Henkel Adhesives Technologies India P.Ltd., Pune V. Dy. Comm. of Income-tax, Pune

ITA 1647/PUN/2011

• Counselvise Citation: 164724514 RSA 2011
• Duration Of Justice: 2 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 23-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: HIMANSHU SINHA MR AMIT SINGHAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Initiation of penalty proceedings; Bad and doubtful debts
• Section: 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHE B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.1647/PN/2011 (ASSESSMENT YEAR : 2007-08) HENKEL ADHESIVES TECHNOLOGIES INDIA PRIVATE LIMITED, D-3/D-4, MIDC INDUSTRIAL ESTATE, JEJURI DISTRICT, PUNE 412 303. PAN : AAACL1954B . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE. . RESPONDENT ASSESSEE BY : MR. HIMANSHU SINHA MR. AMIT SINGHAL DEPARTMENT BY : MR. AJIT KORDE & ORDER PER G. S. PANNU, AM THE CAPTIONED APPEAL HAS BEEN PREFERRED BY THE ASSE SSEE PERTAINING TO THE ASSESSMENT YEAR 2007-08, WHICH IS DIRECTED AGAI NST THE ORDER OF THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE ( IN SHORT THE ASSESSING OFFICER) PASSED U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 25.10.2011, WHICH IS IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL, PUNE (IN SHO RT THE DRP) DATED 20.05.2011. 2. IN THIS APPEAL, THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS UNDER: - 1. GENERAL: THE LEARNED DCIT ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE PURSUANT TO THE DIRECTION S OF THE LEARNED DRP IN MAKING AN ADJUSTMENT AMOUNTING TO IN R 78,43,090/- TO THE VALUE OF INTERNATIONAL TRANSACTI ONS ENTERED INTO BY THE APPELLANT PERTAINING TO IMPORT OF RAW M ATERIALS, ITA NO.1647/PN/2011 A.Y. : 2007-08 EXPORT OF FINISHED GOODS AND DROP SHIPMENT COMMISSI ON REJECTING THE ANALYSIS UNDERTAKEN BY THE APPELLANT IN THE TRANSFER PRICING STUDY REPORT TO DETERMINE THE ARM' S LENGTH PRICE FOR ITS INTERNATIONAL TRANSACTIONS. 2. NON-CONSIDERATION OF THE AGGREGATION APPROACH AD OPTED BY THE APPELLANT IN THE TRANSFER PRICING STUDY REPO RT. 2.1 THE LEARNED DCIT ERRED IN REJECTING THE 'AGGREGATI ON' APPROACH FOLLOWED BY THE APPELLANT FOR THREE OF ITS INTERNAT IONAL TRANSACTIONS RELATING TO IMPORT OF RAW MATERIALS, E XPORT OF FINISHED GOODS, AND IMPORT OF PACKING MATERIALS WHI CH WERE GROUP UNDER 'MANUFACTURING ACTIVITY'. 2.2 THE LEARNED DCIT ERRED ON THE FACTS AND IN CIRCUMS TANCES OF THE CASE AND IN LAW IN REJECTING AGGREGATION APPROA CH USED FOR 'MANUFACTURING ACTIVITY' WITHOUT GIVING ANY REASONA BLE JUSTIFICATION FOR REJECTION. 2.3 THE LEARNED DCIT ERRED ON THE FACTS AND IN CIRCUMS TANCES OF THE CASE AND IN LAW IN REJECTING TRANSACTION NET MA RGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITHOUT GIVIN G REASONS FOR REJECTION. 3. REJECTION OF TRANSACTIONAL NET MARGIN METHOD (T NMM) FOR BENCHMARKING EXPORT OF FINISHED GOODS AND APPLICATI ON OF INTERNAL CUP AS THE MOST APPROPRIATE METHOD. 3.1 THE LEARNED DCIT ERRED ON THE FACTS AND IN CIR CUMSTANCES OF THE CASE BY REJECTING TRANSACTIONAL NET MARGIN METH OD (TNMM) FOR EXPORT OF FINISHED GOODS AND WITHOUT PROVIDING JUSTIFIABLE REASONS FOR SUCH REJECTION AND SELECTING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST APPROPR IATE METHOD. 3.2 THE LEARNED DCIT OUGHT TO HAVE CONSIDERED THE DIFF ERENCE IN FUNCTIONS, RISKS AND GEOGRAPHICAL LOCATION OF THE T RANSACTIONS AND ALSO THE FACT THAT THE EXPORT TO AES WERE MADE OUT OF BUSINESS CONTINGENCIES AND URGENT REQUIREMENTS. 3.3 THE LEARNED DCIT ERRED IN NOT ALLOWING THE ADJUSTM ENT TO THE PRICE CHARGED FOR DIFFERENCES IN FUNCTIONS AND RISK S FOR THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOO DS AS COMPARED WITH DOMESTIC SALE TRANSACTION. 4. REJECTION OF TRANSACTIONAL NET MARGIN METHOD (T NMM) FOR BENCHMARKING IMPORT OF RAW MATERIAL AND APPLICATION OF INTERNAL COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST APPROPRIATE METHOD. 4.1 THE LEARNED DCIT ERRED ON THE FACTS AND IN CIRCUMS TANCES OF THE CASE BY REJECTING TRANSACTIONAL NET MARGIN METH OD (TNMM) FOR BENCHMARKING IMPORT OF RAW MATERIALS WIT HOUT PROVIDING JUSTIFIABLE REASONS FOR SUCH REJECTION AN D SELECTING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE M OST APPROPRIATE METHOD AND MADE AN UPWARD ADJUSTMENT OF INR 5,11,870/-. 4.2 THE LEARNED DCIT OUGHT TO HAVE CONSIDERED THE FACT THAT SIMILAR PRODUCTS WERE PURCHASED ONLY OUT OF BUSINESS CONTIN GENCIES AND URGENT REQUIREMENTS FOR GENUINE BUSINESS REASON S AT DIFFERENT TIME INTERVALS. ITA NO.1647/PN/2011 A.Y. : 2007-08 5. REJECTION OF TRANSACTIONAL NET MARGIN METHOD (T NMM) FOR BENCHMARKING DROP SHIPMENT COMMISSION AND APPLICATI ON OF INTERNAL COMPARABLE UNCONTROLLED PRICE (CUP) MET HOD AS THE MOST APPROPRIATE METHOD. 5.1 THE LEARNED DCIT ERRED ON THE FACTS AND IN CIRCUMS TANCES OF THE CASE BY REJECTING TRANSACTIONAL NET MARGIN METH OD (TNMM) FOR BENCHMARKING DROP SHIPMENT COMMISSION WITHOUT P ROVIDING JUSTIFIABLE REASONS FOR SUCH REJECTION AND SELECTIN G COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST APPROPR IATE METHOD. 5.2 THE LEARNED DCIT ERRED IN COMPARING CONTROLLED TRA NSACTIONS WHICH IS CLEARLY NOT AS PER TP REGULATIONS AS WELL AS OECD GUIDELINES. 