Intervet India Private Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 720/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1986 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-11-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 11-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: DANESH BAFNA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , , !'#'' $ , % & BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 720/PN/2014 %' ( ')( / ASSESSMENT YEAR : 2002-03 INTERVET INDIA PRIVATE LIMITED, BRIAHNAGAR, OFF PUNE NAGAR ROAD, WAGHOLI, PUNE 412207 PAN : AAACH1671F ....... / APPELLANT ' / V/S. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE / RESPONDENT ASSESSEE BY : SHRI DANESH BAFNA REVENUE BY : SHRI SUBHASH CHANDRA/ SHRI HITENDRA NINAWE / DATE OF HEARING : 16-02-2016 / DATE OF PRONOUNCEMENT : 18-04-2016 * / ORDER PER VIKAS AWASTHY, JM : THE APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE OR DER OF COMMISSIONER OF INCOME TAX (APPEALS)-IT/TP, PUNE DATED 22 -01-2014 FOR THE ASSESSMENT YEAR 2002-03. 2 ITA NO. 720/PN/2014, A.Y. 2002-03 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM THE RE CORDS ARE: THE ASSESSEE IS ENGAGED IN THE MANUFACTURING AND TRADING OF VETERINARY PRODUCTS INCLUDING PHARMACEUTICAL PRODUCTS, FEED ADDITIVES, P OULTRY VACCINES, CANINE VACCINES, VIRAL AND BACTERIAL VACCINES, ETC. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF INTERVET HOLDING S BV, NETHERLANDS, WHICH BELONGS TO THE AKZO NOBEL GROUP. DURIN G THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL, T HE ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF ` 4,08,40,652/-. DURING THE PERIOD RELEVANT TO ASSESSMENT YEAR 2002-03 THE AS SESSEE ENTERED INTO INTERNATIONAL TRANSACTIONS IN RESPECT OF SALE OF FINAL PRO DUCTS AND PURCHASE OF RAW MATERIAL. THE DETAILS OF THE INTERNATIONAL T RANSACTIONS ENTERED INTO BY THE ASSESSEE DURING THE RELEVANT PERIOD ARE AS UND ER: A) IMPORT OF RAW MATERIAL FROM AES ` 30,076,579/- B) IMPORT OF FINISHED GOODS FROM AES ` 92,728,812/- C) EXPORT OF RAW MATERIAL TO AES ` 36,752,171/- D) EXPORT OF FINISHED GOODS TO AES ` 89,106,681/- E) EXPENDITURE INCURRED ON BEHALF OF FELLOW ` 2,060,277/- SUBSIDIARIES AND REIMBURSED BY THEM F) EXPENDITURE INCURRED ON BEHALF OF HOLDING ` 700,000/- COMPANY AND REIMBURSED BY THEM G) INTERNAL AUDIT SERVICES ` 1,392,486/- FOR COMPUTING ARMS LENGTH PRICE (ALP) OF VARIOUS TRANSAC TIONS WITH ITS ASSOCIATED ENTERPRISES (AES) THE ASSESSEE APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) IN RESPECT OF MANU FACTURING AND TRADING ACTIVITIES. ONE OF THE VACCINES MANUFACTURED BY THE ASSESSEE IS FLOXIDIN 10% (50ML). THE TPO OBSERVED THAT THE PRICE CHARGED BY THE ASSESSEE IN RESPECT OF SAID VACCINE FROM ITS AES IS MUCH 3 ITA NO. 720/PN/2014, A.Y. 2002-03 LESS IN COMPARISON TO THE PRICE CHARGED TO THE THIRD PAR TIES. THE ASSESSEE COMPANY HAS BEEN EXPORTING THE AFORESAID MEDIC INE TO ITS AE IN THAILAND AND TO THE THIRD PARTY IN VIETNAM. THE CONTEN TIONS OF THE ASSESSEE IN RESPECT OF DIFFERENCE BETWEEN THE PRICES CHAR GED TO THE AE AND THE THIRD PARTY IS ON ACCOUNT OF VOLUME FACTOR, CRED IT PERIOD, CREDIT RISK AND GEOGRAPHICAL LOCATIONS. THE TPO MADE TRANSFER PR ICING ADJUSTMENT OF ` 27,17,821/- AFTER GRANTING ALLOWANCE IN RESPECT OF VOLUME FACTOR 10%, CREDIT PERIOD .5%, CREDIT RISK 5%. FURTH ER, THE TPO APPLIED CUP METHOD AS THE MOST APPROPRIATE METHOD