CUP method fails where there are differences in location, market size and product prices sold to AE & Non-AEs – Mum ITAT

Welspun Zucchi Textiles Ltd. v ACIT [ITA No 6539 (MUM.) OF 2009 & 898 (Mum.) of 2010] dtd 11.1.2013


During the year under consideration, the assessee company had exported bathrobes to its associated enterprises in Italy. The said transactions were benchmarked by the assessee using CUP method as the most appropriate method. In order to determine the arms length price of these transactions, a reference was made by the AO to the TPO u/s 92CA(1) of the Act. Before the TPO, the assessee submitted the comparative chart of sales to AEs and non AEs. It was submitted that out of the total bathrobes exported to non AEs, about 95% bathrobes were exported to Wallmart USA at an average unit price of US Dollars 6.42 while the average unit price of export made by the assessee to its AEs in Italy was US Dollars 8.80. It was contended that since the price charged to AEs was more than the price charged to non AEs, the international transactions with AEs involving export of bathrobes should be considered at arms length.

However, according to the TPO, the exports to AEs in Italy could not be compared with exports to non AEs such as Wallmarts Store in America as these two markets were entirely different with one in Europe and the other in America. He held that the prices were likely to be varied depending on the size of the market, extent of competition, the availability of substitute goods etc. He also held that the price of bathrobe was likely to be varied depending upon the size, sheds, fabric, design, style etc. He was also of the opinion that there was no point in comparing the average price of bathrobe supplied by the assessee to AEs in Italy with the average price of bathrobes supplied to Wall Mart in USA as the average price was dependant on the type and quality of bathrobes which varied in wide range. He held that the CUP method used by the assessee for benchmarking the international transactions with AEs thus was not the most appropriate method and the TNMM should be considered as the most appropriate method for the benchmarking.

Accordingly, a search was undertaken by the TPO under the industry head “Textiles – Terry Towels” and he identified 11 companies as comparables being broadly similar functionally to the assessee. Since the average rate of net profit to total cost of the said comparables was found to be 13.05% as against 5.04% shown by the assessee, TP adjustment was made by the TPO by applying arms length margin of 13.05%.

Assessee’s arguments:

  • The CUP method was stated to be most appropriate as the assessee had exported the same product albeit having slightly different construction/characteristics of almost same volume to the AE as well as to the Non AE under the said condition.
  • Terry towels are akin to the raw material for the manufacture of bathrobe. Further, the technology requirements, the capex requirements and the technical manpower requirements are all significantly higher than that required for simple bathrobe stitching unit.
  • The export sale is also eligible for DEPB benefit during the year. This income has been included under the head “Other Income”. The export benefit is inextricably linked with the export sale. Though, the export benefit is grouped under other income when in real sense it is nothing but part of sales consideration. Hence, while calculating the margins, DEPB and other export benefits should be considered as part of total sales.
  • Comparison could be made between two concerns of the similar size in term of capital employed and volume of business. Assessee is a small size concern whereas the AO has considered the database of company having large turnover.
  • In the past CUP method has been accepted by the Department and nothing has been bought on record by the ld. AO in deviation from the accepted method.

Tax Authority’s contentions:

  • Although CUP was a direct and most reliable method for benchmarking, it required a high degree of comparability in respect of product.
  • Although the products exported by the assessee company to its AEs and non AEs were comparable, the markets involved were geographically different. Accordingly, the learned CIT(Appeals) upheld the action of the AO/TPO in rejecting CUP method.
  • Different kind of bathrobes were manufactured and exported by the assessee. In the absence of the availability of the exact comparable uncontrolled price of the similar products exported by the assessee company to its AEs and non AEs, CUP cannot be applied for a transfer pricing exercise as most appropriate method.


  • In the comparable analysis done by applying CUP method, the assessee had not done the comparison between the price of each type of bathrobes but the average price of all the bathrobes supplied to the AEs and non-AEs was taken.
  • Such average price which is likely to be varied depending on the type of bathrobes supplied as well as product mix of different types of bathrobes cannot be taken as comparable uncontrolled price (CUP) for the purpose of transfer pricing exercise since the said price cannot be taken as price of the similar products supplied by the assessee to AEs and non-AEs.
  • In the absence of exact data made available by the assessee to compare the prices of similar products supplied to AEs and non-AEs, CUP cannot be applied as most appropriate method for the transfer pricing exercise.
  • Moreover, there was also a difference in geographical location and size of the markets also in as much as the AEs of the assessee were in Italy whereas the non-AEs i.e. Wal Mart was based in USA having much bigger market than Italy. Therefore, TNMM is the most appropriate method as adopted by the TPO.
  • However, DEPB benefit received during the year under consideration should be considered as part of the turnover of the assessee for working out the profit margin to make the comparison of like to like and similar to similar. Since the profit margin of the assessee after taking into consideration the DEPB benefit as part of its turnover comes to 12.30% as against the average net profit margin of 13.05% of the comparables which is within the safe limit of 5%, no TP adjustment in respect of transactions made with the associated enterprises was required to be made in the case of the assessee.

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