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2023 (3) TMI 1429 - AT - Income TaxTP Adjustment - comparable selection - Micro Therapeutic Research Labs Limited - HELD THAT - The contention of the ld. A.R. is that Micro Therapeutic Labs Ltd. is not having persistent loss in 2 years out of 3 years, if we consider the operating profit by applying the formal Operating Profit/Operating Cost (OP/OC). On the other hand, the AO has considered the published accounts and observed that it has been suffering loss in 2 years out of last 3 years. Accordingly, she submitted that the issue may be remitted to the file of AO/TPO to examine whether there is operating profit in 1 out of 3 immediate preceding years. We accede to the request of the ld. A.R. We remit this issue to the file of AO/TPO to examine whether there is operating profit in 1 year out of immediate last 3 previous years and if there is any operating profit in any 1 year out of 3 immediate previous years, it should be considered as a comparable. Ordered accordingly. Non-granting of working capital adjustment - DRP observed that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profit - HELD THAT - We are of the opinion that similar issue came for consideration before this Tribunal in assessee s own case as held there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. Non granting risk adjustment - DRP stated in his report that he did not agree with the assessee's plea that it does not bear any significant risk and was of the view that the assessee bears single customer risk, as its entire business activity and survival depends on the AEs.- HELD THAT - We are of the opinion that similar issue came for consideration before this Tribunal in assessee own case though the assessee in the TP report has stated that the assessee being captive contract service provider having lesser economic and business risk, nothing has been brought on record to show that the comparables are functioning with higher risk. The assessee need to substantiate the statement that the comparable companies are realizing higher profits as there are having higher risk in terms of market, product, technology etc. We of the considered view that the assessee should be given an opportunity to bring on record the facts that will substantiate its claim based on which a reasonably accurate adjustment could be computed. We notice that the TPO and DRP have not called for any details evidence the risk adjustments and have decided the issue merely based on submissions made the assessee justifying the adjustments. We therefore remit this issue back to the TPO/AO to consider this issue on facts / data available with regard to the comparable companies and decide as per the provisions of Rule 10B(3) after giving reasonable opportunity of being heard to the assessee. The assessee is directed cooperate with the TPO/AO for producing the details as may be called for. This issue is allowed in favour of the assessee for statistical purposes. Treating recovery of pass-through costs as operating in nature - whether AO/TPO disregarding the fact that the Assessee merely acted as a co- ordinator and facilitator for the performance of clinical trials and considering that the reimbursement of investigator fees is a value- added service which mandates mark-up - HELD THAT - Tribunal in assessment year 2013-14 in assessee s own case 2021 (10) TMI 908 - ITAT BANGALORE new word pass through cost was introduced to show the amount incurred by the assessee to be reimbursed by the parent company and called the investigation fees as part of pass through cost. The ld. AR argued that there is no investigation fees payable to assessee for the work done on behalf of parent company. In our opinion, the Addendum is w.e.f. 1.4.2012 wherein no date of execution is mentioned therein. The Addendum was solely made with an intention to evade payment of taxes and this is only a self-serving document by the assessee with the sole intention to evade taxes. Since both the parties were in a position to enter into this agreement being interrelated companies, that agreement cannot be given any credence which is a nongenuine and make believe story and it cannot be recognized as a true agreement and no benefit can be given on the basis of this agreement. Therefore, the lower authorities are justified in not giving any credence to this Addendum entered into by the assessee on the basis of which assessee has claimed that assessee is not entitled to receive any consideration for facilitating investigations. We have to proceed on the basis of the professed intention and the AO is justified in finding out the real intention of the parties by ignoring the apparent and the conceded intention was to evade the tax liability. The lower authorities merely removed the facade to expose the real intention of the parties cleverly cloaked and discovered the real intention was to evade the taxes and Addendum cannot be given effect and the overall arrangement made by the assessee was to evade the taxes. We are well aware that all commercial arrangements and documents or transactions have to be given effect even though they result in avoidance of tax liability, provided that they are genuine, bonafide and not colourable transaction. In the immediate earlier AY 2012-13, the assessee has shown investigator payment with mark-up and in this year on the basis of Addendum entered by the parties as discussed earlier, made the investigator payment as pass through costs and claimed as reimbursement without any profit element, which is against the agreed norms in the earlier years which cannot be effected and accepted as genuine agreement. Accordingly, we are of the opinion that this intra-group services rendered by the assessee to the parent company cannot be considered as reimbursement of expenses or pass through costs. It is separate services in itself for which the assessee needs to determine the ALP which the assessee failed to do so. The assessee has provided services for which the TPO is justified in marking up the services so as to make TP adjustment. The various case laws relied on by the ld. AR are different on its own facts, which cannot be applied to the facts of the present case. Hence the TPO/AO correctly ascertained the ALP of this transaction and made adjustment on this count. The same is sustained. This ground of the assessee is dismissed. TP Adjustment towards interest on outstanding receivables - HELD THAT - In our opinion, this issue has been decided by Hon ble Bombay High Court in the case of Aurionpro Solutions Ltd 2017 (6) TMI 1087 - BOMBAY HIGH COURT wherein held that in case of interest on receivables, which is notional, the same should be restricted to LIBOR 2%. Accordingly, the issue is remitted to the file of AO/TPO to determine the ALP after considering the above.
Issues Involved:
1. Transfer Pricing Adjustment 2. Inclusion and Exclusion of Comparable Companies 3. Directions of the Panel 4. Working Capital Adjustment 5. Risk Adjustment 6. Treatment of Pass-Through Costs 7. Interest on Outstanding Receivables Summary: 1. Transfer Pricing Adjustment: The appellant contested the transfer pricing adjustment of INR 1,95,53,651 made by the TPO/AO/Panel. The grounds included rejection of the transfer pricing documentation and certain filters applied during the comparability analysis. These grounds were deemed general and did not require adjudication. 2. Inclusion and Exclusion of Comparable Companies: The appellant raised issues regarding the inclusion of certain companies in the final set which were not comparable to their functions, asset base, and risk profile, and the exclusion of others that were comparable. These grounds were dismissed as academic. 3. Directions of the Panel: The appellant argued that the AO did not follow the directions issued by the Panel regarding the acceptance of Micro Therapeutic Research Labs Limited as a comparable company. The Tribunal remitted this issue to the AO/TPO to examine the operating profit in the immediate preceding years and consider it as a comparable if there is operating profit in any one of the last three years. 4. Working Capital Adjustment: The Tribunal addressed the issue of non-granting of working capital adjustment. The DRP had rejected the claim due to the lack of demonstration of material differences affecting price, cost, or profits. The Tribunal, referencing its own previous decision, held that working capital adjustment should be given and decided the issue in favor of the appellant. 5. Risk Adjustment: The appellant contested the non-granting of risk adjustment. The DRP had rejected this claim, arguing that the appellant bore significant risks, including single customer risk and credit risk. The Tribunal remitted this issue back to the AO/TPO for reconsideration, directing them to evaluate the material impact of risk adjustments on profitability. 6. Treatment of Pass-Through Costs: The appellant contested the treatment of recovery of pass-through costs as operating in nature. The Tribunal, referencing its own previous decision, held that the appellant's intra-group services rendered to the parent company could not be considered as reimbursement of expenses or pass-through costs. The Tribunal sustained the AO's adjustment on this count. 7. Interest on Outstanding Receivables: The appellant contested the adjustment towards interest on outstanding receivables. The Tribunal, referencing its own previous decision, remitted the issue to the AO/TPO to benchmark the interest rate considering the period of credit enjoyed by comparables and applicable LIBOR rate. The Tribunal also noted that the interest should be restricted to LIBOR+2% as per the Bombay High Court's decision in a similar case. Conclusion: The appeal was partly allowed for statistical purposes, with issues remitted to AO/TPO for reconsideration following the Tribunal's directions.
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