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TMI Blog2015 (7) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 33,91,959/- does not partake the character of income as defined in section 2 of the Act. In view of the above, the adjustment made by the TPO / CIT(A) are not within the purview of the concept of 'income' as per IT Act and hence, it requires to be deleted. 4] The learned TPO / CIT(A) erred in making an adjustment of ₹ 31,74,314/- by adopting the Comparable Uncontrolled Price (CUP) Method for determining the Arm's Length Price (ALP) in respect of some of the international transactions pertaining to finished goods. 4.1] The learned TPO / CIT(A) erred in holding that the CUP method was the most appropriate method for determining the ALP in respect of some of the transactions of export of goods merely on the basis that the data pertaining to similar transactions with third parties were available. 4.2] The learned TPO / CIT(A) failed to appreciate that there were various differences on account of functional, transactional, geographical, volume, timing, business risks, etc. in respect of alleged comparable transactions which ought to have been considered and since suitable adjustments were not possible, there was no reason to adopt the CUP method for deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. 5.4] The Learned TPO / CIT(A) have erred in rejecting the transactional net margin method (TNMM) as the most appropriate method for benchmarking certain international transactions on the grounds that these transactions should have been separately benchmarked and thereby contradicting themselves, since no such separate benchmarking was conducted by the Ld. TPO himself, while benchmarking the balance international transactions for which the TNMM was accepted. 5.5] Without prejudice to the above grounds, the assessee submits that if at all, the CUP method was to be adopted for determining the ALP, suitable adjustments ought to have been made for differences on account of volume, timing, geographical, business risks, etc between the alleged comparable transactions. 6] The Learned TPO / CIT(A) erred in ignoring the fact that based on the detailed transfer pricing study conducted by the appellant, the TNMM had been demonstrated to be the most appropriate method to determine the ALP of the appellant's export and import transactions pertaining to the manufacturing segment. He also failed to appreciate that the TNMM had been accepted by the Ld. TPO as the most appropriate me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions pertaining to the manufacturing segment. In the alternate, vide ground of appeal No.7, the assessee has agitated that in respect of certain products exported by the assessee, it had charged higher price to its associated enterprises as compared to non-associated enterprises and similar was the position in respect of import of goods, against which the alternate plea was raised vide ground of appeal No.8. The learned Authorized Representative for the assessee stressed that the TPO had applied CUP method, which was not practical and the same should be ignored. 5. The learned Departmental Representative for the Revenue placing reliance on the orders of authorities below, fairly admitted that the issue raised in the present appeal was similar to the issue before the Tribunal in assessee s own case relating to assessment years 2006-07, 2007-08 and 2008-09. 6. We have heard the rival contentions and perused the record. The assessee is in appeal before us against the addition of ₹ 33,91,959/- 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. 7. Briefly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d imported and by taking average selling price per unit or average purchase price per unit in respect of associated enterprises and third parties were different. The TPO did not find favour with the benchmarking of all the transactions by the assessee together under one segment i.e. manufacturing segment except, the transaction relating to purchase of trading goods. It was further observed by the TPO that the assessee had followed TNMM method for the manufacturing segment and has benchmarked the entity level profitability vis- -vis external comparables, but the assessee had failed to benchmark its transaction separately. The TPO was of the view that in such circumstances, where the assessee exports same products to the third parties and also sells the same in domestic market as well, then comparability based on the sale prices of the same product would give more than fair and reasonable results. The TPO was of the view that CUP method should be applied in the instant case and applying the same, the TPO worked out an adjustment of ₹ 33,91,959/- to be made to the arm's length price computed by the assessee. The TPO thus, proposed an addition of ₹ 33,91,959/- as per it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d third parties. It was further pointed out by the learned Authorized Representative for the assessee that out of total import of goods of ₹ 6.97 crores, only goods totaling ₹ 50.14 lakhs imported from the associated enterprises were similar to the import made from third parties. Our attention was drawn to the comparative details furnished at page 15 