New Delhi: Pharma major Ranbaxy Laboratories will move the Delhi High Court against the Income Tax Appellate Tribunal order relating to an under-assessment of income to the tune of Rs224.5 crore in a transfer pricing case.
The ITAT while rejecting the contention of Ranbaxy maintained that the company had under-assessed its income by the said amount during 2004-05 by not pricing appropriately goods and services sold to sister concerns abroad.
“Ranbaxy is appealing this judgement in the Delhi High Court. No additional tax demand for the assessment year 2004-05 has been raised and therefore there is no impact on the current or future earnings of Ranbaxy,” the company spokesperson said.
The bone of contention between Ranbaxy and the income tax department was the method adopted by the company for valuing the goods and services sold to 17 overseas associated enterprises (AEs), including joint ventures and wholly-owned subsidiaries in more than dozen countries including the US, the UK, Germany and China.
The transfer pricing regulations require that goods and services sold to associated enterprises should be valued at Arms’ Length Price (ALP), a price which the company would charge from an unrelated entity.
Also, the companies are expected to adopt the most appropriate method prescribed by the Income Tax Act and the rules while assigning values to the goods sold to overseas AEs.
Ranbaxy, while determining the ALP for the purpose of taxes, relied on prices charged by foreign entities, which according to the income tax officials resulted in under-assessment of income by Rs224.50 crore for 2004-05.
The ITAT ruled that A better way to determine the ALP was to rely on prices charged for similar transactions by domestic pharmaceuticals companies.
“It could have been appreciated if a particular entity in a particular country was sought to be computed with some similar entity in that very country as geographical situation in several ways influence transfer pricing,” the ITAT ruled.
In this case, the firm has taken overseas entities as ‘tested parties´ and calculated its earnings after determining ALP accordingly, which the tax department does not think to be in consonance with the Income Tax rules.