FOR D ETERMINING ALP IN RESPECT OF EXPORT OF FLOXIDIN 10% (50ML). THE ASSES SING OFFICER ON THE BASIS OF ORDER PASSED BY THE TPO U/S. 92CA(3) INTE R ALIA MADE ADDITION OF ` 27,17,821/- IN THE INCOME RETURNED BY THE ASSESSEE. AGGRIEVED BY THE ASSESSMENT ORDER DATED 25-02-2005, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF I NCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE ORDE R DATED 02-03-2006 REJECTED THE APPEAL OF THE ASSESSEE. HOWE VER, THE COMMISSIONER OF INCOME TAX (APPEALS) MARGINALLY INCREASED TH E ALLOWANCE IN RESPECT OF VOLUME TO 20% AND CREDIT PERIOD TO 0.6%. AGAINST THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS), THE ASSESSEE FILED AN APPEAL IN ITA NO. 2845/MUM/2006 BEFORE THE TRIBUNAL. THE ASSESSEE APART FROM OTHER GROUNDS, HAD ALS O CHALLENGED THE ACTION OF LOWER AUTHORITIES IN NOT CONSIDERING THE GEO GRAPHICAL CONDITIONS OF THE MARKET TO WHICH ASSESSEE IS CATERING. T HE TRIBUNAL VIDE ORDER DATED 31-03-2010 REMITTED THE FILE BACK TO CO MMISSIONER OF INCOME TAX (APPEALS) FOR DECIDING THE ISSUE AFRESH BY WIDENIN G THE SCOPE OF ADJUSTMENT AND INTER ALIA CONSIDERING THE DEMOGR APHIC CONDITIONS OF THE MARKET. 4 ITA NO. 720/PN/2014, A.Y. 2002-03 IN SECOND ROUND OF LITIGATION, THE COMMISSIONER OF INCOME T AX (APPEALS) AFTER ANALYZING THE CONTENTIONS OF THE ASSESSEE IN RESPECT OF GEOGRAPHICAL DIFFERENCE IN THE MARKET REJECTED THE SAME. AGGRIEVED BY THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS), THE ASSE SSEE IS IN SECOND APPEAL BEFORE THE TRIBUNAL. 3. SHRI DANESH BAFNA APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE TOTAL EXPORTS MADE BY THE ASSESSEE TO ITS AES IS TO THE TUNE OF ` 8,91,06,681/-. OUT OF ABOVE, THE VALUE OF EXPORT OF FIVE COMMON PRODUCTS WHICH ARE SOLD TO THE AES AS WELL AS TH IRD PARTIES IS ` 1,46,59,056/-. THE ASSESSEE FOR BENCHMARKING THE ALP OF ITS PRODUC TS SELECTED TNM METHOD AS THE APPROPRIATE METHOD. IN RES PECT OF ALL PRODUCTS THE TPO ACCEPTED THE TNMM EXCEPT IN THE CAS E OF FLOXIDIN 10% (50ML). THE TPO APPLIED CUP METHOD FOR DETERMINING AL P IN RESPECT OF FLOXIDIN 10% (50ML). THE LD. AR FILED DETAILED WRITTE N SUBMISSIONS AGAINST THE TP ADJUSTMENT MADE IN RESPECT O F FLOXIDIN 10% (50ML). THE RELEVANT EXTRACT OF THE SAME ARE AS UNDER: APPELLANT'S FACTUAL AND LEGAL ARGUMENTS: THE APPELLANT HUMBLY SUBMITS THAT WHILE PREPARING T HE TP STUDY REPORT, THE APPELLANT HAS EXAMINED AND ANALYSED EAC H OF THE AVAILABLE METHODS PRESCRIBED UNDER THE ACT, AND ONL Y AFTER DETAILED EVALUATION, THE APPELLANT HAD COME TO A CO NCLUSION THAT THE MOST APPROPRIATE METHOD FOR COMPUTING THE ARM'S LENGTH PRICE WAS THE TNMM. THE FACT THAT SIMILAR PRODUCTS WERE SOLD BY THE APP ELLANT TO ITS AES AS WELL AS THIRD PARTIES WAS ALSO EVALUATED AT THE TIME OF DOING THE TP ANALYSIS. IT WAS DETERMINED THAT IT IS NOT POSSIBLE TO MAKE REASONABLY ACCURATE ADJUSTMENTS TO IRON OUT TH E DIFFERENCES BETWEEN THE TWO TRANSACTIONS (I.E. SALES TO AES AND SALES TO THIRD PARTIES), AND HENCE THE CUP METHOD WAS NOT CONSIDER ED AS THE MOST APPROPRIATE METHOD. 