9911796707
TMI Blog2010 (3) TMI 872X X X X Extracts X X X X X X X X Extracts X X X X ..... owned subsidiary of Intervet Holdings B.V. Netherlands. Company belongs to Intervet Group Headquartered in Netherlands. The entities under the Intervet Group are part of the Akzo Nobal Group a multinational group with headquarters in Netherlands. During the year, it had two production centres, located at Hyderabad and Pune. Hyderabad Unit produces poultry vaccine and pig vaccine and the Pune unit manufacture Pharmaceuticals and other veterinary vaccines. 3. The group entities are located in Singapore, Germany, France, Bangkok, Turkey, Austria, Indonesia and Netherlands. The raw material is mainly imported from Intervet International B.V. Netherlands and Intervet Germany. It has exported the raw material/traded goods to group entities in France, Austria, Germany and Bangkok. It imported Traded/finished goods from group entities in Germany and Netherlands. The international transactions are : (a)Import of Raw Material from Associated Enterprises (AEs). (b)Import of Finished Goods from AEs. (c)Export of Raw Materials to AEs. (d)Export of Finished Goods to AEs. (e)Expenditure incurred on behalf of Fellow Subsidiaries and Reimbursed by them. (f)Expenditure incurred on behalf of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specifically mentioned here that the product in question is a long established product offered by almost all the veterinary pharmaceutical companies in India. There is no perceived quality difference in the product offered by various companies. As such, the price is the driving factor for the sales which is inversely related the volume sold. The same is also evident from the trends in the domestic market. As per the Monthly Trade Scheme offered in the domestic market in respect of this product, the discount offered is in the range of 25-40 per cent varying directly with the volume sold. Considering the above, an adjustment factor up to 40 per cent can easily be considered with respect to the Arm's Length Price for the volumes sold to the Associate Enterprise. (b)Credit Period : The following credit periods were offered :- Associate Enterprise : 30 days from the AWB date Third Party - 45 days from the AWB It can be agreed that, additional credit period entails blockage of working capital and interest thereon. Considering a conservative interest rate of 18 per cent per annum (2001-02 rates), an adjustment factor of 0.75 per cent can be considered for a period of lower credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ml) to two companies in Vietnam and one company in Ukraine. (ii)In respect of Modern Veterinary Trading Co. Ltd., Vietnam the company has sold Flox 10 per cent (50ml), Floxidin 10 per cent (15ml), Taktic 12.5 per cent (250ml) and Tono (30ml). The total finished goods sales to this company are of Rs. 1,379,233 Considering these sales, Modern Veterinary Trading Co. Ltd. Vietnam, cannot be considered a small client. The sales to Intervet (Thailand) Limited is Rs. 6,669,847 in comparison to Rs. 1,379,233 in case of Modern Veterinary, Vietnam. The sales to related parties are nearly 4.8 times that of sales to unrelated parties. The company also submitted a discounting scheme which was prevalent during the month of March 2002 for the domestic sales. In case of Floxidin 50 ml, on purchase of 32 Ampoules 8 Ampoules were free (25 per cent) and on purchase of 80 Ampoules 32 Ampoules were free (40 per cent). ARs contended that as the volume increases, the discounts also increase. The sales to AE is nearly 10 times that of unrelated parties, therefore, certainly the volume factor affects the sale price. However, the effect of volume on the price cannot be quantified, because discount affects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is being made. (iv)The conditions prevailing in the markets in which the respective parties to the transactions operate can be considered as similar because the related entity is located in Thailand, and the unrelated party is located in Vietnam to whom exports are made. The parties are located in the South East Asian Countries, the geographical areas of the countries appear to be comparable the incidence of disease for which are medicine (Injectible Ampoule) are used, will most likely be the same. In both the countries, the retail prices will also be similar. Considering the above, the international transactions is comparable to the transactions entered into with unrelated parties. The per Ampoule Unit price charged to Modern Veterinary Trading Co. Ltd. of USD 3.66, which can be taken as the Arm's Length Rate, subject to adjustments, as provided in rule 10B(1)(a)(ii ). Considering this, the Arm's Length Rate, for per unit of the medicine is computed as below, as per rule 10B (1)(a) of the Income-tax Rules, 1962 : (I)Price charged for property Transferred in a comparable Uncontrolled transaction - USD 3.66 per unit (II) (a)The adjustment to acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth price is determined on the basis of analysis of price paid or received and comparison of price charged for related party transaction with the price charged for unrelated transaction in an identical or similar situation. Therefore, no doubt the CUP Method gives a better result. If similar product or service is identified with minor differences provided such minor differences are adjusted to arrive at the ALP. 46. Hence, the identification of comparables and adjustments to comparables are of utmost importance where the CUP Method is considered the appropriate method in the determination of the ALP. 47. Thus, if in the case of a company there exists an internal uncontrolled comparable transaction which is similar to the controlled product or service being consumed then, under the transfer pricing regulation such international uncontrolled comparable is to be taken as comparable and adjustment to the result obtained in such uncontrolled transaction if required is to be made in the determination of ALP. There is no case for ignoring the method altogether. 48. If the claim of the appellant is that the TNMM and not the CUP method should be the appropriate method is examined in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as sought for an adjustment of 50 per cent. There is no doubt that the claim of the appellant is rather excessive, while that made by the Transfer Pricing Officer is rather on a lower side. Hence, considering that in the local trading the appellant in similar circumstances has been providing discounts while there is a case for higher adjustment than what has been made by the Transfer Pricing Officer, it cannot be as high as sought for by the appellant. It would be reasonable if the adjustment for the purpose is restricted to 20 per cent on this account as against 10 per cent made by the Transfer Pricing Officer. 52. Accordingly in the determination of ALP, adopting the CUP Method for the transaction the appellant had with its associate concern, the adjustment on account of volume difference in the market conditions and economic development level is to be made at 20 per cent as against 10 per cent made by the Transfer Pricing Officer. Similarly, the adjustment on account of credit period is to be made at 0.6 per cent as against 0.5 per cent adopted by the Transfer Pricing Officer. No other variation in the adjustment made by the Transfer Pricing Officer is called for. 53. The Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it cannot be overcome by way of adjustment in the price charged in the uncontrolled transaction and the ALP cannot be determined in respect of the transaction with an Associated Enterprise. While we concede that when there is a sale of identical product to an unrelated party, it will form the basis of determining the ALP in respect of sales to an Associated enterprise, but one of the essential prerequisite is that reasonably accurate adjustments are to be made to eliminate material factors affecting price, cost or the profit arising from such transaction. But at least all material factors should be considered in arriving at the adjustments. We find that the TPO and the CIT(A) have assumed similarity of markets and economic conditions and have made adjustments only for the volume discount, credit offered and a small adjustment of credit risk. They have completely ignored the disparate economic and market conditions of Thailand and Vietnam and have made no adjustment for the same. Mere geographical contiguity of two countries need not mean similarity in economic or market conditions. How can the sale prices to wholesale agents in two different countries be comparable, when the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me expenses under respective heads were not specified as these comprised of petty amounts and were miscellaneous in nature. However, the quantum of other miscellaneous expenses as compared to total expenses is not material and was only 4.96 per cent of the total miscellaneous expenses. The details of these miscellaneous expenses were not provided as it is difficult to trace them and classify them as the individual amounts are very small. The AR further submitted that the Assessing Officer has on an ad hoc basis disallowed 10 per cent of the amount appearing under the head 'Other expenses' without any justification thereof. It was submitted that these expenses may be allowed in full, particularly having regard to the volume of business. 15. The ld. CIT(A) held as follows : "The submission made by the appellant's representative has been considered. Considering the nature of business, the total turnover the appellant-company had on one hand, and on the other hand, the total expenditure it had incurred and claimed as deduction and the amount appearing under the head 'Miscellaneous expenses', a part of which has been subjected to disallowance by the Assessing Officer, the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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