Parexel International Clinical Research Private Limited Vs DCIT (ITAT Bangalore)
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 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.
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 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.
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.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Per Chandra Poojari, Accountant Member This appeal by the assessee is against the order of the AO dated 26.9.2017 passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [“the Act”].
2. The first issue for consideration is with regard to TP adjustment towards location savings at Rs. 21,69,17,701.
“All of the grounds and/or sub-grounds of appeal mentioned herein are independent and without prejudice to one another.
1. On the facts and in the circumstances of the case and in law, the Hon’ble Dispute Resolution Panel (`DRP’) erred in upholding the action of the Deputy Commissioner of Income-tax 5(1)(2) (‘Ld. AO’) /Additional Commissioner of Income-tax, Transfer Pricing – 2(2) (Ld. TPO) in making an adjustment of Rs. 21,69,17,701 on allocation of alleged location savings with respect to provision of facilitation and co-ordination services provided by the Appellant to the Associated Enterprises (‘AE’) for performing clinical trials in India.
2. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO erred in treating the alleged location savings to the Appellant as an international transaction as per Section 92B of the Act.
3. Without prejudice to Ground No. 2, the Ld. AO /TPO erred in not following any of the method prescribed by the Act under Section 92C(1).
4. On the facts and in the circumstances of the case and in law, the Ld. AO /TPO and the Hon’ble DRP erred in presuming that location savings advantage accrues to the Appellant. In doing so Ld. AO /TPO:
a) disregarded the fact that the clinical trials are undertaken in India as per the instructions of the Sponsor and in line with the Indian regulatory requirement;
b) disregarded the fact that, the Appellant as well as the AEs operated in a perfectly competitive market and the services of the Appellant do not confer any unique competitive advantage to the AEs, that (i) would not be available to the AEs from other potential service providers in India; or (ii) would not be equally available to the competitors of the AEs;
c) did not consider the fact that, whether the concept of location savings is applicable in a particular case has to be determined based on economic principles i.e. whether a low cost service providers actually confers a unique competitive advantage to its customer;
d) disregarded the fact that, the Appellant does not own any intangible asset, i.e. in as much the advantage (if any) is available to the Appellant the advantage is also available to third parties competing in the market; and
e) did not consider the fact that given the large number of service providers in India providing similar services, under arm’s-length conditions, the Appellant would not be able to earn an additional return on account of location savings, as it would be make the Appellant uncompetitive.
5. Without prejudice to Ground No. 4, the Ld. AO /TPO and the Hon’ble DRP erred in disregarding the fact that, location savings, if at all, is already embedded in the margin of the comparable companies considered for benchmarking the transaction for provisions of facilitation and coordination services for clinical trials which was held to be at arm’s length.
6. Without prejudice to the Ground Nos. 4 & 5, even if adjustment on account of location savings is to be upheld, the Ld. TPO/ AO and the Hon’ble DRP, while computing the adjustment on account of locations savings, erred in:
a) relying on unverified information / web article from the public domain to compute the lo cation savings;
b) not using contemporaneous data as required under Rule 10B of the Income-tax Rule, 1962 (`Rules’) to determine the amount of adjustment;
c) computing the adjustment on the full value of cost savings and not appreciating the fact that the adjustment, if any to be computed only with regard additional profit, if at all, earned by the AE;
d) erroneously considering pass through costs while computing the adjustment;
e) incorrectly using Profit Split Method for determining quantum of adjustment on account of location savings; and
f) attributing location savings in the ratio of 50:5o between the Appellant and the AEs by disregarding their functional and risk profiles.”
3. In the TP order for the current year i.e. AY 2013-14, relying on the TP order for AY 2011-12, the TPO alleged that conducting the clinical trial in India by the AEs through the assessee resulted in location savings for the AEs since the regulatory and compliance cost as well as investigatory costs were significantly lower in India as compared to developed countries where AEs were located. Resultantly, the cost savings that accrue to the AE ought to be shared with the assessee in India.
