Income Tax Appellate Tribunal - Bangalore
Parexel International Clinical ... vs Assistant Commissioner Of Income Tax, ... on 27 March, 2023
IT(TP)A No.894/Bang/2022
Parexel International Clinical Research Pvt. Ltd., Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
"C'' BENCH: BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No.894/Bang/2022
Assessment Year: 2018-19
Parexel International Clinical
Research Private Limited
CoWrks, RMZ EcoWorld,
Ground Floor, Bay Area
Adjacent to Building 6A, ACIT
Outer Ring Road Vs. Circle-3(1)(1)
Devarabeesanahalli Village Bangalore
Bangalore 560 103
Karnataka
PAN NO : AADCP9318C
APPELLANT RESPONDENT
Appellant by : Ms. Chandni Shah, A.R.
Respondent by : Ms. Neera Malhotra, D.R.
Date of Hearing : 21.03.2023
Date of Pronouncement : 27.03.2023
ORDER
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against final assessment order passed by ACIT Circle-3(1)(1), Bangalore for the assessment year 2018-19.
2. At the time of hearing, the assessee has not pressed ground Nos.1 to 4. Accordingly, these grounds are dismissed as not pressed.
IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 2 of 20
3. Ground Nos.5 & 6 of assessee's appeal are reproduced as under:
Grounds relating to Transfer Pricing matters:
5. On the facts and in the circumstances of the case and in law, the Ld. TPO / Ld. AO/ Ld. Panel erred in making a transfer pricing adjustment of INR 1,95,53,651 to the total income of the Appellant on account of international transactions entered into with Associated Enterprises.
6. On the facts and in the circumstances of the case and in law, Ld. TPO / Ld. AO / Ld. Panel erred in:
a. rejecting the transfer pricing documentation which was maintained in good faith and with due diligence by the Appellant; b. rejecting certain filters as applied by the Appellant in selection of the comparable companies at the time of preparation of the transfer pricing documentation; and c. applying certain filters not relevant to the Appellant while undertaking fresh comparability analysis.
4. These grounds are general in nature, which do not require any adjudication.
5. Ground Nos.7 & 8 of assessee's appeal are reproduced as under:
7. On the facts and in the circumstances of the case and in law, Ld. TPO / Ld. AO / Ld. Panel erred in including following companies in the final set which are not comparable to the Appellant's functions, asset base and risk profile:
Sipra Labs Limited a. Aavanira Biotech Private Limited b. Veeda Clinical Research Private Limited c. MS Clinical Research Private Limited d. Prado Preclinical Research & Development Organisation Private Limited e. Cliantha Research Limited f. Q P S Bioserve India Private Limited
8. On the facts and in the circumstances of the case and in law, Ld. AO / Ld. TPO / Ld. Panel erred in excluding following companies in the final set which are comparable to the Appellant's functions, asset base and risk profile:
a. Micro Therapeutic Research Labs Limited b. Rubicon Research Private Limited IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 3 of 20 c. TCG Lifesciences Limited d. Dorizoe Lifesciences Limited 5.1 At the time of hearing, the ld. A.R. submitted that these grounds are only academic, if other grounds are considered herein below. Hence, these grounds are dismissed as academic.
6. Ground No.9 of the assessee's appeal is reproduced below:
9. On the facts and circumstances of the case and in law, Ld. TPO / Ld. AO erred in not following the directions issued by the Ld. Panel in relation to acceptance of a comparable company - Micro Therapeutic Research Labs Limited.
6.1 The contention of the ld. A.R. is that Micro Therapeutic Labs Ltd. is not having persistent loss in 2 years out of 3 years, if we consider the operating profit by applying the formal Operating Profit/Operating Cost (OP/OC). On the other hand, the AO has considered the published accounts and observed that it has been suffering loss in 2 years out of last 3 years. Accordingly, she submitted that the issue may be remitted to the file of AO/TPO to examine whether there is operating profit in 1 out of 3 immediate preceding years. We accede to the request of the ld. A.R. We remit this issue to the file of AO/TPO to examine whether there is operating profit in 1 year out of immediate last 3 previous years and if there is any operating profit in any 1 year out of 3 immediate previous years, it should be considered as a comparable. Ordered accordingly.
