Income Tax Appellate Tribunal - Mumbai
Monsanto Holding India Pvt. Ltd., ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "L",
MUMBAI
BEFORE SHRI R.S.SYAL (A.M) & SHRI N.V.VASUDEVAN(J.M)
ITA NO.3423/MUM/2008(A.Y.2003-04)
ITA No.6558/Mum/2008(A.Y.2004-05)
The DCIT 8(2), M/s. Monsanto Holdings Pvt.
Room No.216-A, Aaykar Bhavan, Ltd., Ahura Centre, 5th Floor,
MK Road, Mumbai - 20. Vs. 96, Mahakali Caves Road,
Andheri (East), Mumbai - 93
(Appellant) PAN:AAACM 5981H
(Respondent)
Appellant by : Smt. Malathi Sridharan
Respondent by : Shri M.P.Lohia
ORDER
PER N.V.VASUDEVAN, J.M.
ITA No.3423/Mum/2008 is an appeal by the revenue is against the
order dated 18/1/08 of CIT(A) 32, Mumbai relating to assessment year 2003-04. ITA No.6558/Mum/2008 is also an appeal by the Revenue against the order dated 24.7.2008 of CIT(A)-32, Mumbai, relating to AY 04-05. Since one common issue is involved in both these appeals and pertain to the same Assessee, we deem it fit to pass this consolidated order.
2. First we shall take up for consideration ITA No.3423/Muim/08, appeal of the revenue for AY 03-04. The ground of appeal of the revenue reads as follows:-
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs.1,11,25,027/- made by way of upward adjustment to the Arm's Length Price of the International Transactions of the assessee company, without appreciating the facts of the case."2 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)
3. The assessee is a company. It is hereinafter referred to as MHPL or Assessee. MHPL is a wholly owned subsidiary of Monsonto Company, USA, (hereinafter referred to as MTC) in India. MTC is stated to be a leading provider of agricultural products to farmers and offers seeds improved through biotechnology with one or more traits. It is stated to be renowned all over the world for its technology-based solutions in the agricultural field. MHPL acts as a holding company for various downstream investments of the Monsanto group in India. As a group holding company of Indian ventures, MHPL provides certain support/steward services to various downstream ventures in India.
4. MTC entered into a Support Agreement with MHPL dated January 1, 2001. Since the said agreement was valid only for a period of one year, a fresh agreement was executed by the contracting entities (effective from April 1, 2002) ('the Support Agreement'). The Support Agreement envisages provision of following services by MHPL.
Contract Research Services:
- Provide contract research services in certain specific area (viz.
agriculture and agro chemicals) for research projects initiated by MTC; and
- Undertake (at the request of MTC) special studies and market research on products launched by MTC, concerning the new need of the Indian market.
Corporate Support Services:
- Assist MTC in expanding its business presence in India through subsidiaries / JVs;
- Update MTC with the changing regulatory scenario, which includes import-export regulations, foreign direct investment policy, commercial issues, etc.; and 3 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)
- Identity appropriate business opportunities and communicate the same to MTC;
MHPL provides contract research and support services to MTC from a separate facility set-up in Bangalore known as Monsanto Research Center ('MRC'). The research project is primarily initiated by MTC. MHPL provides support services to MTC in the field of crop transformation and crop protection. The Support Agreement further provides that MHPL should provide such support services to MTC on an exclusive basis and the risk and rewards of the research would be exclusively owned by MTC. During F.Y 2002-03, MHPL has received a service fee from MTC aggregating to Rs. 12,97,50,895 for providing the aforesaid corporate support and contract research services.
5. It is not in dispute that the transaction between the MHPL and MTC by which MHPL provided contract research services and corporate support services was an international transaction between two associated enterprises and, therefore, any income arising out of the said transaction has to be computed in accordance with the provisions of section 92 of the Income Tax Act, 1961 having regard to the Arm's Length Price (ALP).
6. MHPL had filed a transfer pricing study in which it adopted the TNMM as the most appropriate method for determining the ALP. Operating Profit ('OPM') on total cost has been considered as the relevant net margin for conducting the comparability analysis. The OPM has been worked out as:
Net Margin = Operating Profit / Operating Cost *100 (Operating Profit = Profit Before Tax + Non-operating income / expense) (Operating Cost = Total Cost - Interest - Non-operating expenses)
7. The assessee gave operative profit margin of comparable companies which is as follows:
4 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)Sr. Company Name Year Operating Op Exps. OP OP% No. income
1. Amtrac 31/3/2003 1,458,960 1,475,680 - 1. 3% Management (16,720) Services.
2 Dabur Research 31/3/2003 179,997,656 168,718,427 11,279,229 6.69% Foundation
3. Hinduja Group 31/3/2003 48,002,686 48,455,982 2,059,326 4.25% India Ltd.
4. ICI India Research 31/3/2003 46,933,379 46,864,594 68,785 0.15% & Technology Centre
5. Manu Consultants 31/3/2003 667,500 659,327 8,173 1.24% Ltd.
6. Raptakos, Brett 31/3/2003 8,987,642 8,336,961 650,681 7.80% Test Laboratories Ltd.
Average 3.17% The operative margin of the assessee was worked out at 7.09% of the total cost. According to the Assessee the operative margin was higher than the average OPM of comparable companies i.e. 3.17% and accordingly, having regard to the provisions of Section 92(3), the consideration being received by MHPL for rendering support services to MTC meets with the arm's length principle. The assessee thus claimed that the international transaction with its AE was at Arms Length Price and the same should be accepted as proper.
8. The Transfer Pricing Officer (TPO) however was of the view that the comparable cases which were referred to by the assesse in its Transfer pricing were not comparable for the following reasons:
S.No. Name of the company Remarks
1. Amtrac Management This company is a share transfer agency. Its
Services total revenues is Rs. 15 lakhs during the P.Y
as compared to Rs. 14 lakhs in the preceding
year. It appears that the services provided by this company is of routine nature.
