2014 (1) TMI 1288 - AT - Income Tax

Tribunal allows appeals, directs re-computation of arm's length price with new comparables and working capital adjustments.

The Tribunal partially allowed the appeals of both the assessee and the department. It directed the Assessing Officer to re-compute the arm's length price ... Method of Transfer pricing adjustment – Arithmetic mean of operating margins for arriving at ALP - Selection of comparables – Held that:- TPO considered that as per the agreement, the risk of quality, packing, marking, quality of the goods, insurance of the goods etc. lie with the assessee - the assessee owned up all risks under the agreement - TPO proceeded to make profit margin of three companies and arrived at mean of the profit margin at 11.94% - the TPO suggested the bench markup on the cost of the assessee for the above transactions and suggested ALP adjustment - the adjustment was recommended by TPO and the addition has been made by the AO by considering the three comparables – the entities are not only in the manufacturing of pharmaceuticals products but are also in the business of sale/exports of pharmaceutical products, and whereas assessee has only acted on behalf of the GPL to effect export of the pharmaceutical products to GIR which at the most is in the nature of trading. The assessee has functioned only as a trader - the assessee is not adding any margin on the product sold in such trading activity though the assessee initially incurred the expenditure to undertake activity of advertisement, shipment, insurance and tours and also used its assets /rights in the shape of permission and registration possess by it – all the expenses incurred by the assessee have been reimbursed to it by GPL - it cannot be said that the assessee did not employ any assets for such export activity undertaken by it - CIT(A) has rightly held that the three comparables considered by TPO and taking operating profit margin of 11.94% is not correct as those comparable companies/entities are in the manufacturing of pharmaceutical products and are also in the sales/ export of the same whereas the assessee is in a non-manufacturing export activities - the additional evidence and to seek remand report from the AO in respect of the three comparables entities furnished before him by the assessee. The due adjustment of the working capital assumed by the assessee as well as the comparable entities are to be considered for determining the ALP of the transaction - the assessee had not assumed any risk in respect of marketing of the product, realization of sales proceeds, risk of quality etc.. –matter remitted back to the AO for fresh adjudication to compute ALP afresh in respect of the international transaction of the assessee with the Associated Enterprise (GIR) – Decided in favour of Assessee. Allowability of standard deduction u/s 92C(2) of the Act – Held that:- Since the matter is remitted back to the AO to make a afresh study by considering the comparables to arrive at ALP of the transaction under consideration and give due adjustments as per Rule 10B of the Rules – thus, it is not necessary to decide this issue as to whether the CIT(A) has given direction to allow 5% deduction to the assessee correctly or not – Decided in favour of Assessee. Issues Involved:1. Transfer Pricing Adjustment2. Rejection of Comparables by TPO3. Application of Amended Provision to Section 92C(2)4. Entitlement to 5% Margin AdjustmentDetailed Analysis:1. Transfer Pricing Adjustment:The primary issue in the assessee's appeal was the transfer pricing adjustment. The assessee argued that no transfer pricing adjustment was required, contending that it acted merely as a channel or pass-through entity for Glenmark Pharmaceuticals Limited (GPL) in exporting pharmaceutical products to Glenmark Impex LLC Russia (GIR). The Transfer Pricing Officer (TPO) had determined an arm's length price (ALP) adjustment of Rs. 2,92,23,457/-, using three comparable companies that were manufacturers, which the assessee argued were not comparable as it was a non-manufacturing exporter. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's argument that the comparables used by the TPO were not appropriate and directed the TPO/AO to use two new comparables, Lyka Exports Ltd. and Megafine Pharmachem (P.) Ltd., which were non-manufacturing exporters. The Tribunal agreed with the CIT(A) that the TPO's comparables were not appropriate and directed the AO to compute the ALP afresh using the two new comparables and considering adjustments for working capital.2. Rejection of Comparables by TPO:The department's appeal contested the CIT(A)'s rejection of the TPO's set of comparables. The TPO had used three companies involved in manufacturing and exporting pharmaceutical products, whereas the CIT(A) accepted two new comparables provided by the assessee, which were non-manufacturing exporters. The Tribunal upheld the CIT(A)'s decision, noting that the TPO's comparables were not appropriate given the functional differences between the assessee and the comparables. The Tribunal also noted that the CIT(A) had appropriately sought a remand report from the TPO regarding the new comparables.3. Application of Amended Provision to Section 92C(2):The department also argued that the CIT(A) erred in holding that the amended provision to section 92C(2) was applicable only from AY 2009-10 onwards. The Tribunal did not find it necessary to decide this issue separately, as it directed the AO to re-examine the ALP afresh, considering the appropriate comparables and adjustments as per the applicable rules.4. Entitlement to 5% Margin Adjustment:The department contended that the CIT(A) erred in directing the AO/TPO to grant the benefit of the second proviso to section 92C(2) of a 5% margin adjustment. The Tribunal noted that since it had remitted the matter to the AO for a fresh analysis of the ALP, the AO would decide the issue of the 5% adjustment based on the fresh analysis and applicable law.Conclusion:The Tribunal allowed the appeals of both the assessee and the department in part. It directed the AO to re-compute the ALP afresh using the two new comparables provided by the assessee and to consider adjustments for working capital. The Tribunal also directed the AO to decide on the 5% margin adjustment based on the fresh analysis. The Tribunal upheld the CIT(A)'s rejection of the TPO's set of comparables and its acceptance of the new comparables provided by the assessee.