7. Ground No.10 of the assessee's appeal is not pressed and hence dismissed as not pressed.
8. Ground No.11(a) of the assessee's appeal is with regard to non- granting of working capital adjustment which is reproduced below:
IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 4 of 20
11. On the facts and circumstances of the case, and in law, Ld. TPO / Ld. AO / Ld. Panel erred in:
a. not granting working capital adjustment; and 8.1 The ld. DRP observed that Rule 10B provides for
making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The assessee has argued for working capital adjustment contending that there exist differences in the payable and receivable position between the assessee and the comparables. However, it was not demonstrated with any data or information as to the impact of such difference on the price, cost or profits, and as to whether such difference materially affect the price, cost or profits. The 'Accounts payables' and 'Receivables' shown in the balance sheet only reflects the position as at the end of the financial year, and as such it would not enable to measure the impact of working capital on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc. all of which cannot be captured in the year end Receivable or Payable position. Besides, the 'Payable' and 'Receivable' position stated in the Balance Sheet may not exactly reflect as to whether it arises from transaction relating to Revenue Account or Capital Account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different to different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 5 of 20 is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumstances, the ld. DRP inclined to uphold the TPO's reasoning and rejected the assessee's claim for working capital adjustment. Against this assessee is in appeal before us.
9. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in IT(TP)A No.3270/Bang/2018 in assessee's own case vide order dated 18.4.22 wherein held as under:
"22. With regard to the question whether working capital adjustment should be given or not, we find that the reasons given by the DRP for not allowing working capital adjustment are the same reasons as was given in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). In the aforesaid decision on an identical issue, the Tribunal held that working capital adjustment has to be given. The following are the relevant observations of the Tribunal :-
"10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT (A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows:
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 [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely ;--
(a) to (b)** ** **
(e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic 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;
IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 6 of 20
(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 [or the specified domestic 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 [or the specified domestic transaction);
(f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic 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 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 [or a specified domestic 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.
11. A reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.
IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 7 of 20
12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that:
♦ None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or ♦ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments.
13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows:
"13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect.
14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect.
15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory)
16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 8 of 20 comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that:
♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers."
14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures,
(ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables.
15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons:
(i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year.
(ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made.
(iii) Disclose in the balance sheet does not contain break up of trade and non-
trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed.
(iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results.
16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 9 of 20 be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable.
17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 10 of 20 requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:
"(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 to 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."
18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly."
23. The aforesaid decision clearly lays down the proposition that working capital adjustment is to be given effect to while determining ALP while adopting TNMM method. Respectfully following the said decision, we allow this issue in favour of the assessee."
9.1 In view of the above order of the Tribunal in assessee's own case, we decide the issue in favour of the assessee and against the department.
10. Ground No.11(b) of the assessee's appeal is with regard to risk adjustment, which is reproduced below:
11. "On the facts and circumstances of the case, and in law, Ld. TPO / Ld. AO / Ld. Panel erred in:
not granting risk adjustment."
10.1 The ld. DRP stated in his report that he did not agree with the assessee's plea that it does not bear any significant risk.
The ld. DRP was of the view that the assessee bears single customer risk, as its entire business activity and survival IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 11 of 20 depends on the AEs. As per the agreement, the AE can refuse to make payment if the work delivery is not on the expected requirement. If the technology and the products developed, for which the taxpayer provides services, fails in the market, it would also directly impact the assessee as it would not get farther contract. It was argued, that as the taxpayer is remunerated at cost, it does not bear any of these risks, we do not find merit in the same, as the taxpayer also to an extent bear credit and collection risk. If the AE fails to make the payment within the credit period it -will have a direct and heavy impact on the sustenance of the assessee. If the employees were not paid in time, it will affect the existence of the taxpayer itself, and its performance in the long run. In addition to the reasons given by the TPO, in the order passed under section 92CA(3) of the Act, the ld. DRP was of the view that as the three year weighted average margin of the various comparables and the defined median was only considered for ALP determination, such differences on account of risks, if any gets evened out. Further, no such adjustment is permissible unless the assessee establishes that such difference has a material effect on the margin of the comparable companies and such computation could be made based on reliable data, in view of sub-rule 10B of Income Tax Rules. In view of these, the ld. DRP rejected the pleas raised.
