December 2010
Sale of goods to non-AEs cannot be taken as comparable under CUP, if there are significant differences in quantity sold, geography and customer profiles.
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Part C : Tribunal & AAR International Tax Decisions
ACIT v. Dufon Laboratories
(2010) TII 26 ITAT-Mum.-TP
S. 92C of Income-tax Act
A.Y. : 2004-05. Dated : 26-3-2010
7. Sale of goods to non-AEs cannot be taken as
comparable under CUP, if there are significant differences in quantity sold,
geography and customer profiles.
Facts :
An Indian company (ICO) was engaged in the business
of processing and export of chemicals. ICO sold majority of its products to its
AE in the USA. A small quantity (constituting about 2.5% of overall sale) was
sold to small enterprises in Asia. The independent parties were small-time
buyers who bought in small quantities for resale to other laboratories. However,
AE in USA purchased large quantities and resold to big corporate houses. Resale
by AE was in the competitive markets of USA and Europe.
The average price charged by ICO to AE worked out
to Rs. 440 per kg. as against the average price of Rs. 617 per kg. charged to
non-AE.
Rejecting the taxpayer’s contention that the sale
price to non-AEs was not the right basis for comparable price, the tax officer
made adjustment by adopting the transfer price based on average realisation from
non-AEs.
Incidentally, the assessee had a profit margin of
about 49% even without taking into account the adjustment, whereas the AE in the
USA had incurred losses.
Held :
Considering the following factors, the ITAT held
that the transaction with AEs was on ALP :
- The turnover
quantity to AEs was more than 50 times that of the non-AEs. Such difference in
magnitude would have major bearing on the price.
-
In Ranbaxy
Laboratories Ltd. v. ACIT1, ITAT had held that a particular entity in a
particular country should be compared with a similar entity in the same
country as geographical situations would, in several ways, influence transfer
pricing.
- Transactions with
high-profile clients with which AE dealt were different when compared to small
sales to non-AEs, who were small players in South East Asian business. Also,
AEs dealt in competitive market.
- The adjustment was
not justified also on the ground that it resulted in transfer price being
higher compared to the price recovered by AEs from the independent customers.
