE IS REPORTED TO HAVE FILED FOR MORE THAN 185 PATENTS AN D HAS BEEN GRANTED QUITE A FEW OF THEM. UNLESS IT IS ANA LYZED AS TO HOW THESE INTANGIBLE ASSETS ARE VALUED, IT MAY N OT BE APPROPRIATE TO CONCLUDE THAT THE COMPANY IS DISSIMI LAR IN THIS REGARD. (III) ALSO, THIS COMPANY FAILS THE FILTER ADOPTED B Y THE TPO, VIZ., EMPLOYEE COST LESS THAN 25%. AS THE EMPLOYEE COST FOR THE COMPANY IS LESS THAN 25% IN ALL THE THREE YEARS UNDER CONSIDERATION, IT SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. THIS CONTENTION OF THE ASSESSEE THAT VIMTA LABS FAI LS THE FILTER OF EMPLOYEE COST FILTER HAS BEEN ADVANCED FO R THE FIRST TIME BEFORE US. THIS POINT HAS NOT BEEN EXAMINED B Y THE AO AND THE CIT(A). IN FACT BOTH THE TPO AND THE CI T(A) HAVE RECORDED A FINDING THAT THE ASSESSEE HAS NOT Q UESTIONED THE SEARCH PROCESS AT ALL. HENCE, THIS CLAIM THAT THE ASSESSEE FAILS THE EMPLOYEE COST FILTER FOR ALL THE THREE YE ARS NEEDS TO BE EXAMINED. ITA NOS.789/B/10, 487, & 925/B/11 31 (IV) ASSESSEE IS WORKING IN A RISK FREE ATMOSPHERE WHILE VIMTA LABS IS FACING LOT OF CLINICAL TEST FAILURE R ISK AND ALSO REGULATORY RISKS. IT IS THE CONTENTION OF THE ASSESSEE THAT IT IS TOT ALLY RISK FREE AND ALL THE SUBSTANTIVE RISKS ARE BORNE BY THE AE. IDENTIFICATION OF RISK AND THE PARTY WHO BEARS SUCH RISKS ARE IMPORTANT STEPS IN COMPARABILITY ANALYSIS. THE CON DUCT OF THE PARTIES IS KEY TO DETERMINE WHETHER THE ACTUAL ALLOCATION OF RISK CONFORMS TO CONTRACTUAL RISK ALLOCATION. A LLOCATION OF RISK DEPENDS UPON ABILITY OF THE PARTIES TO THE TRANSACTION TO EXERCISE CONTROL OVER RISK. CORE FUNCTIONS, KEY RESPONSIBILITIES, KEY DECISION MAKING AND LEVEL OF INDIVIDUAL RESPONSIBILITY FOR THE KEY DECISIONS ARE IMPORTANT FACTORS TO IDENTIFY THE PARTY WHICH HAS CONTROL OVER THE RISKS . 36. THE NOTION THAT RISK CAN BE CONTROLLED REMOT ELY BY THE PARENT COMPANY AND THAT THE INDIAN SUBSIDIARY ENGAG ED IN CORE FUNCTIONS, SUCH AS CARRYING OUT RESEARCH AND DEVEL OPMENT ACTIVITIES OR PROVIDING SERVICES ARE RISK FREE ENTITIES IS SOM ETHING WHICH NEEDS TO BE DEMONSTRATED BY THE ASSESSEE. THE CONV ENTIONAL WISDOM IS THAT THE CORE FUNCTION OF R & D SERVICES ARE LOCATED IN INDIA, WHICH IN TURN REQUIRE IMPORTANT STRATEGIC DE CISIONS BY MANAGEMENT AND EMPLOYEES OF INDIAN SUBSIDIARIES OR RELATED PARTY TO DESIGN THE DIRECTION OF R&D ACTIVITIES OR PROVID ING SERVICES AND ITA NOS.789/B/10, 487, & 925/B/11 32 CONTROL OVER THE OPERATIONAL AND OTHER RISKS. IN T HESE CIRCUMSTANCES, THE ABILITY OF THE PARENT COMPANY TO EXERCISE CONTROL