This is an appeal by the assessee against the order dated 15-10- 2012 of DCIT, Circle-12(12), Bangalore passed u/s 143(3) r.w.s.144C of the IT Act, 1961 for the assessment year 2008-09. IT(TP)A No.1605/Bang/2012 Page 2 of 58

2. At the time of hearing the learned counsel for the assessee submitted that ground nos. 4 & 6 raised by the assessee is not pressed for adjudication and therefore those grounds of appeal are dismissed as not pressed. Ground no.5 is purely consequential and the AO is directed to give consequential relief. Ground no.1 gives the factual background of appeal and does not require any specific adjudication.

3. The two issues that need to be adjudicated in this appeal relate to:- (a) the claim of the assessee for deduction u/s 80-IB(8A) of the IT Act, 1961 in ground No.2; and (b) the ground raised in ground no.3 challenging the addition made by the AO and confirmed by the DRP on account of determination of Arms Length Price (ALP) in respect of an international transaction namely, payment of management fee by the assessee to its Associated Enterprise (AE) of a sum of Rs.1,82,77,397/-.

4. We shall first take up for consideration the claim of the Assessee for deduction u/s.80-IB(8A) of the Act. The facts with regard to the claim of the assessee for deduction u/s 80-IB(8A) are as follows:- The assessee is a company. As per the Memorandum of Association of the assessee, the assessee was incorporated for the purpose of commercial scientific research and development and in particular a) undertake clinical research of an international standard by IT(TP)A No.1605/Bang/2012 Page 3 of 58 following good clinical practices b) to undertake on behalf of the clients, pharmaceutical and biotechnology, health care company, and company engaged in pharmaceutical and research & development, clinical research for pharmacy products. In the return of income filed by the assessee for the assessment year - 2008-09, the assessee claimed deduction of a sum of Rs.31,32,49,090/- u/s.80-IB(8A) of the Act. The provision of Sec.80- IB(8A) and relevant rules namely Rule 18D and 18DA of the IT Rules, 1962 read as follows:-

SECTION 80-IB-DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM CERTAIN INDUSTRIAL UNDERTAKINGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS Sec. 80-IB reads as under : (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub- sections (3) to (11), (11A) and (11B) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. (2) to (8). (8A) The amount of deduction in the case of any company carrying on scientific research and development shall be hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, beginning from the initial assessment year, if such company- (i) is registered in India; IT(TP)A No.1605/Bang/2012 Page 4 of 58 (ii) has its main object the scientific and industrial research and development; (iii) is for the time being approved by the prescribed authority at any time after the 31st day of March, 2000, but before the 1st day of April, 2007; (iv) fulfils such other conditions as may be prescribed; RULE 18D : Prescribed authority for approval of companies carrying on scientific research and development. (1) For the purposes of sub-section (8A) of section 80-IB, the prescribed authority shall be the Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India. (2) The prescribed authority shall initially grant approval to a company carrying on scientific research and development for a period of three assessment years and subject to satisfactory performance of that company on periodic review extend the said approval for a further period of three assessment years so that the total period of approval is for ten consecutive assessment years, beginning from the initial assessment year. RULE 18DA 18DA. Prescribed conditions for deduction under sub-section (8A) of section 80-IB. (1) Any company carrying on scientific research and development shall be eligible for deduction specified in sub- section (8A) of section 80-IB, if such company : (a) registered in India; (b) has its main object the scientific and industrial research and development; (c) has adequate infrastructure such as laboratory facilities, qualified manpower, scale-up facilities and prototype development facilities for undertaking scientific research and development of its own; IT(TP)A No.1605/Bang/2012 Page 5 of 58 (d) has a well formulated research and development programme comprising of time bound research and development projects with proper mechanism for selection and review of the projects or programme; (e) is engaged exclusively in scientific research and development activities leading to technology development, improvement of technology and transfer of technology developed by themselves; (f) submits the annual return along with statement of accounts and annual report within eight months after the close of each accounting year to the prescribed authority. (2) Every company which is approved under sub-rule (2) of rule 18D shall (a) sell any prototype of output, if any, from its laboratories or pilot plants with the prior permission of the prescribed authority; (b) intimate the change, if any, in its memorandum of association and articles of association relating to its main objects and forward the altered copy of memorandum of association and articles of association to the prescribed authority; (c) apply for extension of the approval at least three months before expiry of the approval already granted by the prescribed authority; (d) have a system of monitoring the cost of research and development projects. (3) If, at any stage, it is found that (a) the approval granted to the company referred to in sub-rule (2) of rule 18D is to avoid payment of taxes by its group companies or companies related to its directors or majority of its shareholders; (b) any provisions of the Act or the rules have been violated, IT(TP)A No.1605/Bang/2012 Page 6 of 58 the prescribed authority specified may withdraw the approval so granted. (4) Every company referred to in sub-rule (1) shall make an application to the prescribed authority for the purposes of obtaining approval. (5) Every application referred to in sub-rule (4) shall be accompanied by (a) memorandum of association and articles of association incorporating all amendments duly certified by the company secretary or managing director of the company; (b) annual report of the company for the last three years, if available; (c) photocopies of the memorandum of understanding relating to all ongoing and future sponsored research projects or programmes. (6) The prescribed authority may call for any information or document which may be necessary for consideration of the grant of approval under sub-rule (2) of rule 18D. (7) The prescribed authority shall grant approval within four months from the date of receipt of the application: Provided that where the approval is not granted, the decision of the said authority shall be communicated to the applicant within the said period of four months: Provided further that no approval shall be refused unless the applicant has been given an opportunity of being heard.

5. The assessee filed before the AO the details of the receipts from carrying on scientific research and development. The assessee gave copies of the contract with the clients for rendering scientific, research and development. At page-4 of the paper book, we find a copy of the work IT(TP)A No.1605/Bang/2012 Page 7 of 58 order given by Jassen L.P. to the assessee for carrying out clinical research in respect of a product Risperdal and Consola which are drugs used for treatment of schizophrenia. The Assessee has to carry out Phase-IV. It requires to be stated here that Good Clinical Practices (hereinafter referred to as GCP) in India issued by Directorate of Health Services and Chairman, DTAB gives definition of what is Clinical Trial, Human/Clinical Pharmacology Trials, Clinical Research Organization (CRO), Monitor, Protocol and other similar terminologies which are used in GCP. Human/Clinical Pharmacology trials, exploratory trials, confirmatory trials are phase-I and phase-II and III of clinical trial. Phase-IV of clinical trial is study performed after marketing of the pharmaceutical product. The first three phases however, are trials conducted in order to discover or verify the clinical pharmacological and or/adverse effects of pharmaceutical products on human subjects. As far as the assignment given to the assessee by Jassen L.P, referred to above is concerned, it relates to phase-IV which is study to be performed after marketing of pharmaceutical products. Similarly, the assessee furnished another contract a copy of which is at page -37 of the paper book which is work order by Theravance Inc. engaging the assessee to carry out phase-III research in respect of a product by name Telalvancin used for medical condition called HAP.

6. As can be seen from the requirement of 80-IB(8A) of the Act, approval of the Department of Scientific & Industrial Research with the Ministry of Science & Technology, is one of the conditions to be fulfilled by IT(TP)A No.1605/Bang/2012 Page 8 of 58 the assessee. The assessee obtained an approval (initially for AY 02-03) as required and the copy of approval was filed by the assessee which is placed at page-113 of the assessees paper book. It is not in dispute that there has been renewal of the approval granted to the Assessee for the AY 08-09. Before getting this approval/renewal, the assessee has submitted the detail information regarding its income and expenditure from 2002-

2003. From 20022003, in particular the assessee gave the research & development infrastructures it possesses, R & D manpower employed, details of R&D projects/programmes. It is after giving all the details to the authority concerned, had granted an approval contemplated by the provisions of sec. 80-IB(8A) of the Act. It also pertinent to mention that the approval granted by the Ministry of Science & Technology continue to remain valid even after assessment year 2011-12 as stated by the learned counsel for the assessee during the course of arguments before us. The approval at page-113 of the paper book is valid for assessment year 2007- 08 to 2009-10.

7. The AO examined the claim of the assessee for deduction u/s 80-IB (8A) of the Act, 1961. According to the AO one of the important conditions in rule 18DA is that the company should have adequate infrastructure such as laboratory facility etc., for undertaking scientific R & D of its own. The AO referred to the fixed assets schedule of assessee as on 31-03-2008. According to the AO the break-up of Plant and Machinery showed that the Assessee owned mostly communication and related equipments and data IT(TP)A No.1605/Bang/2012 Page 9 of 58 processing equipment consisting of computer/laptop and software. According to the AO there was no category of assets in the schedule to indicate that the assessee had infrastructure to undertake activity in the nature of scientific R & D in terms of rule 18DA(1)( c) of the Rules. The AO confronted the Assessee on his findings as above and called upon to provide explanation.

