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 using new comparables provided by the assessee and to consider adjustments for working capital. The Tribunal upheld the rejection of the Transfer Pricing Officer's set of comparables and accepted the new comparables provided by the assessee. The matter was remanded to the Assessing Officer for a fresh analysis and determination of the 5% margin adjustment based on the new analysis and applicable law.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of Comparables by TPO
3. Application of Amended Provision to Section 92C(2)
4. Entitlement to 5% Margin Adjustment

Detailed 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.

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