2010 (12) TMI 60 - AT - Income Tax

Arm s length price - reference to TPO - Instructions issued by CBDT for scrutiny or reference to valuation officer - Held that - CBDT instruction does not restrict the powers of the Assessing Officer from making references to the Transfer Pricing Officer after 30th June 2003 - There is no legal infirmity in the reference made by the Assessing Officer to the Transfer Pricing Officer.

Issues Involved:
1. Determination of Arm's Length Price (ALP) adjustments for the import of Active Pharmaceutical Ingredients (APIs).
2. Selection of the most appropriate method for determining ALP.
3. Validity of the reference to the Transfer Pricing Officer (TPO) beyond the stipulated time limit.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) Adjustments for the Import of APIs:
The taxpayer, Serdia Pharmaceuticals India Private Limited, challenged the ALP adjustments made by the Commissioner (Appeals) for the import of APIs (Trimetazidine, Indapamide, and Glicazide) from its associated enterprises (AEs). The Transfer Pricing Officer (TPO) had used the Comparable Uncontrolled Price (CUP) method to determine the ALP, comparing the prices paid by the taxpayer with those paid by other companies for similar APIs. The TPO found significant discrepancies, noting that the taxpayer had paid much higher prices for the APIs compared to market prices. The taxpayer argued that the higher prices were justified due to the superior quality and efficacy of the APIs imported from its AEs. However, the TPO and the Commissioner (Appeals) did not find the taxpayer's arguments convincing.

2. Selection of the Most Appropriate Method for Determining ALP:
The taxpayer had initially used the Transactional Net Margin Method (TNMM) to determine the ALP, arguing that it was the most appropriate method. The TPO, however, rejected the TNMM, stating that the CUP method was more direct and reliable. The Tribunal upheld the TPO's decision, stating that while the Indian transfer pricing regulations do not prescribe a hierarchy of methods, the CUP method is preferred when it can be reliably applied. The Tribunal noted that the CUP method offers a more direct comparison of prices and is less influenced by extraneous factors compared to the TNMM. The Tribunal also referenced the OECD Guidelines, which favor the CUP method when it can be applied reliably.

3. Validity of the Reference to the TPO Beyond the Stipulated Time Limit:
The taxpayer argued that the reference to the TPO was invalid as it was made beyond the time limit stipulated by the Central Board of Direct Taxes (CBDT) in its circular dated 20th May 2003. The Tribunal, however, rejected this argument, stating that the CBDT circular did not prohibit references to the TPO beyond the stipulated date but merely suggested that such references should ideally be completed by that date to ensure orderly processing. The Tribunal concluded that the reference made by the Assessing Officer to the TPO was legally valid.

Conclusion:
The Tribunal upheld the ALP adjustments made by the TPO and confirmed by the Commissioner (Appeals), rejecting the taxpayer's arguments regarding the selection of the TNMM over the CUP method and the validity of the reference to the TPO. The appeals for all three assessment years (2002-03, 2003-04, and 2004-05) were dismissed.

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