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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 ..... ngly, dismissed as not pressed. Coming to ground numbers 2 and 3, which are interconnected and which we will take up together, grievances raised are as follows: (2) On facts and in law, the ld. AO and the learned Additional Commissioner of Income Tax-1 (Ld. TPO") erred by violating the provisions of Rule 10B(1)(a) read with Rule 10A(a) and 10B(2) of the Rules in determining ALP by comparing operating profit margin of the appellant with that of GE Industrial India Private Limited ('GE') without appreciating that transactions of GE were not uncontrolled transaction. (3) On facts and in law, the ld. AO and ld. TPO erred by violating the provisions of Rule 10B(1)(a) of the Rules in applying Internal Comparable Uncontrolled Price ('Internal CUP') Method for determining arm's length price ('ALP') of the finished goods imported by the appellant from its associated enterprises ('AEs'), without quoting the uncontrolled prices for comparable transactions, which is a prerequisite for applying CUP Method. 3. To adjudicate on these grounds of appeal, only a few material facts will have to be taken note of. The assessee before us is jointly ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is materially dissimilar to that of the assessee. He then also extensively compared the products of the comparables taken, and concluded that "none of the comparables are found similar to the trading activity carried out by the assessee company and hence they are rejected as comparables". For the reason that the CIT(A) has not dealt with all these aspects and the issues regarding correctness of comparables, we have to come straight to the ALP computation adopted by the Assessing Officer and the reasons of his doing so. The TPO proceeded to adopt the Internal CUP as the most appropriate method in this case, on the short ground that the business of the assessee was exactly the same as was carried out by GEII's plastic division, that there is no change in the business model, business situation or all significant areas of business operations , and, that, therefore, the results shown by the GEII's plastic division are the best comparable with the assessee's business. It was also noted that the operating margin earned by the assessee during this period was 8.95%. There was no change whatsoever in the nature of business activity or profile of the assessee post this demerge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w accepted that the reduction in purchase prices were more than the reduction in the sale prices of the products. Thus, the submission made by the appellant before the TPO regarding fall in operating margin has now been controverted by itself during the course of appellate proceedings. If both the sale prices and the purchase prices fall and fall in purchase prices being more than the sale prices, the operation margins of the appellant should have been better than that of GE India Pvt. Ltd. but it is not so. The operating margin of the appellant is 3.34% as against the operating margin of 8.95% of the predecessor company earned in the same financial year. Since the appellant has now no explanation regarding such fall in operating margins, hence the TPO's action of considering the results of GE India Pvt. Ltd. for determination of ALP is held to be correct. 6.3 The only other objection of the appellant against the consideration of results of GE India Pvt. Ltd. is that the transactions of GE India Pvt. Ltd. were also not uncontrolled transactions and hence, the same cannot be considered as internal CUP. 6.4 From the discussions made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... powers of the TPO to consider such comparable controlled transaction - having adorned the garb of uncontrolled transaction - for the purposes of benchmarking. If the contention of the ld. A.R. is accepted that controlled transaction should be altogether shunted out for the purpose of transfer pricing provision, even in rare circumstances as are presently prevailing, then the very rationale and purpose of sections 92 to 92F, being the determination of ALP, which is otherwise achieved from the controlled transaction, will be defeated. It is in such exceptional circumstances that the principle of purposive interpretation will come into play to set free the hands of the TPO tied with determining ALP only on the basis of uncontrolled transactions [para 19]. The purpose behind these provisions is to prevent the avoidance of tax in the international transactions by ascertaining the arm's length price. These provisions are basically for the assistance of the Revenue as is evident from sec. 92(3) which mandates that the provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween independent enterprises. Moreover, the results declared by GE India Pvt. Ltd. have been accepted by the TPO as submitted by the appellant itself in its submissions reproduced above. Such acceptance makes the transactions of GE India Pvt. Ltd. partake the character of uncontrolled transactions for the purposes of determining the ALP in later international transactions between two AEs. As stated by ITAT in the decision of Bayers Material Science Pvt. Ltd. (supra) in such a situation, no fetters can be placed on the powers of the TPO to consider such comparable controlled transaction having adorned the garb of uncontrolled transactions-for the purposes of benchmarking. The ITAT has also held that if the contention of the assessee is accepted, that controlled transaction