8. The Assessee submitted before AO that the R &D activity carried out by the assessee was mainly people oriented and that the requisite quality and qualified man power is employed by the assessee. That the Assessee carries out the operations from its infrastructure facility at different location in Bangalore, Mumbai and Ahmedabad (where it has office space) in addition to the sites in hospitals. The Assessee uses the facilities/infrastructure of various sites in hospitals across the country for conducting clinical research by way of entering into contracts and paying the requisite fees. In particular the Assessee submitted that Rule 18DA(1)(c ) of the rules, does not specify any condition that assessee should own infrastructure because the reference to the phrase on its own in rule 18DA(1)(c ) is in relation to research and not in the context of ownership of infrastructure.

9. The AO however held that it was not possible to carry out scientific R&D without adequate infrastructure to engage in scientific R&D of their own. The measure of adequate infrastructure has to be understood in the IT(TP)A No.1605/Bang/2012 Page 10 of 58 context of the facility which would enable the company to engage in scientific R&D of its own. The qualified man power is no doubt very important but without established laboratory facilities and necessary instruments/equipment it is not possible to engage in scientific R&D. The infrastructure facility in Bangalore, Mumbai and Ahmedabad referred by the Assessee in his submission was only office space and not a facility that supports scientific R&D activity. This is one of reasons that the assessee has entered into contract with various hospitals to utilize their facilities/infrastructure. According to the AO, the phrase used in rule 18DA(1)(c ) is of its own and not on its own. The AO therefore held that employing qualified manpower and use of the facilities/infrastructure in the hospitals by entering into contract cannot be construed to mean that the assessee company has adequate infrastructure to engage in scientific R&D of its own.

10. The AO thereafter examined the agreement dated 08.06.2005 between the Assessee and M/s Acambis Research Ltd. He found that the Assessee agreed to render the following services under the aforesaid agreement. Description of services

1. Company Acambis Research Ltd.,(Acambis) Trail substance Chimri Vax JE IT(TP)A No.1605/Bang/2012 Page 11 of 58 Title Phase II Randomized double blind safety and immunogenicity trail of Chimeri Vax JE vaccine against mouse brain vaccine (MBV) in India

2. Indication : Japanese Encephalitis

3. Number of subjects : 128 Subjects

4. Treatment and follow up period: 24 months

5. Number of investigator sites: 2 active + 1 back up site

6. Expected study start: May, 2005

7. Enrolment start date: November, 2005 Quintiles Research (Ind.)Pvt. Ltd., shall

1. Provide project management services in India for the start up period.

2. Regulatory document collection and submission to Indian regulatory authorities on behalf of the Indian collaborate of Acambis Plc.

3. Prepare and submit application for regulatory approval and follow up and make presentations to the drugs controller general, India (DCGI) and other concerned government bodies, if required.

4. Prepare and submit an application for customs clearance of study drug.

5. Prepare and submit an application for export of biological samples outside India Director General of Foreign Trade (DGFT)

6. Familiarize with study protocol and other study related documents. IT(TP)A No.1605/Bang/2012 Page 12 of 58

7. Support the investigators in their local EC submission and coordinate Ethics Committee (EC) approvals from the sites.

8. Translate/back translate informed Consent Form

9. Conduct site feasibility at 4 sites and recommend sites to Acambis

10. Perform site selection visits at 3 sites with Acambis

11. Suggest 2 best sites to Acambis for initiation.

12. Review labeling text and suggest changes.

13. Identify a central lab in India and obtain quotation from lab for the laboratory tests.

14. Periodic status reports will be sent to Acambis to update them on the status of the study of India.

11. The AO on perusal of the above terms of the agreement came to the conclusions that the Assessees responsibilities were dealing with regulatory authorities, preparation of protocol and study materials, identification laboratory/investigator sites etc., According to the AO, the above services cannot be equated with the undertaking scientific R&D of its own in terms of 18DA(1)(c ). According to the AO, if the Assessee were to undertake scientific R&D of its own, then the resultant output generated from such activity would also be owned by the Assessee. According to the AO, as per the agreement, the results of activities under the agreement absolutely belongs not the Assessee but to the other party. In this regard the AO has relied on the following clause in the agreement. IT(TP)A No.1605/Bang/2012 Page 13 of 58

Each party agrees that it will maintain in strict confidence any confidential information obtained from the other party and will not reveal, publish or otherwise disclose it to any third party without the disclosing partys prior written consent, expect o the extent that such information already is publicity known through no fault of the receiving party, or unless required to do so by law or regulation. These confidentiality obligations shall remain in effect for ten years after the completions or terminations of this agreement. All data and information generated or derived by Quintiles as the result of services performed by Quintiles under this agreement shall be and remain the exclusive property of customer. Any inventions that may evolve from the data and information described above shall belong to customer and Quintiles agrees to assign its right in all such inventions and/or related patents to customer.

12. According to the AO as per the agreement once the assigned responsibilities as per the agreement are discharged, the data/information generated in the process is transferred to the customer for its exclusive use. According to the AO this clearly indicated that the assessee was not undertaking scientific R&D of its own as specified in rule 18DA(1)(c).

13. The AO also referred to Rule 18DA(1)(e) which provides that the Assessee should be engaged exclusively in scientific R&D activity leading to technology development, improvement of technology and transfer of technology developed by themselves and Rule 18DA(2)(a) which stipulates that the prior permission of the prescribed authority is required to sell any prototype or output from the laboratories. According to the AO, the assessee does not own any output arising out of activities on account of the agreement with the customer and hence, the assessee could not sell IT(TP)A No.1605/Bang/2012 Page 14 of 58 any output/prototype. The assessee by itself was not exclusively engaged in scientific R&D activities leading to development/improvement/transfer of technology.

14. For the above reasons, the AO held that the assessee does not meet prescribed conditions in rule 18DA of IT Rules, 1962 to claim deduction u/s 80-IB(8A) of the Act.. Accordingly, the claim of Rs.31,32,49,090/- as deduction u/s 80-IB(8A) was disallowed by the AO.

15. Before the DRP, the assessee raised a specific objection on the reasons given by the AO for denying the benefit of deduction u/s 80-IB(8A) of the IT Act, 1961 as follows:- (a) Existence of infrastructure facility: The assessee has adequate infrastructure to carry out scientific R&D. The assessees R&D is people oriented and therefore, the role of equipments is very low. The assessee pointed out that medical experts, Doctors are its main infrastructure. The assessee pointed out that apart from the above, the assessee has developed its own standard operating proceedings. It has in-house laboratory besides access to global literature, data bank of its parent company. The assessee has also pointed out that it has office space in three locations at Bangalore measuring 31,378 sq.ft Mumbai 23,123 sqft and Ahmedabad 11,850 sq.ft. IT(TP)A No.1605/Bang/2012 Page 15 of 58 (b) The assessee has also made submissions that deduction u/s 80- IB(8A) of the Act is to encourage scientific R&D and is not on the basis of any investment in capital. In this regard, attention was drawn to the Memorandum explaining the provisions of Finance(2) Bill 1996 whereby the aforesaid provisions was introduced for the first time. The relevant portion of the said Memorandum reads as follows;

In order to promote research and development activities, the Bill proposes o provide for a five year tax holiday under section 80- IA of the IT Act, to approved companies engaged in scientific & industrial research and development activities on commercial lines. This incentive shall be available to any company that has as its main objective, activities in the area of scientific and industrial research and development and which has been accorded approval by the prescribed authority. Secretary, Department of Scientific & Industrial research shall be the prescribed authority for this purpose.

