TMI Blog2016 (7) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench in the case of Amphenol Interconnect India Private Limited [2014 (5) TMI 1066 - ITAT PUNE ], we accept ground in favour of assessee - ITA No. 720/PN/2014 - - - Dated:- 18-4-2016 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri Danesh Bafna For The Revenue : Shri Subhash Chandra/Shri Hitendra Ninawe ORDER PER VIKAS AWASTHY, JM : The appeal has been filed by the assessee against the order of Commissioner of Income Tax (Appeals)-IT/TP, Pune dated 22-01-2014 for the assessment year 2002-03. 2. The brief facts of the case as emanating from the records are: The assessee is engaged in the manufacturing and trading of veterinary products including pharmaceutical products, feed additives, poultry vaccines, canine vaccines, viral and bacterial vaccines, etc. The assessee is a wholly owned subsidiary of Intervet Holdings BV, Netherlands, which belongs to the Akzo Nobel Group. During the period relevant to the assessment year under appeal, the assessee filed its return of income declaring total income of ₹ 4,08,40,652/-. During the period relevant to assessment year 2002-03 the assessee entered into international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Commissioner of Income Tax (Appeals) vide order dated 02-03-2006 rejected the appeal of the assessee. However, the Commissioner of Income Tax (Appeals) marginally increased the allowance in respect of volume to 20% and credit period to 0.6%. Against the findings of Commissioner of Income Tax (Appeals), the assessee filed an appeal in ITA No. 2845/Mum/2006 before the Tribunal. The assessee apart from other grounds, had also challenged the action of lower authorities in not considering the geographical conditions of the market to which assessee is catering. The Tribunal vide order dated 31-03-2010 remitted the file back to Commissioner of Income Tax (Appeals) for deciding the issue afresh by widening the scope of adjustment and inter alia considering the demographic conditions of the market. In second round of litigation, the Commissioner of Income Tax (Appeals) after analyzing the contentions of the assessee in respect of geographical difference in the market rejected the same. Aggrieved by the order of Commissioner of Income Tax (Appeals), the assessee is in second appeal before the Tribunal. 3. Shri Danesh Bafna appearing on behalf of the assessee submitted that the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe - Comparable Uncontrolled Price (CUP) Method; - Resale Price Method; - Cost Plus Method; - Profit Split Method; - Transactional Net Margin Method (TNMM); or - Such other method as may be prescribed by the Board. Further, Section 92C(2) of the Act provides that the most appropriate method shall be applied in accordance with the provisions of Rule 1 OC of the Rules to determine the arm's length price of an international transaction. The relevant extract of the Act and the Rules have been reproduced below for ease of reference: Rule 1 0C(1) and Rule 10C(2) of the Rules provide the following: Rule 10C(1) For the purposes of sub-section(1) of Section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove would be essential as the uncontrolled transaction will be akin to international transaction only if reasonably accurate adjustments can be made to eliminate the material effects of such differences ; - Finally, if it is not possible to make reasonably accurate adjustments to eliminate the material effects of such differences or there exist differences , which are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market, then the uncontrolled transactions could not be considered as comparable to international transactions resulting into failure in application of CUP method . Based on above, if CUP is to be considered to be the most appropriate method, the following factors should be considered: Particulars Remarks Geographical difference The price at which a product is sold in one country cannot be compared with the price at which the same product is sold in another country because of the impact on account of geographical differences i.e. country specific demand/ supply factors, market conditions, regulations and governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts AEs as well as third parties was also evaluated at the time of doing the TP analysis. However, it was determined that it is not possible to make reliable and 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. Further, the Hon'ble Pune Bench of ITAT in the case of Amphenol lnterconnect India Private Limited vs. DC IT (ITA No. 1548/PN/2011) has upheld that: - CUP cannot be considered as the most appropriate method in cases where there are differences, and reliable and accurate adjustments cannot be made to iron out such differences and make the transactions comparable; - When 95% of the exports to the AEs are considered to be at ALP by applying TNMM as the most appropriate method, there is no reason to apply CUP method for benchmarking part of the export transaction. In the Appellant's case also since reliable and accurate adjustments cannot be made to make the transactions of export of finished goods to third parties comparable to the transaction of export of finished goods to AEs, such a comparison cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Atul Ltd. Vs. ACIT (supra). The ld. AR prayed for setting aside the order of Commissioner of Income Tax (Appeals) and accepting the appeal of the assessee. 6. We have heard the submissions made by the representatives of rival sides and have examined the orders of the authorities below. We have also considered the decision on which the ld. AR of the assessee has placed reliance. The first objection raised by the assessee against the findings of the Commissioner of Income Tax (Appeals) is against the selection of Comparable Uncontrolled Price (CUP) method as the most appropriate method for determining the arm s length price of export of Floxidin 10% (50ml), disregarding TNMM applied by the assessee for benchmarking the ALP. A perusal of the records show that during the period relevant to the assessment year under appeal the assessee has manufactured and exported 5 products to its AEs and third parties in various countries. The details of the products manufactured by the assessee and the country of export along with the prices charged per unit are as under: Name of Product Export to AEs Export to third parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the above table shows that the volume of sale to AE is almost ten times to that of the third party. It is also an undisputed fact that credit risk to third party is always higher than the AE. As far as geographical disparity is concerned, it is a fact that both the countries i.e. Thailand and Vietnam are members of the Association of Southeast Asian Nations (ASEAN) but that does not mean that the market conditions of both the countries are similar. Thailand is one of the most competitive market in south-east Asia and has an edge over other neighboring countries in respect of ease of doing business, labour cost and other infrastructure facilities. 9. De hors, the differences dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 dispute to the fact that the CUP method is a more direct method and hence, it should be preferred over TNMM method when comparable transactions are available. However, it is to be 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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