The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the internal Comparable Uncontrolled Price Method (CPU) is the most appropriate method for undertaking the determination of the arm’s length price.
The assessee, Global Green Company Limited (GGCL) is engaged in the business of processing and export of pickled Gherkins (Baby cucumber) 68.8% of the shares of the assessee company are held by M/s Bilt Trading & Infrastructure Pvt. Ltd. In turn, the assessee is a 100% holding company of Tiffy International BV(Tiffy), with whom it had undertaken international transactions.
The assessee company has relied upon Comparable Uncontrolled Price Method (CUP) as per From 3CEB submitted with the return of income and while determining the arm’s length price in respect of the purchase of packing and processing material, on its own revised the price upward.
The Transfer Pricing Officer (TPO) held that the documentation does not contain any indication and material as to how the CUP has been applied by the assessee company. The TPO also held that after going through the Transfer Pricing report it could not be ascertained whether the assessee company is relying upon CUP or is intending to apply Transactional Net Margin Method (TNMM).
Out of the total export of Rs. 51 .33 crores during the year under the reference of pro cessed gherkins, the assessee company made total export exports worth 16.93 crores is to the related party (Tiffy International B.V.) and the remaining about 34 crores to unrelated parties.
The TPO determined the ALP of the international transactions of export of gherkin products by the assessee to its AE at Rs.20,14,85,401/- as against Rs .16,93,48,285/- declared by the assessee. Hence, a sum of Rs.3,21,37,116/- was added to the income of the assessee on account of international transaction of export of gherkin products.
The Assessing Officer held that the intention of the legislature is to compute the impact of each international transaction, separately on the income of the assessee.
Finally, the TPO determined the arm’s length price of the international transaction of “Purchase of packing and processing material” reworked and the negative figure was ignored and the difference of Rs.7,90,535/- was determined to be added to the income of the assessee on this account.
The TPO undertook an invoice-by-invoice comparison of the export made by the assessee to its AEs. Further compared the price charged by the assessee from its AEs for each transaction with the weighted average selling price (WASP) of the sales made by it to third parties.
The main argument of the Authorized Representative was that while doing so, the TPO arbitrarily adopted third parties sale transactions and in most of the cases compared the selling price of different grades of GHERKINS sold to the AEs with the WASP of different grades sold to the third parties.
The two-bench member comprising of C.N. Prasad (Judicial member) and B.R.R Kumar (Accountant member) held that the internal CUP is the most appropriate method for undertaking the determination of Arm’s Length Price.
Hence, it was directed that the economic analysis be conducted afresh by taking into consideration the like with the like and following the right foreign currency conversion. The Assessing Officer was directed to accord reasonable and accurate adjustments to Product characteristics, contractual terms, risk incurred, and geographical factors.
Therefore, the appeals of the assessee are partly allowed for statistical purposes and the appeals of the revenue are dismissed.
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