Assistant Commissioner of Income tax,circle-12(4), Bangalore V. Trilogy E Business Software I P Ltd, Bangalore

MA 31/BANG/2014

• Counselvise Citation: [2014] 124 COUNSELVISE.COM (IT) 2259 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 19 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 26-09-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 07-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURESH RAO
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; International transaction; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER M.P. NO.31/BANG/2014 [IN ITA NO.1054/BANG/2011] ASSESSMENT YEAR : 2007-08 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANGALORE. VS. M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LTD., NO.1/2, LALITHA NILAYA, 4 TH CROSS, RMV IIND STAGE, BHOOPASANDRA, BANGALORE 560 094. PAN : AABCT 2328Q APPLICANT RESPONDENT APPLICANT BY : SHRI SURESH RAO, CIT(DR) RESPONDENT BY : SHRI PADAMCHAND KHINCHA, C.A. DATE OF HEARING : 12.9.2014 DATE OF PRONOUNCEMENT : 19.9.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS MISCELLANEOUS PETITION IS FILED BY THE REVE NUE PRAYING FOR RECTIFICATION OF CERTAIN APPARENT ERRORS IN THE ORD ER DATED 23.11.2012 PASSED BY THIS TRIBUNAL IN THE ABOVE APPEAL. M.P. NO.31/BANG/2014 PAGE 2 OF 9 2. IN THE AFORESAID APPEAL ITA NO.1054/BANG/2011, THE QUESTION FOR CONSIDERATION WAS DETERMINATION OF ARMS LENGTH PRI CE (ALP) IN RESPECT OF AN INTERNATIONAL TRANSACTION OF SOFTWARE DEVELOPMEN T SERVICES RENDERED BY THE ASSESSEE TO ITS AE. ONE OF THE COMPARABLES CHO SEN BY THE REVENUE FOR THE PURPOSE OF COMPARISON WAS A COMPANY BY NAME, M/ S. CELESTIAL LABS LTD. THE COMPARABILITY OF THIS COMPANY WITH THAT O F THE ASSESSEE WAS CONSIDERED BY THIS TRIBUNAL IN PARAGRAPHS 42 TO 42 OF ITS ORDER, WHICH READ THUS:- (C) CELESTIAL LABS LTD. 42. AS FAR AS THIS COMPANY IS CONCERNED, THE STAND OF THE ASSESSEE IS THAT IT IS ABSOLUTELY A RESEARCH & DEVE LOPMENT COMPANY. IN THIS REGARD, THE FOLLOWING SUBMISSIONS WERE MADE:- IN THE DIRECTORS REPORT (PAGE 20 OF PB-IL), IT IS STATED THAT THE COMPANY HAS APPLIED FOR INCOME TAX CONCESSION FOR IN-HOUSE R&D CENTRE EXPENDITURE AT HYDERABAD UNDER SECTION 35(2AB) OF THE INCOME TAX ACT. AS PER THE NOTES TO ACCOUNTS - SCHEDULE 15, UNDER DEFERRED REVENUE EXPENDITURE (PAGE 31 OF PB-II), IT IS MENTIONED THAT, EXPENDITURE INCURRED ON RESEARCH AND DEVELOPMENT OF NEW PRODUCTS HAS BEEN TREATED AS DEFERRED REVENUE EXPENDITURE AND THE SAME HAS BEEN WRITTEN OFF IN 10 YEARS EQUALLY YEARLY INSTALLMENTS FROM THE YEAR IN WHICH IT IS INCURRED. AN AMOUNT OF RS. 11,692,020/- HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AS DEFERRED REVENUE EXPENDITURE (PAGE 30 OF PB-II). THIS AMOUNTS TO NEARLY 8.28 PERCENT OF THE SALES OF THIS