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4 March 2015

ITAT denies to make TP adjustment for location saving relying on BEPS Action plan

Watson Pharma (P.) Ltd. v. Deputy Commissioner of Income-tax-8 (3), Mumbai - (2015) 54 taxmann.com 88 (Mumbai - Tribunal)

Facts:
  • The assessee was engaged in providing contract manufacturing and contract research and development services to its AE(s). In consideration of the said services, the AE(s) compensate the assessee on a total operating cost plus arm's-length mark-up basis.
  • During the course of proceeding, TPO/DRP accepted the TNM method and also the comparables selected by assessee for benchmarking contract manufacturing services provided by the assessee to its AEs.
  • However, the TPO/DRP contended that the assessee ought to have received extra compensation on account of location savings over and above the margins earned by the comparables. Thus, TPO suggest adjustment on account of location savings.
  • On appeal, the DRP sustained the approach of TPO.

The ITAT held in favour of assessee as under:
  • The comparables selected by the assessee to determine arm's length price of transaction were local Indian comparables operating in similar economic circumstances as the assessee. Further, OECD and G20 in 'Action 8: Guidance on Transfer Pricing Aspects of Intangibles' which is part of Base Erosion and Profit Shifting Project, has provided guidance on issue of location savings and concluded that where local market comparables are available specific adjustment for location saving is not required.
  • The concept of Transfer Pricing is based on the principle that instead of entering into a transaction with related party, if the assessee had entered into a similar transaction with unrelated party, what would have been the prices of said transaction between the assessee and unrelated party. The comparison is always in the context of the effect of the related party transaction and unrelated party transaction in the hands of the assessee. Therefore, the financial results of the AE were not relevant for the purpose of determination of arm's length price in relation to the international transaction entered into by the assessee.
  • Thus, once the TNMM method was accepted as method of considering assessee as a tested party then any benefit/advantage accruing to AE would be irrelevant if the PLI was within the range of comparables
  • The TPO had based his computation on a method, which was not ascribed by the provisions of the Act. The AO erred in making the adjustment on account of location savings. Therefore, the order of the DRP was to be set aside and the AO was to be directed to delete the addition.

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