It is observed that the DEPB benefit was not taken into consideration by the AO/TPO for the purpose of working out the profit margin of the assessee whereas such benefit was taken into account in the comparable cases while working out their profit margin as found by the learned CIT(Appeals).
Before us, nothing has been brought on record to controvert or rebut this finding recorded by the learned CIT(Appeals) and this being so, we find no justifiable reason to interfere with the decision of the learned CIT(Appeals) that the DEPB benefit received during the year under consideration should be considered as part of the turnover of the assessee for working out the profit margin to make the comparison of like to like and similar to similar. Since the profit margin of the assessee after taking into consideration the DEPB benefit as part of its turnover comes to 12.30% as against the average net profit margin of 13.05% of the comparables which is within the safe limit of 5%, we find ourselves in agreement with the learned CIT(Appeals) that no TP adjustment in respect of transactions made with the associated enterprises was required to be made in the case of the assessee. We, therefore, uphold the impugned order of the learned CIT(Appeals) deleting the addition made by the AO by way of TP adjustment and dismiss the appeal of the Revenue.
Transfer Pricing – Most appropriate method if price of product supplied to AE and Non-AE varies due to certain factors?
As regards the adoption of most appropriate method for benchmarking the international transactions with AEs in the assessee’s case, it is observed that CUP no doubt is the most appropriate method for such benchmarking provided the comparable prices of similar products or almost similar products in case of uncontrolled transactions are available. The learned counsel for the assessee in this regard has contended that similar products as supplied to associated enterprises viz. bathrobes were also supplied by the assessee to non-AEs and, therefore, internal CUP was very much available. It is, however, observed that a wide variety of bathrobes were manufactured and exported by the assessee to AEs as well as non-AEs and the information obtained by the learned DR from the website of the assessee and placed on record before us shows that there were different types of bathrobes manufactured and exported by the assessee such as, Kimono, Hood, Shawl, Luxury, Hotels, Kids, Zipper etc. Even these products were further divided into sub types such as Kimono Piece Dyed and Kimono Piece Dyed Velour, Hood Piece Dyed and Hood Yam Dyed Ribbed, Hood with Embroidery and Kimono with Embroidery etc. In the comparable analysis done by applying CUP method, the assessee had not done the comparison between the price of each type of bathrobes but the average price of all the bathrobes supplied to the AEs and non-AEs was taken. In our opinion, such average price which is likely to be varied depending on the type of bathrobes supplied as well as product mix of different types of bathrobes cannot be taken as comparable uncontrolled price (CUP) for the purpose of transfer pricing exercise since the said price cannot be taken as price of the similar products supplied by the assessee to AEs and non-AEs. As already observed, such average price of bathrobes is likely to vary in a wide range depending on the type of bathrobes supplied and their product mix and in the absence of exact data made available by the assessee to compare the prices of similar products supplied to AEs and non-AEs, CUP cannot be applied as most appropriate method for the transfer pricing exercise. Moreover, there was also a difference in geographical location and size of the markets also in as much as the AEs of the assessee were in Italy whereas the non-AEs i.e. Wal Mart was based in USA having much bigger market than Italy. We, therefore, find no infirmity in the impugned order of the learned CIT(Appeals) confirming the action of the AO in rejecting the CUP method for benchmarking and applying the TNMM and upholding the same, we dismiss the appeal of the assessee.
Source – Welspun Zucchi Textiles Ltd. V/s. Assistant Commissioner of Income-tax (ITAT Mumbai), IT APPEAL NOS. 6539 (MUM.) OF 2009 & 898 (Mum.) of 2010, Date of Pronouncement – 11.01.2013