COMPANY. M.P. NO.31/BANG/2014 PAGE 3 OF 9 IT WAS THEREFORE SUBMITTED THAT THE ACCEPTANCE OF T HIS COMPANY AS A COMPARABLE FOR THE REASON THAT IT IS INTO PURE SO FTWARE DEVELOPMENT ACTIVITIES AND IS NOT ENGAGED IN R&D AC TIVITIES IS BAD IN LAW. 43. FURTHER REFERENCE WAS ALSO MADE TO THE DECISIO N OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. V. ADDL. CIT ITA NO.6623/MUM/2011 (F OR AY 2007-08) IN WHICH THE COMPARABILITY OF THIS COMPANY FOR CLI NICAL TRIAL RESEARCH SEGMENT. THE RELEVANT EXTRACT OF DIS CUSSION REGARDING THIS COMPANY IS AS FOLLOWS: THE LEARNED D.R. HOWEVER DREW OUR ATTENTION TO PAGE-389 OF THE PAPER BOOK WHICH IS AN EXTRACT FROM THE DIRECTORS REPORT WHICH READS AS FOLLOWS: THE COMPANY HAS DEVELOPED A DE NOVO DRUG DESIGN TOOL CELSUITE TO DRUG DISCOVERY IN, FINDING THE LEAD MOLECULES FOR DRUG DISCOVERY AND PROTECTED THE IPR BY FILING UNDER THE COPY IF SIC (OF) RIGHT/PATENT ACT. (APPRISED AND FUNDED BY DEPARTMENT OF SCIENCE AND TECHNOLOGY NEW DELHI) BASED ON OUR INSILICO EXPERTISE (APPLYING BIO-INFORMATICS TOOLS). THE COMPANY HAS DEVELOPED A MOLECULE TO TREAT LEUCODERMA AND MULTIPLE CANCER AND PROTECTED THE IPR BY FILING THE PATENT. THE PATENT DETAILS HAVE BEEN DISCUSSED WITH PATENT OFFICIALS AND THE RESPONSE IS VERY FAVORABLE. THE CLONING AND PURIFICATION UNDER WET LAB PROCEDURES ARE UNDER PROGRESS WITH OUR COLLABORATIVE INSTITUTE, DEPARTMENT OF MICROBIOLOGY, OSMANIA UNIVERSITY, HYDERABAD. IN THE INDUSTRIAL BIOTECHNOLOGY AREA, THE COMPANY HAS SIGNED THE TECHNOLOGY TRANSFER AGREEMENT WITH IMTECH CHANDIGARH (A VERY REPUTED CSIR ORGANIZATION) TO MANUFACTURE AND MARKET INITIALLY TWO ENZYMES, ALPHA AMYLASE AND ALKALINE PROTEASE IN INDIA AND OVERSEAS. THE COMPANY IS PLANNING TO SET UP A BIOTECHNOLOGY FACILITY TO MANUFACTURE INDUSTRIAL ENZYMES. THIS FACILITY M.P. NO.31/BANG/2014 PAGE 4 OF 9 WOULD ALSO INCLUDE THE RESEARCH LABORATORIES FOR CARRYING OUT FURTHER R & D ACTIVITIES TO DEVELOP NEW CANDIDATES DRUG MOLECULES AND LICENSE THEM TO INTERESTED PHARMA AND BIO COMPANIES ACROSS THE GLOBE. THE PROPOSED FACILITY WILL BE SET UP IN GENOME VALLEY AT HYDERABAD IN ANDHRA PRADESH. ACCORDING TO THE LEARNED D.R. CELESTIAL LABS IS ALSO IN THE FIELD OF RESEARCH IN PHARMACEUTICAL PRODUCTS AND SHOULD BE CONSIDERED AS COMPARABLE. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE DISCOVERY IS IN RELATION TO A SOFTWARE DISCOVERY OF NEW DRUGS. MOREOVER THE COMPANY ALSO IS OWNER OF THE IPR. THERE IS HOWEVER A REFERENCE TO DEVELOPMENT OF A MOLECULE TO TREAT CANCER USING BIO- INFORMATICS TOOLS FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. AS EXPLAINED EARLIER IT IS A DIVERSIFIED COMPANY AND THEREFORE CANNOT BE CONSIDERED AS COMPARABLE FUNCTIONALLY WITH THAT OF THE ASSESSEE. THERE HAS BEEN NO ATTEMPT MADE TO IDENTIFY AND ELIMINATE AND MAKE ADJUSTMENT OF THE PROFIT MARGINS SO THAT THE DIFFERENCE IN FUNCTIONAL COMPARABILITY CAN BE ELIMINATED. BY NOT RESORTING T O SUCH A PROCESS OF MAKING ADJUSTMENT, THE TPO HAS RENDERED THIS COMPANY AS NOT QUALIFYING FOR COMPARABILITY. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE IN THIS REGARD. 44. IT WAS SUBMITTED THAT THE LEARNED DR IN THE ABO VE CASE VEHEMENTLY ARGUED THAT THIS COMPANY IS INTO RESEARC H IN PHARMACEUTICAL PRODUCTS. THE ITAT CONCLUDED THAT TH IS COMPANY IS OWNER OF IPR, IT HAS SOFTWARE FOR DISCOVERY OF N EW DRUGS AND HAS DEVELOPED MOLECULE TO TREAT CANCER. IN THE ULTI MATE ANALYSIS, THE ITAT DID NOT CONSIDER THIS COMPANY AS A COMPARA BLE IN CLINICAL TRIAL SEGMENT, FOR THE REASON THAT THIS CO MPANY HAS DIVERSE BUSINESS. IT WAS SUBMITTED THAT, HOWEVER, FROM THE ABOVE EXTRACTS IT IS CLEAR THAT THIS COMPANY IS NOT INTO SOFTWARE DEVELOPMENT ACTIVITIES, ACCORDINGLY, THIS COMPANY S HOULD BE REJECTED AS A COMPARABLE BEING FUNCTIONALLY DIFFERE NT. M.P. NO.31/BANG/2014 PAGE 5 OF 9 45. FROM THE MATERIAL AVAILABLE ON RECORD, IT TRANS PIRES THAT THE TPO HAS ACCEPTED THAT UP TO AY 06-07 THIS COMPANY W AS CLASSIFIED AS A RESEARCH AND DEVELOPMENT COMPANY. ACCORDING TO THE TPO IN AY 07-08 THIS COMPANY HAS BEEN CLASSI FIED AS SOFTWARE DEVELOPMENT SERVICE PROVIDER IN THE CAPITA LINE/PROWESS DATABASE AS WELL AS IN THE ANNUAL REPORT OF THIS CO MPANY. THE TPO HAS RELIED ON THE RESPONSE FROM THIS COMPANY TO A NOTICE U/S.133(6) OF THE ACT IN WHICH IT HAS SAID THAT IT IS IN THE BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. THE AS SESSEE IN REPLY TO THE PROPOSAL OF THE AO TO TREAT THIS AS A COMPARABLE HAS POINTED OUT THAT THIS COMPANY PROVIDES SOFTWARE PRODUCTS/SERVICES AS WELL AS BIOINFORMATICS SERVICE S AND THAT THE SEGMENTAL DATA FOR EACH ACTIVITY IS NOT AVAILABLE A ND THEREFORE THIS COMPANY SHOULD NOT BE TREATED AS COMPARABLE. BESID ES THE ABOVE, THE ASSESSEE HAS POINT OUT TO SEVERAL REFERE NCES IN THE ANNUAL REPORT FOR 31.3.2007 HIGHLIGHTING THE FACT T HAT THIS COMPANY WAS DEVELOPS BIOTECHNOLOGY PRODUCTS AND PRO VIDES RELATED SOFTWARE DEVELOPMENT SERVICES. THE TPO CAL LED FOR SEGMENTAL DATA AT THE ENTITY LEVEL FROM THIS COMPAN Y. THE TPO ALSO CALLED FOR DESCRIPTION OF SOFTWARE DEVELOPMENT PROCESS. IN RESPONSE TO THE REQUEST OF THE TPO THIS COMPANY IN ITS REPLY DATED 29.3.2010 HAS GIVEN DETAILS OF EMPLOYEES WORKING IN SOFTWARE DEVELOPMENT BUT IT IS NOT CLEAR AS TO WHETHER ANY S EGMENTAL DATA WAS GIVEN OR NOT. BESIDES THE ABOVE THERE IS NO OT HER DETAIL IN THE TPOS ORDER AS TO THE NATURE OF SOFTWARE DEVELOPMEN T SERVICES PERFORMED BY THE ASSESSEE. CELESTIAL LABS HAD COME OUT WITH A PUBLIC ISSUE OF SHARES AND IN THAT CONNECTION ISSUE D DRAFT RED HERRING PROSPECTUS (DRHP) IN WHICH THE BUSINESS OF THIS COMPANY WAS