10.2 In this regard, the ld. DRP referred to para 218 of the judgment in case of Alberta Printed Circuits Ltd V Queen (2011 TCC 232) (Tax Court of Canada), wherein it was held that the fact that the sub-contractor entity is guaranteed business does not necessarily mean that the sub-contracting entity bears lesser risk because if the entity has only one customer and the IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 12 of 20 customer is lost, there is a market risk. For proper appreciation, para 218 of the judgment is reproduced below:
"218. Thirdly, when one evaluates the market risks both sides were exposed to, there is no doubt both bore risks. However, Dr. Wright's suggestion that, since the annual contracts did not address the question of who was liable for potentially poor set- up work or the warranty for such work, the Assessee took on that warranty risk is inconsistent with the evidence that adjustments were made each month for any work that had to be redone; it seems APCI's payments were reduced as a result. In addition, the evidence was that the Assessee collected its fees in advance from its customers while APCI was paid 30 or more days later, so it would seem APCI may technically have been at greater credit risk due to delay in payment, although, practically speaking, when the party that makes the payment also benefits from two-thirds of the profit from it, it becomes rather hard to suggest that there was much risk of non-payment. On the other hand, I agree with Mr. Wall's assertion that since APCI had only one customer, namely the Assessee, if APCI lost that customer, it would have been for all intents and purposes _finished in business and hence bore the biggest market risk. This is what in frict happened. To suggest, as Dr. Wright did, that since APCI was handed a guaranteed market by the :4ssessee, resulting in high profitability from day one, seems to ignore the reality that having one's eggs' ail ke one basket .voti can be out of business at the whim of that sole customer as well."
The ld. DRP stated that the above ratio is equally applicable to the assessee. The ld. DRP also relied on the following decisions.
10.3 Further, the ld. DRP observed that the Hon'ble ITAT Mumbai in the case of Symantec Software Solutions Pvt Ltd Vs ACIT (2011) 46 SOT' 48 (Mumbai) has in paragraph 16 observed that " ..........As regards the difference in function and risk level adjustment, the assessee has raised this issue without quantification of such adjustment on this account. Even otherwise, until and unless such differences results in deflation or inflation of financial result of the comparables, it is not general Rule of standard adjustment.
IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 13 of 20 The assessee has not brought on record how such functional difference and risk has influenced the result of the comparables with quantified data to the satisfaction of the authorities". Further, the Hon'ble Delhi ITAT, in the case of Actis Global Services (P) Ltd. vs. ITO (2016) 150 TR (B) 809 (Del-Trib.), dated 10/12/2015, held that:
"TPO had denied the risk adjustment claimed by assessee on the ground that assessee failed to show that the comparables had actually undertaken such risk and failed to demonstrate how the same material affected from margins. He pointed out that unless it was shown that how the risk adjustment was to fetch the result of each comparable and how the same would improve the comparability and unless adequate reasons were given for such adjustment, no adjustment could he allowed to taxpayer. Unless the difference could be ascertained accurately and their import on the margin could he assessed with reasonable accuracy, the adjustment could not be allowed "
10.4 The ld. DRP also placed relied on the recent decision of the Bangalore ITAT in the case of UEI Electronics Pvt Ltd [TS- 274-ITAT-2017(Bang)-TP] wherein the claim of risk adjustment was rejected by the Tribunal by placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT vs B.0 Srinivasa Setty by observing as follows:
"This is a settled legal position by now that if the income cannot he quantified, it cannot be subjected to tax as was held by the Hon'ble apex court rendered in the case of CIT vs B.0 Srinivasa Setty as reported in 128 ITI? 294. In this case, it was held that in a case where computation provisions cannot apply at all, charging provisions are also not applicable. Since in the present case, computation of Risk adjustment required to he made is not shown to be computable with reasonable certainty and accuracy, in our considered opinion, the ratio of this judgment becomes applicable IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 14 of 20 and no risk adjustment can be allowed on an arbitrary basis. Hence, this claim of risk adjustment is rejected:"
Accordingly, this objection towards allowance of risk is not found acceptable and rejected by the ld. DRP. Against this assessee is in appeal before us.
11. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in IT(TP)A No.3270/Bang/2018 in assessee's own case vide order dated 18.4.22 wherein held as under:
"26. We heard the rival submissions and perused the materials on record. We will look at the provisions of sub-rule (3) to rule 10B which reads as follows (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic 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.
27. According to rule 10B(3) therefore the adjustment towards working capital, risk etc., should be arrived at on a reasonably accurate basis. In the given case, we notice that the assessee has not established the material impact of the risk adjustments to the profitability as compared to that of the comparables. Though the assessee in the TP report has stated that the assessee being captive contract service provider having lesser economic and business risk, nothing has been brought on record to show that the comparables are functioning with higher risk. The assessee need to substantiate the statement that the comparable companies are realizing higher profits as there are having higher risk in terms of market, product, technology etc. We of the considered view that the assessee should be given an opportunity to bring on record the facts that will substantiate its claim based on which a reasonably accurate adjustment could be computed. We notice that the TPO and DRP have not called for any details evidence the risk adjustments and have decided the issue merely based on submissions made the assessee justifying the adjustments. We therefore remit this issue back to the TPO/AO to consider this issue on facts / data available with regard to the comparable companies and decide as per the provisions of Rule 10B(3) after giving reasonable opportunity of being heard to the assessee. The assessee is directed cooperate with the TPO/AO for producing the details as may be called for. This issue is allowed in favour of the assessee for IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 15 of 20 statistical purposes. The TPO is also directed to re-compute the ALP as per this order after giving reasonable opportunity of being heard to the assessee."
11.1 In view of the above order of the Tribunal in assessee's own case, this ground is remitted to the file of AO/TPO on similar directions. This ground is partly allowed for statistical purposes.
12. Ground No.12 (a), (b) & (c) of the assessee's appeal are reproduced as under:
12. On the facts and circumstances of the case and in law, Ld. AO / Ld. TPO / Ld. Panel erred in:
a. treating recovery of pass-through costs as operating in nature; b. disregarding the fact that the Assessee merely acted as a co-
ordinator and facilitator for the performance of clinical trials; c. considering that the reimbursement of investigator fees is a value-
added service which mandates mark-up.
13. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessment year 2013-14 in assessee's own case in IT(TP)A No.2634/Bang/2017 dated 7.10.2021 wherein the Tribunal held as under:
"50. We have considered the rival submissions. In this case, the assessee coordinated between the individual investigator and Paraxel International GmbH Germany. The contention of the assessee is that assessee has not undertaken any risk and all risk was taken over by Paraxel International GmbH Germany and relied on the Addendum dated 19.9.2007. However, the fact is that the assessee acted as coordinator and facilitator in selecting the investigator so as to conduct clinical trial. Selection of the investigator demonstrates that clinical trial is important task in the whole work undertaken by the assessee. The assessee invested considerable time and resources in this. The plea of assessee is that assessee has not received any amount as fee for doing this coordinator and facilitator job. In our opinion, this is an inter-group services provided by the assessee to its parent company and assessee must charge some fee as it would have, had the services been provided to a third party. The contention of the ld. AR is that remuneration for these services has already been included in the provision of clinical trial services and no separate fee is charged for coordinating and facilitating with the investigators. As per OECD guidelines, this is an intra-group services provided by the assessee to its parent company for which the assessee is entitled to remuneration. The parent company derived economic or IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 16 of 20 commercial benefit from the services offered by the assessee company for which the assessee has to be suitably remunerated. More so, the assessee would not have rendered this kind of services to unrelated party.
51. The assessee relied on the Addendum to Contract Clinical Trial Services Agreement. We have gone through the same. Vide this Addendum, the following clauses were replaced in Clause 4 (Consideration) :-
"4.1. In consideration of PICRPL's performance of Services under this Agreement, PIC agrees to pay PICRPL, on a monthly basis, an amount comprising of 4.1.1. Service income which shall be Operating Expenses incurred by PICRPL as increased by 15% mark-up on such Operating Expenses for each year of this Agreement; and 4.1.2. Pass through cost (as defined below) incurred during each year of the Agreement.
