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TMI Blog2019 (5) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the appeal are rendered infructuous calling for no adjudication by us. - ITA No.: 2276/Ahd/ 2013 - - - Dated:- 12-2-2019 - MR Pramod Kumar VP And MR Mahavir Prasad JM For The Assessee : S N Soparkar, Sharad Jain, Bandish Soparkar and Parin Shah For The Revenue : V K Singh, Subhash Bains and MSA Khan ORDER Per Pramod Kumar, VP: 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 11th June 2013, in the matter of assessment under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2008-09. 2. Grievances raised in the appeal are as follows: 1. In the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) ('CIT(A)') grossly erred in confirming the addition u/s 92 of the Income-tax Act made by the Learned Assessing Officer ('AO')/Transfer Pricing Officer ( TPO ) of ₹ 5,55,56,963/- to the income of appellant in respect of the international transactions of sale of chemical products viz. ANH and MBTC by appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing adjustment with reference to lower end of aforesaid +/- 5% range. 8. In the facts and circumstances of the case and in law, the Ld. CIT (A) grossly erred in not considering the foreign exchange gain or loss arising on account of business transactions as operating income for computation of operating margin in Ld. TPO's alternative and without prejudice working in his transfer pricing order u/s 92CA(3). 9. In the facts and circumstances of the case and in law, the Ld. CIT(A) grossly erred in not quashing the Ld. AO s action of initiating the penalty proceedings u/s 274 r.w.s. 271(1)(c) of the Act. 3. When this appeal was taken up for hearing, learned representatives fairly submitted that whatever we decide on the cross appeal for the assessment year 2007-08, which were heard along with this appeal, will apply mutatis mutandis on this appeal as well. 4. Vide our order of even date, we have allowed the appeal of the assessee, for the assessment year 2007-08, and observed as follows: 5. The material facts and circumstances of the case are like this. The assessee company is a wholly ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee further submitted that in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects . While the TPO did not have any specific comment on this request, he simply rejected the explanation of assessee as not accepted . It was also explained to the TPO that the CUP method is not really appropriate to the facts of this case as the assessee has long term business arrangements with the AEs, whereas there are no such long term arrangements with non AEs and that the contractual, economic, commercial, functional and risk profile differences, between the AE transactions vis- -vis non AE transactions, make the comparison of prices irrelevant. The attention was invited to the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again, contention of the assessee is considered but is not acceptable because in USA and UK market, the price of TTC, MBTC and DBTC are higher than non AE price rate . As regards guaranteed purchase of 50% production, the TPO observed that it is seen that the assessee has been earning profits only from the non AE transactions (and) at least 50% guaranteed selling to AEs mean that the assessee is making loss and shifting the profits from India to other countries . On reimbursement of R D costs also, the Assessing Officer did only observe, in rather general terms, that the plea is not acceptable because the assessee has sold the products to its AEs at very lower rate and shifted the profits from India to outside India The same was the comment in respect of interest free ECB loans from the AEs. As for the need of adjustment on account of various factors, the TPO simply observed that the assessee has charged very nominal margin to its AEs (and) therefore, there is no any issue for any adjustment . .. 6. It was in this backdrop that the impugned ALP adjustment was made by the Assessing Officer. Aggrieved by the arm s length price adjustment, assessee carried th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to non-AEs. Each transaction of sale of chemicals to the AEs needed to be benchmarked with reference to the CUP and if the CUP exceeded the sale price to AE for a particular transaction, only then transfer pricing adjustment was warranted. TPO's approach in working out adjustment on the basis of consolidated average sale price for both AEs for MBTC DBTO was therefore erroneous. AE-wise aggregation of transactions for each chemical for the purpose of benchmarking and working out transfer pricing adjustment is however acceptable in this case, since it does not result into an outcome different from transaction-wise benchmarking. Thus, only AE-wise segregation of sale transactions for each chemical needs to be done. Appellant's submissions in respect of DBTA sale also have merit and are accepted. Accordingly, transfer pricing adjustment of ₹ 2,78,02,502/- worked out by the appellant is directed to be substituted in place of adjustment of ₹ 3,91,40,456/- worked out by TPO subject to verification by the AO of arithmetical correctness of the working done by the appellant. 