TaxTMI 
TaxTMI 
2011 (2) TMI 268
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....ntrolled and uncontrolled transactions was not established with certain degree of reasonableness and accuracy. The conditions prevailing in the market were also not established to be identical. Therefore, he proposed to use transactional net margin method (TNMM) for determining the arm's length price. The assessee objected to this method. However, the TPO proceeded to ascertain comparable cases for applying TNMM for determining the arm's length price. In this connection, he ascertained the cases of Lucas-TVS Limited; MAP Auto Limited, Karnataka Hybrid Micro Devices Limited and Elgi Ultra Industries Limited as comparable cases. The mean ratio of profit before Income-tax to total expenses of these cases worked out to 4.09%. Therefore, the assessee was requested to explain why this ratio may not apply to this case. The assessee objected to the proposal. The salient objections are : i) the products imported by the associated enterprise from the assessee on one hand and China-Taiwan on the other hand are similar, and the price paid for Indian products is more than the price paid for the Chinese and Taiwanese products; ii) the averments regarding different g....
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....plying TNMM rather than CUP method, thus, making deduction of Rs. 58,64,501/- from the loss declared by the assessee. 2. Before us, the assessee moved an application under Rule 29 of the I.T.A.T. Rules for admission of fresh evidence. The evidence is in the nature of test reports of Chinese Wiper blade and assessee's Wiper blade. It also consists of the confirmation of Chinese supplier regarding consistency of quality. The test report is dated 09.08.2010 and the confirmation of consistency is dated 18.10.2010. The case of the learned counsel is that these reports will establish comparability of Indian and Chinese goods, which were purchased by the associated enterprise. Therefore, the evidences may be admitted for deciding this appeal. The learned counsel also produced a Chinese wiper and an Indian wiper for our inspection to establish their comparability. 2.1 The learned DR opposed the admission of the evidence. It is submitted that the reports have been conducted on or about 09.08.2010, more than 4 years after the close of the previous year. The products must have gone changes in this period. Therefore, these reports do not establish comparability of the produ....
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....titled to tax holiday u/s 10A of the Act. It is further mentioned that the assessee incurred loss of Rs. 48.27 lac on turn over of about Rs. 3.08 crores. The loss is due to the fact that the business is in the initial phase. This and earlier year's loss could be sustained because Mr. Chawla advanced interest free unsecured loan of Rs. 1.81 crores to the assessee on 31.03.2006. The associated enterprise sells the wipers in the USA by importing them from the assessee in India and Chinese suppliers. These products are comparable. The invoices with the associated enterprises show that the price of the goods exported by the assessee is somewhat higher than the price charged by the Chinese companies. Since, the goods are comparable, therefore, CUP is the most appropriate method for determining arm's method price. However, the Assessing Officer ignored this method and adopted TNMM, leading to upward revision of the total income by an amount of Rs. 58,64,501/-. Thereafter, the learned counsel drew our attention towards the finding of the TPO, Assessing Officer and the DRP. 3.1 In order to buttress the claim that the CUP is the most appropriate method in this case, reliance has been plac....
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....reign party as a tested party, its data must be furnished. In absence of establishment of comparability, it is argued that the TPO was justified in adopting TNMM. The TPO choose comparable cases and if any further adjustment is required, the matter may be restored to the file of Assessing Officer for making such adjustment. 5. In the re-joinder, the learned counsel submitted that sale data was not called for by the Assessing Officer or TPO. The assessee chose CUP method, as it is the most appropriate method. It is submitted that although 100% comparability cannot be established, the minor factors have to be ignored. It is also submitted that the financial results of associated enterprises are not relevant when CUP method is adopted. 6. We have considered the facts of the case and submissions made before us. The facts which emerge are that the assessee manufactures all season wipers and snow wipers, which are exported to the associated enterprise. The associated enterprise also purchases such wipers from Chinese manufacturers. The associated enterprises has given interest free unsecured loan of about Rs. 1.81 crores to the assessee on 31.03.2006. The as....
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....nsactional net margin method; f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall beapplied for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such price, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean." 6.3 It is also provided that on satisfaction that of one of the four conditions mentioned in sub section (3) is not satisfied the Assessing Officer may proceed to determine the arm's length price in accordance with sub sections (1) and (2) and the material available with him. 6.4 Section 92D requires the assessee to keep and maintain information and document in respect of an international transaction entered into by him, as may be prescribed. Section 92E provides that such a person shall also obtain a report from an accountant and furnish the report in the prescribed form and duly signed an....
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...., which may have a bearing on the international transactions entered into by the assessee; (g) a record of uncontrolled transactions taken into account for analyzing their comparability with the international transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions; (h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction; (i) a description of the methods considered for determining the arm's length price in relation to each international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case; (j) a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the ....
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....sense that all other things being equal, the CUP and traditional transactional methods lead to more reliable results vis-a-vis the results obtained by applying transaction profit method. For the sake of ready reference this paragraph is reproduced below:- "As we have seen above, and as clearly discernable even from the OECD approach discussed above and with which we are in considered agreement, whether we proceed on the basis that there is an order of preference in which transfer pricing methods are to be applied, or whether we proceed without any such priority order, the traditional transaction methods, and particularly CUP, are preferred methods in the sense that all other things being equal, CUP and traditional transaction methods lead to more reliable results vis-a-vis the results obtained by applying transaction profit method. As a result, when CUP method can be reasonably applied in determining the arm's length price of an international transaction in a particular fact situation, and unless another method is proven to be more reliable a method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. We are, therefore, of the considere....
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....rnational transaction has not been determined in accordance with subhttp:// section (1) and (2). Even if there are minor abberations in the CUP, it is complete rejection is not justified. 6.14 Coming to the case laws relied upon by the revenue, it has been submitted by the learned DR that comparability of products has not been established either with respect to contemporary technical report or by bringing on record the financial results of the associated enterprise regarding sale price of Chinese wipers and assessee's wipers. In the case of Ranbaxy Laboratories Limited (supra) it has inter alia been held that if the assessee wishes to take a foreign-associated enterprise as a tested party, he must ensure that its data is furnished to the Assessing Officer or the data is available in public domain. Since that has not been done, the CUP method has been rightly rejected and the TNMM has been rightly applied. 6.15 In the case of UCB India (P) Limited Vs. ACIT (2009) 121 ITD 131, the division bench held that the CUP method is most direct method for determining the arm's length price. However, documentation and other data have to be made available for comparability before an....
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.... ratio of this case is applicable mutatis-mutandis to the facts of the case as the focus is on the market in which products are sold. Therefore, the CUP method could validly be employed provided product comparability is established. Therefore, it would have been appropriate for the assessee to make the data of the associated enterprise available to the Assessing Officer, at least in respect of sale of Chinese and Indian wipers so as to establish the comparability. Nonetheless that by itself would not displace the CUP method, which is objective in terms of the purchase price of the associated enterprise. Accordingly, it is held that the Assessing Officer erred in changing the method for determining arm's length price. 7.2 We may now discuss the analysis carried out by the assessee. The sale price of the assessee is higher than the sale price of the Chinese manufacturers to the associated enterprise except in case of all season wipers of 26" and 28". The sale price of 26" wiper is US Dollars 0.99 against the sale price of Chinese manufacturers of US Dollars 1.50. The corresponding figures for 28" wipers are 1.01 US Dollars and 1.50 US Dollars. The analysis does not furnish ....