5 ITA NO. 720/PN/2014, A.Y. 2002-03 AT THIS JUNCTURE, THE APPELLANT WOULD WANT TO REITE RATE THAT MERELY BECAUSE SIMILAR PRODUCTS ARE SOLD TO AES AS WELL AS THIRD PARTIES, CANNOT AUTOMATICALLY LEAD TO A CONCLUSION THAT A CU P EXISTS AND SHOULD BE SELECTED AS THE MOST APPROPRIATE METHOD. THE TPO HIMSELF HAS ACCEPTED 83.55% OF THE TOTAL TR ANSACTION WITH AE AT ALP BY CHOOSING TNMM AS THE MOST APPROPRIATE METHOD AND HENCE, THERE IS NO NEED TO DEVIATE FROM THE METHOD FOR THE TRANSACTION CONSISTING 16.45% OF THE TOTAL TRANSACT ION. IN THIS REGARD, THE APPELLANT WOULD LIKE TO PLACE R ELIANCE ON THE PROVISION OF THE ACT AND THE RULES TO EXPLAIN THE A PPLICATION AND SELECTION OF MOST APPROPRIATE METHOD AS PER THE PRO VISIONS OF ITPR. YOUR HONOUR WOULD APPRECIATE THAT THE ITPR DOES NOT GIVE ANY PREFERENCE TO ONE PARTICULAR METHOD OVER THE OTHER. IT IS RELEVANT TO NOTE THAT THE PROVISIONS OF SECTION 92C(1) OF THE A CT PRESCRIBE THAT THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIO NAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS , BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATUR E OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASS OCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHE R RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE - COMPARABLE UNCONTROLLED PRICE (CUP) METHOD; - RESALE PRICE METHOD; - COST PLUS METHOD; - PROFIT SPLIT METHOD; - TRANSACTIONAL NET MARGIN METHOD (TNMM); OR - SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD . FURTHER, SECTION 92C(2) OF THE ACT PROVIDES THAT TH E MOST APPROPRIATE METHOD SHALL BE APPLIED IN ACCORDANCE W ITH THE PROVISIONS OF RULE 1 OC OF THE RULES TO DETERMINE T HE ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. THE RELEVAN T EXTRACT OF THE ACT AND THE RULES HAVE BEEN REPRODUCED BELOW FOR EA SE OF REFERENCE: RULE 1 0C(1) AND RULE 10C(2) OF THE RULES PROVIDE T HE FOLLOWING: 6 ITA NO. 720/PN/2014, A.Y. 2002-03 'RULE 10C(1) FOR THE PURPOSES OF SUB-SECTION(1) OF SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR INTERNATIONAL TRANSACTION, AND WHICH PROVIDES THE MOST RELIABLE M EASURE OF AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. ' 'RULE 10C(2) IN SELECTING THE MOST APPROPRIATE METH OD AS SPECIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAK EN INTO ACCOUNT, NAMELY:- (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANS ACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF D ATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN T HE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS C AN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INT O SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. ' IN VIEW OF THE ABOVE, IT IS EVIDENT THAT CHOICE OF A PARTICULAR METHOD FOR DETERMINING AN ARM'S LENGTH PRICE IS AN ANALYTICAL PROCESS AND IS DETERMINED BASED ON FACTS OF THE SPE CIFIC CASE, AND CUP METHOD MAY NOT NECESSARILY ALWAYS BE SUPERIOR T O THE TNMM MERELY BECAUSE SIMILAR TRANSACTIONS EXIST. IT IS IMPORTANT TO CONSIDER THE RELEVANT PORTION OF RULE 10B(1), 10B(2) AND RULE 10B(3) OF THE RULES IN HARMONIOUS M ANNER WHICH STATES THAT FOR APPLICATION OF THE CUP METHOD IT IS ESSENTIAL TO FOLLOW THE FOLLOWING STEPS: 7 ITA NO. 720/PN/2014, A.Y. 2002-03 - IDENTIFY PRICE CHARGED UNDER UNCONTROLLED TRANSACTI ONS; - EVALUATE THE COMPARABILITY ON THE BASIS OF CHARACTERISTICS OF THE PRODUCT SOLD / PURCHASED, THE FUNCTIONS PERFORM ED , THE CONTRACTUAL TERMS, CONDITIONS PREVAILING IN THE MAR KETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OP ERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOU R AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMEN T AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WH OLESALE OR RETAIL; - ADJUST THE PRICE CHARGED