NCOME TAX ACT, 1961

--Transfer pricing--Computation of ALpCup method whether suitable--Assessee was a company which derives income from software development. For the assessment year 2005-06, it has filed its return of income showing loss. After processing of the said return under section 143(3) the same was selected for scrutiny assessment. During the assessment proceedings, the assessing officer noticed that the assessee during the previous year has entered into international transactions with its Associated Enterprises (AE). For computation of the arm's length price (ALP) of such transactions, the AO, during the assessment proceedings, has made a reference to the Transfer Pricing Officer (TPO for short) under section 92CA(1). In response to this, the TPO, after conducting necessary enquiries and verification in the matter, vide his order dated 31-10-2008 passed under section 92CA(3), determined the ALP of such transactions at Rs. 12,74,96,713, as against Rs. 6,97,03,702 shown by the assessee, thereby suggesting for adjustment of Rs. 5,77,93,011 under section 92CA of the Act. In the transfer pricing analysis carried on by him, the TPO rejected the Comparable Uncontrolled Price Method ('CUP') applied by the assessee and adopted Transactional Net Margin Method (TNMM) as the most appropriate method for computation of ALP in this case. Later, in conformity with such order of the TPO, the AO, while adopting such ALP as determined by the TPO, made an addition of Rs. 5,77,93,011 to the returned income of the assessee under section 92CA before Commissioner (Appeals) assessee contended that the AO/TPO are not justified in rejecting the Comparable Uncontrolled Price method adopted by the assessee, for bench marking the price of the international transactions in respect of export sales. Held: CUP method is not suitable where there are material product differences or sbstantial adjustments therefore, for Bench markeing of transaction with AE ad third parties CUP method could not be adopted for determining ALP.