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Amphenol Interconnect India Pvt. Ltd. Versus The Addl. Commissioner of Income Tax, Range 8, Pune

Addition made to the value of international transactions entered into by the assessee with its associated enterprises in respect of export of finished goods and import of goods - Held that:- The transactions of exports of goods, import of goods are all part of the assessee's business. Further, the commission is paid to various parties to boost the sales of the assessee's products. Therefore, the transactions of exports, imports and payment of commission to agents are closely inter related and ar .....

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for the various transactions and the assessee had contended that its net operating margin is much higher than the comparable companies. This fact has not been disputed by the learned TPO since he himself has accepted that more than 95% of the exports and imports are at ALP as per the TNMM method. Accordingly, even if the various international transactions are evaluated separately, the final result remains the same. The assessee has adopted TNMM wherein the net operating margin of the assessee is .....

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d arguments as taken with regard to adjustment for export as discussed above in paras 3 & 4 of this order. According to him, the pricing depends upon so many factors and suitable adjustments cannot be made to account for such differences. As discussed above in respect of the same party and the same product, the assessee has paid different prices which itself indicates that the pricing is dependent upon various factors for which suitable adjustments could not be made. In this context, refer page .....

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gth price in respect of international transactions undertaken by the assessee for the year under consideration. - ITA No.678/PN/2013 - Dated:- 27-4-2015 - MS SUSHMA CHOWLA AND SHRI R.K. PANDA, JJ. For The Appellant : Shri Nikhil Pathak For The Respondent : Shri Rajesh Damor ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of CIT(A)-IT/TP, Pune dated 15.01.2013 relating to assessment year 2005-06 passed under section 143(3) r.w.s. 145 of the Income-tax Act, 1961 .....

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TPO u/s 92CA(3) dated 31.03.2008 in the case of the appellant company. 2] The learned TPO / CIT(A) erred in making an addition of ₹ 33,91,959/- without appreciating the fact that such an adhoc addition was not permissible under law in view of the decision of Supreme Court in the case of K.P. Verghese [131 ITR 597]. 3] The learned TPO / CIT(A) erred in not appreciating the fact that the adjustment of ₹ 33,91,959/- made to the total income as returned is beyond the scope of total inco .....

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rable Uncontrolled Price (CUP) Method for determining the Arm's Length Price (ALP) in respect of some of the international transactions pertaining to finished goods. 4.1] The learned TPO / CIT(A) erred in holding that the CUP method was the most appropriate method for determining the ALP in respect of some of the transactions of export of goods merely on the basis that the data pertaining to similar transactions with third parties were available. 4.2] The learned TPO / CIT(A) failed to appre .....

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of export of goods to AE and the net profit margin of the assessee was comparable to the net profit margin of the comparable companies and hence, the transactions with the AE were at ALP. 4.4] The Learned TPO / CIT(A) have erred in rejecting the TNMM as the most appropriate method for benchmarking certain international transactions on the grounds that these transactions should have been separately benchmarked and thereby contradicting themselves, since no such separate benchmarking was conducte .....

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5/- by adopting the Comparable Uncontrolled Price (CUP) Method for determining the Arm's Length Price (ALP) in respect of some of the international transactions pertaining to import of goods. 5.1] The learned TPO / CIT(A) erred in holding that the CUP method was the most appropriate method for determining the ALP in respect of certain transactions of import of certain goods merely on the basis that the data pertaining to similar transactions with third parties were available. 5.2] The learne .....

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import of goods from the AE since the net profit margin of the assessee company was comparable to the net profit margin of the comparable companies and hence, the transactions with the AE were at ALP. 5.4] The Learned TPO / CIT(A) have erred in rejecting the transactional net margin method (TNMM) as the most appropriate method for benchmarking certain international transactions on the grounds that these transactions should have been separately benchmarked and thereby contradicting themselves, si .....

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erred in ignoring the fact that based on the detailed transfer pricing study conducted by the appellant, the TNMM had been demonstrated to be the most appropriate method to determine the ALP of the appellant's export and import transactions pertaining to the manufacturing segment. He also failed to appreciate that the TNMM had been accepted by the Ld. TPO as the most appropriate method for AY 2004-05, in which year the surrounding facts and circumstances were similar. 7] Without prejudice t .....

