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TMI Blog2014 (5) TMI 1066X X X X Extracts X X X X X X X X Extracts X X X X ..... at the pricing of the products is influenced by economic circumstances and underlying transactional differences. In some of the products where the price paid by the assessee to its AEs is more than the price paid to Third Parties, such higher price paid amounts to 2,55,063/-. However, in most cases, where the prices paid by the assessee to its AEs is lower than the 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.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. Adjustment towards Commission paid to AE - According to the TPO, CUP method is the most appropriate method for computing the ALP of the commission payment made by the assessee to its AEs and compared the rate of commission paid by the assessee to unrelated domestic agents against the rate of commission paid to the AEs located in Europe - Held that:- We find that considering the vast differences in the functions performed, the comparison of the rate of commission paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of income as defined in section 2 of the Act. In view of the above, the adjustment made by the TPO / DRP 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 / DRP erred in making an adjustment of ₹ 43,97,063/- 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 export of finished goods. 4.1] The learned TPO / DRP 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 / DRP 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 determining the ALP. 4.3] The learned TPO / DRP failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 / DRP 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 method for AY 2004-05, in which year the surrounding facts and circumstances were similar. 7] Without prejudice to the above grounds, the assessee submits that the learned TPO / DRP failed to appreciate that in respect of certain products exported by the assessee, it had charged higher price to the AE as compared to non AE and hence, this amount should have been adjusted and only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o have granted the benefit of 5% to the assessee company as per the proviso to section 92C(2). 11] The appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 2. Amphenol Interconnect India Pvt. Ltd. (hereinafter called as Amphenol) is mainly engaged in the business of manufacturing of connectors, accessories, cable assemblies and system integration for application in various industries such as military, aerospace, telecom, etc. The products are specialized in nature as they are being used in defence, aerospace, etc. The products are manufactured only against the specific orders i.e. they are customized products. The assessee company is part of Amphenol Group which is one of the largest manufacturers of interconnect products in the world. In the year under consideration, the assessee has entered into international transactions with its Associated Enterprises (hereinafter called as AE). The details of the international transactions entered into by the assessee as detailed in the Transfer Pricing Officer's (hereinafter called as TPO) order are as under: Sr. No. Details of transaction Amount (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sold to AEs and average sales price of products sold to Third parties as detailed in pages 165 - 198 of Paper Book. Thus, he has held that in case of certain products, the average selling price charged by the assessee to its AEs was less than the average selling price charged to third parties and hence, he has made an adjustment of ₹ 43,97,063/- in respect of such exports by applying CUP method. 3.1 According to the TPO, in respect of the products which were sold by the assessee to 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 could 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 sales to AEs and Third Parties. Accordingly, he has made the addition in respect of those products wherein the average selling price charged by the assessee to the AEs was lesser than the average selling price charged to Third Parties. In this regard, the stand of the assessee has been that the addition is question is not justified. We find that out of the total exports to AE of ₹ 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the size and location of the market is to be taken into consideration. This aspect has not been analyzed by the TPO judiciously. c. Timing Differences - This aspect was clarified by the assessee on pages 153 - 154 of the Paper Book, inter alia, submitted that timing differences in the sales made to the AEs and Third Parties have a bearing since the prices are dependent upon various factors. As clarified, the assessee manufactures after receiving the order from the party and the relevant raw material cost at that time is also a crucial factor to determine the prices of the end product. Thus, considering timing differences of transaction, application of CUP method is not justified. d. Risk Difference - This aspect emphasized by the assessee from the details at page 154 of the Paper Book, inter alia, emphasized that the risk mainly market risk and product related risk assumed by the company in case of transactions with AEs are significantly lower as compared to the transactions with Third Parties. Therefore, considering the risk differences, the prices charged to Third Parties are higher than the prices charged to AEs in certain cases. Hence, CUP method could not be applied in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther differences as discussed above. 3.4 We find that the Mumbai Bench in the case of Gharda Chemicals Ltd. [130 TTJ 556 (Mum)] has held that the assessee had sold a product named 'Dicamba' to Ghardha USA Inc. AE of the assessee company. Total amount received by the assessee as 'ALP' towards export of Dicamba was declared at ₹ 20.71 crores. The assessee had determined the ALP by comparable uncontrolled price method. The TPO noted that the sale of Dicamba to unrelated parties was also made by the assessee in various other countries at the rates ranging between 19.47 US $ to 25.00 US $ per kg. As against that the Dicamba sold by the assessee to its AE was at the rate of 14.66 US $. It was found relevant to mention that the total quantity exported by the assessee to different countries was 418803 kgs. inclusive of 272100 kgs. sold to its AE. The TPO determined the average rate of sale to all independent enterprises at 20.67 US $ per kg., which was found to be substantially higher than 14.66 US $ charged by the assessee from its AE. The ITAT held that the internal CUP method envisages comparing the uncontrolled transactions of the assessee itself with other unrel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of a particular commodity or its raw material may have lower sale price in comparison with the country which is short of such natural resources. Similarly the price may vary from one country to another depending upon climatic conditions and the demand and supply factors. Thus the price charged by an Indian party from UK or Australia may be at much variance with that charged from USA. In such a scenario no valid comparison could be made between the price charged by the assessee from other countries with that from USA, more particularly when the Tribunal was of the view that quantity exported to USA on wholesale basis with that to other countries in small lots on retail basis. In this situation, the Tribunal held that the internal CUP method was not suitable in the present circumstances. 