TaxTMI 
TaxTMI 
2015 (11) TMI 1790
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....ant. Thus, the A.O. / DRP erred in making an addition of Rs. 90,04,462/- u/s 92C on the basis of the order of the TPO u/s 92CA(3) dated 24.12.2012 in the case of the appellant company. 3] The learned TPO / DRP erred in making an addition of Rs. 90,04,462/- without appreciating the fact that such an adhoc addition was not permissible under law in view of the decision of Supreme Court in the case of K.P. Verghese [131ITR 597]. 4] The learned TPO / DRP erred in not appreciating the fact that the adjustment of Rs. 90,04,462/- made to the total income as returned is beyond the scope of total income as defined in section 5 of the Act. The learned TPO / DRP also erred in not appreciating the fact that the adjustment of Rs. 90,04,462/- does not 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 Rs. 76,01,160/- by adopting the Comparable Uncontrolled Price (CUP) Method for determining the Arm's Length Price (ALP) in respect of some of....
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....2] The learned TPO / DRP failed to appreciate that there were various differences on account of transactional, functional, 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 the ALP. 6.3] The learned TPO / DRP failed to appreciate that the TNMM was the most appropriate method for determining the ALP in respect of import of goods from the AE since the net profit margin of the assessee company was comparable to the net profit margin of the comparable companies and hence, the transactions 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....
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....sment year 2005-06. It was further pointed out by the learned Authorized Representative for the assessee that the ground of appeal No.1 was general in nature and grounds of appeal Nos.2 and 3 are not pressed. The issue in ground of appeal No.4 is in respect of adjustment made of Rs. 90,04,462/- on account of arm's length price. The issue in ground of appeal No.5 is in respect of the determination of arm's length price pertaining to export of finished goods and vide ground of appeal No.6, similar adjustment in respect of international transactions pertaining to import of goods. Vide ground 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 w....
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.... 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-à-vis external comparables, but the assessee had failed to benchmark its transaction separately. The TPO was of the view that in such circumstances, where the assessee exports same products to the third parties and also sells the same in domestic market as well, then comparability based on the sale prices of the same produc....
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....d was to the tune of Rs. 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 Rs. 90.90 crores, only export of goods totaling Rs. 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 Rs. 26.58 crores, only goods totaling Rs. 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 was dependent on various issues i.e. timing of the transaction, volume of order and geographical locations. In such circumstances, the application of CUP method was not practical. Similar reference was made to the transactions of import of goods. He stressed that the issue arising in the present appeal is identical t....
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....he 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 which suitable adjustments could not be made. In this regard, the attention was drawn to page 165 of the Paper Book wherein which make it clear that the assessee company has charged different prices to Amphenol Ltd., Great Britain for the same product. 3.2 The assessee emphasized that there are various differences in transactions with AEs an....
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....e 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 a difference in value chain. Similarly, assessee explained that it is able to realize higher price on account of Amphenol brand for which no consideration was paid by the assessee. 3.3 Considering the above differences, CUP method was claimed to be not the most appropriate method to determine ALP. The suitable adjustments were not possible for the above differences and therefore, the TPO was not justified in adopting CUP for exp....
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....nrelated 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 importance of the "similar circumstances" could not be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similarity between the two sets of transactions could be judged by the quality, grade and quantity of the material. In addition, the factors like location of the parties, availabilit....
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....at 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 accompanying circumstances and conditions have to be evaluated for comparison. Even a minor change in the properties of the products, circumstances of trade (billing period, amount of credit therein, etc.) may have a significant effect on the price. Product comparability is absolutely key, in particular physical features such as size, weight, appearance along with volume, reliability/storage requirements, regulatory requirements, etc. Pricing of a product is a very subjec....
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....oposition 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 them subsequently to various parties. Thus, it is to be noted that the transactions of exports of goods, import of goods are all part of the assessee's business. Further, the commission is paid to various parties to boost the sales of the assessee's products. Therefore, the transactions of exports, imports and payment of commission to agents are closely inter related and are part of single business activity of the assessee and the profit earned by the assessee is collective result of all these....
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....nts 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 demonstrate that the method selected by it, was most appropriate. There is no dispute regarding this proposition as well. However, once, the TPO has tried to select a different method, the onus is on the TPO to demonstrate that the other method is the most appropriate method. This principle has been laid down by Special Bench in the case of Aztec Software Ltd. [107 ITD 141 (Bang)(SB)]. The learned CIT DR further argued that the assessee had made inadequate compliance. In this regard, the stand of the assessee ha....
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....ts 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 its production to its AEs and also made domestic sales of the same product to unrelated parties. The TPO rejected TNMM method adopted by the assessee and applied Internal Cost Plus Method, thereby comparing the margin earned in the domestic segment with the margin earned in the exports segment and accordingly, made adjustments. In the said case, the issue was regarding applicability of TNMM or the Cost Plus Method. In the said case, the issue of applicability of CUP method was not involved and hence, the said decision has been....
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....rred at page 2 of TPO order. Out of these imports, the TPO has accepted TNMM method for imports amounting to Rs. 13,72,10,348/-. However, in respect of imports amounting to Rs. 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 in pages 199-217 of Paper Book. Thus, he has held that in case of certain products, the average purchase price paid by the assessee to its AEs was more than the average purchase price paid to third parties and hence, he has made an adjustment of Rs. 2,55,003/- in respect of such imports by applying CUP method. According to the TPO, in respect of the products which are purchased by the assessee from its AEs as well as Third Parties, the CUP method is the most appropriate method for determining ALP. The TPO has held that the CUP method can be applied in this scenario. He has furth....