5.3 THE LEARNED DCIT OUGHT TO HAVE CONSIDERED THAT RED UCTION OF ROYALTY FROM DROP SHIPMENT COMMISSION BY ONE OF THE ASSOCIATED ENTERPRISES IS TAX NEUTRAL TRANSACTION. 6. TRANSFER PRICING ADJUSTMENT WITHOUT GIVING BENE FIT OF +/- 5 PER CENT AS AVAILABLE UNDER PROVISO TO SECTION 92C( 2) OF THE ACT. THE LEARNED DCIT ERRED ON THE FACTS AND IN CIRCUMST ANCES OF THE CASE AND IN LAW IN MAKING THE TRANSFER PRICING ADJUSTMENT FROM THE ARM'S LENGTH PRICE WITHOUT GIVING THE BENE FIT OF THE OPTION AVAILABLE TO THE APPELLANT UNDER PROVISO TO SECTION 92C(2) OF THE ACT OF ADOPTING AS ARM'S LENGTH PRICE , A PRICE WHICH VARIES BY NOT MORE THAN 5 PER CENT FROM THE A RM'S LENGTH PRICE. 7 INITIATION OF PENALTY PROCEEDINGS UNDER SEC TION 271 (1) (C) OF THE ACT ON ACCOUNT OF TRANSFER PRICING ADJUSTMEN T. THE LEARNED DCIT ERRED ON THE FACTS AND IN LAW IN P ROPOSING TO INITIATE PENALTY PROCEEDINGS SECTION 271(L)(C) OF T HE ACT, WITHOUT CONSIDERING THE FACTS OF THE CASE. 3. IN BRIEF, THE BACKGROUND OF THE DISPUTE IS THAT THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE CO MPANIES ACT, 1956 AND IS INTER-ALIA, ENGAGED IN THE BUSINESS OF MANUFACTURE AND TRADING OF ADHESIVE PRODUCTS. THE ASSESSEE COMPANY DEALS IN ENGINEERIN G ADHESIVES, SEALANTS & SPECIALITY MAINTENANCE SOLUTIONS IN INDIA. THE APP ELLANT COMPANY IS A PART OF WORLDWIDE HENKEL GROUP, A GERMANY BASED MNC, WHICH IS ENGAGED IN MANUFACTURING AND MARKETING OF A BROAD RANGE OF HIG H TECHNOLOGY SEALANTS, ADHESIVES AND COATINGS ACROSS THE WORLD. FOR THE A SSESSMENT YEAR UNDER CONSIDERATION, ASSESSEE COMPANY FILED A RETURN OF I NCOME ON 31.10.2007 DECLARING TOTAL INCOME OF RS.21,42,53,063/-, WHICH WAS SUBJECT TO A SCRUTINY ASSESSMENT. THE ASSESSEE HAD UNDERTAKEN CERTAIN IN TERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES, WHICH WERE REFERRED BY THE ASSESSING OFFICER TO ITA NO.1647/PN/2011 A.Y. : 2007-08 TRANSFER PRICING OFFICER (IN SHORT THE TPO) IN OR DER TO DETERMINE ITS ARMS LENGTH PRICE IN TERMS OF SECTION 92CA(1) OF THE ACT . THE TPO VIDE HIS ORDER DATED 27.10.2010 PASSED U/S 92CA(3) OF THE ACT PROP OSED AN ADJUSTMENT OF RS.78,43,090/- TO THE STATED VALUE OF THE INTERNATI ONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES IN ORDER TO BRING THEM TO THEIR ARMS LENGTH PRICE. THE ASSESSING OFFICER HAS THER EAFTER PASSED AN ORDER U/S 143(3) R.W.S. 144C(13) OF THE ACT DATED 25.10.2011 MAKING AN ADDITION OF RS.78,43,090/- TO THE RETURNED INCOME IN CONFORMITY WITH THE ORDER OF THE TPO AFTER CONSIDERING THE DIRECTIONS OF THE DRP CONTAIN ED IN ITS ORDER DATED 25.05.2011, WHICH WAS APPROACHED BY THE ASSESSEE RA ISING OBJECTIONS AGAINST THE DRAFT ASSESSMENT ORDER PROPOSED BY THE ASSESSIN G OFFICER DATED 06.12.2010. THE AFORESAID ADDITION OF RS.78,43,090 /- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IS THE SUBJECT-MATTER OF DISPUTE IN THE PRESENT PROCEEDING. 4. BEFORE WE PROCEED TO ADJUDICATE THE SPECIFIC GRO UNDS OF APPEAL RAISED BY THE ASSESSEE, A BRIEF CONNOTATION OF THE DISPUTE BEFORE US CAN BE UNDERSTOOD AS FOLLOWS. THE APPELLANT COMPANY HAD E NTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES ON ACC OUNT OF : (I) IMPORT OF RAW MATERIALS, PACKING MATERIALS, AND FINISHED GOODS; ( II) DROP SHIPMENT COMMISSION RECEIPTS; AND, (III) EXPORT OF FINISHED GOODS. IN THE TRANSFER PRICING STUDY CONDUCTED BY THE ASSESSEE, IT AGGREGATED THE AFORESAID INTERNATIONAL TRANSACTIONS INTO TWO BROAD SEGMENTS FOR THE PURPOS ES OF BENCHMARKING IT WITH THE COMPARABLES. THE INTERNATIONAL TRANSACTIONS CO MPRISING OF IMPORT OF RAW MATERIALS & PACKING MATERIALS, AND EXPORT OF FINISH ED GOODS WERE AGGREGATED UNDER MANUFACTURING SEGMENT, AND THE RESIDUAL INTER NATIONAL TRANSACTIONS ON ACCOUNT OF THE IMPORT OF FINISHED GOODS FOR RE-SALE AND RECEIPTS BY WAY OF DROP SHIPMENT COMMISSION, WERE GROUPED TOGETHER UNDER TR ADING SEGMENT. THE ASSESSEE CHOSE TO AGGREGATE THE TRANSACTIONS INTO T HE RESPECTIVE SEGMENTS FOR THE REASON THAT THE TRANSACTIONS OF IMPORT OF R AW MATERIALS & PACKING MATERIALS, AND EXPORT OF FINISHED GOODS WERE RELATI NG TO THE MANUFACTURING ITA NO.1647/PN/2011 A.Y. : 2007-08 FUNCTIONS WHEREAS THE IMPORT OF FINISHED GOODS FOR RE-SALE AND RECEIPTS BY WAY OF DROP SHIPMENT COMMISSION RELATED TO TRADING ACTI VITIES. FOR BOTH THE SEGMENTS, ASSESSEE CHOSE THE TRANSACTIONAL NET MARG IN (TNM) METHOD AS THE MOST APPROPRIATE METHOD AND THE OPERATING PROFI T/COSTS WAS TAKEN AS THE PROFIT LEVEL INDICATOR (I.E. PLI). AFTER COMPARI NG THE ASSESSEES PLI IN BOTH THE SEGMENTS WITH THOSE OF THE EXTERNAL COMPARABLES CHOSEN FROM THE DATA BASE IN PUBLIC DOMAIN, IT WAS FOUND THAT ASSESSEES OPERATING MARGINS WERE ABOVE THE AVERAGE MEAN MARGIN OF THE COMPARABLES AN D THUS IT WAS INFERRED THAT THE STATED VALUES OF THE INTERNATIONAL TRANSAC TIONS WERE AT AN ARMS LENGTH PRICE. 5. HOWEVER, THE TPO HAS NOT AGREED WITH THE ASSESSE ES SELECTION OF TNM METHOD AS THE MOST APPROPRIATE METHOD AND INSTE AD HE HAS ADOPTED THE COMPARABLE UNCONTROLLED PRICE (I.E. CUP) METHOD A S THE MOST APPROPRIATE METHOD. AS A RESULT, THE TPO HAS NOT ACCEPTED ASSE SSEES PLEA THAT THE STATED VALUE OF THE INTERNATIONAL TRANSACTIONS IN R ELATION TO IMPORT OF RAW MATERIALS, EXPORT OF FINISHED GOODS AND DROP SHIPME NT SERVICES WERE AT AN ARMS LENGTH PRICE. WITH RESPECT TO THE STATED VALU E OF IMPORT OF RAW MATERIALS AT RS.4,08,56,743/-, THE TPO ADOPTED THE CUP METHOD AND DETERMINED THE ARMS LENGTH PRICE AT RS.4,13,68,613/-, THEREBY MAK ING AN ADJUSTMENT OF RS.5,11,870/-. SIMILARLY, THE TPO DID NOT ACCEPT T HE STATED VALUE OF THE EXPORT OF FINISHED GOODS AT RS.17,79,903/- TO BE AT AN AR MS LENGTH PRICE AND INSTEAD DETERMINED THE SAME AT RS.88,81,713/-, THEREBY MAKI NG AN ADJUSTMENT OF RS.71,01,810/-. THIRDLY, IN RELATION TO THE STATED VALUE OF RECEIPTS ON ACCOUNT OF DROP SHIPMENT SERVICES OF RS.62,26,352/-, THE TP O COMPUTED ITS ARMS LENGTH PRICE AT RS.64,55,762/-, THEREBY MAKING AN A DJUSTMENT OF RS.2,29,410/- TO THE STATED VALUE. IN THIS MANNER, THE TOTAL ADJ USTMENT ON ACCOUNT OF TRANSFER PRICING ANALYSIS HAS BEEN COMPUTED AT RS.78,43,090/ -, WHICH IS THE SUBJECT- MATTER OF DISPUTE BEFORE US. ITA NO.1647/PN/2011 A.Y. : 2007-08 6. IN THIS BACKGROUND, THE APPELLANT HAS ASSAILED T HE ADDITION MADE BY THE ASSESSING OFFICER IN TERMS OF THE STATED GROUNDS OF APPEAL. BEFORE US, A VOLUMINOUS PAPER BOOK CONTAINING SUBMISSIONS AND MA TERIAL FURNISHED BEFORE THE LOWER AUTHORITIES HAS BEEN PLACED ON RECORD, WH EREFROM, THE RELEVANT MATERIAL WAS REFERRED TO IN THE COURSE OF THE HEARI NG. THE LEARNED CIT(DR) REFERRED TO THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS FURNISHED WRITTEN SUBMISSIONS IN SUPPORT OF THE CASE OF THE REVENUE. THE RIVAL SUBMISSIONS HAVE BEEN HEARD AND THE RELEVANT MATERIAL PERUSED. 7. THE FIRST AND FOREMOST PLEA RAISED BY THE ASSESS EE IS AGAINST THE APPROACH OF THE TPO IN SELECTING CUP METHOD AS THE MOST APPROPRIATE METHOD INSTEAD OF THE TNM METHOD ADOPTED BY THE ASS ESSEE IN ORDER TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS. ACCORDIN G TO THE LEARNED COUNSEL, THE TPO ERRED IN REJECTING THE AGGREGATION APPROACH ADOPTED BY THE ASSESSEE FOR THREE OF ITS INTERNATIONAL TRANSACTIONS RELATIN G TO IMPORT OF RAW MATERIALS, EXPORT OF FINISHED GOODS AND IMPORT OF PACKING RAW MATERIALS AND BENCHMARKING IT BY APPLYING THE TNM METHOD. JUSTIF YING THE AGGREGATION APPROACH, IT HAS BEEN EXPLAINED THAT THE THREE ACTI VITIES OF THE ASSESSEE ARE CLOSELY LINKED TO THE MANUFACTURING PROCESS. ACCOR DING TO LEARNED COUNSEL, THE TPO HAS NOT GIVEN ANY JUSTIFIABLE REASONS FOR REJEC TION OF THE AGGREGATION APPROACH AND HAS MERELY STATED THAT EACH OF THE TRA NSACTION IS DIFFERENT IN ITS NATURE AND SCOPE. THE LEARNED COUNSEL POINTED OUT THAT THE IMPORTED RAW MATERIAL AND THE PACKING MATERIAL ARE USED IN THE M ANUFACTURING PROCESS AND THE FINISHED GOODS ARE EXPORTED OR SOLD IN THE DOME STIC MARKET AND THEREFORE THE INTERNATIONAL TRANSACTIONS COMPRISING OF IMPORT OF RAW MATERIAL & PACKING MATERIAL, AND EXPORT OF FINISHED GOODS WERE AGGREGA TED FOR THE PURPOSES OF CARRYING OUT THE COMPARABILITY ANALYSIS UNDER THE T NM METHOD. THE LEARNED COUNSEL REFERRED TO THE PROVISIONS OF RULE 10C OF T HE INCOME TAX RULES, 1962 (IN SHORT THE RULES) AND SUBMITTED THAT THE CHOIC E OF THE MOST APPROPRIATE METHOD DEPENDS, INTER-ALIA, ON THE AVAILABILITY OF RELIABLE DATA, DEGREE OF ITA NO.1647/PN/2011 A.Y. : 2007-08 COMPARABILITY BETWEEN THE CONTROLLED AND UNCONTROLL ED TRANSACTIONS AND THE FEASIBILITY OF MAKING REASONABLY ACCURATE ADJUSTMEN TS. EXPLAINING THAT THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE DID NOT WARRANT ADOPTION OF CUP METHOD AS THE MOST APPROPRIATE METHOD BECAUSE THE S AME REQUIRES A MUCH HIGHER DEGREE OF COMPARABILITY AS THE PRICES CHARGE D ARE SENSITIVE TO EVEN MINOR CHANGES IN ATTRIBUTES, GEOGRAPHICAL DIFFERENC ES, RISK DIFFERENCES, ETC. AND THEREFORE ACCORDING TO HIM, ASSESSEE WAS JUSTIF IED IN ADOPTING THE TNM METHOD AS THE MOST APPROPRIATE METHOD, HAVING REGAR D TO THE FACTS AND CIRCUMSTANCES OF THE CASE. FURTHER, THE ACTION OF THE TPO IN BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF DROP SHIPMENT COM MISSION RECEIPTS AND EXPORT OF FINISHED GOODS BY APPLYING THE INTERNAL C UP METHOD HAS ALSO BEEN ASSAILED. THE LEARNED COUNSEL HAS ALSO REFERRED TO VARIOUS DIFFERENCES ON ACCOUNT OF FUNCTIONS PERFORMED, RISKS ASSUMED, GEOG RAPHICAL LOCATION, LEVEL OF MARKET, ETC. TO SHOW THAT CUP METHOD WAS NOT JUSTIF IED. BROADLY SPEAKING, THE STAND OF THE APPELLANT COMPANY IS THAT THE CUP METH OD IS NOT THE MOST APPROPRIATE METHOD AND INSTEAD ASSESSEES APPROACH OF AGGREGATING THE TRANSACTIONS INTO THE TWO SEGMENTS OF MANUFACTURING AND TRADING AND APPLICATION OF THE TNM METHOD WAS JUSTIFIED. IN TH E ALTERNATIVE, IT IS CANVASSED THAT DUE ADJUSTMENTS BE ALLOWED EVEN IF THE APPLICA TION OF CUP METHOD IS TO BE UPHELD FOR THE PURPOSE OF COMPUTING THE ARM'S LE NGTH PRICE. WE WOULD TOUCH-UPON THOSE SPECIFIC ARGUMENTS AS WE PROCEED T O ADJUDICATE THE GROUNDS FURTHER. 8. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS DEFENDED THE ACTION OF THE TPO IN ADOPTING THE CUP METHOD BY POINTING OUT THAT EACH OF THE SEGREGATED TRANSACTIONS ARE OF DIF FERENT NATURE AND THEREFORE THE TPO WAS JUSTIFIED IN DISREGARDING THE AGGREGATI ON MADE BY THE ASSESSEE FOR THE PURPOSES OF COMPARABILITY ANALYSIS. THE LE ARNED CIT(DR) ALSO POINTED OUT THAT THE AGGREGATION APPROACH IS JUSTIFIED IN C ASE WHERE IT IS IMPRACTICABLE TO ANALYSE THE PROFITABILITY FROM EACH INDIVIDUAL T RANSACTIONS OR WHERE SUCH ITA NO.1647/PN/2011 A.Y. : 2007-08 TRANSACTIONS ARE SO INTERRELATED THAT THE ONLY RELI ABLE MEANS OF BENCHMARKING IS THE AGGREGATE APPROACH. ACCORDING TO THE LEARNE D CIT-DR, THE INSTANT WAS NOT ONE SUCH CASE. 9. FIRSTLY, WE MAY CONSIDER THE ADDITION OF RS.71,01,8 10/- WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS OF EXPORT OF FINISHE D GOODS TO THE ASSOCIATED ENTERPRISES WHICH HAS BEEN MADE BY THE TPO BY INVOK ING CUP METHOD AFTER REJECTING THE TNM METHOD ADOPTED BY THE ASSESSEE. IN PARA 8 (A)(III) OF THE ORDER, THE TPO NOTICED THAT ASSESSEE EXPORTED GOODS TO ITS ASSOCIATED ENTERPRISES, NAMELY, HENKEL KOREA, HENKEL CHINA, HE NKEL THAILAND AND HENKEL SINGAPORE AMOUNTING TO RS.17,80,512/-. IN R ESPECT OF EXPORTS TO HENKEL SINGAPORE, IT WAS FOUND THAT IT WAS MADE AT THE SAME PRICE WHICH WAS CHARGED FROM THE THIRD PARTIES; AND, THEREFORE NO A DJUSTMENT WAS MADE BY THE TPO. SIMILARLY, WITH REGARD TO EXPORTS TO HENKEL T HAILAND, IT WAS NOTICED THAT THERE WAS NO THIRD PARTY SALE OF THE SAME PRODUCT A ND THEREFORE NO ADJUSTMENT WAS MADE. THUS, THE TPO TOOK UP FOR CONSIDERATION THE EXPORT OF FINISHED GOODS TO HENKEL KOREA AND HENKEL CHINA OF RS.17,04, 702/-. THE GOODS EXPORTED TO THE SAID ASSOCIATED ENTERPRISES WERE SO LD TO THIRD PARTIES IN INDIA ALSO. IN PARA 8(A)(VII) OF HIS ORDER, THE TPO HAS TABULATED THE DETAILS OF THE PRODUCTS SOLD, THEIR TOTAL EXPORT TO THE ASSOCIATED ENTERPRISES AND THE SALES TO THIRD PARTIES AND ALSO THE AVERAGE SALE RATE TO THE ASSOCIATED ENTERPRISES AND THE THIRD PARTIES. IN TERMS OF SUCH TABULATION, TH E TPO CONCLUDED THAT THE SALES TO THE ASSOCIATED ENTERPRISES WERE MADE AT ALMOST 1 9.3% OF THE PRICES AT WHICH SALES WERE MADE TO THE THIRD PARTIES. IN OTH ER WORDS, THE TPO NOTICED THAT EXPORT SALES TO THE ASSOCIATED ENTERPRISES HAV E BEEN MADE AT PRICES WHICH WERE AT A DISCOUNT OF 80% (APPROX) THAN THE A VERAGE PRICES CHARGED FROM THE NON-ASSOCIATED ENTERPRISES. IN THIS MANNE R, THE TPO CONCLUDED THAT THE ARMS LENGTH PRICE OF THE EXPORT SALES MADE TO THE ASSOCIATED ENTERPRISES WAS RS.88,06,512/- AS AGAINST RS.17,04,702/- SHOWN BY THE ASSESSEE AND ITA NO.1647/PN/2011 A.Y. : 2007-08 ACCORDINGLY HE PROPOSED AN ADJUSTMENT OF RS.71,01,8 10/- IN ORDER TO BRING THE STATED VALUE OF THE SALES TO ASSOCIATED ENTERPRISES AT AN ARMS LENGTH PRICE. 10. ON THIS ASPECT, THE STAND OF THE ASSESSEE IS TH AT THE TPO WAS NOT JUSTIFIED IN APPLYING THE CUP METHOD IN ORDER TO BE NCHMARK THE INTERNATIONAL TRANSACTIONS OF EXPORT OF FINISHED GOODS. FIRSTLY, IT IS STATED THAT THE AMOUNT OF EXPORT SALES TO THE ASSOCIATED ENTERPRISES WAS MERE LY RS.17,79,903/- WHEREAS THE SALE TO THE NON-ASSOCIATED ENTERPRISES IS ALMOS T TO THE TUNE OF RS.39.23 CRORES, THUS, THE EXPORT SALES ARE QUITE INSIGNIFIC ANT. SECONDLY, ACCORDING TO THE ASSESSEE, THE COMPARABILITY ANALYSIS HAS TO BE MADE AFTER CONSIDERING THE DIFFERENCES BETWEEN THE TRANSACTION OF EXPORT TO AS SOCIATED ENTERPRISES AND THE SALE TO THE NON-ASSOCIATED ENTERPRISES. ON THI S, IT IS SUBMITTED THAT IN CASE OF EXPORT SALES TO ASSOCIATED ENTERPRISES, ASSESSEE DOES NOT HAVE TO PERFORM ANY SELLING & MARKETING FUNCTIONS, WHILE IN CASE OF DOMESTIC SALES TO THE NON- ASSOCIATE ENTERPRISES, WHO ARE THIRD PARTIES, ASSES SEE HAS TO INCUR SIGNIFICANT COSTS AND PERFORM CRITICAL FUNCTION OF CREATING A M ARKET BY CARRYING OUT PRE- ENGINEERING SALES FOR ITS END-CUSTOMERS. IN THIS C ONNECTION, IT WAS POINTED OUT THAT DURING THE YEAR ASSESSEE HAS INCURRED RS.10.70 CRORES ON THIS SCORE WHICH TRANSLATES TO 28% OF THE SALES MADE TO THIRD PARTIES IN INDIA. FURTHER, ASSESSEE HAS TO BEAR THE CREDIT RISK IN RELATION TO SALE TO THIRD PARTIES, WHEREAS THERE IS NO SUCH RISK IN CASE OF EXPORT OF GOODS TO ASSOCIATE ENTERPRISES. FURTHER, ASSESSEE BEARS PRODUCT LIABILITY RISK AND WARRANTY RISK FOR GOODS SOLD TO THE DOMESTIC THIRD PARTIES, WHILE ON EXPORT SALE S TO THE ASSOCIATED ENTERPRISES THERE IS NO SUCH RISK. THE ASSOCIATED ENTERPRISES, WHO BUY GOODS FROM THE ASSESSEE, BEAR THIS RISK AS THEY IN-TURN S ELL TO END-CUSTOMERS IN THEIR RESPECTIVE COUNTRIES. FURTHER, THE DIFFERENCE IN G EOGRAPHICAL LOCATION HAS ALSO BEEN HIGHLIGHTED INASMUCH AS SALES TO THIRD PARTIES ARE ONLY IN THE DOMESTIC MARKET WHEREAS THE ASSOCIATED ENTERPRISES ARE LOCAT ED IN CHINA, SINGAPORE, THAILAND AND KOREA. IT IS POINTED OUT THAT SUCH GE OGRAPHICAL DIFFERENCES HAVE A MATERIAL IMPACT ON THE PRICING OF GOODS BUT NO RE LIABLE DATA WAS AVAILABLE TO ITA NO.1647/PN/2011 A.Y. : 2007-08 MAKE REASONABLY ACCURATE ADJUSTMENTS IN THIS REGARD ; EVEN THERE ARE DIFFERENCES IN THE LEVEL OF MARKET BETWEEN THE EXPO RTS MADE TO THE ASSOCIATED ENTERPRISES ON ONE HAND AND SALES MADE TO THE DOMES TIC THIRD PARTIES. IT IS POINTED OUT THAT THE ASSOCIATED ENTERPRISES, WHO BU Y GOODS FROM ASSESSEE FURTHER SELL TO DEALERS OR THE END CUSTOMERS. IT I S POINTED OUT THAT THE PRICE VARIES WITH THE BUYERS PLACE IN THE VALUE CHAIN. I N NUTSHELL, THE PLEA OF THE ASSESSEE IS THAT THERE ARE DIFFERENCES BETWEEN THE UNCONTROLLED AND CONTROLLED TRANSACTIONS WHICH HAVE A MATERIAL IMPACT ON THE PR ICE THAT WOULD BE CHARGED IN THE OPEN MARKET. WHILE DIFFERENCES IN RESPECT O F ADDITIONAL FUNCTION OF SALES & MARKETING AND CREDIT RISK CAN BE SUITABLY ADJUSTE D, BUT THE