(c) Ownership of infrastructure not necessary: In this regard, the assessee pointed out before the DRP that it uses facilities and infrastructure of various hospitals across the country for conducting clinical research under valid agreements. The assessee pointed out that the hospitals carry out instructions given by the assessee. The assessee submitted that it is not requirement of Rule 18DA(1)(c ) infrastructure for carrying out the scientific R&D should be owned by the assessee. It was submitted that the Rule mentions that the assessee should have adequate infrastructure by way of laboratory facilities, qualified manpower etc., to carry out the scientific research and development of its IT(TP)A No.1605/Bang/2012 Page 16 of 58 own. It was argued that the reference to the phrase of its own in rule 18DA(1)(c ) is in relation to research and not in the context of ownership of infrastructure (d) The assessee submitted that it carries on scientific R&D leading to technology development and transfer of technology. The Assessee gave the nature of research activities which was broadly be divided into two categories; a) basic research and b) applied research It was submitted that although the assessee may not be directly involved in basic research on inventing a new molecule or a drug, but is involved in applied research and contributes to inventing a new drug or a molecule by conducting clinical trials. It was pointed out that research and development activities in relation to developing a new drug will be incomplete without clinical trials. It was submitted that the assessee undertakes research and development projects from clients (foreign and Indian pharmaceutical companies) related to phase-I to IV clinical research. The majority of projects are in phase II and III in different therapy areas such as CNs, Oncology, CVS, Infectious Diseases, Endocrinology etc., The associated hospitals, doctors and patients are benefitted due to the state of the art research being conducted in India. It was explained that typically, a request for proposal (RFP) would be received from a client indicating requests such as Protocol, Monitoring, Site Evaluation, Project IT(TP)A No.1605/Bang/2012 Page 17 of 58 Management, Adverse Event Reporting and Analysis, Data Evaluation and Report Writing. The assessee evaluates and responds to this RFP. Thereafter, if a project is awarded, the assessee submits a detailed dossier to the Drugs Controller General of India (DCGI) and to the Ethics Committees of selected research and development centres/Hospitals. Upon approvals from these authorities, the clinical research project commences. Ongoing project review with emphasis on patient safety is important and is performed by the assessees in-house medical experts and Ethics Committee of the participating hospitals. Appropriate interim filings of the project are submitted to the relevant regulatory authorities/client. Any clinical research projects are time bound and could either be completed within a year or spread over 2-3 years, as the case may be. (e) Requirement to be satisfied only where applicable: use of the phrase if any: One of the prerequisites to claim the tax holiday under section 80- IB(8A) is that the Assessee has its main object the scientific and industrial research and development. Accordingly, a pharmaceutical or biotechnology company that manufactures and sells drugs developed by it may not qualify for the deduction u/s 80-IB as its main object is not scientific and industrial research and development. In other words, if an assessee commercially exploits the results of its research for manufacture and production, its main object ceases to be scientific and industrial research and development. Therefore, the benefit of sec.80-IB(8A) is IT(TP)A No.1605/Bang/2012 Page 18 of 58 typically available to entities carrying on contract research on behalf of other entities also. The condition relating to sale of prototype or output contemplated by Rule 18DA(2)(a) of the Rules is qualified by the term if any. This condition will accordingly be triggered only if the assessee that is approved by DSIR u/s 80-IB(8A) actually propose to sell prototype or output to another person. In other words, there will be a large number of cases, like contract research companies, where the question of sale of prototype or output will not arise. (f) Legally only condition in rule 18DA(1) need to be satisfied: Without prejudice to the above, it was submitted that sec.80-IB prescribes that the deduction would be available if the prescribed conditions are satisfied. The conditions to be satisfied are enumerated in sub-rule(1) of rule 18DA, which reads as follows;

18DA(1)Any company carrying on scientific research and development shall be eligible for deduction specified in sub- sec.(8A)of sec.80-IB if such company;-..

On the other hand, sub-rule(2) of rule 18DA reads as under;

18DA(2) Every company which is approved under sub-rule(2) of rule18D shall

In other words, rule 18DA(2) merely specifies conditions that are to be monitored and regulated by DSIR in the granting of approval. Accordingly, to be eligible for the deduction u/s 80-IB(8A), legally, the assessee is required to satisfy the requirements of sub-rule(1) of rule 18DA which it has IT(TP)A No.1605/Bang/2012 Page 19 of 58 satisfied and not sub-rule(2). It was argued that the DSIR has granted approval to the assessee specifically in the context of sec.80-IB(8A). It was pointed out that there was a provision under rule 18DA(3)(b) for withdrawal of approval by DSIR and the DSIR has not withdrawn the approval granted to the assessee.

16. The AO filed remand report before the DRP on the objections to the draft assessment order of the assessee. In the remand report, the AO has reiterated the stand taken by the AO in the draft assessment order. In particular the AO took the following objections;

.Similarly, as per the agreement, the services aforesaid were to be provided to the client and the data/information generated in the process was required to be transferred for the exclusive use of the client. Therefore, it was evident that the assessee was not engaged exclusively in scientific research and development activities by themselves as specified in rule 18DA(1)(e ). On the contrary, the assessee only provided certain services based on the requirement of the client and consequently there was no output generated that is owned or in respect of which the assessee can exercise rights. In any organization whose main aim is to carry out scientific research, income arises from the sale of technology or IP rights arising from such activity. In this case the assessee does not have any right over the research product. Rather assessee is only receiving fees for carrying out activities as per the requirement of the clients. Therefore, it was concluded that the income received was for providing certain specified services to the client and not as income arising from carrying out scientific research and development. Scientific research connotes any activity for extension of knowledge in the fields of natural or applied sciences as defined in sec.43(4). Going by this definition the assessee by itself is not contributing to expansion of such knowledge though its activities. The earnings of the assessee are IT(TP)A No.1605/Bang/2012 Page 20 of 58 more in the nature of job charges. Hence the assessee is not eligible to claim deduction u/s 80-IB(8A).

(emphasis supplied)

17. The assessee filed a reply to the remand report filed by the AO in which the assessee took a stand that even in respect of contract research the assessee was entitled to deduction u/s 80-IB(8A) of the IT Act, 1961.

18. The DRP dealt with the objections raised by the assessee as follows:- (i) The DRP was of the view that qualified man power is no doubt very important but without establishing laboratory facilities and necessary instruments/equipments, it was not possible to engage in scientific R&D. The office space in Bangalore, Mumbai and Ahmedabad cannot be considered as infrastructure for scientific R&D as it was only office space. The DRP went on to hold in para-6.6 wrongly written as 6.7 of its order that infrastructure should be owned by the assessee. The DRP analysed contract between the assessee and M/s Acambis Research Ltd., and came to the conclusion that the assessee was only took contract research and development and not any scientific R&D of its own. (ii) The DRP also held that the assessee does not develop, improve or transfer technology owned by it and therefore, the conditions IT(TP)A No.1605/Bang/2012 Page 21 of 58 mentioned in Rule18DA(1)(e ) are not satisfied. The DRP came to the conclusion that the assessee is not entitled to deduction u/s 80- IB(8A) of the IT Act, 1961.

19. In the appeal on the above issue before the Tribunal, the learned counsel for the assessee drew our attention to the GCP and highlighted as to how clinical research and trials is carried out in India on the basis of the GCP issued by the Director General Health Services (DGHS). In particular, our attention was drawn to the four different phases of clinical trial that are carried out in our country. It was submitted that under the provisions of sec.80-IB(8A) of the Act, there is no requirement that the scientific R&D carried out should be by the assessee himself and that Contract Research Organization (CROs) are not entitled to the benefit of this section. In this regard, the learned counsel for the assessee pointed out that the legislature whenever it thinks appropriate to confer the benefit of particular deduction to be given to an assessee only when the conditions are to be satisfied by the Assessee on its own it would said so in specific words. Our attention was drawn to sec.10(23FB) of the Act which defines venture capital undertaking to include a domestic company engaged in the business of R&D of new chemical entities in the pharmaceutical sector. Thus, the legislation did not intend to restrict the definition of R&D to new chemical or molecular entities. Similarly, u/s 35(2)(AB)(1) of the IT Act, expenditure on scientific research in relation to drugs and pharmaceuticals includes expenditure incurred on clinical drug trial. Thus, the legislation, IT(TP)A No.1605/Bang/2012 Page 22 of 58 wherever required, expressed its intention to restrict scope of particular deduction provision. It was submitted that sec.80-IB(8A) of the Act is wide enough to cover even profits of business of scientific R&D carried out by a CRO.

20. Our attention was also drawn to the various information provided before getting the approval from the prescribed authority u/s 80-IB(8A). Our attention was drawn to the fact that the prescribed authority was fully conscious of the fact that the assessee is a CRO and yet has granted approval to the assessee u/s 80-IB(8A) of the Act, 1961. According to the leaned counsel for the assessee it is not open to the AO to sit in judgment over the approval granted by the prescribed authority. In this regard, reference was made to the following decisions:- (a) Creative Infocity Ltd Vs Under Secretary(19 Taxmann.co. 270) In the aforesaid case, decided by the Honble Gujarat High Court the question for consideration was deduction u/s 80-IB to an industrial park. The Honble Court found that commerce Ministry had granted approval to an undertaking in terms of Rule 18C(2) of IT Rules, 1962. Once such approval is granted for the assessee the Board is duty bound to notify that the assessee is entitled to the benefits of Industrial Park Scheme. The Board however, did not give such notification and a Writ Petition was filed before the Honble High Court. The Honble High Court held that the Board IT(TP)A No.1605/Bang/2012 Page 23 of 58 was bound by the approval given by Commerce Ministry and the same is binding on the Board. (b) Our attention was also drawn to the decision of the Ahmedabad Tribunal in the case of ACIT Vs Navdeep Co-operative Bank Ltd., (43 ITD 697) wherein the question before the Honble ITAT was with regard to deduction u/s 80P(2)(a)(i) of the IT Act, 1961. According to the AO the assessee co-operative society had granted illegal loans by normal procedure and therefore, it no longer retained the character of a cooperative society and therefore, not entitled to deduction claimed. On further appeal, the Honble ITAT held that under the Gujarat Co-operative Society Act, vide powers are vested with the Registrar to deal with irregularities committed by the Co-operative Society. The RBI has also has a part to regulate the banking activity of such Co-operative Society. The AO was therefore, not to enter this area and deny the benefit of deduction to the assessee. (c) Further, attention was also draw to the decision of the Honble Supreme Court in the case of M/s. Gestetner Duplicators Pvt. Ltd., Vs CIT, 117 ITR 1 (SC). The question for consideration in the aforesaid decision was as to whether the recognition granted to Provident Fund (PF) could be reviewed in the assessment proceedings. The Honble Supreme Court upheld the conclusion of the Tribunal that the PF maintained by the assessee satisfied the conditions laid down in Rule-4(c) IT(TP)A No.1605/Bang/2012 Page 24 of 58 of Part-A of the Fourth Schedule. The Honble Supreme Court thereafter observed as follows:-

