ITAT Hyderabad directs reevaluation in transfer pricing case, emphasizing fair opportunity for assessee

The ITAT Hyderabad remitted the transfer pricing adjustment case back to the DRP, finding merit in the assessee's argument of lack of consideration of detailed submissions and violation of natural justice. The DRP was directed to reevaluate the case, emphasizing the need to fully consider the assessee's submissions and provide a fair opportunity to be heard. The appeal was allowed for statistical purposes, with the decision issued on April 1, 2015.

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Issues: Transfer pricing adjustment, Arm's Length Price determination, Opportunity to be heard, Violation of natural justice.

Transfer Pricing Adjustment: The appeal was against the assessment order passed under section 143(3) read with section 144C of the Act, concerning the assessment year 2007-08. The assessee, an Indian company engaged in pharmaceutical products, had international transactions with its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) rejected the TP study conducted by the assessee and independently determined the Arm's Length Price (ALP) for the transactions. The TPO selected comparables with an average operating profit to sales ratio of 17.47% and calculated the ALP using the operating profit to cost ratio, resulting in a TP adjustment of Rs. 16.73 crores. The TPO's decision was challenged by the assessee before the Dispute Resolution Panel (DRP).

Opportunity to be Heard: The assessee contended that the DRP did not consider the detailed written submissions made on the merits of the issues raised against the ALP determination by the TPO. It was argued that the TPO changed the Profit Level Indicator (PLI) from operating profit to sales to operating profit to cost without giving the assessee an opportunity to be heard on this matter. The assessee claimed a violation of the rules of natural justice due to the non-consideration of submissions and the change in PLI without proper consultation.

Remittal to DRP: The ITAT Hyderabad, after considering the submissions of both parties and reviewing the record, found merit in the assessee's grievances. It was observed that the DRP had not fully considered the written submissions made by the assessee on the merits of the issues. The ITAT noted discrepancies in the TPO's calculation of the arm's length margin using the operating profit to cost ratio. Consequently, the matter was remitted back to the DRP for a fresh decision, emphasizing the need for the DRP to consider all submissions made by the assessee and provide a fair opportunity to be heard. The appeal was allowed for statistical purposes, and the decision was pronounced on April 1, 2015.

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