2018 (11) TMI 265 - AT - Income Tax

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

Fresenius Kabi India Private Limited Versus The Assistant Commissioner of Income Tax, Circle-1 (2), Pune. And The Deputy Commissioner of Income Tax, Circle-1 (2), Pune. Versus Fresenius Kabi India Private Limited.

The Tribunal overturned the TPO's decision to apply TNMM instead of RPM for the international transaction of Import of Finished goods, citing precedents ... TPA - selection of MAM - application of the Transactional Net Margin Method (TNMM) in respect of its international transaction of trading activity as against Resale Price Method (RPM) as the most appropriate method - Held that:- The Tribunal in assessment years 2009-10, 2010-11 has approved the application of the RPM as most appropriate method. In doing so, it also relied on the order passed by it for the assessment year 2008-09. The Ld. DR failed to point out any distinguishing feature in the international transaction under dispute for the year under consideration vis-à-vis the preceding years. Respectfully following the precedents, we hold the RPM to be the most appropriate method in respect of distribution activities undertaken by the assessee under the international transaction of `Import of finished goods’. Accordingly, the impugned order is overturned to this extent. Non ranting functional adjustment relating to foreign exchange (forex) loss - Held that:- The amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both for the assessee as well as the comparables. The ground taken by the assessee is, therefore, dismissed. Not allowing import duty adjustment - Held that:- Whether the import duty has been paid or not or paid to lower extent by the comparables cannot have any effect over computation of gross profit margin of the comparables. If the assessee has made costly purchases, it will naturally earn more revenue from the sales as well. One can compare apple with apple and not with orange. If purchase of goods is of higher quality and costly, it is but natural that the sale will also be correspondingly at a higher price. It is impermissible to claim that the amount of higher import duty paid by the assessee should be adjusted in isolation without having effect on the higher sales price realized from the sale of such imported goods. Once we take figure of gross profit, it takes into account not only the higher debit side of cost of purchases but also the higher credit side of the revenue earned from sales. No adjustment on account of separate items resulting into the computation of gross profit can be permitted. In our considered opinion, the stand taken by the assessee for allowing separate adjustment in respect of higher custom duty paid by it has been rightly rejected in the first appeal. Exclusion of Roselabs Limited and Novartis India Limited from its list of comparables and inclusion by the TPO of Mankind Pharma Limited as a comparable company - Held that:- Following the view taken by the Tribunal in its order for the preceding year in the case of the assessee itself, we set aside inclusion/exclusion of the two companies mentioned above and remit the matter to the file of Assessing Officer/TPO for examining their comparability or otherwise afresh after allowing a reasonable opportunity of hearing to the assessee. Granting benefit ±5% margin to the assessee in determining the ALP - Held that:- it is found that the Ld. CIT(A) granted the benefit of ±5% without any standard deduction in view of the amendment to Section 92C(2A) by the Finance Act, 2012 with retrospective effect. In view of legislative amendment carried out retrospectively, the assessee cannot claim any standard deduction. We, therefore, hold that ld. CIT(A) was justified in giving benefit of ±5% on individual basis without any standard deduction. 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.