2011 (2) TMI 268 - AT - Income Tax

Arm s length price - CUP or TNMM method - Dispute Resolution Panel (DRP) - The associated enterprise sells the wipers in the USA by importing them from the assessee in India and Chinese suppliers - Since both Indian and Chinese goods have been sold in the American market and products are comparable, the onus is on the revenue to show that the CUP method is not the appropriate method - all the documents and information mentioned in Rule 10D have not been maintained - Held that evidence relied upon by the assessee establishes the true comparable nature of the transactions - buyer in the USA market will be more concerned with quality and price rather than economic conditions prevailing in China and India Regarding comparability of the products - In fact, the claim of the assessee is that Chinese goods are of better quality - it would have been appropriate for the assessee to make the data of the associated enterprise available to the Assessing Officer, at least in respect of sale of Chinese and Indian wipers so as to establish the comparability - Nonetheless that by itself would not displace the CUP method, which is objective in terms of the purchase price of the associated enterprise - CUP method is the valid method for determining sale price - In result, the appeal is treated as partly allowed for statistical purposes

Issues Involved
1. Determination of the appropriate method for calculating the arm's length price (ALP) for international transactions.
2. Admission of additional evidence.
3. Comparability of products and market conditions.
4. Compliance with statutory requirements and documentation.
5. Assessment of the arm's length price using the chosen method.

Issue-wise Detailed Analysis

1. Determination of the Appropriate Method for Calculating ALP

The primary issue was whether the Comparable Uncontrolled Price (CUP) method or the Transactional Net Margin Method (TNMM) should be used to determine the arm's length price of the international transactions undertaken by the assessee. The Transfer Pricing Officer (TPO) rejected the CUP method used by the assessee, arguing that the comparability of controlled and uncontrolled transactions was not established with reasonable accuracy and that market conditions were not identical. The TPO adopted the TNMM and identified comparable cases, leading to an upward adjustment of Rs. 58,64,501 in the price declared by the assessee.

The tribunal noted that the CUP method is generally preferred for its directness in determining ALP, provided comparability is established. The tribunal concluded that the CUP method is the most suitable method in this case, as the market conditions in the USA, where the products were sold, were the same for both the assessee and the Chinese manufacturers.

2. Admission of Additional Evidence

The assessee sought to admit fresh evidence, including test reports of Chinese and Indian wiper blades and confirmation of consistency in quality from a Chinese supplier. The tribunal rejected this additional evidence, noting that the reports were prepared more than four years after the relevant financial year, making them unreliable for establishing contemporaneous comparability. The tribunal emphasized the need for contemporaneous documentation to substantiate the comparability of products.

3. Comparability of Products and Market Conditions

The tribunal examined whether the products sold by the assessee and the Chinese manufacturers were comparable. The assessee argued that the wipers did not involve high-end technology and were comparable in quality. The tribunal noted that the market conditions in the USA, where the products were sold, were the same, and the buyer's primary concerns would be quality and price rather than economic conditions in India or China.

However, the tribunal found that the assessee failed to provide sufficient data or reports to establish product comparability. The tribunal held that the assessee should have made the data of the associated enterprise available to the Assessing Officer, at least in respect of the sale prices of Chinese and Indian wipers, to establish comparability.

4. Compliance with Statutory Requirements and Documentation

The tribunal highlighted the statutory requirements under Section 92C and Rule 10D, which mandate the maintenance of specific information and documents to substantiate the chosen method for determining ALP. The tribunal found that the assessee had not maintained all the required documents and information, such as the financial results of the associated enterprise and a detailed FAR (Functions, Assets, and Risks) analysis.

5. Assessment of the Arm's Length Price Using the Chosen Method

The tribunal directed the assessee to provide the sale data of the associated enterprise, including the sale prices of Chinese and Indian wipers in the USA market, and the quantitative data of purchases by the associated enterprise. The Assessing Officer was instructed to compute the arm's length price using this data and the CUP method after hearing the assessee.

Conclusion

The tribunal concluded that:
1. The CUP method is the most appropriate method for determining the arm's length price in this case.
2. The assessee must provide the necessary data and documentation to establish comparability.
3. The Assessing Officer should recompute the arm's length price using the CUP method based on the provided data.

The appeal was treated as partly allowed for statistical purposes.

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