SAME IS NOT POSSIBLE IN RESPECT OF GEOGRAPHICAL LOCATION OR LEV EL OF MARKET AND THEREFORE THE CUP METHOD ADOPTED BY THE TPO HAS TO FAIL. IN THE ALTERNATIVE, IT IS SUBMITTED THAT IF THE APPLICATION OF CUP METHOD IS UPHELD, SUITABLE ADJUSTMENTS SHOULD BE MADE TO THE COMPARABLE UNCONT ROLLED PRICES ON ACCOUNT OF SALES & MARKETING FUNCTIONS AND CREDIT R ISK; AND, IT IS POINTED OUT THAT SIMILAR ADJUSTMENTS HAVE BEEN ALLOWED BY THE L EARNED DRP IN THE SUBSEQUENT ASSESSMENT YEAR OF 2008-09, A COPY OF SU CH ORDER HAD BEEN PLACED AT PAGE 413 OF THE PAPER BOOK. 11. ON THIS ASPECT, THE STAND OF THE LEARNED CIT(DR ) IS THAT THE ADJUSTMENTS THAT ARE SOUGHT TO BE CLAIMED BY THE ASSESSEE ARE R ELEVANT ONLY WHEN THE BENCHMARKING IS BEING DONE UNDER THE TNM METHOD AND NOT UNDER THE CUP METHOD WHICH HAS BEEN APPLIED BY THE TPO IN THE PRE SENT CASE. ACCORDING TO HIM, WHEN AN ENTITY BEARS MORE RISKS OR PERFORMS CE RTAIN ADDITIONAL FUNCTIONS, THE SAME ARE MANIFESTED BY INCURRENCE OF ADDITIONAL EXPENDITURE, WHICH IMPACTS THE NET MARGIN AND NOT THE PRICE CHARGED, A ND THEREFORE TRANSFER PRICE RELEVANT FOR THE CUP METHOD DOES NOT GET EFFECTED. EVEN OTHERWISE, IT IS SUBMITTED THAT THERE CAN BE NO PRESUMPTION THAT SUC H ADJUSTMENTS ARE WARRANTED UNLESS ASSESSEE IS ABLE TO JUSTIFY A LINK BETWEEN EXISTENCE OF SUCH FACTORS AND THE FINANCIAL RESULTS OF THE COMPARED T RANSACTIONS. FURTHERMORE, IT ITA NO.1647/PN/2011 A.Y. : 2007-08 IS POINTED OUT THAT THERE IS NO DIRECT RELATIONSHIP BETWEEN THE MARKETING EXPENDITURE AND THE NET PROFIT BECAUSE A MARKETING EXPENDITURE NEED NOT NECESSARILY RESULTS IN PROFITS AND THEREFORE IT IS NOT POSSIBLE TO QUANTIFY THE ADJUSTMENT ON THIS COUNT QUITE ACCURATELY, AS REQUI RED UNDER RULE 10B(3)(II) OF THE RULES. IN THIS CONNECTION, HE HAS REFERRED TO THE DISCUSSION MADE BY THE TPO TO THE EFFECT THAT THE MARKETING COSTS ETC. MAY HAVE BEEN INCURRED BY THE ASSESSEE WITH RESPECT TO THIRD PARTY SALES BUT THE SAME MAY NOT BE INCLUDIBLE IN THE PRICES CHARGED FROM THE CUSTOMERS, WHICH IS DETERMINED ON THE BASIS OF PRICES PREVAILING IN THE OPEN MARKET; AND, IS NOT D EPENDENT ON THE INCURRENCE OF MARKETING FUNCTION ALONE. IN THE AFORESAID MANN ER, THE ACTION OF THE TPO IN MAKING AN ADJUSTMENT OF RS.71,01,810/- ON ACCOUNT O F THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS TO THE ASSO CIATED ENTERPRISES IS SOUGHT TO BE JUSTIFIED. 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. AS REGARDS THE METHOD TO BE ADOPTED FOR COMPARABILITY ANALYSIS, AT THE OUTSET WE MAY SAY THAT THE APPROACH OF THE TPO AND THE DRP IN THIS REGARD CANNOT BE FAULTED. IN OUR CONSIDERED OPINION, HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE, INCLUDING THE FACT THAT INTERNAL COMPARABLE UNCONTR OLLED TRANSACTIONS ARE AVAILABLE, THE ADOPTION OF CUP METHOD AS THE MOST A PPROPRIATE METHOD FOR THE PURPOSES OF COMPARABILITY ANALYSIS, IS LIABLE TO BE UPHELD. THE LEARNED COUNSEL FOR THE ASSESSEE AS WELL AS THE LEARNED CIT (DR) HAVE REFERRED TO CERTAIN DECISIONS OF THE TRIBUNAL IN THIS REGARD IN SUPPORT OF THEIR RESPECTIVE STANDS. WE ARE NOT INCLINED TO DISCUSS EACH OF THE M AS THE ADOPTION OF THE MOST APPROPRIATE METHOD FOR THE PURPOSES OF COMPARA BILITY ANALYSIS IS DETERMINED BY THE PECULIAR FACTS AND CIRCUMSTANCES OF EACH CASE. SO HOWEVER, IN THIS REGARD, WE MAY MAKE A BRIEF REFERE NCE TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SERDIA PHARMACEUTICALS (INDIA) (P) LTD. VS. ACIT, (2011) 136 TTJ 129 (MUMBAI) WHER EIN THE BENCH WAS CONSIDERING APPLICABILITY OF EITHER THE TNM METHOD OR THE CUP METHOD FOR THE ITA NO.1647/PN/2011 A.Y. : 2007-08 PURPOSES OF COMPARABILITY ANALYSIS. AS PER THE TRI BUNAL, THOUGH THE TRANSFER PRICING LEGISLATION DOES NOT PRESCRIBE A PARTICULAR ORDER OF PREFERENCE FOR THE METHODS FOR DETERMINING THE ARM'S LENGTH PRICE, BUT THE SELECTION OF MOST APPROPRIATE METHOD ESSENTIALLY REQUIRES THE METHODS TO BE RANKED ON A RATIONAL BASIS, HAVING REGARD TO THE PECULIARITIES OF THE FACTS OF EACH CASE. FOLLOWING THE AFORESAID RATIONALE, IN THE PRESENT C ASE, HAVING REGARD TO THE EXISTENCE OF INTERNAL COMPARABLE UNCONTROLLED TRANS ACTIONS, THE CUP METHOD HAS BEEN RIGHTLY SELECTED AS THE MOST APPROPRIATE M ETHOD IN ORDER TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATION AL TRANSACTIONS OF EXPORT OF FINISHED GOODS TO THE ASSOCIATED ENTERPRISES. 13. THIS BRINGS US TO THE ALTERNATIVE PLEA OF THE A SSESSEE, WHICH HAS BEEN VEHEMENTLY ARGUED, TO THE EFFECT THAT REASONABLY AC CURATE ADJUSTMENT BE MADE TO THE PRICE OF COMPARABLE UNCONTROLLED TRANSA CTION SO AS TO ELIMINATE THE DIFFERENCES WITH THE TESTED TRANSACTION ON ACCO UNT OF SALES & MARKETING FUNCTIONS AND CREDIT RISK. ON THIS ASPECT, WE DO N OT FIND ANY JUSTIFICATION IN THE PLEA OF THE LEARNED CIT-DR THAT SUCH ADJUSTMENTS AR E PERMISSIBLE ONLY IN CASE OF TNM METHOD AND NOT CUP METHOD, WHICH HAS BEEN US ED IN THIS CASE. RULE 10B(1) OF THE RULES PROVIDE THAT THE ARMS LENGTH P RICE OF AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHO DS ENUMERATED, BEING THE MOST APPROPRIATE METHOD. THE METHODS ENUMERATED TH EREIN INTER-ALIA , INCLUDE THE CUP METHOD, TNM METHOD, ETC. SUB-RULE (2) OF R ULE 10B PRESCRIBES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION W ITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO VARIO US FACTORS ENUMERATED THEREIN, VIZ. CHARACTERISTICS OF THE PROPERTY TRANS FERRED OR SERVICES PROVIDED IN THE TRANSACTION, FUNCTIONS PERFORMED, ASSETS EMPLOY ED, RISKS ASSUMED, CONTRACTUAL TERMS, ETC. SUB-RULE (3) OF RULE 10B P ROVIDES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFFERENCES BETWEEN THE TRANSACTIONS BEING COMPARED ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR THE PRO FIT ARISING FROM SUCH ITA NO.1647/PN/2011 A.Y. : 2007-08 TRANSACTIONS IN THE OPEN MARKET. IN FACT, CLAUSE ( II) OF SUB-RULE (3) OF RULE 10B PERMITS MAKING OF ADJUSTMENTS TO ELIMINATE THE MATE RIAL EFFECTS OF DIFFERENCES, IN ORDER TO FACILITATE A MEANINGFUL COMPARISON BETW EEN AN UNCONTROLLED TRANSACTION AND THE TESTED INTERNATIONAL TRANSACTIO N. THERE IS NOTHING IN THE PHRASEOLOGY OF RULE 10B(3) OF THE RULES TO SUGGEST THAT THE ADJUSTMENT TO AN UNCONTROLLED TRANSACTION IS PERMISSIBLE ONLY UNDER THE TNM METHOD AND NOT TO THE OTHER METHODS ENUMERATED IN RULE 10B(1) OF THE RULES. THEREFORE, THE PLEA OF THE LEARNED CIT(DR) THAT THE IMPLICATIONS O F SUB-RULES (2) AND (3) OF RULE 10B OF THE RULES ARE ONLY IN RELATION TO THE C OMPARABILITY ANALYSIS TO BE CARRIED OUT IN TERMS OF TNM METHOD AND NOT IN TERMS OF CUP METHOD, IN OUR VIEW, IS NOT MANIFESTED BY THE LEGISLATIVE INTENT. THEREFORE, EVEN IN RELATION TO THE PRESENT SITUATION WHEREBY THE COMPARABILITY ANA LYSIS HAS BEEN CARRIED OUT BY ADOPTING THE CUP METHOD, THE ADJUSTMENTS TO THE UNCONTROLLED COMPARABLE TRANSACTION WHICH ARE PERMISSIBLE AND JUSTIFIABLE I N LAW AND ON FACTS OF THE CASE, IN ORDER TO FACILITATE COMPARABILITY OF THE I NTERNATIONAL TRANSACTION WITH THE UNCONTROLLED COMPARABLE TRANSACTIONS DESERVE TO BE ALLOWED. 14. NO DOUBT, THE ONUS SHALL BE ON THE ASSESSEE TO JUSTIFY SUITABLE ADJUSTMENTS TO THE COMPARABLE UNCONTROLLED TRANSACT ION. IN THE PRESENT CASE, ASSESSEE HAS CLAIMED ADJUSTMENTS ON ACCOUNT OF DIFF ERENCES IN SALES & MARKETING FUNCTIONS AND CREDIT RISK, AND SUCH A PLE A WAS VERY MUCH RAISED BEFORE THE TPO. THE ASSESSEE HAS REFERRED TO THE S EGMENTAL ACCOUNTS PLACED AT PAGE 302 OF THE PAPER BOOK TO SHOW THAT IT HAD I NCURRED EXPENDITURE ON SALES & MARKETING FUNCTION, WHICH IS ALMOST 41% OF THE SALES MADE TO THE NON- ASSOCIATED ENTERPRISES AND ON ACCOUNT OF CREDIT RIS K IT IS STATED TO BE 1%, AS THE PROVISION FOR BAD AND DOUBTFUL DEBTS IS AROUND 1% OF SALES, AND IN THIS REGARD REFERENCE HAS BEEN MADE TO SCHEDULE 16 OF TH E FINANCIAL STATEMENTS PLACED AT PAGE 180 OF THE PAPER BOOK. ON THIS BASI S, THE TOTAL ADJUSTMENT TO THE COMPARABLE UNCONTROLLED TRANSACTION HAS BEEN WO RKED AT RS.34,10,274/- AS PER DETAILS AT PAGE 303 OF THE PAPER BOOK. THE SAID WORKING WAS VERY ITA NO.1647/PN/2011 A.Y. : 2007-08 MUCH BEFORE THE TPO AS IS EVIDENT FROM A READING OF PARA 8(A)(VIII) OF HIS ORDER. THE TPO HAS NOT DISPUTED THE WORKING OF THE ADJUSTMENTS, AND IN PRINCIPLE ALSO WE FIND NO REASONS TO DENY THE SAME. IT IS ALSO NOT IN DISPUTE THAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 200 8-09, THE LD. DRP ITSELF HAS ALLOWED ADJUSTMENTS ON ACCOUNT OF SALES & MARKE TING FUNCTIONS AND CREDIT RISK. THE PLEA OF THE TPO THAT SUCH COSTS DO NOT E NTIRE THE PRODUCT PRICING AS THE PRODUCTS ARE PRICED AT THE PREVAILING MARKET PR ICES, IN OUR OPINION IS NOT JUSTIFIED. THUS, IN THE ABSENCE OF ANY CREDIBLE RE ASON ADVANCED BY THE TPO TO DENY SUCH ADJUSTMENTS, WE ARE OF THE VIEW THAT THE ADJUSTMENT OF RS.34,10,274/- COMPUTED BY THE ASSESSEE ON ACCOUNT OF SALES & MARKETING FUNCTION AND CREDIT RISK IS ALLOWABLE. WE HOLD SO. 15. APART THEREFROM, ASSESSEE HAS PLEADED THAT DIFF ERENCES BETWEEN TESTED TRANSACTIONS AND THE COMPARABLE UNCONTROLLED TRANSA CTIONS EXIST ON ACCOUNT OF LEVEL OF MARKET AND GEOGRAPHICAL LOCATIONS. HOWEVE R, THE ASSESSEE HAS NOT FURNISHED ANY DATA TO JUSTIFY AND EFFECTUATE SUCH D IFFERENCES, IF ANY, WHILE DETERMINING THE ARMS LENGTH PRICE. IN THE ABSENCE OF THE ONUS HAVING BEEN DISCHARGED BY THE ASSESSEE TO QUANTIFY THE ADJUSTME NTS ON THIS COUNT ON THE BASIS OF ANY RELIABLE DATA, NO ADJUSTMENTS ON THIS SCORE ARE PERMISSIBLE. 16. THEREFORE, IN CONCLUSION WE HOLD THAT SO FAR AS ADJUSTMENTS PROPOSED BY THE TPO ON ACCOUNT OF THE INTERNATIONAL TRANSACT ION OF EXPORT OF FINISHED GOODS TO THE ASSOCIATED ENTERPRISES IS CONCERNED, T HE SAME SHALL BE SCALED DOWN TO RS.36,91,536/- AS AGAINST RS.71,01,810/- DE TERMINED BY THE TPO. ACCORDINGLY, ASSESSEE SUCCEEDS PARTLY. 17. NOW, WE MAY CONSIDER THE INTERNATIONAL TRANSACT IONS OF RECEIPT OF DROP SHIPMENT COMMISSION BY THE ASSESSEE OF RS.62,26,352 /-. IN THIS CONNECTION, THE TPO NOTICED THAT ASSESSEE HAD RECEIVED SUCH COM MISSION ON SERVICES GIVEN TO ITS ASSOCIATED ENTERPRISES, VIZ. HENKEL MA LAYSIA, HENKEL USA AND ITA NO.1647/PN/2011 A.Y. : 2007-08 HENKEL SINGAPORE AS PER DETAILS IN PARA 9.2 OF HIS ORDER. THE ASSESSEE BENCHMARKED THE SAID INTERNATIONAL TRANSACTIONS ON THE BASIS OF TNM METHOD WHEREAS THE TPO HAS SELECTED THE CUP METHOD AS THE MOST APPROPRIATE METHOD. THE ASSESSEE EARNS DROP-SHIPMENT COMMISSIO N AS PER THE COMMISSION AGREEMENTS. THE TPO NOTICED THAT THE HE NKEL MALAYSIA WAS DEDUCTING 7% OF THE COMMISSION AMOUNT AS PER UNDERS TANDING BETWEEN ASSESSEE AND HENKEL MALAYSIA FOR CERTAIN ADDITIONAL FUNCTIONS, AND NO SUCH DEDUCTION WAS MADE BY OTHER ASSOCIATED ENTERPRISES, NAMELY, HENKEL USA AND HENKEL SINGAPORE FROM WHOM ASSESSEE WAS ALSO EA RNING DROP-SHIPMENT COMMISSION. THEREFORE, BY CONSIDERING THE AGREEMEN T WITH HENKEL USA, WHICH HAD NO CLAUSE FOR THE 7% DEDUCTION, THE TPO C ONCLUDED THAT THE INTERNATIONAL TRANSACTION OF RECEIPT OF DROP SHIPME NT COMMISSION FROM HENKEL MALAYSIA WAS NOT AT AN ARM'S LENGTH PRICE AND MADE AN ADDITION OF RS.2,29,410/- ON THIS POINT. AS PER THE TPO, THE A SSESSEE OUGHT TO HAVE RECEIVED THE AFORESAID SUM IN ADDITION TO WHAT IT H AD RECEIVED FROM THE ASSOCIATED ENTERPRISES AS DROP-SHIPMENT CHARGES. 