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TMI Blog2015 (11) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price of the exports made by the assessee to its associated enterprises (AEs) abroad. 3. While the assessee has contended that the transactional net margin method (TNMM) is the most appropriate method on the facts of this case, the stand of the authorities below is Comparable Uncontrolled Price (CUP) method is the most appropriate method for ascertaining the arm's length price for the assessment year 2007-08, while Cost Plus Method (CPM) is the most appropriate method for ascertaining the arm's length price for the assessment year 2008-09. 4. To adjudicate on these appeals, only a few material facts need to be taken note of. The assessee before us is engaged in the business of manufacturing glass mosaic products and selling the same to its AEs. During the course of the proceedings before the TPO for the assessment year 2007-08, it was noted that the assessee has used transactional net margin method to determine the arm's length price. It was also noted that the companies selected by the assessee as comparables, for the purposes of TNMM, were manufacturing glass bottles, kitchen glass wares, insulated glass, laminated glass etc but then these products are completely d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compared with the prices at which the same products are sold abroad, on account of geographical differences, the TPO rejected the same by observing that "it is seen that the assessee company has sold its products at lower rate to the European market" but the "European market (in which AEs are based) is a premium market for luxurious good like the decorative products manufactured by the assessee and rate of these products should be higher than the (rates prevailing in) Indian market". On the basis of this reasoning and adopting the price at which the same products are sold to group entities in India as the arm's length price, the TPO recommended a transfer pricing adjustment of Rs. 5,09,77,309. Aggrieved by the arm's length price adjustment so proposed, assessee approached the Dispute Resolution Panel. The DRP rejected the grievances of the assessee by observing, inter alia, that "the TP method adopted by the assessee was not more appropriate than adopted by the TPO" and that but for the adjustment for geographical differences, "CUP is more appropriate method and cannot be faulted with". Accordingly, the ALP adjustment of Rs. 5,09,77,309 was upheld. The assessee is aggrieved and is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not available does not have much force". The assessee is not satisfied with the stand so taken by the DRP, and is in appeal before us. 5. We have heard the rival contentions, carefully perused the material on record and duly considered facts of the case in the light of the applicable legal position. 6. We have noted that so far as assessment year 2007-08 is concerned, the TPO has applied internal CUP method to ascertain the arm's length price. It is only elementary that comparable uncontrolled price at which the entity has sold the same product to an independent enterprises is a sine qua non for application of internal CUP. It is so for the reason that Rule 10 B(1)(a) provides that under comparable uncontrolled price method, as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. Rule 10A(a), on the other hand, defines 'uncontrolled transaction' "a transaction between enterprises other than associated enterprises, whether resident or non-resident". Therefore, the first essential input for application of CUP method is the price charged or paid for similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Vs 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 Associated Enterprises under controlled conditions......". Yet these controlled trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trolled 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 ofthis 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 that if the determination of income from international transaction at arm's length price results into a lower income than what has been declared by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber decision in Technimont ICB India (P) Ltd. case, curiously no discussion is made onthe 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 submissions, and see no legally sustainable merits in the same. As far as the question of binding nature of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus it follows that the ALP can be determined only by making comparison 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinions when picked up a few months after delivery, and reread with due contrition. The per-suasion that one's own infallibility is a myth leads by easy stages and with somewhat greater satisfaction to a refusal to ascribe infallibility to others." The hyper technical issues raised by the learned Departmental Representative are thus devoid of any legally sustainable merits. The issue stands covered against the revenue by a Third Member decision which prevails over a division bench decision. Learned counsel submits that even if Bayer decision (supra) is to be implemented on merits, the assessee's case will not be covered. That aspect of the matter is, however, academic now. The course of action adopted by the authorities below, in adopting the net margin @ 8.95%, on the basis of results shown by the GEII's plastic division, is unsustainable in law, and we vacate the same. However, we have noted that the learned CIT(A) has declined to deal with all 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Cost Plus or RPM methods, and TNMM is less sensitive to minor differences in the products being sold. It is also important that the data for application of CPM, as collected by the TPO, was not in public domain and this has been done by collecting information under section 133(6). Such a data could not have been available to the assessee. All shortcomings being equal in the application of the methods of determining the ALP, as at best is the case of the authorities below, the method to be preferred is the method for which necessary inputs are available in the public domain. As for the TNMM data not being available, as there is difference between the product that the assessee is manufacturing vis-à-vis the products being manufactured by the comparables adopted, it is only broad similarity in the product and economic similarity in the conditions which is need. While on this issue, it may be relevant to refer to following observations in the UN's Transfer Pricing Manual: TNMM is usually applied with respect to broad comparable functions rather than particular controlled transactions. Returns to these functions are typically measured by a PLI in the form of a net margin th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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