4. To make the adjustment, the TPO relied upon a random non-contemporaneous article titled ‘Clinical Trial Magnifier Vol. 1:6 Jun 2008’ published on the website www.clinicaltrialmagnifier.com and computed location savings amounting to Rs. 29,11,647 per clinical trial. The TPO then multiplied the said alleged savings per clinical trial by the total number of clinical trials undertaken in India i.e. 149. Accordingly, the TPO arrived at a total cost savings of Rs. 43,38,35,403 (Rs. 29,11,647*149). The said purported savings were split in the ratio of 50:50 between the AE and the assessee and thereby, TPO proposed an adjustment of Rs. 21,69,17,701 on account of alleged location savings.
5. Aggrieved, the assessee filed objections before the DRP. The DRP vide order dated 18.09.2017 upheld the adjustments proposed by the TPO. Against this, the assessee is in appeal before us.
6. After hearing both the parties, we are of the opinion that similar issue came up for consideration before this Tribunal in the assessee’s own case for AYs 2011-12 to 2012-13 in IT(TP)A No. 254/Bang/2016 & 292/Bang/2017 dated 16.6.2017 wherein it was held as under:
“8. We have considered the rival submissions as well as the relevant material on record. The TPO proceeded to make assessment on the basis of location saving available to the assessee being doing its research and trial activity in India in comparison to US. There is no dispute that location saving is one of the primary factors of all cross border trade which includes exports and imports of articles, goods and services. Low cost of the location includes benefit in respect of low cost labour, low cost of raw-material, low fuel cost as well as location advantage being near to raw material and other supplies apart from the comparable infrastructure cost and available facilities. Though the low cost of regulatory and other compliance are also relevant factor adding to the location saving however the location savings and conditions are available to all parties irrespective the transaction is between the related party or unrelated party. Therefore if the comparable uncontrolled price is available then the location saving or condition cannot be itself the basis for determination of ALP and consequential adjustment. It can be a relevant factor for conducting a proper enquiry for determination of arm’s length price of the international transactions. Further the location saving and advantage are universally accepted in cross border trade so far as the transactions are not entered into solely for the purpose of avoiding tax and particularly the transactions between the related party with motive to shift the benefit of location saving and advantage to the counter part where either there is no tax or very low tax is attracted. Therefore the concept of Base Erosion and Profit Shifting (BEPS) is relevant only in respect of the transactions which are entered into with the sole purpose of avoidance of tax and treaty shopping. To deal with such transactions between related parties the transfer pricing provisions has been introduced in the statute and are applied for determination of ALP. Therefore the location savings and advantages are very much relevant in the cross border transaction but for limited purpose of carrying out exercise of examination and investigation of the transaction and not as a basis for determining the ALP and consequently adjustment. We find that the Mumbai Bench of the Tribunal in the case of Watson Pharma (P.) Ltd. (supra) has dealt with this aspect and held that when the local comparables are available then instead of going to the location saving as a basis of adjustment, the TNMM shall be preferred. Similar view was taken by the Tribunal in the case of Syngenta India Ltd. (supra) in paras 17 to 20 as under:
’17. We have heard the rival submissions and perused the relevant finding given in the impugned orders qua the issue of Transfer Pricing adjustment on account of locational savings. The TPO noted that, one unit of the assessee is captive manufacturer which is producing agro chemicals for sale to the world market by a Singapore based entity. Due to unique location of operating in India, the assessee company is able to generate cost savings on one or many of the factors of production for which assessee should have been compensated with a better price. He has also referred to Draft UN Model and India’s stand about the location advantage vis-a-vis the labour cost and other factors of production and, therefore, assessee should have received compensation for it from the AE. From the reading of the order of the TPO as well as the order of the DRP, we are at the outset, unable to apprehend as to under which existing Transfer Pricing provisions enunciated in our Income-tax Act or the Income-tax Rules, such a transaction has been reckoned as separate international transaction which warrants separate benchmarking especially when the overall profit margin of the entire transaction with the AE under the TNMM vis-a-vis the comparables has been accepted. No provision or precedence has been referred by the Revenue authorities, whether our existing Transfer Pricing provisions suggest any such kind of an adjustment or is there any settled judicial principle that location costs requires to be adjusted while measuring the allocation of the profits of the Group entities/associated enterprises operating in. different tax jurisdiction and such a location cost advantages needs to be factored in while determining the Arm’s Length Price. The locational savings alludes to a concept of a location specific advantage with reference to specific market features and/or factors of production that enables MNE to achieve improved financial outcome from the provision of the same product or services relative to alternative locations, that is, the places where costs are lower than the location where the activities were Initially performed or carried out. The features and factors include labourers/skilled labourers, incentives, market advantage, infrastructure and other factors of costs savings. The location saving arise from the cost saving due to differences in the costs of operations, between high cost and low cost tax jurisdictions. Earlier this concept was recognized under OECD Transfer Pricing Guidelines, wherein in Chapter 9 dealing with “Business Restructuring”, this concept has been discussed in the following manner:—
