If business of comparable company & assessee remains unchanged from last year, the company can’t be held incomparable in current year

Brief of the case:

In the case of Eli Lilly & Co. (India) Pvt. Ltd. Vs. ACIT Delhi bench of ITAT have held that as there is no change in the facts for the instant assessment year, the AO/DRP is directed to include EDCIL (the company excluded by TPO) in the final set of comparable companies. ITAT relied upon the decision of ITAT, Mumbai in the case of ACIT vs. NGC Network India (P) Ltd. 10 taxmann.com 140 wherein it was held that These comparables and the method of computation of arm’s length price has been accepted by the department in the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also.

Facts of the case:

• The assessee is a wholly owned subsidiary of Eli Lilly Netherlands B.V. and engaged in the business of trading of formulations in the domestic market which is purchased from its AE’s and third parties.
• It is also into marketing and selling of life saving drugs formulations that find usage in the treatment of several disease segments ranging from Oncology, CNS, Cardiovascular, Cancer, Infectious diseases, Endocrine, etc.
• Assessee filed its return of income declaring taxable income of Rs. 19,61,38,326/-, which came to be assessed at an income of Rs. 20,06,38,580/- u/s 144C/143(3).
• During the previous year, relevant to the A.Y. 2009-10, the assessee received an amount of Rs. 7,71,49,367/- for Business Support Services.
• The assessee sought to justify the consideration received for the international transactions entered into with the AEs to be at ALP.
• Assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for the purposes of benchmarking the international transaction.
• The assessee’s operating profit margin (i.e. operating profit/total cost) was computed at 9.82% and the assessee claimed that the same was comparable with other companies rendering Business Support Services.
• For the purposes of the transfer pricing study, the assessee chose 14 comparable entities.
• The TPO computed the TP adjustment at Rs. 63,40,748/- by accepting the method adopted by the Assessee (i.e. TNMM), but rejected the benchmarking report.
• The TPO also rejected the assessee’s claim for any adjustment on account of working capital provided to the assessee and/or risks borne by the AE.
• TPO excluded 13 companies out of 14 companies, which were held comparable by assessee, and he brought 8 new companies in the list of comparables. Further he computed an average operating profit margin at 18.85%.
• TPO computed an adjustment of Rs. 63,40,748/- to the total income of the assessee on account of difference in arm’s length price of provision of business support services by the assessee to its associated enterprises.
• DRP excluded one company but directed to include one another company in the list of comparables.
• After the directions of DRP AO computed income, having an average operating profit margin of 16.23%, at Rs. 45,00,250/-.

Contention of the assessee:

• As the price charged in its international transactions is more than the said arithmetical mean price, the price charged in the international transactions is treated as at Arm’s length i.e. 8.37%.
• DRP/TPO erred in excluding Educational Consultant India Limited (EDCIL) (Technical assistance & HRD) (segment) from the final set of comparable companies by holding that EDCIL engaged in educational consultancy business and is not providing any services and therefore functionally not comparable to the assessee.
• As per the Annual Report of the company, EDCIL operates in three segments, namely, Technical Assistance, Institutional Development and Human Resources Development.
• The ‘technical assistance’ and ‘human resource development’ segment of EDCIL is comparable to the services provided by it to its associated enterprise as these segment covers services including feasibility studies, training, management services, recruitment services, strategic consultancy, etc.
• Assessee has considered “Technical Assistance” and “Human Resource Development” segments of EDCIL as comparable to the assessee and TPO/DRP were incorrect in concluding that the same is not functionally comparable.
• For the assessment year 2008-09 DRP had directed the TPO to consider the aforesaid segment, namely, ‘Technical Assistance’ and ‘Human Resource’ as comparable to the assessee and since the business of EDCIL and assessee has remained unchanged from preceding years, EDCIL continues to be comparable to the assessee.
• Assessee relied upon the judgment of Hon’ble Supreme Court in the case of CIT vs. Excel Industries Limited 358 ITR 295, wherein their Lordships reiterated the law laid down in Radhasoami Satsang vs. CIT 193 ITR 321 to hold that, where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year.

Held by ITAT:

• Having gone through the Assessment order for AY 2008-09 in the case of assessee, it is stated that DRP has held the same company as comparable and as there is no change in the facts in relevant AY, TPO/AO is directed to include the company in list of comparables.
• After including EDCIL in the final set of comparable companies considered by the TPO, the average operating profit to cost margin of the comparable companies works out to 14.98%.
• Since, the operating profit to cost of the appellant at 9.82% is within the +/-5% range of the average operating profit to cost ratio of the aforesaid comparable companies at 14.98%, the international transaction of provision of business support services of assessee during the relevant year is considered to be at arm’s length and the adjustment made by the TPO in the impugned order is liable to be deleted, for this reason alone.