ITAT dismisses transfer pricing adjustment, recalls disallowance of E-connectivity charges for fresh consideration

The miscellaneous application concerning the transfer pricing adjustment was dismissed by the ITAT, upholding the TPO's findings favoring the CUP method over the TNMM method. The application regarding the disallowance of E-connectivity charges was recalled for fresh consideration due to the acknowledgment of a mistake apparent from the record. The ITAT partially allowed the applications, with the order pronounced in open court on 22.01.2020.

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Issues Involved:
1. Transfer Pricing Adjustment of Export of Finished Dosage Forms (FDF) to Associated Enterprises (AE) of Rs. 3,20,67,090/-
2. Disallowance of E-connectivity Charges of Rs. 4,53,29,476/-

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment of Export of FDF to AE:
The assessee sought rectification of the ITAT's order, contending incorrect findings and erroneous reactions to their contentions. The primary arguments included:
- Incorrect factual findings and rejection of segmental accounts.
- Rejection of contentions regarding the principle of consistency.
- Non-appreciation of additional submissions and evidence.
- Incorrect observations about the use of unutilized production capacity and the quality of products exported to AEs.

The ITAT adjudicated that the Transfer Pricing Officer (TPO) rightly rejected the Transactional Net Margin Method (TNMM) adopted by the assessee, favoring the Comparable Uncontrolled Price (CUP) method instead. The key reasons included:
- The assessee's method was unreliable as it compared entity-level OP/OC for total exports instead of specific transactions with AEs.
- Absence of segmental accounts in annual audited accounts.
- Inappropriate benchmarking of different activities (import of API and export of FDF) using the same set of comparables.

The TPO found an internal CUP in the form of local sales of identical products, rejecting the assessee's objections regarding differences in functions, assets, and risks (FAR). The Dispute Resolution Panel (DRP) directed an appropriate discount for additional marketing expenses incurred locally but found no significant economic differences affecting the price in open market transactions.

The ITAT upheld the TPO's findings, noting that the assessee's argument about using surplus capacity was not raised before lower authorities and lacked cogency. The ITAT directed the Assessing Officer to follow the DRP's directions regarding ALP adjustments and reiterated that the exported products were of superior quality, complying with strict regulations.

The ITAT concluded that the assessee's contentions amounted to seeking a review, not permissible under Section 254(2) of the Income Tax Act. Therefore, the miscellaneous application regarding this issue was dismissed.

2. Disallowance of E-connectivity Charges:
The assessee contended that a favorable decision in its own case was ignored by the Tribunal. The ITAT acknowledged that the Tribunal had noted a lack of convincing arguments from the assessee's counsel, leading to the upholding of the authorities' order.

However, recognizing the assessee's contention that its own favorable case was not considered, the ITAT found a mistake apparent from the record. Citing the Apex Court's decision in Honda Siel Power Products Ltd., the ITAT recalled the order on the disallowance of E-connectivity charges for fresh consideration.

Conclusion:
The miscellaneous application regarding the transfer pricing adjustment was dismissed, while the issue relating to the disallowance of E-connectivity charges was recalled for fresh consideration. The applications were partly allowed, and the order was pronounced in the open court on 22.01.2020.

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