/ INCOME TAX

ALP: TPO COULD NOT MAKE ADDITION TO ASSESSEE’S ALP BY ADOPTING CUP METHOD DURING RELEVANT YEAR WITHOUT CONDUCTING ANY FAR ANALYSIS.

ALP: TPO COULD NOT MAKE ADDITION TO ASSESSEE’S ALP BY ADOPTING CUP METHOD DURING RELEVANT YEAR WITHOUT CONDUCTING ANY FAR ANALYSIS.

Schutz Dishman Bio-Tech (P.) Ltd vs DCIT [2015] (Ahmadabad – Trib.)

In a recent ruling, Where Tribunal in earlier year adopted TNMM in assessee’s case for determining ALP, in absence of change in circumstances; TPO could not make addition to assessee’s ALP by adopting CUP method during relevant year without conducting any FAR analysis.

Facts

The assessee was engaged in business of manufacturing and trading chemicals and other materials. During year under consideration, the assessee sold various products to two associate enterprises viz. ‘A’ GmbH, Germany and ‘S’ (GmbH), Germany. In transfer pricing proceedings, the assessee benchmarked its international transactions by adopting TNMM. The TPO, however, adopted CUP method for determining ALP. He accordingly made adjustment of Rs. 1.59 crore to assessee’s ALP. The Commissioner (Appeals) set aside addition made by Assessing Officer.

Ruling

It was noted that in assessee’s own case relating to assessment year 2004-05, the Tribunal decided the similar issue in favour of assessee. Domestic and international rates cannot be compared. Fundamental requirement in any of the method selected is selection of comparables for benchmarking international transaction. Whatever methodology is chosen for the purpose of determination of ALP under section 92C, as specified in the Act and the Rules have to form a basis of judging the comparability. There should be proper analysis of such transaction with respect to functional performed, assets employed and risk assumed by respective parties with reference to transaction in question. This can be termed as functional, asset, risk analysis i.e. FAR analysis. The provision also provides scope for carrying out adjustments in cases where there are some differences or variations to make two transactions commercially comparable, for the purpose of benchmarking. The underlying principal being that only likes can be compared with likes. Raw materials purchased from Indian supplier were not qualitative compared to raw material purchased from ‘A’ Germany. Assessee is responsible for qualitative product and it assumes risk thereof. So, it was decided to continue with qualitative raw material being purchased from ‘A’ Germany Assessing Officer ought to have taken into consideration FAR analysis and should also take into account various factors such as quality, quantity, pricing factors, government policy and transportation cost before comparing controlled transaction with uncontrolled transaction. Assessing Officer ought to have evaluated all the methods of transfer pricing, however, he selected directly CUP method being easy to apply. Assessing Officer has taken price from Database without pointing out any comparable cases. The industry average is not a comparable instance as held by the Special Bench in case of Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007](Bang.) (SB), where in it was held that Assessing Officer :

  • Right to select most appropriate method is that of assessee.
  • It has to be duly substantiated.
  • Industry average cannot be applied.
  • No specific preference to any method compared to other methods is given.

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