The Ahmedabad bench Income Tax Appellate Tribunal ( ITAT ) held that advance payment made to associate enterprises for commercial expediency of pharmaceutical business in foreign territory should be subject matter of Arm Length Price ( ALP ) under Section 92 of the Income Tax Act, 1961.
The Assessee Intas Pharmaceuticals Ltd.is having international transactions with its Associated Enterprises. As per the transfer pricing study, the assessee had advanced amounts for the purpose of using the same towards filing of registration and other activities in overseas jurisdictions.
The assessee was of the view that since obtaining registration for assessee’s products was essential for selling its products in the respective local overseas territories and thereby increasing sales, the aforesaid advances were of a commercial nature and for the benefit of the assessee.
According to the assessee advances made were out of commercial expediency, Transfer Pricing provisions would not apply However, the Assessing Officer made an upward adjustment of Rs. 1,25,43,960/- and added the same to the total income of the assessee
Aggrieved by the order assesee filed an appeal before the CIT(A). The CIT(A) confirmed the upward adjustment. Thereafter the assessee filed an appeal before the tribunal.
During the adjudication the tribunal observed that the primary underlying principle governing transfer pricing adjustments is what could be the price / remuneration that could be charged in case similar transactions were to be carried out between two independent / unrelated parties. Accordingly, they are unable to accept the above arguments of the Counsel for the assessee that in case of commercial transactions, the transfer pricing principles are not applicable.
Subsequently the amounts advanced by the assessee to it’s AEs are inextricably linked with export sale of finished goods or such advances have yielded the economic benefits to the assessee including increase in export turnover or that the advances were given out of interest free funds available with the assessee.
The tribunal also pointed out that Transfer Pricing is a special provision for computing arm’s length price in respect of international transactions between Associated Enterprises, with a view to ensure that there is no tax base erosion at the India level and shifting of profits to an overseas jurisdiction with a view to avoid taxes.
Although the transaction of granting interest free loans by the assessee to it’s non-resident Associated Enterprise comes within the ambit of international transaction and thus, such a transaction can be a subject matter of Arm’s Length Price under Section 92 of the Act
After analyzing the submission of both parties, the bench comprising Annapurna Gupta ( Accountant Member ) & Siddhartha Nautiyal, ( Judicial Member ) held that for the purpose of computing arm’s length Price between associated enterprises, since transfer pricing provisions are special provisions introduced with an aim of checking tax base erosion.
Therefore the advance payment made to associate enterprises for commercial expediency of pharmaceutical business in foreign territory should be subject matter of Arm Length Price ( ALP ) under Section 92 of the Income Tax Act, 1961.
S. N. Soparkar, the counsel appeared for assessee and Dr. Darsi Suman Ratnam, counsel appeared for the Department representatives.
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