2. Dabur Research Foundation This company is engaged in research activity.
5 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)3. Hinduja Group India Ltd. This company is engaged in providing consultancy and advisory services. However, the nature of such consultancy is not indicated anywhere and the information in the balance sheet is very sketchy.
4. ICICI India Research and This company is engaged in technical research Technology Services activity. The Director's report has not been provided. However, from the Balance Sheet it is evident that it has entered into related party transaction. It appears to be in-house research company providing research to ICICI India Ltd.
5. Manu Consultants Ltd. This company has total consultancy income of Rs. 1,40,000/- during the year. No other information is available such as Director's Report etc. from which any information regarding the nature of activity undertaken by this company could be ascertained.
6. Raptakos, Brett Tests This company is an industrial test laboratory.
Laboratories Ltd.
According to the TPO from a perusal of above it was evident that the companies appearing at Sr.No.1, 3 and 5 cannot be regarded as comparable to the assessee's contract research activity. The level of activity in the case of Sr.No.1 and 5 according to the TPO was very low. In the case of company at Sr.No.4, the entire services are rendered to its group companies. In case of Sr.No.3, the information available was extremely sketchy and it was not clear what kinds of consultancy services are provided. According to the AO, barring cases at Sr.No. 2 & 6 the other comparable entities cannot be considered to be comparable to the functions performed by the assessee in its contract research activity. The TPO therefore examined database to identify whether mere closely comparable cases could be identified. The TPO therefore examined companies engaged in services such as consultancy, business consultancy, general services, technical and engineering, consultancy and contract research were examined in 'prowess' and 'çapitaline' database and on the basis of the same, identified the following four companies. The companies alongwith their business activities was as follows 6 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)
(i) Alpha Geo India Ltd. : This company was engaged in analysis of data relating to seismic for oil companies
(ii) Vimta Labs Ltd. : They are engaged in providing inspecting, testing and analysis services in connection with water, food, drug, chemical, petro products, mineral & water and contract research
(iii) Chokshi Laboratories Ltd.: The company was a commercial testing house engaged in testing of various products and offers services in the field of pollution control.
(iv) Syngene International Pvt. Ltd.: This company was formed for providing contract research services to overseas customers in the field of synthetic chemistry and molecular biology.
9. The assessee submitted before the TPO that the comparable cases identified by the TPO are not engaged in similar activities as that of the assessee. It was further submitted that the services provided by the comparable cases identified by the TPO were high end services, whereas the services performed by the assessee were in the nature of low end services. It was also submitted that two of the comparable companies identified by the TPO namely Vimta Labs Ltd. & Syngene International Pvt. Ltd. had engaged in transactions with related parties and were, therefore, not comparable. It was further submitted that the assets employed by Vimta Labs Ltd.and Alpha Geo Ltd. were much more than the assets employed by the assessee. It was also pointed out that the comparable cases identified by the TPO performed marketing functions also and they had to be face risk of bad debts whereas the assessee does not perform marketing functions or assumed risk for bad debts.
7 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)10. The TPO however was of the view that the objections raised by the assessee cannot be accepted. The TPO however, was of the view that the nature of activities performed by the comparable cases identified by her was same as that of the assessee. The TPO also held that some of the companies identified by the assessee also assumed risk of bad debts. With regard to companies identified as comparable by the TPO having related party transactions, the TPO held that such related transactions were not with group companies but were only on account of Key Management Personnel being one and the same persons. With regard to the objections regarding capital employed by the companies identified by the TPO being the same the TPO held that even the comparable companies identified by the assessee employed huge capital. Similar finding was given with regard to the performing of marketing functions by the comparable companies identified by the TPO. With regard to the objection that the assessee was performing low end services the TPO held as follows:
(a) The assessee employed 50 employees consisting of persons having Bachelor and Masters degree and some are Ph.Ds. There are support staffs.
(b) The assessee used lab equipment and computers to perform these functions.
(c) The assessee carried out efficacy studies of the seeds under different climatic and soil condition, fertility analysis etc. to comply with the requirement of regulatory bodies
(d) Providing support for obtaining approval for commercialization of hybrid seeds of Monsanto
(e)Analysis of hybrid seeds to ascertain pests resistant. The assessee also outsourced some of these studies
(f) Discovery of gene and its evaluation
(g) Laboratory Testing of genes, studying gene expression on a crop and whether seeds of such crop contained gene as per requirement.8 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)
(h) Assessee has a 25,000 Sq.ft. lab space and 10,000 sq. ft. of green house space. Pt has also has a well stocked library of technical journal and research reports.
For the above reasons, the TPO held that the type of services rendered by the assessee was more comparable to the type of services rendered by the comparables identified by her. Thereafter the TPO worked out the arithmetic mean of the four companies identified by her and also six companies identified by the assessee and arrived at 18.22%. This was later rectified as there were apparent mistakes in such calculation to16.28%. An addition on account of adjustment to ALP was determined by the TPO as follows:
Particulars As per revised
calculation.
Revenue from support services including contract 129,750,895
research services.
Profit from the above activity 8,594,456
Cost of the above activity 121,156,439
Profit markup on cost 7.09%
Arm's Length profit mark up 16.28%
Arm's length profit (Rs.) 19,719,483
Arm's Length price (Rs.) 140,875,922
Difference between transaction value and arms 11,125,027
length price (adjustment value)
The same was adopted by the AO and a sum of Rs.1,11,25,027 was added to the total income of the Assessee by the AO in the order of assessment.