4.2. Operating Expenses, for the purposes of section 4.1.1, shall mean and refer to the operating cost of PICRPL in respect of PICRPL's activities of coordination and facilitation of clinical trials, including, but not limited to personnel costs, general and administration expenses, depreciation and amortization based on the financial statements of PICRPL. For avoidance of doubt, Operating Expenses shall not include any financing costs, extraordinary expenses, prior period cost, capital expenses and pass through cost.
4.3. Pass through cost, for the purposes of section 4.1.2 and section 4.2, shall mean costs including but not limited to investigators fee, drug charges, laboratory fees, legal & professional charges, translation cost, related travel & conveyance expenses, and any other expenses incurred by the PICRPL which are ultimately payable by the Sponsor on a cost to cost basis to PIC or any other contracting affiliate. The Parties agree that PICRPL will not load any margin on the recharge of such pass through cost. PICRPL shall maintain complete, accurate and up-to date accounting records relating to such 'Pass through Costs' which can be produced to PIC.
4.4. These terms are based on the parties determination of an amount equal to Arm's Length compensation that are adequate to compensate for the functions performed, assets employed and risks assumed by PICRPL and will be determined by PIC and PICRPL in accordance with arm's length standards. Any changes to the fees shall be communicated between the parties in writing and such written communication shall be considered as addendum to this agreement. Any taxes leviable in India on the above fees shall be borne by PIC. Further, PIC may withhold taxes to the extent required to do so as applicable in its jurisdiction.
IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 17 of 20 4.5 Sponsor, for the purposes of section 4.3, shall mean and refer to a customer / 'company who have entered into a contract with PIC for the provision of Clinical Services.
4.6. Investigator, for the purposes of section 4.3, shall mean and refer to a physician, medical doctor, medical consultant, or a hospital, which has entered into an investigation contract with PICRPL and/or Sponsor to administer pharmaceutical drugs for the purposes of clinical research trials.
4.7. PIC shall pay the remuneration on the basis of invoices duly issued by PICRPL within 3o (thirty) days after the end of the month. PICRPL shall maintain true and accurate books of accounts and records reflecting the services and cost incurred in connection therewith. PIC may from time to time request for the detailed breakup of cost incurred and PICRPL agrees to provide details as and when requested.
4.8. PIC agrees to make payment within 6o days from the date of receipt of invoice from PICRPL. PIC further agrees to pay advance against services to PICRPL upon PICRPL's request.
4.9. PICRPL shall raise invoice in US Dollar or any other mutually agreeable currency and shall be settled by PIC in the same currency.
All other provisions of the agreement shall continue to be the same."
52. Thus, new word 'pass through cost' was introduced to show the amount incurred by the assessee to be reimbursed by the parent company and called the investigation fees as part of pass through cost. The ld. AR argued that there is no investigation fees payable to assessee for the work done on behalf of parent company. In our opinion, the Addendum is w.e.f. 1.4.2012 wherein no date of execution is mentioned therein. The Addendum was solely made with an intention to evade payment of taxes and this is only a self-serving document by the assessee with the sole intention to evade taxes. Since both the parties were in a position to enter into this agreement being inter- related companies, that agreement cannot be given any credence which is a non- genuine and make believe story and it cannot be recognized as a true agreement and no benefit can be given on the basis of this agreement. Therefore, the lower authorities are justified in not giving any credence to this Addendum entered into by the assessee on the basis of which assessee has claimed that assessee is not entitled to receive any consideration for facilitating investigations. Further, it is to be noted that in the earlier years, investigator payments were reimbursed to the assessee with a mark-up. However, for the assessment year under consideration, it was treated as pass through cost under the head 'recovery of expenses' and there was no mark-up paid to the assessee. The assessee failed to explain why in this assessment year there was no mark-up on the investigator payments. The assessee only relied on the Addendum filed by the assessee, wherein it was mentioned that it was only pass through costs. As discussed earlier, this Addendum is only a make believe story and the AO has right to go beyond this document to find out the real intention of the parties. We IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 18 of 20 observe that the real intention to this Addendum is different from what it appears ex facie. Hence, we have to proceed on the basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or transactions have to be given effect even though they result in avoidance of tax liability, provided that they are genuine, bonafide and not colourable transaction.