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price to the AE as compared to non AE and hence, this amount should have been adjusted and only the net amount could be added. 9) The assessee submits that without prejudice to its contention that the addition made u/s 92C is not warranted at all, it is submitted that the learned TPO / CIT(A) ought to have granted the benefit of 5% to the assessee company as per the proviso to section 92C(2). 10] The appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before .....

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case relating to assessment years 2006-07, 2007-08 and 2008-09. It was further pointed out by the learned Authorized Representative for the assessee that the ground of appeal No.1 was general in nature and grounds of appeal Nos.2 and 3 are not pressed. The issue in ground of appeal No.4 is in respect of the determination of arm's length price pertaining to export of finished goods and vide ground of appeal No.5, similar adjustment in respect of international transactions pertaining to impor .....

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erprises as compared to non-associated enterprises and similar was the position in respect of import of goods, against which the alternate plea was raised vide ground of appeal No.8. The learned Authorized Representative for the assessee stressed that the TPO had applied CUP method, which was not practical and the same should be ignored. 5. The learned Departmental Representative for the Revenue placing reliance on the orders of authorities below, fairly admitted that the issue raised in the pre .....

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e is a wholly owned subsidiary of Amphenol Corporation, USA. The assessee was engaged in the manufacturing of broad range inter-connected products and assemblies for voice, video and data communication systems, commercial and military aerospace system automation and mass transportation application and industrial and factory automation equipments. The manufacturing activity carried on by the assessee was customized. The total turnover of the assessee company for the year under consideration was & .....

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) Method Adopted 1 Import of raw material 6,96,36,395 TNMM 2 Export of connectors i.e. finished goods 22,18,95,168 TNMM 3 Purchase of Traded goods 1,24,69,776 RPM 4 Receipt of Indenting Commission 50,04,556 TNMM 5 Receipt of Bank guarantee charges 1,14,726 TNMM 6 Reimbursement of expenses 47,27,547 (Normal) TOTAL 31,38,48,168 8. The TPO on the analysis of the data noted that the assessee had exported finished goods to the associated enterprises and also to the third parties. On the perusal of th .....

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ssee together under one segment i.e. manufacturing segment except, the transaction relating to purchase of trading goods. It was further observed by the TPO that the assessee had followed TNMM method for the manufacturing segment and has benchmarked the entity level profitability vis-à-vis external comparables, but the assessee had failed to benchmark its transaction separately. The TPO was of the view that in such circumstances, where the assessee exports same products to the third parti .....

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the Act. The Assessing Officer vide order passed under section 143(3) r.w.s. 145 of the Act added the adjustment of ₹ 33,91,959/- as income of the assessee for the year under consideration. 9. The CIT(A) upheld the addition in the hands of the assessee, in view of the similar issue having been raised before the Dispute Resolution Panel (DRP) in assessment years 2007-08 and 2008-09, wherein the DRP had held against the assessee on both the issues i.e. the issue of application of CUP method .....

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er dated 30.05.2014, the Tribunal deliberated upon both the issues i.e. whether the CUP method is to be applied by benchmarking the international transactions of the assessee and / or whether the assessee was correct in bunching the international transactions as one under the head manufacturing segment and working out that the said transaction was at arm's length price as compared to the other comparables picked up by the assessee. 12. As pointed out by us in the paras hereinabove, the asses .....

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#8377; 1.24 crores were aggregated under manufacturing segment. The learned Authorized Representative for the assessee pointed out that out of the total export of finished goods of ₹ 22.18 crores, only export of goods totaling ₹ 1.35 crores was on account of similar manufactured goods, which were sold both to associated enterprises and third parties. It was further pointed out by the learned Authorized Representative for the assessee that out of total import of goods of ₹ 6.97 .....

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3.73 equivalent to ₹ 120.81. Another sale was made to the associated enterprises of quantity of 47 @ EUR 2.89 at ₹ 170.77. The learned Authorized Representative for the assessee pointed out that the price charged from the associated enterprises and / or the third parties dependent on various issues i.e. timing of the transaction, volume of order and geographical locations. In such circumstances, the application of CUP method was not practical. Similar reference was made to the transa .....

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ation of appropriate method whether the TNMM method or CUP method is to be applied and had come to a finding that in the circumstances of the case, where the prices varied on account of various issues i.e. timing of the transaction, volume of order and geographical location, then CUP method cannot be applied and it was most appropriate to apply TNMM method. The relevant finding of the Tribunal is as under:- 3.1 According to the TPO, in respect of the products which were sold by the assessee to i .....

