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TMI Blog2013 (9) TMI 596X X X X Extracts X X X X X X X X Extracts X X X X ..... er Material Science Pvt Ltd v. Additional Commissioner of Income Tax (2011 (12) TMI 393 - ITAT MUMBAI) or Third member decision in Technimont ICB Pvt Ltd v Additional Commissioner of Income Tax (2013 (9) TMI 595 - ITAT MUMBAI) whereas the judicial member in the Bayer case is the third member in the ICB case - Held that:- As far as the question of binding nature of these judgments is concerned, there does not seem to be much dispute on the proposition that a Third Member decision overrides the decision of a division bench and has a greater binding force. It has the same precedence value as that of a special bench. Elaborating this principle, a special bench of this Tribunal, in the case of DCIT v Oman International Bank SAOG (2006 (5) TMI 117 - ITAT BOMBAY-H), that a Third Member decision is defacto a decision of larger bench, and , in coming to this conclusion, the Special Bench was guided by Hon'ble Delhi High Court's judgment in the case of PC Puri v. CIT (1984 (2) TMI 48 - DELHI High Court). - IT Appeal No. 142 (Ahd.) of 2013 - - - Dated:- 28-6-2013 - Pramod Kumar AND Kul Bharat, JJ. For the Appellant : Manoj Pardasani and Vishal Gada. For the Respondent : Alok Johr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... division of the GEII was vested in the assessee company w.e.f 3rd August 2007. It was a case of vertical demerger, i.e. an entire tier of business activity chain was given up altogether by the GEII. Therefore, all the significant parameters within which, and with the help of which, the business operated, such as vendors, customers, personnel, core activity and business structure etc, have remained the same as of plastic division in GEII. In effect, therefore, during the relevant previous year itself, from 1st April 2007 to 3rd August 2007, business of the assessee was carried out by GEII. The business of the assessee is manufacturing of manufacturing and marketing of engineering thermoplastic granules. When the assessee's transfer pricing came up for examination before the Transfer Pricing Officer, he rejected the same by pointing out several flaws in the working of transfer pricing report. It was also noted that while the assessee has shown manufacturing activity to the tune of Rs 139.89 crores, with a margin of 10.05%, the assessee has shown a trading turnover of Rs 220 crores on which a margin of 3.34% is shown. In the transfer pricing study filed by the assessee, the comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions during the course of appellate proceedings are the same as filed before the TPO. Besides this, the appellant has also stated that for the purposes of internal CUP also, the uncontrolled transactions can only be considered. Since, the transactions of the predecessor company i.e. GE India Pvt. Ltd. were not uncontrolled transactions, but were transactions made with Associated Enterprises under controlled conditions hence, the margin of GE India Pvt. Ltd. cannot be considered as internal CUP. The appellant has also submitted that having regard to market conditions during the second half of financial year 2008-09, the average sale price was gradually reduced across all the key product groups due to sluggish economic trend on account of which the company had to reduce the sales price to sustain the volume, which would help In absorbing the fixed cost of the company. The appellant also submitted that vide Its submission dated 10th October, 2011, it submitted to the TPO that owing to the sluggish economic trend, the appellant suffered 6% decrease in the gross profit margin under the trading operations. As already stated, the TPO has stated that there is a fallacy in the analysis con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the ALP in this case. The ITAT, Mumbai Bench in its decision in the case of Bayer Material Science Pvt. Ltd. 18 taxman.com 60 (Mum) has discussed a situation, where no comparables are available and whatever comparable are available have got very high percentage of controlled transactions. The Bench has stated as follows in this regard :- "It is possible that the nature of international transaction between two associated enterprises may be such which, in normal course, is unusual between independent enterprises. In such a case there will be hardly any comparable uncontrolled case for the purposes of benchmarking of such transaction. The question will arise as to whether in such a situation, the transfer pricing provisions will fail and cease to be applicable and as such the TPO will be compelled to accept the manoeuvred price declared by the assessee. The further question will be as to whether any cognizance can be taken of such controlled transactions for benchmarking. We have observed above that a majority of assesses do not intend to play foul with the Revenue by unnecessarily attempting to reduce the tax liability. In such circumstances the declared income from su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no cognizance should be taken of such determination of ALP, which shall be ignored and the income shall be computed on the basis of entries made. On the other hand, if the income determined at arm's length price is higher than that emanating from entries in the books of account, then such income at arm's length price, being higher than that from the entries in the books of account, shall be included in the total income of the assessee. It is, therefore, manifest that the higher of income determined at arm's length price or as emerging from the entries made in the books of account, is taken into consideration for computing the total income of an assessee. This sub-section (3) of section 92 when seen in juxtaposition to the Chapter X in which the relevant sections have been resided titled as 'Provisions relating to avoidance of tax', makes it apparent that the purpose behind such provisions is to uncover the arrangement made by the associated enterprises in not reflecting the true profit from the international transactions. If we accept the contention raised by the ld. A.R. that the controlled transactions should be completely ignored in such a situation when there are no uncontroll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 6. A plain reading of the orders of the authorities below shows that the method upheld by the CIT(A), for the purposes of ascertaining ALP, is Internal CUP, but then the application of this method is clearly incorrect inasmuch as any application of any CUP (Comparable Uncontrolled Price) method involves dealing with prices of a product not the profit margin earned thereon. Rule 10 B(1)(a) of the Income Tax Rules, lays down that the arm's length price in relation to an international transaction shall be determined by any of the prescribed methods, being the most appropriate method, and defines CUP method as follows: (a) comparable uncontrolled price method, by which, - (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking of such transaction. The question will arise as to whether in such a situation, the transfer pricing provisions will fail and cease to be applicable and as such the TPO will be compelled to accept the manoeuvred price declared by the assessee. The further question will be as to whether any cognizance can be taken of such controlled transactions for benchmarking. We have observed above that a majority of assesses do not intend to play foul with the Revenue by unnecessarily attempting to reduce the tax liability. In such circumstances the declared income from such international transactions will itself represent the arm's length price. Thus, where it is an admitted position between the tax payer and the tax collector that there is no comparable uncontrolled transaction due to the nature of transaction being such that it is ordinarily between associated enterprises, in such a case, a transaction between two associated enterprises at arm's length price, though technically called 'controlled transaction', would partake of the character of 'uncontrolled transaction' for the purposes of determining the ALP in a later international transaction between two AEs. In such a situation, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration for computing the total income of an assessee. This sub-section (3) of section 92 when seen in juxtaposition to the Chapter X in which the relevant sections have been resided titled as 'Provisions relating to avoidance of tax', makes it apparent that the purpose behind such provisions is to uncover the arrangement made by the associated enterprises in not reflecting the true profit from the international transactions. If we accept the contention raised by the ld. A.R. that the controlled transactions should be completely ignored in such a situation when there are no uncontrolled transactions at all, it would amount to defeating the object of these provisions. When the very purpose of these provisions is to determine arm's length price and there is admittedly no record of any uncontrolled transaction, in our considered opinion, it is perfectly in order to consider a controlled transaction genuinely entered in an uncontrolled manner between some other associated enterprises, for the purposes of benchmarking of such a transaction. 8. However, the same learned Member, as a Third Member in the case of Technimont ICB Pvt Ltd v Additional Commissioner of Income Tax (138 ITD 23 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing together and this method of referring to the third Judge in the case of a difference of opinion between the two Judges. Whether the first method is adopted or the second, "opinion of the majority" will be decisive. In this case, there is a formal reference to a third Judge to ascertain his opinion. He is the deciding voice. He turns the scales. The third Judge is the Full Bench. Not alone. But along with the two others, who first heard the case. Whether the three Judges sit at the same time or at different times - two at one time and the third hearing the matter later on a difference of opinion - does not make much difference.". Viewed thus, a Third Member may not really be bound by the decisions of division benches and the Third Member decision may be seen as overruling not only the dissenting views but also unanimous decisions of the division benches. Learned Third Member, in his majority view in the case of Technimont (supra), had stated as follows: 14. What is an 'uncontrolled transaction' has been clearly defined under Rule 10A(a) to mean 'a transaction between enterprises other than associated enterprises whether resident or non-resident'. A plain reading of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparison with a comparable uncontrolled transaction and not a comparable controlled transaction. 9. Learned Third Member thus virtually overruled his own view in a division bench. As he did so, he was not oblivious of the division bench order that he was departing from, as evident from his following closing remarks: 18. Before parting with this matter, I consider it my duty to record that the ld. AR relied on certain decisions including UCB India (P.) Ltd. v.. Asstt. CIT [2009] 121 ITD 131 , Bayer Material Science (P.) Ltd. v. Addl. CIT [2012] 134 ITD 582 and Dy. CIT v. BP India Services (P.) Ltd. [2011] 133 ITD 255 (Mum) in which it has been held that controlled transactions cannot be considered for determining ALP in other transactions. Per contra , the ld. DR has relied on a solitary decision rendered by the Mumbai bench of the tribunal in NGC Network (India) (P.) Ltd. (supra) to buttress his contention that a controlled transaction can also be considered for benchmarking. I do not propose to embark upon these cases separately for discussion, I clarify that my decision in the foregoing paras is founded on the interpretation of the relevant bare provisions of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l other issues on the short ground that the decision to apply, what he erroneously terms as, 'Internal CUP' method for ascertaining arm's length price is correct and does not call for any interference. This stand, in the light of the discussions above, is clearly incorrect and unsustainable in law. In this view of the matter, as also bearing in mind entirety of the case, we deem it fit and proper to remit the matter to the file of the CIT(A) for fresh adjudication on merits in the light of above observations, in accordance with the law and by way of a speaking order. There cannot be any good reasons for us to deal with all other issues on merits when learned CIT(A) did not have an occasion to deal with the same at all. Learned CIT(A) has decided the matter on the short legal ground, which we find to be unsustainable in law, and, therefore, we send the matter back to the CIT(A) for proper adjudication. With these observations, matter stands restored to the file of the CIT(A) and all other grounds of appeal stand dismissed as infructuous. 11. In the result, while the stand of the authorities below in making the impugned ALP additions of Rs 12,34,74,937 is vacated in principle, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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