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TMI Blog2015 (2) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint out that the appellant liaises with its associated enterprises (AEs) to transport time sensitive packages from origination por to the destination port, whether inbound or outbound, and further deliver the same to the third party customers. In other words, the assessee undertakes international transactions pertaining to payments to, and receipt from, the AEs in respect of this cargo handling and freight forwarding. In order to undertake these transactions, the assessee enters into a revenue split agreement with the AEs. The way this model works is said to be like this. All the expenses in transportation of packages from origination point to destination point are reduced from the revenues generated by the service rendered to the end customer and the balance amount is split between the assessee and the AEs on a 50:50 basis. On this factual backdrop set out in the petition, our attention is invited to rather recent decisions of the Tribunal in the cases of ACIT Vs Agility Logistics Pvt Ltd (136 ITD 46) and ACIT Vs Danzas Lemuir Pvt Ltd (TS-752- ITAT-Mum (2012) TP] wherein it is held that in the logistics industry, international transactions benchmarked on the basis of 50:50 revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portation, but, unlike a business model in which the assessee owns or manages such means of transportation on his own and which includes rendition of related services outside India as well, the assessee is using services of other enterprises for these purposes. In the course of conducting this business, the assessee picks up or rec eives freight shipments from its customers, consolidates these shipments of various customers for common destinations, arranges for transportation of the consolidated freight to these destinations, and, at destination, distributes the shipments and effects delivery to the consignees. The assessee also facilitates the custom clearances at the international points of entry. These services are offered either directly by the appellant to its customers, or, as a part of deliverables sold to overseas customers by the assessee s AEs as also unrelated third party agents abroad. In respect of the cases in which services are rendered to the overseas customers, the assessee receives these shipments from such AEs or independent third party associates, obtains customs clearance at the port of entry, and organizes delivery of these consignments to the consignees in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al profit, after deducting of related transportation cost, is shared equally between the associated parties and arrangement is as much in with the associated enterprises as much it is with the unrelated enterprises. While the TPO was fair enough to place on record the fact that though it is not denied that in most companies engaged in similar business of logistics and freight forwarding adopt this revenue model but such an arrangement should have been demonstrated by the assessee in black and white along with supporting documents , he did reject this business model as an acceptable evidence of arm s length pricing and proceeded to adopt the Transactional Net Margin Method (TNMM) for determining the arm s length price. In the computation of arm s length price in accordance with TNMM, an arm s length price adjustment of ₹ 2,09,00,179, but, for the reasons we will set out in a short while, it is not really necessary to go into fine points about adjustments under TNMM in this case. Suffice to note that CUP was rejected at the assessment stage. Based on the arm s length adjustment so recommended by the TPO, the Assessing Officer proposed to frame the assessment. The assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain arm s length price under this method, all other methods of ascertaining arm s length price relegate into irrelevance. There cannot be, and there is no, dispute on this proposition in principle. The controversy, however, sometimes arises with respect to the functional aspects of CUP method, and the case before us indicates one such dimension. 7. Under rule 10 B (1)(a), the mechanism of determining arm s length price as per the comparable uncontrolled price method is set out as follows: (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 transactions, which could materially affect the price in the open market; and (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction. 8. A quick look at the above definition of arm s length price de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociated enterprises as also independent enterprises, that the profits from a transaction, after meeting the direct costs, were shared equally between the parties involved in a transaction. It was thus contended that the arrangements with independent enterprises, entered into by the assessee, const itute instances of comparable uncontrolled transaction and since these transactions were on the same terms as with the associated enterprises, the transactions entered into with the AEs should be held to be arm s length transactions. This plea was rejected at the assessment stage for a variety of reasons, including the reason that the agreements are entered into on a profit split basis and jot on the basis of rate and, as such, there is, in fact, no internal CUP . The TPO applied the TNMM method and rejected assessee s reliance on CUP method. When the matter travelled in appeal before the CIT(A), it was, inter alia, contended that CUP method is most direct and reliable way to apply the arm s length price and is preferable over all other methods and tha t Since CUP is the most direct method, it should be used to test the arm s length nature of transactions of the assessee. Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the country of its destination, collecting it from such port/airport of the other country and then supplying it to the destination entity ultimate buyer. In so far as the activities in India are concerned, these are done by the assessee and the activities abroad are executed by certain foreign entities, with whom the assessee has entered into contracts for this purpose. In the like manner, such foreign entities also undertake shipping/airlifting of cargo from their respective countries. The activities in India, similar to which are performed by such foreign entities in their countries for the bookings made by the assessee in India, are done by the assessee for the bookings made by such foreign entities abroad. The total direct expenses incurred in India by the assessee and abroad by the foreign entities were aggregated and then reduced from the gross receipts. The residual was shared in the ratio of 50:50 between the entity of origin country and the entity of destination country. Initially, the assessee had adopted the TNMM but subsequently, vide letter dated 3rd October, 2006, the assessee pleaded for adoption of CUP method stating that the terms and conditions applicable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing the precedent, we uphold the order passed by the learned CIT (A). 