M/s Akay Flavours & Aromatics P. Ltd, Cochin V. The ACIT, Cochin

CO 10/COCH/2015

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 1377 (ITAT-COCHIN)
• Duration Of Justice: 4 month(s) 18 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 28-10-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 15-09-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 10-06-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SHANTAM BOSE
• Assessee Lawyers: K M JOSE
• Keywords: Business income; Transfer pricing; International transaction
• Section: 143(3); 92B; 92E

Judgement Text

ITA NO 251/C/2015 & CO 10/C/2014 1 I N THE INCOME TAX APPEL L A TE T R IBUNAL COCHIN BENCH , COCHIN BEFORE S/SH RI B P JAIN , A M & G EORGE GEORGE.K , J M ITA NO . 251/COCH/2015 (ASST YEAR 2010 - 11 ) & CROSS OBJECTION NO. 10/COCH/2015 THE ASST COMMR OF INCOME TAX CIRCLE (1) KOCHI VS AKAY FLAVOURS & ARO MATICS PVT. LTD AMBUNAND MALAIDAMTHURUTHU KIZHAKKAMBALAM KOCHI 683 561 ( APPELLANT /RESPONDENT ) (RESPONDENT /CROSS OBJECTOR ) PAN NO. AACCA6827A ASSESSEE BY SH K M JOSE REVENUE BY SH SHANTAM BOSE, CIT - DR DATE OF HEARING 15 TH SEPT 2015 DATE OF PR ONOUNCEMENT 28 TH , OCT 2015 OR D ER PER GEORGE GEORGE. K. J M: THIS APPEAL FILED BY THE REVENUE AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARISE OUT OF THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO FOR SHORT HEREAFTER) UNDER SECTI ON 143(3) READ WITH SECTION 144C DATED 16.2.2015 FOR THE AY 2010 - 11. THIS ORDER WAS PASSED CONSEQUENT TO DIRECTIONS OF DISPUTE RESOLUTION PANEL (DRP) DATED 28.11.2014 WHEREIN THE ASSESSEES OBJECTIONS AGAINST THE DRAFT ASSESSMENT ORDER DATED 20.2.2014 WERE DISPOSED OFF. ITA NO 251/C/2015 & CO 10/C/2014 2 2 THE FACTS OF THE CASE ARE AS UNDER: THE ASSESSEE IS AN INDIAN COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING, EXTRACTING, FORMULATING, PROCESSING AND EXPORTING OF AROMATIC COMPOUNDS AND OILS, FLAVOURS, EXTRACTS, ESSENTIAL OILS, AND OLEO RESINS. DURING THE PREVIOUS YEAR, THE ASSESSEE EXPORTED OILS AND OLEORESINS TO ITS ASSOCIATED ENTERPRISES (AES) VIZ., M/S AKAY USA AND AKAY EUROPE GMBH. TOTAL SALES TO AFOREMENTIONED AES DURING THE YEAR AMOUNTED TO RS. 14,47,66,057/ - THE ASSESSEE JUSTIFI ED THAT THE AFORESAID SALES WERE AT ARMS LENGTH ON THE BASIS OF TRANSACTIONAL NET MARGIN METHOD. (TNMM). FOLLOWING COMPANIES WERE IDENTIFIED AS COMPARABLES ON THE BASIS OF A SEARCH PROCESS CARRIED OUT TO IDENTIFY A LIST OF COMPANIES OPERATING IN THE OLEORE SIN INDUSTRY, MANUFACTURING AND DEALING IN