53. In the present case, in the immediate earlier AY 2012-13, the assessee has shown investigator payment with mark-up and in this year on the basis of Addendum entered by the parties as discussed earlier, made the investigator payment as 'pass through costs' and claimed as reimbursement without any profit element, which is against the agreed norms in the earlier years which cannot be effected and accepted as genuine agreement. Accordingly, we are of the opinion that this intra-group services rendered by the assessee to the parent company cannot be considered as reimbursement of expenses or pass through costs. It is separate services in itself for which the assessee needs to determine the ALP which the assessee failed to do so. The assessee has provided services for which the TPO is justified in marking up the services so as to make TP adjustment. The various case laws relied on by the ld. AR are different on its own facts, which cannot be applied to the facts of the present case. Hence the TPO/AO correctly ascertained the ALP of this transaction and made adjustment on this count. The same is sustained. This ground of the assessee is dismissed."
13.1. In view of the above order of the Tribunal in assessee's own case, we dismiss this ground of appeal on similar reasons.
14. Ground No.13 of the assessee's appeal is reproduced below:
13. "On the facts and circumstances of the case and in law, the Ld. TPO / Ld. AO / Ld. Panel erred in proposing an adjustment amounting to INR 28,67,816 towards interest on outstanding receivables. In doing so, the Ld. TPO / Ld. AO/ Ld. Panel erred in:
a. treating outstanding receivables from AE as deferred; b. considering outstanding receivables as separate international transaction for arriving at an arm's length price. c. not appreciating the fact that the working capital adjustment takes into account the impact of deferred receivables, if any, on the profitability; and d. levying interest by adopting SBI short term deposit rate."
IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 19 of 20
15. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in the case of ING Novosoft Technologies Ltd. in IT(TP)A No.3284/Bang/2018 dated 18.3.2021, wherein held as under:
24. "We have heard both the parties and perused the material on record. The ld. AR fairly conceded that outstanding amount on account of sales/services billed to AE akin to loan advanced by assessee is an international transaction.
As held by the Hon'ble Delhi High Court in the case of Avenue Asia Business Advisors (P.) Ltd. v. DCIT [2017] 398 ITR 120 (Del), there should be TP adjustment on this count after making proper TP study by the TPO after considering the period of credit enjoyed by the comparables and also applicable LIBOR rate in the place of AEs for benchmarking the rate of interest to arrive at the ALP. With these observations, we remit the issue in dispute to the file of AO/TPO to benchmark the interest rate in the light of the decisions cited by ld. DR. Further, we make it clear that the TPO should compute the interest only for the relevant assessment year after going through the relevant agreements entered by the assessee with AEs while computing the ALP.
15.1 However, the ld. A.R. submitted that no adjustment to be made towards notional interest of outstanding receivables without prejudice to the above. She submitted that "Without prejudice to the above, it is humbly submitted that the appellant is a debt-free company and therefore, no adjustment qua notional interest on receivables should be made. In this regard, reliance is placed on the Delhi HC's decision in the case of Boeing India P. Ltd. [(2023) 146 taxmann.com 131) Without prejudice to the above, it is humbly submitted that for the receivables falling out of the working capital adjustment, the rate of interest should be restricted to LIBOR + 2%. In this regard, reliance is placed on the Bombay HC's decision in the case of Aurionpro Solutions Ltd. (ITA No.1869 of 2014)."
15.2. In our opinion, this issue has been decided by Hon'ble Bombay High Court in the case of Aurionpro Solutions Ltd. in ITA No.1869 of 2014 wherein held that in case of interest on receivables, which is notional, the same should be restricted to LIBOR+2%. Accordingly, the issue is remitted to the file of AO/TPO to determine the ALP after considering the above. Ordered accordingly.
IT(TP)A No.894/Bang/2022 Parexel International Clinical Research Pvt. Ltd., Bangalore Page 20 of 20
16. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 27th Mar, 2023 Sd/- Sd/-
(Beena Pillai) (Chandra Poojari)
Judicial Member Accountant Member
Bangalore,
Dated 27th Mar, 2023.
VG/SPS
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The CIT(Judicial)
5. The DR, ITAT, Bangalore.
6. Guard file
By order
Asst. Registrar,
ITAT, Bangalore.