OVER THE RISK REMOTELY AND FROM A PLACE WHERE COR E FUNCTIONS OF R & D AND SERVICES ARE NOT LOCATED IS VERY LIMITE D. UNDER THESE CIRCUMSTANCES, THE CLAIM OF THE ASSESSEE THAT IT IS TOTALLY RISK FREE IS NOT ACCEPTABLE. HOWEVER, THE RELATIVE RISK PROFILE OF THE COMPARABLE COMPANY, PARTICULARLY ON THE FACTORS OF HUMAN INVOLVEMENT IN THE CLINICAL TRAILS NEEDS TO BE EVAL UATED AND A DETERMINATION MADE WHETHER SUCH DIFFERENCES IN RISK NEEDS TO BE ADJUSTED OR WHETHER SUCH RISKS ARE NOT AMENABLE FOR ADJUSTMENT AT ALL, AS CLAIMED BY THE ASSESSEE. IN VIEW OF ALL TH E ABOVE, THE ISSUE OF COMPARABILITY OF VIMTA LABS IS REMANDED BACK TO THE AO/TPO WITH A DIRECTION THAT THE COMPARABILITY MAY BE ANAL YZED IN THE LIGHT OF THE OBSERVATIONS MADE ABOVE. 37. NOW LET US EXAMINE THE CORRECTNESS OR OTHERWISE OF THE COMPARABLES ADOPTED BY THE TPO FOR ALL THE THREE AS SESSMENT YEARS. THOUGH THE ASSESSEE HAS NOT SPECIFICALLY ADVANCED A RGUMENTS FOR EXCLUSION OF THE COMPARABLES RAISED IN ITS GROUNDS OF APPEAL FOR THE ASSESSMENT YEAR 2004-05 AND 2005-06, IT IS NECESSAR Y TO CONSIDER THE APPROPRIATENESS OF THE ACTION OF THE TPO FOR TH E SAID YEARS ALSO AS THE DETAILED REASONING FOR THE SAID SELECTION/ A DOPTION ARE ITA NOS.789/B/10, 487, & 925/B/11 33 MENTIONED THEREIN. FOR THE PURPOSES OF CONVENIENC E AND EASE OF COMPARISON THE DETAILS OF THE FINAL LIST OF COMPARA BLES ADOPTED BY THE TPO AND THEIR MARGINS FOR THE THREE ASSESSMENT YEARS ARE TABULATED HEREUNDER : 2004-05 2005-06 2006-07 1) ALPHANGEO INDIA LTD. 56.25 26.73 -- 2) VIMTA LABS LTD., 61.7 75.93 57.80 3) LURGI LABS LTD., 18.9 -6.90 -- 4) CELESTIAL LABS LTD., -- -- 48.15 5) GEOMETRIC LTD., 29.39 20.34 6.70 6) TATA ELXI 20.79 24.35 27.65 7) SASKEN COMMUNICATION TECH LTD, 13.13 -- 13.90 8) INFOTECH ENTERPRISES LTD., 19.12 -- -- 9) ROLTA INDIA LTD., 28.06 -- -- 10) ZIGMA SOFTWARE LTD. 16.47 14.42 -- --------------------------------------------------- ---------------------- ARITHMETIC MEAN 29.37 25.81 30.84 ASSESSEES MARGINS 16.26% 14.25% 16.28% ----------------------------------------------- ---------------------------- 38. FROM THE ABOVE TABLE, IT CAN BE SEEN THAT THE C OMPARABLES UNIFORMLY ADOPTED/OFFERED BY BOTH ASSESSEE AND THE TPO FOR ALL THE THREE YEARS ARE TATA ELXI AND GEOMETRIC LTD., WHILE SASKEN COMMUNICATION TECH. LTD., IS ADOPTED FOR 2004-05 AN D 2006-07 AND ZIGMA SOFTWARE IS ADOPTED FOR 2004-05 AND 2005- 06. 