PRODUCTS SIMILAR TO THAT OF THE ASSESSEE. I ) KANCOR INGREDIANTS LIMITED II ) CHILLIES EXPORT HOUSE LIMITED III ) PAPRIKA OLEOS (INDIA) LIMITED IV ) ENJAYES SPICES & CHEMICAL OIL LIMITED 3 THE RETURN OF INCOME WAS FILED ON 31.8.201 0 DECLARING NIL INCOME AFTER SET OFF OF BROUGHT FORWARD LOSSES. THE COMPUTATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WERE REFERRED TO TRANSFER PRICING OFFICER (TPO) BY THE AO. VIDE LETTER DATED 16.1.2013, THE TPO ASKED THE ASSESSEE TO FURNISH INFORMATION IN TERMS OF SECTION 92B AND 92E ALONG WITH A QUESTIONNAIRE. THE ASSESSEE FILED THE TP DOCUMENTS ON 7.3.2013. ANOTHER SHOW CAUSE NOTICE DATED ITA NO 251/C/2015 & CO 10/C/2014 3 6.12.2013 WAS ISSUED ASKING THE ASSESSEE TO SUBMIT THE COMPLETE SEARCH PROCESS AND THE FILTERS USED TO IDENTIFY THE COMPARABLES. THE TPO ALSO PROPOSED TO APPLY INTERNAL CUP METHOD INSTEAD OF TNMM AS HE WAS OF THE VIEW THAT THE ASSESSEE EXPORTED SIMILAR PRODUCTS OF SIMILAR SPECIFICATIONS TO BOTH AES AND NON AES. IN RESPONSE TO TPOS SHOW CAUSE NOTICE DATE D 6.12.2013, THE ASSESSEE SUBMITTED THE ANNUAL REPORTS OF THE COMPARABLE COMPANIES. IN RESPONSE TO TPOS PROPOSAL TO ADOPT INTERNAL CUP METHOD, IT WAS SUBMITTED BY THE ASSESSEE THAT THE PRODUCTS VARY IN TECHNICAL SPECIFICATIONS AND IDENTICAL PRODUCTS IN RE SPECT OF ALL PARAMETERS MAY NOT BE IDENTIFIABLE WITH RESPECT TO EXPORTS TO AES AND NON AES. THE ASSESSEE ALSO SUBMITTED COMPLETE INVOICE DETAILS TO JUSTIFY ITS STAND. CONSIDERING THE DIFFERENCES IN SPECIFICATION, NATURE AND QUALIFY OF EACH PRODUCT, THE T PO MADE AN ANALYSIS TO FIND OUT THE PRODUCTS OF SIMILAR SPECIFICATIONS EXPORTED TO BOTH AES AND NON AES DURING THE PREVIOUS YEAR. WITH THIS ANALYSIS, THE TPO FOUND THAT ONLY 16 ITEMS HAVING SIMILAR SPECIFICATIONS WERE EXPORTED TO BOTH AES AND NON AES. THE TPO PROPOSED ADJUSTMENT IN RESPECT OF EACH OF THE 16 ITEMS AND THE TOTAL ADJUSTMENT PROPOSED AMOUNTED TO RS. 2,14,68,190/ - [REFER PAGE 4 OF TPO ORDER] IN RESPONSE, THE ASSESSEE FILED WRITTEN SUBMISSIONS AND ARGUED THAT EVEN IF INT ERNAL CUP METHOD IS BE ADOPTED, VARIOUS ADJUSTMENTS HAVE TO BE MADE TO COMPARABLE UNCONTROLLED PRICE TO ACCOUNT FOR DIFFERENCES BETWEEN THE AE AND THE NON AE TRANSACTION. THE ASSESSEE INTER ALIA ASKED FOR QUANTITY BASED PRICE VARIATION, QUALITY BASED PRICE VARIATION, ANALYSIS COST ADJUSTMENT ETC. THE ASSESSEE ALSO SUBMITTED THAT SIMPLE ITA NO 251/C/2015 & CO 10/C/2014 4 AVERAGE OF COMPARABLE PRICES SHOULD NOT BE TAKEN AND RATHER WEIGHTED AVERAGE OF PRICES OF COMPARABLE PRODUCTS