AMPHENOL INTERCONNECT INDIA (P) LTD. Vs. DEPUTY COMMISSIONER OF INCOME TAX
LAWS(IT)-2014-5-131
INCOME TAX APPELLATE TRIBUNAL
Decided on May 30,2014

Amphenol Interconnect India (P) Ltd. Appellant
VERSUS
DEPUTY COMMISSIONER OF INCOME TAX Respondents

JUDGEMENT

- (1.) ALL these appeals pertain to the same assessee on similar issues, so they are being disposed of by this common order. In ITA No. 1486/Pn/2010, the assessee has filed the appeal on the following grounds: "(1) The learned TPO/DRP erred in recomputing the transfer price of the international transactions relating to exports and import of goods and payment of commission despite the fact that none of the conditions as prescribed in s. 92C(3) of the IT Act, 1961 ('the Act'), had been violated by the appellant. Thus, the AO/DRP erred in making an addition of Rs. 62,89,277 under s. 92C on the basis of the order of the TPO under s. 92CA(3), dt. 1st Oct., 2009 in the case of the appellant company. (2) The learned TPO/DRP erred in making an addition of Rs. 62,89,277 without appreciating the fact that such an ad hoc addition was not permissible under law in view of the decision of the Supreme Court in the case of K.P. Verghese vs. ITO & Anr. : (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC). (3) The learned TPO/DRP erred in not appreciating the fact that the adjustment of Rs. 62,89,277 made to the total income as returned is beyond the scope of total income as defined in s. 5 of the Act. The learned TPO/DRP also erred in not appreciating the fact that the adjustment of Rs. 62,89,277 does not partake the character of income as defined in s. 2 of the Act. In view of the above, the adjustment made by the TPO/DRP is not within the purview of the concept of 'income' as per IT Act and hence, it requires to be deleted. (4) The learned TPO/DRP erred in making an adjustment of Rs. 43,97,063 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. (4.1) The learned TPO/DRP erred in holding that the CUP method was the most appropriate method for 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. (4.2) 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 the ALP. (4.3) The learned TPO/DRP failed to appreciate that the TNMM was the most appropriate method for determining the ALP in respect of export of goods to AEs and the net profit margin of the assessee was comparable to the net profit margin of the comparable companies and hence, the transactions with the AEs were at ALP. (4.4) 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 benchmarked and thereby contradicting themselves, since no such separate benchmarking was conducted by the learned TPO himself, while benchmarking the balance international transactions for which the TNMM was accepted. (5) The learned AO/DRP erred in making an adjustment of Rs. 2,55,003 by adopting the CUP method for determining the ALP in respect of some of the international transactions pertaining to import of goods. (5.1) The learned TPO/DRP erred in holding that the CUP method was the most appropriate method for determining the ALP in respect of certain transactions of import of certain 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 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. (5.3) 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 AEs 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 AEs were at ALP. (5.4) The learned TPO/DRP erred in rejecting the TNMM as the most appropriate method for benchmarking certain international transactions on the grounds that these transactions should have been separately benchmarked and thereby contradicting themselves, since no such separate benchmarking was conducted by the learned TPO himself, while benchmarking the balance international transactions for which the TNMM was accepted. (5.5) 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. (6) 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 accepted by the learned TPO as the most appropriate method for asst. yr. 2004 -05, in which year the surrounding facts and circumstances were similar. (7) Without prejudice to the above grounds, the assessee submits that the learned TPO/DRP failed to appreciate that in respect of certain products exported by the assessee, it had charged higher price to the AEs as compared to non -AEs and hence, this amount should have been adjusted and only the net amount could be added. (8) Without prejudice to the above grounds, the assessee submits that the learned TPO/DRP failed to appreciate that in respect of certain products imported by the assessee, it had paid lesser price to the AE as compared to non -AEs and hence, this amount should have been adjusted and only the net amount could be added. (9) The learned TPO/DRP erred in making an adjustment of Rs. 16,37,200 by adopting the CUP method for determining the ALP in respect of the transaction of payment of commission by the assessee company to its AE. (9.1) The learned TPO/DRP erred in holding that the assessee had paid commission at a higher rate to its AEs as compared to the rate paid to the third parties in domestic market and hence, an adjustment was required to be made on account of the commission paid. (9.2) The learned TPO/DRP failed to appreciate that there were various transactional, functional and economic differences in respect of the services provided by the AEs and the third parties in the domestic market and hence, since suitable adjustments were not possible to be made for the various differences between the services rendered, the CUP method was not the most appropriate method