CUP method can be applied by a comparing a pricing formulae instead of pricing quantification in amount

CA Suraj R. Agrawal

CUP method can be applied by a comparing a pricing formulae, rather than the pricing quantification in amount. Rule 10AB inserted w.e.f. 01.04.2012 is beneficial in nature and so retrospective w.e.f. 01.04.2002.

Facts of the case:

1. The Respondent Assessee is a logistics service provider, offering a bouquet of international and domestic freight handling services including time defined air and ocean transport and freight forwarding services.
2. The Assessee has been using the Comparable Uncontrolled Price (‘CUP’) Method for benchmarking its international transactions with its Associated Enterprises (‘AEs’).
3. The residual profits were split between the Assessee and the AEs in the ratio of 50:50.
4. The TPO, therefore, proceeded to adopt the Transactional Net Margin Method (‘TNMM’) and benchmarked the profitability of the Assessee with comparable companies engaged in a similar business by application of the TNMM at the entity level by using operating margin as the profit level indicator.
5. On this methodology, the TPO determined that there was a difference of Rs.20,900,179/- between the booked value and the ALP and since the same was more than 5%, the said difference was added back to the income of the Assessee.
6. The ITAT acknowledged that where a standard formula is adopted, the data regarding the precise amount charged or received for precisely the same services may not be available. Since the Assessee failed to furnish data to show that exactly the same amount was charged for the same service in the uncontrolled transactions, the TPO rejected the CUP method and instead adopted the TNMM, which is normally deployed as a method of last resort for computation of ALP.

Issue put before ITAT/Court:

Appropriateness of adopting CUP method as against the TNMM for determination of the ALP.

Ruling of Honorable ITAT/Court:

1. The Court finds the impugned order of the ITAT to be well reasoned and researched. The legal principles governing the determination of ALP in a TP adjustment exercise have been expounded lucidly by the ITAT in the impugned orders.
2. The Court does not find any substantial question of law arising from the impugned orders of the ITAT.
3. The appeals are accordingly dismissed.