Income Tax Appellate Tribunal - Delhi
Eli Lilly & Co. (India) Pvt. Ltd., ... vs Assessee on 24 November, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-2' : NEW DELHI)
BEFORE SHRI S.V.MEHROTRA, ACCOUNTANT MEMBER
and
SHRI A.T. VARKEY, JUDICIAL MEMBER
ITA No.780/Del./2014
(ASSESSMENT YEAR : 2009-10)
Eli Lilly & Co. (India) Pvt. Ltd., vs. ACIT, Circle 1 (1),
Plot No.92, Sector 32, Gurgaon.
Gurgaon.
(PAN : AAACE8901F)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ajay Vohra, Senior Advocate,
Shri Neeraj Jain, Advocate
Shri Abhishek Agarwal, CA & Ms Nitya
Gupta CA
REVENUE BY : Shri Syed Nasir Ali, CIT DR
Date of Hearing : 28.08.2015
Date of Pronouncement : 24.11.2015
ORDER
PER A.T. VARKEY, JUDICIAL MEMBER :
ITA NOS.780/Del/202 This appeal, at the instance of the assessee, is directed against the assessment order dated 24.12.2013 passed u/s 143(3) r.w.s 144C of the I.T. Act.
2. The assessee is, essentially aggrieved by the TP Adjustments made in respect of the business support services rendered by the assessee to its AE's, and raised the following grounds of appeal :-
"1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 20,06,38,576 as against the income of Rs. 19,61,38,326 returned by the appellant.
2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 45,00,250 in the 'international transactions' of business support services, on the basis of the order passed under section 92CA(3) of the Act by the TPO.
2.1 That the assessing officer/DRP erred on facts and in law in rejecting Educational Consultants India Limited from the set of comparable companies allegedly holding that Technical Assistance and Human Resource Development segment of the said company are functionally not comparable to the appellant.
2.2 That the assessing officer/DRP erred on facts and in law in rejecting Educational Consultants India Limited from the set of comparable companies without appreciating that the said company was considered by the DRP in the preceding year as comparable to the ITA NOS.780/Del/203 appellant and there ought to be consistency in the approach of the revenue.
2.3 That the assessing officer/DRP erred on facts and in law in considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the appellant:
i. Choksi Laboratories Ltd. ii. WAPCOS Limited
iii. Basiz Funds Services Private Limited 2.4 That the assessing officer/DRP erred on facts and in law in considering Basiz Funds Services Private Limited in final set of comparable companies without appreciating that the company is earning super normal profit margin of 46.75%.
2.5 That the assessing officer/DRP erred on facts and in law in not considering the following comparable companies placed on record by the appellant during the course of proceedings before the DRP:
(i) M.N. Dastur & Company (P) Limited
(ii) Simon India Limited
(iii) Telecommunications Consultants India Limited
(iv) Ma Foi Global Services Limited
(v) Microgenetics System Limited
(vi) Allsec Technologies Limited
(vii) CG-Vak Software & Exports Limited 2.6 That the assessing officer/DRP erred on facts and in law in rejecting comparability adjustment to account for difference in working capital employed by the appellant vis-à-vis comparable companies considered by the TPO, allegedly holding that the onus in this ITA NOS.780/Del/204 regard was on the appellant to demonstrate the reasons and calculation of working capital adjustment, which was not discharged.
2.7 That the DRP / TPO erred on the facts and in law in not being consistent while denying on the claim of working capital adjustments have been allowed in case of other assesses.
3. That the assessing officer erred on facts and in law in levying interest under section 234B and section 234C of the Act."
3. The assessee is a wholly owned subsidiary of Eli Lilly Netherlands B.V. and engaged in the business of trading of formulations in the domestic market which is purchased from its AE's and third parties. It is also into marketing and selling of life saving drugs formulations that find usage in the treatment of several disease segments ranging from Oncology, CNS, Cardiovascular, Cancer, Infectious diseases, Endocrine, etc. It filed its return of income on 30.09.2008 declaring taxable income of Rs. 19,61,38,326/-, which came to be assessed at an income of Rs. 20,06,38,580/- dated 24.12.2013 u/s 144C/143(3) of the Act and, hence this appeal by appellant company.