However, we would like to make some observations with regard to the true impact of the recognition granted by the CIT to a provident fund maintained in this behalf are that it was as far back as 1937 that the CIT had granted recognition to the provident fund maintained by the assessee under the relevant Rules under the 1922 Act, that such recognition had been granted after the true nature of the commission payable by the assessee to its salesman under their contracts of employment had been brought to the notice of the Commissioner and that the said recognition had continued to remain in operation during the relevant assessment years in question, the last fact in particular clearly implied that the provident fund of the assessee did satisfy all the conditions laid down in r.4 of Part A of the Fourth Schedule to the Act even during the relevant assessment years. In that situation we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the ground that the assessees provident fund did not satisfy any particular condition mentioned in r.4. It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under r.4 of Part A of the Fourth Schedule to the Act and not sit in judgment over it. There is ample power conferred upon the Commissioner under r.3 of Part A of the Fourth Schedule to withdraw at any time the recognition already granted I, in his opinion, the provident fund contravenes any of the conditions required to be satisfied for its recognition and if during the assessment proceedings for any particular assessment year the taxing authority finds that the provident fund maintained by an assessee had contravened any of the conditions of recognition, he may refer the question of withdrawal of recognition to the Commissioner but until the Commissioner acting under the powers reserved to him withdraws such recognition the taxing authority must proceed on the basis that the provident fund has satisfied all the requisite conditions for its recognition for that year: any other course is IT(TP)A No.1605/Bang/2012 Page 25 of 58 bound to result in chaos and uncertainty which has to be avoided

. (d) Reference was also made to the decision of the Honble Bombay High Court in the case of CIT Vs Parrys (Eastern) Pvt.Ltd.,176 ITR 449 (Bom). It was a case where the question for consideration was the allowability of deduction u/s 85(c) of the IT Act, 1961. The deduction u/s 85(c) allowed on royalty, commission etc., received by an assessee from a company which is not an Indian Company. The agreement under which royalty is paid should be approved by the Central Government. The revenue took the stand that a person who made payment of royalty to the assessee was not a foreign company, and there was no agreement and no commercial or technical services were rendered. The Honble Bombay High Court while confirming the order of the Tribunal allowing the claim of the assessee found that an approval had been granted by the Central Government in respect of payment in question as required u/s 85(c) of the IT Act, 1961. The Honble Bombay High Court observed that the Central Government having granted the approval it must be held that the conditions u/s 85(c) were fulfilled by the assessee. The Honble Court observed that the Central Government was better equipped to decide whether or not the person making payment to foreign company and whether or not the services rendered were technical services. Reference was also made to the following two decisions for identical proposition:- IT(TP)A No.1605/Bang/2012 Page 26 of 58 (e) CIT Vs Bhaichand Amoluk Consultancy Pvt. Ltd., 208 ITR 1 (Bom.) (f) Prudential Assurance Co., Ltd., Vs DIT & Another 324 ITR 381 .

21. The learned counsel for the assessee also submitted that the requirement for claiming deduction u/s 80-IB(8A) of the IT At, 1961 is not dependent on the infrastructure owned by the assessee. In this regard our attention was drawn to the following decisions:- i) Ms/ Taurus Merchandising (P) Ltd., Vs ITO (25 Taxman.com

442) : The Honble Delhi High Court held that there was no legal bar for claiming deduction u/s 10B of the IT Act, 1961 when the necessary activity is outsourced and that what is required is that the assessee must mainly engage in manufacture of goods either itself or through some agency under its supervisory control or direction. ii) Reference was also drawn to the decision of the ITAT Delhi Bench in the case of ITO Vs Techdrive (Ind.) (P)Ltd., 124 ITD 249(Del). The question for consideration in the aforesaid decision was as to whether for claiming deduction u/s 10B of the IT Act the undertaking need not own plant & machinery or equipment and manufacture or produce computer software. The Tribunal held in the affirmative. IT(TP)A No.1605/Bang/2012 Page 27 of 58

22. The learned counsel for the assessee further drew our attention to the provisions of Rule 18DA(3) of the IT Rules, 1962 and submitted that the recognition granted to a company carrying on scientific R&D by the prescribed authority can only revoked by prescribed authority. It was submitted if at all the AO finds any violation, it is for him to bring the same to the notice of the prescribed authority.

23. With regard to the conditions prescribed in Rule 18DA(1)(c ) of the I.T. Rules, 1962 the learned counsel for the assessee submitted that expression such as used in the Rules refers to laboratory facilities qualified manpower, lab facilities and prototype development facilities. It was submitted that in Whartons law lexicon, the meaning of the words such as has been explained as indicating that whatever is mentioned after expression such as are only illustrative and not exhaustive.

24. It was pointed out that the revenue allowed the claim of the assessee up to assessment year 2007-08 and it is for the first time in 2008- 09 such an issue has been raised by the assessee. It was submitted by the learned counsel for the assessee that looked at from any angle the clam of assessee for deduction cannot be denied.

25. The learned DR relied on the observation of the AO in the order of assessment and the observation of the CIT(A) on the issue. It was submitted by him that the deduction u/s 80-IB(8A) of the Act is allowed only taking into consideration the risk involved in engaging oneself in scientific IT(TP)A No.1605/Bang/2012 Page 28 of 58 R&D. According to him, in a contract research there is no risk assumed by the assessee and therefore, there is no reason that the assessee should be entitled to any deduction at all. It was also submitted that the activities done by the assessee are more in the nature of co-ordination than scientific R&D. According to him, it would not been the intention of the legislation to allow deduction to CRO. According to him, it is not appropriate to submit that the approval given by the prescribed authority is conclusive and that the AO cannot examine the fulfillment of condition for allowing deduction u/s 80-IB(8A) of the IT Act, 1961. The learned counsel for the assessee in his submissions had placed strong reliance on the decision of the Honble ITAT, Delhi Bench in the case of DCIT Vs M/s Fortis Clinical Research Ltd., (2012) 27 Taxmann.com 4(Del.). In the aforesaid decision, the assessee was deriving income by doing scientific research and development to pharmaceutical companies. The claim for deduction u/s 80-IB(8A) of the IT Act, 1961 was denied by the revenue on the ground that the was violation of Rule 18DA(2)(a) of the IT Rules, 1962 which says that an approved company shall not sell any prototype or output without the prior permission of the prescribed authority. The Tribunal held that even assuming such violation existed, it was for the prescribed authority to revoke the permission and it would not open to the AO to deny the benefit of deduction to the assessee. According to the learned DR, the aforesaid decision relied upon by the learned counsel for the assessee is not relevant for the present case because, the grievance of the revenue in the IT(TP)A No.1605/Bang/2012 Page 29 of 58 present case was with regard to violation of conditions prescribed under rule 18DA(c ) & (e) of the IT Rules, 1962.

26. We have given a careful consideration to the rival submissions. The requirement for claiming deduction u/s 80-IB(8A) read with sec.80-IB(1) of the IT Act, 1961 are that the assessee should have derived profit & gains from the business of carrying on scientific R&D. The assessee should be a company. We are not re-producing relevant provisions of the Act and the Rules as the same have been set out in the earlier part of this order. In the present case, there is no dispute by the revenue that the conditions mentioned in sec.80-IB(8A)(i) to (iii) are satisfied. The dispute is only with regard to(iv) which refers to the Rules prescribed. Rule 18DA(1)(a) to (f) prescribes several conditions. In the present case, the revenue disputes that the assessee does not specify the conditions laid down in Rule 18DA(1)(c ) and (e) of the Rules, 1962.

