ITAT permits Inclusion of Five Comparable Companies for Transfer Pricing, quashes Rs. 2.39 Cr Adjustment [Read Order]

Troy Chemicals India Pvt. Ltd. (assessee), a subsidiary of Troy Corporation, USA, is engaged in the trading of specialty chemicals in India. The assessee filed its income tax return on 14.02.2022, declaring a total income of Rs. 2,33,200.

The assessee entered into international transactions with its associated enterprise (AE), Troy Siam Company Ltd., involving the purchase of finished goods worth Rs. 79,76,34,766 and purchase returns of Rs. 31,35,888, adopting the Resale Price Method (RPM) for benchmarking.

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The Transfer Pricing Officer (TPO) excluded 13 of the 22 comparable companies selected by the assessee, citing that they traded in bulk chemicals, unlike the assessee’s specialty chemicals. The TPO selected nine comparables with a median gross profit margin of 6.91%, against the assessee’s 4.58%, resulting in a transfer pricing adjustment of Rs. 2,39,98,806.

The Dispute Resolution Panel (DRP) upheld the TPO’s decision, and the Assessing Officer (AO) passed the final assessment order on 19.09.2024, computing the assessee’s total income at Rs. 2,42,32,006.

Aggrieved by the AO’s order, the assessee appealed to the ITAT. the assessee arguing that the exclusion of comparables was unjustified as RPM focuses on functional comparability rather than product similarity.

The assessee proposed the inclusion of five companies engaged in trading chemicals for industries like textiles, paints, and leather, asserting that their inclusion would place the assessee’s gross margin within the arm’s length range.

The two-member bench, comprising Sandeep Singh Karhail (Judicial Member) and Bijayananda Pruseth (Accountant Member) observed that under RPM, as prescribed by Rule 10B(1)(b) of the Income Tax Rules, 1962, the focus is on the similarity of functions and risks rather than strict product similarity.

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The tribunal found that the five proposed companies, engaged in trading chemicals for similar industries, were valid comparables for the assessee’s transactions. The tribunal directed the TPO/AO to include these companies in the benchmarking analysis.

The tribunal observed that their inclusion would align the assessee’s gross margin with the arm’s length standard. The tribunal quashed the transfer pricing adjustment of Rs. 2,39,98,806. The appeal of the assessee was allowed.

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