Transfer Pricing: No bar on reliance of private database u/R 10D(3). Nuances of the CUP Method under Rule 10B(1)(a)(i) explained
(i) Rule 10 D(3) is only illustrative in nature and merely describes the information required to be maintained by the assessee under section 92D “shall be supported by authentic documents, which may include the following …”. The logic employed by the Transfer Pricing Officer that since databases compiled by private entities is not included in rule 10D (3), such databases cannot be relied upon by the assessee is clearly fallacious inasmuch as an item not being included in illustrative list of required documents does not take outside the ambit of ‘acceptable document’ for the required purposes. In any event, all that Tips Software does is to collect the data, compile the same in easy to refer format and make it available to the end-user of such data online. The data is public data maintained by the customs department at various ports. It was also open to the TPO to, if he had any doubts, call for further information from this database supplier and examine authenticity of the data so furnished. His summary rejection of the data as unreliable on a technical ground is not tenable in law;
(ii) In applying the CUP Method product comparability should be closely examined as a price may be materially influenced by differences between the goods in the controlled and uncontrolled transactions, but product comparability does not require the comparables to be exactly the same. The product categorization has been done on the basis of reasonable generic description, and the product being generic in nature, such categorization in reasonable and sufficient. Generic goods, even under different brand names, do not cease to be comparable with each other unless the impact of brand or other intangibles is so substantial that it distorts the comparison altogether. In any event, even if there are minor variations in prices of generic goods, such factors are adequately taken care of by average in the case of large size of comparables;
(iii) However, under CUP, the arm’s length price of the transactions with the AEs cannot be determined by comparing average export price by the assessee to its AEs with the average uncontrolled export price because while under rule 10B (1)(a)(i) it is open to compute ALP on the basis of price charged in a comparable control led transaction or ‘a number of such transactions’ , the arm’s length price so computed is, under rule 10B(1)(a)(iii), taken as arm’s length price in respect of property transferred in the international transaction. The expression ‘the international transaction’ referred to in rule 10 B(1)(a)(iii) is used in singular and does not permit taking into account, unlike rule 10B(1)(a)(i), ‘a number of such transactions’. While averaging is thus permissible for the uncontrolled transactions, each international transaction is to be taken on standalone basis. It is not open to the assessee to compare the average price in his transactions with AEs with average price in uncontrolled transactions;
(iv) Also, the CUP method does not allow exclusion of high priced sale instances unless such high prices could be explained by differences of product or commercial terms. In any event, exclusion of extreme cases, such as in quartile ranges, is normally not permissible under the scheme of determination of ALP under the CUP method.