TMI Blog2014 (5) TMI 1066X X X X Extracts X X X X X X X X Extracts X X X X ..... ts where the price paid by the assessee to its AEs is more than the price paid to Third Parties, such higher price paid amounts to ₹ 2,55,063/-. However, in most cases, where the prices paid by the assessee to its AEs is lower than the price paid to Third Parties, the lower price paid is to the tune of ₹ 18,08,201/- as detailed on page 217 of the Paper Book. This aspect has not been appreciated by the TPO.In view of above discussion, the TPO was not justified in adopting CUP method for determining ALP in respect of some of the international transactions pertaining to import of goods. Adjustment towards Commission paid to AE - According 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 and 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 - Held that:- We find that considering the vast differences in the functions performed, the comparison of the rate of commission paid by the assessee to the AEs and third parties is not justified. It is further to be appreciated that the assessee has given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haracter of income as defined in section 2 of the Act. In view of the above, the adjustment made by the TPO / DRP are not within the purview of the concept of 'income' as per IT Act and hence, it requires to be deleted. 4] The learned TPO / DRP erred in making an adjustment of ₹ 43,97,063/- 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 export of finished goods. 4.1] The learned TPO / DRP 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 / DRP failed to appreciate that there were various differences on account of functional, transactional, geographical, volume, timing, business risks, etc. in respect of alleged comparable transactions which ought to have been considered and since suitable adjustments were not possible, there was no reason to adopt the CUP method for determining the ALP. 4.3] The learned TPO / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Ld. TPO himself, while benchmarking the balance international transactions for which the TNMM was accepted. 5.5] Without prejudice to the above grounds, the assessee submits that if at all, the CUP method was to be adopted for determining the ALP, suitable adjustments ought to have been made for differences on account of volume, timing, geographical, business risks, etc between the alleged comparable transactions. 6] The Learned TPO / DRP 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 to the above grounds, the assessee submits that the learned TPO / DRP failed to appreciate that in respect of certain products exported by the assessee, it had charged higher price to the AE as compared to non AE and hence, this amount shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that the learned TPO / DRP ought to have granted the benefit of 5% to the assessee company as per the proviso to section 92C(2). 11] The appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 2. Amphenol Interconnect India Pvt. Ltd. (hereinafter called as Amphenol) is mainly engaged in the business of manufacturing of connectors, accessories, cable assemblies and system integration for application in various industries such as military, aerospace, telecom, etc. The products are specialized in nature as they are being used in defence, aerospace, etc. The products are manufactured only against the specific orders i.e. they are customized products. The assessee company is part of Amphenol Group which is one of the largest manufacturers of interconnect products in the world. In the year under consideration, the assessee has entered into international transactions with its Associated Enterprises (hereinafter called as AE). The details of the international transactions entered into by the assessee as detailed in the Transfer Pricing Officer s (hereinafter called as TPO) order are as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent towards exports, we find that the assessee has made total exports of ₹ 28,64,38,138/- to its AEs as referred in page 2 of TPO order. Out of these exports, the TPO has accepted TNMM method for exports amounting to ₹ 27,24,19,025/-. However, in respect of exports amounting to ₹ 1,40,19,113/-, the TPO has stated that similar products have also been sold by the assessee to third parties wherein lesser price was charged from the AEs. Accordingly, the TPO has held that in respect of such exports, CUP method should be applied. The TPO has computed average sale price of the products sold to AEs and average sales price of products sold to Third parties as detailed in pages 165 - 198 of Paper Book. Thus, he has held that in case of certain products, the average selling price charged by the assessee to its AEs was less than the average selling price charged to third parties and hence, he has made an adjustment of ₹ 43,97,063/- in respect of such exports by applying CUP method. 