Arm’s length price (“ALP”) is nothing but a benchmark or a standard price meant for comparison with price charged or paid by assessee in international transactions with its associated enterprises. Since this standard price constitutes basis for making addition in hands of assessee on account of its international transactions with associated enterprises, legislature, in order to iron out creases, inserted proviso to section 92C(2); role of this proviso is to make such standard price or ALP, flexible and not rigid. It has been provided that if price actually charged or paid by assessee falls within plus/minus 5% range of such ALP or standard price, then no addition should be made.

1. Deputy Commissioner of Income-tax, Circle 8(3)
vs.
Roche Diagnostics India (P.) Ltd.
IT Appeal No. 4127 (Mum.) of 2009
Arm’s length price (“ALP”) is nothing but a benchmark or a standard price
meant for comparison with price charged or paid by assessee in
international transactions with its associated enterprises. Since this
standard price constitutes basis for making addition in hands of assessee on
account of its international transactions with associated enterprises,
legislature, in order to iron out creases, inserted proviso to section 92C(2);
role of this proviso is to make such standard price or ALP, flexible and not
rigid. It has been provided that if price actually charged or paid by assessee
falls within plus/minus 5% range of such ALP or standard price, then no
addition should be made.

2. Roche Diagnostics India (P.) Ltd.( “the assessee or the Company”)
incorporated in the year 1998, was originally a joint venture between AVL
Medical Instrumentation AG, Switzerland (AVL Switzerland) and local
promoters. The Diagnostics arm of Roche Group (Roche Diagnostics) acquired
the medical instruments business of AVL Switzerland in the year 2000.
Consequently Roche India became a wholly owned subsidiary of Roche Group.
• During the AY 2004-05, the assessee filed its return declaring loss of Rs.
29,65,605 and during the course of assessment proceedings such return
was revised declaring loss of Rs. 29,65,610.
• The Assessing Officer (“AO”) referred the case to the Transfer Pricing
Officer (“TPO”) for computing the ALP in respect of international
transactions. The TPO observed that in relevant AY the assessee performed
functions of distributor and service provider to its AEs, in respect of
biomedical equipments, reagents and spares. The assessee's transactions
with its Associated Enterprises (AEs) were as under:-

3. TABLE-1
AE Description Amount[Rs. in
Crore]
Roche Diagnostics, Purchase of Trading 4.28
Switzerland Goods
Roche Diagnostic, Purchase of Trading 0.21
Germany
Roche Diagnostics Asia Goods Commission 2.59
Pacific Pte. Ltd. Singapore
Total 7.08
• Transaction net margin method (“TNMM”) has been adopted as Most
appropriate method (“MAM”) for computing the ALP separately in
respect of Distribution activities and Support services rendered to its
AEs. The TPO accepted the price declared by assessee as ALP in respect
of Support services.
• The entire controversy in the present appeal revolves around the
determination of ALP in respect of the Distribution segment.

4. For its distribution division, the assessee depicted operating margin at
1.63% as against the arithmetical mean of the operating margin of
comparable cases as chosen by the assessee at 1.73%. Exercising option
under proviso to section 92C(2), the assessee declared that its international
transactions with AEs were at arm's length price.
The TPO rejected 5 out of 7 comparables selected by assessee in its TP
study. Further he considered 5 new comparable cases at his own and
worked out mean PBIT at 8.86%.
Assessee raised objections to the TPO's inclusion of five new cases and after
considering such objections, the TPO finally short listed the comparable cases
chosen by him to two. He, thus, worked out PBIT of four comparable cases, that
is, two from the assessee's TP study and two as finally selected from the five
initially proposed by him- Mean PBIT 8.82%
Based on operating margin at 8.82%, TPO made adjustment to the income of
the assessee for Rs. 11,111,356. Being aggrieved assessee filed appeal to the
CIT(A).

5. Assessee and Department’s contention before CIT (A)
The two new comparables chosen by the TPO were functionally different to
the assessee’s distribution division.
The assessee submitted that the arithmetical mean of the assessee's remaining
two comparable cases comes at 6.1% and if the option given under proviso to
section 92C(2) i.e. plus minus 5% adjustment to the margin was exercised, the
assessee's declared margin at 1.63% would become comparable to the
uncontrolled transactions..
It was also argued that if Comparable uncontrolled price method (“CUP”) was
applied for determining ALP, then no adjustment would be required.
The submission of applicability of CUP method was raised for the first time
before the learned CIT(A) apart from adducing certain additional evidence in
respect of two cases chosen by TPO, the learned CIT(A) called for remand
report from the TPO.