27. As far as the requirement of Rule 18DA(1)(c) of the Rules are concerned, it has been the contention of the revenue that the infrastructure facilities such as laboratory facilities, prototype facilities etc., should be owned by the assessee. In this regard, we find that the deduction u/s 80- IB(8A) of the IT Act is not dependent on capital investment. In this regard, we have already referred to the memorandum explaining the provisions of sec.80-IB(8A) of the Act introduced by the Finance (No.2) Bill 1996. The Memorandum clearly recognizes that deduction is to an undertaking IT(TP)A No.1605/Bang/2012 Page 30 of 58 carrying out scientific R & D. In the light of the object of the provision, we are of the view that expression of its own found in Rule 18DA(1)(c ) qualifies the words scientific R & D and not the earlier part of the Rule which refers to the existence of the infrastructure. We are therefore, of the view that this basis given by the revenue authorities for denying the benefit of deduction u/s 80-IB of the Act cannot be sustained.

28. With regard to the fulfillment of the conditions mentioned in Rule 18DA(1) (e) of the IT Act, we find that Rule talks about transfer of technology developed by themselves. The question is as to whether the aforesaid expression should be construed to mean that the scientific R & D undertaken by the assessee should be on its own or even where such scientific R & D is carried out on behalf of the client under a contract, the assessee should be allowed deduction. In this regard, we have gone through the entire Rule 18DA of the IT Rules, 1962. Sub-rule (5) gives documents that are required to be given to the prescribed authority for getting approval and clause-(c ) of the said Rules requires the Assessee to give photocopies of the memorandum of understanding relating to all ongoing and future sponsored research projects or programme. It can thus be seen that the Rules clearly contemplate even sponsored research programmes. The above requirements gives a clear indication that even contract research and profits derived there from are covered under the provisions of sec.80-IB (8A) of the Act, 1961. IT(TP)A No.1605/Bang/2012 Page 31 of 58

29. We also find that the form prescribed by the guidelines for approval of R&D company, u/s 80-IB(8A) of the IT Act issued by the Department of Science and Industrial Research, Ministry of Science & Technology gives an indication that even contract research is covered by provisions of sec. 80-IB(8A) of the IT Act, 1961. The form so prescribed is given as an Annexure-A to this order. In Part-C of the said form in col.5 & 6 the information with regard to R&D projects and programmes have been sought for. The patent, if any have been obtained have also asked for. The technology developed and transferred particulars are also asked for. The assessee in its application for recognition as well as renewal has clearly admitted the fact that it was only contract research and therefore, all this requirements do not arise for consideration. The following are the observations made by the assessee in its application for recognition to the prescribed authority.

5. Patents filed/obtained in India/abroad during the last three years. Sl.No Products/process Name of the Country(s) Year (Attach copies of sealed patents) As company is doing on behalf of the clients, final results of research are sent to clients for its further process. Patents, if any of the related research is filed by the respective clients at their respective country as per the final outcome of a particular research study.

6. Details of technology developed and transferred to other arties during each of the last three completed accounting years giving names of parties and details of technology transferred (i./e amount of royalties/premium/technology/transfer fee received). IT(TP)A No.1605/Bang/2012 Page 32 of 58 Though company is using its owned technology as well as knowledge bank in form of standard operating procedures (SOPs) for conduct of a research project of an International standard, ultimate research results of various research projects undertaken by the company were transferred by the company to the clients

.

30. In the present case, it is not disputed that the entire receipts of the assessee are from contract research and not own research. It is also pertinent to mention that in the appendix to the form for approval to the renewal there is a specific column namely col.no.2 & 3 dealing with contract research. The said column seek details of sponsorship fee (if any,) name of the sponsors if, any. It is, thus clear that the forms contemplates a sponsor research (contract research) as also falling within the ambit of sec.80-IB(8A) of the IT Act, 1961.

31. It is also relevant to note that the prescribed authority after being fully conscious of the Act that the assessee is only a CRO has still though it fit to grant 80-IB(8A) of the IT Act, 1961. It thus clear that on a overall reading of the relevant provisions and Rules that the deduction u/s 80- IB(8A) of the IT Act, would be allowed to a CRO. The decision of the Honble Delhi ITAT in the case of Fortis Clinical Research Ltd., also supports the aforesaid view. In the aforesaid case, though the issue as to whether the CRO are also covered u/s 80-IB(8A) of the Act was not directly in issue, yet, it is an authority for the proposition that any violation of the conditions of the Rule 18DA(8A) can be looked into only by the prescribed IT(TP)A No.1605/Bang/2012 Page 33 of 58 authorities and not by the AO, while completing the assessment. In that view of the matter, we are of the view that the revenue authorities fell with an error in denying the claim of the assessee. We therefore, hold that the assessee would be entitled to claim for deduction u/s 80-IB(8A) of the IT Act, 1961. The AO is directed to allow the claim for deduction. The relevant ground of appeal raised by the assessee is allowed.

32. The next issue that requires consideration is the addition made by the AO consequent to adjustment to the ALP in respect of international transaction between the Assessee and its AE. The issue has been raised by the Assessee in Ground No.3 of the grounds of appeal.

33. The assessee, viz., Quintiles Research (India) Private Limited [ QRPL] was incorporated and registered as a private limited company in India wholly owned (indirectly, through subsidiaries) by Quintiles Transnational Corporation (QTC), a company established in the USA. The shareholding structure of the Assessee is as under: Shareholders No. of shares held % of holding Quintiles Mauritius Holdings 9,99,155 99.01% Quintiles Transnational Corp 10,000 0.99% The Assessee commenced its commercial operations since 2002. The Assessee was incorporated with an objective of rendering services relating to undertaking clinical trials on behalf of pharmaceuticals, biotechnology and healthcare companies. The Assessee has its units at Bangalore, IT(TP)A No.1605/Bang/2012 Page 34 of 58 Mumbai and Ahmedabad, which conduct clinical trials at various locations across India.

34. The Assessee undertakes variety of clinical trials of Phase II & III trials. It also undertakes trials for generic as well as new drugs. The overseas Quintiles group entities enter into contracts with pharmaceutical companies (sponsors) for undertaking global clinical trial studies through an identified scope of services under the global study contract which may be undertaken by various geographically or legally dispersed group entities including the Assessee.

35. In conducting business by the Assessee, its holding company provides certain support services which benefit the Assessee and the Quintiles group companies across the globe. The Assessee being part of the Quintiles group also receives benefit of such global sourcing. Some of such support activities, sourced by Quintiles Group are in relation to legal support services like client contracts, employee contracts, integration support services, etc.; human resource and learning and development services like networking online courses, salary planning, job grading, etc.; finance support like providing need based support on finance/treasury matters, etc.; corporate communication services like publishing internal brochures and videos, media training, crisis communication planning and response, etc.; business development, marketing and strategic management services like global best practice identification and transfer, IT(TP)A No.1605/Bang/2012 Page 35 of 58 advertising brand management, sales support, support for interregional sales, planning support, maintenance of global website.

36. For performing these activities, the holding company incurs certain costs. These costs are incurred in relation to various group entities and hence are accordingly allocated amongst various companies, including the assessee, on the basis of scientific allocation keys like head count, turnover, etc.

37. During the year under consideration, the assessee entered into several international transactions with its Associated Enterprise(AE). Among those transactions the following international transaction is in dispute in Gr.No.3 raised by the Assessee in its appeal:- Description of transaction Name of the AE Amount Rs. Qunitiles Transnational Corporation, USA 1,88,04,545 Management Fees Allocation Quintiles Limited, UK (5,27,148) Total 1,82,77,397

38. In its TP study, the assessee did not choose any method prescribed under the rules as, in its opinion, the payment of management fee was nothing but a cost allocation and therefore no method is prescribed for determining the arms length price (ALP) in respect of such transactions. The relevant portions of the TP study of the Assessee on this aspect was as follows:- IT(TP)A No.1605/Bang/2012 Page 36 of 58

Cost allocations are the actual costs allocated on reasonable basis by Quintiles Group companies and in view of the company, these are appropriate payments of actual cost incurred towards benefits received by it. Therefore, it can be reasonably concluded that these transactions are on arms length basis. Reimbursement and recovery of expenditure, being in the nature of pure reimbursement on the basis of actual expenditure incurred by the respective parties, no benchmarking is required.

39. The TPO by letter dated 12.08.2011 called upon the assessee to furnish the following:- (a) Copies of invoices raised by the AE (Quintiles Transnational Corporation, USA and Quintiles Limited, UK) in assessees favour and also ledger account of Management Fees in assessees books of account for the FY 2007-08. (b) Details and nature of management services rendered by AEs. The quantification of such services and also the basis for such apportionment as the management services would have been rendered to various other Quintiles Research group entities also. In this regard, the justification as to how two independent parties would have quantified the services. (c) Copy of the agreements with AE(s) in respect of management fee. Also to establish that a service (i.e., a benefit) has actually been supplied for which management fee is paid by the assessee. (d) Quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from.