SHOULD BE TAKEN. THE TPO REFUTED THE ASSESSEES CONTENTIONS IN R ESPECT OF CERTAIN ADJUSTMENTS. IN RESPECT OF QUANTITY BASED PRICE VARIATION, THE TPO REFERRED TO SOME INVOICES WHEREIN LOWER QUANTITIES ARE SOLD AT LOWER PRICES AND HIGHER QUANTITIES WERE SOLD AT HIGHER PRICES. ON THE BASIS OF THESE INVOICES, TPO CONCLUDED THAT THERE IS NO RELATION BETWEEN PRICE CHARGED AND THE QUANTITY SOLD AND CONSEQUENTLY QUANTITY BASED PRICE VARIATION ADJUSTMENT WAS REJECTED. IN RESPECT OF QUALITY SPECIFICATION BASED PRICE VARIATION, THE TPO CONCLUDED THAT THE COMPARISON IS MADE IN RESP ECT OF PRODUCTS OF SIMILAR TECHNICAL SPECIFICATION. REFERRING TO RULE 10B(1)(A) IT WAS STATED THAT UTMOST CARE HAS BEEN TAKEN IN COMPARING ONLY THE TECHNICALLY SIMILAR GRADES. HOWEVER, THE MATERIAL DIFFERENCES IN QUALITY OF PRODUCTS SHOWN BY THE ASSESSEE W ERE CONSIDERED AS MINISCULE BY THE TPO. [REFER PARA 5.2.3 OF TPO ORDER] AS REGARDS THE APPLICATION OF WEIGHTED AVERAGE RATE FOR THE COMPARABLE PRICE, THE TPO RELIED ON THE PROVISO TO SECTION 92C(2) AND CONCLUDED THAT ONLY SIMPLE AVERAGE IS PERMISSIBLE UN DER THE ACT AND CONSEQUENTLY THE REQUEST OF THE ASSESSEE TO APPLY WEIGHTED AVERAGE RATE WAS REJECTED. THE TPO HOWEVER ACCEPTED THE ANALYSIS COST ADJUSTMENT PROPOSED BY THE ASSESSEE AND AFTER PROVIDING THE SAME, THE TP ADJUSTMENT WAS REVISED DOWNWARDS FROM ORIGINALLY PROPOSED FIGURE OF RS. 2,14,68,190/ - TO A SUM OF RS. 1,73,55,099/ - THE ORDER UNDER SECTION 92CA WAS PASSED BY THE TPO ON 27.1.2014. ITA NO 251/C/2015 & CO 10/C/2014 5 4 THE AO PASSED THE DRAFT ASSESSMENT ORDER DATED 20.2.2014 UNDER SECTION 144C OF THE INC OME TAX ACT, 19 61 INCORPORATING THE TP ADJUSTMENT. THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP IN RESPECT OF THE TP ADJUSTMENT OF RS. 1,73,55,099/ - MADE BY THE TPO. THE ASSESSEE EXPLAINED BEFORE THE DRP AS TO HOW THE METHODOLOGY ADOPTED AND THE COMPUT ATION OF ALP BY THE TPO IS INCORRECT BASED ON FACTS OF THE CASE. THE DRP EXAMINED THE INTERNAL CUP TAKEN BY THE TPO AND FOUND THAT THE SAME WAS NOT COMPARABLE TO THE INTERNATIONAL TRANSACTION ON ACCOUNT OF DIFFERENCES IN TERMS OF HUGE TIME GAP, DIFFERENT G EOGRAPHICAL LOCATIONS, DIFFERENT QUANTITIES ETC. CONSIDERING THESE DIFFERENCES, THE DRP HELD THAT NO REASONABLE ADJUSTMENTS CAN BE MADE TO THE INTERNAL CUP ADOPTED BY THE TPO AND CONSEQUENTLY CONCLUDED THAT TNMM IS THE MOST APPROPRIATE METHOD ON THE BASIS OF FACTS AND CIRCUMSTANCES OF THE CASE. HAVING HELD THAT TNMM WAS THE MOST APPROPRIATE METHOD, THE DRP DIRECTED THE