2011 (11) TMI 398 - AT - Income Tax

Transfer Pricing CIT(A) deleted adjustment made to ALP - assessee wholly owned subsidiary of foreign company(MTC) - international transaction of providing contract research services in specific area of agriculture, agro chemicals, market research on products launched by MTC and corporate support services - disputes regarding comparability of the comparable relied upon by the TPO rejection of one of the comparable companies identified by the Assessee, consideration of which would lead to difference between ALP and the Price adopted by the Assessee be less than 5% plus or minus contemplated by the second Proviso to Sec.92C(2) - determination of nature of services performed by assessee - whether high end or low end services Held that - Clingene International Pvt. Ltd. was engaged in similar activity as Syngene International Private Limited - one of the companies considered by TPO as comparable. Assessee pleaded that if Syngene is considered as comparable, then even Clingene ought to have been included as a comparable in determining the ALP. On look at the way Operating Profit has been arrived at in both the cases, it is observed that adjustments made to the operating profit margins of the two comparables would get neutralised and therefore their margins as claimed by the Assessee for arriving at the arithmetic mean of 11.71% after including all comparable companies considered by the TPO and the results of Clingene International Pvt. Ltd. is held to be proper and acceptable. In view of second Proviso to Sec.92C(2), the price at which the international transaction has actually been undertaken shall by the Assessee is held to be at arm s length. The order of the CIT(A) is upheld on this ground - Decided against the Revenue. In view of the above conclusion, the other issues with regard determination of nature of services and non-consideration of other factors laid down in Rule 10B(1)(e)(i) are not being considered. In respect of deletion of dis-allowance of interest paid on working capital loan received from group company (MIL) assessee have also advanced interest free loan to MIL for placing security deposit by MIL with the lessor in respect of flat taken for accommodation of Business Head A.O. disallowed deduction of interest paid on working capital loan to MIL of amount corresponding to the notional interest on interest free sum advanced to MIL - Held that - MHPL as a group holding company of Indian ventures, provides certain support/steward services to various downstream ventures in India. It is clear that the interest free advance in question was owing to commercial and business expediency. There is no nexus between the advance placed by the appellant and the working capital borrowing obtained by the appellant from MIL. Therefore the disallowance of interest was rightly held to be not proper by the CIT(A) Decided against the Revenue.

Summary

Issues Involved:
1. Arm's Length Price (ALP) adjustment for international transactions.
2. Comparability of companies for transfer pricing.
3. Inclusion of Clingene International Pvt. Ltd. as a comparable company.
4. Disallowance of interest on an interest-free loan to a group company.

Issue-wise Detailed Analysis:

1. Arm's Length Price (ALP) Adjustment for International Transactions:
The primary issue was the ALP adjustment of Rs. 1,11,25,027 for AY 2003-04 and Rs. 1,85,13,396 for AY 2004-05 made by the Transfer Pricing Officer (TPO) for the international transactions between the assessee (MHPL) and its associated enterprise (MTC). The TPO used the Transactional Net Margin Method (TNMM) and compared the operating profit margins of the assessee with those of other companies. The TPO identified four additional companies as comparable and calculated an average operating profit margin of 16.28% for AY 2003-04 and 20.93% for AY 2004-05. The TPO's adjustment was based on the premise that the assessee's operating profit margin was lower than the average of the comparable companies.

2. Comparability of Companies for Transfer Pricing:
The TPO rejected some of the companies identified by the assessee as comparable, citing reasons such as differences in the nature of services provided and the level of activity. The TPO included four new companies: Alpha Geo India Ltd., Vimta Labs Ltd., Chokshi Laboratories Ltd., and Syngene International Pvt. Ltd., considering them functionally similar to the assessee. The assessee contested the inclusion of these companies, arguing that they provided high-end services and assumed significant risks, unlike the assessee, which provided low-end support services with minimal risks.

3. Inclusion of Clingene International Pvt. Ltd. as a Comparable Company:
The assessee argued that Clingene International Pvt. Ltd., engaged in similar activities as Syngene International Pvt. Ltd., should be included as a comparable. The CIT(A) accepted this argument, noting that including Clingene would reduce the arithmetic mean of the profit margins of all comparable companies to 11.71% for AY 2003-04 and 14.18% for AY 2004-05. Since the assessee's operating profit margin was within the safe harbor range of +/- 5% of the ALP, no adjustment was required. The Tribunal upheld this view, emphasizing that the inclusion of Clingene was justified and that the TPO's exclusion was arbitrary.

4. Disallowance of Interest on an Interest-Free Loan to a Group Company:
The AO disallowed Rs. 15,15,000 as interest on an interest-free loan of Rs. 2 crores advanced by the assessee to Monsanto India Ltd. (MIL) for providing accommodation to the South Asia Business Head of the Monsanto Group. The CIT(A) deleted the disallowance, citing commercial expediency and the absence of a nexus between the borrowed funds and the interest-free loan. The Tribunal upheld this decision, agreeing that the loan was for business purposes and that the interest disallowance was not justified.

Conclusion:
The Tribunal dismissed the appeals of the Revenue for both AY 2003-04 and AY 2004-05. It upheld the CIT(A)'s decisions on the inclusion of Clingene International Pvt. Ltd. as a comparable, the non-requirement of ALP adjustments due to the safe harbor rule, and the deletion of the interest disallowance on the interest-free loan to MIL. The Tribunal emphasized the importance of functional comparability and commercial expediency in transfer pricing and interest disallowance cases.