2017 (6) TMI 1357 - AT - Income Tax

TP Adjustment - Determination of ALP - transactions between related parties - computation of the location saving by the TPO - TPO proceeded to. make assessment on the basis of location saving available to the assessee being doing its research and trial activity in India in comparison to US - HELD THAT - The location saving and advantage are universally accepted in cross border trade so far as the transactions are not entered into solely for the purpose of avoiding tax and particularly the transactions between the related party with motive to shift the benefit of location saving and advantage to the counter part where either there is no tax or very low tax is attracted. Therefore the concept of Base Erosion and Profit Shifting (BEPS) is relevant only in respect of the transactions which are entered into with the sole purpose of avoidance of tax and treaty shopping. To deal with such transactions between related parties the transfer pricing provisions has been introduced in the statute and are applied for determination of ALP. Therefore the location savings and advantages are very much relevant in the cross border transaction but for limited purpose of carrying out exercise of examination and investigation of the transaction and not as a basis for determining the ALP and consequently adjustment. We find that the Mumbai Bench of the Tribunal in the case of Watson Pharma Pvt. Ltd. Vs. DCIT 2015 (1) TMI 699 - ITAT MUMBAI has dealt with this aspect and held that when the local comparables are available then instead of going to the location saving as a basis of adjustment, the TNMM shall be preferred. The orders of the TPO and DRP are not sustainable as suffer from serious defect of considering the location saving as basis of adjustment. Further we find that the computation of the location saving by the TPO is purely based on some articles and not on the basis of actual cost in the US in comparison to India. Therefore the price/cost as computed by the TPO is not based on actual data but on presumption of accepting the article on the subject as the comparable cost. Since the functional comparability of the companies selected by the assessee has not been examined by the TPO as well as no steps were taken to find out the other comparables of the assessee for determination of ALP therefore, the issue of determination of ALP and consequential adjustment, if any, is required to be examined and adjudication afresh at the level of TPO/A.O - As assessee is receiving its price in foreign currency therefore the comparable uncontrolled price shall also have atleast 75% of their revenue in foreign currency otherwise the price received from domestic market may not be acceptable when the assessee is receiving its 100% revenue in foreign exchange. Accordingly, the matter is set aside to the record of the TPO/A.O. for adjudication of the same afresh in the light of our above observations.Appeals allowed for statistical purpose.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP)
2. Transfer Pricing Adjustment
3. Location Savings as an International Transaction
4. Methodology for Computing Location Savings
5. Comparable Uncontrolled Price (CUP) Method
6. Levied Interest under Sections 234B and 234C

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The primary issue raised by the assessee is regarding the determination of ALP and the consequent Transfer Pricing Adjustment made by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP). The assessee, a subsidiary of Parexel International Holdings BV, Netherlands, engaged in clinical research services in India, benchmarked its international transactions by selecting 17 comparable companies with an average Profit Level Indicator (PLI) of 18.05%. The TPO, however, focused on location savings and applied the Profit Split Method (PSM) to allocate these savings between the assessee and its Associated Enterprise (AE).

2. Transfer Pricing Adjustment:
The TPO concluded that conducting clinical trials in India resulted in location savings for the AE due to lower regulatory, compliance, and investigatory costs compared to developed countries. The TPO proposed a 50:50 split of these savings, resulting in an adjustment of ?22,18,86,367. The DRP concurred with this view, noting that the assessee failed to provide complete information regarding the clinical trials and locations.

3. Location Savings as an International Transaction:
The assessee contended that location savings are already embedded in the margins of the comparable companies and that specific adjustments for location savings are unwarranted. The Tribunal referenced previous decisions, such as Watson Pharma Pvt. Ltd. Vs. DCIT and Syngenta India Ltd. Vs. DCIT, which held that when local comparables are available, specific adjustments for location savings are not required. The Tribunal emphasized that location savings should not be the basis for determining ALP and making adjustments.

4. Methodology for Computing Location Savings:
The TPO's computation of location savings was based on unverified information and web articles, rather than actual cost data. The Tribunal found this approach unsustainable, noting that the computation was not based on actual data but on presumptions. The Tribunal stressed the need for functional comparability and actual data in determining ALP and making adjustments.

5. Comparable Uncontrolled Price (CUP) Method:
The Tribunal reiterated that if local comparables are available, the benefits of location savings are already captured in the ALP determined using the Transactional Net Margin Method (TNMM). The Tribunal criticized the TPO's reliance on location savings without conducting a proper comparability analysis with uncontrolled transactions.

6. Levied Interest under Sections 234B and 234C:
The assessee also challenged the levying of interest under Sections 234B and 234C of the Income Tax Act. However, the Tribunal's primary focus was on the issues related to ALP determination and transfer pricing adjustments.

Conclusion:
The Tribunal set aside the orders of the TPO and DRP, finding them unsustainable due to the reliance on location savings as the basis for adjustments. The Tribunal directed the TPO/A.O. to re-examine and adjudicate the issue afresh, considering the functional comparability of the companies and actual data. The appeals were allowed for statistical purposes.