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TMI Blog2020 (2) TMI 1389X X X X Extracts X X X X X X X X Extracts X X X X ..... of sales quantity, sales revenue and total revenue - segmental details have been reconciled with entity level audited accounts. TPO did not have any objection with regard to the allocation made by the assessee, but explanation given by the assessee was simply rejected as not accepted . CIT (A) also did not refer to any flow to the allocations made in the segmental accounts and discussed the issue on generalities only The Tribunal has taken into consideration the voluminous documentary evidence on record for the purpose of coming to the conclusion of adoption of TNMM by the assessee as the Most Appropriate Method of arriving at ALP. Delhi High Court in the case of Make My Trip India (P.) Ltd. [ 2017 (11) TMI 587 - DELHI HIGH COURT] has also held that difference of opinion as to the appropriateness of one or the other method cannot be gone into in the appeal under Section 260A of the Act, 1961. Decision of the Tribunal is correct and requires no interference and no question of law much less any substantial question of law can be said to have arisen from the impugned order of the Tribunal. In the result, these appeals fail and are hereby dismissed. - R/Tax Appeal No. 751 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functions, risk and other economic factors between assessee s transactions with AEs vis- -vis assessee s transactions with non AEs while applying the Comparable Uncontrolled Price (CUP) method: vi. Adjustment on account of business volumes difference. vii. Adjustment for advance payment received from AE. viii. Adjustment for marking and selling expenses not required to be incurred for AE sales vis- -vis non AE sales. ix. Adjustment for credit risk not required to be borne by the assessee for AE sales vis- -vis non AE sales. x. Adjustment for interest free ECB loan received from AE? 6. Brief facts of the case are as under: 6.1. It appears from the material on record that the respondent assessee filed his return of income for A.Y. 200708 on 05.11.2007 declaring the income at ₹ 99,43,677/. The case of the assessee was selected for scrutiny assessment and a notice under Section 143(2) and 142 (1) of the Act, 1961 were issued. 6.2. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act, 1961. The TPO passed an order dated 19.10.2010 under Section 92CA (3) of the Act, 1961 determining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that the assessee had sold 40% of its products to the associated enterprises, and earned margin of PBIT/Cost at 2.07%, as against the sale of 70% of its products in the immediately preceding year and earning margin of PBIT/Cost at 3.26%. The TPO computed the total cost per kg for each type of chemicals and compared it with average sale rate to AEs so as to compute the GP/Cost (%) and noted that the assessee has charged very nominal margin to the AEs . Coming to the Internal TNMM adopted by the assessee and the TPO s view that the basis of allocating the overheads was not clear, it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these are directly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat since 200304, the assessee company has been using internal CUP as the most appropriate method and the assessee company has shifted from internal CUP method to internal TNMM without giving any appropriate reasons. So the contention of the assessee is rejected . As regards the justification of TNMM on the ground that the volume of sales to the AEs is several times higher than the sale to non AEs, the TPO observed that it means that the assessee has sold huge volume to AEs at a lower rate and shifted the huge profits from India to other countries and, therefore, the contention of the assessee is not acceptable . As regards the credit period and advance payments, the TPO observed, on a superficial note 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 reim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount, credit terms, marketing and selling function and consequent costs, credit risk, reimbursement of R D costs, interest from ECB loan and all such factors. As the TPO observed that there is a huge difference between the sale price of Meno N Butyl Trichloride i.e. MBTC to its USA based AE and UK based AE, inasmuch as the same product was sold to USA based AE for ₹ 412.95 and to UK based AE for ₹ 370.13. According to the CIT (A) such difference indicated that sales to USA based AE was much above the ALP. The CIT (A) therefore, observed that, the appellant has not explained the vast difference between the prices charged for the same chemical from two AEs in the same period. And therefore, the adjustment claimed by the appellant and the calculation done by the appellant to arrive at ALP after adjustments is not acceptable and determination by the TPO of ALP of transactions to be average sale price to non-AEs over the year, without carrying out adjustments is upheld . The CIT (A) however, reduced the ALP adjustment to ₹ 2,78,02,502/by observing as under: 3.3.2 Appellant s contentions in para 3.2.2 of its submissions regarding mistakes in quantification o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in case of ACIT v. MSS India Ltd. reported in (2009) 32 SOT 132 (Pune) and Serdia Pharmaceuticals India Pvt. Ltd. (supra) and has observed as under: Going by this principle, all other things being equal, a direct method like Comparable Uncontrolled Price (CUP) method will have an edge over an indirect method like Transactional Net Margin Method (TNMM). That does not, and cannot, however mean that whatever be the fact situation, CUP is always a preferred method because of one of the essential prerequisite for application of any method of ascertaining the ALP is the inputs necessary for that purpose. Whatever may be inherent edge of the direct methods of determining arm s length price of an international transaction over indirect methods of determining the arm s length price of international transactions, selection of the most appropriate method for determining arm s length price under the transfer pricing provisions, in a particular fact situation, is not an academic exercise which can be decided de hors the peculiar facts of that situation, and, therefore, there cannot be any straightjacket formulas holding application of a particular method in case of a particular t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions and the comparable uncontrolled transactions, and unless such adjustments can be made the related method cannot be said to be most appropriate method. We have already seen as to how, in the CIT(A) s analysis, suitable adjustments could not be made even though in his opening observations in the operative portion of the order, he stated that suitable adjustments can indeed be made. The inability to make suitable adjustments, therefore, does take the method outside the ambit of most appropriate method. Quite clearly, therefore, unless suitable reliable data inputs necessary for application of a particular method, as CUP in this case, are available, CUP method cannot be said to be most appropriate methods on the facts of this case. Let us, therefore, first examine whether sufficient inputs were indeed available. 