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TMI Blog2014 (11) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... e our order of even date, we have decided the appeal for the assessment year 2007-08 by observing, inter alia, as follows: 5. We find that in the present case it is not really even in dispute that in this field of business activity, the 50:50 business model (i.e. the business model of sharing residual profits in equal ratio with the service provider at the other end of the transaction i.e. at the consignee's end in the case of export transaction and at consigner's end in the case of import transaction), is a standard practice. In other words, even with respect to the transaction with unrelated parties in this line of activity, it is admitted practice to share the residual profit in equal ratio and that is precisely the assessee claimed to have been adopted with the associated enterprise as well. The trouble however is that while there is a standard formulae for computing the consideration, the data regarding precise amount charged or received for precisely the same services may not be available for comparison. While the assessee is pleading for acceptance of former as a valid comparable under the CUP, the authorities below are of the considered view that availability of precise a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, admittedly, the assessee has not even made any efforts to demonstrate nor claimed that actual amount charged for comparable services rendered to, or received from, associated enterprise is the same as in the case of the independent enterprise, but the assessee's case is that the amount charged for comparable services rendered to, or received from, associated enterprise is computed on the basis of the same residual profit sharing formulae as in the case of the independent enterprise. The connotations of 'price', as set out in rule 10 B(1)(a) are thus required to be taken to be something much broader than the expression 'amount' inasmuch as it is required to cover not only quantification of price in terms of an amount but also in terms of a formulae according to which the price is quantified. The question that we really need to adjudicate upon is 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. 10. This issue is no longer res integra. There are at least two reported decisions by very distinguished coordinate benches of this Tribunal dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect of the business as well as orders of his predecessors and hence arrived at an erroneous finding". Learned CIT(A) also referred to, and relied upon, decision of the Tribunal in the case of ACIT Vs MSS India Pvt Ltd (25 DTR 119) in support of the proposition that TNMM should be applied only when standard methods, such as CUP, fail. He thus concluded that, "a valid CUP exist for benchmarking the international transaction in this case as conditions are identical" and that "To sum up, the appellant's contention on CUP method supported with third party agreements and the understanding of the comparable level of functions performed, asset used and risk borne by the original company and the destination company has merit. As such I am in agreement that the risk and rewards of the business is to be shared in 50:50 ratio". The matter travelled in further appeal, this time at the instance of the Assessing Officer, before a coordinate bench of this Tribunal. The coordinate bench upheld the stand of the CIT(A) by concluding that "we do not find any infirmity in the CUP method (50:50 module) adopted by the assessee". By implication, thus, the coordinate bench upheld the application of CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of transactions between the assessee and its AEs towards receipt/payment of freight. The assessee shared profit in the ratio of 50:50 both on the payments made by it and the receipts of freight from its AEs. We have perused the submissions and the finding of the learned CIT (A) on the functions performed, assets employed and risk undertaken by both the AEs in such transactions. The learned DR could not controvert such finding that the functions performed, assets employed and risk undertaken in both the AEs is same. The assessee paid certain sum to its AEs abroad for doing the work similar to which it did for which it received freight revenue from its AEs. The crux of the matter is that in both the situations, the total receipts are taken on one hand, from which all the expenses incurred in connection with the transportation of cargo in both the countries are excluded. The remaining amount is distributed between the entity of origin country and the entity of destination country in equal share. As the assessee has earned/paid revenue from/to its AEs in the same proportion, in our considered opinion, the transactions have been recorded at arm's length price and there was no justific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual, US transfer pricing regulation 1.482-3(b) refers to 'amount' as a comparator as it states that, "(t)he comparable uncontrolled price method evaluates whether the amount charged in a controlled transaction is arm's length by reference to the amount charged in a comparable uncontrolled transaction ". dealing with CUP analysis, which have pioneered transfer pricing legislation worldwide, our domestic transfer pricing regulation, as against the OECD Transfer Pricing Guidelines OECD Transfer Pricing Guidelines 2010 recognizes mechanism of CUP method, in paragraph 2.13, as "(t)he CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services in a comparable uncontrolled transaction in comparable circumstances" and as against UN Practical Manual on Transfer Pricing for Developing Countries UN Practical Manual on Transfer Pricing for Developing Countries, in paragraph 6.2.1.1 recognizes the working mechanism of CUP method by stating that " (t)he Comparable Uncontrolled Price (CUP) Method compares the price charged for property or services transferred in a controlled transaction to the price charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the authorities that CUP cannot be applied in such cases, because of non availability of data in terms of comparable amount having been charged for the same service, loses its relevance. Be that as it may, for the reasons we will set out in a short while, even this aspect of the matter may be somewhat academic at this stage. 19. It is also important to bear in mind the fact that what we are dealing with at present is a classic case in which while there is no, and there cannot be any, dispute, even at the assessment stage, that the terms at which the assessee has entered into the arrangements with the AEs are the same as the terms at which the assessee has entered into arrangements with the independent enterprise, there are still some procedural issues, with regard to application of methods of determining arm's length price as set out in rule 10B. Here is a case in which there is no dispute that the price determination for all business associates, whether associated enterprises or independent enterprises, is on the same terms and as per the same business model, which is admittedly unique to that line of business, but, owing to the limitations of the methods prescribed under rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dministration of an international tax regime' [Emphasis by underlining supplied by us] 22. Viewed thus, adopting a pedantic approach in determination of arm's length price, which serves letter of the law but leads to the conclusion diametrically opposed to the spirit of the law, has to be deprecated. We are in considered agreement with this school of thought. To that extent, the methods of determination of arm's length prices have to be essentially implemented in a reasonable and pragmatic manner so as to achieve its laudable objectives without any collateral damage. 23. The lawmakers have also not been oblivious of this compelling need of a certain degree of flexibility in the methods of determining arm's length price. Central Board of Direct Taxes, vide notification dated 23rd May 2012, has introduced, in addition to Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM) and Transactional Net Margin Method (TNMM), the following additional method: "..................any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Plus Method (CPM), has an inherent edge over indirect methods such as Transactional Net Margin Method (TNMM) and Profit Split Method (PSM). 25. In effect, thus, it would appear that 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. As we have noted earlier in this order, 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. In any case, when the expression 'price which....would have been charged on paid" is used in rule 10BA, dealing with this method, in this method the place of "price charged or paid", as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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, 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. 28. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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