3.1 According to the TPO, in respect of the products which were sold by the assessee to its AEs as well as Third Parties, the CUP method is the most appropriate method for determining ALP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revailing market conditions, level 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 prevailing in the market in which the respective parties operate are the same and also the size and location of the market is to be taken into consideration. This aspect has not been analyzed by the TPO judiciously. c. Timing Differences This aspect was clarified by the assessee on pages 153 - 154 of the Paper Book, inter alia, submitted that timing differences in the sales made to the AEs and Third Parties have a bearing since the prices are dependent upon various factors. As clarified, the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rices to the AEs as compared to Third Parties. This fact itself indicates that the pricing of the products is influenced by economic circumstances and underlying transactional differences. The assessee has charged higher amount of ₹ 16,18,244/- to the AEs in respect of the same products which were also sold to third parties as referred on page 198 of the Paper Book. Considering the above differences, the CUP method was not the most appropriate method since suitable adjustments were 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 ₹ 20.71 crores. The assessee had determined the ALP by comparable uncontrolled price method. The TPO noted that the sale of Dicamba to unrelated parties was also made by the assessee in various other coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transactions of export by the assessee are to non-USA countries. The price on which a particular product is available in one country may largely vary from the price prevailing in other countries due to various factors. The country which is producer of a particular commodity or its raw material may have lower sale price in comparison with the country which is short of such natural resources. Similarly the price may vary from one country to another depending upon climatic conditions and the demand 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even a minor difference could materially affect the price. There should be a scientific basis to say that APIs are identical, with the same purity, potency, and characteristics. APIs are unique compound making, and the effect of usage of a particular PDF using an API would depend on the composition, 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 wrongly adopted CUP method and it was held that the assessee had made comparison of the average price of all the bathrobes sold to AEs vis-a-vis third parties. The ITAT held that such comparison is not correct and secondly, there were differences in geographical locations and size of the markets which affected the price. Accordingly, CUP was rejected as the most appropriate method. 3.8 In Intervet Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 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 compared with the net operating margin of the comparables. Once the net margin of the assessee is higher, it means that all the international transactions entered into by the assessee with its AEs are at ALP. 4.1 The learned CIT 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 commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission issues as far as determination of ALP is concerned. 4.2 The learned CIT DR has placed reliance on the 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 thereby determined the ALP under TNMM method. In the said case, Bench held that the assessee was not able to establish that the transactions were closely linked with each other and hence, it was held that the aggregation of such transactions was not justified. However, in the instant case, the assessee has demonstrated that the transactions of exports, imports and payment of commission to agents are closely interrelated and part of single business activity of the assessee and therefore, the ratio of the above decision is not applicable to the case of the assessee. 4.3 The learned Departmental Representat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This proposition is not in dispute. However, in 'the instant case, the assessee has demonstrated that the CUP method adopted by the learned TPO is not applicable in the case of the assessee and TNMM is a more appropriate method as discussed above, the same should be applied. 4.6 In the case of Atul Ltd. v. ACIT [ITA No. 3118/Ahd/2010], wherein both the assessee and the TPO had adopted CUP method as the most appropriate method. The Bench held that in the CUP method, a transaction is held 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 on account of various differences as discussed above. Therefore, the ratio in Atul Ltd. (supra) is not against the assessee. This legal proposition will be applicable only to the adjustment towards impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 the most appropriate method to determine ALP in the case of the assessee. As discussed by us with regard to extent of the pricing of the product depends upon various factors like the geographical location of the vendor, the volume of the order, timing of the order, urgency of requirement, competition in the market, etc. In this regard, reliance was placed on the detailed 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 199 of the Paper Book wherein it is evident that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting 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 AEs in Europe was 9.33% on sales made to clients referred by such AEs. 8.1 Accordingly, the TPO has held that the assessee has paid commission at a higher rate to it AEs as compared to the commission paid to unrelated domestic agents and such difference in the rate of commission works out to 7.28% of respective sales. Thus, the TPO has made an adjustment of ₹ 16,37,200/- in respect of commission paid by the assessee to its AEs by applying CUP method. 8.2 In this regard, the assessee has submitted that the addition made by the TPO is not justified. It is submitted that the assessee had clarified that the functions performed by the AEs were much wider than the functions performed by the Non AEs. On page 245 of the Paper Book, the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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