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TMI Blog2014 (3) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... such an authority - it is bounden duty of every quasi -judicial authority to appreciate the scope of the legal provisions and apply them in letter and in spirit. The TPO himself has noted in his order, the assessee did not have any contractual arrangement and these were market driven prices on which the exports to AEs took place - It is also important to bear in mind the fact that the assessee has taken average of a quarter so as to ensure that day to day variations in prices do not distort the comparability - Neither there is any specific objection to this averaging, nor has the TPO suggested any better alternative to this approach – CUP method does provide for a reasonable, even if not perfect, solution to the distortion which may creep in case comparison of prices is done on day to day basis, and due to limited comparables being available for the same – Relying upon Serdia Pharmaceuticals Pvt Ltd Vs ACIT [2010 (12) TMI 60 - ITAT, Mumbai] - the ALP determination under CUP Method on the basis of ‘Daily Export Port Data – April 2007- March 2008’ , by adopting quarterly averages, was wrongly rejected by the TPO and the DRP - the application of CUP has been approved method in pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant for the purpose of benchmarking its international transactions with its associated enterprises. 4. (a) The TPO/AO have further erred in law on facts of the case in applying, and DRP has erred in confirming, an export turnover filter of 25% while applying TNMM as the MOM, as against 50% proposed by the Assessee, without providing any cogent reasons for the same. (b) Further the TPO/AO/DRP has erred in rejecting the one company ( RT Exports Ltd. ) identified by the TPO in the show cause notice, without providing cogent reasons. 5. The DRP has erred in law on the facts of the case in excluding entire Other Income amounting to Rs.85,030,000 while computing the operating margin of the Assessee without appreciating that a significant portion of the Other Income is intrinsically l inked to the business operation of the Assessee and hence should be considered as part of the operating income. 6. The TPO/AO/DRP have erred in law and on facts of the case in not al lowing appropriate adjustments for difference in working capital employed by the Appellant vis - -vis the comparable companies. 7. The TPO/AO/DRP have erred in law and on facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and, therefore, the transactions are at an arm s length. 4. As for the nature of comparables relied upon in the transfer pricing study, it was stated by the assessee that for industry data, we looked for the information from publicly available data on the similar transact ions entered into by the unrelated parties in India , that (w)e obtained and relied on the Daily Export Port Data April 2007-March 2008 (hereinafter referred to as database ) compiled by Tips Software Services Pvt Ltd Mumbai with respect to export of BasmatI Rice from India to EU, ME, and North America/ US and export of other varieties of rice, viz. Sona Masoori and Permal Rice to North America/ US, ME and that the database provides quantum, price, date, quantity and the type of rice exported by part ies in India to parties in EU, ME and North America . The exports were categorised on the basis of different products and different markets and in the light of manner and format in which data was available. While applying the CUP method, transactions wi th regard to the organic rice were eliminated as pricing of organic rice commands a premium vis - -vis non organic rice. The transact ions in units ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is preferable over an indirect method like the TNMM. Reliance was placed, in support of this proposition, on judicial precedents in the cases of ACIT Vs MSS India Pvt Ltd (123 TTJ 657), Serdia Pharmaceuticals Pvt Ltd Vs ACIT (136 TTJ 129) , Clear Plus India Pvt Ltd Vs DCIT (ITA No. 3944/Del/2010), and Coastal Energy Pvt Ltd Vs ACIT (12 ITR Trib 347). 7. The TPO was, however, of the view that in terms of the OECD Guidelines, an uncontrolled transaction is comparable to a controlled transaction, for the purpose of CUP method and where products are not exactly the same, only i f either none of the differences between the transactions being compared or between the enterprise undertaking those transactions could materially affect the price, or, if where differences do affect the price, reasonably accurate adjustments could be made to eliminate the effect of such differences. He also referred to rule 10C(2)(e) of the Income Tax Rules 1962, in selecting the most appropriate method, the extent to which reliable and accurate adjustments can be made for differences is an important factor in selecting the most appropriate method. While the TPO did note that the product data compiled in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cult to find the exact comparables which can meet the stringent standards required for application of CUP method. The price of rice varies depending on the area where it is grown, the variety, the aroma and size of the rice grains. The same variety grown in Dehradun would fetch a different price as compared to that grown in Punjab or Haryana. The price also fluctuates from time to time almost on weekly basis. Therefore, this Panel is in agreement with the opinion of the AO that CUP is not the most appropriate method to be used in this kind of business. Accordingly, these grounds of object ions are rejected. 9. The assessee is aggrieved, inter alia, of reject ion of the CUP method on the facts of this case, and is in appeal before us. 10. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 11. We have noted that the information inputs given by the Tips Software, on the facts of this case, are inputs with regard to the information publicly available with the customs department at the different ports. These inputs are not the independent quotes , as referred to by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation inputs received from the Tips Software and the database made available by the said entity. The DRP laid so much of emphasis on the observation that the assessee has not been able to rebut the argument of the TPO that Rule 10D(3) does not al low the use of private databases but did not note of the glaringly illustrative, rather than exhaustive, character of the documents listed in the said rule. As a quasi -judicial authority, and while pursing the goal of justice, one cannot remain at the mercy of the wisdom of representatives of the parties appearing before such an authority; it is bounden duty of every quasi -judicial authority to appreciate the scope of the legal provisions and apply them in letter and in spirit. We uphold the grievance of the assessee to the extent the authorities below have indeed erred in summarily rejecting assessee s reliance on the database, with respect to information publicly available with customs department at various ports, compiled by a private entity. 13. As regards learned DRP s additional observation that, Further, in a commodity like Basmati rice, it is very difficult to find the exact comparables which can meet the stringent sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfluenced by minor variations in the fine points about product quality . Viewed thus, even i f there be some minor variations in the quality even under the elaborate categorization of rice varieties, such variations, which do not materially affect the prices of uncontrolled trans actions due to large size of comparables and the same geographical consumption market being covered by the comparables, can be ignored. 14. As for rejection of CUP method on the ground that prices of uncontrolled transactions often fluctuate on weekly and even daily basis. The TPO himself has noted in his order, the assessee did not have any contractual arrangement and these were market driven prices on which the exports to AEs took place. I t is also important to bear in mind the fact that the assessee has taken average of a quarter so as to ensure that day to day variations in prices do not distort the comparability. Neither there is any specific objection to this averaging, nor has the TPO suggested any better alternative to this approach. In our humble understanding, this method does provide for a reasonable, even i f not perfect, solution to the distortion which may creep in case comparison of pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its earlier posit ion that transactional prof it methods may be used to approximate arm s length conditions when traditional transactional methods cannot be reliably applied alone, or exceptionally cannot be applied at al l . In sharp contrast to the said observation, 2010 OECD Guidelines, in para 2.4, recognize that there are situations when transactional profit methods are found to be more suitable (vis -a-vis traditional transactional methods) such as, in a situation, where each of the party makes a unique contribution in relation to control led transact ion, or where the parties engage in highly integrated activities . This change in OECD approach is quite in line with Indian transfer pricing legislation which requires select ion of most appropriate method rather than the method being picked up in the order of priority. To this extent , the approach of OECD and Indian transfer pricing legislation is now quite in harmony with each other. 63. It will , however, be stretching the things too far to suggest that in the 2010 version of OECD Guidelines, al l the methods of determining the ALP have been placed at par with each other. The change in the OECD Guidelines, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another method is proven to be more reliable a method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. The reason is simple. When AEs enter into a transaction at such conditions in commercial and financial terms, which are different from commercial and financial terms imposed in comparable transact ion between independent enterprises, the differences in these two sets of conditions in financial and commercial terms are attributed to inter-relationship between the AEs, and it is this impact of inter-relationship between the AEs that is sought to be neutralized by the transfer pricing regulations. As long as CUP method can be reliably applied on the facts of a case, it does offer most direct method of neutralizing the impact of inter - relationship between AEs on the price at which the transactions have been entered into by such AEs. 16. In view of the above discussions , and bearing in mind entirety of the case, we are of the considered view that the ALP determination under CUP Method on the basis of Daily Export Port Data April 2007- March 2008 , by adopting quarterly averages, was wrongly rejected by the TPO and the DRP. 17. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han on global basis, and this fundamental scheme of CPM is also evident from the plain wordings of r. 10B as well . Any other view of the matter will result in incongruities. For example, if our average mark-upto unrelated enterprises is 20 percent , and we charge a mark-up of 2 per cent in one transact ion with AE and 38 per cent in another transact ion with the AE, both these transactions, by applying the mark-up on global basis, will meet the test of ALP whereas in the first case, the mark-up charged is certainly not a mark-up resulting in an ALP. In this part Icular case, for example, the normal mark-up in transact ions with has been computed at 16.31 percent, and the average of mark-up on sales to AEs having been taken at 17.08 per cent, entire sales to AEs has been taken at ALP, but, the mark-up in the many cases is clearly less than benchmark. To give one example, at p. 221 of the paper-book, margin of 14.15 per cent (4 invoices), 13.95 per cent, 13.81 per cent, 14 per cent (4 invoices), 14.14 per cent (2 invoices), and 14.16 per cent is given by assessee s own computation, and, on the same page, on one invoice, the assessee has shown a margin as high as 27 per cent. The CPM ..... X X X X Extracts X X X X X X X X Extracts X X X X
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