UNDER UNCONTROLLED TRANSACTIONS FOR DIFFERENCE ON ACCOUNT OF ABOVE REFERRED COMPARABILI TY PARAMETERS ; - THE ABOVE WOULD BE ESSENTIAL AS THE UNCONTROLLED TR ANSACTION WILL BE AKIN TO INTERNATIONAL TRANSACTION ONLY IF REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE M ATERIAL EFFECTS OF SUCH DIFFERENCES ; - FINALLY, IF IT IS NOT POSSIBLE TO MAKE REASONABLY A CCURATE ADJUSTMENTS TO ELIMINATE THE MATERIAL EFFECTS OF SUC H DIFFERENCES OR THERE EXIST DIFFERENCES , WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET, THEN THE UNCONTROLLED TRANSACTIONS COULD NOT BE CONSIDER ED AS COMPARABLE TO INTERNATIONAL TRANSACTIONS RESULTING INTO FAILURE IN APPLICATION OF CUP METHOD. BASED ON ABOVE, IF CUP IS TO BE CONSIDERED TO BE TH E MOST APPROPRIATE METHOD, THE FOLLOWING FACTORS SHOULD BE CONSIDERED: PARTICULARS REMARKS GEOGRAPHICAL DIFFERENCE THE PRICE AT WHICH A PRODUCT IS SOLD IN ONE COUNTRY CANNOT BE COMPARED WITH THE PRICE AT WHICH THE SAME PRODUCT IS SOLD IN ANOTHER COUNTRY BECAUSE OF THE I MPACT ON ACCOUNT OF GEOGRAPHICAL DIFFERENCES I.E. COUNTRY SPECIFIC DEMAND/ SUPPLY FACTORS, MARKET CONDITIONS, REGULATIONS AND GOVERNMENT ORDERS IN FORCE, LEVEL O F COMPETITION, AVAILABILITY OF SUBSTITUTE PRODUCTS, CONSUMER PURCHASING POWER, ETC. WHICH HAVE A BEARIN G ON THE PRICE. DIFFERENCE IN CREDIT RISK THE APPELLANT FACES MINIMAL CREDIT RISK ON SALE OF FINISHED PRODUCTS TO ITS AES, BECAUSE THE RISK OF D EFAULT 8 ITA NO. 720/PN/2014, A.Y. 2002-03 ON ACCOUNT OF NON-REALISATION OF SALES PROCEEDS IS VERY NEGLIGIBLE. WHEREAS, THE APPELLANT BEARS THE CREDIT RISK WHEN IT SELLS THE FINISHED GOODS TO THIRD PARTIES, AND WOULD HAVE TO BEAR THE LOSS ON ACCOUNT OF BAD DEBTS IF IT FAILS TO REALISE THE SALES PROCEEDS. DIFFERENCE IN CREDIT PERIOD THE CREDIT PERIOD OFFERED BY THE APPELLANT TO ITS A ES DIFFERS FROM THE CREDIT PERIOD OFFERED BY THE APPEL LANT TO THIRD PARTIES. THE APPELLANT HAS A POLICY OF OFF ERING 30 DAYS CREDIT ON SALES MADE TO ITS AES, FROM THE D ATE OF THE AIRWAY BILL. WHEREAS, THE CREDIT PERIOD OFFE RED TO THIRD PARTIES IS 45 DAYS FROM THE DATE OF AIRWAY BI LL! INVOICE. THE AFORESAID DIFFERENCES ALSO HAVE AN IMP ACT ON THE PRICING AT WHICH THE PRODUCTS ARE SOLD BY TH E APPELLANT TO ITS AES/ THIRD PARTIES. DIFFERENCE IN SALES VOLUME QUANTITY SOLD TO THE AE IS ALMOST 10 TIMES THE QUAN TITY SOLD TO THE THIRD PARTY. IT MAY BE SPECIFICALLY MEN TIONED HERE THAT FLOXIDIN IS A LONG ESTABLISHED PRODUCT OF FERED BY ALMOST ALL THE VETERINARY PHARMACEUTICAL COMPANI ES IN INDIA. THERE IS NO PERCEIVED QUALITY DIFFERENCE IN THE PRODUCT OFFERED BY VARIOUS COMPANIES. AS SUCH, THE PRICE IS THE DRIVING FACTOR FOR THE SALES, WHICH IS INVERSELY RELATED TO THE VOLUME SOLD. ANNUAL/FUTURE BUSINESS FROM AE/THIRD PARTY THE TOTAL ANNUAL BUSINESS DONE BY THE APPELLANT WITH THE THAILAND AE IS SUBSTANTIALLY HIGHER THAN T HE BUSINESS RECEIVED FROM THE THIRD PARTY. THE TOTAL ANNUAL BUSINESS FOR AY 2002-03 IS: - INTERVET THAILAND RS.6.6 MILLION - MODERN VETERINARY RS.1.4 MILLION MARKETING FUNCTION IT IS IMPORTANT TO NOTE THAT WITH RESPECT TO SALE O F FINISHED PRODUCTS TO AES, THE APPELLANT IS NOT REQUIRED TO UNDERTAKE ANY SIGNIFICANT SALES AND MARKETING EFFORTS, WHEREAS, THE APPELLANT IS NECESSITATED TO UNDERTAKE SALES AND MARKETING EFFORTS WITH RESPECT TO ITS THIRD PARTY BUSINESS. THE FACT THAT SIMILAR PRODUCTS WERE SOLD BY THE APP ELLANT TO ITS AES AS WELL AS THIRD