Foreign AE Can Be Accepted As Tested Party: Mumbai ITAT Deletes ALP Adjustment Qua Export Of Formulations

The Bench comprising B.R Baskaran (Accountant Member) and Rahul Chaudhary (Judicial Member) observed that “so far the assessee herein is concerned and qua the transfer pricing provisions, what is required to be seen is whether the price realized on export of products to their AEs is at arms-length or not. Further, the fact the profitability of AEs is lower than the profitability of comparable companies, would also show that the assessee has not under invoiced the sales”. (Para 8.8)

As per the brief facts of the case, the TPO did not accept ALP of export of goods formulations by assessee to AEs in South Africa and Mexico, and held that AEs cannot be considered as tested party as done by assessee, and that 10.86% (OP/OC) earned on sale to non-AEs both in domestic and Export markets should be taken as ALP margin.

The Bench noted that there is no dispute that foreign AEs were accepted as tested parties by TPO in preceding two years.

The Bench also observed that Rule 10B(2)(d) applies to the present case viz. market conditions of concerned regions, geographical location, size of markets, level of competition etc cannot be ignored.

Both AEs are in their initial years of operations, and their respective profitability will be lower than comparable companies in respective regions, since AEs have to incur huge expenditure on marketing of products while comparables are established players, added the Bench.

The Bench went on to observe that the profit ratio of comparable companies are required to be considered only to show that the profit ratio of the assessee was lower than their profit ratio, and hence, the difference in accounting period may not be that much relevant.

The Bench found that as per data furnished by assessee, its profitability in exporting products to these two AEs is increasing year after year, and therefore, concluded that assessee's TP study should be accepted.

Thus, the ITAT directed to delete the ALP adjustment qua exports of goods to AEs.

Counsel for Appellant/ Department: P Kumar & Ashok Kumar Amastha

Counsel for Respondent/ Taxpayer: Vijay Mehta & Jay Modi

Case Title: ACIT verses Glenmark Pharmaceuticals Ltd

Case Number: ITA No 1455/Mum/2020

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