In M/s Auronext Pharma Private Limited vs The Deputy Commissioner of Income Tax, ITA-TP No. 486/Hyd/2022, a transfer pricing dispute arose concerning the determination of the arm's length price (ALP) for some international transactions undertaken by the taxpayer. Auronext Pharma Pvt Ltd (the taxpayer), a pharmaceutical company engaged in cross-border transactions with its associated enterprises, had applied the Comparable Uncontrolled Price (CUP) method to determine its ALP. In support of their transfer pricing study, the taxpayer provided data on transactions involving unrelated parties, arguing that such data was relevant for the comparability analysis.
The taxpayer's transfer pricing study was aimed at demonstrating that the prices charged in its cross-border transactions were in line with the prices charged in similar transactions between unrelated parties. The CUP method is one of the methods prescribed to determine ALP. The CUP method compares the price charged for a property or service in a controlled transaction (between associated enterprises) with the price charged for a comparable property or service in an uncontrolled transaction (between unrelated parties) under similar circumstances.
Arguments By The Parties
The taxpayer contested the Transfer Pricing Officer's (TPO) rejection of the CUP method. The taxpayer maintained that the information pertaining to the transactions with unrelated parties was readily available and accessible, and thus, should form the basis of the comparability analysis. According to the taxpayer, the availability of data from unrelated parties' transactions allowed them to establish a compelling case for comparability under the CUP method. Its simplicity and reliance on actual market data seemed particularly suitable given the circumstances of the case.
On the other hand, the TPO remained firm in their stand that the CUP method required the examination of transactions solely between unrelated parties. They claimed that the taxpayer's data involving related parties could not be used for conducting a valid comparability analysis. The TPO also further expressed reservations regarding the comparability of the transactions and preferred the Transactional Net Margin Method (TNMM) method. The TPO’s concerns stemmed from the variances in product qualities and geographical disparities across diverse markets where the taxpayer’s subsidiaries and associated companies were located, and to whom supplies were dispatched by the associated enterprises. The TNMM's adaptability to address complex scenarios with various operating models and geographical disparities was seen as being a more appropriate method by the TPO.
The taxpayer submitted that the TPO's analysis lacked a thorough inquiry into whether the comparable transactions identified were in fact between unrelated parties. The taxpayer also pointed out that their access to information about external comparable enterprises was limited to publicly available external databases, and thus the TPO's dismissal of the benchmarking's reliability was flawed. The dispute also involved the taxpayer's selection of a company known as Seaair for the benchmarking studies on the premise that Seaair's status as a global export-import information provider with extensive experience and data credibility.
Findings Of The Tribunal
The Indian Income Tax Appellate Tribunal (ITAT) emphasised the critical importance of a precise comparability analysis in cases involving transfer pricing. Aligning with the taxpayer's stance, the ITAT acknowledged the submission of data related to transactions with unrelated parties to the TPO, underscoring that such information should have been duly considered for the CUP method. The ITAT referenced a key excerpt from its decision, affirming the taxpayer's position:
"Undoubtedly, the assessee in the rejoinder has rebutted the contention of the TPO/DRP and had submitted that the documents/data were furnished before the DRP, of unrelated parties transactions with respect to the sale of goods/products."
However, the ITAT also recognised the TPO's valid concerns regarding the stringent comparability requirements inherent to the CUP method. It concurred with the TPO's perspective that the available data concerning transactions with unrelated parties needed rigorous re-evaluation to ensure alignment with the principle of arm's length pricing.
To address this, the ITAT issued a directive to the TPO. The TPO was instructed to undertake a fresh comparability analysis using the CUP method, with an emphasis on incorporating pertinent data related to transactions involving unrelated parties. Furthermore, the TPO was advised to expand the scope of the analysis beyond the Taxpayer's suggested comparables. This step aimed to identify additional suitable comparables sharing comparable profiles and functions, ensuring a comprehensive and robust assessment of the transfer pricing arrangements in question.
Conclusion
This transfer pricing case highlights the significance of accurately applying transfer pricing methods and providing comprehensive and relevant data on unrelated parties' transactions. The case underscores the importance of diligent compliance with transfer pricing regulations and maintaining meticulous documentation to substantiate the arm's length price determination during scrutiny. Importantly, the ITAT commented that:
"In view of the above, we are of the opinion that the DRP/TPO is duty-bound to examine the data available in respect of unrelated parties and apply the CUP method to benchmark the international transactions."
As such, for companies engaged in cross-border transactions, it is crucial to proactively assess and analyse the suitability of different transfer pricing methods based on the nature of their transactions and the available data. By providing comprehensive data on unrelated parties' transactions and justifying the choice of the transfer pricing method, taxpayers can strengthen their position during transfer pricing audits and avoid disputes.
On the other hand, tax authorities should exercise due diligence in evaluating the data provided by companies and be open to exploring other suitable comparables beyond those suggested by taxpayers. A fair and accurate determination of the arm's length price requires a thorough and unbiased assessment of available data and adherence to the principles of comparability.
By fostering transparency, co-operation and open communication between taxpayers and tax authorities, transfer pricing disputes can be effectively resolved, promoting a fair and efficient tax regime for international transactions. This ruling serves as a reminder of the significance of sound transfer pricing practices and the need for constructive engagement between taxpayers and tax authorities to achieve certainty and compliance in transfer pricing.
18 August 2023