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The Tax Publishers Roche Products (India) (P) Ltd. v. ACIT [ITA No. 4035/Mum/2015, dt. 12-4-2016] : 2016 TaxPub(DT) 2192 (Mum-Trib) TP addition based on irrelevant comparables *Facts:* Assessee was providing marketing and support services to its group AE (FHLR). TNMM was used as a comparable with the Profit level indicator (PLI) as Operating profit/ Operating cost. The rejected the comparable chosen by the assessee and brought in new comparables which were found to be incongruent to the nature of the activities of the assessee. Thus additions were made to the AE transaction. On appeal DRP upheld the same. On further appeal to ITAT: Held in favour of the assessee that the TPOs choice of comparable had no relevance to the nature of the business of the assessee. Provisions of section 92 were introduced in the Act, so that under-charging or over-charging by AE in intra-group transactions can be prevented that intra-group transfers can be valued. In short, TP mechanisms aims to implement and check controlling pricing. It is said that the tax authorities are free to examine related and associated parties' transaction as actually undertaken and structured by the parties. But, they cannot disregard the actual transaction or substitute it for another transaction according to their perceptions. Restructuring of legitimate business transaction would be an arbitrary exercise. However, there are two exceptions to the rule. The first being where the economic substance of the transaction differs from its form. In such cases, the tax authorities may disregard the parties' characterisation of the transaction and re-characterise the transaction in accordance with its substance. The second exception is when the form and substance of the transaction are the same but the arrangements made in relation to the transaction, when viewed in their totality, differ from those which would have been adopted by the independent enterprise behaving in a commercially rational manner. The second exception also mandates that the actual structure should practically impede the tax authorities from determining an appropriate transfer price. We find that the TPO/DRP has not brought on record any material to prove that either of the two exceptions were present in the case under consideration. Provisions of Chapter X were never aimed to make adjustment at any cost, but to decide fairly and equitably that the price quoted by an assessee with regard to an international transactions entered into with its AE's are at ALP. The burden is on the assessee to prove that transactions with its AE's are above board and it is paying/charging the same rate that is prevalent in the open market. The comparables selected by the assessee should not be ignored lightly, unless and until it can be proved that the variables selected by it were functionally or otherwise different from the job done by it. The TPO is free to make search and refer to other comparables. But, this is not an unbridled power. He has to prove that comparables selected by him were engaged in the similar or almost similar activities of the assessee. In the case under consideration, the TPO had selected comparables which had no similarity at all with the activities of the assessee. We are unable to understand is how the results of companies dealing in foreign exchange/maintaining freight station or engaged in providing end-to-end engineering services can be compared with marketing and allied services. Accordingly, we hold that the selection made by the TPO is comparables was neither methodical not scientific. It is found that NCP margin as per the TP study of the assessee was 10.14%, that NCP margin, after excluding the six comparables, is 12.05%. Thus, it is within the permissible limit of +5%. Considering these facts, we decide the first effective ground of appeal in favour of the assessee.

The Tax Publishers

Roche Products (India) (P) Ltd. v. ACIT [ITA No. 4035/Mum/2015, dt. 12-4-2016] : 2016 TaxPub(DT) 2192 (Mum-Trib)

TP addition based on irrelevant comparables

Facts:

Assessee was providing marketing and support services to its group AE (FHLR). TNMM was used as a comparable with the Profit level indicator (PLI) as Operating profit/ Operating cost. The rejected the comparable chosen by the assessee and brought in new comparables which were found to be incongruent to the nature of the activities of the assessee. Thus additions were made to the AE transaction. On appeal DRP upheld the same. On further appeal to ITAT:

Held in favour of the assessee that the TPOs choice of comparable had no relevance to the nature of the business of the assessee.

Provisions of section 92 were introduced in the Act, so that under-charging or over-charging by AE in intra-group transactions can be prevented that intra-group transfers can be valued. In short, TP mechanisms aims to implement and check controlling pricing. It is said that the tax authorities are free to examine related and associated parties' transaction as actually undertaken and structured by the parties. But, they cannot disregard the actual transaction or substitute it for another transaction according to their perceptions. Restructuring of legitimate business transaction would be an arbitrary exercise. However, there are two exceptions to the rule. The first being where the economic substance of the transaction differs from its form. In such cases, the tax authorities may disregard the parties' characterisation of the transaction and re-characterise the transaction in accordance with its substance. The second exception is when the form and substance of the transaction are the same but the arrangements made in relation to the transaction, when viewed in their totality, differ from those which would have been adopted by the independent enterprise behaving in a commercially rational manner. The second exception also mandates that the actual structure should practically impede the tax authorities from determining an appropriate transfer price. We find that the TPO/DRP has not brought on record any material to prove that either of the two exceptions were present in the case under consideration.

Provisions of Chapter X were never aimed to make adjustment at any cost, but to decide fairly and equitably that the price quoted by an assessee with regard to an international transactions entered into with its AE's are at ALP. The burden is on the assessee to prove that transactions with its AE's are above board and it is paying/charging the same rate that is prevalent in the open market. The comparables selected by the assessee should not be ignored lightly, unless and until it can be proved that the variables selected by it were functionally or otherwise different from the job done by it. The TPO is free to make search and refer to other comparables. But, this is not an unbridled power. He has to prove that comparables selected by him were engaged in the similar or almost similar activities of the assessee. In the case under consideration, the TPO had selected comparables which had no similarity at all with the activities of the assessee. We are unable to understand is how the results of companies dealing in foreign exchange/maintaining freight station or engaged in providing end-to-end engineering services can be compared with marketing and allied services. Accordingly, we hold that the selection made by the TPO is comparables was neither methodical not scientific. It is found that NCP margin as per the TP study of the assessee was 10.14%, that NCP margin, after excluding the six comparables, is 12.05%. Thus, it is within the permissible limit of +5%. Considering these facts, we decide the first effective ground of appeal in favour of the assessee.