Tribunal Adjusts Transfer Pricing for Corporate & R&D Services &DServices

The Tribunal partially allowed the assessee's appeal regarding transfer pricing adjustments for corporate support services and research and development services. It directed the Transfer Pricing Officer to recompute the adjustments by including/excluding specified comparables, such as including R Systems International Ltd. and excluding Excel Infoways Ltd. for corporate support services, and excluding Syngene International Ltd. for R&D services. The order was issued on 2.8.2019.

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Issues Involved:
1. Transfer pricing adjustment in respect of provision for corporate support services to Associated Enterprises (AEs) amounting to Rs. 1,07,31,614/-.
2. Transfer pricing adjustment in respect of research and development services to AEs amounting to Rs. 32,14,036/-.

Detailed Analysis:

1. Transfer Pricing Adjustment for Corporate Support Services:

Facts and Comparables:
The assessee, engaged in the business of specialty chemicals, benchmarked its corporate support services transactions using seven comparables with an OP/OC profit level indicator. The TPO rejected these comparables and selected four others, resulting in a higher average margin of 25.59% compared to the assessee's 15%. This led to an adjustment of Rs. 1,01,26,028/-.

Assessee's Argument:
The assessee argued for the inclusion of R Systems International Ltd. as a comparable, which had been excluded due to its different accounting period. The assessee presented case laws supporting the inclusion of R Systems International Ltd. and provided quarterly results to address the TPO's concerns. Additionally, the assessee sought the exclusion of Excel Infoways Ltd. due to its fluctuating margins and declining revenues, supported by various case laws.

Tribunal's Decision:
The Tribunal agreed with the assessee's arguments, noting that R Systems International Ltd. could be included as a comparable based on the now available quarterly results. The Tribunal also found Excel Infoways Ltd. unsuitable due to its fluctuating margins and diversified business activities. Consequently, the Tribunal directed the TPO to include R Systems International Ltd. and exclude Excel Infoways Ltd. in the final list of comparables, and to recompute the adjustment accordingly.

2. Transfer Pricing Adjustment for Research and Development Services:

Facts and Comparables:
The assessee provided a list of comparables for its R&D services, with an average margin of 12.97%. The TPO accepted some comparables and computed an average margin of 20.14%, which was upheld by the DRP.

Assessee's Argument:
The assessee contended that Syngene International Ltd. should be excluded as a comparable because it engaged in different business activities (contract research and manufacturing services) and lacked segmental information. The assessee cited several case laws where Syngene International Ltd. was excluded for similar reasons.

Tribunal's Decision:
The Tribunal accepted the assessee's argument, noting that Syngene International Ltd. was not a suitable comparable due to its different business activities and lack of segmental information. The Tribunal directed the TPO to exclude Syngene International Ltd. from the comparables and to recompute the adjustment accordingly.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the TPO to recompute the transfer pricing adjustments for both corporate support services and R&D services after including and excluding the specified comparables. The order was pronounced on 2.8.2019.

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