“9.148 Location savings can be derived by an MNE group that relocates some of its activities to a place where costs (such as labour costs, real estate costs, etc.) are lower than in the location where the activities were initially performed, account being taken of the possible costs involved in the relocation (such as termination costs for the existing operation, possibly higher infrastructure costs in the new location, possibly higher transportation costs if the new operation is more distant from the market, training costs of local employees, etc.). Where a business strategy aimed at deriving location savings is put forward as a business reason for restructuring, the discussion at paragraphs 1.59- 1.63 is relevant;
9.149 Where significant location savings are derived further to a business restructuring, the question arises of whether and if so how the location savings should he shared among the parties. The response should obviously depend on what independent patties would have agreed in similar circumstances. The conditions that would be agreed between independent parties would normally depend on the functions, assets and risks of each party and on their respective bargaining powers;
9.150 Take the example of an enterprise that designs, manufactures and sells brand name clothes. Assume that the manufacturing process is basic and .that the brand name is famous and represents a highly valuable intangible. Assume that the enterprise is established in Country A where the labour costs are high and that it decides to close down its manufacturing activities in Country A and to relocate them in an affiliate company in Country B where labour costs are significantly lower. The enterprise in Country A retains the rights on the brand name and continues designing the clothes. Further to this restructuring, the clothes will be manufactured by the affiliate in Country B under a contract manufacturing arrangement. The arrangement does not involve the use of any significant intangible owned by or licensed to the affiliate or the assumption of any significant risks by the affiliate in Country B. Once manufactured by the affiliate in Country B, the clothes will be sold to the enterprise in Country A which will on-sell them to third party customers. Assume that this restructuring makes it possible for the group formed by the enterprise in Country A and its affiliate in Country B to derive significant location savings. The question arises whether the location savings should be attributed to the enterprise in Country A, or its affiliate in Country B, or both (and if so in what proportions);
9.151 in such an example, given that the relocated activity is a highly competitive one, it is likely that the enterprise in Country A has the option realistically available to it to use either the affiliate in Country B or a third party manufacturer. As a consequence, it should be possible to find comparables data to determine the conditions in which a third party would be willing at arm’s length to manufacture the clothes for the enterprise. In such a situation, a contract manufacturer at arm’s length would generally be attributed very little, if any, part of the location savings. Doing otherwise would put the associated manufacturer in a situation different from the situation of an independent manufacturer, and would he contrary to the arm’s length principle;
9.152 As another example assume now that an enterprise in Country X provides highly specialized engineering services to independent clients. The enterprise is very well known for its high quality standard. It charges a fee to its independent clients based on a fixed hourly rate that compares with the hourly rate charged by competitors for similar services in the same market. Suppose that the wages for qualified engineers in Country X are high. The enterprise subsequently opens a subsidiary in Country Y where it hires equally qualified engineers for substantially lower wages, and sub-contracts a large part of its engineering work to its subsidiary in Country Y, thus deriving significant location savings for the group formed by the enterprise and its subsidiary. Clients continue to deal directly with the enterprise in Country X and are not necessarily aware of the sub-contracting arrangement. For some period of time, the well known enterprise in Country X can continue to charge its services at the original hourly rate despite the significantly reduced engineer costs. After a certain period of time, however, it is forced due to competitive pressures to decrease its hourly rate and pass on part of the location savings to its clients. In this case also, the question arises of which party/ies within the MNE group should be attributed the location savings at arm’s length: the subsidiary in Country Y, the enterprise in Country X, or both (and if so in what proportions); and
9.153 In this example, it might be that there is a high demand for the type of engineering services in question and the subsidiary in Country Y is the only one able to provide them with the required quality standard, so that the enterprise in Country X does not have many other options available to it than to use this service provider. It might be that the subsidiary in Country Y has developed a valuable intangible corresponding to its technical, know-how. Such an intangible would need to be taken into account in the determination of the arm’s length remuneration for the sub-contracted services. In appropriate circumstances (e.g. if’ there are significant unique contributions such as intangibles used by both the enterprise in Country X and its subsidiary in Country Y), the use of a transactional profit split method may be considered”.