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verage selling price charged to Third Parties. In this regard, the stand of the assessee has been that the addition is question is not justified. We find that out of the total exports to AE of _ 28.64 crores, the TPO has accepted that exports of _ 27.24 Crs. are at ALP. Only in respect of exports of _ 1.40 Crs. which account for 5% of total exports, the TPO has applied the CUP method. The TPO has made the addition only on the basis that there is product similarity. The TPO has not appreciated th .....

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Representative has pointed out that in respect of the same party and the same product, the assessee has charged different prices which itself indicates that the pricing is dependent upon various factors for which suitable adjustments could not be made. In this regard, the attention was drawn to page 165 of the Paper Book wherein which make it clear that the assessee company has charged different prices to Amphenol Ltd., Great Britain for the same product. 3.2 The assessee emphasized that there a .....

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vel of competition in the market and future growth prospects. This fact has not been appreciated by the TPO. b. Geographical Differences - This aspect was clarified by the assessee on page 152 of the Paper Book, inter alia, clarified to the Assessing Officer that the prices charged depends upon the country where the AE/ Third Party is situated and also the demand and supply factors in the respective countries. The assessee explained that CUP method can be applied only when the conditions prevail .....

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manufactures after receiving the order from the party and the relevant raw material cost at that time is also a crucial factor to determine the prices of the end product. Thus, considering timing differences of transaction, application of CUP method is not justified. d. Risk Difference - This aspect emphasized by the assessee from the details at page 154 of the Paper Book, inter alia, emphasized that the risk mainly market risk and product related risk assumed by the company in case of transact .....

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e. Functional Differences - This aspect was clarified by the assessee as per details on page 154 of the Paper Book, inter alia, assessee explained to the Assessing Officer that in respect of sales to AEs, it was not required to undertake marketing functions while in respect of sales to Third Parties, the assessee has to extensively undertake marketing operations. Ignoring undertaking of marketing function is not justified. f. Other Differences - This aspect was clarified by the assessee on page .....

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ts were not possible for the above differences and therefore, the TPO was not justified in adopting CUP for exports of _ 1.40 Crs. to the AEs specially when in respect of some of the products, the assessee has charged higher price to the AEs as compared to the prices charged to Third Parties. This fact was clarified by the assessee to the TPO by the details as mentioned on page 161 of the Paper Book. Considering the above fact, we find that in respect of some of the instances, the assessee has c .....

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e not possible to be made for the various differences. The TPO has applied CUP only on the basis of product similarity without appreciating the various other differences as discussed above. 3.4 We find that the Mumbai Bench in the case of Gharda Chemicals Ltd. [130 TTJ 556 (Mum)] has held that the assessee had sold a product named 'Dicamba' to Ghardha USA Inc. AE of the assessee company. Total amount received by the assessee as 'ALP' towards export of Dicamba was declared at _ 20 .....

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gs. sold to its AE. The TPO determined the average rate of sale to all independent enterprises at 20.67 US $ per kg., which was found to be substantially higher than 14.66 US $ charged by the assessee from its AE. The ITAT held that the internal CUP method envisages comparing the uncontrolled transactions of the assessee itself with other unrelated parties so as to determine the ALP with the AE. However, the external CUP method disregards the price charged or paid by the assessee to or from its .....

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d parties and AE. The essence of determining ALP under CUP method is to ensure that the price charged by the Indian enterprise from its AE should be consistent with that charged from unrelated parties under similar circumstances. The importance of the "similar circumstances" could not be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should .....

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d from AE must be taken into consideration. The Tribunal was dealing with a case in which the assessee has its AE in USA and rate charged was 14.66 US $ per kg. of Dicamba. There was no other export by the assessee to USA. The uncontrolled transactions of export made by the assessee are to other countries such as UK, Netherlands, New Zealand, Australia, France, etc. in respect of which average rate of 20.67 US $ per kg. of Dicamba has been determined by the TPO for computing the ALP. All other t .....

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and supply factors. Thus the price charged by an Indian party from UK or Australia may be at much variance with that charged from USA. In such a scenario no valid comparison could be made between the price charged by the assessee from other countries with that from USA, more particularly when the Tribunal was of the view that quantity exported to USA on wholesale basis with that to other countries in small lots on retail basis. In this situation, the Tribunal held that the internal CUP method w .....

