2019 (8) TMI 1766 - AT - Income Tax

Tribunal favors assessee in transfer pricing appeal, directs use of Resale Price Method

Bristol Myers Squibb India Private Limited Versus The Office of the Dy. Commissioner of Income Tax-6 (1), Mumbai.

The Tribunal allowed the appeal for statistical purposes, finding merit in the assessee's argument that the Resale Price Method (RPM) was the most ... TP Adjustment - selection of MAM - RPM v/s TNMM - assessee had selected “Resale Price Method” (RPM) as the most appropriate method for benchmarking its purchase transactions with the AEs - TPO rejected RPM and applied TNMM as the most appropriate method - HELD THAT:- For the purpose of application of RPM what is relevant is that as to whether there is any value addition or not to the goods purchased by the assessee for resale or not. In case, there is no significant value addition and the finished goods which are purchased from the AE are resold in the domestic market in the same form, then the gross profit margin earned on such transactions becomes the determinative factor for benchmarking the international transactions of the assessee with its AE by taking RPM as the most appropriate method. Our aforesaid view is supported by the order in the case of Fresenious Kabi India (P) Ltd. [2017 (6) TMI 1298 - ITAT PUNE] wherein it was held that in case of distribution activity the selling and marketing expenses which are borne by the assessee would not lead to any value addition to the product in question. We find substantial force in the contention advanced by the ld. A.R that as per Rule 10B(1)(b) in the Income Tax Rules, 1962, the RPM can safely be taken as the best suited method for determining the ALP of the international transactions in the case of the assessee before us, which as observed by us hereinabove had imported formulations from its AE and resold the same without making any value addition to unrelated parties in the domestic market. We are unable to subscribe to the view taken by the TPO/DRP that merely for the reason that complete information about the business profile and financial data in respect of companies selected by the assessee as comparables in its TP study report was not available in the public domain or furnished by the assessee, therefore, for the said reason the application of the said method for benchmarking the international transactions of the assessee was to be rejected. Rejection of the comparables which were selected by the assessee in its TP study report - As regards the three companies which were rejected by the TPO as comparables viz. (i) Abbott India Ltd; (ii) Duchem Laboratories Ltd.; and (iii) Lyka Exports Ltd., we are in agreement with the view taken by the TPO/DRP that as the said companies had a different year ending, therefore, the results emerging therefrom was not contemporaneous, and hence as per Rule10B(4) they were not suitable for being considered for arriving at a feasible comparison. However, at the same time, we are unable to persuade ourselves to accept the rejection of one of the comparable selected by the assessee company viz. M/s Daga Global Chemicals Ltd. It is the claim of the assessee that as the aforementioned company viz. Daga Global Chemicals Ltd. alike the assessee was engaged in the business of distribution, therefore, it was rightly selected as a comparable for benchmarking analysis. We have given a thoughtful consideration to the aforesaid contentions advanced by the ld. A.R and find substantial force in the same. In our considered view, as the DRP had declined to include the aforementioned company i.e Daga Global Chemicals Ltd. as a comparable, apparently on the basis of misconceived facts as had been canvassed by the ld. A.R before us, therefore, in all fairness the matter requires to be restored to the file of the TPO for fresh adjudication. The TPO after considering the aforesaid claim of the assessee in respect of the aforementioned company, viz. Daga Global Chemical ltd, is directed to readjudicate the issue as regards inclusion of the same in the final list of comparables for benchmarking the international transactions of the assessee as per RPM. We set aside the view taken by the TPO/DRP as regards the rejection of RPM as the most appropriate method for benchmarking the international transactions of the assessee and substituting the same by applying TNMM. The matter is restored to the file of the TPO, who is directed to re-determine the ALP of the international transactions of the assessee after accepting RPM as the most appropriate method. Issues Involved:1. Transfer Pricing Adjustment.2. Rejection of Resale Price Method (RPM).3. Business Reasons for Losses.4. Bifurcation of Segmental Financials.5. Violation of Provisions of Rule 10B(2) and 10B(3).6. Lack of Consistency.7. Lack of Opportunity.8. Non-satisfaction of Requisite Conditions under Section 92C(3).9. Initiation of Penalty Proceedings.Detailed Analysis:1. Transfer Pricing Adjustment:The assessee challenged the computation of total income by the AO, which included a transfer pricing adjustment of Rs. 10,31,20,379/-. The TPO had computed the arm's length price (ALP) of the international transaction and confirmed the adjustment based on the provisions of Chapter X of the Income Tax Act. The TPO rejected the RPM adopted by the assessee for benchmarking its international transactions and instead applied the Transactional Net Margin Method (TNMM).2. Rejection of Resale Price Method (RPM):The TPO rejected RPM on the grounds that the complete information about the business profile and financial data of the comparables was not available. The TPO argued that the RPM method required adjustments for differences in functions performed and costs incurred, which were not feasible due to lack of data. The DRP upheld this view, stating that the RPM could not be applied due to the absence of requisite details in the public domain.3. Business Reasons for Losses:The assessee contended that the losses were due to legitimate business reasons, such as increased expenses in rent, legal costs, and foreign exchange losses. The TPO and DRP, however, did not accept these reasons and upheld the adjustments made to the total income.4. Bifurcation of Segmental Financials:The assessee argued for the bifurcation of its segmental financials into Pharma Division and Nutritional Division, claiming that the losses were primarily due to the Nutritional Division. The TPO and DRP rejected this bifurcation, stating that the segmentation was not acceptable due to factual discrepancies and the lack of relevance to the comparability analysis under TNMM.5. Violation of Provisions of Rule 10B(2) and 10B(3):The TPO rejected Daga Global Chemicals Ltd. as a comparable, citing differences in financial year and functional dissimilarity. The DRP supported this rejection, noting that the comparable had different business activities and overseas subsidiaries, making it unsuitable for benchmarking.6. Lack of Consistency:The assessee claimed that the TPO had accepted RPM as the most appropriate method in the previous year and should have maintained consistency. The DRP dismissed this claim, stating that no documentary evidence was provided to support the assertion of consistency.7. Lack of Opportunity:The assessee argued that the TPO did not provide a reasonable opportunity to justify its position before making adjustments. The DRP and TPO were not persuaded by this argument, maintaining that the adjustments were justified based on the available data.8. Non-satisfaction of Requisite Conditions under Section 92C(3):The assessee contended that the TPO failed to justify the conditions under Section 92C(3) for determining ALP. The DRP upheld the TPO's actions, stating that the conditions were satisfied based on the analysis and data available.9. Initiation of Penalty Proceedings:The assessee objected to the initiation of penalty proceedings under Section 271(1)(c), arguing that there was no willful concealment or furnishing of inaccurate particulars. The TPO initiated the penalty proceedings, which the assessee contended should not have been initiated.Conclusion:The Tribunal found merit in the assessee's argument that RPM was the most appropriate method for benchmarking its international transactions, given that the assessee was a pure distributor without any value addition. The Tribunal set aside the TPO/DRP's rejection of RPM and directed the TPO to re-determine the ALP using RPM. The Tribunal also instructed the assessee to provide the necessary details about the comparables, and if not provided, the TPO was free to search for fresh comparables. The appeal was allowed for statistical purposes.