2015 (8) TMI 6 - AT - Income Tax

TP adjustments - selection of tested party in determination of Arm s Length Price (ALP) - Held that - Profitability of the selected Comparable companies in domestic market may vary with the profit margins available abroad, particularly in the USA market. DRP also rejected the method solely on the reason that AE was not selected as tested party. Therefore, keeping in mind the submissions made by the Ld. Counsel, the issue of selection of method of resale price method or of TNMM or any other method suitable to the international transactions is also restored to the file of A.O. to examine the suitability of various methods and consider accordingly Thus restore the issue of selection of most appropriate method as well as selection of the tested party to the file of AO/TPO to examine afresh, whether AE can be selected as tested party and RPM can be selected as most appropriate method. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Tested Party for ALP Determination
3. Rejection of Resale Price Method (RPM)
4. Application of Transactional Net Margin Method (TNMM)
5. Filters Applied in Selecting Comparables
6. Initiation of Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee, engaged in manufacturing bulk drugs and having a subsidiary in the USA, filed its return for AY 2009-10. The Assessing Officer (AO) determined the total income at Rs. 12,71,70,274 by making adjustments, including a significant transfer pricing adjustment of Rs. 8,86,12,580 under section 92CA. The Dispute Resolution Panel (DRP) confirmed this adjustment.

2. Selection of Tested Party for ALP Determination:
The assessee argued that the AE in the USA, involved in marketing and distribution, should be the tested party for determining the Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) rejected this, citing defects in the assessee's transfer pricing study, including improper FAR analysis, lack of transparency in the search process, and selection of foreign comparables that were functionally dissimilar.

3. Rejection of Resale Price Method (RPM):
The assessee selected RPM as the most appropriate method for determining ALP, arguing that the AE had the least complex transactions. However, the TPO and DRP rejected this method, asserting that the comparables used were inappropriate and the analysis flawed. The DRP upheld this rejection, following its stance from earlier years.

4. Application of Transactional Net Margin Method (TNMM):
The assessee also conducted an alternative analysis using TNMM, selecting comparables based on specific filters. The TPO rejected this analysis, conducting an independent search and applying different filters, leading to an adjustment. The DRP supported the TPO's approach, noting that the turnover filter applied by the TPO was more accurate and the export revenue filter was not substantiated by the assessee.

5. Filters Applied in Selecting Comparables:
The TPO applied several filters to select comparables, including excluding companies with insufficient data, those with less than 75% revenue from pharmaceuticals, and those with more than 25% related party transactions. The DRP upheld these filters, agreeing with the TPO's selection of comparables as functionally similar to the assessee.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee contested the initiation of penalty proceedings under section 271(1)(c). The tribunal noted that this issue was consequential and did not arise from the DRP's order, rendering this ground not maintainable.

Conclusion:
The tribunal, after hearing both parties, decided to restore the issue of determining ALP by RPM to the AO/TPO for fresh examination, following the precedent set in earlier years. The tribunal directed that the AO/TPO should consider whether the AE can be the tested party and whether RPM is the most appropriate method. Consequently, the issue of determining ALP by TNMM was deemed academic, and the assessee was given the liberty to raise contentions if RPM is rejected. The appeal was partly allowed for statistical purposes. The order was pronounced on 27th May, 2015.