EXPLAINED AS TO CLINICAL RESEARCH. TH E TPO WANTED TO KNOW AS TO WHETHER THE PRIMARY BUSINESS OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES AS INDICATED IN THE A NNUAL REPORT FOR FY 06-07 OR CLINICAL RESEARCH AND MANUFACTURE O F BIO PRODUCTS AND OTHER PRODUCTS AS STATED IN THE DRHP. THERE IS NO REFERENCE TO ANY REPLY BY CELESTIAL LABS TO THE ABOVE CLARIFI CATION OF THE TPO. THE TPO WITHOUT ANY BASIS HAS HOWEVER CONCLU DED THAT THE BUSINESS MENTIONED IN THE DRHP ARE THE SERVICES OR BUSINESSES THAT WOULD BE STARTED BY UTILIZING THE F UNDS GARNERED THOUGH THE INITIAL PUBLIC OFFER (IPO) AND THUS IN N O WAY CONNECTED WITH BUSINESS OPERATIONS OF THE COMPANY D URING FY 06-07. WE ARE OF THE VIEW THAT IN THE LIGHT OF THE SUBMISSIONS MADE BY THE ASSESSEE AND THE FACT THAT THIS COMPANY WAS BASICALLY/ADMITTEDLY IN CLINICAL RESEARCH AND MANUF ACTURE OF BIO M.P. NO.31/BANG/2014 PAGE 6 OF 9 PRODUCTS AND OTHER PRODUCTS, THERE IS NO CLEAR BASI S ON WHICH THE TPO CONCLUDED THAT THIS COMPANY WAS MAINLY IN THE B USINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. WE THEREF ORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY OUGHT NO T TO HAVE BEEN CONSIDERED AS COMPARABLE. 3. IN THIS M.P., THE REVENUE HAS SUBMITTED THAT THE TRIBUNAL BASED ITS CALCULATIONS ON THE BASIS OF DECISION RENDERED IN T HE CASE OF TEVA PHARMA PRIVATE LTD. , WHICH IS IN THE BUSINESS OF RENDERING CONTRACT RESE ARCH. THE COMPARABILITY OF THE SAID COMPANY WITH SOFTWARE DEV ELOPMENT SERVICE PROVIDER OUGHT NOT TO HAVE BEEN ACCEPTED ON THE BAS IS OF DECISION IN THE CASE OF TEVA PHARMA PRIVATE LTD.(SUPRA). I T HAS FURTHER BEEN SUBMITTED THAT IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD., ITA NO.7821/MUM/2011 , THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SOFTWARE DEVELOPER SERVICE PROVIDER, HAS HELD THAT CELESTIAL LABS LTD. IS A COMPARABLE. IN VIEW OF THE ABOVE, THE REVENUE HAS PRAYED FOR RECTIFICATION OF THE ORDER OF THE TRIBUNAL BY CONSIDERING CELESTI AL LABS LTD. AS A COMPARABLE IN THE CASE OF THE ASSESSEE FOR DETERMIN ING THE ALP. 4. THE LD. DR REITERATED THE STAND OF THE REVENUE A S REFLECTED IN THE MISCELLANEOUS PETITION. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. DR AND ARE OF THE VIEW THAT THE MISCELLANEOUS PETITION IS DEVOID OF A NY MERIT WHATSOEVER. IN THE CASE OF TEVA PHARMA PRIVATE LTD. , THE TRIBUNAL CAME TO THE CONCLUSION THAT CELESTIAL LABS LTD. IS IN THE FIELD OF RESEARCH AND M.P. NO.31/BANG/2014 PAGE 7 OF 9 PHARMACEUTICAL PRODUCTS AND WAS NOT COMPARABLE IN T HE CASE OF A COMPANY CARRYING ON CONTRACT RESEARCH. IT IS A DIV ERSIFIED COMPANY WHICH ALSO PROVIDES SOFTWARE FOR DISCOVERY OF NEW DRUGS O WNING THE IPR FOR THE DRUG. IT ALSO DEVELOPS MOLECULE TO TREAT CANCER US ING BIOINFORMATICS TOOLS FOR WHICH PATENTING PROCESS WAS ALSO BEING PURSUED. 