Thus, under OECD, the locational saving costs has been recognized only when there is either reallocation of activities or business restructuring whereby MNE Group, Multinational Enterprises reallocates some activities or business to a place where costs are lower than the location where such activities or business was initially performed. Whether under various circumstances, locational savings may arise or not and whether under the TP analysis such an adjustment can be made has been elaborately dealt in the examples explained in para 9.150 to 9.153.
18. The key factor which is required to looked into while considering the location cost advantage to an entity working in low cost jurisdiction is that, whether there are suitable local comparable data to determine the conditions in which third party would be carrying out such an activity which would be the measure of Arm’s Length and if on such comparability analysis the price received or charged is comparable then no attribution on account of locational savings can be made. If comparable data are available where transaction is being tested or where the tested party is located, then the benefits of location savings can be said to have been captured in the ALP which has been determined. Now, in the OECD/G-20 “Based Erosion & Profit Shifting Project” (BEPS), New Guidelines on the concept of locational savings have been illustrated under “Action 8”. These guidelines recommend that, while determining how the locational savings are to be shared between two or more Associated Enterprises then at the threshold it is necessary to consider, firstly, whether location savings exists; secondly, the amount of any net location savings; thirdly, the extent to which locational savings are either retained by a Member or Members of the MNE Group or are passed on to independent customers or suppliers; and lastly, where locational savings are not fully passed on to independent customers or suppliers, the manner in which independent enterprises operating under the similar circumstances would allocate any retained net location savings. Guidelines further states that, suitable comparability adjustment is to be made to account for location savings advantage giving rise to location savings, when function analysis shows that location savings are not passed on to customers or suppliers and there is no local market comparables then, adjustment can be made based on analysis of all the relevant facts and circumstances including functions performed, risk assumed and assets used of the relevant associated enterprises. However, before that, if reliable local market comparables are available which can be used to identify Arm’s Length Prices, then specific Comparability adjustment or location savings may not be required at all. The guidelines, however, does not prescribe any formula or basis for adjustment. The India Chapter on latest 2016 Draft on OECD/G-20 BEPS, which highlights the view of the Indian Tax Administration accept that, where comparable uncontrolled transactions are available, then the comparability analysis and benchmarking by using the results/profit margin of such local comparable companies will determine the ALP of a transaction with a related party in a low cost jurisdiction. If good local comparables are available then the benefits of locational savings can be said to have been captured in the ALP so determined. However, if good local parties are not available, or whether the overseas AE is chosen as a tested party, then the problem of capturing the benefit of location savings would remain an issue for determination the ALP. The Indian Chapter has also aligns with the position advocated by BEPS ‘Action 8’ Report. However under the BEPS also such an adjustment is not required to be made separately if reliable local market comparables are available. In case, reliable local market comparables are not present, then various aspects have been highlighted for making the adjustment. But, whether such an Action Plan as enunciated in the BEPS Guidelines has been captured in our present TP provision? Till now, at least nothing has been brought on record before us, that the Action Plan as enunciated in the BEPS has been captured in our current TP laws/provisions. Therefore, the manner in which the TPO or DRP have made the adjustment is not at all justified sans any specific provision or guidelines.