PARTIES WAS ALSO EVALUATED AT THE TIME OF 9 ITA NO. 720/PN/2014, A.Y. 2002-03 DOING THE TP ANALYSIS. HOWEVER, IT WAS DETERMINED T HAT IT IS NOT POSSIBLE TO MAKE RELIABLE AND ACCURATE ADJUSTMENTS TO IRON OUT THE DIFFERENCES BETWEEN THE TWO TRANSACTIONS (I.E. SALE S TO AES AND SALES TO THIRD PARTIES), AND HENCE THE CUP METHOD W AS NOT CONSIDERED AS THE MOST APPROPRIATE METHOD. FURTHER, THE HON'BLE PUNE BENCH OF ITAT IN THE CASE OF AMPHENOL LNTERCONNECT INDIA PRIVATE LIMITED VS. DC IT (ITA N O. 1548/PN/2011) HAS UPHELD THAT: - CUP CANNOT BE CONSIDERED AS THE MOST APPROPRIATE METHOD IN CASES WHERE THERE ARE DIFFERENCES, AND RELIABLE AND ACCURATE ADJUSTMENTS CANNOT BE MADE TO IRON OUT SUCH DIFFERENCES AND MAKE THE TRANSACTIONS COMPARABLE; - WHEN 95% OF THE EXPORTS TO THE AES ARE CONSIDERED T O BE AT ALP BY APPLYING TNMM AS THE MOST APPROPRIATE METHOD, THERE IS NO REASON TO APPLY CUP METHOD FOR BENCHMARKING PART OF THE EXPORT TRANSACTION. IN THE APPELLANT'S CASE ALSO SINCE RELIABLE AND ACC URATE ADJUSTMENTS CANNOT BE MADE TO MAKE THE TRANSACTIONS OF EXPORT OF FINISHED GOODS TO THIRD PARTIES COMPARABL E TO THE TRANSACTION OF EXPORT OF FINISHED GOODS TO AES, SUC H A COMPARISON CANNOT BE MADE AT ALL. FURTHER, IN APPEL LANT'S CASE ALSO, 98.13% OF THE TRANSACTION HAS BEEN ACCEPTED AT ALP BY CHOOSING TNMM AS THE MOST APPROPRIATE METHOD AND HENCE, THERE IS NO REASON TO APPLY CUP METHOD FOR BENCHMARKING PART OF THE EXPORT TRAN SACTION. GIVEN THE ABOVE, THE APPELLANT SUBMITS THAT THE CUP METHOD CANNOT BE CONSIDERED AS THE MOST APPROPRIATE METHOD TO DEMONSTRATE THE ARM'S LENGTH NATURE OF INTERNATIONA L TRANSACTION PERTAINING TO EXPORT OF FINISHED GOODS, AND THE ADJUSTMENT PROPOSED BY THE LD. TPO / SHOULD BE DELE TED. 4. PER CONTRA SHRI SUBHASH CHANDRA AND SHRI HITENDRA N INAWE REPRESENTING THE DEPARTMENT VEHEMENTLY DEFENDED THE O RDERS OF COMMISSIONER OF INCOME TAX (APPEALS) AND THE TPO. THE LD. DR 10 ITA NO. 720/PN/2014, A.Y. 2002-03 SUBMITTED THAT THE ASSESSEE COMPANY IS EXPORTING 5 PRO DUCTS TO ITS AES AS WELL AS UNRELATED PARTIES. IN RESPECT OF 4 PRODUCTS T HE PRICE CHARGED TO AES IS ALMOST SIMILAR AS CHARGED TO THE UNRELATED PART IES. IT IS ONLY IN RESPECT OF FLOXIDIN 10% (50ML) THAT THE TPO HAS MADE AD JUSTMENT. THE ASSESSEE HAS NOT BROUGHT ANY EVIDENCE ON RECORD TO SHOW THAT THE ASSESSEE HAD CARRIED OUT ANY MARKETING EXPENDITURE WITH RESPECT TO SALE OF ITS PRODUCT (FLOXIDIN 10% (50ML)) TO UNRELATED PARTIES IN VIETNAM. FURTHER, THE ASSESSEE HAS NOT SHOWN FROM THE DOCUMENTS ON RECORD THAT THE MARKET CONDITIONS IN VIETNAM ARE DIFFERENT FROM THE OTHER COUNTRIES WHERE THE ASSESSEE IS EXPORTING FLOXIDIN 10% (50ML) TO ITS AES. THE LD. DR SUBMITTED THAT THE AUTHORITIES BELOW HAVE CONSIDERED ALL THE CONTENTIONS WHICH THE LD. AR OF THE ASSE SSEE HAS REITERATED BEFORE THE TRIBUNAL AND THEREAFTER REJECTED THE SAME BEING DEVOID OF ANY MERIT. IN SO FAR AS USE OF CUP METHOD FOR BENCHMARKING THE ALP IS CONCERNED, THE LD. DR CONTENDED THAT THE DRP IN ITS DIRECTIONS FOR ASSESSMENT YEAR 2008-09 HAS APPLIED CUP M ETHOD. THE DRP HAS REJECTED THE CONTENTIONS OF THE ASSESSEE THAT IF GEOGRAPHICAL CONDITIONS ARE NOT TO BE CONSIDERED THEN DOMESTIC SALE P RICE SHOULD BE COMPARED FOR DETERMINING ALP. 5. THE LD. AR OF THE ASSESSEE CONTROVERTING THE SUBMISSIO NS MADE ON BEHALF OF THE REVENUE SUBMITTED THAT THE DRP IN ITS DI RECTIONS FOR ASSESSMENT YEAR 2008-09 FOLLOWED THE DECISIONS OF TRIBUNAL IN THE CASE OF ATUL LTD. VS. ACIT IN ITA NO. 3118/AHD/2010. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF AMPHENOL INTERCONNECT INDIA P VT. LTD. VS. DCIT (SUPRA) HAS CONSIDERED THE DECISION RENDERED IN THE CASE OF ATUL LTD. VS. ACIT (SUPRA). THE LD. AR PRAYED FOR SETTING ASIDE T HE ORDER OF 11 ITA NO. 720/PN/2014, A.Y. 2002-03 COMMISSIONER OF INCOME TAX (APPEALS) AND ACCEPTING THE APP EAL OF THE ASSESSEE. 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF RIVAL SIDES AND HAVE EXAMINED THE ORDERS OF THE AUTHORITIE S BELOW. WE HAVE ALSO CONSIDERED THE DECISION ON WHICH THE LD. AR OF TH E ASSESSEE HAS PLACED RELIANCE. THE FIRST OBJECTION RAISED BY THE ASS ESSEE AGAINST THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) IS AG AINST THE SELECTION OF COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS T HE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE OF EXPORT OF FLOXIDIN 10% (50ML), DISREGARDING TNMM APPLIED BY THE ASSESSE E FOR BENCHMARKING THE ALP. A PERUSAL OF THE RECORDS SHOW TH AT DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL TH E ASSESSEE HAS MANUFACTURED AND EXPORTED 5 PRODUCTS TO ITS AES AND T HIRD PARTIES IN VARIOUS COUNTRIES. THE DETAILS OF THE PRODUCTS MANUFACTUR ED BY THE ASSESSEE AND THE COUNTRY OF EXPORT ALONG WITH THE PRICE S CHARGED PER UNIT ARE AS UNDER: NAME OF PRODUCT EXPORT TO AES EXPORT TO THIRD PARTIES COUNTRY PRICE COUNTRY PRICE DECIVAC OIL ADJ 100ML TURKEY 15.00 ITALY 11.75 AMNOVIT 250 GM INDONESIA 1.62 BANGLADESH 1.47 AND 1.62 HOG CHOLERA 50D NEITHELANDS 5.00 BELARUS 5.00 BERENIL 7% 20ML MALAYSIA 1.25 SRI LANKA 0.93 FLOXIDIN 10% (50ML) THAILAND 1.24 VIETNAM 3.81 7. THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIATE M ETHOD FOR DETERMINING ALP. THE TPO ACCEPTED THE TNM METHOD ADOP TED BY THE ASSESSEE IN RESPECT OF 4 PRODUCTS EXCEPT FLOXIDIN 10% (50 ML). THE TPO 12 ITA NO. 720/PN/2014, A.Y. 2002-03 APPLIED CUP METHOD AS THE MOST APPROPRIATE METHOD IN RE SPECT OF FLOXIDIN 10% (50ML) ON THE GROUND THAT THE PRICE CHARGED BY THE ASSESSEE FROM ITS AES IS FAR LESS THAN THE PRICE CHARGED FROM THE THIRD PARTIES. THE ASSESSEE HAS GIVEN THE REASONS FOR THE DIFFE RENCE BETWEEN THE TWO PRICES VIZ: VOLUME FACTOR, CREDIT PERIOD, CREDIT RISK , ANNUAL AND FUTURE BUSINESS AND GEOGRAPHICAL DISPARITY. NOT CONVINCED WITH THE REASONS GIVEN BY THE ASSESSEE, THE TPO APPLIED CUP METH OD AS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP IN RESPECT O F FLOXIDIN 10% (50ML). HOWEVER, THE TPO ALLOWED MINOR ADJUSTMENT IN RE SPECT OF VOLUME FACTOR 10%, CREDIT PERIOD .5% AND CREDIT RISK 5%. IN FIRST APPEAL, THE COMMISSIONER OF INCOME TAX (APPEALS) MARGINALLY INCREASED THE ALLOWANCE IN RESPECT OF VOLUME 20% AND CREDIT PERIOD 0 .6%. THE COMMISSIONER OF INCOME TAX (APPEALS) ON THE DIRECTIONS OF T HE CO- ORDINATE BENCH OF THE TRIBUNAL CONSIDERED THE GEOGRAPHICA L FACTOR AND REJECTED THE CONTENTIONS OF THE ASSESSEE TO GRANT AD JUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENCE. 8. THE DETAILS OF THE TRANSACTION IN RESPECT OF FLOXIDIN 10% (50ML) WITH AE AND THIRD PARTY ENTERED INTO BY THE ASSESSEE ARE AS UNDER: FLOXIDIN 10% 50ML ASSOCIATE ENTERPRISES THIRD PARTY PARTY NAME INTERVET (THAILAND) LTD. MODERN VETERINARY TRAD ING COUNTRY THAILAND VIETNAM QUANTITY 30,144 3,152 CURRENCY EURO/USD EURO/USD AMOUNT IN FOREIGN CURRENCY 37,240 12,020 AMOUNT IN INR 1,662,825 541,707 