7. The assessee is aggrieved and is in further appeal before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method as specified in rule 10C(1), certain factors are to be taken into account: ( a) the nature and class of the international transaction; ( b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; ( c) the availability, coverage and reliability of data necessary for application of the method; ( d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; ( e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; ( f) the nature, extent and reliability of assumptions required to be made in application of a method [ Emphasis, by underlining, supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The way this rule works, the benchmark gross profit is to be applied on each transaction with the AEs , while, for computing the benchmark, one could take into account a series of same or similar transactions. In other words, while setting the benchmark, one can take into account several transactions with unrelated enterprise on what can be termed as 'global basis', essentially in respect of same or similar property or services though, the benchmark so arrived at cannot be applied on the global basis i.e. the average of gross profit earned from same or similar transactions with AEs. The application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of cost plus method is also evident from the plain wordings of Rule 10 B as well. Any other view of the matter will result in incongruities. For example, if our average mark up to unrelated enterprises is 20 per cent. and we charge a mark-up of 2 per cent in one transaction with AE and 38 per cent in another transaction 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 cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciple is beyond any doubt or controversy. In the OECD Guidelines for Multinational Enterprises and Tax Administrators, it is clearly stated that application of CUP method requires high degree of comparability not only in the products sold and services provided but also in the economic circumstances in which the respective AE and non AE transactions take place . In the UN Transfer Pricing Manual, it is observed that degree of comparability between controlled and uncontrolled transactions is typically determined on the basis of a number of attributes of the transactions or parties that could materially affect prices or profits and the adjustment that can be made to account for differences and then it is observed that these attributes, which are usually referred to as the five comparability factors, include: (i) Characteristics of the property or service transferred; (ii) Functions performed by the parties taking into account assets employed and risks assumed, in short referred to as the functional analysis (iii) Contractual terms; (iv) Economic circumstances; and (v) Business strategies pursued . Clearly, therefore, the significant variations in economic circumstances and cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are wholly superficial and devoid of any legally sustainable merits. The variations in quantities between the AEs and the non AEs cannot be ignored either. There is no dispute that there is huge variations in quantities sold to the AEs vis- -vis the quantities sold to the non-AEs but the CIT(A) has rejected the plea on the basis that there is no consistent pattern or correlation between the volume and sale prices and that there is no reference to any volume discount in the agreement . That is again a superficial approach. Whether there is a mention of the volume discount or not or whether there is always a direct relation between the prices and volumes, the fact remains that the transactions with such huge variations, as in this case, cannot be considered to be comparable transactions and that is the consistent approach in benchmarking analysis. The scale of transactions is an important economic factor affecting the comparability. We have also noted that the AEs have reimbursed R D costs, with mark up, to the assessee. The AEs have also given interest free ECB loans. These are also equally important factors. When we take the transactions with the AEs in the light of these surrou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of emphasis has been placed on the fact that the assessee on its own was using the Internal CUP method in past, and, there was, thus, no good reason to deviate from the same. It is for this main reason that the application of TNMM has been declined by the authorities below. Nothing, however, turns on this plea. What is before us is the question as to which method is most appropriate method for ascertaining the arm s length in the present year. We donot see how this question is to be adjudicated simply on the basis of what has been accepted by the assessee, on his own, as the most appropriate method in the earlier years. Such a choice of method in the earlier years, in our humble understanding, cannot act as an estoppel against the assessee. In our considered view, the decision as to what is the most appropriate method on the facts of this case is to be taken in the light of the facts and material on record before us in the present year. The past conduct of the assessee, with regard to the selection of the most appropriate method for ascertaining arm s length price for the present assessment year, is not really decisive. We, therefore, reject this plea of the revenue authorities as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that In the light of these discussions, as also bearing in mind entirety of the case, we donot see legally sustainable merits in the case of the learned Commissioner (DR) and we reject his plea that on the facts and in the circumstances of this case, CUP method is required to be applied. In any case, the issue is squarely covered by the decision of the coordinate benches, in favour of the assessee, and having perused these decisions and material on record, we are not inclined to take any other view of the matter than the view so taken by the coordinate benches. We have also noted that Hon ble High Court is already seized of the matter and it is only a matter of time that Their Lordships take a call on the matter. Given this situation, even if we had any reservations on the correctness of the coordinate bench decision, which we donot have anyway, the matter could not have been referred for the constitution of a special bench and this division bench could not have taken a different view of the matter. That is what is the settled legal position. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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