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2011 (9) TMI 196 - AT - Income TaxMethod of determination of arm's length price - Referring to TPO u/s 92CA of the Act - Held that: - TPO is directed to recalculate the ALP keeping in view the specific directions of this Bench - in the absence of uncontrolled independent comparable companies the Excess Earning Method [EEM] adopted by the TPO in the present circumstance is reasonable - the reason for adopting EEM method that it is only an internal CUP method, wherein, it is seen what is the price for which the same product would have been sold by the assessee to an independent entity. This price also reflects the price at which the assessee would have sold in an uncontrolled condition, but, as there were no comparable prices available in the public domain for sale of IPR produce similar to that of the assessee, this EEM is used to determine the price that would have been arrived at, if the assessee sold the IPR to an independent entity. While calculating the ALP under EEM, the TPO is directed to adhere the following steps - Estimating future turnover based on the past performance - Estimation of future cash flows - Estimation of discounted future cash flows - present value of improvement - Future cash flows - Return on fixed assets - Return on working capital - Return on human capital - After following the above formulae, the TPO should calculate the ALP accordingly. If the amount so arrived at were to be higher than the total actual consideration [Rs. 38.50 crores] received, the TPO should adopt the higher price arrived at. Value paid by the assessee to AE for subsequent purchase of the same software product cannot be considered as uncontrolled transaction as the said transaction was between two associated enterprises. Further, as there was a long gap of almost three years between the two transactions; we are of the view that the point raised by the assessee for comparison is unreasonable due to the subsequent value additions made to the IPR and discounting factors. - Decided partly in favor of assessee.
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