40. THE COMPARABLES PROPOSED AND RETAINED BY THE TP O ARE (1) VIMTA LABS FOR ALL THE THREE YEARS, (2) ALPHANG EO INDIA LTD., FOR ITA NOS.789/B/10, 487, & 925/B/11 34 AYS 2004-05 AND 2005-06 (3) LURGI LABS LTD., FOR AY S 2004-05 AND 2005-06 AND 4) CELESTIAL LABS LTD. FOR AY 2006- 07. 41. IT IS ALSO TO BE SEEN THAT THE ASSESSEE HAS OBJ ECTED TO THE ADOPTION OF ALPHANGEO AND VIMTA LABS IN BOTH AYS 20 04-05 AND 2005-06, WHILE IT OBJECTED TO ADOPTION OF LURGI LAB S IN AY 2004- 05 ONLY WHILE NO OBJECTION WAS RAISED FOR ITS ADOPT ION IN AY 2005- 06 EITHER BEFORE THE CIT(A) OR BEFORE THIS TRIBUNAL . THIS IS PROBABLY BECAUSE LURGI LABS INCURRED LOSS DURING AY 2005-06 WHICH WHEN CONSIDERED BY THE TPO HAS RESULTED IN LO WER ARITHMETIC MEAN BENEFITTED THE ASSESSEE. 42. FURTHER, WE ALSO HAD AN OPPORTUNITY TO GO THROU GH THE TP ORDER AND ASSESSEES OBJECTION TO THE TPO FOR AY 20 08-09 THE COPIES OF WHICH ARE FILED BY THE ASSESSEE BEFORE US IN CONNECTION WITH THE OTHER ISSUE ARISING IN THE APPEAL FOR A.Y 2006-07 I.E., THE TP ADJUSTMENT MADE TOWARDS INTEREST ON EXTERNAL COM MERCIAL BORROWING. WE FIND THAT FOR THE A.Y 2008-09 ALSO, THE TPO PROPOSED TO ADOPT VIMTA LABS AND CELESTIAL BIO LABS LTD. AS COMPARABLES WITH MARGINS OF 18% AND 88% RESPECTIVEL Y. FROM THE REPLY OF THE ASSESSEE TO THE SHOW CAUSE NOTICE OF T HE TPO PROPOSING TP ADJUSTMENTS, WE FIND THAT THE ASSESSEE HAD RAISED ITA NOS.789/B/10, 487, & 925/B/11 35 OBJECTIONS TO CELESTIAL LABS AND ENGINEERS INDIA LT D. AND OIL FIELD INSTRUMENTATION INDIA LTD BUT DID NOT RAISE ANY OBJ ECTION TO ADOPTION OF VIMTA LABS AS A COMPARABLE FOR A.Y 2008 -09, WHICH GOES TO SHOW THAT IT HAS ACCEPTED VIMTA LABS AS A C OMPARABLE FOR THE RELEVANT A.Y PROBABLY BECAUSE ITS MARGIN WAS ON LY 18% FOR THE RELEVANT A.Y. THE CELESTIAL LABS WAS RETAINED BY T HE TPO WHILE THE OTHER TWO COMPANIES WERE EXCLUDED. 43. FROM THE ABOVE DETAILS, IT CAN BE SEEN THAT THE ASSESSEE IS NOT ADOPTING A UNIFORM APPROACH FOR OBJECTING TO THE CO MPARABLES PROPOSED BY THE TPO. AS REGARDS LUGRI LABS, IT APP EALS AGAINST ITS ADOPTION IN A.Y 2004-05 WHILE IT ACCEPTS THE DECISI ON OF TPO FOR A.Y 2005-06. AS REGARDS VIMTA LABS, IT APPEALS AGA INST ITS ADOPTION IN A.YS 2004-05, 2005-06, & 2006-07 WHILE IT DOES NOT EVEN OBJECT TO THE PROPOSAL OF TPO FOR ITS ADOPTION IN A.Y 2008- 09. SUCH CHERRY PICKING BY THE ASSESSEE CANNOT BE ALLOWED. UNIFORMITY AND CONSISTENTLY IN APPROACH IS ESSENTIA L FOR BOTH THE REVENUE AS WELL AS THE ASSESSEE ALIKE UNLESS THE CI RCUMSTANCES WARRANT OTHERWISE. THE OBJECTIONS OF THE ASSESSEE TO LURGI LABS AND VIMTA LABS WAS THAT THEY ARE FUNCTIONALLY DIFFE RENT. THERE IS EVIDENTLY NO