TMI Blog2015 (11) TMI 1790X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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. CUP method is not the most appropriate method in the case of the assessee since suitable adjustments are not possible to be made in respect of the above differences. So, the addition on this account is not justified. No adjustment is to be made for determining the arm's length price in respect of international transactions undertaken by the assessee for the year under consideration. We direct the Assessing Officer to delete the said adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partake the character 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. 5] The learned TPO / DRP erred in making an adjustment of ₹ 76,01,160/- 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. 5.1] The learned TPO / DRP erred in holding that the CUP method was the most appropriate method of 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. 5.2] 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions with the AE were at ALP. 6.4 The learned TPO / DRP 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 bench marked and thereby contradicting themselves, since no such separate benchmarking was conducted by the Ld. TPO himself, while benchmarking the balance international transactions for which the TNMM was accepted. 6.5] 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. 7] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of appeal No.7, the assessee has relied on the transfer pricing study conducted by it, in which the TNMM method was demonstrated to be the most appropriate method to determine the arm's length price of the assessee s export and import transactions pertaining to the manufacturing segment. In the alternate, vide ground of appeal No.8, the assessee has agitated that in respect of certain products exported by the assessee, it had charged higher price to its associated enterprises 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.9. 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 present appeal was similar to the issue before the Tribunal in assessee s own case relating to assessment years 2006-07, 2007-08 and 2008-09 and also assessment year 2005-06. 6. We have heard the rival con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM TOTAL 1,23,04,54,377 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 the product-wise details in respect of each separate product and also after perusing the details in respect of similar products imported from associated enterprises and third parties, the TPO observed that on product-wise comparability of goods exported and imported and by taking average selling price per unit or average purchase price per unit in respect of associated enterprises and third parties were different. The TPO did not find favour with the benchmarking of all the transactions by the assessee 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- -vis external comparables, but the assessee had failed to benchmark its transaction separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... totaling ₹ 26.58 crores and export of finished goods of ₹ 90.90 crores. In addition, the assessee had imported capital goods worth ₹ 1,82,25,394/-, commission was paid at ₹ 1,19,61,249/- and commission received at ₹ 41,87,942/-. Further, reimbursement of expenses paid was to the tune of ₹ 1,03,26,097/- and reimbursement of expenses received was to the tune of 1,08,26,857/-. All the said transactions were aggregated by the assessee. The learned Authorized Representative for the assessee pointed out that out of the total export of finished goods of ₹ 90.90 crores, only export of goods totaling ₹ 1.51 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 ₹ 26.58 crores, only goods totaling ₹ 72.64 lakhs imported from the associated enterprises were similar to the import made from third parties. The learned Authorized Representative for the assessee pointed out that the price charged from the associated enterprises and / or the third parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 that the CUP method is not the most appropriate method to determine ALP in the case of the assessee because the assessee manufactures customized products. The pricing of the product depends upon various factors like the geographical location of the customer, the volume of the order, timing of the order, urgency of the customer, competition in the market, etc. The pricing depends upon so many factors and suitable adjustments could not be made to account for such differences. The learned Authorized 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... significantly lower as compared to the transactions with Third Parties. Therefore, considering the risk differences, the prices charged to Third Parties are higher than the prices charged to AEs in certain cases. Hence, CUP method could not be applied in the case of the assessee. Further, the assessee does not have any credit risk in respect of sales to the AEs which is an important factor. This difference is discussed above has not been judiciously appreciated by the assessee. 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 154 of the Paper Book, inter alia, assessee explained that the AEs are usually original equipment manufacturers while the Third Parties are usually distributors. Thus, there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 envis ages 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 unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transactions with AE. Ordinarily the internal CUP method should be preferred over the external CUP method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the assessee in particular, having bearing over the comparison of price charged from unrelated 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 impor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that the assessee had charged lesser price to its AE as compared to the price charged to third party for the same product. The ITAT held that if the differences are taken into consideration like geographical, volume, profile of the customer, etc. etc., no addition was warranted. 3.6 In UCB India Ltd. [121 ITD 131 (Mum)], the assessee had made imports 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 the price obtained in comparable uncontrolled transaction. An uncontrolled price is the price agreed between unconnected parties for the transfer of goods or services. The CUP can be either (a) internal CUP or (b) external CUP. In this case on hand, external CUP is considered. Under the CUP method the properties of a product and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 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 contractual terms, economic conditions, geographical areas, risks assumed, functions assumed could affect the prices of the products. 4. New let us analyse the arguments of learned CIT DR on broad proposition that the assessee was not justified in aggregating the transactions of Exports, Imports and commission into a single activity for the purposes of determining the ALP under TNMM method. It was argued by the learned Departmental Representative that the transactions are distinguishable in their nature 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the products in respect of which comparable transactions were available. While raising this contention, the learned CIT DR has not controverted the various differences between the transactions entered into by the assessee with its AEs and third parties. Considering the various differences as discussed above between the two transactions, CUP method is not applicable to the facts of the present case. The learned CIT DR had also stated that the onus is on the assessee to demons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d mainly because the comparable entities selected by the assessee company had substantial related party transactions. Hence, the comparison under TNMM was not possible. Secondly, in the said decision, Bench has held that when a transaction to transaction comparison is to be preferred only if proper adjustment can be carried out to account for the differences that could materially affect the prices in the open market of the related items. However, in the instant case, the assessee has demonstrated that suitable adjustments could not be made on account of the various differences and hence, the CUP cannot be applied 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 was involved in manufacture of chewing gum. The assessee exported some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to export of finished goods. More so, when the TPO accepts 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 2 of TPO order. Out of these imports, the TPO has accepted TNMM method for imports amounting to ₹ 13,72,10,348/-. However, in respect of imports amounting to ₹ 87,07,838/-, the TPO has stated that similar products have also been purchased by the assessee from third parties and in which case, the assessee has paid higher amount to the AEs. Accordingly, the TPO has held that in respect of such imports, CUP method should be applied. The TPO has computed average purchase price of the products purchased from AEs and average purchase price of same products purchased from Third parties as referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices to Amphenol Aerospace Operations, USA for the same product. Accordingly, in view of the various differences enumerated above. The CUP method is not the most appropriate method in the case of the assessee since suitable adjustments are not possible to be made in respect of the above differences. So, the addition on this account is not justified. 6.2 It was also pointed out on behalf of assessee that in respect of most of the products, the assessee has paid lower price to its AEs as compared to the prices paid to Third Parties. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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