18. ON THIS ASPECT, THE PLEA OF THE LEARNED COUNSEL WAS THAT ASSESSEE EARNS DROP-SHIPMENT COMMISSION INCOME WHICH IS EQUI VALENT TO GROSS MARGINS EARNED BY THE ASSESSEE IN TRADING OF IDENTICAL GOOD S, AND IN SUPPORT HE REFERRED TO THE RELEVANT AGREEMENT, A COPY OF WHICH HAS BEEN PLACED AT PAGE 266 OF THE PAPER BOOK. THE LEARNED COUNSEL EXPLAIN ED THAT THE LEVEL OF FUNCTIONS, ASSETS AND RISKS INVOLVED ARE MUCH LESSE R IN COMMISSION ACTIVITY THAN IN THE TRADING ACTIVITY; AND IN ANY CASE, THE COMMISSION RATES EARNED ARE MUCH HIGHER THAN WHAT A THIRD PARTY COMMISSION AGEN T WOULD EARN IN THE OPEN MARKET. THUS, THE TRANSACTIONS ARE AT AN ARMS LEN GTH PRICE. IN ANY CASE, IT HAS BEEN SUBMITTED THAT THERE IS A FUNDAMENTAL FLAW IN THE APPROACH OF THE TPO BECAUSE THE ENTIRE ADJUSTMENT IS BASED ON AN AG REEMENT BETWEEN HENKEL MALAYSIA AND ASSESSEE WHICH CANNOT BE CONSTR UED AS A COMPARABLE TRANSACTION UNDER THE CUP METHOD AS IT IS NOT AN UN CONTROLLED TRANSACTION. A ITA NO.1647/PN/2011 A.Y. : 2007-08 REFERENCE WAS MADE TO SECTION 92F(II) OF THE ACT WH ICH DEFINES ARM'S LENGTH PRICE TO MEAN A PRICE ADOPTED BETWEEN THE PARTIES T HAT ARE NOT ASSOCIATED ENTERPRISES IN UNCONTROLLED CONDITIONS. IT WAS THE REFORE SUBMITTED THAT THE ADDITION IS NOT JUSTIFIED. 19. ON THIS ASPECT, THE LEARNED DEPARTMENTAL REPRES ENTATIVE HAS MERELY REFERRED TO THE STAND OF THE TPO IN SUPPORT OF THE STAND OF THE REVENUE. 20. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN THIS CONTEXT, CLAUSE (A) OF SUB-RULE (1) OF RULE 10B OF THE RULES PRESCRIBES THE MANNER IN WHICH THE ARMS LENGTH PRICE IN RELATION TO AN INTE RNATIONAL TRANSACTION IS TO BE DETERMINED UNDER THE CUP METHOD, WHICH READS AS UND ER :- (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHIC H, - (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFER RED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, 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-CLAUS E (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; 21. THE AFORESAID THREE STEPS WOULD REVEAL THAT TH E ACTION OF THE TPO IN THE PRESENT CASE IS CONTRARY TO THE PRESCRIPTION CO NTAINED IN SUB-CLAUSE (I) OF CLAUSE (A) OF SUB-RULE (1) OF RULE 10B OF THE RULES . OSTENSIBLY, IN TERMS OF SUB- CLAUSE (I), THE PRICE CHARGED OR PAID IN A COMPARABLE UNCONTROLLED TRANSACTION IS TO BE IDENTIFIED FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BEING TESTED. IT IS STAR KLY EVIDENT THAT IN THE PRESENT CASE, THE COMPARABLE TRANSACTION PICKED-UP BY THE T PO, NAMELY, AGREEMENT BETWEEN ASSESSEE AND HENKEL USA IS A TRANSACTION BE TWEEN TWO RELATED/ASSOCIATED ENTERPRISES AND THEREFORE IT IS A CONTROLLED TRANSACTION AND ITA NO.1647/PN/2011 A.Y. : 2007-08 NOT A UNCONTROLLED TRANSACTION. SUCH A TRANSACTI ON UNDERTAKEN BETWEEN TWO CONTROLLED ENTITIES, IN OUR VIEW CANNOT BE CONSIDER ED AS A COMPARABLE UNCONTROLLED TRANSACTION , AS ENVISAGED IN CLAUSE (A) OF SUB-RULE (1) OF RUL E 10B OF THE RULES. HENCE, ON THIS COUNT ITSELF, IN OUR VIEW, THE ADJUSTMENT MADE BY THE TPO BY CONSIDERING THE AGREEMENT BETWEEN HENKEL USA AND ASSESSEE AS AN ARM'S LENGTH PRICE FOR THE IMPUGNED INTERNATIONA L TRANSACTION HAS TO FAIL. THEREFORE, THE ADDITION MADE BY THE TPO ON THIS COU NT AMOUNTING TO RS.2,29,410/- IS HEREBY DIRECTED TO BE DELETED. 22. NOW, WE MAY CONSIDER THE ADJUSTMENT MADE BY THE TPO AMOUNTING TO RS.5,11,870/- ON ACCOUNT OF INTERNATIONAL TRANSACTI ONS OF IMPORT OF RAW MATERIAL BY APPLYING THE CUP METHOD. IN THIS REGARD, THE TP O HAS MADE A TABULATION IN PARA 8 (B)(V) OF HIS ORDER SHOWING THAT IN CASE OF PURCHASE/IMPORT OF RAW MATERIAL FROM ASSOCIATED ENTERPRISES IN RELATION TO 5 PRODUCTS, THE AVERAGE PRICE PAID WAS HIGHER THAN THE PRICE PAID FOR PURCH ASE OF SAME PRODUCTS FROM THIRD PARTIES IN DOMESTIC MARKET. ACCORDINGLY, HE HAS WORKED OUT AN AMOUNT OF RS.5,11,870/- AS ADJUSTMENT REQUIRED TO BE MADE TO THE VALUE OF IMPORT OF RAW MATERIAL FROM ASSOCIATED ENTERPRISES TO ARRIVE AT T HE ARM'S LENGTH PRICE OF SUCH TRANSACTIONS. 