CHANGE IN THE FUNCTIONAL ACTIVITIES OF LURGI IN A.Y 2004-05 AND 2005-06. LIKEWISE VIMTA LABS ALSO HAS BEEN IN ITA NOS.789/B/10, 487, & 925/B/11 36 PHARMACEUTICAL INDUSTRY DOING RESEARCH AND DEVELOPM ENT IN ALL THE RELEVANT AYS. IN FACT, IT IS THE CASE OF THE ASSES SEE THAT FROM A.Y 2006-07, IT HAS BEEN RECLASSIFIED AS DRUGS, MEDICI NES AND ALLIED PRODUCTS AND HENCE IS NOT COMPARABLE AT ALL. THEN IT IS NOT CLEAR AS TO HOW IT CAN BE ADOPTED AS A COMPARABLE FOR A.Y 2 008-09 WHEN ITS FUNCTIONS ARE NO DIFFERENT FROM A.Y 2006-07. 44. IN VIEW OF THE ABOVE OBSERVATIONS AND ALSO INCO NSISTENCIES IN THE APPROACH OF THE ASSESSEE AND ALSO IN VIEW OF TH E FACT THAT THE ASSESSEE WAS NOT GIVEN AN OPPORTUNITY OF HEARING FO R A.Y 2006-07 AGAINST ADOPTION OF VIMTA LABS AS A COMPARABLE AND ALSO IN VIEW ASSESSEES SUBMISSIONS THAT THERE HAS BEEN A CHANGE IN THE CLASSIFICATION OF THE VIMTA LABS IN THE DATABASE IN AY 2006-07, AND ALSO ADDITIONAL EVIDENCE FILED BEFORE US WITH R EGARD TO THE RISKS ENCOUNTERED BY VIMTA LABS AND CELESTIAL LABS, WE DE EM IT FIT AND PROPER TO REMAND THE ISSUE TO THE FILE OF THE AO/TP O FOR RECONSIDERATION OF THE ISSUE DE NOVO FOR ALL THE A.YS. THE AO/TPO SHALL CONSIDER THE OBJECTIONS OF THE ASSESSEE IN DE TAIL AND SHALL GIVE A FAIR OPPORTUNITY OF HEARING TO THE ASSESSEE BEFOR E COMPLETING THE PROCEEDINGS IN ACCORDANCE WITH LAW. ITA NOS.789/B/10, 487, & 925/B/11 37 45. IN THE ASSESSMENT YEAR 2004-05, THE ASSESSEE HA S ALSO RAISED GROUNDS NO.13 TO 15 AGAINST THE ORDER OF THE CIT(A) CONFIRMING THE ORDER OF THE AO AS REGARDS THE COMPUTATION OF D EDUCTION U/S 10A OF THE INCOME-TAX ACT. 46. THE BRIEF FACTS OF THE CASE ARE THAT FOR THE AS SESSMENT YEAR 2004-05, THE ASSESSEE EARNED A PROFIT OF RS.10,90,5 6,643/- FROM 10A UNDERTAKING AND INCURRED A LOSS OF RS.1,90,02, 182/- FROM NON-10A BUSINESS ACTIVITIES. FURTHER, THE ASSESSEE ALSO HAD BROUGHT FORWARD LOSSES OF 10A UNDERTAKING FOR THE ASSESSMEN T YEAR 2002-03 AND 2003-04 AGGREGATING TO RS.22,95,47,384/-. IN I TS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2004-05, THE ASSESSE E COMPUTED ITS TOTAL INCOME BY FIRST CLAIMING THE DEDUCTION OF PRO FIT U/S 10A OF THE UNDERTAKING AT RS.10,90,54,643/- AND THEREAFTER TH E SET OFF OF CARRIED FORWARD LOSSES OF NON 10A BUSINESS ACTIVIT IES OF RS.1,90,02,182/- AND ALSO THE BROUGHT FORWARD LOSSE S OF 10A UNDERTAKING AT RS.22,95,47,384/-. THE ASSESSING OF FICER HOWEVER COMPUTED THE DEDUCTION U/S 10A OF THE INCOME-TAX A CT AFTER FIRST REDUCING THE PROFITS OF THE 10A UNDERTAKING BY BROU