9911796707
TMI Blog2016 (7) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions in respect of sale of final products and purchase of raw material. The details of the international transactions entered into by the assessee during the relevant period are as under: a) Import of Raw Material from AEs Rs. 30,076,579/- b) Import of Finished Goods from AEs Rs. 92,728,812/- c) Export of Raw Material to AEs Rs. 36,752,171/- d) Export of Finished Goods to AEs Rs. 89,106,681/- e) Expenditure incurred on behalf of Fellow Subsidiaries and Reimbursed by them Rs. 2,060,277/- f) Expenditure incurred on behalf of holding company and reimbursed by them Rs. 700,000/- g) Internal Audit Services Rs. 1,392,486/- For computing Arm's Length Price (ALP) of various transactions with its Associated Enterprises (AEs) the assessee applied Transactional Net Margin Method (TNMM) in respect of manufacturing and trading activities. One of the vaccines manufactured by the assessee is Floxidin 10% (50ml). The TPO observed that the price charged by the assessee in respect of said vaccine from its AEs is much less in comparison to the price charged to the third parties. The assessee company has been exporting the aforesaid medicine to its AE in Thailand an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... din 10% (50ml). The TPO applied CUP method for determining ALP in respect of Floxidin 10% (50ml). The ld. AR filed detailed written submissions against the TP adjustment made in respect of Floxidin 10% (50ml). The relevant extract of the same are as under: "Appellant's factual and legal arguments: * The Appellant humbly submits that while preparing the TP study report, the Appellant has examined and analysed each of the available methods prescribed under the Act, and only after detailed evaluation, the Appellant had come to a conclusion that the most appropriate method for computing the arm's length price was the TNMM. * The fact that similar products were sold by the Appellant to its AEs as well as third parties was also evaluated at the time of doing the TP analysis. It was determined that it is not possible to make reasonably accurate adjustments to iron out the differences between the two transactions (i.e. sales to AEs and sales to third parties), and hence the CUP method was not considered as the most appropriate method. * At this juncture, the Appellant would want to reiterate that merely because similar products are sold to AEs as well as third parties, cannot a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be madeto account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method. " * In view of the above, it is evident that choice of a particular method for determining an arm's length price is an analytical process and is determined based on facts of the specific case, and CUP method may not necessarily always be superior to the TNMM merely because similar transactions exist. * It is important to consider the relevant portion of Rule 10B(1), 10B(2) and Rule 10B(3) of the Rules in harmonious manner which states that for application of the CUP method it is essential to foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit period The credit period offered by the Appellant to its AEs differs from the credit period offered by the Appellant to third parties. The Appellant has a policy of offering 30 days credit on sales made to its AEs, from the date of the airway bill. Whereas, the credit period offered to third parties is 45 days from the date of airway bill! invoice. The aforesaid differences also have an impact on the pricing at which the products are sold by the Appellant to its AEs/ third parties. Difference in Sales volume Quantity sold to the AE is almost 10 times the quantity sold to the third party. It may be specifically mentioned here that Floxidin is a long established product offered by almost all the veterinary pharmaceutical companies in India. There is no perceived quality difference in the product offered by various companies. As such, the price is the driving factor for the sales, which is inversely related to the volume sold. Annual/future Business from AE/third party The total annual business done by the Appellant with the Thailand AE is substantially higher than the business received from the third party. The total annual business for AY 2002-03 is: - Intervet Thailand - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 5 products to its AEs as well as unrelated parties. In respect of 4 products the price charged to AEs is almost similar as charged to the unrelated parties. It is only in respect of Floxidin 10% (50ml) that the TPO has made adjustment. The assessee has not brought any evidence on record to show that the assessee had carried out any marketing expenditure with respect to sale of its product (Floxidin 10% (50ml)) to unrelated parties in Vietnam. Further, the assessee has not shown from the documents on record that the market conditions in Vietnam are different from the other countries where the assessee is exporting Floxidin 10% (50ml) to its AEs. The ld. DR submitted that the authorities below have considered all the contentions which the ld. AR of the assessee has reiterated before the Tribunal and thereafter rejected the same being devoid of any merit. In so far as use of CUP method for benchmarking the ALP is concerned, the ld. DR contended that the DRP in its directions for assessment year 2008-09 has applied CUP method. The DRP has rejected the contentions of the assessee that if geographical conditions are not to be considered then domestic sale price should be compared fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and future business and geographical disparity. Not convinced with the reasons given by the assessee, the TPO applied CUP method as the most appropriate method for determining ALP in respect of Floxidin 10% (50ml). However, the TPO allowed minor adjustment in respect of volume factor 10%, credit period .5% and credit risk 5%. In first appeal, the Commissioner of Income Tax (Appeals) marginally increased the allowance in respect of volume 20% and credit period 0.6%. The Commissioner of Income Tax (Appeals) on the directions of the Coordinate Bench of the Tribunal considered the geographical factor and rejected the contentions of the assessee to grant adjustment on account of geographical difference. 8. The details of the transaction in respect of Floxidin 10% (50ml) with AE and third party entered into by the assessee are as under: Floxidin 10% 50ml Associate Enterprises Third Party Party Name Intervet (Thailand) Ltd. Modern Veterinary Trading Country Thailand Vietnam Quantity 30,144 3,152 Currency EURO/USD EURO/USD Amount in Foreign Currency 37,240 12,020 Amount in INR 1,662,825 541,707 Avg. S.P./unit in F.C. 1.24 3.81 G.M. % 70% 90% A perusal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng CUP for exports of Rs. 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 charged higher prices 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 Rs. 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." The Tribunal further held : "4.1 ............According to us, as general proposition, there is no d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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