2015 (2) TMI 114 - AT - Income Tax

Transfer pricing adjustment - AO/TPO/DRP not appreciating the 50 50 revenue split business model between the appellant and its associated enterprises in relation to international transactions, i.e. provision and receipt of freight forwarding services, and, further making an upward adjustment alleging that such transactions were not at arm s length - TNMM v/s CUP method? - whether the business model said to have been adopted by the assessee, in principle, meets the test of arm s length price determination under rule 10BA as well? - Held that - It may appear to be some kind of a dichotomy in the tax legislation but the well settled legal position is that 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. What logically follows from the law so settled by a constitutional bench of Hon ble Supreme Court in the case of CIT Vs Vatika Townships Pvt Ltd 2014 (9) TMI 576 - SUPREME COURT , is that 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. In our considered view, therefore, rule 10BA is to be held as effective from 1st April 2002, i.e. the time when transfer pricing provisions were introduced in India. In view of the above discussions, the conclusion arrived at by the coordinate benches meets our considered approval not only because of our respect for the pioneering work done by the coordinate benches but also because of our analysis elsewhere in the order and the subsequent developments, in jurisprudence as also in legislative field, supporting the conclusions arrived at by the coordinate benches. 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 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. Accordingly, the impugned arm s length price adjustment of ₹ 2,09,00,179 stands deleted. - Even as we admit the additional grounds of appeal, we are alive to the fact that all the related aspects of the matter have been examined at the assessment stage. We, therefore, consider it appropriate to remit the matter to the assessment stage for examination of the plea raised by way of the additional ground of appeal. Decided in favour of assessee for statistical purposes i.

Summary

Issues Involved:
1. Admission of additional ground of appeal regarding the 50:50 revenue split business model.
2. Arm's length price determination using Comparable Uncontrolled Price (CUP) method versus Transactional Net Margin Method (TNMM).
3. Retrospective applicability of Rule 10BA and its implications on the arm's length price determination.

Detailed Analysis:

1. Admission of Additional Ground of Appeal:
The primary issue raised by the appellant was the failure of the AO/TPO/DRP to appreciate the 50:50 revenue split business model between the appellant and its associated enterprises (AEs) for international transactions related to freight forwarding services. The appellant argued that recent judicial precedents, specifically in the cases of ACIT Vs Agility Logistics Pvt Ltd and ACIT Vs Danzas Lemuir Pvt Ltd, support the 50:50 revenue sharing model as complying with the arm's length principle. The appellant contended that the omission to raise this ground earlier was neither willful nor deliberate and sought its admission based on the Supreme Court judgments in National Thermal Power Co Ltd Vs CIT and Jute Corporation of India Ltd Vs CIT. The Departmental Representative opposed the admission, arguing that the issue could not be raised at this stage, especially for the assessment year 2006-07, which was in the second round of proceedings.

2. Arm's Length Price Determination:
The Tribunal acknowledged that the 50:50 revenue split model is a recognized industry norm in the logistics and freight forwarding industry. The appellant's business model involved sharing residual profits equally with AEs after deducting transportation costs. The appellant had initially adopted the CUP method for determining the arm's length price, but the TPO rejected it in favor of the TNMM method. The Tribunal noted that the CUP method is the most direct method of ascertaining the arm's length price and should be preferred wherever practical. The Tribunal referred to the decisions in ACIT Vs Agility Logistics Pvt Ltd and ACIT Vs DHL Danzas Lemuir Pvt Ltd, which upheld the use of the CUP method based on a 50:50 profit-sharing formula.

3. Retrospective Applicability of Rule 10BA:
The Tribunal discussed the introduction of Rule 10BA, which allows for any method that considers the price charged or paid for similar uncontrolled transactions under similar circumstances. This rule, effective from the assessment year 2012-13, was deemed retrospective by the Tribunal, citing the Supreme Court's judgment in CIT Vs Vatika Townships Pvt Ltd. The Tribunal emphasized that transfer pricing legislation is an anti-abuse measure and should be implemented pragmatically to ensure substantive justice. The Tribunal concluded that the 50:50 business model meets the arm's length price determination criteria under Rule 10BA.

Conclusion:
The Tribunal admitted the additional ground of appeal, recognizing the 50:50 revenue split model as an industry norm and a valid basis for arm's length price determination. The matter was remitted to the assessment stage for re-examination of the appellant's plea, directing the appellant to cooperate fully in the remanded proceedings. The Tribunal's decision was influenced by recent judicial precedents and legislative developments, ensuring a fair and pragmatic application of transfer pricing rules. The appeals were allowed for statistical purposes, with the matter remitted for further examination.