4. Ground No. 1 is general in nature and, therefore, does not require any adjudication.
ITA NOS.780/Del/205
5. Ground Nos.2 to 2.7 relate to an adjustment of Rs. 45,00,250 in the 'international transactions' of business support services, on the basis of an order passed under section 92CA(3) of the Act by the TPO. During the course of hearing, the learned counsel made his submission in support of grounds 2.1 and 2.2 of the Grounds of appeal. The facts in relation to the above ground are that for the relevant assessment year, the assessee had undertaken the following international transactions:
Sr. Types of International Method Total Value of No Transaction selected Transaction .
1 Purchase of Formulations TNMM 1,45,72,55,486 2 Co-ordination of Clinical Trials TNMM 21,95,64,342 in India 3 Provision of Business Support TNMM 7,71,49,367 Services 4 Payment of interest on external CUP 1,14,33,577 commercial borrowings 5 Cost recharges to AEs - 93,74,320 6 Cost reimbursements to AE's - 41,58,397
6. During the previous year, relevant to the A.Y. 2009-10, the assessee received an amount of Rs. 7,71,49,367/- for Business Support Services. The assessee sought to justify the consideration received for the international transactions entered into with the AEs to be at ALP. The assessee submitted a Transfer Pricing Report adopting operating profits to the total cost as its profit level indicator (hereafter 'PLI') for the transfer pricing studies. The ITA NOS.780/Del/206 assessee applied the Transactional Net Margin Method (hereafter 'TNMM'), which was considered to be the most appropriate method for the purposes of benchmarking the international transaction. The assessee's operating profit margin (i.e. operating profit/total cost) was computed at 9.82% and the assessee claimed that the same was comparable with other companies rendering Business Support Services. For the purposes of the transfer pricing study, the assessee chose 14 comparable entities and the result of the benchmarking analysis is as under:
Sr. Name of the Company Weighted average No. OP/TC (%) 1 Cyber Media India Online Limited 8.43% 2 IDC (India) Limited 15.08% 3 Times Innovative Media Limited -2.21% 4 Educational Consultant Ind Limited 7.39% (Segment) (Technical assistance & HRD) 5 Capital Trust Limited -6.71% 6 Crisil Limited 21.41% 7 ICRA Management Consulting Services 4.04% Limited 8 Access India Advisor Limited 37.75% 9 Besant Raj International Limited -11.74% 10 ITDC Limited 10.29% 11 Saket Projects Limited 23.65% 12 In House Production Limited (Segment) 0.31% (Healthcare division) 13 Overseas Manpower Corpn. Limited 13.10% 14 Acquire Talent Services Limited -3.54% Average 8.37% ITA NOS.780/Del/207
7. It was submitted that since, arithmetic average of the operating profit margins of the said comparables was computed 8.37%. According to the assessee, as the price charged in its international transactions is more than the said arithmetical mean price, the price charged in the international transactions is treated as at Arm's length.
8. The TPO, by an order dated 29th January, 2013, passed under section 92CA(3) of the Act, computed the TP adjustment at Rs. 63,40,748/- (Rupees Sixty Three Lacs Forty Thousand Seven Hundred and Forty Eight). The TPO accepted the method adopted by the Assessee (i.e. TNMM), but rejected the benchmarking report. The TPO also rejected the assessee's claim for any adjustment on account of working capital provided to the assessee and/or risks borne by the AE.
9. Further, TPO applied the following filters for selection of comparable companies in order to benchmark the international transaction of provision of business support services:
i) Companies whose data is not available for FY 2008-09 are excluded
ii) Companies whose Market/Business Support Service income < Rs. 1 Cr. are excluded ITA NOS.780/Del/208
iii) Companies whose revenue from Market/Business Support Services is less than 75% of total operating revenues are excluded.
iv) Companies having more than 25% related party transactions of income are excluded
v) Companies having different financial year ending (i.e. not March 31, 2009) or data of the company does not fall within 12 month period i.e. 01.04.2008 to 31.03.2009, are rejected
vi) Companies that are functionally different from the taxpayer are excluded
vii) Companies that are having peculiar economic circumstances are excluded.