23. THE PLEA OF THE ASSESSEE WAS THAT OUT OF THE TO TAL 1310 PRODUCTS IMPORTED BY IT, AROUND 870 PRODUCTS WERE RAW MATERI ALS. OUT OF THESE 870 PRODUCTS, 10 PRODUCTS WERE PURCHASED BY THE ASSESSE E FROM LOCAL THIRD PARTIES ALSO. ONLY IN RELATION TO IMPORT OF 5 PRODUCTS, TH E PRICES CHARGED BY THE ASSOCIATED ENTERPRISES WERE HIGHER WHILE IN RESPECT OF THE REMAINING 5 PRODUCTS, THE PRICE CHARGED BY THE NON-ASSOCIATED E NTERPRISES WAS HIGHER. THE LEARNED COUNSEL POINTED OUT THAT THE TPO HAS MA DE ADJUSTMENTS ONLY IN RESPECT OF IMPORT OF 5 PRODUCTS WHERE ASSESSEE HAS PAID HIGHER PRICE TO THE ASSOCIATED ENTERPRISES, WHILE COMPLETELY IGNORING T HE OTHER 5 IMPORTS, WHERE ASSESSEE HAD PAID LESS PRICE TO THE ASSOCIATED ENTE RPRISES THAN THE PRICE PAID ITA NO.1647/PN/2011 A.Y. : 2007-08 TO LOCAL THIRD PARTIES. IN THIS CONNECTION, REFERE NCE HAS BEEN INVITED TO THE DETAILS PLACED AT PAGE 248 TO 250 OF THE PAPER BOOK , WHICH WAS ALSO BEFORE THE TPO. THE CONTENTION OF THE ASSESSEE IS THAT TH E NUMBER OF TRANSACTIONS WITH ASSOCIATED ENTERPRISES ARE LESS COMPARED TO NO N-ASSOCIATED ENTERPRISES, ITS TIMINGS ARE DIFFERENT AND THAT SUCH IMPORTS HAV E BEEN MADE FOR COMPELLING BUSINESS REASONS. IN THIS CONNECTION, A TABULATION POINTING OUT THE BUSINESS REASONS, THE FREQUENCY OF IMPORTS AND THE TIMING DI FFERENCES HAS BEEN FURNISHED WHICH IS AN UNDER :- NAME OF THE PRODUCT FREQUENCY OF IMPORT FROM AE FREQUENCY OF IMPORT FROM NON-AE BUSINESS REASONS AZO DYESTUFF/C.I. PART I SOLVENT ONCE (27.12.2006) THRICE AIR FREIGHT IS A MAJOR COMPONENT OF COST IN THE PRICE COMPARED. CABOSIL TS 720 (10 LB BAG) SHORTAGE IN LOCAL MARKET FROM DEC. 2006 TO MARCH 2007 HENCE IMPORTED FROM AE THE BUSINESS REASON FOR IMPORT FROM AE IS DUE TO SHORTAGE AND QUALITY PROBLEMS WITH THE LOCAL SOURCE HENCE IT WAS IMPORTED FROM AE. CAP/NOZ 25/10/100 G NEW DESIGN ONLY IN MONTH OF JUNE 2006 LATER TAKEN FROM 3 RD PARTY WHEN LOCAL VENDOR IDENTIFIED ONCE LOCAL SUPPLIED WAS LOCATED IT STOPPED THE IMPORTS AND PURCHASED LOCALLY DURING THE YEAR UNDER CONSIDERATION. ISOTRIDECANOL ETHOXYLATED MARLIPAL (GALE 12) ONCE (04.08.2006) 10 TIMES THE BUSINESS REASON FOR THIS IMPORT WAS BUSINESS EXIGENCY AND HENCE WAS PURCHASED FROM CHINA PLANT BY AIR SHIPMENT. SILICA MICROCRYSTALLINE (NOVACITE 1250) ONCE (19.05.2006) 8 TIMES THE BUSINESS REASON FOR THE IMPORT WAS BUSINESS EXIGENCY. 24. ON THE AFORESAID BASIS, IT IS SUBMITTED THAT T HE ADJUSTMENT MADE IS NOT JUSTIFIED. THE LEARNED COUNSEL FURTHER POINTED OUT THAT THE IMPORT OF THE IMPUGNED 5 PRODUCTS IS NOT IN THE REGULAR COURSE OF BUSINESS INASMUCH AS THE SAME WAS REQUIRED TO BE MADE ONLY IN CASE OF NON-AV AILABILITY OF THE PRODUCT IN THE LOCAL MARKET OR FOR OTHER BUSINESS CONSIDERATIO NS TABULATED ABOVE. THE LEARNED COUNSEL VEHEMENTLY POINTED OUT THAT THE APP ROACH OF THE TPO IS QUITE MYOPIC, AS HE HAS TAKEN-UP FOR CONSIDERATION ONLY T HE TRANSACTIONS WHICH ARE FAVOURABLE TO THE REVENUE AND NOT CONSIDERING THOSE WHICH ARE FAVOURABLE TO THE ASSESSEE. 25. THE LEARNED CIT(DR), ON THE OTHER HAND, HAS PRI MARILY RELIED UPON THE ORDER OF THE TPO IN SUPPORT OF THE CASE OF THE REVE NUE. ITA NO.1647/PN/2011 A.Y. : 2007-08 26 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. IN OUR CONSIDERED OPINION, THE ENTIRE PURPOSE OF THE TRANSFER PRICING ANALYSIS IS TO COMPUTE THE INCOME ARISING FROM AN INTERNATIONAL TRANSACTION, H AVING REGARD TO ITS ARM'S LENGTH PRICE. THE INTERNATIONAL TRANSACTION IN Q UESTION, RELATES TO IMPORT OF RAW MATERIALS BY THE ASSESSEE FROM ITS ASSOCIATED E NTERPRISES. THEREFORE, WHAT IS EXPECTED OF THE TPO IS TO CONSIDER THE TRAN SACTIONS OF IMPORT OF RAW MATERIALS BY THE ASSESSEE FROM ITS ASSOCIATED ENTER PRISES IN ITS ENTIRETY. IN THE PRESENT CASE, AS FACTUALLY DEMONSTRATED BY THE ASSE SSEE, TPO HAS IGNORED CERTAIN TRANSACTIONS OF IMPORT OF RAW MATERIALS FRO M THE ASSOCIATED ENTERPRISES WHERE THE PRICES CHARGED BY THE ASSOCIATED ENTERPRI SES WERE LOWER THAN THE PRICES CHARGED BY THE NON- ASSOCIATED ENTERPRISES. IN OTHER WORDS, TPO HAS PICKED UP ONLY THOSE TRANSACTIONS WHERE THE PRICES CHARGED BY THE ASSOCIATED ENTERPRISES ARE HIGHER IN COMPARISON TO PRICES CHAR GED BY THE THIRD PARTIES, WITHOUT CONSIDERING THE REASONS FOR THE SAME. IN O UR CONSIDERED OPINION, THE SAID APPROACH OF THE TPO IS QUITE FLAWED AND IS NOT JUSTIFIED. MOREOVER, IN THE TABULATION NOTED ABOVE, ASSESSEE HAS EXPLAINED REAS ONS WHICH PREVAILED WITH IT TO MAKE IMPORTS FROM THE ASSOCIATED ENTERPRISES OF THE 5 PRODUCTS, THOUGH THE PRICES CHARGED BY ASSOCIATED ENTERPRISES WERE H IGHER THAN THE PRICES CHARGED BY THE NON-ASSOCIATED ENTERPRISES. THE CIR CUMSTANCES CANVASSED BY THE ASSESSEE HAVE NOT BEEN FOUND TO BE LACKING IN B ONAFIDES BY THE TPO. HE HAS MERELY BRUSHED ASIDE THE SAME. IN OUR CONSIDER ED OPINION, IT WOULD MEET THE ENDS OF JUSTICE, IF THE AFORESAID ACTION OF THE TPO IS SET-ASIDE AND THE MATTER IS REMANDED BACK FOR RE-COMPUTATION OF THE A RM'S LENGTH PRICE BY TAKING INTO CONSIDERATION THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIALS FROM THE ASSOCIATED ENTERPRISES IN ITS ENTIRETY AND NOT MERELY IN RELATION TO 5 PRODUCTS AND LEAVING OUT THE OTHER 5 PRODUCTS WHICH ARE ALSO IMPORTED FROM THE ASSOCIATED ENTERPRISES. THUS, THE TPO/ASSESS ING OFFICER SHALL RE-VISIT THE CONTROVERSY ON THIS ASPECT AFTER ALLOWING THE A SSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD AND THEREAFTER DECIDE AS PER LAW. THUS, ON THIS GROUND, ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. ITA NO.1647/PN/2011 A.Y. : 2007-08 27. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH MARCH, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 18 TH MARCH, 2014. SUJEET/GCVSR COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE; 4) THE DR B BENCH, I.T.A.T., PUNE; 5) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE