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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 ..... s associated enterprises (AE's) viz., M/s AKAY USA and AKAY Europe GMBH. Total sales to aforementioned AE's during the year amounted to Rs. 14,47,66,057/- The assessee justified that the aforesaid sales were at arms length on the basis of Transactional Net Margin Method. (TNMM). Following companies were identified as comparables on the basis of a search process carried out to identify a list of companies operating in the oleoresin industry, manufacturing and dealing in products similar to that of the assessee. i) Kancor Ingrediants Limited ii) Chillies Export House Limited iii) Paprika Oleo's (India) Limited iv) Enjayes Spices & Chemical Oil Limited 3 The return of income was filed on 31.8.2010 declaring NIL income after set off of brought forward losses. The computation of arms length price of international transactions were referred to Transfer Pricing officer (TPO) by the AO. Vide letter dated 16.1.2013, the TPO asked the assessee to furnish information in terms of section 92B and 92E along with a questionnaire. The assessee filed the TP documents on 7.3.2013. Another show cause notice dated 6.12.2013 was issued asking the assessee to submit the complete search process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat utmost care has been taken in comparing only the technically similar grades. However, the material differences in quality of products shown by the assessee were considered as 'miniscule' by the TPO. [refer para 5.2.3 of TPO order] As regards the application of weighted average rate for the comparable price, the TPO relied on the proviso to section 92C(2) and concluded that only simple average is permissible under the Act and consequently the request of the assessee to apply weighted average rate was rejected. The TPO however accepted the analysis cost adjustment proposed by the assessee and after providing the same, the TP adjustment was revised downwards from originally proposed figure of Rs. 2,14,68,190/- to a sum of Rs. 1,73,55,099/- The order under section 92CA was passed by the TPO on 27.1.2014. 4 The AO passed the draft assessment order dated 20.2.2014 under section 144C of the Income tax Act, 1961 incorporating the TP adjustment. The assessee filed its objections before the DRP in respect of the TP adjustment of Rs. 1,73,55,099/- made by the TPO. The assessee explained before the DRP as to how the methodology adopted and the computation of ALP by the TPO is incorrect ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.1 above, the objection relating to determination of Arm's Length Price without allowing or inappropriately allowing the adjustment under CUP for geographical differences, the quality difference due to permutations and combinations, technical specifications and not allowing other adjustments like forward contract based price variation, Market based price variation, key customer based price variation and opportunity cost based price variation becomes academic in nature and therefore we do not find it appropriate to issue directions on such adjustments." As directed by the DRP, the AO sent the DRP directions to TPO for determination of ALP under TNMM. The TPO vide letter dated 7.1.2015 intimated that there is no adjustment required to be made under section 92CA. The AO consequently passed the final assessment order on 16.2.2015 deleting the TP adjustment. 5 The revenue's grounds against the deletion of TP adjustment are as under. "1. The order of the DRP in F No. 47/DRP-BNG/2014-15 dated 28.11.2014, is opposed to law, weight of evidence, facts and circumstances of the case. 2. Whether the learned Dispute Resolution Panel, Bangalore was right in holding that the TNMM is the mos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not considered the timing gap or difference between the exports to AE and non AE. The TPO has compared exports to AE with exports to non AE on different dates. The difference in the AE transaction date and comparable transaction date ranges from a single day to a maximum of 260 days [page 213A to 213E of paper book] The TPO has not taken into account the differences in selling price on account of time gap. As rightly observed by the DRP, sales made on 28.4.2009 cannot be compared with the sales made 6.7.2009. The TPO also has not disputed that there existed a price difference on account of exports on different dates. The TPO has therefore erred in adopting the non AE export sale price as the internal CUP which in fact was not a comparable transaction at all. The adoption of internal CUP is therefore bad in law for this reason also. 6.2 Thirdly, the TPO has compared the exports in different geographical locations. For instance, as rightly observed by the DRP, exports to Germany cannot be compared with exports to Italy. The TPO has not appreciated the price fluctuation / difference according to demand / supply position in different geographical locations. The adoption of non AE ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inter alia, (a) specific characteristics of the property transferred; (b) functions performed, assets employed and risks assumed; (c) contractual terms of the transaction and conditions prevailing in the market. As per rule 10B(3), an uncontrolled transaction shall be comparable to an international transaction if (i) None of the differences, if any, between the transactions being compared are likely to materially affect the price or (ii) Reasonably accurate adjustments can be made to eliminate the material effects of such differences. 6.6 Similarly, as per rule 10C(2), one of the factor in selecting the most appropriate method is the extent to which reliable and accurate adjustments can be made to account for differences between the international transactions and the comparable uncontrolled transaction. 6.7 In the present case, as discussed above, there are a number of differences in the international transaction and the non AE export rates considered by the TPO for comparability analysis. As put forth by the assessee, these differences, inter alia, include impact due to adopting simple average instead of weighted average, quantity based price variation, quality based pric ..... 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