2021 (3) TMI 146 - AT - Income Tax

TP Adjustment - payment made by the assessee after 5% mark up - tested party - HELD THAT - When it is admitted by DRP that the functions and risks of the assessee are more complex in nature and numerous adjustments would have to be made, in our considered opinion, as per the Tribunal order cited by learned AR of the assessee having been rendered in the case of Ranbaxy 2008 (1) TMI 445 - ITAT DELHI-H , the foreign AEs in the present case should be considered as tested party as has been considered by the assessee in the TP study. This is not the case of the TPO or DRP that the data of AEs are not available or not reliable because this is admitted position that the foreign AEs are paid 5% mark up and therefore, even if in the comparable cases, no mark up is paid by the customers of such uncontrolled comparables, then also, 5% mark up paid by the assessee in the present case will be within ALP as per 2nd proviso to section 92C(2) in which it is specified that if the variation between the Arm s Length Price and price at which international transaction has actually been undertaken does not exceed 5% of transaction price, there should not be a T P adjustment. So in the present case, if cost incurred is 100, the assessee is paying 105 after 5% mark up and therefore, even if in the case of the comparable, the payment is made of ₹ 100/- without any mark up then also the payment made by the assessee after 5% mark up is excess by 5% only for which no TP adjustment can be made up in these two assessment years involved in the present two appeals i.e. A. Y. 2010 11 and 2011 12 because the amendment in this proviso has taken place from Assessment Year 2012 13 and therefore, in the present two years, the unamended provisions are applicable and as per that, for up to /- 5% difference, no T P adjustment is called for in these two years. We find no merit in the TP adjustment proposed by the TPO and approved by DRP and AO and we delete the same in both years.

Summary

Issues:
- Transfer Pricing Adjustment
- Disallowance under section 14A

Transfer Pricing Adjustment:
The appeals were filed against two Assessment Orders concerning Transfer Pricing (TP) adjustments proposed by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP) and Assessing Officer (AO). The primary issue revolved around the TP adjustment proposed by the TPO and accepted by the DRP and AO for the Assessment Years 2010-11 and 2011-12. The functional profile of the assessee company, which provided sales, marketing, and business consulting services related to the pharmaceutical industry, was scrutinized. The TPO rejected the TP study submitted by the assessee based on the selection of foreign companies for comparison under the Transactional Net Margin Method (TNMM). The TPO contended that the foreign entities chosen as tested parties were not suitable due to differences in geographical areas, functions, and profit ratios compared to the Indian company. The assessee argued that considering the foreign entities as tested parties was appropriate under Indian TP regulations. The dispute also involved the use of 3 years weighted average data for comparables, with the assessee advocating for the adoption of current year data. The DRP supported the TPO's decision, emphasizing the complexity of the functions and risks of the assessee. However, the assessee contended that the 5% mark-up paid to the foreign entities was within the Arm's Length Price (ALP) range as per the applicable provisions. The Tribunal, citing precedent cases, held that the foreign entities should be considered as tested parties, as chosen by the assessee in the TP study. The Tribunal concluded that no TP adjustment was warranted for the years in question due to the permissible 5% variation under the unamended provisions.

Disallowance under section 14A:
In the Assessment Year 2011-12, an additional issue was raised regarding the disallowance of a specific amount under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. The assessee chose not to press this ground due to the smallness of the amount involved. Consequently, ground No.6 for Assessment Year 2011-12 was rejected as not pressed.

In conclusion, the Tribunal allowed the assessee's appeal for Assessment Year 2010-11 and partly allowed the appeal for Assessment Year 2011-12, primarily focusing on the TP adjustment issue and addressing the disallowance under section 14A accordingly.