6. The ld CIT(A) got convinced with the assessee's contention for the removal of
two comparable cases, chosen by the TPO for the reasons discussed in the
impugned order.
The learned CIT(A) got convinced with the assessee's submission and ordered
for the deletion of addition.
Being aggrieved department filed appeal to the ITAT.
Department’s contention
5% adjustment should have been considered of 6.1% being arithmetical mean
of OP rate of two comparable cases which were finally selected by him. Since
+-5% of 6.1% gives percentage of OP ranging between 6.4% to 5.8%,
therefore, assessee's declared margin at 1.63% was far below. It was thus
summed up that the ld. CIT(A) erred in applying +-5% on the cost instead of
the OP margin of 6.1%.

7. Whether the learned CIT(A) was justified in excluding the cases of Span
Diagnostics and Casil Health , selected by TPO as comparables
• There is no functional comparability between assessee's case and that of
comparable, Casil Health and Span Diagnostic as segmental data not
available for proper comparability. Therefore hold that the learned CIT(A)
was justified in excluding the case of Span Diagnostics and Casil Health
from the purview of list of comparable cases.
 Determination is about the granting of plus minus 5% adjustment.
In principle plus minus 5% adjustment is allowable for determining ALP.

8. The prescription of the proviso to section 92C(2) makes it clear that the plus
minus five percent is on the price and not on the profit embedded in such
price. That plus minus 5% margin has been stipulated on the value of the
transaction and not the income from such transaction. Various methods
prescribed u/s. 92C(1) are ways to compute arm's length price in respect of
international transactions. These are alternatives having a common objective
to see as to whether or not the international transaction entered into by the
assessee with its AE, is at arm's length price.
It is relevant to note that the assessee as per its transfer pricing study
computed operating profit margin at 1.63%. However, the TPO determined
operating loss at Rs. 14,86,852 discarding the assessee's operating profit. It is
on the basis of such figure of operating loss of Rs. 14.86 lakh that the addition
of Rs. 1.11 crore was made by the A.O but nowhere from the CIT (A) order it
can be ascertained that the learned CIT(A) held such figure of operating loss
to be incorrect or correct. He proceeded with profit margin of 1.63% as
declared by the assessee for coming to the conclusion that it was within the
range of 1.405% to 10.597%. When the assessee challenged the adjustment of
Rs. 1.11 crore before the ld, CIT(A), it was his duty to adjudicate not only upon
the inclusion or exclusion of the comparable cases and determination of
operating profit margin percentage but also the most important figure being
operating profit or operating loss in assessee's own case.

9. Ultimately, under TNMM it is the assessee's figure of profit or loss which is
compared with the uncontrolled transactions to determine whether or not
the price charged or paid by the assessee is on ALP. If we accept the TPO's
calculation giving loss of Rs. 14.86 lakh as correct, it would mean that such
amount as a percentage of sales value of Rs. 10.91 crore will give percentage
of operating loss at 1.36%. In that case, the assessee's cost will become Rs.
101.36, which will cease to fall between the permissible range of Rs. 89.2050
and Rs. 98.595 as worked out by the assessee. In that case the substantial part
of the addition (by applying 6.1% instead of 8.82%) so made by the AO would
be sustainable.
Ultimately, under TNMM it is the assessee's figure of profit or loss which is
compared with the uncontrolled transactions to determine whether or not
the price charged or paid by the assessee is on ALP. If we accept the TPO's
calculation giving loss of Rs. 14.86 lakh as correct, it would mean that such
amount as a percentage of sales value of Rs. 10.91 crore will give
percentage of operating loss at 1.36%. In that case, the assessee's cost will
become Rs. 101.36, which will cease to fall between the permissible range
of Rs. 89.2050 and Rs. 98.595 as worked out by the assessee. In that case
the substantial part of the addition (by applying 6.1% instead of 8.82%) so
made by the AO would be sustainable.

10. Since no decision has been rendered by the ld. CIT(A) on this aspect of the
matter, we are of the considered opinion that it will be just and fair if the
impugned order is set aside and the matter is restored to his file for giving
decision on it.
In the result, the appeal is allowed for statistical purposes.

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