6. IN THE LIGHT OF ABOVE FEATURES BROUGHT OUT IN TH E ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. AND ALSO FOR THE REASON GIVEN IN PARA 45 OF THE TRIBUNALS O RDER, THIS COMPANY WAS REJECTED AS A COMPARABLE. IN PARA 45 OF THE ORDER OF THE TRIBUNAL, THE CONCLUSIONS THAT CELESTIAL LABS (SUPRA) IS NOT A CO MPARABLE COMPANY WAS NOT BASED ON THE DECISION RENDERED IN TEVA PHARMA PRIVATE LIMITED S CASE ALONE. THE TRIBUNAL CONSIDERED THE SUBMISSION S MADE BY THE ASSESSEE AND THE FACT THAT CELESTIAL LABS WAS BASIC ALLY/ADMITTEDLY ENGAGED IN CLINICAL RESEARCH AND MANUFACTURE OF BIO PRODUCTS AND OTHER PRODUCTS AND CONCLUDED THAT THERE WAS NO CLEAR BASI S ON WHICH THE TPO CONCLUDED THAT CELESTIAL LABS WAS MAINLY IN THE BUS INESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES. THE TRIBUNAL THEREF ORE ACCEPTED THE PLEA OF THE ASSESSEE THAT CELESTIAL LABS OUGHT NOT TO HA VE BEEN CONSIDERED AS COMPARABLE. WE ARE, THEREFORE, OF THE VIEW THAT THE FIRST GROUND ON THE BASIS OF WHICH THIS M.P. HAS BEEN FILED BY THE REVE NUE IS TOTALLY MISCONCEIVED. M.P. NO.31/BANG/2014 PAGE 8 OF 9 7. WITH REGARD TO THE RELIANCE PLACED BY THE REVENU E ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. (SUPRA) , WE ARE OF THE VIEW THAT SUCH AN ARGUMENT WAS NOT PUT FORTH BY THE LD. DR IN THE COURSE OF HEARING OF THE APPEAL. IT IS NOT POSSIBLE FOR THE REVENUE TO FILE A M.P. FOR THE PURPOSE OF RAISING A FRESH ARGUMENT. BESIDES THE ABOVE, THE DECISION RENDERED BY THE MUMBAI BENC H OF THE TRIBUNAL IN THE CASE OF TEVA PHARMA PRIVATE LTD. IS DATED 23.12.2011, WHEREAS IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD., THE DECISION WAS RENDERED BY THE TRIBUNAL ON 11.5.2012, WITHOUT THE DECISION RENDERED IN THE CASE OF TEVA PHARMA PRIVATE LTD. BEING BROUGHT TO ITS NOTICE. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE DECISION IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD., WILL NOT BE BINDING ON THIS TRIBUNAL IN SO FAR AS THE CHOICE OF CELESTIAL LABS AS A COMPARABLE . EVEN ON THIS BASIS, THE MISCELLANEOUS PETITION DESERVES TO BE DISMISSED . 8. IN SHORT, THROUGH THIS M.P., THE REVENUE VIRTUAL LY SEEKS REVIEW OF THE ORDER OF THE TRIBUNAL. THE LAW IS WELL SETTLED THAT U/S. 254(2) OF THE ACT, THE TRIBUNAL DOES NOT HAVE THE POWER TO REVIEW. IN THE GARB OF RECTIFICATION OF APPLICATION, THE REVENUE CANNOT SEEK A REVIEW OF TH E ORDER OF THE TRIBUNAL. EVEN ON THIS BASIS, THE M.P. IS LIABLE TO BE DISMIS SED. M.P. NO.31/BANG/2014 PAGE 9 OF 9 9. FOR THE REASONS GIVEN ABOVE, THE MISCELLANEOUS P ETITION IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 19 TH DAY OF SEPTEMBER , 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 19 TH SEPTEMBER , 2014 . /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.