ASSESSING OFFICER TO EXAMINE THE COMPARABILITY ANALYSIS OF COMPARABLES SELECTED BY THE ASSESSEE IN ITS TP DOCUMENTATION AND ACCORDINGLY DETE RMINE THE ALP. SINCE TNMM WAS ACCEPTED TO THE MOST APPROPRIATE METHOD, VARIOUS ADJUSTMENTS PROPOSED BY THE ASSESSEE TO INTERNAL CUP WAS NOT DEALT BY THE DRP AND CONSEQUENTLY NO DIRECTIONS WERE ISSUED IN RESPECT OF SUCH ADJUSTMENTS. THE RELEVANT FINDINGS OF THE DRP ARE REPRODUCED HEREUNDER. HAVING HEARD THE OBJECTION, WE EXAMINED THE INSTANCES BY THE TPO IN PARAGRAPH 5.1.2 OF THE ORDER, FROM WHICH IT IS EVIDENT THAT THERE IS A HUGE ITA NO 251/C/2015 & CO 10/C/2014 6 TIME GAP IN THE TRANSACTIONS COMPARED WITH THE AE AND NON AE. FURTHER, THE TRANSACTIONS COMPARED ARE IN THE DIFFERENT GEOGRAPHICAL LOCATIONS AND ALSO THERE IS A LARGE VARIATION IN THE QUANTITY SOLD TO AE AND NON AE COMPARED. IN OUR VIEW, WITH THE CHANGE IN TIME, THE PRICES WILL FLUCTUATE WITH CHANGE OF GEOGRAPHICAL AREAS, THE PRI CES WILL VARY. FOR EXAMPLE WE CANNOT COMPARE THE SALES MADE ON 28.4.2009 WITH THAT OF 6.7.2009. WE CANNOT COMPARE THE RATE OF THE SALES MADE IN GERMANY WITH THAT MADE IN ITALY. SIMILARLY, WE CANNOT COMPARE THE RATES FOR SALE OF 1000 KGS WITH SALE OF 2000 K GS. FURTHER, FOR SUCH DIFFERENCES, NO REASONABLE ADJUSTMENT CAN BE MADE AND THEREFORE CONSIDERING THE SUBMISSIONS MADE AND JUDICIAL PRONOUNCEMENTS RELIED, WE ARE IN AGREEMENT WITH THE SUBMISSION THAT IN PECULIAR CIRCUMSTANCES OF THE CASE, THE CUP IS NOT BE THE MOST APPROPRIATE METHOD TO DETERMINE ALP. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE MOST A PPROPRIATE METHOD WILL BE TNMM. HAVING HELD THAT TNMM IS THE MOST APPROPRIATE METHOD, THE ASSESSING OFFICER IS DIRECTED TO EXAMINE APPROPRIATENESS OF TH E COMPARABLES SELECTED BY THE ASSESSEE IN ITS TP DOCUMENTATION AND DETERMINE THE ALP. 2.2 IN VIEW OF THE DIRECTIONS GIVEN IN PARA 2.1 ABOVE, THE OBJECTION RELATING TO DETERMINATION OF ARMS LENGTH PRICE WITHOUT ALLOWING OR INAPPROPRIATELY ALLOWING THE ADJ USTMENT UNDER CUP FOR GEOGRAPHICAL DIFFERENCES, THE QUALITY DIFFERENCE DUE TO PERMUTATIONS AND COMBINATIONS, TECHNICAL SPECIFICATIONS AND NOT ALLOWING OTHER ADJUSTMENTS LIKE FORWARD CONTRACT BASED PRICE VARIATION, MARKET BASED PRICE VARIATION, KEY CUSTOMER BASED PRICE VARIATION AND OPPORTUNITY COST BASED PRICE VARIATION BECOMES ACADEMIC IN NATURE AND THEREFORE WE DO NOT FIND IT APPROPRIATE TO ISSUE DIRECTIONS ON SUCH ADJUSTMENTS. AS DIRECTED BY THE DRP, THE AO SENT THE DRP DIRECTIONS TO TPO FOR DETERMINAT ION OF ALP UNDER TNMM. THE TPO VIDE LETTER DATED 7.1.2015 INTIMATED THAT THERE IS NO ADJUSTMENT REQUIRED TO BE MADE UNDER SECTION 92CA. THE AO CONSEQUENTLY PASSED THE FINAL ASSESSMENT ORDER ON 16.2.2015 DELETING THE TP ADJUSTMENT. 