19. Here in this case, the entire transaction between assessee and the AE have been analyzed under TNMM and the assessee’s profit margin vis-a-vis the comparables have not only be accepted at Arm’s Length Price, albeit its margin has been found to be higher than the average profit margin of the comparables. In that situation, any kind of return or advantage on account of location savings, already stands embedded/captured in the operating margin of the Arm’s Length Price determined vis-a-vis the comparability of the operating margins of the comparable companies. The TPO or the DRP have not carried, out any comparability analysis with an uncontrolled transaction to show that such a factor materially affects the price/profit margin of the transaction. Such a comparability analysis with the uncontrolled transaction is sine quanon for the determination of Arm’s Length Price by choosing any of the prescribed method. If such an exercise has not been carried out, then such kind of TP adjustment should not be permitted to be made. If the revenue’s case is that, though not canvassed before us, such an adjustment is being made under Rule 10B(3) to eliminate the material effect of a difference between the transactions which is being compared, then the onus is heavily, upon the revenue to bring on record that, due to location savings, the comparability with the local comparables has failed to yield the Arm’s Length results. The TPO has made the adjustment by comparing the cost per employee globally with cost of per employee in India. The method by which TPO has made the adjustment lacks merits because comparison of the employees of the AE working in the economic conditions at the location of the AE are completely different and cannot be benchmark factor at the outset. Here the tested party is SIL, i.e. assessee, which operates in a perfectly competitive market and in such a market; a manufacturer will have to pass on any location specific advantages to the customers to remain competitive. Otherwise it would not be able to earn more than what the third party comparable companies, in same geographical location, performing similar functions and assuming similar risk, would earn. In a nutshell, comparison of the transactions with an uncontrolled transaction is the key factor and primary requirement under our Transfer Pricing Laws before resorting to any kind of adjustment of the ALP. It is also not clear whether the TPO has treated the location saving as an independent international transaction or it is just an adjustment on the determination of profit of the assessee. If it is an independent international transaction, then it needs to be benchmarked with uncontrolled transaction by carrying out comparability analysis under prescribed methods. On the other hand, if it is an adjustment on the profit of the assessee, then the TPO has to demonstrate that firstly, the profit margin of the assessee, under TNMM is incapable of determining the Arm’s Length Prices and in the case of the assessee there are no independent local comparables in India to carry out the comparability analysis for determining of the ALP. Such an arbitrary adhocism for making such huge adjustment in the profit sans any Transfer Pricing analysis under the prescribed provisions cannot be sustained. Hon’ble Delhi High Court in Li and Fung India (P.) Ltd (supra) too has observed that. ” Tax authorities should base their conclusions on specific facts and not on vague generalities, such as “significant risks”, “functional risks”, “enterprise risk” etc. without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reason, based on objective facts and the relative evaluation of their weight and significance”. Thus, the Transfer Pricing adjustment cannot be on vague generalities. Accordingly, the adjustment made on account of location saving’ for sums amounting to Rs.54,69,43,636/- is directed to be deleted.
20. In view of our finding, the other pleas and arguments raised by the parties before us regarding powers of the TPO at the time of reference and recording of satisfaction by AO before reference, etc. (as discussed by us in foregoing paragraphs) are not being dealt upon and as they have become pure academic in view our finding given above.’
9. Having concurred with the view of the earlier decisions of this Tribunal, we find that the orders of the TPO and DRP are not sustainable as suffer from serious defect of considering the location saving as basis of adjustment. Further we find that the computation of the location saving by the TPO is purely based on some articles and not on the basis of actual cost in the US in comparison to India. Therefore the price/cost as computed by the TPO is not based on actual data but on presumption of accepting the article on the subject as the comparable cost. Since the functional comparability of the companies selected by the assessee has not been examined by the TPO as well as no steps were taken to find out the other comparables of the assessee for determination of ALP therefore, the issue of determination of ALP and consequential adjustment, if any, is required to be examined and adjudication afresh at the level of TPO/A.O.
Needless to say that the assessee is receiving its price in foreign currency therefore the comparable uncontrolled price shall also have at least 75% of their revenue in foreign currency otherwise the price received from domestic market may not be acceptable when the assessee is receiving its 100% revenue in foreign exchange. Accordingly, the matter is set aside to the record of the TPO/A.O. for adjudication of the same afresh in the light of our above observations.”
7. In view of the above order of the Tribunal for AY 2011-12 & 2012-13 in assessee’s own case, taking a consistent view, we are inclined to set aside the orders of lower authorities and remit the issue to the TPO/AO for fresh adjudication with similar directions as in the above referred order of the Tribunal.