GHT FORWARD LOSSES OF 10A UNDERTAKING FROM THE EARLIER YEARS AN D THEREAFTER FURTHER REDUCED THE INCOME BY THE LOSSES FROM THE N ON-10A UNDERTAKING AND THEREAFTER ARRIVED AT NIL DEDUCTI ON U/S 10A OF THE ITA NOS.789/B/10, 487, & 925/B/11 38 ACT. AGAINST THE SAID COMPUTATION, THE ASSESSEE FI LED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ACTION OF THE A O AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 47. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE 10A DEDUCTION/EXEMPTION SHOULD BE ALLOWED FROM ITS SOUR CE I.E 10A UNIT ITSELF AND ACCORDINGLY THE SAID DEDUCTION/EXEM PTION SHOULD BE ALLOWED AT THE TIME OF CALCULATION OF BUSINESS INCO ME ITSELF. THUS ACCORDING TO HIM, 10A PROFIT WILL NOT AT ALL ENTER THE COMPUTATION OF BUSINESS INCOME AND THE SAME SHOULD BE ALLOWED B EFORE ARRIVING AT THE GROSS TOTAL INCOME AND BEFORE SETTING OFF OF LOSSES, WHETHER 10A LOSSES OR NON 10A LOSSES. HE SUBMITTED THAT IN THE CASE OF THE ASSESSEE, IF SEC. 10A DEDUCTION/EXEMPTION IS ALLOWE D AT SOURCE ITSELF, THEN THERE WILL BE NO BUSINESS PROFIT LEFT AGAINST WHICH THE LOSS OF NON-10A UNITS AND BROUGHT FORWARD LOSSES OF 10A UNITS CAN BE SET OFF AND, THEREFORE, THE SAID LOSSES WILL BE ELIGIBLE TO BE CARRIED FORWARD TO THE SUBSEQUENT YEARS. IN SUPPOR T OF ITS ABOVE CONTENTIONS, THE ASSESSEE HAS PLACED RELIANCE UPON THE FOLLOWING DECISIONS : 1) CIT VS. YOKOGAWA INDIA IN ITA NO.1388/2011 (KAR, HC ) 2) HINDUSTAN UNILIVER VS. DCIT, (2010), 325 ITR 102 ( BOM) 3) CIT VS. TEI TECHNOLOGIES IN ITA NO.4025/2012 (DEL, HC) ITA NOS.789/B/10, 487, & 925/B/11 39 48. THE LEARNED DR, HOWEVER SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 49. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL CONTENTIONS, WE FIND THAT THIS ISSUE IS COVER ED BY THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF YOKOGAWA INDIA (CITED SUPRA), WHEREIN IT HAS BEEN HELD THAT FOR CO MPUTING THE DEDUCTION U/S 10A OF THE ACT, THE PROFIT OF ELIGIBL E UNITS HAVE TO BE DEDUCTED AT SOURCE AND DO NOT ENTER INTO THE COMPUT ATION OF INCOME AND AS A CONSEQUENCE OF WHICH, THE LOSSES SUFFERED BY NON ELIGIBLE UNITS CANNOT BE SET OFF AGAINST THE PROFITS OF ELI GIBLE UNITS. FURTHER IT HAS BEEN HELD THAT THE DEPRECIATION AND BUSINESS LO SS OF ELIGIBLE UNITS RELATING TO THE ASSESSMENT YEAR 2000-01 ONWARDS IS ELIGIBLE FOR SET OFF AND CARRY FORWARD FOR SET OFF AGAINST THE INCOM E POST TAX HOLIDAY AS PER THE AMENDED PROVISION OF SEC. 10A(VI) AMENDE D WITH RETROSPECTIVE EFFECT FROM 1/4/2001. TAKING NOTE OF THE ABOVE