2015 (8) TMI 1035

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....f Rs. 5,36,16,103/. This international transaction reported by the assessee in Form No.3CEB consisted of sale of Blowing Agent worth 297617 kgs. and that of Antioxidants worth 4360 kgs. In order to demonstrate that this international transaction was at arm's length price (ALP), the assessee employed Comparable Uncontrolled Price (CUP) method. In the proceedings initiated by the Transfer Pricing Officer (TPO), on a reference made by the Assessing Officer (AO), the assessee submitted that the price charged from its AE for the products sold was higher than the price for similar products charged from unrelated customers, wherever applicable. It was explained that the formulations done by the assessee are proprietary in nature and the final products vary as per requirements of various customers. To cater to the requirements of various customers, the assessee stated that sometimes, it needs to alter the chemical compositions and undertake research, so that the final product suits the customers' processing parameters. The formations of the products were stated to be varying by application depending upon the processing technique, polymer used and articles manufactured. It was also put fort....

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....rst sale was made by the assessee to its AE on 14.10.2003, then on 6.12.2003. The assessee sold the same product to M/s Maricell SRI, Italy, on 17.12.2003. Noticing not much variation in the sale volume made to AE and Italy party, the TPO treated the price of Rs. 126 per kg. as the ALP of this transaction. That is how the differential amount between the ALP and the actual price charged amounting to Rs. 10,78,347/- was proposed as a transfer pricing adjustment. The AO made the addition which came to be deleted in the first appeal. 5. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee used the CUP method for demonstrating that its international transactions of exports made to AE were at ALP. The TPO, too, did not dispute the application of CUP as the most appropriate method. However, the extant addition was made by observing that the price charged by the assessee from its AE was less than that charged from Italy party for the same product. During the course of hearing, our attention was drawn towards the product ADC-L-5 having been sold by the assessee to various related and unrelated parties in the fo....

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....fied methods. The first prescribed method is Comparable uncontrolled price (CUP) method. Clause (a) of Rule 10B(1), dealing with the mechanism for the determination of ALP under CUP method, provides as under:- "(a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction ;" 7. A bare perusal of the prescription of Rule 10B(1)(a) divulges that the first step in the determination of the ALP under the CUP method is to identify the price charged for property transferred in a comparable uncontrolled transaction or a number of such transactions. Second step provi....

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.... instance, must have overall similar products. It is obvious that if the products are different, then, there can be no question of making an effective comparison between the prices charged. Once the products under both the transactions are broadly similar but there is a difference in them because of certain specific characteristics; and/or the products in both the transactions are identical, but still there are certain differences due to the contractual terms or the geographical location, etc., then, a reasonably accurate adjustment should be made in the price of the uncontrolled transaction for eliminating the material effects of such differences so as to bring the international transaction and the comparable uncontrolled transaction on the same pedestal. If due to one reason or the other, no reasonable accurate adjustment can be made due to such differences, then, such uncontrolled transaction should not be considered as a comparable transaction. If, after eliminating such transaction(s), there remains no other comparable uncontrolled transaction, then, the CUP method cannot be considered as the most appropriate method which should be discarded and substituted with another more s....

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....ances, we overturn the impugned order on this issue and send the matter back to the file of AO/TPO for a fresh determination of ALP of this transaction under the CUP method in accordance with our above directions/observations. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. Polymerization Catalysts named DBH. 10. The assessee sold 13500 kgs. of this product to its AE at a total price of Rs. 18,15,205/-, giving the average unit sale price of Rs. 134/-per kg. The assessee also sold this product to Belgium and Japanese parties. Total seven transactions of this product were undertaken by the assessee which have been tabulated on page 50 of the paper book, with the price ranging from Rs. 134/- per kg. to Rs. 195/- per kg., being the lowest price charged by the assessee from its AE and the highest from the Belgium party. The TPO took up the highest price of Rs. 195/- per kg. as benchmark and, accordingly, proposed transfer pricing adjustment of Rs. 8,17,295/- . The addition so made by the AO came to be deleted in the first appeal. 11. After considering the rival submissions and perusing the relevant material on record,....

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....a Japanese party at Rs. 125/- per kg. It is obvious that the transaction of sale of 1 kg. to non-AE is a solitary and exceptional in nature and hence cannot constitute the bedrock for making comparison with 73710 kgs. sold to AE. If we exclude this lonely exceptional transaction of sale to non-AE, there remains no other comparable uncontrolled transaction, which can be compared with the international transaction under consideration. 14. It has been noticed from the mandate of Rule 10B(1)(a) above that the ALP under this method can be determined only by making a comparison of the controlled transaction with similar uncontrolled transaction(s). Such comparable uncontrolled transactions can be internal as well as external. Usually, preference is given to internally comparable transactions. If, however, internal comparables are not available and the assessee seeks to apply CUP as the most appropriate method, then, the onus is upon him to put forward certain externally comparable uncontrolled transactions for enabling the TPO to make a logical comparison with the international transaction undertaken by the assessee. To summarize the position, if internally comparable uncontrolled tra....