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from its AE. The assessee had applied TNMM. The TPO adopted CUP Method to determine ALP. The ITAT held that though CUP was a direct method, it could not be applied in all situations. Much depends on the availability of data on comparables. Just because it is the only direct method, it does not automatically become the most appropriate method. The CUP method is the most direct method for determining ALP. Under this method, the price at which controlled transaction is carried out is compared to t .....

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od, amount of credit therein, etc.) may have a significant effect on the price. Product comparability is absolutely key, in particular physical features such as size, weight, appearance along with volume, reliability/storage requirements, regulatory requirements, etc. Pricing of a product is a very subjective exercise and its true value, as received by the receiver, can differ from that received by others in the market place. Broader business functions and not just the product comparability have .....

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tion, purity, method of usage, dosage used, side-effects. All such data should be first obtained by the Revenue or the assessee, who wish to compare products and then arrive at the ALP or wish to make adjustments to a price, cost or margin. 3.7 In the case of Welspun Zucchi Textiles Ltd. [153 TTJ 153 (Mum)], the assessee had exported bathrobes to its AEs. The assessee had adopted CUP method to determine ALP. The TPO rejected CUP method and applied TNMM. The ITAT held that the assessee had wrongl .....

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ding economic and market conditions, geographical locations, volume discount, credit risks, etc. etc. are to be taken into account and simply, product similarity is not the only criteria for applying CUP method. 3.9 We find in the case of Arvind Mills Ltd. [11 Taxmann.com 67 (Ahd)], ITAT has held that for applying the CUP method, there should not only be product similarity but impact of broader business functions on prices should be considered. The ITAT held that even minor differences in contra .....

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re and scope and separate profitability can be arrived at in respect these transactions and hence, the aggregation approach adopted by the assessee is not justified. In this regard, we find that the assessee submits that the above contention is not correct. It is submitted that the assessee is engaged in the business activity of manufacturing connectors and other products and selling them subsequently to various parties. Thus, it is to be noted that the transactions of exports of goods, import o .....

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gly, the assessee has rightly aggregated the above transactions for the purposes of determining the ALP under TNMM. Even if the various transactions are evaluated independently, the net final result remains the same. The assessee has adopted TNMM for determining the ALP for the various transactions and the assessee had contended that its net operating margin is much higher than the comparable companies. This fact has not been disputed by the learned TPO since he himself has accepted that more th .....

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DR has further submitted that CUP is a more direct method for determining the ALP of international transactions entered into by a company and hence, it should be preferred over TNMM method. In this respect, she has placed reliance on the decision in the case of ACIT v. MSS India [32 SOT 132(Pune)]. Accordingly, it has been contended that the learned TPO has rightly applied CUP method for determining the ALP of certain transactions relating to exports and imports of goods and commission where si .....

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e appreciated that in the instant case, where there are various differences like geographical differences, volume differences, different market conditions, etc. etc. in the transactions entered by the assessee with its AEs and the third parties. It is not possible to make suitable adjustments in respect of such differences, hence, CUP method is not the most appropriate method in the instant case. In the course of the hearing, the learned CIT DR submitted that the TPO has rightly adopted CUP for .....

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selected by it, was most appropriate. There is no dispute regarding this proposition as well. However, once, the TPO has tried to select a different method, the onus is on the TPO to demonstrate that the other method is the most appropriate method. This principle has been laid down by Special Bench in the case of Aztec Software Ltd. [107 ITD 141 (Bang)(SB)]. The learned CIT DR further argued that the assessee had made inadequate compliance. In this regard, the stand of the assessee has been tha .....

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e decision in the case of Knorr- Bremse India Pvt. Ltd. v. ACIT [ITA No. 5097/Del/2011] and contended that the transactions of export, import and commission payment should have been benchmarked separately. The aggregation of these transactions is not justified. The said decision is distinguishable on facts. In the said case, the assessee had aggregated transactions like payment of "Professional Consultancy Fee" and payment of "Management Fee for Support Services" "and th .....

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of the above decision is not applicable to the case of the assessee. 4.3 The learned Departmental Representative has also placed reliance on the decision of Delphi TVS v. ACIT [24 taxmann.com 179(Chennai)] in support of his contention that CUP should be applied on the facts of the assessee's case and not TNMM. We find that in the Delphi TVS (supra), ITAT has rejected TNMM method mainly because the comparable entities selected by the assessee company had substantial related party transactions .....