40. The assessee in reply to the show cause notice of the TPO, by letter dated 06.09.2011 submitted the following:- IT(TP)A No.1605/Bang/2012 Page 37 of 58

1. Allocation of Management fee - Copy of the agreement entered into between the assessee and QTC with respect of allocation of the management fee was enclosed as Annexure-1. - Sample copies of invoices raised by QTC on the assessee was enclosed as Annexure-2. - Sample details of management fees allocation by QTRN for quarter ended December 2007 was enclosed as Annexure-3. - The details of nature of the services provided, basis of allocation, method of invoicing, etc. by AEs to the assessee for the year under consideration was enclosed as Annexure- 4. - Payment by independent concern - The assessee submitted that no management fee is paid by any independent concern or entity in any other country through which Quintiles Group carries on similar business as that of the assessee. The assessee also submitted that the services are exclusively performed by the AEs for the benefit of the group and further such services are not performed for third party. Hence there is no question of provision of similar services to independent concerns.

2. IT cost allocation, software cost allocation and other cost allocation The Assessee has also availed services in the nature of IT, software license, insurance etc. Copy of the agreement entered into between AE and the Assessee with respect to allocation of the IT cost, insurance cost, etc. was enclosed as Annexure-5. Also, details with respect to nature of expenses, basis of allocation etc. were elaborated in Annexure-6.

41. The basis of management fee calculation was also given as Annexure-A to the master cost allocation agreements to which the IT(TP)A No.1605/Bang/2012 Page 38 of 58 assessee and QTC are parties. Attachment-A to the master cost allocation agreement gives the following details:- Basis of Management Fee Calculation: Management Fees are allocated to the units each quarter in the last month of the quarter. Since the fees are charged out on Day 1 of close, before the units have submitted their final last month of quarter numbers to QTRN, the management fee calculation uses two months of actual costs and one month of estimated costs. The estimated monthly cost is calculated by averaging the YTD monthly costs. QTRN charges out its departmental operating costs as the Management Fees. Each departments costs are allocated to the units somewhat differently. Departmental Operating Expenses are allocated as follows: Legal - Department provides estimates & time spent on each geographical region. The region gets that percent of the departments costs. Within a region each unit is charged based on net revenue. Quality Assurance - the departments costs excluding D&O insurance, are allocated to each CDS or EDLS unit based on net revenue. Facilities the departments costs are allocated to the other QTRN departments based on each departments percent of total costs. Then these costs are included in the other departments allocations. Human Resources/Benefits/Learning and Development Department provides estimates of time spent on each geographical region. The region gets that percent of the departments costs. Within a region, each unit is charged based on headcount. CEO Admin - the departments costs, excluding Management Fees to Equity partners, are charged to the US units based on net revenue. No regional estimates are used. Finance - Department provides estimates of time spent on each geographical region. The region gets that percent of the IT(TP)A No.1605/Bang/2012 Page 39 of 58 departments costs. Within a region, each unit is charged based on net revenue. Business Development - Allocated by net revenue. No regional estimates are used. Commercialization - Allocated by net revenue. No regional estimates are used. Marketing - Allocated by net revenue. No regional estimates are used. Clinical GAEs - Allocated by net revenue. No regional estimates are used. All Corporate Development costs for deal making areas are charged to the Pharmabio legal entity only. Corporate Web Site - the departments costs are charged to all units based on headcount. No regional estimates are used. Annexures - 2, 4 & 6 to the letter dated 06.09.2011 of the assessee to the TPO contains sample invoices besides explaining the basis of allocation of management fee. The actual allocation of Management fee is given as Annexure-B to this order.

42. The TPO was, however, not convinced with the reply of the assessee. The TPO made the following observations in his order:-

The above reply is very general as far as the description of the services rendered by the AE is concerned. It is mentioned that the AE provides advice and support in various fields. The taxpayer is charged on the basis of the costs incurred by the AE allocation on appropriate allocation. However the reply is not clear about the actual services rendered and the benefits accrued to the taxpayer. The submissions made by the taxpayer are considered. The justification given by the taxpayer for payment of management fee is not convincing. Apart from the coy of the agreement and written submission, the taxpayer has not furnished any evidence regarding actual services received from the AE. It IT(TP)A No.1605/Bang/2012 Page 40 of 58 is noticed that the management fee is paid @ 2.26% of the taxpayers turnover. The taxpayers claim that the payment is based on the actual costs incurred by the AE is thus contrary to the actual computation of the payment.

43. Thereafter, in his order, the TPO has narrated the nature of services rendered for which the management fee was paid. It should be mentioned here that the nature of services as given by the TPO in his order does not tally with the nature of services as narrated by the assessee in reply to the show cause notice of the TPO. The TPO has thus proceeded on a wrong basis regarding the nature of services. The TPO also says that the assessee applied CUP method. This is factually incorrect. As we have already mentioned, the assessee in its TP report did not choose any method. Apart from the above, the name of AE as given in TPOs order is not correct and the TPO has referred to a company by name LMG, Denmark as the assessees AE, but the AE concerned is QTC. The TPO thereafter has made a reference to OECD guidelines which mandates ascertaining nature of services rendered intra group and see whether independent parties would pay similar sum for similar services. The TPO in para 3.4 at page 11 of his order, refers to the assessee having applied TNMM as Most Appropriate Method (MAP), which again is factually incorrect. The TPO also says that the assessee has aggregated all transactions entered into with AE, which is factually incorrect. The final conclusions of the TPO are as follows:- IT(TP)A No.1605/Bang/2012 Page 41 of 58

1. The taxpayer failed to produce any evidence regarding the expenditure incurred by the AE on behalf of the taxpayer.

2. The taxpayer has not shown whether such services are rendered except producing invoice copy and describing the nature of services.

3. The taxpayer has not shown how such services would he valued by an independent entity dealing in similar circumstances.

3. The taxpayers management fee is nothing but siphoning off profits from India with minimum incidence of tax as the taxpayer has paid only 10% , when compared to the tax rate of 40% (30% tax + 10% dividend tax) if the same was shown as profits and remitted as dividend.

5. The imports from AEs Constitute major consumption of raw material / purchases indicating that the AEs are already compensated enough in the form of purchase price and also compensated for the va1ue addition in India by way of royalty paid based on the technology received from AE.

6. The taxpayer did not prove the arms length nature of management fee paid to LMG Denmark.

7. As no independent party in an uncontrolled scenario would pay any amount without getting direct and tangible benefits, the CUP for the management fee is determined at nil. To sum up, the payment of the management fee in the case of the taxpayer is not at all justified. There is no proof of any service having actually been rendered by the AE. The existing facts and circumstances amply show that the services even if any rendered by the AE were mere duplication of the functions being carried out by the taxpayer on his own and independently. The taxpayer did not get any economic value from the alleged services rendered by the AE. Thus the arms length price of management fee paid is treated as Rs. Nil due to inadequacy of the taxpayers argument and the entire payment of management fee of Rs. 1,82,77,397/- is treated as an adjustment U/s 92CA.

3.6 Determination of arms length price The arms length price of management fee is determined as under using CUP method. IT(TP)A No.1605/Bang/2012 Page 42 of 58 Management Service fee paid Rs.1,82,77,397 Arms Length Price 0 Adjustment u/s. 92CA Rs.1,82,77,397 Thus the above amount of Rs.1,82,77,397/- is treated as an adjustment u/s 92CA.

44. The assessee filed objections before the Dispute Resolution Panel (DRP) to the draft assessment order passed by the AO as follows:-

1. The TPO has erroneously considered the facts of another tax payer instead of the / assessee in his order. Few of such instances were reproduced: (a) Para 2.1.11 on Page 4 of the Order:

As per the details furnished, the management fee is paid by the taxpayer on the following accounts: Resource allocation, Financing Planning, Accounting Tax information systems Marketing Administration Treasury Market development Employee relations and training Legal matters and Public affairs

(b) Para 3.2 on Page 5 of the Order: IT(TP)A No.1605/Bang/2012 Page 43 of 58

Transfer pricing aspect of intra group services: CUP Method is followed in the comparability analysis of management fee paid by the taxpayer to its AE LMG Denmark

(whereas there is no such AE of QRPL by named LMG Denmark) (c) Para 3.2 on Page 5 of the Order:

In the case of the taxpayer the company is rendering marketing services to its Group companies for India and outside,

(Whereas there are no marketing services which are rendered by the QRPL to its AEs) (d) Para 3.4 on Page 11 of the Order:

The tax payer has aggregated all transactions and applied TNMM .. The taxpayer in its letter dated 06-09-2011 stated that all the transactions including management fee are aggregated and justified under TNMM and as such, no separate analysis is required to be done separately for management fee.

(e) Para 3.5 on Page 16 of the Order:

5. The imports from AEs constitute major consumption of raw material/purchases indicating that the AEs are already compensated enough in the form of purchase price and also compensated for the value addition in India by way of Royalty paid based on the technology received from AE.

6. The tax payer did not prove the arms length nature of management fee paid to LMG Denmark

.

