Transfer pricing benchmarking must reflect functional profile; group-company margins and assumed profit attribution were rejected.

The Tribunal held that the transfer pricing analysis could not be rejected by benchmarking the assessee against a group company's operating margin without regard to its functional, asset and risk profile. As the assessee was only a distributor in the initial period of operations, with no value addition, warehousing or R&D, the resale price method supported by comparable margins was accepted as the more appropriate benchmark. Profit attribution to India based on assumptions and arbitrary apportionment between India and abroad was found unsustainable, and the assessee's transfer pricing study was accepted.

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Issues: Whether the Revenue was justified in rejecting the assessee's transfer pricing analysis and computing the taxable income by applying the operating profit margin of the group company, and in making attribution of profits to India on that basis.

Analysis: The assessee was engaged in import and distribution of cigarettes and provision of marketing support services, and the assessment year involved only the initial period of operations. The Assessing Officer rejected the assessee's transfer pricing study by comparing the assessee with its group company and by assuming that brand loyalty and group margins were the proper benchmark. The Tribunal found that this approach ignored the assessee's functional, asset, and risk profile, the short duration of trading operations, and the fact that the assessee was only a distributor without value addition, warehousing, or R&D. It also found that the assessee's resale price method analysis, supported by comparable margins and fresh comparables produced in appellate proceedings, was a more appropriate benchmark than the group-company margin. The Tribunal further held that the profit attribution made on assumptions, including arbitrary apportionment of profit between India and abroad, was unsustainable.

Conclusion: The rejection of the assessee's transfer pricing study and the consequent profit attribution were not justified, and the assessee's benchmarking was accepted.

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