11. Aggrieved by the order of the AO, the Assessee filed appeal before the CIT(A). The submissions as were made before the AO were reiterated before the CIT(A). In particular the following aspects were highlighted:
Assessee performs low end services: A comparative summary of the functions performed by the Assessee and its AE in relation to the research activity was provided in the form of a table given below:9 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)
Functions The Monsanto
Appellant USA
Determining overall concept, direction, and methodology for No Yes
research
Tracking and screening genetic databases and collating Yes No
information for identifying potential gene traits Preliminary study of gene configurations for tracking desired Yes No characteristics Identifying leads and decision to conduct further investigation No Yes Field trials and selection of potential products for No Yes commercialization Advanced development of the hybrid! variety and demonstrate efficacy of trait Development of data / documentation for seeking approval No Yes Seek local government] regulatory approvals and respond to local Yes No regulatory procedures Develop plans for product commercialization / launch No Yes Marketing / sales function No Yes It was contended that the Assessee's activities (research support services) were confined to low-end routine work, not involving use of any significant assets or intellectual capital or undertaking of any entrepreneurial risk. It was highlighted that the Assessee's research work was negligible in comparison to the global R&D activity of its AE (viz, its parent company -- Monsanto USA).
Risks Assumed by the Assessee: The Assessee submitted that it is a risk free service provider. In this regard, the Assessee pointed out the risk assumed by it in the matter of providing contract market research services in the form of the following chart:10 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)
Risk The appellant Monsanto
USA
Market risk No Yes
Research risk No Yes
Price/ margin risk (due to cost overruns etc.) No Yes
Bad debt risk No Yes
Third party liability risk in relation to research No Yes
results.
In the light of the above description of the risk assumed and functions performed by the Assessee in respect of the international transaction, the Assessee gave a description of the nature of functions and risks assumed by the four companies chosen as comparable by the TPO. A comparative analysis of the activities of the said additional companies ( based on information available in the annual accounts and official websites of the companies) vis-à-vis the activity of the assessee, was given by the Assessee in the form of the following table:
S.No. Name of company Activity of identified company The assessee's activity
1. Alphageo (India) Ltd. - Acquiring and processing Provision of research seismic data support and
- Provides seismic survey facilitation services.
services to oil companies and government, in relation to oil exploration projects.
2. Choksi Laboratories - Analytical testing of building materials, drugs, food, water, etc.
3. Syngene - Research in the field of International Pvt. synthetic chemistry and Ltd. molecular biology.
- Sale of products arising from research activity.
4. Vimta Labs Ltd. - Clinical trails
- Environmental Monitoring and impact assessment.
- Analytical testing of a wide
variety of consumer
products.
It was firstly submitted that the four companies chosen by the TPO as comparable are not engaged in the same/similar activity as the Assessee, the 11 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) Assessee did only support in the field of research without assuming any risk. It was submitted that the four comparable companies chosen by the TPO were not risk free service providers but perform marketing function assume entrepreneurial risks and make substantial investments in assets. The following chart was filed by the Assessee:
Particulars Alpha Geo Choksi Syngene Vimta Labs The Assessee Nature of activity Not Not Not Not Research whether comparable comparable comparable comparable support.
comparable to the
assessee
Level of activity High-end High-end High-end High-end Low-end
Related party / Yes No Yes No Transaction
controlled under
transactions (Rs. 0.42 cr. (Transactions consideration
Amounting with holding
to 4.27% of company -
sales) Biocon Ltd.)
Relatively higher Yes Yes Yes Yes No
investment in
total assets
0.46
Ratio of costs to 1.02 0.91 2.46
assets
Marketing / sales Yes Yes Yes Yes No
function
Bad debt risk Yes Yes Yes Yes No
Price / margin Yes Yes Yes Yes No
risk
Business risk Yes Yes Yes Yes No
Yes - indicate existence of specified functions/assets/risk No - indicate absence of specified functions/assets/risk
12. Without prejudice to the Assessee's contention that the four additional companies identified by the learned TPO should not be considered as comparable, it was submitted that the learned TPO should have also included other similar instances existing in the database at the time of assessment proceedings, as comparable which are also engaged in the 12 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) same/ similar activity as the four additional companies selected by the TPO, viz., :
1. Clingene International Private Limited
2. Panacea Biotec Limited. ('Research and development' segment)
3. I D C (India) Limited
4. CRISIL Limited ('Information segment' pertaining to the company's research activity)
5. ICRA Limited ('Information segment' pertaining to the company's research activity)
13. It was brought to the notice of the learned CIT(A) that the Assessee had submitted before the AO vide letter dated March 24, 2006 requesting the learned AO to include Clingene International Pvt. Ltd. as a comparable (along with other companies considered in the TPO's order) for benchmarking the Assessee's international transaction. It was pointed out that as per the annual report of Clingene International Pvt. Ltd. for FY 2002- 03 the said company was engaged in similar activity as Syngene International Pvt. Ltd. -- one of the companies considered by the learned TPO as comparable. It was highlighted that the operating profit margin of Clingene was (-) 33.97% of its operating cost. Thus, it was prayed that if Syngene is considered as comparable, then even Clingene International Pvt.
Ltd. ought to have been included as a comparable in determining the arm's length price. After including Clingene International Pvt. Ltd. as comparable (alongwith the correct profit margins of the ten companies considered by the learned TPO in order dated March 20, 2006), the arithmetic mean of the profit margins of all eleven companies would stand reduced to 11.71%. Since the profit margin from the Assessee's contract research and support services activity was 7.08% on cost, the transaction value the Asssessee's international transaction meets with the arm's length principle by applying 13 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) the safe harbor rule enshrined in the second proviso below Section 92C(2) of the Act which provides that if the variation between the arm's length price determined by the TPO and price at which the international transaction has actually been undertaken by the Assessee does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. The following chart would explain the contention put forth by the Assessee:
Sl.No. Company Name Year OP%
1. Amtrac Management Services Ltd. 31.3.2003 -1.13%
2. Dabur Research Foundation 31.3.2003 6.69%
3. Hinduja Group India Ltd. 31.3.2003 4.25%
4. ICI India Research & Technology
Centre 31.3.2003 0.15%
5. Manu Consultants Ltd. 31.3.2003 1.24%
6. Raptakos, Brett Test Laboratories
Ltd. 31.3.2003 7.80%
7. Vimta Labs Ltd. 31.3.2003 26.08%
8. Alphageo (India) Ltd. 31.3.2003 37.28%
9. Syngene International Pvt.Ltd. 31.3.2003 46.51%
10. Choksi Laboratories Ltd. 31.3.2003 33.36%
11. Clingene International Pvt.Ltd. 31.3.2003 -33.97%
------------
ARITHMETICAL MEAN 11.71%
------------
Calculation of Arm's Length Price based on the above:
Particulars Rs. Revenue from Contract Research 12,97,50,895 Profit from Contract Research support 85,94,456 Cost of Contract Research support 12,11,56,439 Profit markup on cost 7.09% Arm's Length Profit mark up 11.71% Arm's Length Profit 1,41,84,851 Arms's Length Price 13,53,41,290
Difference between the transaction value and Arm's Length Price 55,90,395 95% of Arm's Length Price 12,85,74,225 14 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) Since the Transaction value falls within 5% range, the Assessee's price should be accepted as at Arm's Length.
14. Without prejudice to the above contentions and in the alternative the Assessee pointed out that in terms of Rule 10B(1)(e)(i) of the rules, the TNMM can be applied by taking three criteria viz., the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise can be computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. The Assessee point out that if cost to Asset ratio is taken in respect of the companies identified by it and that identified by the TPO, the Assessee's cost to asset ratio is much higher. The following charts were given to demonstrate the above proposition:
Chart-1: Ratio of Operating Costs to Assets of the comparable companies identified by the Assessee:
Name of the Company Operating cost/Assets
Amtrac Management Services Ltd. 0.57
Dabur Research Foundation 1.47
Hinduja Group India Ltd. 1.10
ICI India Research & Technology Centre 1.13
Manu Consultants Ltd. 1.05
Raptakos, Brett Test Laboratories Ltd. 1.16
---------------------
Arithmetic Mean 1.08
The Assessee's Operating Cost to Asset 2.46
Chart-2: Ratio of Operating Costs to Assets of the 4 comparable companies identified by the TPO:
Name of the Company Operating cost/Assets 15 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) Alpha Geo Ltd. 0.46 Vimta Laboratories 0.91 Choksi Laboratories Ltd. 0.35 Syngene International Pvt.Ltd. 1.02 --------------------- Arithmetic Mean 0.69 The Assessee's Operating Cost to Asset 2.46
15. Finally it was submitted that even if all contentions of the Assessee are rejected and it is held that the comparable identified by the TPO are comparable with that of the Assessee functionally, even then in terms of Rule 10B(3) of the Rules, adjustments to the profit margin of the comparables have to be made to eliminate the effects of differences in functions, asets and risks.
16. The CIT(A) after considering the above submissions on behalf of the Assessee, held as follows:
a) The Assessee was a low end service provided for it's AE and it's role was limited to providing support services in relation to the research activities of the Associated enterprises. The Assessee was not taking any business risk like contract risk, market risk, warranty risk, price risk etc., which were borne by the Associate enterprise. The Intellectual Property Right (IPR) was owned by the AE and not the Assessee. The Assessee only deployed necessary human resources and infrastructure for research. The above characteristics of the international transaction of the Assessee were not kept in mind while making functional comparison with those selected by the TPO.
b) The TP study done by the Assessee was in accordance with the Act and the Rules and confirmed to the OECD guidelines. Though identical transaction could not be located even by the Assessee, an attempt was made to find out comparable transactions as close as possible to the 16 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) controlled transaction. This according to CIT(A) was evident from the fact that even the TPO did not reject the comparable identified by the Assessee.
c) The CIT(A) also held that Syngene International Pvt. Ltd. And Clingene International Pvt. Ltd. Were both subsidiary companies of Biocon Ltd.
Engaged in identical business and the TPO arbitrarily selected Syngene International Pvt. Ltd. As comparable and ignored Clingene International Pvt. Ltd. As comparable. The CIT(A) held that had Clingene International Pvt. Ltd. been considered as comparable then the arithmetic mean would of all comparables selected by the TPO and the Assessee would be only 11.71% and applying the safe harbour rules in terms of Second Proviso below Sec.92C(2) of the Act, the difference in price between the one adopted by the Assessee and the ALP determined by including Clingene International Pvt. Ltd. Would be within + or - 5% range calling for no adjustment to the price adopted by the Assessee in respect of the international transaction.
For the above reasons, the CIT(A) deleted the addition made by the AO.
17. Aggrieved by the order of the CIT(A), the Revenue has preferred the present appeal before the Tribunal. We have heard the submissions of the learned D.R. and the learned counsel for the Assessee.
18. The learned D.R. submitted that the findings of the CIT(A) that the TPO did not take into account the functional dissimilarity between the comparable cases relied by the Assessee and the comparable cases identified by the TPO on her own study, is not correct. It was submitted by her that the further finding of the CIT(A) that the Assessee was performing low end services is also not correct. In this regard the Assessee pointed out to the findings of the TPO in her order as to how the functions performed by the Assessee were high end. It was also submitted by her that the process of 17 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) selection of comparable as adopted by the Assessee as well as the TPO were identical viz., selection of data from "prowess" and "capitalline", keeping in mind the nature of service rendered by the Assessee to its AE viz., contract research and corporate support services. It was her submission that there is always an element of subjectivity in the process of selection of comparable on the basis of functional similarity. It has to be seen to what extent the comparable functional similarity adopted by the TPO is arbitrary. It was her submission that the TPO in the present case has given valid reasons for choosing 4 additional companies as comparable with that of the business of the Assessee based on functions performed. It was her submission that neither the CIT(A) nor the Assessee has been able to show to what extent the action of the TPO is arbitrary.
19. Her further contention was that the findings of the CIT(A) that the TPO arbitrary did not choose Clingene International Pvt. Ltd., as a comparable company is not correct. In this regard it was submitted by her that data relating to Clingene International Pvt. Ltd., was not brought to the notice of the TPO at all. Our attention was drawn to the fact that the data relating to Clingene International Pvt. Ltd., was brought to the notice of the AO by Assessee's letter dated 24.3.2006. The TPO's order was passed on 20.3.2006. It was therefore submitted that the TPO had not acted arbitrarily in not considering Clingene International Pvt. Ltd., as comparable. Without prejudice to the above contention, it was her submission that though functionally Clingene International Pvt. Ltd., can be considered as comparable to the functions performed by the Assessee as it was also engaged in contract research of drugs, yet the results of Clingene International Pvt. Ltd., for the Financial Year ending 31.3.2005 cannot be taken for comparison for the reason that the said company incurred loss due to the following reasons as stated in the Directors Report:
18 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)"For the Financial year, the company has incurred a loss of Rs.5.56 million as against a profit of Rs.8.4 million in the previous year. This is due to the completion of the diabetes study for Surromed Inc. and the continuation of the self-sponsored diabetic study. This study has enrolled two research partners viz., Strand Genomics and IISC and the progress has generated several potentially high value patents for Clingene International Pvt. Ltd.in the area of new biomarker for Diabetic Nephrology.
The company is also in the process of setting up a Human Pharmacology unit to carry out Phast-1 to Phase-3 clinical trial and BAVBE studies. Necessary application for establishment of the same have been filed and the facility is expected to be operational by September, 2003."
Based on the above remarks of the directors the learned D.R. submitted that firstly Clingene International Pvt. Ltd. was doing its own research and had suffered loss during the previous year due to self-sponsored research and therefore functionally it should not be regarded as comparable or in the alternative suitable adjustment ought to be made to the result of loss before benchmarking the same as comparable.
20. It was also submitted by her that the CIT(A) has not considered the comparability factor of the 4 comparable identified by the TPO on his own but has only held that the same are not comparable without assigning his own reasons.
21. The learned counsel for the Assessee reiterated submissions as were made before the CIT(A). With regard to Clingene International Pvt. Ltd., it was submitted by him that they were in the business of undertaking contract research for others and their results were comparable with that of the Assessee.
22. We have considered the rival submissions. It is not in dispute before us that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the 19 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) comparability of the comparable relied upon by the TPO, the nature of services performed by the Assessee whether it is low end or high end service and whether the TPO was justified in rejecting one of the comparable companies identified by the Assessee viz., Clingene International Pvt.Ltd. and in the event of the same being considered alongwith the other comparable instances relied by TPO the difference between ALP and the Price adopted by the Assessee would be less than 5% plus or minus contemplated by the second Proviso to Sec.92C(2) of the Act and consequently there would be no need to make any adjustment to the price adopted by the Assessee in respect of the international transaction entered into with its AE. In this regard the relevant provisions of the Act have to be noticed.
Computation of arm's length price.
92C. (1) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe24, namely :--
(a) comparable uncontrolled price method;
(b) resale price method;
(c) cost plus method;
(d) profit split method;
(e) transactional net margin method;
(f) such other method as may be prescribed24 by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed25 :
26[Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price.] 20 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :--
(a).......
to
(d)........
(e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii);
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:--
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly 21 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
(3) An uncontrolled transaction shall be comparable to an international transaction if--
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into :
Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.
23. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. In terms of Rule 10B(3) of the Rules an uncontrolled transaction shall be considered as comparable if none of the differences between the controlled and uncontrolled transactions materially affects the price or cost charged or paid in, or the profit arising from, such transactions in the open market. If there is scope for variation in the price or cost charged or paid in, or the profit arising from, such transactions in the open market, such variation should be capable of being quantified and suitable adjustment made to eliminate the material effect of such differences.
22 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)24. We will first take up for consideration one of the plea of the Assessee before CIT(A), which was accepted by the CIT(A) to include Clingene as a comparable (along with other companies considered in the TPO's order) for benchmarking the Assessee's international transaction. It is not in dispute that as per the annual report of Clingene International Pvt. Ltd. for FY 2002- 03 the said company was engaged in similar activity as Syngene International Private Limited -- one of the companies considered by the learned TPO as comparable. The operating profit margin of Clingene International Pvt. Ltd was (-) 33.97% of its operating cost. It was the plea of the Assessee that if Syngene International Pvt. Ltd is considered as comparable, then even Clingene International Pvt. Ltd ought to have been included as a comparable in determining the arm's length price. After including Clingene International Pvt. Ltd as comparable (alongwith the correct profit margins of the ten companies considered by the learned TPO in order dated March 20, 2006), the arithmetic mean of the profit margins of all eleven companies would stand reduced to 11.71%. Since the profit margin from the Assessee's contract research and support services activity was 7.08% on cost, the transaction value the Asssessee's international transaction meets with the arm's length principle by applying the safe harbor rule enshrined in the second proviso below Section 92C(2) of the Act which provides that if the variation between the arm's length price determined by the TPO and price at which the international transaction has actually been undertaken by the Assessee does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. The objection of the learned D.R. was that the results of Clingene International Pvt. Ltd., for the Financial Year ending 31.3.2005 cannot be taken for comparison for the reason that the said company incurred loss due to the fact that it was doing not only contract research but was also doing own research. Operating Profit ('OPM') on total cost considered by the Assessee according to the 23 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) learned D.R. would not be proper as the operating expenses would be inclusive of own research as well as contract research.