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lied to the facts of this case. It is pertinent to mention that the TNMM has not been rejected in the assessee's case as the TPO himself has adopted it for determining the ALP for majority of the transactions. Accordingly, the ratio of Delphi TVS (supra) is not applicable to the facts of the assessee's case. 4.4 Regarding reliance of learned Departmental Representative on the ratio in the case of Wrigley India Pvt. Ltd. v. Addl. CIT [14 taxmann.com 91 (Del)(ITAT)], wherein, the assessee .....

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said case, the issue of applicability of CUP method was not involved and hence, the said decision has been rendered in different facts and circumstances. 4.5 The learned CIT DR has placed reliance on the decisions of DCIT v. Hellosoft India Pvt. Ltd. [32 taxmann.com 101 (Hyd)] & Coca Cola India Inc. v Asst. CIT [309 ITR 194] and contended that it is open for the TPO to reject the method adopted by the assessee and apply a different method which is found to be more appropriate on facts of the .....

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ld to be comparable only if both, the product sold and the circumstances surrounding the controlled transaction, are substantially the same as those of the uncontrolled transaction. Thus, the comparability depends upon the quality of product, volume of sale, market level, geographical conditions, date and other realistic factors governing the sale price. However, in the instant case, the assessee has demonstrated that the transactions with related parties and unrelated parties are not comparable .....

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that more than 90% of the exports to the AEs are at ALP, there is no reason to apply CUP method for part of the exports. Accordingly, the additions made on this account are not justified and they are directed to be deleted. 15. The Tribunal also deliberated on the adjustment made on account of import of goods and observed as under:- 6. Regarding adjustment towards imports, the assessee has made total imports of raw material and finished goods of _ 14,59,18,186/- from its AEs as referred at page .....

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sed from AEs and average purchase price of same products purchased from Third parties as referred in pages 199-217 of Paper Book. Thus, he has held that in case of certain products, the average purchase price paid by the assessee to its AEs was more than the average purchase price paid to third parties and hence, he has made an adjustment of _ 2,55,003/- in respect of such imports by applying CUP method. According to the TPO, in respect of the products which are purchased by the assessee from it .....

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erage purchase price paid to Third Parties. 6.1 In this regard, the stand of learned Authorized Representative has been that out of the total imports from the AEs of _ 14.59 Crs., the TPO has accepted that imports of _ 13.72 Crs. are at ALP. Only in respect of imports of _ 0.87 Crs. which account for 5.96 % of total imports, the TPO has applied the CUP method. The TPO has made the addition only on the basis that there is product similarity. The TPO has not appreciated that the CUP method is not .....

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the pricing depends upon so many factors and suitable adjustments cannot be made to account for such differences. As discussed above in respect of the same party and the same product, the assessee has paid different prices which itself indicates that the pricing is dependent upon various factors for which suitable adjustments could not be made. In this context, refer page 199 of the Paper Book wherein it is evident that the assessee company has paid different prices to Amphenol Aerospace Operat .....

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es. This fact has been clarified by the assessee to the TPO as detailed on page 161 of the Paper Book filed by the assessee. In this background, it was submitted that considering the fact that in respect of most of the instances, the assessee has paid lower prices to the AEs as compared to Third Parties, which indicates that the pricing of the products is influenced by economic circumstances and underlying transactional differences. In some of the products where the price paid by the assessee to .....

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national transactions pertaining to import of goods. 16. Another aspect noted by the Tribunal was with regard to the adjustment made towards Commission paid to associated enterprises and it was held that there was no merit in making any adjustment on this account by applying CUP method and it was held as under:- 8. Regarding adjustment towards Commission paid to AE, the assessee has paid commission of _ 20,98,224/- to its AEs at the average rate of 9.33% of sales made to clients identified by AE .....

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to the TPO, CUP method is the most appropriate method for computing the ALP of the commission payment made by the assessee to its AEs. The TPO has compared the rate of commission paid by the assessee to unrelated domestic agents against the rate of commission paid to the AEs located in Europe. The TPO has observed that the weighted average rate of commission paid by the assessee to unrelated domestic agents was 2.05% on sales made in India whereas the weighted average rate of commission paid to .....

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