AMENDMENTS, THE HONBLE HIGH COURT OF KARNATAKA HAS HELD THAT IT IS NECESSARY THAT NOTIONAL COMPUTATION OF BUSINESS INC OME AND DEPRECIATION SHOULD BE MADE FOR EACH YEAR OF THE TA X HOLIDAY PERIOD AND SUCH LOSS IS ELIGIBLE TO BE CARRIED FORWARD IN THE POST TAX HOLIDAY PERIOD AND, THEREFORE, FOR THE RELEVANT ASSESSMENT YEAR, THE QUESTION OF SETTING OFF OF THE LOSS OF CURRENT YEARS OR THE PREVIOUS BROUGHT ITA NOS.789/B/10, 487, & 925/B/11 40 FORWARD BUSINESS LOSSES OF UNITS AGAINST THE PROFIT S OF 10A UNIT DOES NOT ARISE. THIS ISSUE IS ALSO COVERED BY THE OTHER DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE. 50. RESPECTFULLY FOLLOWING THE DECISION OF THE JU RISDICTIONAL HIGH COURT, WE HOLD THAT THE LOSSES OF NON 10A UNIT S CANNOT BE SET OFF AGAINST THE PROFITS OF 10A UNIT AND THE BROUGHT FOR WARD LOSSES OF 10A UNITS FOR THE ASSESSMENT YEARS 2002-03, 2003-04 CAN NOT BE SET OFF AGAINST THE CURRENT YEARS 10A PROFITS BUT CAN BE SE T OFF AGAINST THE PROFITS OF THE POST TAX HOLIDAY PERIOD. THIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED. 51. IN THE RESULT, THE APPEAL FOR THE ASSESSMENT YE AR 2004-05 IS ALLOWED. 52. FOR THE ASSESSMENT YEAR 2005-06, THE ONLY ISSUE IS WITH REGARD TO THE TRANSFER PRICING ADJUSTMENT MADE ON A CCOUNT OF RESEARCH AND DEVELOPMENT ACTIVITY CARRIED ON BY THE ASSESSEE AND AS THE ISSUE HAS ALREADY BEEN REMANDED TO THE FILE OF THE AO/TPO IN OUR ORDER FOR THE ASSESSMENT YEAR 2004-05, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALSO REMANDED TO THE AO/TPO FOR DE NOVO CONSIDERATION. ITA NOS.789/B/10, 487, & 925/B/11 41 53. FOR THE A.Y 2006-07, IN ADDITION TO THE ABOVE, TP ADJUSTMENT TO THE ALP ON ACCOUNT OF RESEARCH AND DE VELOPMENT ACTIVITY, THE ASSESSEE HAS ALSO RAISED GROUND OF A PPEAL NO.4 AGAINST THE ORDER OF THE ASSESSING OFFICER MAKING TP ADJUST MENT TO THE ALP ON ACCOUNT OF INTEREST ON EXTERNAL COMMERCIAL BORRO WINGS. 54. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE HAD OBTAINED TWO COMMERCIAL BORROWINGS FROM ITS AES (GE INDIA & PACIFIC MAURITIUS LTD.) THESE WERE OBTAINED UNDER LONG TER M LOAN AGREEMENTS ENTERED IN 2001 AND INTEREST RATES OF SU CH ECBS WERE FIXED @ 7.5% AND 8.49% WHICH WAS DETERMINED BASED ON BUSINESS AND ECONOMIC CIRCUMSTANCES AT THE TIME OF ENTERING INTO LOAN AGREEMENT AND THESE ECBS WERE NOT RENEGOTIATED ON A YEAR TO YEAR BASIS. ACCORDING TO THE ASSESSEE, THE INTEREST RAT ES AND THE LOAN AGREEMENTS WERE IN ACCORDANCE WITH ECB GUIDELINES I SSUED BY THE GOVERNMENT OF INDIA. THE AO MADE A REFERENCE TO TH E