TNMM Should Be Applied In Respect Of International Transaction Of `Sale Of Finished Goods’: ITAT

The Pune bench of the Income Tax Appellate Tribunal (ITAT) has held that the Transactional Net Margin Method (TNMM) should be applied in respect of international transactions of `Sale of finished goods’.

The bench of R.S. Syal (Vice President) and S.S. Viswanethra Ravi (Judicial Member) has observed that, in view of huge quantitative differences, one cannot say that the price charged for a product sold in huge quantities can be taken as a comparable price for the sale of lower units of the same product. Thus, the Comparable Uncontrolled Price (CUP) is not the most appropriate method in the facts of the case. If the CUP method is excluded, what remains is the TNMM, as was applied by the assessee.

The respondent/assessee is a domestic company engaged in the manufacturing of colour concentrates and additive masterbatches. In addition, it is also engaged in trading activities. The return was filed, declaring total income at Rs. 4.99 crore, along with an audit report in Form No. 3CEB detailing certain international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions.

The department’s appeal was against the application of the CUP method in the manufacturing segment. The TPO observed that the assessee applied the TNM method in respect of an international transaction of `Sale of finished goods’ at a transacted value of Rs. 42,11,78,831. The TPO opined that the CUP method should have been applied instead of the TNMM. The TPO computed the transfer pricing adjustment amounting to Rs. 40,77,800 on this count. The CIT (A) allowed the relief.

The assessee contended that the assessee applied the TNM method for benchmarking the international transaction of `Sale of finished goods’, which was substituted with the CUP method by the TPO. The latter method can be applied more appropriately if all other facts and circumstances of the international transaction and of the comparable transaction are similar. If there is a difference in product, geography, timing, quantity sold, etc., then the CUP method cannot be applied as the most appropriate method.

The tribunal noted that there is a huge difference in the quantities of products sold by the assessee to its AEs and non-AEs. The difference in the quantity sold to the AEs and non-AEs appears for other months as well. In view of such huge quantitative differences, one cannot say that the price charged for a product sold in huge quantities can be taken as a comparable price for the sale of lower units of the same product. Thus, the CUP is not the most appropriate method based on the facts of the case.

Case Title: DCIT Versus M/s. Ampacet Speciality Products Private Limited

Case No.: ITA No.797/PUN/2022

Date: 13-09-2023

Counsel For Appellant: Rajat Soni

Counsel For Respondent: Shashank Deogadkar

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