8. Grounds 7 to 8 by the assessee are as follows:-
“7. On the facts and circumstances of the case and in law, the Ld. Hon’ble DRP erred in upholding the action of the Ld. AO /TPO in making an adjustment of Rs. 5,45,30,838 on account of recovery of expenses (investigator’s fee) from AE. In doing so, the Ld. TPO / Ld. AO erred in:
a) disregarding the fact that the Appellant merely acts as a coordinator and facilitator for the performance of clinical trials and that the reimbursement of investigator fees do not represent any functions performed so as to consider it for profitability purposes;
b) disregarding the fact that the payments made to the investigators by the Appellant are charged by AE on an as-is basis to the Sponsor, which are reimbursed subsequently; and
c) disregarding the fact that there is no profit element in the hands of AE in relation to such recoveries.
8. Without prejudice to the Ground No. 7, even if adjustment on account of recovery of expenses from AEs is to be upheld, the Ld. TPO erred in incorrectly applying a mark-up of 15.27% on such investigator fees recovered.”
9. The TPO observed that in the TP study there is an International Transaction under the head “recovery of expenses” amounting to Rs. 35,10,71,928. During the hearing, in reply to the query, the assessee stated that this is the money paid to the various doctors who conduct the Clinical trial in India for PICLPV. The TPO noted that the investigators’ payments was reimbursed with a markup and it was part of the total clinical services receipts. Interestingly, in the relevant assessment year it is shown under the head ‘recovery of expenses’ and that too without any mark up. The TPO issued a show cause notice dated 16.09.2016 and the figure of 15.27% was arrived at on the basis of the assessee’s own admission of its profit percentage being at 15.27
10. The TPO after examining all the submissions made by the taxpayer was of the view that the assessee’s arguments are bereft of logic and proper evidences to back its claim. He observed that the whole Clinical trial hinges on the commitment and knowledge level of these investigators concerned. Without the right set of Investigators, no Clinical trial would achieve its objectives. Clinical trial is a very risky endeavor as it involves experimentation of unknown chemicals on the human body. Hence the investigator administering the clinical trial become the most important person in safeguarding the patient. Hence the Investigator needs to possess certain skill set, should have immense patience (as Clinical trials last for years together) and complete focus and dedication on the job. Any slip from his side will not only affect the life and limb of the patient but will harm the reputation of Parexel India and the Group as a whole. Hence, the selection of investigators is very important and this is the job of the Taxpayer. This is a very important job and cannot be done routinely. The taxpayer invests considerable time and resources on this. The same was recognized by the AE. The AE was not only reimbursing the investigator’s costs but, considering the investment of time and resources involved and the importance of finding the right person for the job, was also providing a markup on these costs till the previous assessment year. Infact, in the previous assessment year, the investigators costs was part of the Clinical trial services receipts. The situation remains the same in this assessment year also. If there was any change, it would have been brought out by the taxpayer in the submissions made or in the TP study. lnfact, there is no mention of the change in position adopted in the TP report.
11. As far as the argument of the taxpayer that pass-through is the norm in the Parexel Group and hence Parexel India should not be treated separately, the TPO holds it wrong. The taxpayer has not brought out the difference in environment, if any, between the earlier assessment year and this assessment year. There has been no policy change at the Global level also. Hence the arguments of the taxpayer cannot be accepted and were rejected.
12. Further the TPO observed that the case laws cited have different facts and those are not of the jurisdictional courts. It is also very clear from the functional analysis of the taxpayer that it is performing agency function and for performing this function any independent entity would have definitely added a markup apart from recovering the costs. The taxpayer is using its resources for considerable time to find the investigators. The taxpayer pays salaries to these employees and other benefits and perks. When the resources of the taxpayer is being deployed for a considerable period of time, then an independent entity would definitely add a markup on the costs incurred. This is what the taxpayer was doing till last year and again as mentioned earlier, there is no change in the situation for the taxpayer to change his model. Hence it is concluded that the taxpayer doesn’t fall in the category it is claiming to be in as per the OECD guideline quoted by him. Hence it is rejected. Considering all the facts and circumstances of the case, the TPO has decided the ALP of the ‘recovery of expenses’ of the Investigators fees to be at Cost plus markup of 15.27% as follows:-
