2014 (5) TMI 1066 - AT - Income Tax

Transfer pricing adjustment - CUP v/s TNMM method - Held that - TPO has wrongly applied the CUP method for determining the ALP in respect of some mentioned transactions pertaining to export of finished goods. More so, when the TPO accepts that more than 90% of the exports to the AEs are at ALP, there is no reason to apply CUP method for part of the exports. Accordingly, the additions made on this account are not justified and they are directed to be deleted. Adjustment towards imports - Held that - On behalf of assessee that in respect of most of the products, the assessee has paid lower price to its AEs as compared to the prices paid to Third Parties. This fact has been clarified by the assessee to the TPO filed by the assessee. In this background, it was submitted that considering the fact that in respect of most of the instances, the assessee has paid lower prices to the AEs as compared to Third Parties, which indicates that the pricing of the products is influenced by economic circumstances and underlying transactional differences. In some of the products where the price paid by the assessee to its AEs is more than the price paid to Third Parties, such higher price paid amounts to ₹ 2,55,063/-. However, in most cases, where the prices paid by the assessee to its AEs is lower than the price paid to Third Parties, the lower price paid is to the tune of ₹ 18,08,201/- as detailed on page 217 of the Paper Book. This aspect has not been appreciated by the TPO.In view of above discussion, the TPO was not justified in adopting CUP method for determining ALP in respect of some of the international transactions pertaining to import of goods. Adjustment towards Commission paid to AE - According to the TPO, CUP method is the most appropriate method for computing the ALP of the commission payment made by the assessee to its AEs and compared the rate of commission paid by the assessee to unrelated domestic agents against the rate of commission paid to the AEs located in Europe - Held that - We find that considering the vast differences in the functions performed, the comparison of the rate of commission paid by the assessee to the AEs and third parties is not justified. It is further to be appreciated that the assessee has given the details of the parties to whom commission is paid in the domestic market. The rate of commission varies from 1 % to 7% which itself indicates that depending upon the services rendered, the commission is paid. Accordingly, the TPO has wrongly applied the CUP method for determining the ALP in respect of transactions of payment of commission by the assessee company to its AEs. Similar issues i.e. determination of ALP for export, import & commission arose in other A.Ys. 2007-08 and 2008-09. Facts being similar, so following the same reasoning, we hold that the TPO was not justified in applying CUP method for determining ALP on account of some export, import transactions and commission payments as discussed above. - Decided in favour of assessee.

Issues Involved:
1. Recomputing the transfer price of international transactions.
2. Adoption of Comparable Uncontrolled Price (CUP) Method vs. Transactional Net Margin Method (TNMM) for determining Arm's Length Price (ALP).
3. Adjustment for differences in transactions.
4. Aggregation of transactions for ALP determination.
5. Onus of demonstrating the most appropriate method.
6. Justification for commission payments to Associated Enterprises (AEs).

Detailed Analysis:

1. Recomputing the Transfer Price of International Transactions:
The Tribunal addressed the issue of recomputing the transfer price for international transactions related to exports, imports, and commission payments. The assessee argued that the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) erred in their recomputation, as none of the conditions prescribed in Section 92C(3) of the Income Tax Act, 1961, had been violated. The Tribunal noted that the TPO made adjustments totaling Rs. 62,89,277 based on the order u/s 92CA(3).

2. Adoption of CUP Method vs. TNMM for Determining ALP:
The Tribunal examined the TPO's decision to adopt the CUP method for certain transactions, while the assessee had applied TNMM. The TPO's adjustments included Rs. 43,97,063 for exports, Rs. 2,55,003 for imports, and Rs. 16,37,200 for commission payments. The Tribunal found that the TPO had accepted TNMM for the majority of transactions but applied CUP for specific ones due to product similarity.

3. Adjustment for Differences in Transactions:
The Tribunal highlighted various differences that should have been considered when applying the CUP method, such as:
- Volume Differences: The assessee clarified that volumes for AEs were much higher than for third parties, affecting pricing.
- Geographical Differences: Prices charged depended on the country and market conditions.
- Timing Differences: Timing of orders influenced raw material costs and final prices.
- Risk Differences: Lower market and product-related risks for transactions with AEs.
- Functional Differences: Different marketing functions undertaken for AEs and third parties.
- Other Differences: Differences in the value chain and brand influence.

The Tribunal concluded that suitable adjustments were not possible for these differences, making the CUP method inappropriate.

4. Aggregation of Transactions for ALP Determination:
The Tribunal addressed the argument that the assessee was not justified in aggregating transactions of exports, imports, and commission payments for ALP determination under TNMM. The Tribunal found that these transactions were closely interrelated and part of a single business activity. The net operating margin of the assessee was higher than that of comparable companies, justifying the aggregation approach.

5. Onus of Demonstrating the Most Appropriate Method:
The Tribunal emphasized that while the assessee must demonstrate that the method selected was most appropriate, the TPO must also justify the selection of an alternative method. The Tribunal referred to the Special Bench decision in Aztec Software Ltd., which states that the onus is on the TPO to demonstrate that another method is more appropriate.

6. Justification for Commission Payments to AEs:
The Tribunal examined the TPO's adjustment for commission payments, where the TPO applied the CUP method, comparing the commission rate paid to AEs with that paid to unrelated domestic agents. The Tribunal found that the functions performed by AEs were much wider than those performed by third parties, justifying the higher commission rates. The CUP method was deemed inappropriate due to significant differences in functions and services provided.

Conclusion:
The Tribunal held that the TPO was not justified in applying the CUP method for determining the ALP for certain transactions related to exports, imports, and commission payments. The Tribunal directed the deletion of the adjustments made by the TPO, allowing the appeals filed by the assessee. The decision emphasized the importance of considering various transactional differences and the appropriateness of the TNMM method for the assessee's transactions.

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