for determining the ALP. (9.3) The learned TPO/DRP erred in not appreciating that the assessee had also received commission from its AEs and the rate of the commission received was almost equal to the rate paid by the assessee company to its AEs and hence, there was no reason to hold that the assessee had paid higher rate of commission to its AEs. (9.4) The learned TPO/DRP failed to appreciate that the TNMM was the most appropriate method for determining the ALP in respect of the commission paid to its AEs and since the net profit margin of the assessee company was comparable to the net profit margin of the comparable entities, hence, no addition was required to be made. (9.5) 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 the various differences in the services rendered by the AEs and the third parties. (10) The assessee submits that without prejudice to its contention that the addition made under s. 92C is not warranted at all, it is submitted that the learned TPO/DRP ought to have granted the benefit of 5 per cent to the assessee company as per the proviso to s. 92C(2). (11) The appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal." Amphenol Interconnect India (P) Ltd. (hereinafter called as Amphenol) is mainly engaged in the business of manufacturing of connectors, accessories, cable assemblies and system integration for application in various industries such as military, aerospace, telecom, etc. The products are specialized in nature as they are being used in defence, aerospace, etc. The products are manufactured only against the specific orders i.e. they are customized products. The assessee company is part of Amphenol Group which is one of the largest manufacturers of interconnect products in the world. In the year under consideration, the assessee has entered into international transactions with its Associated Enterprises (hereinafter called as AEs). The details of the international transactions entered into by the assessee as detailed in the Transfer Pricing Officer's (hereinafter called as TPO) order are as under:
(2.) 1 The assessee company had entered into international transactions of purchase of raw material and export of finished goods in respect of which the addition was made by the AO. In this year, the assessee has record sales turnover of Rs. 84.16 crores and had declared net profit before tax of Rs. 24.33 crores. In the transfer pricing study report as placed on pp. 54 - 84 of Paper Book - I, the assessee has applied TNMM as the most appropriate method for computing the ALP of international transactions. The assessee identified 12 companies as comparable with the assessee company and average operating margin of these companies was 7.71 per cent (as detailed on back side of p. 75 of Paper Book -I) as against the operating margin of 26.59 per cent as referred back side of p. 83 of Paper Book -I earned by the assessee and accordingly, it was the stand of assessee that the international transactions entered into with the assessee were at ALP. The TPO has not accepted the contention of the assessee and he made adjustment under s. 92C on three counts which as under: Regarding adjustment towards exports, we find that the assessee has made total exports of Rs. 28,64,38,138 to its AEs as referred in p. 2 of TPO order. Out of these exports, the TPO has accepted TNMM for exports amounting to Rs. 27,24,19,025. However, in respect of exports amounting to Rs. 1,40,19,113, the TPO has stated that similar products have also been sold by the assessee to third parties wherein lesser price was charged from the AEs. Accordingly, the TPO has held that in respect of such exports, CUP method should be applied. The TPO has computed average sale price of the products sold to AEs and average sales price of products sold to third parties as detailed in pp. 165 -198 of paper book. Thus, he has held that in case of certain products, the average selling price charged by the assessee to its AEs was less than the average selling price charged to third parties and hence, he has made an adjustment of Rs. 43,97,063 in respect of such exports by applying CUP method. 2.1 According to the TPO, in respect of the products which were sold by the assessee to 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 could be applied in this scenario. He has further stated that the assessee did not submit any data for the adjustments to be made on account of the differences in respect of sales to AEs and third parties. Accordingly, he has made the addition in respect of those products wherein the average selling price charged by the assessee to the AEs was lesser than the average selling price charged to third parties. In this regard, the stand of the assessee has been that the addition in question is not justified. We find that out of the total exports to AEs of Rs. 28.64 crores, the TPO has accepted that exports of Rs. 27.24 crores are at ALP. Only in respect of exports of Rs. 1.40 crores which account for 5 per cent 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 which suitable adjustments could not be made. In this regard, the attention was drawn to p. 165 of the paper book which makes it clear that the assessee company has charged different prices to Amphenol Ltd., Great Britain, for the same product. 