5 THE REVENUES GROUNDS AGAINST THE DELETION OF TP ADJUSTMENT ARE AS UNDER. ITA NO 251/C/2015 & CO 10/C/2014 7 1. THE ORDER OF THE DRP IN F NO. 47/DRP - BNG/2014 - 15 DATED 28.11.2014, IS OPPOSED TO LAW, WEIGHT OF EVIDENCE, FACTS AND CIRCUMSTANCES OF THE CASE. 2. WHETHER THE LEARNED DISPUTE RESOLUTION PANEL, BANGALO RE WAS RIGHT IN HOLDING THAT THE TNMM IS THE MOST APPROPRIATE METHOD TO DETERMINE ALP INSTEAD OF CUP ADOPTED BY THE TPO? THE TPO HAS TAKEN UTMOST CARE IN COMPARING ONLY THE TECHNICALLY SIMILAR GRADES FOR ALP DETERMINATION. HENCE, THE HONBLE DRP OUGHT TO H AVE CONSIDERED THE DETAILED ANALYSIS AND REASONING OF THE TPO. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS REQUESTED THAT THE ORDER OF THE LEARNED DISPUTE RESOLUTION PANEL, BANGALORE MAY BE SET ASIDE AND THAT OF THE ASSES SING OFFICER RESTORED. 6 WE HAVE CONSIDERED THE FACTS OF THE CASE, TPOS ORDER, DRP DIRECTIONS AND THE MATERIAL ON RECORD FILED BY THE ASSESSEE. IN THE PRESENT CASE, THE TPO HAS APPLIED INTERNAL CUP METHOD REJECTING THE TNMM ADOPTED BY THE ASSESSEE. IN DOING SO, THE TPO HAS COMPARED EXPORT INVOICE OF PRODUCTS OF SIMILAR TECHNICAL SPECIFICATION. FOR INSTANCE, OR BLACK PEPPER 40/20 GRADE IS COMPARED WITH OR BLACK PEPPER 40/20 EXPORTED TO NON AE. HOWEVER, THE TPO HAS NOT CONSIDERED THE QUALITY DIFFERENCES W ITHIN THE SAME GRADE. THE TPO ACCEPTS AT PARA 5.2.3 OF HIS ORDER THAT THERE ARE MATERIAL DIFFERENCES WITHIN THE SAME GRADE BUT DISREGARDS THE SAME AS MINISCULE. THE ASSESSEE HAS DEMONSTRATED THE QUALITY VARIATION OR DIFFERENCES WITHIN THE SAME GRADE OF P RODUCTS. FOR INSTANCE, THE PRODUCT IN THE NON - AE INVOICES AK038 AND AK 139 WHICH ARE TAKEN FOR ALP COMPARISON IS OR CAPSICUM 0.5M / DECOL, WHICH IS WATER SOLUBLE, WHEREAS THE PRODUCT IN AE INVOICES AK 151 AND AK 277 IS OR ITA NO 251/C/2015 & CO 10/C/2014 8 CAPSICUM 0.5M/ DECOL, IS OIL SOLUB LE. NORMALLY, CAPSICUM OLEORESIN IS AN OIL SOLUBLE PRODUCT IN NATURE AND IN ORDER TO MAKE IT SOLUBLE IN WATER, EMULSIFIERS SUCH AS POLYSORBATE 80 ETC TO THE EXTENT OF MORE THAN 80% HAVE TO BE USED. THE COST OF WATER SOLUBLE PRODUCTS THUS WILL BE HIGHER THA N THE COST OF OIL SOLUBLE PRODUCTS. THE COLOUR OF THE PRODUCT ALSO PLAYS AN IMPORTANT ROLE IN PRICING. THE PRODUCTS IN NON AE INVOICES ARE DECOLOURISED THAN THE PRODUCTS IN AE INVOICES