Watson Pharma Pvt. Ltd., engaged in contract manufacturing R&D services for AEs, faced TP adjustment of ₹7.80 crore. TPO relied solely on APA margins agreed for earlier years despite assessee’s independent benchmarking.
Assessee’s Contentions | Revenue’s Contentions | Tribunal’s Judgment |
The assessee contended that its Contract Manufacturing and Contract R&D transactions had been appropriately benchmarked using the TNMM, and the Transfer Pricing study demonstrated that the transactions were at arm's length. | The Revenue contended that the APA margins represented the most reliable benchmark for determining the arm's length remuneration, particularly since there was no material change in the assessee's Functions, Assets and Risks (FAR) profile. | The Tribunal held that while an APA has persuasive value for non-covered years where the FAR profile remains unchanged, it cannot automatically replace a proper transfer pricing benchmarking analysis. |
It further argued that the APA executed for earlier assessment years was not applicable to AY 2022–23, and therefore the TPO could not substitute the contemporaneous benchmarking analysis by mechanically applying the APA margins without conducting an independent comparability analysis. | Accordingly, the TPO adopted the APA margins for the Contract Manufacturing and Contract R&D segments and proposed a transfer pricing adjustment, considering the assessee's margins to be below the arm's length standard. | Since, the Revenue neither rejected the assessee's comparables nor conducted an independent search for more appropriate comparables, the Tribunal deleted the TP adjustment and accepted the assessee's benchmarking. |
Ruling Summary -
Mumbai ITAT held APA can be relied upon as a persuasive benchmark for non- covered years where FAR profile remains unchanged. In absence of independent analysis by the TPO, APA alone cannot justify TP adjustment; adjustment deleted.