TPO U/S 92CA OF THE INCOME-TAX ACT FOR DETERMINATION OF THE ALP OF INTEREST ON ECB. THE TPO MADE THE ADJUSTMENTS TO THE ALP ON ACCOUNT OF INTEREST ON ECB AND THE AO PROPOSED THE ADDITION IN THE DRAFT ASSESSMENT ORDER. THE ASSESSEE RAISED OBJECTIONS B EFORE THE DRP. DRP, HOWEVER, CONFIRMED THE DRAFT ASSESSMENT ORDER AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. ITA NOS.789/B/10, 487, & 925/B/11 42 55. IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE INTEREST RATES OF THESE BORROWINGS WERE CONSIST ENTLY ACCEPTED BY THE REVENUE IN THE EARLIER ASSESSMENT YEARS I.E 20 02-03, 2003-04 AND 2004-05, 2005-06 AND ALSO FOR THE SUBSEQUENT ASSESS MENT YEARS 2008- 09. HE SUBMITTED THAT FOR THE ASSESSMENT YEAR 2008 -09, THIS ISSUE WAS SPECIALLY RAISED BY THE TPO VIDE SHOW CAUSE NOTIC E DATED 11/10/2011 BUT NO TP ADJUSTMENT MADE AFTER CONSIDE RING THE SUBMISSIONS OF THE ASSESSEE DATED 27/10/2011. IN S UPPORT OF HIS CONTENTIONS, THE LEARNED COUNSEL FOR THE ASSESSEE HAS FILED THE COPIES OF THE SHOW CAUSE NOTICE OF THE TPO, THE ASSESSEES SUBMISSIONS IN RESPONSE TO THE SAME AND ALSO THE TPOS ORDER FOR T HE ASSESSMENT YEAR 2008-09. IN ADDITION TO THE ABOVE EVIDENCE AN D IN SUPPORT OF ITS CONTENTIONS THAT THE INTEREST RATES SHOULD BE DETER MINED BASED ON THE INTEREST RATES PREVAILING AT THE TIME OF AVAILING THE LOAN, THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE UPON T HE DECISION OF THE DELHI ITAT IN THE CASE OF ITO VS. MAHARISHI SOLAR T ECHNOLOGY PVT. LTD. IN ITA NO.4561 AND 4393 OF 2009. THUS, THE LEARNED AR PRAYED THAT THE ADDITION RELATING TO THE ABOVE ADJUSTMENT MAY BE DELETED. 56. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT FOR THE EA RLIER ASSESSMENT ITA NOS.789/B/10, 487, & 925/B/11 43 YEARS, THE TPO HAS NOT EXAMINED THE ISSUE AT LARGE/ LENGTH AND, THEREFORE, IT CANNOT BE SAID THAT THE ISSUE HAS BEE N DECIDED ON MERITS IN FAVOUR OF THE ASSESSEE. IN SUPPORT OF HIS CONTE NTIONS REGARDING THE INTEREST RATE ON ECB TO BE ADOPTED FOR THE RELEVANT A.Y, HE SUBMITTED THAT TWO LOANS OR EXTERNAL COMMERCIAL BO RROWINGS WERE BETWEEN TWO CROSS BORDER ENTITIES AND, THEREFORE, RESULTED IN AN INTERNATIONAL TRANSACTION AND EACH TRANSACTION HAS TO BE CONSIDERED EVERY YEAR WHETHER THE SAME IS AT ALP AS THE RATE O F INTEREST ON SUCH LOANS IS INTEGRAL PART OF DETERMINATION OF ALP. IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE UPON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF PEROT SYSTEMS TSI (I NDIA) LTD. VS. DCIT REPORTED IN (2010) 5 ITR 106. 57. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL CONTENTIONS, WE FIND THAT TWO ECB LOANS HAVE BEEN OBTAINED BY THE ASSESSEE IN THE YEAR 2000-01 AT THE FIXED RATE OF INTEREST AT 7.5% AND 8.49% RESPECTIVELY. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE INTEREST RATE IS DEPENDING UP ON THE CREDIT RATING OF THE BORROWINGS AND ALSO ON THE PRICES AND ECONOM IC CONDITIONS PREVAILING AT THE TIME OF ADVANCING THE LOAN. THE ASSESSEE HAS OBTAINED THE LOANS IN THE YEAR 2001 AND THE ISSUE H AS BEEN CONSIDERED BY THE TPO FOR THE ASSESSMENT YEARS 2004-05 AND 200 5-06 AND ALSO ITA NOS.789/B/10, 487, & 925/B/11 44 FOR THE ASSESSMENT YEAR 2008-09. AFTER CONSIDERIN G THE ASSESSEES SUBMISSIONS, THE TPO ACCEPTED THE RATE OF INTEREST FIXED IN THE LOAN AGREEMENTS. IN VIEW OF RULES OF UNIFORMITY AND CONS ISTENCY WE ARE OF THE OPINION THAT THE SAME APPROACH IS TO BE ADOPTED THIS YEAR ALSO. 58. IN VIEW OF THE ABOVE, AS THE ASSESSING OFFICER FOR THE ASSESSMENT YEAR 2002-03 ONWARDS UP TO THE ASSESSMEN T YEAR 2008-09 EXCEPT FOR THE ASSESSMENT YEAR 2006-07 HAS ACCEPTED THE RATE OF INTEREST AS FIXED IN THE LOAN AGREEMENT, WE HOLD TH AT THE TP ADJUSTMENT ON ACCOUNT OF THE INTEREST ON EXTERNAL C OMMERCIAL BORROWINGS FOR THIS ASSESSMENT YEAR IS NOT CALLED F OR. 59. IN THE RESULT, THE ASSESSEES GROUND OF APPEAL NO.4 FOR THE ASSESSMENT YEAR 2006-07 IS ALLOWED. 60. IN ADDITION TO THE ABOVE, THE ASSESSEE HAS ALS O RAISED GROUND NO.5 AGAINST EXCLUSIONS/DEDUCTION OF TELECOMMUNICAT ION EXPENSES OF RS.3,25,98,610/- FROM EXPORT TURNOVER AND TRAVELLIN G EXPENSES INCURRED IN FOREIGN CURRENCY OF RS.90,92,976/- FROM THE EXPORT TURNOVER BUT NOT MAKING THE CORRESPONDING REDUCTION FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTIO N U/S 10A OF THE INCOME-TAX ACT. WE FIND THAT THIS ISSUE IS NOW COV ERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF ITA NOS.789/B/10, 487, & 925/B/11 45 TATA ELXI PVT. LTD., WHEREIN IT HAS BEEN HELD WHEN ANY EXPENDITURE IS REDUCED FROM THE EXPORT TURNOVER, THEN THE SAME SHO ULD ALSO BE REDUCED FROM THE TOTAL TURNOVER FOR THE PURPOSES OF COMPUTATION OF DEDUCTION U/S 10A OF THE INCOME-TAX ACT. THEREFORE, AO IS DIRECTED ACCORDINGLY. 61. IN THE RESULT, THE ASSESSEES APPEALS ARE ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31ST DECEMBER, 2012. SD/- SD/- (JASON P BOAZ) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMB ER VMS BANGALORE DATED : 31ST DECEMBER, 2012. COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER + SR. PRIVATE SECRETARY, ITAT, BANGALORE .