WITHIN THE SAME GRADE. THUS, THE PRODUCTS IN NON AE INVOICES ARE MORE E XPENSIVE THAN THAT OF AE PRODUCTS. THE ASSESSEE HAS DEMONSTRATED THESE DIFFERENCES WITH INVOICES BOTH IN AE AND NON AE. THE TPO HOWEVER HAS NOT AT ALL CONSIDERED THESE DIFFERENCES. THE INTERNAL CUP FAILS ON ACCOUNT OF THE DIFFERENCES WITHIN THE SAME GRADE OF THE PRODUCT. THE TPO THEREFORE HAS FLAWED IN HIS APPROACH IN ADOPTING INTERNAL CUP AS THE MOST APPROPRIATE METHOD. 6.1 SECONDLY, THE TPO HAS NOT CONSIDERED THE TIMING GAP OR DIFFERENCE BETWEEN THE EXPORTS TO AE AND NON AE. THE TPO HAS COMPARED EXPORTS TO AE WITH EXPORTS TO NON AE ON DIFFERENT DATES. THE DIFFERENCE IN THE AE TRANSACTION DATE AND COMPARABLE TRANSACTION DATE RANGES FROM A SINGLE DAY TO A MAXIMUM OF 260 DAYS [PAGE 213A TO 213E OF PAPER BOOK] THE TPO HAS NOT TAKEN INTO ACCOUNT THE DIFFERENCE S IN SELLING PRICE ON ACCOUNT OF TIME GAP. AS RIGHTLY OBSERVED BY THE DRP, SALES MADE ON 28.4.2009 CANNOT BE COMPARED WITH THE SALES MADE 6.7.2009. THE TPO ALSO HAS NOT DISPUTED THAT THERE EXISTED A PRICE DIFFERENCE ON ACCOUNT OF EXPORTS ON DIFFERENT DATES . THE TPO HAS THEREFORE ERRED IN ADOPTING THE NON AE EXPORT SALE PRICE AS THE INTERNAL CUP WHICH IN FACT WAS ITA NO 251/C/2015 & CO 10/C/2014 9 NOT A COMPARABLE TRANSACTION AT ALL. THE ADOPTION OF INTERNAL CUP IS THEREFORE BAD IN LAW FOR THIS REASON ALSO. 6.2 THIRDLY, THE TPO HAS COMPARED T HE EXPORTS IN DIFFERENT GEOGRAPHICAL LOCATIONS. FOR INSTANCE, AS RIGHTLY OBSERVED BY THE DRP, EXPORTS TO GERMANY CANNOT BE COMPARED WITH EXPORTS TO ITALY. THE TPO HAS NOT APPRECIATED THE PRICE FLUCTUATION / DIFFERENCE ACCORDING TO DEMAND / SUPPLY POSITION IN DIFFERENT GEOGRAPHICAL LOCATIONS. THE ADOPTION OF NON AE EXPORT SALE PRICE AS INTERNAL CUP IS THEREFORE INCORRECT AND BAD IN LAW. 6.3 FOURTHLY, THE TPO HAS CONCLUDED AT PARA 5.1.1 TO 5.1.3 OF HIS ORDER THAT IN SOME CASES LOWER QUANTITIES HAVE BEEN SOLD AT A LOWER RATE AND HIGHER QUANTITY IS SOLD AT A HIGHER PRICE AND IN SOME OTHER CASES, THE DIFFERENCE IN QUANTITY DOES NOT JUSTIFY THE DIFFERENCE IN PRICE CHARGED. THE ASSESSEE HOWEVER HAS REBUTTED THE TPOS CONCLUSION BY TAKING TPOS OWN INSTANCES WHEREI N 360 KG OF OIL BP IS SOLD AT $ 74.30 WHILE 40 KG IS SOLD AT $ 82.30. FURTHER, THE TPO HAS NOT DISPUTED THE FACT THAT SMALLER QUANTITY WAS SOLD AT LESSER PRICE SINCE THE SMALLER QUANTITY SHIPPED WAS FORMING PART OF A VERY LARGE CONSIGNMENT. SIMILARLY, LARG ER QUANTITY WAS SOLD AT A HIGHER PRICE SINCE THE CONSIGNMENT OR SHIPMENT WAS SMALLER. [PAGE 3 OF DRP