2. The Assessee pointed out that the TPO erred in contending that the services cannot be clearly distinguished and quantified. The TPO failed to appreciate submission dated 6 IT(TP)A No.1605/Bang/2012 Page 44 of 58 September 2011 and 21 2011, and evidence filed along with the said letters, wherein the assessee had clearly detailed the functions undertaken by the AEs for the benefit of the group entities. The assessee being a part of the group also received benefit from such services. The assessee had submitted the details and description of services rendered by the AEs. The assessee had further broken down services into specific functions which were provided by its AEs. However, the TPO in his order has wrongly contended that the same is very general and is not clear.

3. The assessee also pointed out that sample email correspondences vide its submission dated 21st October 2011 to substantiate its contentions were filed. A few instances of the services received by assessee from its AEs were listed for ready reference: Centralized legal department of the AE had assisted assessee in drafting the Master Service Agreement with respect to services agreement between assessee and the customers of assessee. Drafting of such master service agreement would require technical knowledge for which any independent organization would have hired a third party consultant/law firm. Human resource team at USA had supported assessee in drafting various policies such as bonus policy, conducting training program for assessee employees, recruitment support services, formulation of various incentive schemes and computation of such incentive, salary planning etc. The assessee had leveraged on the services obtain from the group centralized finance department. Such services include assistance with local country audits, capital budgeting and expenditures, etc. Corporate communications team at USA has helped in branding Quintiles in India by extending necessary support in the form of media interaction, supporting Indian team on developing technical articles for various publications, assistance in preparation of various briefing documents etc. IT(TP)A No.1605/Bang/2012 Page 45 of 58 The AEs have helped Quintiles Indian entities in designing and developing the web page as well as in hosting the said page. Any independent organization would have incurred such expenses in order to develop the website. The assessee would like to submit that the said services are in the nature of standard business support services, which would not only enable any organization to function smoothly but also in a cost efficient manner, the Assessee has not only availed these services but has also benefited from such support services.

4. The Assessee pointed out that management services are required by the assessee in order to enable the assessee to discharge effectively and efficiently, its business functions in respect of finance legal and human resources, etc. In the event the assessee were to procure these services on its own, it would lead to increased costs as the assessee would normally not be able to enjoy benefits such as discounts that would arise as a result of procuring such services in bulk.

5. The Assessee also pointed out that the TPO has observed that the company has incurred expenditure on legal and professional fees and hence there is no need for allocation of legal costs. In this regard the assessee submits that the legal fees paid by the assessee to third parties are not in respect to master service agreements and hence legal services rendered by AE are not repetitive. Mere payment of legal fees to third party and cost allocation to AEs under legal services does not tantamount that there is duplication of services. The assessee submitted that the dissimilarity of services availed by the assessee from third party and AEs must also be considered.

6. The assessee brought to the notice of the DRP that under an inter-company service agreement, a participant gets an ability to avail high quality services in the future as and when such a need arises without going through the hassle of locating and short listing prospective service providers. This anticipated and not so tangible benefit should also be taken into account while considering the benefits availed of under an inter- company service agreement, In support of its contention, the Assessee placed reliance on Para 7.16 and Para 7.17 of the OECD Guidelines. The OECD Guidelines also recognizes IT(TP)A No.1605/Bang/2012 Page 46 of 58 that under the above mentioned circumstances, management fees may also be justified for assurance to provide support services on short notice/call. It is not necessary that actual services need to flow.

7. The Assessee submitted that all the benefit flows from the services of the AEs need not flow instantaneously in the current year and may be reaped in the future. To quote an instance, training made available by the AE to the personnel of the assessee would have long term impact on the service potential of the assessee. However, the benefits from the same cannot be accurately quantified nor can the benefits be said to be reaped in the same period. Similarly, marketing services including advertising, sales support, publishing external marketing brochures, brand management, market research and competitor analysis etc., helps the assessee in gaining market advantage; however the same may or may not lead to significant benefits in the same year. However the absence of such services would definitely have adverse effect on the market standing of the assessee in a competitive market.

8. With regard to the complaint of the TPO that the assessee has not produced any evidence of independent transactions between unrelated parties in similar circumstances, the Assessee submitted that it was very unlikely that such information of independent transactions could be obtained by the assessee from public domain. The Assessee also submitted that it has not entered into such transactions with unrelated parties.

9. The Assessee contended that TPO failed to demonstrate how the allocation of costs incurred by the assessee was not acceptable. Merely rejection without providing rationale for the same is opposed to the principles of natural justice.

10. The Assessee claimed that the TPO failed to appreciate that the allocation of costs made in accordance with the OECD guidelines. The assessee placed reliance on relevant principles contained in the Guidelines summarized below:

Administrative services such as planning, co- ordination, budgetary control, financial service, accounting, auditing, legal, factoring, computer services, financial services such as supervision IT(TP)A No.1605/Bang/2012 Page 47 of 58 of cash flows and solvency, capital increases, loan contracts, management of interest and exchange rate risks and refinancing, assistance in the fields of production, buying, distribution and marketing; services in staff matters such as recruitment and training are ordinarily considered as intra-group services because they are the type of activities that independent enterprises would be willing to pay for or to perform for themselves. Hence a charge can be made for the above services.

11. The Assessee claimed that the cost of services is allocated among group companies deriving benefits from the above services without any mark-up. Relevant principles contained in the OECD Guidelines were given as below:

The allocation might be based on turnover, or staff employed, or some other basis. Whether the allocation method is appropriate may depend on the nature & usage of the service. For example, the usage or provision of payroll services may be more related to the number of staff than to turnover, while the allocation of the stand-by costs of priority computer back-up could be allocated in proportion to the relative expenditure on computer equipment by the group members.

. Depending upon the method being used to establish an arm s length charge for intra-group services, the issue may arise whether it is necessary that the charge be such that it results in a profit for the service provider. In an arm s length transaction, an independent enterprise normally would seek to charge for services in such a way as to generate a profit, rather than providing the services at a mere cost

Based on the above, it was submitted that the assessee has appropriately allocated the management fee and hence the same is at arms length.

45. The DRP, however, did not find the above objections to the draft assessment order of the AO acceptable. In para 10.1 to 10.4 of the DRPs IT(TP)A No.1605/Bang/2012 Page 48 of 58 directions, there is a general reference to the applicability of test of ALP, and whether services are rendered intra group. The DRP has also highlighted the necessity of the assessee to prove the services rendered. Thereafter, the DRP gave its conclusions which are as follows:-

10.5 In the light of the above a perusal of the details filed by the assessee of the management fees paid and the basis of allocation of such expenses to the taxpayer, it is observed that there were items in the nature of Global HR, legal, global finance, facilities and IT fees (hardware and software) which were allocated to UL Inc. USA amongst itself, Japan, India and Canada in the ratio of revenue earned. UL India received 0.86% of the total cost under these heads. The TPO was of the view that these expenses were duplicated and thrust upon UL India for the following reasons: - UL India is an independent entity capable of running its business. - For the support it takes from its parent UL Inc, USA in the nature of trademark, technical know-how, royalty @ 5% on sales is being paid to the parent. - Again for the subcontracting of certification services, the taxpayer makes payment to its AEs including UL Inc. USA with a mark-up. - UL India has taken a loan during 2003 for which it is paying interest @ 2.5% per year. While it is again paying apportioned finance charges in another form. - Expenses which it ought to have spent but which the AE has spent on its behalf has been once again reimbursed by way of reimbursement of expenses.

10.6 This Panel has carefully considered the submissions of the assessee and the reasoning of the TPO and is of the view that the expenses that have been allocated by the AE is only a payment for duplicated services and no third party would be willing to pay a charge on the expenses incurred by UL Inc., towards global HR, global finance etc. once again in an another form. In these IT(TP)A No.1605/Bang/2012 Page 49 of 58 circumstances the action of the TPO in considering the ALP as Nil is upheld. Accordingly this ground is rejected.

46. It may be seen from the aforesaid observations of the DRP that a reference is made to a company by name UL Inc., USA. This company is unrelated to the case. Further, DRP has also referred to some services rendered by the AE which are in relation to trademark, technical know-how and royalty. It may be clarified that there was no such services rendered by the assessee to its AE. Thus, it can be said that there was no proper application of mind by the TPO as well as the DRP to the TP documentation and the evidence filed by the assessee in support of its claim that the management fee paid to AE was at arms length.

47. In the appeal before us, the ld. counsel for the assessee while reiterating the manner in which the TPO and DRP have passed the impugned orders without application of mind, first submitted that the final order of the AO making addition by way of adjustment to Arms Length Price (ALP) should be deleted on this sole ground. He further brought to our notice the evidence on record to prove the nature of services rendered by the AE for which the assessee made payments. We have already made a reference to all the evidence in the earlier part of this order. Apart from the documents referred to in the earlier part of this order, the ld. counsel for the assessee drew our attention to Paperbooks 2 & 3 filed by the assessee containing pages 582 to 1269 which are email correspondence between IT(TP)A No.1605/Bang/2012 Page 50 of 58 the assessee and its AE. According to the assessee, these emails show that the assessee did get the benefit of services from its AE for which management fee was paid. Our attention was also drawn to the letter dated 06.09.2011 and 21.10.2011 of the assessee to the TPO and the Annexures to those letters, which give complete details of manner of allocation of management fee and evidence regarding the manner in which the services were rendered by the AE.

