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TMI Blog2015 (10) TMI 2790X X X X Extracts X X X X X X X X Extracts X X X X ..... case and law applicable. DRP as to how TNMM is the most appropriate method. As rightly observed by the DRP, TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation. The assessee in the present case has chosen comparables in the similar industry under the TNMM. The DRP had directed the TPO to make comparability analysis under the TNMM and subsequently the TPO has not determined any TP adjustment thereby concluding that the international transactions are at ALP even under the TNMM. As concluded that the TNMM is the most appropriate method. The assessee has relied on various decisions in support of the proposition that accurate adjustments should be given if CUP method is followed. Regarding adjustments to be given under the internal CUP. Since it is held that TNMM is the most appropriate method on the basis of facts and circumstances of the case and law applicable, the decisions relied on and the assessee s cross objections are not being dealt. - ITA No.251/Coch/2015, CROSS OBJECTION NO. 10/Coch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecifications to both AE s and non AE s. In response to TPO s show cause notice dated 6.12.2013, the assessee submitted the annual reports of the comparable companies. In response to TPO s proposal to adopt Internal CUP method, it was submitted by the assessee that the products vary in technical specifications and identical products in respect of all parameters may not be identifiable with respect to exports to AE s and non AE s. The assessee also submitted complete invoice details to justify its stand. Considering the differences in specification, nature and qualify of each product, the TPO made an analysis to find out the products of similar specifications exported to both AE s and non AE s during the previous year. With this analysis, the TPO found that only 16 items having similar specifications were exported to both AE s and non AE s. The TPO proposed adjustment in respect of each of the 16 items and the total adjustment proposed amounted to ₹ 2,14,68,190/- [refer page 4 of TPO order] In response, the assessee filed written submissions and argued that even if Internal CUP method is be adopted, various adjustments have to be made to comparable uncontrolled price to account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in terms of huge time gap, different geographical locations, different quantities etc. Considering these differences, the DRP held that no reasonable adjustments can be made to the internal CUP adopted by the TPO and consequently concluded that TNMM is the most appropriate method on the basis of facts and circumstances of the case. Having held that TNMM was the most appropriate method, the DRP directed the assessing officer to examine the comparability analysis of comparables selected by the assessee in its TP documentation and accordingly determine the ALP. Since TNMM was accepted to the most appropriate method, various adjustments proposed by the assessee to internal CUP was not dealt by the DRP and consequently no directions were issued in respect of such adjustments. The relevant findings of the DRP are reproduced hereunder. Having heard the objection, we examined the instances by the TPO in paragraph 5.1.2 of the order, from which it is evident that there is a huge time gap in the transactions compared with the AE and non AE. Further, the transactions compared are in the different geographical locations and also there is a large variation in the quantity sold to AE and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Hence, the Hon ble DRP ought to have considered the detailed analysis and reasoning of the TPO. 3. For these and other grounds that may be urged at the time of hearing, it is requested that the order of the learned Dispute Resolution Panel, Bangalore may be set aside and that of the assessing officer restored. 6 We have considered the facts of the case, TPO s order, DRP directions and the material on record filed by the assessee. In the present case, the TPO has applied internal CUP method rejecting the TNMM adopted by the assessee. In doing so, the TPO has compared export invoice of products of similar technical specification. For instance, OR black pepper 40/20 grade is compared with OR black pepper 40/20 exported to non AE. However, the TPO has not considered the quality differences within the same grade. The TPO accepts at para 5.2.3 of his order that there are material differences within the same grade but disregards the same as miniscule . The assessee has demonstrated the quality variation or differences within the same grade of products. For instance, the product in the non-AE invoices AK038 and AK 139 which are taken for ALP comparison is OR Capsicum 0.5M / D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es lower quantities have been sold at a lower rate and higher quantity is sold at a higher price and in some other cases, the difference in quantity does not justify the difference in price charged. The assessee however has rebutted the TPO s conclusion by taking TPO s own instances wherein 360 Kg of oil BP is sold at $ 74.30 while 40 KG is sold at $ 82.30. Further, the TPO has not disputed the fact that smaller quantity was sold at lesser price since the smaller quantity shipped was forming part of a very large consignment. Similarly, larger quantity was sold at a higher price since the consignment or shipment was smaller. [Page 3 of DRP directions] Thus, there is no merit in the contention of the TPO that the assessee was following a preferential treatment to its AE and was not dealing at arm s length. The adoption of internal CUP as the most appropriate method is therefore bad in law. 6.4 The TPO has rejected the claim of weighted average of comparable prices by referring to second proviso to section 92C(2). The assessee has argued that adoption of simple average of comparable price has resulted in excessive TP adjustment. [Page 214 to 218 of paper book] The TPO in the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price variation etc. These differences materially affect the computation of ALP of the international transaction. Even though the assessee has computed the adjustments to be given for these differences, the same will not make the Internal CUP as the most appropriate method. On the other hand, reasonably accurate adjustments cannot be made to eliminate these differences. Thus, Internal CUP fails to be a most appropriate method on the basis of facts and circumstances of the case and law applicable. 6.8 The DRP has discussed at page 7 to 12 of its directions as to how TNMM is the most appropriate method. As rightly observed by the DRP, TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation. The assessee in the present case has chosen comparables in the similar industry under the TNMM. The DRP had directed the TPO to make comparability analysis under the TNMM and subsequently the TPO has not determined any TP adjustment thereby concluding that the international transactions are at ALP even under th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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