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2015 (7) TMI 1 - AT - Income TaxAddition made to the value of international transactions entered into by the assessee with its associated enterprises in respect of export of finished goods and import of goods - Held that - The transactions of exports of goods, import of goods are all part of the assessee s business. Further, the commission is paid to various parties to boost the sales of the assessee s products. Therefore, the transactions of exports, imports and payment of commission to agents are closely inter related and are part of single business activity of the assessee and the profit earned by the assessee is collective result of all these transactions and hence, it is impractical to analyse the profits of each individual transactions. Accordingly, the assessee has rightly aggregated the above transactions for the purposes of determining the ALP under TNMM. Even if the various transactions are evaluated independently, the net final result remains the same. The assessee has adopted TNMM for determining the ALP for the various transactions and the assessee had contended that its net operating margin is much higher than the comparable companies. This fact has not been disputed by the learned TPO since he himself has accepted that more than 95% of the exports and imports are at ALP as per the TNMM method. Accordingly, even if the various international transactions are evaluated separately, the final result remains the same. The assessee has adopted TNMM wherein the net operating margin of the assessee is compared with the net operating margin of the comparables. Once the net margin of the assessee is higher, it means that all the international transactions entered into by the assessee with its AEs are at ALP. With regard to extent of the pricing of the product depends upon various factors like the geographical location of the vendor, the volume of the order, timing of the order, urgency of requirement, competition in the market, etc. In this regard, reliance was placed on the detailed arguments as taken with regard to adjustment for export as discussed above in paras 3 & 4 of this order. According to him, the pricing depends upon so many factors and suitable adjustments cannot be made to account for such differences. As discussed above in respect of the same party and the same product, the assessee has paid different prices which itself indicates that the pricing is dependent upon various factors for which suitable adjustments could not be made. In this context, refer page 199 of the Paper Book wherein it is evident that the assessee company has paid different prices to Amphenol Aerospace Operations, USA for the same product. Accordingly, in view of the various differences enumerated above. The CUP method is not the most appropriate method in the case of the assessee since suitable adjustments are not possible to be made in respect of the above differences. So, the addition on this account is not justified. No adjustment is to be made for determining the arm s length price in respect of international transactions undertaken by the assessee for the year under consideration.
Issues Involved:
1. Recomputing the transfer price of international transactions. 2. Adhoc addition of Rs. 33,91,959/-. 3. Adjustment beyond the scope of total income. 4. Adoption of Comparable Uncontrolled Price (CUP) Method for determining Arm's Length Price (ALP) for export of finished goods. 5. Adoption of CUP Method for determining ALP for import of goods. 6. Appropriateness of Transactional Net Margin Method (TNMM) for determining ALP. 7. Price adjustments for higher charges to associated enterprises (AE). 8. Price adjustments for lesser charges to AE. 9. Benefit of 5% tolerance range under section 92C(2). Detailed Analysis: 1. Recomputing the Transfer Price of International Transactions: The Tribunal addressed the recomputation of the transfer price of international transactions related to exports and imports. The assessee argued that the Transfer Pricing Officer (TPO) and Commissioner of Income Tax (Appeals) [CIT(A)] erred in recomputing the transfer price despite compliance with Section 92C(3) of the Income Tax Act, 1961. The Tribunal noted that the issue raised was similar to the assessee's previous appeals for assessment years 2006-07, 2007-08, and 2008-09. 2. Adhoc Addition of Rs. 33,91,959/-: The TPO made an addition of Rs. 33,91,959/- based on the CUP method. The assessee contended that such an adhoc addition was not permissible under the Supreme Court's decision in K.P. Verghese [131 ITR 597]. The Tribunal found that the TPO's application of the CUP method was not practical due to differences in timing, volume, and geographical factors, and thus, the addition was not justified. 3. Adjustment Beyond the Scope of Total Income: The assessee argued that the adjustment of Rs. 33,91,959/- was beyond the scope of total income as defined in Section 5 of the Act and did not partake the character of income as defined in Section 2. The Tribunal upheld that the adjustment was not within the purview of the concept of 'income' as per the IT Act. 4. Adoption of CUP Method for Export of Finished Goods: The TPO adopted the CUP method for determining the ALP for certain international transactions of finished goods. The Tribunal found that the CUP method was not the most appropriate due to differences in functional, transactional, geographical, volume, timing, and business risks. The Tribunal favored the TNMM method, which the assessee had applied in its transfer pricing study. 5. Adoption of CUP Method for Import of Goods: Similarly, the TPO adopted the CUP method for certain import transactions. The Tribunal reiterated that the CUP method was not suitable due to various differences and upheld the TNMM method as more appropriate for determining the ALP. 6. Appropriateness of TNMM for Determining ALP: The assessee had applied the TNMM method, demonstrating it as the most appropriate for determining the ALP for export and import transactions. The Tribunal agreed, citing that the TPO had accepted TNMM for the majority of transactions and only disputed a small portion. The Tribunal concluded that TNMM was the most appropriate method given the circumstances. 7. Price Adjustments for Higher Charges to AE: The assessee argued that for certain products, it charged higher prices to AEs compared to non-AEs, and this should be adjusted. The Tribunal acknowledged this argument, noting that the pricing depended on various factors, and thus, the higher charges should be considered. 8. Price Adjustments for Lesser Charges to AE: Similarly, the assessee contended that for certain products, it paid lesser prices to AEs compared to non-AEs, and this should be adjusted. The Tribunal agreed, emphasizing that suitable adjustments should be made for differences in volume, timing, geographical, and business risks. 9. Benefit of 5% Tolerance Range Under Section 92C(2): The assessee sought the benefit of a 5% tolerance range as per the proviso to Section 92C(2). The Tribunal did not specifically address this issue in the detailed analysis but focused on the broader appropriateness of the TNMM method over the CUP method. Conclusion: The Tribunal concluded that the TPO had wrongly applied the CUP method for determining the ALP for certain transactions and upheld the TNMM method as more appropriate. Consequently, the Tribunal directed the deletion of the additions made on this account. The appeal was partly allowed, with specific grounds of appeal dismissed as not pressed. The order was pronounced on April 27, 2015.
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