Relief to Thermo Fisher in Transfer Pricing Dispute: ITAT Partly Allows Appeal on Royalty ALP, Benchmarking, Comparables, Aggregation and Working Capital Adjustments [Read Order]

The Mumbai Bench of the Income Tax AppellateTribunal (ITAT) has partly allowed the appeal filed by Thermo Fisher Scientific India Pvt. Ltd. in a transfer pricing dispute involving determination of the arm’s length price of royalty payments, benchmarking of international transactions, selection of comparables, aggregation of transactions, and grant of working capital and risk adjustments.

The appeal was filed against the assessment order passed pursuant to an order of the Transfer Pricing Officer (TPO) for the assessment years 2011-12, 2012-13, 2013-14 and 2014-15. The assessee, engaged in the business of trading and distribution of scientific and laboratory equipment and provision of related support services, had entered into various international transactions with its associated enterprises (AEs).

The appeal was heard by the bench comprising Vikram Singh Yadav (Accountant Member) and Sandeep Singh Karhail (Judicial Member).

The assessee contended that the TPO had erred in determining the arm’s length price of royalty at nil under Section 92C ofthe Income Tax Act, 1961 by applying a benefit test, adopting dissimilar comparables, segregating closely linked transactions, and denying working capital and risk adjustments. Grounds were also raised in relation to certain procedural aspects of the transfer pricing proceedings.

As part of the transfer pricing adjustments, the TPO had proposed an adjustment of ₹2,90,74,384 in relation to the international transaction of purchase of finished goods and an adjustment of ₹5,93,65,507 in respect of receipt of indenting commission.

The Tribunal noted that the main dispute related to the determination of the arm’s length price of royalty payments. It examined the TPO’s approach of applying a benefit test and determining the arm’s length price of royalty at nil.

The ITAT held that when the genuineness of the transaction is not in dispute, the TPO cannot question the commercial expediency of the expenditure or determine its arm’s length price at nil merely on the ground that the assessee did not derive benefit. The Tribunal accordingly set aside the royalty adjustment, which had been made by determining the arm’s length price at nil.

The Tribunal also took note of the fact that similar royalty payments had been accepted in the assessee’s own case in earlier assessment years and there was no change in the factual position.

On the issue of selection of comparables, the ITAT accepted the assessee’s contention that certain entities selected by the TPO were functionally dissimilar and did not satisfy the criteria. The Tribunal observed that proper examination of functional, asset and risk profiles is essential for benchmarking analysis.

The Tribunal further dealt with the issue of aggregation versus segregation of international transactions and held that where transactions are closely linked and form part of a business arrangement, they should be aggregated to determine the arm’s length price.

With regard to working capital and risk adjustments, the Tribunal held that such claims cannot be rejected and require examination on the basis of facts and supporting material. These issues were restored to the file of the Assessing Officer to the extent of factual verification.

Certain procedural grounds raised by the assessee were rendered academic in view of the relief granted on substantive transfer pricing issues.

As a result, the Tribunal partly allowed the appeal, setting aside major transfer pricing adjustments and directing consequential relief to the assessee.

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