DIRECTIONS] THUS, THERE IS NO MERIT IN THE CONTENTION OF THE TPO THAT THE ASSESSEE WAS FOLLOWING A PREFERENTIAL TREATMENT TO ITS AE AND WAS NOT DEALING AT ARMS LENGTH. THE ADOPTION OF INTERNAL CUP AS THE MOST APPROPRIATE METHOD IS THEREFORE BAD IN LAW. ITA NO 251/C/2015 & CO 10/C/2014 10 6.4 THE TPO HAS REJECTED THE CLAIM OF WEIGHTED AVERAGE OF COMPARABLE PRICES BY REFERRING TO SECOND PROVISO TO SECTION 92C(2). THE ASSESSEE HAS ARGUED THAT AD OPTION OF SIMPLE AVERAGE OF COMPARABLE PRICE HAS RESULTED IN EXCESSIVE TP ADJUSTMENT. [PAGE 214 TO 218 OF PAPER BOOK] THE TPO IN THE PRESENT CASE HAS TAKEN SIMPLE AVERAGE OF DIFFERENT PRICES BASED ON DIFFERENT QUANTITIES. THE TPO HAS NOT GIVEN ANY ADJUSTME NT FOR PRICE DIFFERENTIALS BASED ON THE QUANTITY SHIPPED. FURTHER, IN VIEW OF OUR FINDING THAT THE NON AE EXPORT SALE PRICE ADOPTED BY THE TPO WAS NOT A COMPARABLE UNCONTROLLED PRICE, THE INTERNAL CUP METHOD CANNOT BE REGARDED AS THE MOST APPROPRIATE METHO D AND CONSEQUENTLY THE QUESTION AS TO WHETHER THE TPO SHOULD HAVE ADOPTED WEIGHTED AVERAGE OR SIMPLE AVERAGE IS NOT RELEVANT IN THE FACTS OF THE PRESENT CASE. 6.5 THE ASSESSEE SUBMITTED A LIST OF ADJUSTMENTS AND THE WORKINGS THEREOF TO BE REDUCED FROM THE ADJUSTMENT MADE BY THE TPO EVEN IF INTERNAL CUP IS TO BE TAKEN. THE ASSESSEE HAS CONTENDED THAT AS A RESULT OF THESE ADJUSTMENTS, THE VALUE OF ADJUSTMENTS WILL BE MORE THAN THE TP ADJUSTMENT AND CONSEQUENTLY NO ADJUSTMENT WILL SURVIVE FOR INCLUSION IN THE ASSESSABLE INCOME. AS PER RULE 10B(2), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO, INTER ALIA, (A) SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED; (B) FUNCTIONS PERFORMED, ASS ETS EMPLOYED AND RISKS ASSUMED; (C) CONTRACTUAL TERMS OF THE TRANSACTION AND ITA NO 251/C/2015 & CO 10/C/2014 11 CONDITIONS PREVAILING IN THE MARKET. AS PER RULE 10B(3), AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWE EN THE TRANSACTIONS BEING COMPARED ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 6.6 SIMILARLY, AS PER RULE 10C(2), ONE OF THE FACTOR IN SELECTING THE MOST APPROPRIATE METHOD IS THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND THE COMPARABLE UNCONTROLLED TRANSACTION. 