25. To appreciate this contention, we have to have a look at the way Operating Profit has been arrived at both in the case of Clingene International Pvt. Ltd and Syngene International Pvt. Ltd, which are as follows:
Clingene International Pvt. Ltd Particulars Amount F.Y.2002-03 Sales/Service Income (as per P & L A/c) 1,10,72,704 Total Operating Income 1,10,72,704 Profit Before Tax (as per P & L A/C.) (60,52,929) Add: Interest Expenses (as per P & L A/c.) 3,55,460 Operating Profits (56,97,469) Operating Costs 1,67,70,173 Operating Profit % on cost -33.97% Syngene International Pvt. Ltd Particulars Amount F.Y.2002-03 Total Income (as per P & L A/c) 26,17,97,528 Less: Non operating Income 5,50,695 Total Operating Income 26,12,46,861 Profit Before Tax (as per P & L A/C.) 8,21,85,579 Add: Interest Expenses (as per P & L A/c.) 12,92,903 24 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) Less: Non-operating income (as per P& L A/c) 5,50,695 Operating Profits 8,29,27,815 Operating Costs 17,83,19,046 Operating Profit % on cost 46.51% Note: Clingene International Pvt. Ltd's income is only in the form of fee for contract research. Synegene International Pvt. Ltd's income of Rs.26,17,97,528 comprises of Contract Research fee of Rs.22,51,53,306 and Sale of compounds of Rs.3,60,93,565. To that extent Synegene International Pvt. Ltd's income includes receipts from activities other than Contract Research also.
26. We will now consider the expenditure in the form of Contract Research and other operating expenses debited in the profit and loss account of both the above companies.
Total expenditure debited in the Profit and Loss A/C. towards Contract Research and other operating expenses:
Syngenie International Pvt. Ltd Rs.16,15,48,290 Clinigene International Pvt. Ltd Rs. 1,58,80,701 A Break-up of the Contract Research and other operating expenses (with figures for the year ending 31.3.2002) in respect of Syngenie International Pvt. Ltd and Clingene International Pvt. Ltd is at page 105 and 121 respectively of the paper book-I filed by the Assessee. A perusal of the same shows that both companies have incurred expenses on chemicals and reagents, sales, employees costs etc. The OPM has been worked out by the Assessee as well as TPO as:
Net Margin = Operating Profit / Operating Cost *100 (Operating Profit = Profit Before Tax + Non-operating income / expense) (Operating Cost = Total Cost - Interest - Non-operating expenses) 25 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) There is no break up of expenses as between own research and contract research in the case of Clingene International Pvt. Ltd but comparison of the figures of expenses as on 31.3.2002 does not show any significant difference in the expenses head as well as the quantum of expenses. Similarly there is no break up of figures of expenditure in the case of Synigene International Pvt. Ltd as expenses relating to sale of compounds and contract research. We are therefore of the view that Clingene International Pvt. Ltd would not cease to be a comparable company because of the fact that they were also doing own resource during the financial year ending 31.3.2003. As pointed out above, downward adjustment to the operating profit margin of Synigene International Pvt. Ltd ought to have been given for the activity relating to sale of compounds. An upward adjustment ought to have been made for the expenses relating to own research having been considered while arriving at the operating profit margin. Thus the adjustment to be made to the operating profit margins of the two comparables of Synigene International Pvt. Ltd and Clingene International Pvt. Ltd would get neutralised (without going into actual details of quantification) and therefore their margins as claimed by the Assessee for arriving at the arithmetic mean of 11.71% after including all comparable companies considered by the TPO and the results of Clingene International Pvt. Ltd. is held to be proper and acceptable. In that view of the matter the difference between the profit margin from the Assessee's contract research and support services activity of 7.08% on cost being the transaction value the Assessee's international transaction meets with the arm's length principle by applying the safe harbor rule enshrined in the second proviso below Section 92C(2) of the Act which provides that if the variation between the arm's length price determined by the TPO and price at which the international transaction has actually been undertaken by the Assessee being not excess of five per cent of the latter, the price at which the international transaction has actually been undertaken shall by the Assessee is held to be at arm's length. The order of the CIT(A) is upheld on this ground. In view of the above conclusion, the other issues with regard to 26 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) comparability (whether the Assessee was performing low-end services and the comparable companies were performing high-end services etc.) and non- consideration of other factors laid down in Rule 10B(1)(e)(i) are not being considered. For the reasons given above, the order of the CIT(A) is upheld.
26. For the reasons given above, appeal being ITA No.3423/Mum/08 is dismissed.
27. ITA No.6558/Mum/2008 (Revenue's appeal for AY 04-05) Gr.No.2 raised by the revenue is identical to the only ground of appeal of the revenue in AY 03-04 which we have already decided. The said ground of appeal reads as follows:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the Addition of Rs.1,85,13,396/- made by the TPO to the value of international transaction undertaken by the Asssessee, without appreciating the facts of the case."
28. The facts with regard to the Transfer pricing adjustment made in this year are identical to the facts as it prevailed in AY 03-04. The Assessee's operating profit margin to cost in AY 04-05 was 18.87%. The TPO called upon the Assessee to explain as to why the AE compensated the Assessee at cost plus 18.87% compared to cost plus 7% agreed mark up in the earlier year. The Assessee explained that MHPL charged its AE on a costs plus basis, whereby costs are budgeted at the time of invoice and billed to the AE alongwith the agreed mark-up and that during the relevant period, the actual costs incurred were lower than that budged costs which resulted in a higher recovery and hence the higher profitability of 18.87% on cost. A certificate from the AE to the said effect was also filed before TPO. It was further confirmed by the AE that the amounts paid to the Assessee will not be recovered by it from the Assessee in future in any form.