48. Our attention was invited to the following decisions:- (i) AWB India Pvt. Ltd. v. ACIT, ITA No.4454/Del/2011, order dated 22.03.13; (ii) Castrol India Ltd. v. ACIT, ITA No.3939/Mum/2010, order dated 14.09.2012; (iii) Festo Controls India Pvt. Ltd. v. DCIT, IT(TP)A No.969/Bang/2011, order dated 04.01.13; (iv) Dresserrand India Ltd. v. ACIT, ITA No.8753/Mum/2010, order dated 07.09.11; (v) TNS India Pvt. Ltd. v. ACIT, ITA No.944/Hyd/2007, order dated 22.01.14; wherein the principle that in the cases of services rendered intra group, the TPO cannot determine the ALP at Nil and treat the entire payment to the AE as TP adjustment.

49. It was also submitted by the ld. counsel for the assessee that on the basis of wrong facts, wrong conclusions have been arrived at by the TPO and the DRP and on this ground itself, the addition made has to be deleted. IT(TP)A No.1605/Bang/2012 Page 51 of 58

50. The ld. DR relied on the order of the TPO and DRP. Our attention was drawn to the decision of the Delhi Bench of the Tribunal in the case of M/s. Knorr Bremse India Pvt. Ltd. v. ACIT, ITA No.5097/Del/2011, order dated 31.10.12, wherein the Tribunal took the view that the assessee had to show that the payments made for the services rendered to the AE could have been paid, had services been rendered between two independent enterprises. On facts, the Tribunal held that the assessee failed to prove the benefit that the assessee received from services rendered by the AE.

51. We have considered the rival submissions. As we have already seen, in its TP study the assessee in support of the payment made to AE was at arms length did not choose any of the methods prescribed by the rules. The assessee took a stand that payments were on actual cost basis and were in the nature of reimbursement of costs of the AE. The assessee claimed that the payments were at arms length. In response to the query of the AO calling for the nature of services rendered in which management fee was paid, the assessee gave details vide its letter dated 06.09.11 and

21.10.11. We have already referred to these details and are not repeating the same.

52. We have seen some of the emails at pages 583 to 1269 of the assessees Paperbook. These emails are in relation to clinical trials or contract in respect of clinical trials carried on by the assessee and IT(TP)A No.1605/Bang/2012 Page 52 of 58 connected with the same. Sample invoices at pages 1317 to 1320 of the paperbook show the nature of services for which the invoices were raised. The basis of allocation of cost was also given. All the agreements for allocation of cost were also filed. It is the claim of the assessee that actual costs have been reimbursed and hence the same should be construed as at arms length.

53. In this regard, we may notice the legal position with regard to determining the ALP in respect of services rendered intra group. In the case of Festo Controls India Pvt. Ltd. v. DCIT (supra), on identical facts, this Tribunal held that when an a reference is made by the AO to the TPO for determination of ALP of an international transaction, it was not open to the TPO and he has no jurisdiction to hold that no services were rendered for which payments were made by the assessee and on that ground, the TPO cannot hold that the arms length price is NIL. In this regard, the Tribunal relied on the decision of the Mumbai Bench of the ITAT in the case of Castrol India Ltd. v. ACIT in ITA No.3938/MUM/2010 dated 14.09.2012. In the aforesaid decision, the TPO treated the ALP as NIL and made the addition of entire payments made by the assessee. On such an approach, the Tribunal held it was incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil keeping in view the facts and IT(TP)A No.1605/Bang/2012 Page 53 of 58 circumstances of the case and the relevant details furnished by the assessee. The Tribunal also relied on the decision of the Honble Delhi High Court in the case of CIT v. EKL Appliances Ltd., ITA No.1068/2011 dated 29.03.2012 wherein the Court had to deal with a case where the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) & Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Honble Delhi High Court held that the transfer pricing guidelines laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as IT(TP)A No.1605/Bang/2012 Page 54 of 58 a valid input in judging the action of the TPO because, in a different form, they have been recognized in Indias tax jurisprudence. It is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same.

54. The same principle is also discernible from the several decisions to which a reference was made by the ld. counsel for the assessee before us. In fact, even in the decision referred to by the ld. DR, factually the Tribunal found the assessee did not discharge its obligation to show the nature of services rendered for which payment was made to the AE. Following the principle laid down in the aforesaid decisions we hold that the TPO was not right in concluding that the ALP of the transaction had to be taken at Nil and the entire payment made by the Assessee to its AE treated as adjustment to ALP. We hold accordingly.

55. As far as the determination of ALP is concerned, we have already reproduced in the earlier part of this order that the TP study done by the assessee in support of the ALP. We are of the view that the TP study so done by the assessee does not give out any comparable instances of IT(TP)A No.1605/Bang/2012 Page 55 of 58 similar transactions between the unrelated parties. As far as the determination of ALP under the Act is concerned, the provisions lay down that the assessee has to adopt one of the methods laid down in section 92C(1) of the Act. The assessee has to substantiate the price that is paid to its AE as at Arms Length within one of the methods so prescribed. As already noticed, the TP study of the assessee is not in tune with the provisions of section 92C of the Act.

56. In this regard in the case of Festo Controls (supra) this Tribunal has explained the payment of fees for intra group services in para 16 of its order, as follows:

.Multinationals have a long-standing practice of providing certain services from a central point to one or more affiliates. The parent company provides centralized services or one affiliate provides services on a central basis to several other affiliates. In these situations, cost contribution (or shared-service) arrangements can be constructed to charge the costs of the service providers to the affiliates that benefit from the services they provide. As the unique bundle of services provided may vary significantly between taxpayers, it may be difficult to find a comparable price for such services or to evaluate the benefit received. Tax authorities therefore regard the area of cost sharing arrangement as prone to potential abuse. At the same time, the increasingly competitive global marketplace is demanding greater efficiency from multinational businesses. They must take every opportunity to minimise costs, so there is an ever greater need to arrange for the centralisation of business functions where possible. It is vital to establish the following: The exact nature of the services that are to be performed; Which entities are to render the services; Which entities are to receive the services; and IT(TP)A No.1605/Bang/2012 Page 56 of 58 What costs are involved in providing the services. Once these facts are known, consideration can be given to selecting the basis for charging the recipient group companies. Sufficient evidence of costs involved and services actually rendered should be provided. The Assessee is also required to prove that benefit is derived from the services received and that such benefits are of a more than just remote or indirect benefit.

57. In the present case, as we have already seen, voluminous evidence was filed by the assessee before the TPO. The TPO as well as DRP proceeded on wrong facts regarding the nature of services rendered and also made reference to entities which are not in any way connected with the assessee or the payment of management fee. Clearly there has been lack of proper application of mind by the TPO as well as the DRP. However, for this reason, we are not inclined to accept the submission of the ld. counsel for the assessee that the addition made should be deleted on this ground alone. We find that evidence on record exists regarding allocation of cost and the basis of such allocation. The invoices regarding nature of services rendered, however, are in the form of invoices supported by emails exchanged between the assessee and the AE. These invoices per se, in our opinion, do not demonstrate the nature of services rendered. The invoices have to be linked to the emails in support of the invoices. We also find that the assessee has not made any attempts to demonstrate the ALP of the transaction with the AE. As we have already stated, the evidence in the present case has to be linked with the invoices to show the IT(TP)A No.1605/Bang/2012 Page 57 of 58 nature of services rendered. The assessee has to choose a method in accordance with the Act and the Rules. On production of such evidence, the TPO will have to give the basis of his price, if he disputes the assessees claim with comparable cases. We feel that the evidence on record need to be presented in a proper form so that the nature of services rendered can be discerned with reasonable accuracy. The assessee can demonstrate on a sample basis item expenditure comprised in the management fee. We are therefore of the view that it would be just and proper to set aside the order of the Assessing Officer and remand the question of determination of ALP to the TPO for fresh consideration.

58. Ground No.3 is treated as allowed for statistical purposes.

59. In the result, the appeal is partly allowed. Pronounced in the open court on this 21 st day of February, 2014. Sd/- Sd/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member Encl: Annexure-A & B Bangalore, Dated, the 21 st February, 2014. /D S/ IT(TP)A No.1605/Bang/2012 Page 58 of 58 Copy to:

1. Appellant

2. Respondent

3. CIT

4. CIT(A)

5. DR, ITAT, Bangalore.

6. Guard file By order Senior Private Secretary ITAT, Bangalore.