AVG. S.P./UNIT IN F.C. 1.24 3.81 G.M. % 70% 90% 13 ITA NO. 720/PN/2014, A.Y. 2002-03 A PERUSAL OF THE ABOVE TABLE SHOWS THAT THE VOLUME OF SA LE TO AE IS ALMOST TEN TIMES TO THAT OF THE THIRD PARTY. IT IS ALSO AN UNDISPUTED FACT THAT CREDIT RISK TO THIRD PARTY IS ALWAYS HIGHER THA N THE AE. AS FAR AS GEOGRAPHICAL DISPARITY IS CONCERNED, IT IS A FACT THAT BO TH THE COUNTRIES I.E. THAILAND AND VIETNAM ARE MEMBERS OF THE ASSO CIATION OF SOUTHEAST ASIAN NATIONS (ASEAN) BUT THAT DOES NOT MEAN THAT THE MARKET CONDITIONS OF BOTH THE COUNTRIES ARE SIMILAR. THAILAN D IS ONE OF THE MOST COMPETITIVE MARKET IN SOUTH-EAST ASIA AND HAS AN EDGE OVER OTHER NEIGHBORING COUNTRIES IN RESPECT OF EASE OF DOING B USINESS, LABOUR COST AND OTHER INFRASTRUCTURE FACILITIES. 9. DE HORS, THE DIFFERENCES DISCUSSED ABOVE, A PERUSAL OF T HE DOCUMENTS ON RECORD SHOW THAT MORE THAN 80% (83.55%) O F EXPORTS WHICH HAVE BEEN BENCHMARKED BY THE ASSESSEE UNDER TN MM HAS BEEN ACCEPTED BY THE AUTHORITIES BELOW. WHERE SUBSTANTIAL PAR T OF THE EXPORTS MADE TO AES HAVE BEEN ACCEPTED BY THE TPO A ND THE REASON HAS BEEN GIVEN BY THE ASSESSEE FOR THE PRICE DIFFERENCE IN RESPECT OF ONE PRODUCT, WE FIND NO VALID REASON FOR ADOPTING CUP METHOD A S THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE TRANSACTIONS. T HE ASSESSEE HAS DISCHARGED ITS ONUS BY GIVING THE DETAILED REASONS FOR DIFFERENCE IN PRICE. THEREAFTER, THE ONUS IS ON THE TPO TO SHOW THAT THE METHOD ADOPTED BY THE ASSESSEE FOR BENCHMARKING THE TRANSACT IONS WITH AES IS NOT THE MOST APPROPRIATE METHOD. 10. IN THE CASE OF AMPHENOL INTERCONNECT INDIA PVT. LTD . VS. DCIT (SUPRA) SIMILAR ISSUE HAD COME UP BEFORE THE CO-ORDINATE BE NCH OF THE TRIBUNAL. IN THE SAID CASE THE ASSESSEE HAD ENTERED INT O AN INTERNATIONAL TRANSACTION FOR PURCHASE OF RAW MATERIAL AND EXPORT OF 14 ITA NO. 720/PN/2014, A.Y. 2002-03 FINISHED GOODS. IN THE TP STUDY REPORT THE ASSESSEE HA D APPLIED TNMM AS THE MOST APPROPRIATE METHOD FOR COMPUTING THE ALP O F INTERNATIONAL TRANSACTIONS. THE TPO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND APPLIED CUP METHOD. THE ASSESSEE CONTENDED THAT T HE DIFFERENCE IN THE PRICE IS ON ACCOUNT OF VOLUME, GEOGRAPHICAL LOCATIONS, TIME DIFFERENCE, RISK FACTOR, FUNCTIONAL DIFFERENCE ETC. THE TRIBUNAL AFTER CONSIDERING THE FACTS OF THE CASE OBSERVED AS UNDER: 3.3 CONSIDERING THE ABOVE DIFFERENCES, CUP METHOD WAS CLAIMED TO BE NOT THE MOST APPROPRIATE METHOD TO DETERMINE ALP. T HE SUITABLE ADJUSTMENTS WERE NOT POSSIBLE FOR THE ABOVE DIFFERE NCES AND THEREFORE, THE TPO WAS NOT JUSTIFIED IN ADOPTING CUP FOR EXPOR TS OF ` 1.40 CRS. TO THE AES SPECIALLY WHEN IN RESPECT OF SOME OF THE PRODUC TS, THE ASSESSEE HAS CHARGED HIGHER PRICE TO THE AES AS COMPARED TO THE PRICES CHARGED TO THIRD PARTIES. THIS FACT WAS CLARIFIED BY THE ASSE SSEE TO THE TPO BY THE DETAILS AS MENTIONED ON PAGE 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 PRODU CTS IS INFLUENCED BY ECONOMIC CIRCUMSTANCES AND UNDERLYING TRANSACTIONAL DIFFERENCES. THE ASSESSEE HAS CHARGED HIGHER AMOUNT OF ` 16,18,244/- TO THE AES IN RESPECT OF THE SAME PRODUCTS WHICH WERE ALSO SOLD T O THIRD PARTIES AS REFERRED ON PAGE 198 OF THE PAPER BOOK. CONSIDERIN G THE ABOVE DIFFERENCES, THE CUP METHOD WAS NOT THE MOST APPROP RIATE METHOD SINCE SUITABLE ADJUSTMENTS WERE NOT POSSIBLE TO BE MADE F OR THE VARIOUS DIFFERENCES. THE TPO HAS APPLIED CUP ONLY ON THE B ASIS OF