2019 (4) TMI 1830 - AT - Income Tax

TP Adjustment - international transaction of export of the FDFs Ucerax and Zyrtec to its AE - TPO rejecting TNMM as the most appropriate method and choosing the most appropriate method as CUP - HELD THAT - Transfer pricing officer's observation that assessee is trying to camouflage the OP/OC of small export associated enterprises (₹ 5 cr) with the OP/OC of the total export of ₹ 33 crore is cogent. Further in the annual accounts there are no segmental accounts. The annual audited accounts does contain the breakup of export to associated enterprise and non-associate enterprise. Further more in the audited annual accounts the segmental results for export and local sales is also not available. Further the transfer pricing officer found that assessee has benchmarked the transaction of import of API and export of finished drugs with the same set of comparable. The transfer pricing officer has rightly observed that activity of import of API cannot be compared with that of export of finished products. In these circumstances the transfer pricing officer has rejected the TNMM method of benchmarking adopted by the assessee. In our considered opinion the reasons given by the transfer pricing officer for rejecting the TNMM method adopted by the assessee is quite cogent. The above clearly show that if on the same facts in earlier period TNMM method was adopted it was an error. It is settled law that there is no use of perpetuating an error. The case here is not that the transfer pricing officer is changing the method to that of CUP by claiming that this method is a superior method to TNMM. Hence the objection of the learned counsel of the assessee by placing reliance upon case laws in this regard is liable to be rejected and the same is rejected as such. Appropriate discount for the additional marketing expense incurred by the assessee in its local sales - Asdirected that the ALP computed by T.P.O. would be reduced by per unit salary cost of employees engaged in marketing field - Assessee has made a proposition before us that assessee has only used its surplus/spare capacity to make exports to the associated enterprise and it has actually made a profit out of the same. We find that this line of argument was never before the authorities below. We do not find any cogency in the same for taking this international transaction out of the ambit of ALP determination. As a matter of fact it is in fact an admission on the part of the assessee that prices charged from the associated enterprise are comparatively lower, which in turn further fortifies the action of the transfer pricing officer. We note that it is the contention of the learned counsel of the assessee that the assessing officer has not given effect to the direction of the DRP regarding adjustment in ALP computed by T.P.O. we direct the assessing officer to follow the direction of the dispute admissions panel. It will not be out of place here to reiterate that T.P.O. from examination of assessee‟s personnel has found that finished products exported to AE are superior quality they comply with strict U.S FDA regulation. Our order as above shall apply mutatis mutandis for assessment year 2011-12 AY 2012-13. Connectivity charges being treated as capital expenditure and the deprecation there on - In absence of any convincing arguments by the counsel of the assessee against the above treatment we dismiss the ground raised by the assessee in this regard. It is needless to add that assessing officer is bound to give effect to the direction of the dispute resolution panel in this regard

Summary

Issues Involved
1. Transfer Pricing Adjustment on Export of Finished Dosage Forms (FDFs) to Associated Enterprises (AEs).
2. Treatment of E-Connectivity Charges as Capital Expenditure.
3. Levy of Interest under Sections 234B and 234D.
4. Short Grant of Credit of Advance Tax.

Detailed Analysis

1. Transfer Pricing Adjustment on Export of Finished Dosage Forms (FDFs) to Associated Enterprises (AEs)
The main issue in these appeals relates to the transfer pricing adjustment concerning the export of finished dosage forms (FDFs) to overseas associated enterprises (AEs). The assessee benchmarked this international transaction using the Transactional Net Margin Method (TNMM) at the segmental level, claiming its Profit Level Indicator (PLI) was higher than the comparables. However, the Transfer Pricing Officer (TPO) rejected the benchmarking, stating that the assessee calculated the PLI at the entity level, which included total exports rather than just exports to AEs. The TPO found this method unreliable and noted that the assessee's benchmarking of import of Active Pharmaceutical Ingredients (API) and export of finished drugs using the same comparables was incorrect.

The TPO adopted the Comparable Uncontrolled Price (CUP) method, comparing the price of FDFs exported to AEs with the price of similar products sold locally. The TPO concluded that the price charged to AEs was less than the local sale price, resulting in a proposed adjustment. The Dispute Resolution Panel (DRP) upheld the CUP method, noting that it is preferable for benchmarking transactions involving pharmaceutical products. The DRP directed the TPO to give a discount for additional marketing expenses incurred by the assessee in local sales.

The Tribunal found the TPO's reasons for rejecting the TNMM method cogent and upheld the adoption of the CUP method. The Tribunal also noted that the assessee's argument that it used surplus capacity for exports to AEs did not exclude the transaction from Arm's Length Price (ALP) determination. The Tribunal directed the Assessing Officer to follow the DRP's direction regarding adjustments for marketing expenses.

2. Treatment of E-Connectivity Charges as Capital Expenditure
The assessee paid annual e-connectivity charges for services like SAP, data security, and worldwide IT support, claiming them as revenue expenses. The Assessing Officer treated these expenses as capital in nature, granting depreciation instead. The DRP upheld this treatment, noting the consistent approach in previous years. The Tribunal found no compelling reason to change this treatment and dismissed the assessee's ground on this issue. However, the Tribunal directed the Assessing Officer to grant depreciation on the written-down value of e-connectivity assets from earlier years.

3. Levy of Interest under Sections 234B and 234D
The issues concerning the levy of interest under Sections 234B and 234D were deemed consequential in nature. The Tribunal did not provide a separate ruling on these issues, implying that the outcome would follow from the main issues' resolution.

4. Short Grant of Credit of Advance Tax
The issue of the short grant of credit of advance tax was not considered appealable before the ITAT. Therefore, the Tribunal dismissed this ground.

Conclusion
The appeals filed by the assessee were partly allowed. The Tribunal upheld the TPO's adoption of the CUP method for transfer pricing adjustments and the capital treatment of e-connectivity charges while directing proper adjustments for marketing expenses and depreciation on e-connectivity assets. The issues related to interest and advance tax credit were either consequential or dismissed.