Tribunal overturns TPO's transfer pricing adjustments, directs reevaluation of arm's length prices

The tribunal set aside the transfer pricing adjustments proposed by the TPO for international transactions related to contract manufacturing support services, business development, procurement support services, reimbursement for product registration, and wound care services. The tribunal remitted the matters to the AO/TPO for reevaluation, directing consideration of voluntary adjustments made by the assessee and appropriate methods for determining arm's length prices. The appeal was partly allowed, leading to a revised operating profit for the assessee.

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Issues Involved:
1. Contract Manufacturing Support Services and Business Development and Procurement Support Services
2. Contract Manufacturing
3. Reimbursement for Registration of Products
4. Reimbursement for Wound Care Services

Issue-wise Detailed Analysis:

I. Contract Manufacturing Support Services and Business Development and Procurement Support Services:

The TPO analyzed international transactions related to 'Quality Assistance Support Services' and 'Contract Manufacturing support services,' which were benchmarked by the assessee under the Transactional Net Margin Method (TNMM). The TPO rejected the comparables provided by the assessee and averaged the profit margins from the 'Business development and procurement services' and 'Support services' segments to establish a benchmark profit margin of 17%. The TPO calculated the assessee’s Operating Profit/Total Cost (OP/TC) at 7.73% and proposed a transfer pricing adjustment of Rs. 22,78,671. The assessee argued that a voluntary transfer pricing adjustment of Rs. 10,22,453 should be considered. The tribunal remitted the matter to the AO/TPO to re-determine the ALP by including the voluntary adjustment, resulting in a revised operating profit of Rs. 29,23,205.

II. Contract Manufacturing:

The assessee declared Rs. 173,39,08,249 as the value of the 'Contract Manufacturing' transaction, applying TNMM with a PLI of 14.26%. The TPO, however, applied the Comparable Uncontrolled Price (CUP) method, using retail prices from the CIMS database, adjusted to ex-factory prices by reducing 39.6% for retail margins, wholesale margin, and taxes. This led to a proposed adjustment of Rs. 55,60,75,740. The tribunal found several flaws in the TPO’s approach, including the use of current retail prices for earlier periods, wide fluctuations in retail prices, and inappropriate comparisons between full-fledged manufacturers and contract manufacturers. The tribunal remitted the matter to the AO/TPO to reconsider the method used for determining the ALP, suggesting that the CUP method should be applied if comparable data from other contract manufacturers is available. If not, the TNMM should be used with appropriate comparables.

III. Reimbursement for Registration of Products:

The TPO proposed a transfer pricing adjustment of Rs. 18,72,637 by applying a 14.26% profit margin to the reimbursement of Rs. 1,31,32,100 for product registration fees. The tribunal found that the reimbursement was a cost incurred by the assessee for its AE without rendering any service, and thus no mark-up was warranted. The tribunal directed the deletion of the Rs. 18,72,637 addition.

IV. Reimbursement for Wound Care Services:

The TPO applied a 14.26% margin to Rs. 34,10,065 incurred for 'Wound care' services, proposing an adjustment of Rs. 4,86,275. The tribunal noted that the nature of the reimbursement was unclear and remitted the matter to the AO/TPO for further examination to determine if the assessee's involvement warranted a mark-up.

Conclusion:

The tribunal set aside the impugned order on the transfer pricing adjustments for the three international transactions and remitted the matters for fresh determination by the AO/TPO. The appeal was partly allowed.

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