3.5 We find in Dufon Laboratories [(39 SOT 59 (Mum)], the TPO had made the addition based on the fact that the assessee had charged lesser price to its AE as compared to the price charged to third party for the same product. The ITAT held that if the differences are taken into consideration like geographical, volume, profile of the customer, etc. etc., no addition was warranted. 3.6 In UCB India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to its AEs. The assessee had adopted CUP method to determine ALP. The TPO rejected CUP method and applied TNMM. The ITAT held that the assessee had wrongly adopted CUP method and it was held that the assessee had made comparison of the average price of all the bathrobes sold to AEs vis-a-vis third parties. The ITAT held that such comparison is not correct and secondly, there were differences in geographical locations and size of the markets which affected the price. Accordingly, CUP was rejected as the most appropriate method. 3.8 In Intervet India Pvt. Ltd. [39 SOT 59 (Mum)], ITAT has held that for applicability of CUP, various differences including economic and market conditions, geographical locations, volume discount, credit risks, etc. etc. are to be taken into account and simply, product similarity is not the only criteria for applying CUP method. 3.9 We find in the case of Arvind Mills Ltd. [11 Taxmann.com 67 (Ahd)], ITAT has held that for applying the CUP method, there should not only be product similarity but impact of broader business functions on prices should be considered. The ITAT held that even minor differences in contractual terms, economic conditions, geograph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee with its AEs are at ALP. 4.1 The learned CIT DR has further submitted that CUP is a more direct method for determining the ALP of international transactions entered into by a company and hence, it should be preferred over TNMM method. In this respect, she has placed reliance on the decision in the case of ACIT v. MSS India [32 SOT 132(Pune)]. Accordingly, it has been contended that the learned TPO has rightly applied CUP method for determining the ALP of certain transactions relating to exports and imports of goods and commission where similar transactions were available for comparison. In this regard, the stand of the assessee has been that the above contention is not correct. The learned TPO has relied on the decision of MSS India (supra) to state that CUP method is to be preferred over TNMM method. According to us, as general proposition, there is no dispute to the fact that the CUP method is a more direct method and hence, it should be preferred over TNMM method when comparable transactions are available. However, it is to be appreciated that in the instant case, where there are various differences like geographical differences, volume differences, different mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod. In the said case, Bench held that the assessee was not able to establish that the transactions were closely linked with each other and hence, it was held that the aggregation of such transactions was not justified. However, in the instant case, the assessee has demonstrated that the transactions of exports, imports and payment of commission to agents are closely interrelated and part of single business activity of the assessee and therefore, the ratio of the above decision is not applicable to the case of the assessee. 4.3 The learned Departmental Representative has also placed reliance on the decision of Delphi TVS v. ACIT [24 taxmann.com 179(Chennai)] in support of his contention that CUP should be applied on the facts of the assessee's case and not TNMM. We find that in the Delphi TVS (supra), ITAT has rejected TNMM method mainly because the comparable entities selected by the assessee company had substantial related party transactions. Hence, the comparison under TNMM was not possible. Secondly, in the said decision, Bench has held that when a transaction to transaction comparison is to be preferred only if proper adjustment can be carried out to account for the diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as those of the uncontrolled transaction. Thus, the comparability depends upon the quality of product, volume of sale, market level, geographical conditions, date and other realistic factors governing the sale price. However, in the instant case, the assessee has demonstrated that the transactions with related parties and unrelated parties are not comparable on account of various differences as discussed above. Therefore, the ratio in Atul Ltd. (supra) is not against the assessee. This legal proposition will be applicable only to the adjustment towards import and commission. 5. In view of the above, we hold that the TPO has wrongly applied the CUP method for determining the ALP in respect of some mentioned transactions pertaining to export of finished goods. More so, when the TPO accepts that more than 90% of the exports to the AEs are at ALP, there is no reason to apply CUP method for part of the exports. Accordingly, the additions made on this account are not justified and they are directed to be deleted. 6. Regarding adjustment towards imports, the assessee has made total imports of raw material and finished goods of ₹ 14,59,18,186/- from its AEs as referred at page 2 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etailed 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. 6.2 It was also pointed out on behalf of assessee that in respect of most of the products, the assessee has paid lower price to its AEs as compared to the prices paid to Third Parties. This fact has been clarified by the assessee to the TPO as detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unrelated domestic agents and such difference in the rate of commission works out to 7.28% of respective sales. Thus, the TPO has made an adjustment of ₹ 16,37,200/- in respect of commission paid by the assessee to its AEs by applying CUP method. 8.2 In this regard, the assessee has submitted that the addition made by the TPO is not justified. It is submitted that the assessee had clarified that the functions performed by the AEs were much wider than the functions performed by the Non AEs. On page 245 of the Paper Book, the assessee has given the comparison of the functions performed by the AEs and the third parties. 9. We find that considering the vast differences in the functions performed, the comparison of the rate of commission paid by the assessee to the AEs and third parties is not justified. It is further to be appreciated that on page 142, the assessee has given the details of the parties to whom commission is paid in the domestic market. The rate of commission varies from 1 % to 7% which itself indicates that depending upon the services rendered, the commission is paid. Accordingly, the TPO has wrongly applied the CUP method for determining the ALP in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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