Sale of identical goods to non-AEs cannot be taken as comparable under CUP, if there are significant differences in quantity sold, geography and cust

Court : Mumbai Bench of the Income-tax Appellate Tribunal

Citation : ACIT Vs. Dufon Laboratories [2010-T11-26-ITAT-MUM-T9

Brief:- The taxpayer, a manufacturer and exporter of chemicals had more than 97.5 percent of its sales to its associated enterprise (“AE”). It benchmarked the sales to AEs under the Comparable Uncontrolled Price (“CUP”) method based on the average price charged by the AEs to the customers. The Revenue observed that the non-AEs who purchased the chemicals paid a higher price and adopted the price charged to the non-AEs as the CUP.

The taxpayer stated that the AEs operated in the insulation industry and that the non-AEs were in the aerospace sector, which also resulted in the difference in pricing. It also contended that the AE came into existence for the reason that its ultimate customers required long term warranties on the product and were more comfortable dealing with an American firm than directly with the taxpayer. It was also pointed out that the ALP determined by the Revenue turned out to be higher than even the price ultimately charged to the buyers by the AEs. It also stated that the sale to non-AEs were in small quantities and non-recurrent, which cannot be compared directly with the sales to the AEs. However, the Revenue rejected taxpayer’s contentions after considering various aspects concerning the comparability of sales to non-AEs including differences in turnover, quantity, customer profiles and geography. On appeal, the Tribunal accepted the contentions of the taxpayer and ruled that there was no case for the Revenue in making the adjustments and accordingly, the sales to the AEs were held to be at arm’s length.

Facts:- The assessee was engaged in the business of processing and exporting chemicals. Its international transactions were primarily that of sales to its Associated Enterprise (“AE”), namely M/s. Chemical Link LLC, USA. The assessee also had sales transactions with non-AEs, although the majority of the sales transactions (i.e., 97.5% of total sales) were with its AE. The assessee determined the ALP of its international transactions with the AE using the Comparable Uncontrolled Price (“CUP”) Method.

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