10. The TPO applied the aforesaid criteria of acceptance/ rejection and accordingly, rejected following companies from the set of companies submitted by the assessee:
Sr. Name of the Company Remarks of the TPO No. 1 Cyber Media India Online Limited Functionally not comparable 2 Times Innovative Media Limited Functionally not comparable 3 Educational Consultant Ind Functionally not Limited (Segment) comparable (Technical assistance & HRD) 4 Capital Trust Limited Functionally not comparable ITA NOS.780/Del/209 5 Crisil Limited Functionally not comparable RPT > 25% 6 ICRA Management Consulting Functionally not Services Limited comparable 7 Access India Advisor Limited Functionally not comparable Sales only 18 lacs 8 Besant Raj International Limited Functionally not comparable 9 ITDC Limited Functionally not comparable 10 Saket Projects Limited Functionally not comparable 11 In House Production Limited Functionally not (Segment) comparable (Healthcare division) 12 Overseas Manpower Corpn. Functionally not Limited comparable 13 Acquire Talent Services Limited Data not available
11. Also, the TPO brought following companies in the final set of comparable companies which were rejected by the assessee in its transfer pricing study on account of functional dissimilarity:
Sr. Name of the Company OP/TC (%)
No.
1 Best Mulyankan Consultants Ltd. 9.91%
2 Basiz Fund Services Pvt. Ltd. 46.75%
3 Indus Technical & Financial 6.45%
Consultants Ltd.
4 Immacs Management Services Ltd. 14.54%
5 Shristi Urban Infrastructure 8.66%
Development Ltd.
6 Choksi Laboratories Ltd. 23.19%
7 Tata Consulting Services Ltd. 26.08%
(Segment)
8 WAPCOS Ltd. (Segment) 23.60%
ITA NOS.780/Del/2010
12. The final set of 9 comparable companies considered by the TPO in the impugned order, having an average operating profit margin of 18.85%, is as under:
Sr. Name of the Company OP/TC (%)
No.
1 Best Mulyankan Consultants Ltd. 9.91%
2 IDC (India) Ltd. 10.46%
3 Basiz Fund Services Pvt. Ltd. 46.75%
4 Indus Technical & Financial 6.45%
Consultants Ltd.
5 Immacs Management Services Ltd. 14.54%
6 Shristi Urban Infrastructure 8.66%
Development Ltd.
7 Choksi Laboratories Ltd. 23.19%
8 Tata Consulting Services Ltd. 26.08%
(Segment)
9 WAPCOS Ltd. (Segment) 23.60%
Average 18.85%
13. Accordingly, the TPO computed an adjustment of Rs. 63,40,748/- to the total income of the assessee on account of difference in arm's length price of provision of business support services by the assessee to its associated enterprises, as under:
Operational Cost for Business Support 7,02,48,000 Service Segment Arm's Length Price at a margin of 118.85% 8,34,89,748 Price received 7,71,49,000 Adjustment 63,40,748 ITA NOS.780/Del/2011
14. Upon receiving the Draft Assessment Order forwarded by the Assessing Officer to assessee and served upon the assessee on 2nd March, 2013 under section 143(3) of the Act read with section 144C(1) of the Act, the assessee filed its objections to the same before the Dispute Resolution Panel-1, New Delhi (hereafter 'DRP') against the adjustment proposed by the Assessing Officer in its draft order. The DRP has discussed in detail, all the objections raised by the assessee and vide an order dated 05.09.2013 directed to include In House Production Limited and to exclude Tata Consulting Engineers Limited from the final set of comparables. As a result, the final set of 9 comparable companies having an average operating profit margin of 16.23%, is as under :-
Sr. Name of the Company OP/TC (%)
No.