2.2 The assessee emphasized that there are various differences in transactions with AEs and the third parties pertaining to similar products. These differences are as under: (a) Volume differences - - This aspect was clarified by the assessee on p. 150 of the paper book. The assessee, inter alia, had explained to the AO that volumes involved for AEs are much higher as compared to third parties. The assessee has further stated that volume discount offered depends upon various factors like prevailing market conditions, level of competition in the market and future growth prospects. This fact has not been appreciated by the TPO. (b) Geographical differences - - This aspect was clarified by the assessee on p. 152 of the paper book, inter alia, clarified to the AO that the prices charged depend upon the country where the AE/third party is situated and also the demand and supply factors in the respective countries. The assessee explained that CUP method can be applied only when the conditions prevailing in the market in which the respective parties operate are the same and also the size and location of the market is to be taken into consideration. This aspect has not been analyzed by the TPO judiciously. (c) Timing differences - - This aspect was clarified by the assessee on pp. 153 -154 of the paper book, inter alia, submitted that timing differences in the sales made to the AEs and third parties have a bearing since the prices are dependent upon various factors. As clarified, the assessee manufactures after receiving the order from the party and the relevant raw material cost at that time is also a crucial factor to determine the prices of the end -product. Thus, considering timing differences of transaction, application of CUP method is not justified. (d) Risk difference - - This aspect emphasized by the assessee from the details at p. 154 of the paper book, inter alia, emphasized that the risk mainly market risk and product related risk assumed by the company in case of transactions with AEs are 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 as discussed above has not been judiciously appreciated by the assessee. (e) Functional differences - - This aspect was clarified by the assessee as per details on p. 154 of the paper book, inter alia, assessee explained to the AO 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 p. 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. 2.3 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 exports of Rs. 1.40 crore to the AEs specially when in respect of some of the products, the assessee has charged higher price to the AEs as compared to the prices charged to third parties. This fact was clarified by the assessee to the TPO by the details as mentioned on p. 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 Rs. 16,18,244 to the AEs in respect of the same products which were also sold to third parties as referred on p. 198 of the paper book. Considering the above differences, the CUP method was not the most appropriate method since suitable adjustments were not possible to be made for the various differences. The TPO has applied CUP only on the basis of product similarity without appreciating the various other differences as discussed above. 2.4 We find that the Mumbai Bench in the case of Gharda Chemicals Ltd. vs. Dy. CIT, (2010) 130 TTJ (Mumbai) 556 :, (2010) 39 DTR (Mumbai)(Trib) 130 has held that the assessee had sold a product named 'Dicamba' to Gharda USA Inc., AE of the assessee company. Total amount received by the assessee as 'ALP' towards export of Dicamba was declared at Rs. 20.71 crores. The assessee had determined the ALP by comparable uncontrolled price method. The TPO noted that the sale of Dicamba to unrelated parties was also made by the assessee in various other countries at the rates ranging between 19.47 US $ to 25.00 US $ per kg. As against that the Dicamba sold by the assessee to its AE was @ 14.66 US $. It was found relevant to mention that the total quantity exported by the assessee to different countries was 4,18,803 kgs. inclusive of 2,72,100 kgs. sold to its AE. The TPO determined the 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 Tribunal held that the internal CUP method envisages 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 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, availability of raw material; demand and supply equation also play pivotal role in finding out as to whether the two are really comparable or not. Thus in the internal CUP method the local factors of AE in the other country and all the relevant factors which could have bearing on the price so charged from AE must be taken into consideration. The Tribunal was dealing with a case in which the assessee has its AE in USA and rate charged was 14.66 US $ per kg. of Dicamba. There was no other export by the assessee to USA. The uncontrolled transactions of export made by the assessee are to other countries such as UK, Netherlands, New Zealand, Australia, France, etc. in respect of which average rate of 20.67 US $ per kg. of Dicamba has been determined by the TPO for computing the ALP. All other transactions of exports by the assessee are to non -USA countries. The price on which a particular product is available in one country may largely vary from the price prevailing in other countries due to various factors. The country which is producer of a particular commodity or its raw material may have lower sale price in comparison with the country which is short of such natural resources. Similarly the price may vary from one country to another depending upon climatic conditions and the demand and supply factors. Thus the price charged by an Indian party from UK or Australia may be at much variance with that charged from USA. In such a scenario no valid comparison could be made between the price charged by the assessee from other countries with that from USA, more particularly when the Tribunal was of the view that quantity exported to USA on wholesale basis with that to other countries in small lots on retail basis. In this situation, the Tribunal held that the internal CUP method was not suitable in the present circumstances. 