Transfer Pricing: The Comparable Uncontrolled Price (CUP) method is not the Most Appropriate Method for determining the Arm's Length Price (ALP) in respect of the transactions of (sales of goods and sales commission) with Associated Enterprises (AEs) if there are geographical differences, volume differences, timing differences, risk differences and functional differences. If it is not shown that the selection of TNMM as the Most Appropriate Method is perverse, the same cannot be challenged

The Tribunal allowed the assessee’s appeal from the orders of the Assessing Officer under Section 143(3) r/w 144C of the Act i.e. in terms of the directions of the Dispute Resolution Panel (DRP). It upheld that the Transactional Net Margin Method (TNM method) for determining the Arm’s Length Price (ALP) in respect of the transactions (sales of goods and sales commission) with Associated Enterprises (AEs) is the Most Appropriate Method (MAM) to determine the ALP. The Tribunal negatived the stand of the Assessing Officer / Transfer Pricing Officer (TPO) that the Comparable Uncontrolled Price (CUP) method as the MAM should be applied to determine the ALP of the respondent assessee’s transaction with AEs.

The Revenue urged the following common reframed questions of law for the consideration of the Bombay High Court:

(i) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in considering TNMM and MAM, without considering the FAR analysis of the transactions to determine the ALP of the export sales to AEs?

(ii) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in differentiating CUP analysis on the basis of geographic difference and volume difference in respect of sale commission, especially when the commission is earned on the basis of percentage of sales?

HELD by the High Court dismissing the appeal:

(a) We find the only grievance urged by the Revenue is unjustified. In fact, we find that the TPO has while stating that FAR analysis has to be carried out, does not indicate that it was carried out. On the contrary, we find that the Tribunal in the impugned order has done the necessary FAR analysis. This is so as it has compared the risk and functional differences involved in finished goods being sold to AEs as against those sold to third parties as we have enumerated above to come to the conclusion that the prices at which the finished goods sold to the third parties are not comparables to the prices at which the goods sold to the AEs inter alia on the FAR analysis. We note that the finished goods are customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences, came to a conclusion that the CUP method would not be the MAM to determine the ALP. It upheld the stand of the respondent assessee that TNM method is the MAM to arrive at ALP. Thus, the view taken by the Tribunal on the facts before it, is a possible view on the application of appropriate tests. Revenue has not shown that the selection of TNM method as the MAM to determine the AL of export to AEs is perverse.

(b) We note that the impugned order of the Tribunal has analyzed the differences between sales commission paid to its AEs for clients identified by them and the sales commission paid to third party agents in respect of sales goods in India. On account of the differences in respect of function and geography between the AEs transaction and third party transaction, the CUP method is not the MAM method. It, therefore, held that TNM method is the most appropriate. In these circumstances, the view of the Tribunal that the TNM method is the most appropriate method is a reasonable and possible view on application of appropriate test in the present facts. In the above view, this question also does not give rise to any substantial question of law. Thus, not entertained.