onwards of the Paper Book, under which the assessee had sold product No.621N-12E-8-4P to its associated enterprises i.e. quantity of 600 @ EUR 2.09 i.e. selling price of ₹ 117.96 as against the same, the said product was sold to non-associated enterprises i.e. quantity of 7 @ AUD 3.73 equivalent to ₹ 120.81. Another sale was made to the associated enterprises of quantity of 47 @ EUR 2.89 at ₹ 170.77. The learned Authorized Representative for the assessee pointed out that the price charged from the associated enterprises and / or the third parties dependent on various issues i.e. timing of the transaction, volume of order and geographical locations. In such circumstances, the application of CUP method was not practical. Similar reference was made to the transactions of import of goods, details of which were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount for such differences. The learned Authorized Representative has pointed out that in respect of the same party and the same product, the assessee has charged different prices which itself indicates that the pricing is dependent upon various factors for which suitable adjustments could not be made. In this regard, the attention was drawn to page 165 of the Paper Book wherein which make it clear that the assessee company has charged different prices to Amphenol Ltd., Great Britain for the same product. 3.2 The assessee emphasized that there are various differences in transactions with AEs and the Third Parties pertaining to similar products. These differences are as under a. Volume Differences - This aspect was clarified by the assessee on page 150 of the Paper Book. The assessee, inter alia, had explained to the Assessing Officer that volumes involved for AEs are much higher as compared to Third Parties. The assessee has further stated that volume discount offered depends upon various factors like prevailing market conditions, level of competition in the market and future growth prospects. This fact has not been appreciated by the TPO. b. Geographical Differences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Paper Book, inter alia, assessee explained that the AEs are usually original equipment manufacturers while the Third Parties are usually distributors. Thus, there was a difference in value chain. Similarly, assessee explained that it is able to realize higher price on account of Amphenol brand for which no consideration was paid by the assessee. 3.3 Considering the above differences, CUP method was claimed to be not the most appropriate method to determine ALP. The suitable adjustments were not possible for the above differences and therefore, the TPO was not justified in adopting CUP for exports of _ 1.40 Crs. to the AEs specially when in respect of some of the products, the assessee has charged higher price to the AEs as compared to the prices charged to Third Parties. This fact was clarified by the assessee to the TPO by the details as mentioned on page 161 of the Paper Book. Considering the above fact, we find that in respect of some of the instances, the assessee has charged higher prices to the AEs as compared to Third Parties. This fact itself indicates that the pricing of the products is influenced by economic circumstances and underlying transactional differences. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian enterprise from its AE should be consistent with that charged from unrelated parties under similar circumstances. The importance of the similar circumstances could not be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similarity between the two sets of transactions could be judged by the quality, grade and quantity of the material. In addition, the factors like location of the parties, availability of raw material; demand and supply equation also play pivotal role in finding out as to whether the two are really comparable or not. Thus in the internal CUP method the local factors of AE in the other country and all the relevant factors which could have bearing on the price so charged from AE must be taken into consideration. The Tribunal was dealing with a case in which the assessee has its AE in USA and rate charged was 14.66 US $ per kg. of Dicamba. There was no other export by the assessee to USA. The uncontrolled transactions of export made by the assessee are to other countries such as U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) external CUP. In this case on hand, external CUP is considered. Under the CUP method the properties of a product and accompanying circumstances and conditions have to be evaluated for comparison. Even a minor change in the properties of the products, circumstances of trade (billing period, amount of credit therein, etc.) may have a significant effect on the price. Product comparability is absolutely key, in particular physical features such as size, weight, appearance along with volume, reliability/storage requirements, regulatory requirements, etc. Pricing of a product is a very subjective exercise and its true value, as received by the receiver, can differ from that received by others in the market place. Broader business functions and not just the product comparability have to be considered. It would also be necessary to come to a conclusion, with some scientific