2.5 We find in Asstt. CIT vs. Dufon Laboratories, (2010) 47 DTR (Mumbai)(Trib) 20 :, (2010) 39 SOT 59 (Mumbai), the TPO had made the addition based on the 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 Tribunal held that if the differences are taken into consideration like geographical, volume, profile of the customer, etc. etc., no addition was warranted. 2.6 In UCB India (P) Ltd. vs. Asstt. CIT, (2009) 124 TTJ (Mumbai) 289 :, (2009) 26 DTR (Mumbai)(Trib) 458 :, (2009) 121 ITD 131 (Mumbai), the assessee had made imports from its AE. The assessee had applied TNMM. The TPO adopted CUP method to determine ALP. The Tribunal 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 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 subjective exercise and its true value, as received by the receiver, can differ from that received by others in the market place. Broader business functions and not just the product comparability have to be considered. It would also be necessary to come to a conclusion, with some scientific study or enquiry that the APIs imported by independent entities are same as the API imported by the assessee, as even a minor difference could materially affect the price. There should be a scientific basis to say that APIs are identical, with the same purity, potency, and characteristics. APIs are unique compound making, and the effect of usage of a particular PDF using an API would depend on the composition, purity, method of usage, dosage used, side effects. All such data should be first obtained by the Revenue or the assessee, who wishes to compare products and then arrive at the ALP or wish to make adjustments to a price, cost or margin. 2.7 In the case of Welspun Zucchi Textiles Ltd. vs. Asstt. CIT, (2013) 153 TTJ (Mumbai) 153 :, (2013) 83 DTR (Mumbai)(Trib) 293, the assessee had exported bathrobes to its AEs. The assessee had adopted CUP method to determine ALP. The TPO rejected CUP method and applied TNMM. The Tribunal held that the assessee had wrongly adopted CUP method and it was held that the assessee had made comparison of the average price of all the bathrobes sold to AEs vis -a -vis third parties. The Tribunal held that such comparison is not correct and secondly, there were differences in geographical locations and size of the markets which affected the price. Accordingly, CUP was rejected as the most appropriate method. 2.8 In Intervet India (P) Ltd. vs. Asstt. CIT, (2010) 130 TTJ (Mumbai) 301 : (2010) 38 DTR (Mumbai)(Trib) 422 :, (2010) 39 SOT 93 (Mumbai), Tribunal has held that for applicability of CUP, various differences including economic and market conditions, geographical locations, volume discount, credit risks, etc. etc. are to be taken into account and simply, product similarity is not the only criteria for applying CUP method. 2.9 We find in the case of Arvind Mills Ltd. vs. ITO, 11 Taxmann.com 67 (Ahd), Tribunal 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 Tribunal held that even minor differences in contractual terms, economic conditions, geographical areas, risks assumed, functions assumed could affect the prices of the products.
(3.) NEW let us analyse the arguments of learned CIT -Departmental Representative 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. 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 of 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 interrelated and are part of single business activity of the assessee and the profit earned by the assessee is collective result of all these transactions and hence, it is impractical to analyse the profits of each individual transaction. Accordingly, the assessee has rightly aggregated the above transactions for the purposes of determining the ALP under TNMM. Even if the various transactions are evaluated independently, the net final result remains the same. The assessee has adopted 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 per cent of the exports and imports are at ALP as per the TNMM. 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. 3.1 The learned CIT -Departmental Representative has further submitted that CUP is a more direct method for determining the ALP of international transactions entered into by a company and hence, it should be preferred over TNMM. In this respect, she has placed reliance on the decision in the case of Asstt. CIT vs. MSS India (P) Ltd., (2009) 123 TTJ (Pane) 657 :, (2009) 25 DTR (Pune)(Trib) 1 : : (2009) 32 SOT 132 (Pune). Accordingly, it has been contended that the learned TPO has rightly applied CUP method for determining the ALP of certain transactions relating to exports and imports of goods and commission where similar transactions were available for comparison. In this regard, the stand of the assessee has been that the above contention is not correct. The learned TPO has relied on the decision of MSS India (supra) to state that CUP method is to be preferred over TNMM. According 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 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. 