27 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)29. The TPO drew up list of comparable 11 companies, which were the same as was done by the TPO in AY 03-04. The arithmetic mean of these 11 companies is as follows:
Sr.No. Name of the Company Profit margin % on cost
1. Amtrac Management Services (-) 9.86%
2. Dabur Research Foundation 0.73%
3. Hinduja Group India Ltd. 5.79%
4. IDC India Limited 11.99%
5. ICI India Research and Technology (-) 0.91% Services.
6. Manu Consultants Ltd. 0.73%
7. Raptakos Brett Tests Laboratories 8.54% Ltd.
8. Alpha Geo Ltd. 47.56%
9. Vimta Laboratories 61.04%
10. Choksi Laboratories Ltd. 33.48%
11. Syngene International Pvt. Ltd. 71.12% Arithmetic Mean of all 11 companies 20.93% MHPL 18.87%
30. The TPO thereafter determined the ALP of the international transaction as follows:
"18. From the aforesaid and the certificate provided, it is clear that the assessee has not put the AE in knowledge that the assessee has charged the AE on a basis actual cost plus more than 7% mark up. Accordingly, there is always the possibility of the AE asking the money back from the assessee in the subsequent years. Further more the AE's reply, it is inferred that the AE had paid to the assessee assuming that it is being charged at cost plus 7%. Therefore, assuming that the assessee has actually received its remuneration at cost plus 7%, this office is deriving the assessee's cost and consequently the margins to be earned by the assessee based on the margins earned by comparables. The calculation of arm's length mark up is as hereunder:
Amount recovered by the assessee from its AE for the services Rs.14,22,06,270 provided(the AE has confirmed that it has paid this amount of 28 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) Rs. 14,22,06,270 on a basis cost plus 7% so this amount is being treated as cost plus 7%) Cost after mark down of 7% mark-up Rs.13,29,03,056 (Rs.14,22,06,270 x100/107) Arms length mark-up ( as discussed earlier in the order) 20.98% over costs Arm's length mark-up (Rs.13,29,03,056 x 20.93 / 100) Rs.278,16,5610 Arm's length price (Rs.13,29,03,056 + Rs. 2,78,16,610) Rs.16,07,19,666 Adjustment to be made Rs.1,85,13,396 (Rs.16,07,19,666 less Rs.14,22,06,270)
19. In view of the aforesaid, it is held that the assessee should have charged a mark-up of 20.93% over cost whereas it has charged a mark up of 7% embedded in the amount of Rs. 14,22,06,270/-. As elaborated above, an adjustment of Rs. 1,85,13,396/- is being made to the arm's length price of research, support, services. The Assessing Officer is required to make the adjustment as aforesaid."
31. On appeal by the Assessee the CIT(A) deleted the addition made by the AO based on TPO's report for identical reasons that were assigned by the CIT(A) for AY 03-04. In addition to the above, the CIT(A) held that if Clingene International Pvt. Ltd was considered as comparable then the arithmetic mean of the 11 companies including Clingene International Pvt. Ltd would be only 14.18% which was lower than 18.87% on cost adopted by the Assessee for its international transaction with the AE. On the action of the AO in considering 7% mark up on cost, the CIT(A) held as follows:
" 7.20. The TPO has also proceeded by applying the margins worked out by him on hypothetical cost base. Actual cost of the appellant was Rs. 11,96,35,967/-. After adding margins of the appellant. of Rs. 2,25,70,303/-, the amount charged to AE worked out to Rs. 14,22,06,270/-. Thus, margins of appellant stood out 18.87%. As per the terms and agreement with AE, the appellant was supposed, to charge cost plus 7%. Such charging was derived on the basis of budgeted cost. Since actual cost incurred by the appellant was less than the budgeted costs for the current year, its margin ultimately worked out to be 18.87%. The appellant also represented before TPO and filed confirmation before AO that excess sum charged is not refundable to its AE. In any event appellant had offered full margin of Rs. 2,25,70,303/- (18.87%) to tax. The TPO disregarded all these and did backward calculation. He began 29 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) with amount charged by appellant to its AE (ie Rs. 14,22,06,270/-). From that he reduced the assumed margin of 7% and considered the resultant figure (Rs. 13,29,03,056/- as hypothetical cost against actual cost (Rs. 11,96,35,967/-). On this hypothetical cost base, the TPO applied the arm's length margin as computed by him leading to double topping of the layers on cost i.e first retaining the difference of Rs. 1,32,67,089/- as part of hypothetical cost base and again inflating the same by the margin applied. Such an action of TPO is not supported by any provision of the Act and therefore not tenable. Further, the appellant demonstrated that if margins as calculated by TPO were applied to actual cost base even the appellant's charges/price to AE would have fallen within limits prescribed u/s 92C(2). Therefore, I hold that no adjustment would be required on this count also.
7.21. In view of the foregoing, it is observed that the mark-up charged by the appellant was higher than that earned by the comparables selected by the appellant through a scientific screening process. Further, for the year under consideration, the appellant has earned an actual higher return 18.87% (as against the agreed mark up of 7%) and the excess consideration received by the assessee has not been refunded and is not refundable to its AE and was also offered to tax. This important aspect was not considered by the TPO / AO. Therefore, having regard to facts of the case and material on record, the price disclosed by the assessee as ALP is required to be accepted. Consequently, the addition of Rs.1,85,13,396/- is directed to be deleted."
32. Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.2 before the Tribunal. The Learned D.R. and the learned Counsel for the Assessee adopted the same arguments that were advanced in the appeal for AY 03-04. We have already held while deciding the appeal of the Revenue for AY 03-04 that Clinigene International Pvt. Ltd. ought to be considered as comparable. It is not in dispute that if Clinigene International Pvt. Ltd is considered as comparable then 14.81 would be the arithmetic mean of profit margin. In that case the Assessee's margin on cost of 18.87% in respect of the international transaction with the AE is much higher and deserves to be accepted as at Arm's length. Besides the above, for argument sake, even if TPO's comparable and arithmetic mean of 20.93% is accepted as correct, even then there is no reason to treat the Assessee's margin on cost at 7%. The Assessee's margin is 18.87% and there is nothing on record to indicate 30 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) that the AE had agreed or is likely to refund the excess. If 18.87% is the margin on cost then difference between the value of international transaction by applying the arithmetic mean of 20.93% determined by the TPO and the actual value of international transaction by the Assessee with its AE, would be within the range of plus or minus 5% range, calling for no adjustment in view of the second proviso below Sec.92C(2) of the Act. Even on this basis the additional made by the AO was rightly deleted by the CIT(A). Consequently, we find no merit in Gr.No.2 raised by the Revenue in its appeal and the same is dismissed.
33. Gr.No.1 raised by the Revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing deleting the disallowance of interest of Rs. 15,15,000/- without appreciating the facts of the case."
The Assessee had advanced an interest free loan of Rs. 2 crores to Monsanto India Ltd., a group company (MIL), during the previous year 2000-01 i.e. Assessment year 2001-02. The said sum was advanced for placing an interest-free security deposit of Rs.2 Crores by MIL with the lessor in respect of flat taken in Mumbai on leave and license basis for providing accommodation to Mr. Sekhar Natrajan, the then Managing Director of MIL and who also was the South Asia Business Head of the Monsanto Group of companies.
34. According to the Assessee since it acts as the holding company for Monsanto group of companies in India, it was agreed that the Assessee would share the housing cost by providing the interest free security deposit which was to be placed with the landlord in terms of the leave and license agreement between the lessor and MIL. Accordingly, the aforesaid sum was advanced by the Assessee pursuant to consent of the Board of Directors of both the companies i.e., Assessee and MIL 31 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05)
35. During the assessment year under consideration, the Assessee had borrowed working capital loan of Rs.40,20,00,000 from MIL (amount outstanding as on March 31, 2004 was Rs.13,48,00,000) and paid interest of Rs.90,74,383 on the amounts borrowed from MIL The said loans were advanced at interest rate of 7.75% p.a. for the month of April 2003 and 7.5% p.a. for the period May 2003 to March 2004. According to the Assessee interest paid on working capital loan, corresponding proportionate to the interest free sum advanced, is allowable under Section 36(1)(iii) as the loan was provided for business purposes (i.e., placing the interest free security deposit for the accommodation of Monsanto's regional business head) and since there was no nexus between the funds borrowed from and lent to MIL.
36. The AO did not however agree with the contention of the Assessee and disallowed deduction of interest paid on working capital loan to MIL of Rs.15,50,000, corresponding to the interest free sum advanced to MIL i.e., interest computed at 7.75% p.a. on Rs. 2,00,00,000.
37. Before CIT(A), the Assessee submitted that the entire interest paid by the assessee on the working capital loan taken from Monsanto India Ltd. during FY 2003-04, is allowable under section 36(1)(iii) as the loan was taken for business purposes, the funds were fully utilized for carrying on business activities and were deployed as working capital. Further, there is no nexus between the funds borrowed from Monsanto India Limited and advance given. The assessee submitted that the advance p1aced with Monsanto India Limited (for security deposit with landlord) is for the purpose of business and is commercially justified. Further, the advance placed by the assessee with Monsanto India Limited way back in FY 2000-01 was a separate business transaction unlinked to the working capital loan taken by 32 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) the appellant during the AY under consideration. The assessee also placed reliance on the judicial precedents in the case of S A Builders Ltd vs CIT (289 ITR 26) (Supreme Court) and CIT vs Sridev Enterprises (192 ITR 165) (Karnataka High Court).
38. The CIT(A) held as follows:
"6.5 I have considered the appellant's arguments/submissions as well as AO's findings as discussed in his order. I agree with the appellant's contention that there is no nexus between the advance placed by the appellant and the working capital borrowing obtained by the appellant from Monsanto India Limited since there is a time appellant way back in FY 2000-2001 and the commercial expediency was not disputed by the AOs during the assessment proceedings for the earlier financial years. The appellant's claim that Mr. Shekhar Natrajan was South Asia Business head of Monsanto Group of Companies and hence loan advanced to sister concern for the purpose of his residence was out of appellant's business need has not been disputed by the AOs in earlier years when the loan was given. Further in the case of S.A. Builders, the Honourable Supreme Court has upheld that interest free advance made to the sister concern made for the purpose of business could not be the basis to disallow interest expenses. In view of the above, the addition of Rs. 15,50,000/- is deleted."
39. Before us the learned D.R. relied on the order of the AO. We have considered her submission. We are of the view that the order of CIT(A) deserves to be upheld. We have already seen that MHPL acts as a holding company for various downstream investments of the Monsanto group in India. As a group holding company of Indian ventures, MHPL provides certain support/steward services to various downstream ventures in India. Mr.Sekhar Natrajan, was South Asia head of the Monsato group. It is thus clear that the interest free advance in question was owing to commercial and business expediency. Therefore the disallowance of interest was rightly held 33 ITA NO.3423/MUM/2008(A.Y.2003-04) ITA No.6558/Mum/2008(A.Y.2004-05) to be not proper by the CIT(A). We do not find any grounds to interfere with the order of the CIT(A). Consequently, Gr.No.1 raised by the Revenue is dismissed.
40. In the result, ITA No.6558/Mum/08 is dismissed.
41. In the result, both the appeals of the Revenue are dismissed.
Order pronounced in the open court on the 9th day of Nov.2011.
Sd/- Sd/- (R.S.SYAL ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 9th Nov .2011
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"L" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
34 ITA NO.3423/MUM/2008(A.Y.2003-04)
ITA No.6558/Mum/2008(A.Y.2004-05)
Details Date Initials Designation
1 Draft dictated on Sr.PS/PS
2/11&4/11/11
2 Draft Placed before author 8/11 Sr.PS/PS
3 Draft proposed & placed JM/AM
before the Second Member
4 Draft discussed/approved JM/AM
by Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes
to the Head clerk
9 Date of Dispatch of order