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2016 (7) TMI 20 - AT - Income TaxTransfer pricing adjustment - selection of Comparable Uncontrolled Price (CUP) method as the most appropriate method for determining the arm s length price of export of Floxidin 10% (50ml), disregarding TNMM applied by the assessee for benchmarking the ALP - Held that - a perusal of the documents on record show that more than 80% (83.55%) of exports which have been benchmarked by the assessee under TNMM has been accepted by the authorities below. Where substantial part of the exports made to AEs have been accepted by the TPO and the reason has been given by the assessee for the price difference in respect of one product, we find no valid reason for adopting CUP method as the most appropriate method for benchmarking the transactions. The assessee has discharged its onus by giving the detailed reasons for difference in price. Thereafter, the onus is on the TPO to show that the method adopted by the assessee for benchmarking the transactions with AEs is not the most appropriate method. Thus, in view of the facts of the case and the decision of Co-ordinate Bench in the case of Amphenol Interconnect India Private Limited 2014 (5) TMI 1066 - ITAT PUNE , we accept ground in favour of assessee
Issues Involved:
1. Selection of the most appropriate method for determining the Arm's Length Price (ALP) for international transactions. 2. Application of Comparable Uncontrolled Price (CUP) method versus Transactional Net Margin Method (TNMM). 3. Consideration of geographical differences, volume factor, credit period, and credit risk in determining ALP. Issue-Wise Detailed Analysis: 1. Selection of the Most Appropriate Method for Determining ALP: The primary issue in the appeal was the selection of the most appropriate method for determining the ALP for the export of Floxidin 10% (50ml). The assessee applied the TNMM for benchmarking the ALP of its products, which the Transfer Pricing Officer (TPO) accepted for all products except Floxidin 10% (50ml). The TPO applied the CUP method for this product, leading to a transfer pricing adjustment of ?27,17,821/-. 2. Application of CUP Method versus TNMM: The assessee argued that the CUP method was not appropriate due to significant differences between transactions with Associated Enterprises (AEs) and third parties, including volume, credit period, credit risk, and geographical differences. The TPO, however, applied the CUP method, allowing minor adjustments for volume factor (10%), credit period (0.5%), and credit risk (5%). The Commissioner of Income Tax (Appeals) marginally increased these allowances but rejected the geographical difference adjustment. The Tribunal noted that more than 80% of the exports benchmarked under TNMM were accepted, finding no valid reason for adopting the CUP method for the remaining transactions. 3. Consideration of Geographical Differences, Volume Factor, Credit Period, and Credit Risk: The Tribunal examined the details of the transactions and found that the volume of sales to the AE in Thailand was almost ten times that to the third party in Vietnam. The credit risk to third parties was higher, and the geographical conditions in Thailand and Vietnam were different. The Tribunal emphasized that Thailand is a more competitive market with advantages in ease of doing business, labor costs, and infrastructure. The Tribunal concluded that the assessee had provided detailed reasons for the price differences, discharging its onus. The TPO failed to demonstrate that the CUP method was more appropriate than the TNMM. The Tribunal referred to the case of Amphenol Interconnect India Pvt. Ltd. Vs. DCIT, where similar issues were considered. The Tribunal in that case held that CUP was not appropriate due to differences in geographical locations, volume, market conditions, etc., and that the TPO must show that the chosen method by the assessee was not the most appropriate method. Conclusion: The Tribunal accepted the assessee's contention that the TNMM was the most appropriate method for determining the ALP for the export of Floxidin 10% (50ml). The Tribunal found that the TPO had wrongly applied the CUP method for a minor part of the transactions, despite accepting the TNMM for more than 80% of the transactions. Consequently, the Tribunal allowed the appeal of the assessee, setting aside the order of the Commissioner of Income Tax (Appeals) and deleting the transfer pricing adjustment made by the TPO. Order: The appeal of the assessee was partly allowed, with the Tribunal pronouncing the order on April 18, 2016.
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