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2014 (9) TMI 266 - AT - Income TaxDetermination of Arms length price TNM method rejected and CUP method invoked - Addition of international transaction of export of finished goods to AE Held that:- The adoption of CUP method is to be treated as the most appropriate method for the purposes of comparability analysis is liable to be upheld relying upon Serdia Pharmaceuticals (India) (P.) Ltd. v. ACIT [2010 (12) TMI 60 - ITAT, Mumbai] - though the transfer pricing legislation does not prescribe a particular order of preference for the methods for determining the arm's length price, but the selection of most appropriate method essentially requires the methods to be ranked on a rational basis - the CUP method has been rightly selected as the most appropriate method in order to determine the arm's length price of the international transactions of export of finished goods to the associated enterprises. There is nothing in the phraseology of Rule 10B(3) of the rules to suggest that the adjustment to an uncontrolled transaction is permissible only under the TNM method and not to the other methods enumerated in Rule 10B(1) of the rules - even in relation to the present situation whereby the comparability analysis has been carried out by adopting the CUP method, the adjustments to the uncontrolled comparable transaction which are permissible and justifiable in law and on facts of the case, in order to facilitate comparability of the international transaction with the uncontrolled comparable transactions deserve to be allowed so far as adjustments proposed by the TPO on account of the international transaction of export of finished goods to the associated enterprises is concerned, it shall be scaled down to ₹ 36,91,536/- as against ₹ 71,01,810/- determined by the TPO Decided partly in favour of Assessee. The comparable transaction picked-up by the TPO, namely, agreement between assessee and Henkel USA is a transaction between two related/associated enterprises and therefore it is a controlled transaction and not an "uncontrolled transaction" - Such a transaction undertaken between two controlled entities, in our view cannot be considered as a 'comparable uncontrolled transaction', as envisaged in clause (a) of sub-rule (1) of rule 10B of the Rules - the adjustment made by the TPO by considering the agreement between Henkel USA and assessee as an arm's length price for the international transaction has to fail - the addition made by the TPO is to be set aside. The entire purpose of the transfer pricing analysis is to compute the income arising from an international transaction, having regard to its arm's length price - The 'international transaction' in question, relates to import of raw materials by the assessee from its associated enterprises - what is expected of the TPO is to consider the transactions of import of raw materials by the assessee from its associated enterprises in its entirety - as factually demonstrated by the assessee, TPO has ignored certain transactions of import of raw materials from the associated enterprises where the prices charged by the associated enterprises were lower than the prices charged by the non- associated enterprises - TPO has picked up only those transactions where the prices charged by the associated enterprises are higher in comparison to prices charged by the third parties, without considering the reasons for the same - the approach of the TPO is quite flawed and is not justified. In the tabulation, assessee has explained reasons which prevailed with it to make imports from the associated enterprises of the 5 products, though the prices charged by associated enterprises were higher than the prices charged by the non-associated enterprises - The circumstances canvassed by the assessee have not been found to be lacking in bonafides by the TPO the action of the TPO is set-aside and the matter is remitted back for re-computation of the arm's length price by taking into consideration the international transaction of import of raw materials from the associated enterprises in its entirety and not merely in relation to 5 products and leaving out the other 5 products which are also imported from the associated enterprises Decided in favour of Assessee.
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