should be altogether shunted out for the purpose of transfer pricing provision even in rare circumstances as are presently prevailing, then the very rational and purpose of section 92 to 92F will be defeated. It is in such exceptional circumstances that principal of purposive interpretation will come into play to set free the hands of the TPO tied with determining ALP only on the basis of uncontrolled transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent enterprises, latter refers to the situation in which two unconnected independent enterprise deal with each other. In other words, even in the case of 'internal CUP', the arm's length price to be adopted is the price, subject to admissible adjustments, at which the similar transactions are carried out between the assessee and an independent enterprise. Internal CUP has nothing to do with the margins earned by the same enterprises from other transactions, as is the case before us. Learned CIT(A)'s reliance on the decision of a coordinate bench of this Tribunal, in the case of Bayer Material Science Pvt Ltd v. Additional Commissioner of Income Tax (134 ITD 582), is also of no longer sustainable in law. The authorities below have proceeded on the basis that in the case of GEII's plastic division there were substantial intra AE transactions as evident from learned CIT(A)'s observations to the effect that, "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 Associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd purpose of sections 92 to 92F, being the determination of ALP, which is otherwise achieved from the controlled transaction, will be defeated. It is in such exceptional circumstances that the principle of purposive interpretation will come into play to set free the hands of the TPO tied with determining ALP only on the basis of uncontrolled transactions. 20. We have noticed above that the purpose behind these provisions is to prevent the avoidance of tax in the international transactions by ascertaining the arm's length price. These provisions are basically for the assistance of the Revenue as is evident from sec. 92(3) which mandates that the provisions of this section shall not apply in a case where the computation of income under subsection (1) or the determination of allowance for any expense or interest under that sub-section or determination of any cost or expense allocated or apportioned has the effect of reducing the income chargeable to tax computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. The effect of section 92(3) is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In a written note filed before us, it is submitted that "In this regard, it is important to note that in the Third Member decision in Technimont ICB India (P) Ltd. case, curiously no discussion is made on the earlier judgments delivered in the cases of NGC Network and Bayer Material Science. This assumes significance in this case because the Hon'ble member who wrote the Third Member judgment in Technimont case had earlier written the judgment in the case of Bayer Material Sciences also. The Hon'ble Member categorically wrote that no cognizance of the judgments cited by the representatives (including Bayer Material Sciences and NGC) are being made by him in the case (Technimont), which is an inherent contradiction in the stands taken by the Hon'ble Member in these cases. In such a scenario, the case should have been referred to the Special Bench instead of deciding the same issue in two different ways that too without distinguishing the earlier judgment....... Consequently, the extreme view taken in the Technimont judgment is incorrect, impractical and against the spirit of several judgments delivered by different Benches of Tribunals on this issue". We are not swayed by these sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it becomes abundantly clear that in computing ALP under the transactional net margin method, a comparison of the assessee's net profit margin from international transactions with its AEs has necessarily to be made with that of the net profit margin realized by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction i.e., a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise's international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m to be correct. What may be material is the hierarchical position of the forum at which the judicial officer is placed and not the judicial officer himself. A Third Member decision, as we have noted above in the light of Hon'ble Delhi High Court's judgment in the case of P C Puri (supra), is a de facto full bench decision and a view does seem possible that it is not, therefore, bound by division bench decisions- including, of course, the orders the Third Member himself may have authored on behalf of the division benches. In any case, no one is infallible and there cannot be any heroism in perpetuating an error either. Banjamin N Cardozo, one of the most distinguished US Chief Justices, in his classic book 'The Nature of Judicial Process' (Yale University Press; first published in Dec 1921; online version at http://www.constitution.org/cmt/cardozo/jud_proc.htm) beautifully puts it as "I own that it is a good deal of a mystery to me how judges, of all persons in the world, should put their faith in dicta. A brief experience on the bench was enough to reveal to me all sorts of cracks and crevices and loopholes in my own opinions when picked up a few months after delivery, and reread ..... X X X X Extracts X X X X X X X X Extracts X X X X
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