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2016 (7) TMI 20 - ITAT PUNE

2016 (7) TMI 20 - ITAT PUNE - TMI - Transfer pricing adjustment - selection of Comparable Uncontrolled Price (CUP) method as the most appropriate method for determining the armís length price of export of Floxidin 10% (50ml), disregarding TNMM applied by the assessee for benchmarking the ALP - Held that:- a perusal of the documents on record show that more than 80% (83.55%) of exports which have been benchmarked by the assessee under TNMM has been accepted by the authorities below. Where substan .....

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not the most appropriate method. Thus, in view of the facts of the case and the decision of Co-ordinate 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 assess .....

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l 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 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 ₹ 30,07 .....

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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 and to the third party in Vietnam. The content .....

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on the basis of order passed by the TPO u/s. 92CA(3) inter alia made addition of ₹ 27,17,821/- in the income returned by the assessee. Aggrieved by the assessment order dated 25-02-2005, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). 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 c .....

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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 total exports made by the assessee .....

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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 th .....

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ely because similar products are sold to AEs as well as third parties, cannot automatically lead to a conclusion that a CUP exists and should be selected as the most appropriate method. • The TPO himself has accepted 83.55% of the total transaction with AE at ALP by choosing TNMM as the most appropriate method and hence, there is no need to deviate from the method for the transaction consisting 16.45% of the total transaction. • In this regard, the Appellant would like to place relianc .....

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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 .....

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nternational transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction." "Rule 10C(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account ass .....

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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 exi .....

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to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail; - Adjust the price charged under uncontrolled transactions for difference on account of above referred comparability parameters; - The above would be essential as the uncontrolled transaction will be akin to international .....

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tional 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 c .....

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ar the loss on account of bad debts if it fails to realise the sales proceeds. Difference in credit 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 .....

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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 - ₹ 6.6 million - Modern Veterinary - ₹ 1.4 million Marketing function It is important to note that with respect to sale of finished products to AEs, the Appellant is not required to undertake any sig .....

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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 .....

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action has been accepted at ALP by choosing TNMM as the most appropriate method and hence, there is no reason to apply CUP method for benchmarking part of the export transaction. • Given the above, the Appellant submits that the CUP method cannot be considered as the most appropriate method to demonstrate the arm's length nature of international transaction pertaining to export of finished goods, and the adjustment proposed by the Ld. TPO / should be deleted. 4. Per contra Shri Subhash .....

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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 .....

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Revenue submitted that the DRP in its directions for assessment year 2008-09 followed the decisions of Tribunal in the case of Atul Ltd. Vs. ACIT in ITA No. 3118/Ahd/2010. The Pune Bench of the Tribunal in the case of Amphenol Interconnect India Pvt. Ltd. Vs. DCIT (supra) has considered the decision rendered in the case 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 t .....

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ng 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 Country Price Country Price Decivac Oil Adj 100ml .....

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on the ground that the price charged by the assessee from its AEs is far less than the price charged from the third parties. The assessee has given the reasons for the difference between the two prices viz: volume factor, credit period, credit risk, annual 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 mi .....

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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 of the above table shows that the volume of sale to AE is almost ten times to th .....

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t of ease of doing business, labour cost and other infrastructure facilities. 9. De hors, the differences discussed above, a perusal of the documents on record show that more than 80% (83.55%) of exports which have been benchmarked by the assessee under TNMM has been accepted by the authorities below. Where substantial part of the exports made to AEs have been accepted by the TPO and the reason has been given by the assessee for the price difference in respect of one product, we find no valid re .....

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he said case the assessee had entered into an international transaction for purchase of raw material and export of finished goods. In the TP study report the assessee had applied TNMM as the most appropriate method for computing the ALP of international transactions. The TPO did not accept the contention of the assessee and applied CUP method. The assessee contended that the difference in the price is on account of volume, geographical locations, time difference, risk factor, functional differen .....

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d 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 ₹ 16,18,244/- to the A .....

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s, 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 a .....

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