PRODUCT SIMILARITY WITHOUT APPRECIATING THE VARIOUS OTHER D IFFERENCES AS DISCUSSED ABOVE. THE TRIBUNAL FURTHER HELD : 4.1 ACCORDING TO US, AS GENERAL PROPOSITION, THERE IS N O DISPUTE TO THE FACT THAT THE CUP METHOD IS A MORE D IRECT METHOD AND HENCE, IT SHOULD BE PREFERRED OVER TNMM METHOD WHEN COMPARABLE TRANSACTIONS ARE AVAILABLE. HOWEVER, IT IS TO BE AP PRECIATED THAT IN THE INSTANT CASE, WHERE THERE ARE VARIOUS DIFFERENCES L IKE GEOGRAPHICAL DIFFERENCES, VOLUME DIFFERENCES, DIFFERENT MARKET C ONDITIONS, ETC. ETC. IN THE TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS A ES AND THE THIRD PARTIES. IT IS NOT POSSIBLE TO MAKE SUITABLE ADJUS TMENTS IN RESPECT OF 15 ITA NO. 720/PN/2014, A.Y. 2002-03 SUCH DIFFERENCES, HENCE, CUP METHOD IS NOT THE MOST APPROPRIATE METHOD IN THE INSTANT CASE. IN THE COURSE OF THE HEARING, THE LEARNED CIT DR SUBMITTED THAT THE TPO HAS RIGHTLY ADOPTED CUP FOR THE PRODUCTS IN RESPECT OF WHICH COMPARABLE TRANSACTIONS WERE AVAIL ABLE. WHILE RAISING THIS CONTENTION, THE LEARNED CIT DR HAS NOT CONTROV ERTED THE VARIOUS DIFFERENCES BETWEEN THE TRANSACTIONS ENTERED INTO B Y THE ASSESSEE WITH ITS AES AND THIRD PARTIES. CONSIDERING THE VARIOUS DIFFERENCES AS DISCUSSED ABOVE BETWEEN THE TWO TRANSACTIONS, CUP M ETHOD IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE LE ARNED CIT DR HAD ALSO STATED THAT THE ONUS IS ON THE ASSESSEE TO DEMONSTR ATE THAT THE METHOD SELECTED BY IT, WAS MOST APPROPRIATE. THERE IS NO D ISPUTE REGARDING THIS PROPOSITION AS WELL. HOWEVER, ONCE, THE TPO HAS TRI ED 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 BEE N LAID DOWN BY SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE LTD. [1 07 ITD 141 (BANG)(SB)]. 11. THE CO-ORDINATE BENCH AFTER CONSIDERING VARIOUS DECISIO NS RELIED UPON BY BOTH THE SIDES CONCLUDED THAT THE TPO HAD WRO NGLY APPLIED CUP METHOD FOR DETERMINING ALP IN RESPECT OF SOME OF THE TRANSACTIONS PERTAINING TO EXPORT OF FINISHED GOODS ESPECIALLY WHEN THE TPO HAD ACCEPTED MORE 90% OF THE EXPORT TO THE AES. THE TRIBU NAL DELETED THE ADDITIONS MADE BY APPLYING CUP METHOD. IN THE PRESENT CASE, WE FIND THAT THE TPO HAS ACCEPTED SUBSTANTIAL PART OF THE TRAN SACTIONS WITH AES (MORE THAN 80%), IT IS ONLY ON THE MINOR PART OF THE T RANSACTIONS IN RESPECT OF ONE PRODUCT THAT THE TPO HAS APPLIED CUP ME THOD EVEN THOUGH THE REASONS WERE GIVEN BY THE ASSESSEE FOR DIFFER ENCE IN THE RATE AT WHICH THE PRODUCTS ARE SUPPLIED TO AE IN THE ONE COU NTRY (THAILAND) AND THE THIRD PARTY IN OTHER (VIETNAM). THUS, IN VIEW OF T HE FACTS OF THE CASE AND THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF AMPHENOL INTERCONNECT INDIA PRIVATE LIMITED, WE ACCEPT GROUND NO. 2 RAISED IN THE APPEAL. 16 ITA NO. 720/PN/2014, A.Y. 2002-03 12. SINCE, WE HAVE ACCEPTED THE FIRST CONTENTION OF THE AS SESSEE THE ALTERNATE PRAYER MADE BY THE ASSESSEE IN GROUND NOS. 3 AND 4 HAVE BECOME ACADEMIC AND HENCE, REQUIRE NO ADJUDICATION. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON MONDAY, THE 18 TH DAY OF APRIL, 2016. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 18 TH APRIL, 2016 RK *+,%-.#/#)- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ' () / THE CIT(A)-IT/TP, PUNE 4. DIRECTOR OF INCOME TAX, TRANSFER PRICING, MUMBAI 5. !*+ %%,- , ,- , . ./0 , / DR, ITAT, B BENCH, PUNE. 6. + 1 23 / GUARD FILE. // ! % // TRUE COPY// #4 / BY ORDER, %5 ,0 / PRIVATE SECRETARY, ,- , / ITAT, PUNE