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2014 (1) TMI 1288 - AT - Income TaxMethod of Transfer pricing adjustment – Arithmetic mean of operating margins for arriving at ALP - Selection of comparables – Held that:- TPO considered that as per the agreement, the risk of quality, packing, marking, quality of the goods, insurance of the goods etc. lie with the assessee - the assessee owned up all risks under the agreement - TPO proceeded to make profit margin of three companies and arrived at mean of the profit margin at 11.94% - the TPO suggested the bench markup on the cost of the assessee for the above transactions and suggested ALP adjustment - the adjustment was recommended by TPO and the addition has been made by the AO by considering the three comparables – the entities are not only in the manufacturing of pharmaceuticals products but are also in the business of sale/exports of pharmaceutical products, and whereas assessee has only acted on behalf of the GPL to effect export of the pharmaceutical products to GIR which at the most is in the nature of trading. The assessee has functioned only as a trader - the assessee is not adding any margin on the product sold in such trading activity though the assessee initially incurred the expenditure to undertake activity of advertisement, shipment, insurance and tours and also used its assets /rights in the shape of permission and registration possess by it – all the expenses incurred by the assessee have been reimbursed to it by GPL - it cannot be said that the assessee did not employ any assets for such export activity undertaken by it - CIT(A) has rightly held that the three comparables considered by TPO and taking operating profit margin of 11.94% is not correct as those comparable companies/entities are in the manufacturing of pharmaceutical products and are also in the sales/ export of the same whereas the assessee is in a non-manufacturing export activities - the additional evidence and to seek remand report from the AO in respect of the three comparables entities furnished before him by the assessee. The due adjustment of the working capital assumed by the assessee as well as the comparable entities are to be considered for determining the ALP of the transaction - the assessee had not assumed any risk in respect of marketing of the product, realization of sales proceeds, risk of quality etc.. –matter remitted back to the AO for fresh adjudication to compute ALP afresh in respect of the international transaction of the assessee with the Associated Enterprise (GIR) – Decided in favour of Assessee. Allowability of standard deduction u/s 92C(2) of the Act – Held that:- Since the matter is remitted back to the AO to make a afresh study by considering the comparables to arrive at ALP of the transaction under consideration and give due adjustments as per Rule 10B of the Rules – thus, it is not necessary to decide this issue as to whether the CIT(A) has given direction to allow 5% deduction to the assessee correctly or not – Decided in favour of Assessee.
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