2024 (3) TMI 949 - HC - Income Tax

TP Adjustment - Comparable selection - ITAT excluding Modicare Limited Modicare as a comparable under the Resale Price Method RPM - ITAT after considering various factors such as the non-availability of data of Modicare for various product segments and marketing strategies, difference between the entities in the treatment of discounts given to consultants/agents and the substantial difference between the entities in the advertising, marketing and promotion expenses incurred by them - ITAT also held that the Transactional Net Margin Method TNMM ought to be adopted as the most appropriate method for benchmarking the respondent s case. HELD THAT - During the course of hearing today, it was brought to our attention that the matter has been resolved inter partes in terms of the assessment which came to be finalised for AY 2014-15 and that Modicare Limited has been excluded from the list of comparables to determine the ALP and the upward adjustments of income as proposed by the Department has not been undertaken as well. We are informed that the view taken therein has been duly accepted and followed in the subsequent years. Thus bearing in mind the principle of consistency, we find no justification to entertain the instant appeals.

Summary

Issues:
The issues involved in this judgment are:
1. Whether the Income Tax Appellate Tribunal erred in excluding Modicare Limited as a comparable under the Resale Price Method despite reliable data being available and its comparability analysis being established by the Transfer Pricing Officer?
2. Whether the ITAT erred in restricting the TPO to the comparables set by the assessee in the Transfer Pricing analysis, thus restraining the TPO from conducting an independent comparability analysis as required by the Income Tax Act?

Issue 1:
The respondent, a subsidiary engaged in selling skin care and cosmetic products, had international transactions with associated enterprises referred to the TPO for determination of the arm's length price for assessment years 2009-10 to 2012-13. The TPO rejected the comparables selected by the respondent and included Modicare as a comparable, leading to upward income adjustments. The ITAT remanded the matter back to the TPO to enhance Modicare's comparability with the respondent.

Issue 2:
The High Court found that dissimilarities in products sold and turnover proportions impact profitability, emphasizing the importance of segmental data missing for Modicare. The differential marketing strategy between the entities was also considered, with the Court directing the ITAT to re-examine the appropriateness of including Modicare and the functional differences in marketing strategy. The ITAT ultimately held that Modicare cannot be considered a comparable entity under the RPM method and recommended the TNMM as the most appropriate method for benchmarking.

Conclusion:
The High Court dismissed the appeals as the matter had been resolved inter partes for subsequent years, with Modicare excluded from comparables to determine the arm's length price. The principle of consistency was cited as the reason for not entertaining the appeals, leading to their dismissal.