Associated Enterprises of assessee cannot be taken as comparable for determining ALP as per CUP method

 Brief of the case:

The ITAT Ahmedabad in the case of Gemstone Glass Pvt. Ltd vs. JCIT held that when an associated enterprise is taken as comparable then CUP method cannot be adopted for determining Arm Length Price irrespective of the fact that the associated enterprise taken as comparable is resident or non-resident.

 Facts of the case:

• The assessee was engaged in the business of manufacturing glass mosaic products and selling the same to its AEs. During the course of the proceedings before the TPO for the assessment year 2007-08, it was noted that the assessee has used transactional net margin method to determine the arm’s length price.
• It was also noted that the companies selected by the assessee as comparables, for the purposes of TNMM, were manufacturing glass bottles, kitchen glass wares, insulated glass, laminated glass etc. These products are completely different from the glass mosaic products manufactured by the assessee. Due to incomparability of products, TNMM method adopted by the assessee was rejected.

• TPO made an effort to work out ALP by internal cost plus price method, but had to drop that method for want of data on the cost analysis of the product sold to AEs and non-AEs.
• Finally, TPO adopted the CUP method (Comparable Uncontrolled Price) by taking goods sold by the assessee company to its AEs (resident group companies) as base for arriving ALP for goods sold to AEs in Europe. Accordingly, TPO recommended a transfer price addition of Rs. 5,09,77,309/-
• Aggrieved by the said proposed adjustment, assessee approached the Dispute Resolution Panel (DRP). The DRP rejected the grievances of the assessee by observing that “the TP method adopted by the assessee was not more appropriate than adopted by the TPO” and that but for the adjustment for geographical differences, “CUP is more appropriate method and cannot be faulted with”. Accordingly, the ALP adjustment of Rs 5,09,77,309 was upheld.
• Aggrieved by the order passed by AO in pursuance of directions by DRP, assessee is in appeal before ITAT Ahmedabad.

 Contention of the Assessee:

• The CUP method cannot be applied to work out Arm Length Price (ALP because the comparable which the TPO had taken base was resident group companies of assessee company and thus, an associated enterprise. Such comparable do not qualify for uncontrolled transactions as defined in Rule 10B of Income Tax Rules,1962.
• Therefore, the assessee’s TNMM method should be accepted in arriving ALP.

  Contention of the Revenue:

• It was impractical to adopt TNMM and Cost plus method for want of relevant data and therefore, CUP method was most appropriate to be adopted.
• Further, assessee’s contention that the prices at which it has sold goods to these group entities cannot be treated as valid comparable for CUP method cannot make CUP faulty because the comparable were the transaction of the assessee was with resident Indian companies and there is no motive for tax avoidance.
• Assessee’s contention that prices at which products are sold in India could not be compared with the prices at which the same products sold abroad, on account of geographical differences is not tenable because the assessee company has sold its products in European market at lower rate whereas the European market (in which associated enterprise was based) is a premium market for luxurious good like the decorative products manufactured by the assessee and rate of these products should be higher than the (rates prevailing in) Indian market.

  Issue before ITAT:

Whether DRP was justified in upholding the CUP method recommended by TPO by rejecting the TNMM method adopted by the assessee for want of relevant data?

 Held by ITAT Ahmedabad:

• Rule 10 B(1)(a) provides that under comparable uncontrolled price method, as a first step, the price charged in a comparable uncontrolled transaction(s) to be identified. Where ‘uncontrolled transaction’ has been defined to mean “a transaction between enterprises other than associated enterprises, whether resident or non-resident”.
• Therefore, for adoption of CUP method the prerequisite is that comparison has to be made taking uncontrolled transaction as base i.e. a transaction between two enterprises, whether resident or non-resident, which are not associated enterprises. In the present case , the comparable transaction taken as base for CUP method was entered into assessee with its Indian AEs(Indian group companies)
• DRP defended the view taken by TPO on the ground that the transaction of the assessee was with resident Indian companies and there could not be any motive for tax avoidance.

• Once it is not in dispute that “uncontrolled transaction” is a statutorily defined term, there is no room for questioning this definition on the basis of any superior logic matching the practicalities of cases.

• In the present case relevant data availability is an issue , both for adoption of cost plus method or TNMM. In such a scenario the method to be preferred is the method for which necessary inputs are available in the public domain.
• But even then TNMM can be adopted as the comparables are product of same industry and for that the same can be adjusted to take account of functional differences. Application of Cost plus method is not possible because the data required for its application are not available in public domain and could not be collected in this case.
• In the view of ITAT, lower authorities had erred in not applying the TNMM for ascertaining the arm’s length price of assessee’s transactions with the associated enterprises. We direct the AO/TPO to compute the ALP on the basis of the transactional net margin method. With these directions, we remit the matter to the file to AO for fresh determination of arm’s length price applying TNMM.