1 Best Mulyankan Consultants Ltd. 9.91%
2 IDC (India) Ltd. 10.46%
3 Basiz Fund Services Pvt. Ltd. 46.75%
4 Indus Technical & Financial 6.45%
Consultants Ltd.
5 Immacs Management Services Ltd. 14.54%
6 Shristi Urban Infrastructure 8.66%
Development Ltd.
7 Choksi Laboratories Ltd. 23.19%
8 In House Production Limited 2.51%
9 WAPCOS Ltd. (Segment) 23.60%
Average 16.23%
ITA NOS.780/Del/2012
15. Consequently, Assessing officer vide an order dated 24.12.2013 read with order of TPO under section 144C(10)/92CA(3) of the Act, made an addition of Rs. 45,00,250/- to the total income of assessee as under :-
Operational Cost for Business Support 7,02,48,000 Service Segment Arm's Length Price at a margin of 8,16,49,250 116.23% Price received 7,71,49,000 Adjustment u/s 92CA 45,00,250
16. In the above background, the assessee is in appeal against the final assessment order, inter alia on the ground that DRP/TPO erred in excluding Educational Consultant India Limited (EDCIL) (Technical assistance & HRD) (segment) from the final set of comparable companies. The TPO has held that EDCIL engaged in educational consultancy business and is not providing any services and therefore functionally not comparable to the appellant.
Further, DRP in this regard has held as under:
"According to the assessee EDCIL operates in three segments:
Technical Assistance, Institutional Development and Human Resources Development. The services provided under Technical Assistance and Human Resource Development are considered to be different from the ITA NOS.780/Del/2013 assessee. The comparable segment cover services including feasibility studies, training, mgmt services, recruitment services etc. Hence EDCIL's services cannot be considered to be comparable with that of assessee. The objection of the taxpayer is rejected."
17. In pursuance to the above, the assessee submitted that this company is engaged in provision of support services in the following areas:
"Student placement: The objective is to place international/NRIs/PIO in Indian Institutions, recognized by the Regulatory Bodies, Government of India.
Secondment of experts: The objective is to facilitate Human Resource Development through secondment of Faculty/teachers and experts in diverse fields to various countries in Asia and Africa.
Technical Assistance: Technical assistance division is engaged in the services of tailoring solutions in identifying key issues such as vision, mission, concept development and detailed mapping of the Institutional/Educational entities including delivery mechanism. The issue addressed by the department includes-Feasibility, Governance Plan, Academic Plan, Infrastructure Plan, Financial Plan and Implementation Plan.
Procurement services: EDCIL assists in the capacity building of educational institutions in India and abroad through procurement of educational aids ITA NOS.780/Del/2014 ranging from school kits to hi-tech laboratory equipment.
Testing and recruitment services: EDCIL offers recruitment solutions in selection and recruitment of executives, professionals, teachers and skilled staff to various ministries and departments of central and state governments, public sector enterprises, autonomous bodies and academic institutions across the country.
Technical support group: EDCIL offers services as a strategic partner consultancy organization providing core competence in the specified areas.
Training & Management services: EDCIL organizes need based short term and long term training programs for foreign nations sponsored by their Governments/International Funding Agencies at reputed educational institutions/training establishments. The company is involved in the design and management of customized short term and long term training programs including study visits to meet the requirements of the international clients including foreign governments and funding agencies."
18. Further, it was submitted that, as per the Annual Report of the company, it operates in three segments, namely, Technical Assistance, Institutional Development and Human Resources Development. It was also submitted that the 'technical assistance' and 'human resource development' segment of EDCIL is comparable to the services provided by it to its associated ITA NOS.780/Del/2015 enterprise as these segment covers services including feasibility studies, training, management services, recruitment services, strategic consultancy, etc. It was therefore submitted that accordingly the assessee in its transfer pricing study has considered "Technical Assistance" and "Human Resource Development"
segments of EDCIL as comparable to the assessee and TPO/DRP were incorrect in concluding that the same is not functionally comparable. A reference was also made to the order of DRP for assessment year 2008-09 whereby EDCIL had been included a comparable. The learned DR supported the action of exclusion of authorities below.
19. We have heard the rival submissions and, perused the material on record. In the present case, the assessee wants inclusion of EDCIL, a government company, in the final set of comparables adopted by TPO/DRP. The assessee inter-alia submitted that in the appellants own case for the assessment year 2008-09. DRP had directed the TPO to consider the aforesaid segment, namely, 'Technical Assistance' and 'Human Resource' as comparable to the assessee and since the business of EDCIL and assessee has remained unchanged from preceding years, EDCIL continues to be comparable to the assessee and there exists no legitimate reason to reject the company in the year under consideration. The assessee placed his reliance on the judgment of ITA NOS.780/Del/2016 Hon'ble Supreme Court in the case of CIT vs. Excel Industries Limited 358 ITR 295, wherein their Lordships reiterated the law laid down in Radhasoami Satsang vs. CIT 193 ITR 321 to hold that, where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year. Having gone through the order dated 30.8.2012 for Assessment year 2008-09 in the case of appellant, it is stated that DRP has held in regard to the above comparable as under:
"1 Educational Consultants India Ltd. (EDCIL) According to the assessee EDCIL offer support services in the following areas:
Student placement Secondment of experts Technical assistance Procurement services Testing and recruitment services Technical support group Training and Management Services The company operates in three segments:
Technical Assistance, Institutional Development and Human Resources Development. The services provided under Technical Assistance and Human Resource Development have been considered as comparable to ITA NOS.780/Del/2017 the nature of services provided by the assessee to its AE.
Further, we wish to submit the EDCIL was accepted as comparable to the assessee by the learned TPO during the assessment proceedings for AY 2007-08 as well as earlier years. Hence since the business of EDCIL and the assessee has remained unchanged from last year, EDCIL continues to be comparables to the assessee and there exist no legitimate reason to reject the company this year."
After considering the above facts, we find that functionally it is comparable and TPO is directed to include it in the list of comparables for computation of ALP"
20. For the foregoing reason and there being no change in the facts for the instant assessment year, the AO/DRP is directed to include EDCIL in the final set of comparable companies. Reliance in this regard is placed on the following observation of the Mumbai Bench of the Tribunal in the case of ACIT vs. NGC Network India (P) Ltd. 10 taxmann.com 140 wherein it has been held as under:
"These comparables and the method of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also."
ITA NOS.780/Del/2018
21. Thus, after including EDCIL in the final set of comparable companies considered by the TPO, the average operating profit to cost margin of the comparable companies works out to 14.98%, as under:
Sr. Name of the Company OP/TC (%)
No.
1 Best Mulyankan Consultants Ltd. 9.91%
2 IDC (India) Ltd. 10.46%
3 Basiz Fund Services Pvt. Ltd. 46.75%
4 Indus Technical & Financial 6.45%
Consultants Ltd.
5 Immacs Management Services Ltd. 14.54%
6 Shristi Urban Infrastructure 8.66%
Development Ltd.
7 Choksi Laboratories Ltd. 23.19%
8 In House Productions (Segment) 2.51%
9 WAPCOS Ltd. (Segment) 23.60%
10 Educational Consultant India Limited 3.80%
(Technical assistance & HRD Segment) Average 14.98%
22. Since, the operating profit to cost of the appellant at 9.82% is within the +/-5% range of the average operating profit to cost ratio of the aforesaid 10 comparable companies at 14.98%, the international transaction of provision of business support services of assessee during the relevant year is considered to be at arm's length and the adjustment made by the TPO in the impugned order is liable to be deleted, for this reason alone. The grounds are allowed to the extent discussed above.
ITA NOS.780/Del/2019
23. As far as Ground No. 3 is concerned i.e. with regard to levy of interest under section 234C, it is held that interest under section 234C is leviable on the shortfall of advance tax as compared to the tax due on returned income.
24. In the result, the appeal of the assessee stands allowed.
Order pronounced in open court on this 24th day of November, 2015.
Sd/- sd/-
(S.V.MEHROTRA) (A.T.VARKEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 24th day of November, 2015 TS Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi.
AR, ITAT NEW DELHI.