2022 (5) TMI 503 - AT - Income Tax

TP adjustment made in respect of international transaction on purchase of traded goods - inclusion of comparable company ADS Diagnostics Ltd., and its correct gross margins thereon - HELD THAT - Valuation adopted by the said comparable company is in accordance with generally accepted accounting principles and in consonance with accounting standards issued by ICAI which are mandatorily to be followed by every corporate in India. In view of the same, we find considerable force in the argument advanced by the Ld. AR that closing stock of inventories figure of ADS Diagnostics Ltd., should be considered only at Rs.2,24,02,515/- as against Rs.3,00,11,802/- taken by the Ld. TPO. If the revised closing stock figure of Rs.2,24,02,515/- is considered, then the gross profit margin of the comparable company as worked out in the table supra comes to 11.08%. The aforesaid tabulation has been reproduced in the order of the Ld. DRP in page 18. The workings thereon are not disputed by the Revenue before us. Hence, we direct the Ld. TPO to consider the gross profit margin of ADS Diagnostics Ltd., only at 11.08%. AR before us stated that if the revised gross profit margin of 11.08% is considered, then even after inclusion of said two comparables by the Ld.TPO, the assessee s margin would be through and no transfer pricing adjustment is required to be made. In view of the same, we direct the Ld. TPO to delete the transfer pricing adjustment made in respect of international transaction on purchases of traded goods. Accordingly, the ground No.1.5 raised by the assessee is allowed.

Summary

Issues:
1. Transfer pricing adjustment on purchase of traded goods
2. Incorrect computation of gross profit margin of a comparable company
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act
4. Levy of interest under sections 234A, 234B, and 234C of the Income Tax Act

Transfer Pricing Adjustment on Purchase of Traded Goods:
The appeal in ITA No.7417/Mum/2018 was filed against the final assessment order passed by the Assessing Officer concerning transfer pricing adjustments on international transactions. The primary issue was the correct gross profit margin of a comparable company, ADS Diagnostics Ltd. The Assessing Officer had made adjustments based on the direction of the Dispute Resolution Panel (DRP) without following the correct margins of ADS Diagnostics Ltd. The Tribunal analyzed the functional profile of the assessee, a healthcare distributor, and noted the distinction between its distribution and indenting activities. The Tribunal found discrepancies in the comparability analysis conducted by the Transfer Pricing Officer (TPO) and rejected several comparable companies selected by the assessee. The TPO's adjustment was based on the inclusion of ADS Diagnostics Ltd., leading to additional payments to the assessee's Associated Enterprises (AEs). The assessee raised concerns regarding the calculation of gross profit margin for ADS Diagnostics Ltd., arguing for a reduction in the closing stock value to align with accounting standards. The Tribunal agreed with the assessee's argument, directing the TPO to consider the revised closing stock value and delete the transfer pricing adjustment on traded goods, thereby allowing the appeal.

Incorrect Computation of Gross Profit Margin of a Comparable Company:
The Tribunal examined the financials of ADS Diagnostics Ltd. and the gross profit margins calculated by the TPO. The assessee sought a reduction in the closing stock value to adjust the gross profit margin of ADS Diagnostics Ltd. The Tribunal reviewed the accounting standards followed by ADS Diagnostics Ltd., supporting the assessee's contention for a revised closing stock value. By considering the revised figure, the gross profit margin of ADS Diagnostics Ltd. was determined to be 11.08%, contrasting with the TPO's calculation of 25.02%. The Tribunal directed the TPO to adopt the correct gross profit margin, leading to the elimination of the transfer pricing adjustment and aligning the assessee's margin with the comparables.

Initiation of Penalty Proceedings and Levy of Interest:
The Tribunal dismissed the challenge against the initiation of penalty proceedings under section 271(1)(c) of the Act, deeming it premature for adjudication at that stage. Additionally, the grounds challenging the levy of interest under sections 234A, 234B, and 234C were considered consequential and did not require specific adjudication. Consequently, the appeal was partly allowed, with the Tribunal providing a comprehensive analysis of the transfer pricing adjustment issue and addressing the associated challenges effectively.