2019 (7) TMI 1899 - AT - Income Tax

Tribunal directs RPM for ALP in reagents sale, sets aside arm's length interest issue for fresh examination.

The Deputy Commissioner of Income Tax, Circle 5 (1) (1), Versus  M/s. Randox Laboratories India Private Limited, Bangalore, Vice Versa

The Deputy Commissioner of Income Tax, Circle 5 (1) (1), Versus  M/s. Randox Laboratories India Private Limited, Bangalore, Vice Versa - TMI Issues Involved:1. Determination of Arm's Length Price (ALP) for the sale of reagents to Associated Enterprises (AE).2. Computation of arm's length interest on receivables outstanding from AE beyond six months.Detailed Analysis:1. Determination of Arm's Length Price (ALP) for the Sale of Reagents to Associated Enterprises (AE):The primary issue was whether the Transaction Net Margin Method (TNMM) or the Resale Price Method (RPM) was the most appropriate method (MAM) for determining the ALP for the sale of reagents by the assessee to its AE. The assessee, a wholly owned Indian subsidiary of a UK-based company, imported reagents and diagnostic equipment from its AE and sold them to third parties in India. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) had previously rejected RPM in favor of TNMM, citing the assessee's involvement in manufacturing and research activities.However, the Tribunal noted that in the previous assessment year (AY 2010-11), it had ruled that RPM was the MAM because the assessee was merely reselling the reagents without any value addition. The Tribunal examined the nature of the transactions and found that the assessee was not engaged in manufacturing during the relevant assessment year (AY 2011-12) and was only reselling the reagents. The Tribunal cited multiple precedents where RPM was deemed the most appropriate method for similar transactions involving resale without value addition.The Tribunal concluded that RPM should be applied to determine the ALP for the sale of reagents, and directed the Assessing Officer (AO) and TPO to compute the ALP accordingly, following the precedent set in the previous assessment year.2. Computation of Arm's Length Interest on Receivables Outstanding from AE Beyond Six Months:The second issue was whether the receivables outstanding from the AE beyond six months constituted an international transaction requiring an arm's length interest adjustment. The TPO had added a notional interest income based on the assessee's borrowing rate from HDFC Bank plus a markup, resulting in an addition to the assessee's income.The Tribunal referred to the Delhi High Court's ruling in the case of Prl.CIT Vs. Kusum Health Care Pvt. Ltd., which clarified that not all receivables from AEs automatically qualify as international transactions. The Court emphasized the need for a detailed analysis to determine if the extended credit period was intended to benefit the AE and whether it impacted the working capital and profitability of the assessee.The Tribunal noted that the receivables in question related to services rendered in previous financial years and were not directly linked to any international transaction reported for the relevant assessment year. The Tribunal also highlighted the need to consider the overall financial relationship between the assessee and the AE, including any payables and the nature of the transactions.Given the lack of detailed analysis by the TPO, the Tribunal set aside the issue for fresh examination. The TPO was directed to reassess whether the extended credit period constituted an international transaction and to consider the appropriate rate of interest, if applicable, based on the LIBOR rate plus a suitable markup.Conclusion:The Tribunal allowed the assessee's appeal in part by directing the application of RPM for determining the ALP for the sale of reagents and set aside the issue of arm's length interest on receivables for fresh examination. The revenue's appeal was dismissed, affirming the Tribunal's findings and directions.