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TMI Blog2018 (11) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to export of goods 1.1 On the facts and circumstances of the case and law, the Dispute Resolution Panel-I, Mumbai (Hon'ble DRP") erred in upholding the action of the Income Tax Officer-9(3)(2), Mumbai ('Ld.AO')/Joint Commissioner of Income-tax (TP)-2(1), Mumbai ('Ld. TPO') in determining the arm's length price of the international transaction of export of finished goods ('impugned international transaction') and computing an adjustment of INR 1,41,13,97,695. 1.2 While doing so, the Hon'ble DRP/ Ld. AO/Ld. TPO erred in: 1.2.1Comparing the export prices charged on the products sold to group companies with the products sold to the domestic third parties i.e. using Comparable Uncontrolled Price ('CUP') Method; 1.2.2. Ignoring the differences on account of geographical market, volume of transactions, functional profile etc. while comparing the impugned international transaction with the internal comparable uncontrolled transaction; 1.2.3 Rejecting the comparability study conducted by the Appellant and disregarding the application of Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ('MAM'); and 1.2.4 Selecting two methods i.e., CUP and TNMM as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The TPO did not take cognizance of the submission made by the assessee and as alleged in the original show cause notice that the assessee is allegedly earning more profit from the AE Transactions, made an adjustment of INR 141,13,97,695/- by comparing the average sales price of product sold to AEs with the average price of product sold to Non-AE's. He however accepted the arm's-length price of the other transactions covered in the TNMM. Further, the assessee also entered into "Information Systems Service Agreement" for implementation of S3-ERP being SAP software and availing software services pertaining to IS& S3 from its AE i.e. Firmench SA. The TPO disregarded the details filed by the assessee which were regarding the allocation methodology, KPMG certificate of allocation, services received, nature of services etc. and made an adjustment by contending that the payment of software charges by the assessee is not justified. The TPO determined the ALP on an ad-hoc basis for the said transaction by applying the CUP method. Based on above, TPO passed an order dated October 28, 2016 making the following transfer pricing adjustments: S. No. Adjustment on account of Amount (In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fereed to rule 10B of the Income-tax Rules, 1962 ('the Rules') provides that while applying the CUP method one needs to adjust or account for the differences, if any, between the international transaction and the comparable uncontrolled transaction, which could materially affect the price in the open market. Hence he finally argued that when it is not possible to quantify or make appropriate adjustment, then CUP method cannot be applied to benchmark the international transactions. In fact that is why the TPO has not even attempted to make such adjustment. 7. On the other hand LD CIT-DR Sh Jayant Kumar supported the orders of TPO and DRP. 8. First of all it is pertinent to consider that the price at which finished products are exported to AEs are not comparable with the domestic prices for the following reasons: * differences in the level of market of the product by either parties (i.e. traders / manufacturers); and * difference in functional and risk profiles; * differences in volume of both the transactions; * differences in the geographic markets; The reasons of difference in prices is tabulated below: Reasons for difference Export to AE Local Sales to third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantitative differences in respect of Sales made to the AE and the Non-AE. Sr.No in TPO Order Material Description Quantity in KG sold to Non AE's Quantity in KG sold to AE's Addition Value (INR) AE sales times of Non AE sales 59 Neobutenone Alpha 25 32,343 490,680,563 1,294 56 Damascenone Total 25 19,734 490,873,437 789 45 Great Heart 28,080 303,840 95,340,394 11 55 Aldehyde Supra 245 38,528 96,920,377 157 57 Damascone Alpha 2,175 33,610 84,185,258 15 60 Norlimbanol 250 10,825 73,314,292 43 1,331,314,321 Thus, we find from the facts of the case that the quantities sold to Non-AEs is significantly lower as compared with sales made to AEs. In fact the difference in quantities is to the extent of 1,294 times to 11 times. It is noteworthy that the CUP analysis of common products sold to AE and Non-AE, one of the example taken from the facts of the case is that w.r.t. product 'Damascenone Total', the assessee had sold 25 kg to a Non-AE at the rate of INR 38,000 per kg and sold 1,260 kg and 16,299 kg at the rate of INR 9,800 and INR 9,664 respectively to its AE namely, Firmenich Aromatics (China ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, it is essential to adjust for the above mentioned differences in order to create level paying filed ie.. in order to ensure like by like comparison. Since, the TPO was unable to quantify the same, the CUP should not be used as the most appropriate method. 12. We find that this issue is covered by the decision of the Coordinate Bench of this ITAT in the case of M/s. Amphenol Interconnect India Pvt. Ltd., in ITA No. 477/Pun/2015 [TS-201-ITAT- 2014(PUN)-TP], wherein it is held as under: "8. In this regard, the Ld. Counsel for the assessee brought our attention to the DRP's order dated 24-12-2014 and read out the contents of Para Nos. 3.15 to 3.17 which read as under : "3.15 The assessee submitted that the TPO also disregarded and ignored Tribunal rulings which have laid down principles that the transactions will not be considered as similar for the purpose of benchmarking transactions under CUP method merely on account of similar products sold to AEs to third parties. These rulings are as under: * Intervet India Private Limited Vs ACIT (ITA No.3185/Mum/2006 * ACIT Vs. Dufon Laboratiories (2010-TII-26-ITAT-MUM-TP) * Ranbaxy Laboratories Ltd. Vs. Asstt. CIT (20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents were made to the transactions with Associated Enterprises with reference to the Export of goods and Import of the raw materials. Appropriateness of the TNMM method was also the issue in those years. Tribunal decided the issue in favour of the assessee and dismissed the appeal of the revenue on those issues. After hearing both the ITA No.477/PUN/2015 sides and perusing the contents of the DRP, we are of the opinion that the order passed by the DRP with reference to the most appropriate accounting method for TP study, is fair and reasonable and same does not call for any interference. Accordingly, the ground raised by the Revenue is dismissed". 13. Further, Hon'ble Bombay High Court dismissed the appeal of the Department filed by the Department against the ITAT's order and noted that in this case, since the finished goods are customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences, the CUP method would not be the most appropriate method to determine the ALP. It upheld the stand of the assessee that TNMM is the most appropriate method to arrive at ALP. This judgement is reported as PCIT Vs. M/s. Amph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance software and software for other purposes into S3-ERP being SAP software in AY 2011-12 which was developed / acquired by AE for all its entities around the world. The TPO, relied on the previous year's order for AY 2012-13 wherein based on estimates of man hours of services and salary, an ALP of INR 1,62,05,000 was determined. The TPO in AY 2013-14, followed the same mechanism (considering the same man hours and salary) and determined the same ALP of INR 1,62,05,000. This resulted in an adjustment of INR 9,88,26,934 (i.e. INR 11,50,31,934/- minus INR 1,62,05,000). At the outset it is stated by Ld. Counsel that this issue squarely covered by Tribunal decision in assessee's group company in case of ITA No. 2590/Mum/2017 (A.Y.2012-13) Firmenich Aromatics India Pvt.Ltd Vs Dy. Commissioner of Income Tax, dated 23.07.2018, Wherein the Tribunal held as under: "21. We have considered rival submissions and perused materials on record in the light of decisions relied upon. Though, the Transfer Pricing Officer has alleged that the assessee failed to furnish any evidence to substantiate its claim that the payment made to the AE for availing Information System Services, however, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the DRP has approved the determination of the arm's length price by the Transfer Pricing Officer without properly appreciating the implication of the relevant statutory provisions. As regards the observations of the DRP regarding the report of the KPMG, it is necessary to observe that the KPMG report is not an audit report but was furnished by the assessee to support the attribution of cost. Therefore, it cannot be said that it is a qualified report. It is further relevant to observe, the material submitted before us, which also forms part of the Transfer Pricing Officer's record, indicates that the cost of the software has been allocated to 40 group companies across the globe who are using the software and related services and assessee's share in cost allocation works out to 2.3%. Moreover, when the Transfer Pricing Officer himself agrees that the AE has provided software and certain services, there is no reason for not accepting the payment made to the AE to be at arm's length in the absence of any contrary evidence brought on record and by simply applying the benefit test. If the Transfer Pricing Officer did not agree to the arm's length price shown by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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