study or enquiry that the APIs imported by independent entities are same as the API imported by the assessee, as even a minor difference could materially affect the price. There should be a scientific basis to say that APIs are identical, with the same purity, potency, and characteristics. APIs are unique compound ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in the business activity of manufacturing connectors and other products and selling them subsequently to various parties. Thus, it is to be noted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. The learned CIT DR had also stated that the onus is on the assessee to demonstrate that the method selected by it, was most appropriate. There is no dispute regarding this proposition as well. However, once, the TPO has tried to select a different method, the onus is on the TPO to demonstrate that the other method is the most appropriate method. This principle has been laid down by Special Bench in the case of Aztec Software Ltd. [107 ITD 141 (Bang)(SB)]. The learned CIT DR further argued that the assessee had made inadequate compliance. In this regard, the stand of the assessee has been that it had submitted all the relevant details to demonstrate that TNMM was the most appropriate method and the detailed report in this regard is enclosed on pages 54 - 84 of the Paper Book. Considering the various differences between the transactions entered into with the AEs and the third parties, the CUP is not applicable to the facts of the present case. Same holds good for import and commission issues as far as determination of ALP is concerned. 4.2 The learned CIT DR has placed reliance on the decision in the case of Knorr- Bremse India Pvt. Ltd. v. ACIT [ITA No. 5097/Del/2011] and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in manufacture of chewing gum. The assessee exported some of its production to its AEs and also made domestic sales of the same product to unrelated parties. The TPO rejected TNMM method adopted by the assessee and applied Internal Cost Plus Method, thereby comparing the margin earned in the domestic segment with the margin earned in the exports segment and accordingly, made adjustments. In the said case, the issue was regarding applicability of TNMM or the Cost Plus Method. In the said case, the issue of applicability of CUP method was not involved and hence, the said decision has been rendered in different facts and circumstances. 4.5 The learned CIT DR has placed reliance on the decisions of DCIT v. Hellosoft India Pvt. Ltd. [32 taxmann.com 101 (Hyd)] Coca Cola India Inc. v Asst. CIT [309 ITR 194] and contended that it is open for the TPO to reject the method adopted by the assessee and apply a different method which is found to be more appropriate on facts of the case. This proposition is not in dispute. However, in 'the instant case, the assessee has demonstrated that the CUP method adopted by the learned TPO is not applicable in the case of the assessee and TNMM is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in pages 199-217 of Paper Book. Thus, he has held that in case of certain products, the average purchase price paid by the assessee to its AEs was more than the average purchase price paid to third parties and hence, he has made an adjustment of _ 2,55,003/- in respect of such imports by applying CUP method. According to the TPO, in respect of the products which are purchased by the assessee from its AEs as well as Third Parties, the CUP method is the most appropriate method for determining ALP. The TPO has held that the CUP method can be applied in this scenario. He has further stated that the assessee did not submit any data for the adjustments to be made on account of the differences in respect of purchases from AEs and Third Parties. Accordingly, he has made the addition in respect of those products wherein the average purchase price paid by the assessee to the AEs was more than the average purchase price paid to Third Parties. 6.1 In this regard, the stand of learned Authorized Representative has been that out of the total imports from the AEs of _ 14.59 Crs., the TPO has accepted that imports of _ 13.72 Crs. are at ALP. Only in respect of imports of _ 0.87 Crs. which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 7. 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. 16. Another aspect noted by the Tribunal was with regard to the adjustment made towards Commission paid to associated enterprises and it was held that there was no merit in making any adjustment on this account by applying CUP method and it was held as under:- 8. Regarding adjustment towards Commission paid to AE, the assessee has paid commission of _ 20,98,224/- to its AEs at the average rate of 9.33% of sales made to clients identified by AEs. This commission has been paid by the assessee to its AEs located in Europe for the various functions performed by them which are enumerated on page 245 of the Paper Book filed by the assessee. The rate of commission paid to different AEs varies from 3.50% to 10.50%. The assessee applied TNMM method for determining the ALP of the commission paid to its AEs and thus, it was sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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