6.7 IN THE PRESENT CASE, AS DISCUSSED ABOVE, THERE ARE A NUMBER OF DIFFERENCES IN THE INTERNATIONAL TRANSACTION AND THE NON AE EXPORT RATES CONSIDERED BY THE TPO FOR COMPARABILITY ANALYSIS. AS PUT FORTH BY THE ASSESSEE, THESE DIFFERENCES, INTER ALIA, INCLUDE IMPACT DUE TO ADOPTING SIMPLE AVERAGE INSTEAD OF WEIGH TED AVERAGE, QUANTITY BASED PRICE VARIATION, QUALITY BASED PRICE VARIATION, ANALYSIS COST ABSORPTION BASED PRICE VARIATION, MARKET BASED PRICE VARIATION, KEY CUSTOMER BASED PRICE VARIATION, FORWARD CONTRACT BASED PRICE VARIATION ETC. THESE DIFFERENCES MATE RIALLY AFFECT THE COMPUTATION OF ALP OF THE INTERNATIONAL TRANSACTION. EVEN THOUGH THE ASSESSEE HAS COMPUTED THE ADJUSTMENTS TO BE GIVEN FOR THESE DIFFERENCES, THE SAME WILL NOT MAKE THE INTERNAL CUP AS THE MOST APPROPRIATE METHOD. ON THE OTHER HAND, REA SONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE TO ELIMINATE THESE DIFFERENCES. THUS, ITA NO 251/C/2015 & CO 10/C/2014 12 INTERNAL CUP FAILS TO BE A MOST APPROPRIATE METHOD ON THE BASIS OF FACTS AND CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE. 6.8 THE DRP HAS DISCUSSED AT PAGE 7 TO 12 OF ITS DIRECTIONS AS TO HOW TNMM IS THE MOST APPROPRIATE METHOD. AS RIGHTLY OBSERVED BY THE DRP, TNMM REQUIRES ESTABLISHING COMPARABILITY AT A BROAD FUNCTIONAL LEVEL. IT REQUIRES COMPARISON BETWEEN NET MARGINS DERIVED FROM THE OPERATION OF THE UNCONTROLLED PARTIE S AND NET MARGIN DERIVED BY AN ASSOCIATED ENTERPRISE ON SIMILAR OPERATION. THE ASSESSEE IN THE PRESENT CASE HAS CHOSEN COMPARABLES IN THE SIMILAR INDUSTRY UNDER THE TNMM. THE DRP HAD DIRECTED THE TPO TO MAKE COMPARABILITY ANALYSIS UNDER THE TNMM AND SUBSEQ UENTLY THE TPO HAS NOT DETERMINED ANY TP ADJUSTMENT THEREBY CONCLUDING THAT THE INTERNATIONAL TRANSACTIONS ARE AT ALP EVEN UNDER THE TNMM. THUS, IN VIEW OF THE ABOVE AND ON THE BASIS OF MATERIAL ON RECORD, IT IS CONCLUDED THAT THE TNMM IS THE MOST APPROPRI ATE METHOD. THE ASSESSEE HAS RELIED ON VARIOUS DECISIONS IN SUPPORT OF THE PROPOSITION THAT ACCURATE ADJUSTMENTS SHOULD BE GIVEN IF CUP METHOD IS FOLLOWED. THE ASSESSEE HAS ALSO FILED CROSS OBJECTIONS IN CO 10/C/2015 REGARDING ADJUSTMENTS TO BE GIVEN UNDER THE INTERNAL CUP. SINCE IT IS HELD THAT TNMM IS THE MOST APPROPRIATE METHOD ON THE BASIS OF FACTS AND CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE, THE DECISIONS RELIED ON AND THE ASSESSEES CROSS OBJECTIONS ARE NOT BEING DEALT. ITA NO 251/C/2015 & CO 10/C/2014 13 7 IN THE RESULT, BOTH REV ENUES APPEAL AND THE ASSESSEES CROSS OBJECTIONS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF OCT 2015 . SD/ - SD/ - ( B P JAIN ) ( GEORGE GEORGE K ) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN: DATED 28 TH , OCT 2015 RAJ* COPY TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT , 5 . DR 6 . GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN