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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA, AM & SHRI GEORGE BENCH: K, JM
O R D E R PER SHRI A.K. GARODIA, AM: Both these appeals are filed by the assessee and these are directed against two Assessment Orders passed by the AO under section 143(3) r.w.s. 144C of Income Tax Act, 1961 (hereinafter called ‘the Act’) as per the directions of DRP. The Assessment Order for Assessment Year 2010 – 11 is dated 15.01.2015 and the Assessment Order for Assessment Year 2011 – 12 is dated 08.01.2016. Both these appeals are heard together and are being disposed of by way of this common order, for the sake of convenience.
IT(TP) A Nos. 615, 496/Bang/2015 Page 2 of 8 2. In course of hearing, it was submitted by the learned AR of the assessee that in both these years, a common issue is involved regarding TP adjustment proposed by the TPO and confirmed by DRP and AO. He also submitted that in Assessment Year 2011 – 12, one more issue is raised by the assessee as per ground No.6 regarding disallowance of Rs.2,20,040/- under section 14A of Income Tax Act, 1961 r.w.r. 8D of I.T. Rules, 1962 and because of smallness of amount, the assessee is not pressing this ground in Assessment Year 2011-12. Accordingly ground No.6 in Assessment Year 2011-12 is rejected as not pressed.
Regarding TP issue in dispute which we have to decide in both these years, it was submitted by learned AR of the assessee that the functional profile of the assessee company is noted by the TPO in para No.2 of his order for Assessment Year 2010-11 and that is same for Assessment Year 2011-12 also. He pointed out the TPO has noted that the assessee company renders sales and marketing services and business consulting services related to pharmaceutical industry to support global contracts negotiated by IMS Health with its overseas clients. He pointed out that it is also noted by TPO in the same para of his order that the assessee company has two subsidiaries namely PharmARC Inc, USA and PharmARC Consulting services GmbH, Switzerland which are engaged in providing business development and marketing services to the assessee company at pre agreed mark up in accordance with the contractual terms. He pointed out that this pre agreed mark up is 5% of the cost incurred by these two AEs which were rendering market support to the assessee company in these two years and this payment is only
IT(TP) A Nos. 615, 496/Bang/2015 Page 3 of 8 in dispute in the present two years. He further pointed out that in para 6.1 of his order, the TPO has noted that it is seen from the TP documents filed by the assessee that the tax payer has selected TNMM as the most appropriate method (MAM) to evaluate the arm’s length standard for the international transaction with its AE, PharmARC, Swiss and selected 5 Switzerland comparable service providers with the weighted arithmetic mean margin for 3 years at 10.40% on cost and in the international transaction with its AE, PharmARC, USA, the taxpayer selected 20 US comparable companies, with the weighted arithmetic mean margin for 3 years at 6.69%. Thereafter, he pointed out that in para 6.3 of his order, the TPO has observed that in view of the facts that the tax payer has selected foreign companies for comparison under TNMM and for the reasons mentioned in the show cause notice dated 12.12.2013, the TPO rejected the TP study. Thereafter, he pointed out that the said notice 12.12.2013 issued by the TPO is available on pages 154 to 163 of the Paper Book and in particular, he pointed out that in the said notice, the TPO has observed that the assessee has adopted the foreign AEs as tested parties but because these AEs are in entirely different geographical area, the nature, the functions, the profit ratio may not be similar to that of the Indian company and Indian condition and hence, the TP document is rejected by the TPO. Thereafter, he pointed out that the assessee has filed reply to this show cause notice as per letter dated 09.01.2014 copy available on pages 165 to 253 of the Paper Book in which it was submitted by the assessee that the AEs performed least complex functions and therefore, considering the AEs as the tested party is the most appropriate method and permitted under the India TP regulations.
IT(TP) A Nos. 615, 496/Bang/2015 Page 4 of 8 Learned AR of the assessee drawn our attention to page 168 of the Paper Book which contains this submission of the assessee before TPO and learned AR of the assessee pointed out that as per the order passed by the TPO, he rejected the TP study of the assessee company simply on the basis of the said show cause notice dated 12.12.2013 without taking into consideration the reply submitted by the assessee as per letter dated 09.01.2014 and without pointing out in the order of TPO as to how this claim of the assessee is incorrect that the AEs performed least complex functions and therefore, considering the AEs as the tested party is the most appropriate approach and permitted under the Indian TP regulations. He submitted that under these facts, TP study carried out by the assessee should be accepted and the TP adjustment proposed by TPO and accepted by DRP and AO should be deleted. Reliance was placed by him on the Tribunal order rendered in the case Ranbaxy Laboratory Ltd., Vs. ACIT as reported in 110 ITD 428 and he pointed out that reliance on this Tribunal order was placed before the TPO also in the same letter dated 09.01.2014 and in this regard, he drawn our attention to page 172 of the Paper Book. He further submitted that the relevant para of this Tribunal order has been reproduced by the assessee in that reply and it is available on page 174 of the Paper Book. He pointed out that as per this para of the Tribunal order, it was held that tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It is also held by the Tribunal in the same para that it may be local or foreign entity that is one party of the transaction. Thereafter, he drawn our attention to para 7 on page 3 of the DRP directions for Assessment
IT(TP) A Nos. 615, 496/Bang/2015 Page 5 of 8 Year 2010-11 and pointed out that in para 7.3, it is observed by DRP that the functions and risks of the assessee are more complex in nature and that numerous adjustments will have to be made if the foreign entity would be taken as a tested party and in this regard, the DRP has taken guidance from the Tribunal order of the Mumbai Bench rendered in the case of Onward Technologies and Aurionpro Solutions cases and reproduced a para from this Tribunal order in which it is stated as under: “The contention of the ld. AR in considering the profit of the foreign AE as 'profit A' for the purposes of comparison with profit of comparables, being 'profit B', to determine the ALP of transaction between the assessee and its foreign AE. misses the wood from the tree by making the substantive section 92 otiose and the definition of ' internal transaction' u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible" Therefore, the objection is rejected.”
He submitted that in the present case, the Tribunal order cited by him having been rendered in the case of Ranbaxy (supra) should be followed. He further submitted that on page 4 of its order, the DRP has stated that as per Tribunal order rendered in the case of 24/7 Customer.com Pvt. Ltd., in dated 09.11.2012 and in the case of Customer Services (India) Pvt. Ltd., Vs. ACIT (2009-TIOL-424-ITAT-DEL), current year data should be adopted and the earlier year data should be rejected. He submitted that in the present case also, the TPO may be directed to adopt current year data instead of 3 years weighted average data of the comparables and in this regard, he submitted that on page 108 of the Paper Book is the working regarding 5 Switzerland comparables IT(TP) A Nos. 615, 496/Bang/2015 Page 6 of 8 for which the average mean profit for 3 years was worked out at 10.40% and as per the same, profit for the calender 2009 is 12.40% and therefore, even if the data of 2009 is considered instead of 3 years weighed average, then also no TP adjustment can be made. Regarding 20 comparables of USA, working of 3 years weighted average is available on page 149 of the Paper Book at 6.69% and pointed out that even for these 20 comparables, the average for calendar year 2009 is 6.60% and therefore, even if the current year data of these 20 comparables is considered, then also no TP adjustment is called in the facts of the present case, because the assessee has paid only 5% mark up.
As against this, learned DR of the Revenue supported the orders of TPO and DRP. He pointed out that valid reasoning is given by both TPO and DRP to hold that instead of foreign AEs, Indian assessee should be adopted as tested party because of difference in geographical area. He also submitted that this is also noted by TPO in paras 6.1 and 6.2 that in the TP study, the assessee has worked out the weighted arithmetic mean margin for these comparables on the basis of 3 years data whereas only current year data should be adopted. He also submitted that this is also the finding of TPO and DRP that the working of foreign AEs is more complex.
We have considered the rival submissions. First of all, we reproduce paras 7.1 to 7.3 from the direction of DRP in Assessment Year 2010-11. These are as under: “7.1 Foreign Tested Party ought not to be rejected: Rejection of foreign tested party is unjustified. Accordingly, The arm's length comparability analysis using the IT(TP) A Nos. 615, 496/Bang/2015 Page 7 of 8 associated enterprises as tested parties as per the transfer pricing documentation ought to be accepted. 7.2 It is seen that the Assessee has chosen its subsidiaries M/s PharmARC Inc USA and M/s. PharmARC, its own AEs as tested parties for TP analysis and the same was rejected by TPO. 7.3 This Panel is not able to accept the objection regarding rejection of foreign AEs as tested parties. The functions and risks of the assessee are more complex in nature and that numerous adjustments would have to be made if a foreign entity would be taken as a tested party. Guidance is taken from decisions of Mumbai ITAT in Onward Technologies & Aurionpro Solutions cases.”
From the above paras reproduced from the DRP directions, it is seen that this is the finding of DRP that the functions and risks of the assessee are more complex in nature and that numerous adjustments would have to be made if the foreign entity would be taken as a tested party. We fail to understand the logic behind this observation of DRP because if we are taking the foreign AEs as tested party, comparison has to be between comparables of the respective country selected by the assessee in TP study and such foreign AE selected as tested party and there is no need to compare with the data of the assessee company. More over 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 (supra), 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 IT(TP) A Nos. 615, 496/Bang/2015 Page 8 of 8 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 Rs.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. Considering all these facts and in view of the above discussion, 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.
In the result, the assessee’s appeal for Assessment Year 2010- 11 is allowed whereas the assessee’s appeal for Assessment Year 2011-12 is partly allowed. Order pronounced in the open court on the date mentioned on the caption page.