13. In both of these cases, thus, it was concluded that even in a situation in which the comparables were the formulas on the basis of which exact quantification for price of services was done, the same could be accepted as a price for the purposes of application of CUP method of ascertaining arm s length price. The approach so adopted, even if somewhat serendiptuous, was quite remarkable, pragmatic and in due deference to the realities of businesses. In the peculiar circumstances of this case, when connotations of price under rule 10B(1)(a) are treated to include not only an amount stated in monetary terms but also a mechanism in terms of a formulae to arrive at consideration, such an interpretation is certainly a very purposive and realistic interpretation. 14. The conclusion so arrived, even without the benefit of too elaborate a discussions on the legal framework enabling such, what may seem at the first sight, extended meaning to the expression price , meet our considered concurrence. In coming to this conclusion, we may have different, or many different, sets of specific reasons, as analysed el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived from, an associated enterprise is not stated in terms of an amount but in terms of a formulae which leads to quantification in amount. 17. On a conceptual note, it is not really essential that price of a commodity or service must always be quoted in terms of an amount. Price , in economic and business terms, could be interpreted as reward for functions performed, assets employed and risks assumed, while amount , in economic and business terms, is a relatively mundane quantification in terms of a currency. As economic principles recognize, price can even be in terms of a formulae to arrive at the amount which is paid or received as a consideration for the commodity or service in question, and there cannot be a better example of this phenomenon than interest rate, which are frequently used in CUP analysis, as a measure of computing the amount rather than the amount itself. Other examples can be found in pricing financial derivatives and other financial assets. For instance the price of inflation-linked government securities in several countries is quoted as the actual price divided by a factor representing inflation since the security was issued. The examples can be endles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as have arisen in this case due to limitations of the prescribed methods of ascertaining arm s length price, are not allowed to come in the way of substantive justice, particularly when it is beyond reasonable doubt that there is no influence of intra AE relationship on the determination of prices in respect of intra AE transactions. 21. While on this subject, it will be appropriate to take note of some very thoughtful and very well articulated observations made by a coordinate bench of this Tribunal, in the case of Ascendas India Pvt Ltd Vs DCIT (143 ITD 208). These observations are reproduced below: the purpose of enactment of Chapter X, is to benchmark an international transaction with the Fair Market Value of such transaction, so as to ensure that there are no profit transfers between parties in different jurisdictions effectually circumventing taxes. Thus, purpose of transfer pricing rules, is to verify whether the prices at which an international transaction has been carried out is comparable with the market value of the underlying asset or commodity or service. It may be true that difficulties might arise in ascertaining the fair market value, but such difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 92C(1), shall be applied, for determination of arm s length price, in the manner prescribed . Therefore, as long as the method covered by rule 10AB, which is duly covered by Section 92C(1) satisfies the test of being the most appropriate method , it can be applied to a fact situation. There is clearly no bar on its applicability just because a method specified in rule 10B, even if indirect method like TNMM, can also be applied to the same. Quite to the contrary, as noted by the coordinate benches in the cases of ACIT Vs. MSS India Pvt Ltd (supra), direct methods, such as CUP and the other method under rule 10B which, as we will see in a short while, is only a variant of the CUP method, have an inherent edge over indirect methods, such as TNMM, and, therefore, as long as it is possible to do so, a direct method of ascertaining the arm s length method should be applied. In the case of Serdia Pharmaceuticals Pvt Ltd Vs ACIT (44 SOT 391), a coordinate bench of the Tribunal has observed that, .even as the transfer pricing legislation does not provide for an order of preference of methods of determining ALP, such an order of preference being drawn up is an integral, though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2014 TIOL 78 SC), the legal position in this regard has been very succinctly summed up by observing that (i)f a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect Hon ble Supreme Court has observed that This (the foregoing analysis) exactly is the justification to treat procedural provisions as retrospective . Their Lordships then further observed that, In Government of India Ors. v. Indian Tobacco Association (2005) 7 SCC 396 the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation and that The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra Ors. (2006) 6 SCC 286. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the impugned arm s length price adjustment of ₹ 2,09,00,179 stands deleted. 6. We are also alive to the fact that the insertion of rule 10 BA, particularly in view of recent Hon ble Supreme Court s judgment in the case of CIT Vs Vatika Townships Pvt Ltd (2014 TIOL 78 SC), is required to be held as retrospective in effect. Going by this rule, as we noted in the case of Toll Global Forwarding (supra), the 50:50 business model, as is said to have been adopted by the assessee, would meet arm s length test. It thus appears to be free from doubt that 50:50 business model, as has been adopted by many assessees in logistics and freight forwarding industry, is, as per the recent developments in the legislation and jurisprudence in the transfer pricing, a vital factor in determining the arm s length pricing of assessee s international transactions. We have also noted that the assessee had specifically taken up the issue of appreciation of this unique 50:50 business model before the DRP in the assessment years 2007-08 and 2008-09. As regards the assessment year 2006- 07, it has been noted that the assessee s claim is that the assessee had pleaded for appreciation of this 50:50 bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment, and in a situation in which the plea has been raised due to subsequent developments in legislation and jurisprudence. 7. In view of the above discussions, as also bearing in mind entirety of the case, we deem it fit and proper to admit the additional ground of appeal in all these three appeals. 8. 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 as set our earlier in this order, and for examination of all the related facts, as may be necessary, relating to the said ground of appeal. 9. With a view to ensure that the assessee does not resort to any delaying tactics in the remanded proceedings, we direct the assessee to approach the Assessing Officer and the Transfer Pricing Officer, within four weeks of receiving this order, so as to ensure the date of hearing for the remanded proceedings, and to fully cooperate in expeditious disposal of the remanded proceedings. In case the assessee does not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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