Tribunal Reverses TPO Decision on Transfer Pricing Method, Directs Fresh Examination

The Tribunal overturned the TPO's decision to apply TNMM instead of RPM for the international transaction of Import of Finished goods, citing precedents where RPM was approved. It upheld considering forex gain/loss as operational and rejected the import duty adjustment request. The Tribunal remitted the inclusion/exclusion of comparables for fresh examination and directed reconsideration of Novartis India Limited's comparability. The benefit of +/-5% margin without standard deduction was upheld. The matter was remitted for fresh determination of the ALP of the transaction.

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Issues Involved:

1. Application of Transactional Net Margin Method (TNMM) vs. Resale Price Method (RPM) for benchmarking the international transaction of trading activity.
2. Functional adjustment relating to foreign exchange (forex) loss.
3. Import duty adjustment.
4. Exclusion of Roselabs Limited and inclusion of Mankind Pharma Limited as comparables.
5. Exclusion of Novartis India Limited as a comparable.
6. Granting benefit of ±5% margin in determining the Arm's Length Price (ALP).

Issue-wise Detailed Analysis:

1. Application of TNMM vs. RPM:
The assessee, a 100% Indian subsidiary of a German company, engaged in Infusion Therapy and Clinical Nutrition, applied the RPM for the international transaction of `Import of Finished goods’. The TPO rejected RPM and applied TNMM, selecting nine comparable companies and proposing a transfer pricing adjustment of Rs. 12,28,68,248/-. The CIT(A) upheld the TPO's method, relying on a previous year's order. However, the Tribunal noted that in prior years, the RPM was approved as the most appropriate method for similar transactions. Respectfully following the precedents, the Tribunal held that RPM should be the most appropriate method for the distribution activities under the international transaction of `Import of finished goods’. The impugned order was overturned to this extent.

2. Functional Adjustment Relating to Forex Loss:
The assessee treated forex loss of comparables as non-operational, but the TPO and CIT(A) considered it operational. The Tribunal referred to the Special Bench decision in ACIT Vs Prakash I. Shah, which held that exchange rate fluctuations are integral to export proceeds. Similarly, in transfer pricing, forex fluctuation gain/loss is part of operating profit. The Tribunal dismissed the assessee's ground, stating that forex gain/loss arising from revenue transactions should be considered as operating revenue/cost for both the assessee and comparables.

3. Import Duty Adjustment:
The assessee requested an adjustment for higher import duty paid compared to comparables before the CIT(A), which was rejected. The Tribunal found the contention untenable, emphasizing that gross profit margin calculation includes all items of income and expenses. It ruled that higher import duty paid by the assessee should not be adjusted in isolation, as it would be reflected in higher sales prices. The Tribunal upheld the CIT(A)'s rejection of the separate adjustment for higher import duty.

4. Exclusion of Roselabs Limited and Inclusion of Mankind Pharma Limited:
The TPO excluded Roselabs Limited and included Mankind Pharma Limited as comparables. The assessee argued against this, citing a similar issue in the preceding year where the Tribunal remitted the matter for fresh determination. The Tribunal followed the same approach, setting aside the inclusion/exclusion and remitting the matter to the AO/TPO for fresh examination of comparability after allowing a reasonable opportunity of hearing to the assessee.

5. Exclusion of Novartis India Limited:
The Revenue appealed against the exclusion of Novartis India Limited as a comparable. The Tribunal noted that this issue was similarly remitted for fresh determination in the preceding year. Following the same view, the Tribunal set aside the impugned order and directed the AO/TPO to reconsider the comparability of Novartis India Limited after giving the assessee an opportunity of hearing.

6. Granting Benefit of ±5% Margin:
The Revenue contested the CIT(A)'s granting of ±5% margin without standard deduction. The Tribunal found that the CIT(A) correctly applied the benefit of ±5% in view of the amendment to Section 92C(2A) by the Finance Act, 2012, with retrospective effect, which disallows any standard deduction. The Tribunal upheld the CIT(A)'s decision on this issue.

Conclusion:
The Tribunal partly allowed the assessee's appeal and the Revenue's appeal for statistical purposes. The matter was remitted to the AO/TPO for fresh determination of the ALP of the international transaction of `Import of Finished goods’ in conformity with the Tribunal's discussion. The order was pronounced on 2nd November 2018.

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