2014 (11) TMI 644 - AT - Income Tax

Transaction with AE towards receipt/payment of freight - Determination of ALP Application of CUP method Held that - In ACIT Vs DHL Danzas Lemuir Pvt Ltd 2014 (2) TMI 991 - ITAT MUMBAI it has been held that the assessee paid certain sum to its AEs abroad for doing the work similar to which it did for which it received freight revenue from its AEs - in both the situations, the total receipts are taken on one hand, from which all the expenses incurred in connection with the transportation of cargo in both the countries are excluded - even in a situation in which the comparables were the formulas on the basis of which exact quantification for price of services was done, the same could be accepted as a price for the purposes of application of CUP method of ascertaining arm s length price - The approach so adopted, even if somewhat serendipitous, was quite remarkable, pragmatic and in due deference to the realities of businesses - under any method of determining the arm s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm s length price. Rule 10BA as also the corresponding enabling rule 10B(1)(f) are inserted by the Income Tax (Sixth Amendment) Rules 2012 and are specifically stated to be effective from 1st April 2012, i.e. assessment year 2012-13 onwards - when a legislation confers a benefit on the taxpayer by relaxing the rigour of pre-amendment law, and when such a benefit appears to have been the objective pursued by the legislature, it would a purposive interpretation giving it a retrospective effect but when a tax legislation imposes a liability or a burden, the effect of such a legislative provision can only be prospective - the operation of rule 10BA, which confers the benefit of an additional method of ascertaining arm s length price and, inter alia, relaxes the rigour of CUP method, can only be retrospective in effect - Rule 10BA is to be held as effective from 1st April 2002, i.e. the time when transfer pricing provisions were introduced in India - the assessee s contention to the effect that the arm s length price of services rendered to, or received from, the associated enterprises, which was computed on the basis of the same 50 50 model as is the industry norm and as has been employed by the assessee for computing similar services to the independent enterprises, was at arm s length the order is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Correctness of the order passed by the Assessing Officer under section 143(3) r.w.s. 144 of the Income Tax Act, 1961.
2. Application of the Comparable Uncontrolled Price (CUP) method versus the Transactional Net Margin Method (TNMM) for determining the arm's length price (ALP) in transfer pricing.

Issue-Wise Detailed Analysis:

1. Correctness of the Order Passed by the Assessing Officer:
The appeal challenges the correctness of the order dated 22nd November 2011, by the Assessing Officer concerning the assessment year 2007-08. The representatives agreed that the decision for the assessment year 2006-07, which was heard simultaneously, would apply mutatis mutandis to this appeal. The primary difference was the amount of the impugned arm's length price adjustment, which was Rs. 33,96,272 for the current year compared to Rs. 2,09,00,179 for the previous year.

2. Application of CUP Method vs. TNMM for Determining ALP:
The Tribunal observed that in the business activity in question, a 50:50 business model of sharing residual profits with the service provider is a standard practice. The assessee claimed to have adopted this model with the associated enterprise. The authorities, however, contended that precise data on the amount charged for the same services in uncontrolled transactions was necessary for applying the CUP method. Since the assessee did not furnish this data, the TNMM was used, resulting in the impugned ALP adjustment.

The Tribunal noted that while the CUP method is the most direct method for ascertaining the ALP, practical issues arise regarding its functional aspects. Under Rule 10B(1)(a), the CUP method requires identifying the price charged in comparable uncontrolled transactions and adjusting for differences that could affect the price in the open market. The Tribunal emphasized that the term 'price' should be interpreted broadly to include not just an amount but also a formula for quantifying the price.

The Tribunal referred to previous decisions in similar cases, such as ACIT vs. Agility Logistics Pvt Ltd and ACIT vs. DHL Danzas Lemuir Pvt Ltd, where the CUP method was upheld even when the comparables were formulas rather than specific amounts. These decisions supported the application of the CUP method in situations where the pricing mechanism was the same for both controlled and uncontrolled transactions.

The Tribunal also discussed the introduction of an additional method by the Central Board of Direct Taxes in 2012, which allows for any method that considers the price charged or paid for similar uncontrolled transactions. This method is not a residual method and can be applied if it is the most appropriate method for determining the ALP.

The Tribunal concluded that the business model of 50:50 profit sharing, as followed by the assessee, satisfies the test for determining the ALP. Therefore, the impugned ALP adjustment of Rs. 2,09,00,179 for the previous year and Rs. 33,96,272 for the current year was deleted.

Conclusion:
The Tribunal upheld the grievance of the assessee, ruling that the arm's length price of services rendered to or received from associated enterprises, computed based on the industry norm 50:50 model, was at arm's length. The impugned disallowance of Rs. 33,96,272 was directed to be deleted, and the appeal was allowed in the terms indicated above. The judgment was pronounced in the open court on 18th November 2014.