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 -Departmental Representative 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 -Departmental Representative 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 -Departmental Representative 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. Asstt. CIT, (2007) 109 TTJ (Bang)(SB) 892 :, (2007) 107 ITD 141 (Bang)(SB). The learned CIT -Departmental Representative further argued that the assessee had made inadequate compliance. In this regard, the stand of the assessee has been that it had submitted all the relevant details to demonstrate that TNMM was the most appropriate method and the detailed report in this regard is enclosed on pp. 54 -84 of the paper book. Considering the various differences between the transactions entered into with the AEs and the third parties, the CUP is not applicable to the facts of the present case. Same holds good for import and commission issues as far as determination of ALP is concerned. 3.2 The learned CIT -Departmental Representative has placed reliance on the decision in the case of Knorr -Bremse India (P) Ltd. vs. Asstt. CIT (ITA No. 5097/Del/2011) and contended that the transactions of export, import and commission payment should have been benchmarked separately. The aggregation of these transactions is not justified. The said decision is distinguishable on facts. In the said case, the assessee had aggregated transactions like payment of "professional consultancy fee" and payment of "management fee for support services" and thereby determined the ALP under TNMM. In the said case, Bench held that the assessee was not able to establish that the transactions were closely linked with each other and hence, it was held that the aggregation of such transactions was not justified. However, in the instant case, the assessee has demonstrated that the transactions of exports, imports and payment of commission to agents are closely interrelated and part of single business activity of the assessee and therefore, the ratio of the above decision is not applicable to the case of the assessee. 3.3 The learned Departmental Representative has also placed reliance on the decision of Delphi TVS Diesel Systems Ltd. vs. Asstt. CIT, 24 taxmann.com 179 (Chennai) in support of his contention that CUP should be applied on the facts of the assessee's case and not TNMM. We find that in the Delphi TVS (supra), Tribunal has rejected TNMM 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. 3.4 Regarding reliance of learned Departmental Representative on the ratio in the case of Wrigley India (P) Ltd. vs. Addl. CIT, (2011) 142 TTJ (Del) 23 :, (2011) 62 DTR (Del)(Trib) 201 :, 14 taxmann.com 91 (Del), 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 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 rendered in different facts and circumstances. 3.5 The learned CIT -Departmental Representative has placed reliance on the decisions of Dy. CIT vs. Hellosoft India (P) Ltd. : (2013) 153 TTJ (Hyd) 322 :, (2013) 84 DTR (Hyd)(Trib) 345 :, 32 taxmann.com 101 (Hyd) and Coca Cola India Inc. vs. Asstt. CIT and Ors. : (2009) 221 CTR (P and H) 225 : (2009) 17 DTR (P and H) 66 : (2009) 309 ITR 194 (P and H) and contended that it is open for the TPO to reject the method adopted by the assessee and apply a different method which is found to be more appropriate on facts of the case. This proposition is not in dispute. However, in the instant case, the assessee has demonstrated that the CUP method adopted by the learned TPO is not applicable in the case of the assessee and TNMM is a more appropriate method as discussed above, the same should be applied. 3.6 In the case of Atul Ltd. vs. Asstt CIT (ITA No. 3118/Ahd/2010) [reported at, (2012) 80 DTR (Ahd)(Trib) 210 :, (2013) 151 TTJ (And) 346 - - Ed.], wherein both the assessee and the TPO had adopted CUP method as the most appropriate method, the Bench held that in the CUP method, a transaction is held to be comparable only if both, the product sold and the circumstances surrounding the controlled transaction, are substantially the same as those of the uncontrolled transaction. Thus, the comparability depends upon the quality of product, volume of sale, market level, geographical conditions, date and other realistic factors governing the sale price. However, in the instant case, the assessee has demonstrated that the transactions with related parties and unrelated parties are not comparable on account of various differences as discussed above. Therefore, the ratio in Atul Ltd. (supra) is not against the assessee. This legal proposition will be applicable only to the adjustment towards import and commission. In view of the above, we hold that the TPO has wrongly applied the CUP method for determining the ALP in respect of some mentioned transactions pertaining to export of finished goods. More so, when the TPO accepts that more than 90 per cent 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. Regarding adjustment towards imports, the assessee has made total imports of raw material and finished goods of Rs. 14,59,18,186 from its AEs as referred at p. 2 of TPO order. Out of these imports, the TPO has accepted TNMM 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 pp. 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 further stated that the assessee did not submit any data for the adjustments to be made on account of the differences in respect of purchases from AEs and third parties. Accordingly, he has made the addition in respect of those products wherein the average purchase price paid by the assessee to the AEs was more than the average purchase price paid to third parties.;


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