2014 (11) TMI 844 - AT - Income Tax

Determination of ALP CUP method rightly rejected or not CUP method or TNMM - Transactions with Associated enterprises - International transactions of provision/ receipt of freight forwarding services to/from AEs Whether the mechanism for computing the amount of profit, so agreed upon between the parties, can indeed be taken as a comparable for the purposes of CUP analysis in transfer pricing - Held that - Availability of precise amount having been charged for precisely the same service is a sine qua non for application of CUP method - the TPO has held that it is not a fit case for application of CUP and, accordingly, the TNMM, which is usually referred to as method of last resort for computation of arm s length price, has been put in service resulting in impugned ALP adjustment - as decided in ACIT Vs Agility Logistics Pvt Ltd 2012 (4) TMI 260 - ITAT MUMBAI the application of CUP method by a comparing a pricing formulae, rather than the pricing quantification in amount as was considered sine qua non by the TPO - even in a situation in which the comparables were the formulas on the basis of which exact quantification for price of services was done, it could be accepted as a price for the purposes of application of CUP method of ascertaining arm s length price - when connotations of price under rule 10B(1)(a) are treated to include not only an amount stated in monetary terms but also a mechanism in terms of a formulae to arrive at consideration, such an interpretation is certainly a very purposive and realistic interpretation. As long as one can come to the conclusion, 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 - the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount - the business model adopted by the assessee, in principle, meets the test of arm s length price determination under rule 10BA as well - 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 business model of 50 50, as was admittedly prevalent in the line of business activity of the assessee and as is followed by the assessee, thus indeed satisfies the test for determination of arm s length price - the contention of the assessee is accepted 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 arm s length price adjustment is to be set aside Decided in favour of assessee.

Issues Involved:
1. Rejection of the Comparable Uncontrolled Price (CUP) method by the authorities.
2. Adoption of the Transactional Net Margin Method (TNMM) instead of the CUP method.
3. Justification of the 50:50 profit-sharing model in the freight forwarding industry.
4. Procedural and substantive aspects of determining the arm's length price.

Issue-wise Detailed Analysis:

1. Rejection of the Comparable Uncontrolled Price (CUP) method by the authorities:
The fundamental issue in this appeal was whether the authorities were justified in rejecting the CUP method for determining the arm's length price of transactions between the assessee and its associated enterprises (AEs). The authorities below, including the Deputy Commissioner of Income Tax and the Dispute Resolution Panel (DRP), upheld the Transfer Pricing Officer's (TPO) rejection of the CUP method. The TPO argued that the CUP method was not demonstrated adequately by the assessee and required precise documentation of third-party transactions, which was not furnished. The authorities insisted that the exact amount charged for precisely the same service in uncontrolled transactions was a sine qua non for applying the CUP method.

2. Adoption of the Transactional Net Margin Method (TNMM) instead of the CUP method:
Due to the perceived inadequacies in demonstrating the CUP method, the authorities adopted the TNMM for determining the arm's length price. The TPO's stance was that the CUP method was not applicable because the necessary data about the exact amounts charged in comparable uncontrolled transactions was not provided. Consequently, the TPO applied the TNMM, resulting in an arm's length price adjustment of Rs. 2,09,00,179.

3. Justification of the 50:50 profit-sharing model in the freight forwarding industry:
The assessee argued that the 50:50 profit-sharing model, after deducting transportation costs, was a standard practice in the freight forwarding industry and was applied uniformly to both associated and independent enterprises. The Tribunal acknowledged that this business model was a standard practice and that the terms of transactions with AEs were the same as those with independent enterprises. The Tribunal noted that the authorities had not disputed this practice but had procedural issues with the application of the CUP method.

4. Procedural and substantive aspects of determining the arm's length price:
The Tribunal emphasized that transfer pricing is an anti-abuse measure to ensure transactions are not artificially priced to deprive tax jurisdictions of their due share of taxes. The Tribunal criticized the authorities' pedantic approach and highlighted the need for a pragmatic and reasonable implementation of transfer pricing methods. The Tribunal referred to previous decisions, including ACIT vs. Agility Logistics Pvt Ltd and ACIT vs. DHL Danzas Lemuir Pvt Ltd, which upheld the application of the CUP method based on a profit-sharing formula rather than exact amounts. The Tribunal also noted the introduction of an additional method by the Central Board of Direct Taxes, which considers the price charged or paid for similar uncontrolled transactions, supporting a more flexible approach.

Conclusion:
The Tribunal concluded that the 50:50 profit-sharing model adopted by the assessee was in line with industry norms and satisfied the test for determining the arm's length price. The Tribunal upheld the assessee's contention and deleted the arm's length price adjustment of Rs. 2,09,00,179. Consequently, all other grounds of appeal were rendered academic and were not addressed on merits.

Judgment:
The appeal was allowed, and the decision was pronounced in the open court on 18th November 2014.

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