TP Update: Both positive & negative adjustments to be considered while computing ALP – Chennai ITAT


Mainetti India (P.) Ltd. v. ACIT [IT APPEAL NO. 1789 (MDS.) OF 2011] Chennai ITAT

Background:

The assessee is in the business of manufacturing plastic garment hangers. As the assessee is a part of the Mainetti global group, it used to buy and sell the hangers from/ to its group concerns. The assessee has purchased from its AE in Hongkong, Srilanka, Malayasia, Pakistan and RANDY Asia and has sold to its AE in Srilanka, Korea, Hongkong, Gulf, Egypt, Bangladesh, Malayasia, Taiwan, UK and Pakistan. On the purchase, the assessee has a positive differential i.e. the assessee purchases at a lower price from its AE than the non-AE and when its sales to the AE, its selling price is lower than the selling price as compared with the non-AE

When computing the ALP, the AO had taken into account only those transactions where the sale price to Associate Enterprise (AE) was lower than the sale price to non-Associated Enterprise (non-AE) and ignoring the instances where the purchase-price from and sale price to AE exceeded the purchase-price from and the sale price to non-AE. Thus, while applying CUP method for determining the ALP, TPO had considered only positive deviations and had ignored negative deviations.

Assessee’s contentions

  • Margin of plus or minus 5% as per Proviso to Section 92C(2) was not considered by the TPO.
  • Even when applying the CUP method, it was the net of the transaction that was liable to be considered.
  • On comparison with the non-AE when the pricing is considered by applying the CUP method, the same could be done only if a reasonable comparison could be made and only if direct methods were available. The consolidated effect of all the transactions between the assessee and the AEs must be considered as a whole.
  • As otherwise it would lead to a situation where the assessee would be making very high margins in some cases and very low margins in some cases and where the transactions show high margins, the same would stand accepted and in the transactions were low margins, the same would call for an adjustment

HELD:

  • Perusal of the provisions of Sec.92C shows that the words used is “in relation to an international transaction ………… having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons”
  • Reading the provisions of Sec.92C shows that the word used is “nature of transaction”. “Nature of transaction” would be a particular set of transaction, which are to be seen together.  When the assessee is buying from one place and selling at another that would be a “class of transaction”.
  • What is to be seen is whether the transaction of purchase and sale being the nature of transactions, when seen in consolidated from, generates profits which normally would be generated.
  • The profitability if considered without considering the positive deviations would lead to impossible profitability positions, which is not what is contemplated under the provisions of 92C.
  • The AO is directed to re-compute the ALP by taking into consideration both the net difference on the sale to the AE and purchase from the AE.

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