11. At the outset, it is important to note that what has been relied upon by the TPO is Internal CUP data but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intraAE transactions and independent transactions. This approach, though in the case of application of Cost Plus Method, has been rejected by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price for which no ALP documentation is available and the price of imports have been taken into account in computation of costs as well. The costs of inputs have not been verified either. No efforts are made to show that the terms of sale to the AEs and all other relevant factors are materially similar vis-a-vis the transactions with independent enterprises. The CPM is applied by comparing gross profit on sales, whereas the method requires comparison of mark up on costs on transactions with AEs vis-a-vis mark up on costs on transactions with non AEs [Emphasis, by underlining, supplied by us now] 12. It is also important to note that the TPO has justified application of internal CUP on the basis of deviations in prices at which products are sold to different AEs and, by implication, using one intra AE price to bench the other intra AE price. That is wholly incorrect. It is well settled in law that it is only an uncontrolled price which can be compared with controlled price and used for any benchmarking. This position has been well summarized in a coordinate bench decision in the case of Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 138/35 taxmann.com 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also noted that in three invoices on non-AEs the credit period was 60 days but then he declines to treat these evidence as support for the claim that in all cases similar credits were given. However, what is clear that there is clearly significant variation in payment terms. As a matter of fact, at page 29, learned CIT(A) himself notes that as per the agreement, advance payment was to facilitate appellant s purchases, working capital etc which, in turn, ensured uninterrupted supply to the AE . He does accept that he was given analysis sheet showing 17 months advance payment but rejects it as agreement refers to only 120 days advance payment. That does not belittle the fact that whatever may have been payment terms under the intra AE agreement, the payment was actually received substantially in advance. The question we must ask ourselves is that whether such substantial advance payments, which ensure availability of working capital to the assessee, can be compared with normal business transactions allowing, on the contrary, credit period to the customers. The answer is clearly in negative as the economic circumstances in which these two sets of transactions operate are substanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that adjustments can indeed be made, he rejects the adjustments on merits. That is clearly incongruous. When he admits that no adjustments can be made on merits, the very foundation of his decision to uphold application of CUP method ceases to hold good. In any case, having perused the material on record, we are of the considered view that accurate adjustments cannot be made to nullify the impact of absolutely fundamental variations in the terms of the intra AE and non AE transactions, and since accurate adjustments cannot be made, for this reason alone, CUP method ceases to be workable on the facts of this case. The contradiction in the approach is also evident from the fact that the CIT(A) has upheld application of CUP method on the sole basis that accurate adjustments can be made to take care of variations in the intra AE and independent transactions but then one of the points made before us, in the written submissions, is that if total adjustment of 36% claimed in those years was allowed, prices would come down to such unrealistic levels that one of the international transaction, including sales to non AEs, were made anywhere neat them . Clearly, there is no meeting ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re so fundamentally different in character in economic circumstances and contractual terms, that these cannot be compared with the independent transactions entered into by the assessee. We, therefore, reject the stand of the authorities below on this issue. 20. We have noted that the assessee has applied TNMM by comparing the profits on transactions with AEs and the non AEs and no specific defects have been pointed out in the allocation of costs in the segmental accounts which are duly reconciled with entity level consolidated accounts. We have also noted that dealing with the Internal TNMM adopted by the assessee the TPO had expressed the view that the basis of allocating the overheads was not clear, in response to which it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these are directly 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 had further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A (d) of the Income Tax Rules, 1962 (for short the Rules ), wherein, it is defined that transaction includes a number of closely linked transactions. It was therefore submitted that if the appropriate method adopted by the assessee by applying TNMM is to be given any credence then in case of any enterprise all its international transaction would be closely interlinked because all the transaction of an enterprise in one way or the other are connected to the overall operation and objective of the company, and the basis of comparability and analysis on a transaction to transaction basis would lose its meaning. 6.3. It was further submitted that by following the TNMM and by clubbing all the international transactions for all the products, the assessee has failed to follow the Letter and Intent of TNMM as described in law. 6.4. Learned advocate for the Revenue, in support of his submission referred to the decision of the ITAT Ahmedabad D Bench in case of Effective Teleservices (P.) Ltd. v. Deputy Commissioner of Income Tax reported in (2019) 19 taxman.com 98 (AhmedabadTrib.). He relied upon the following observations made by the Tribunal as under: 6. We have heard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Effective Teleservices (P.) Ltd. (supra) where issue was decided in favour of assessee by the ITAT vide order dated 16012018 by observing as under: 13. For the sake of completeness of the adjudication, rejection of internal TNMM analysis undertaken by the appellant during the course of transfer pricing assessment should not have been rejected. We find that the appellant company has provided identical services to AE as well as non AEs and functions performed, assets used and risks assumed in AE as well as non AE business were similar. Therefore, in our considered opinion, even internal TNMM can be considered as most appropriate method. We find that the operating margin of the appellant from the AE segment was derived at 30.90% and the operating margins in the non AE segment was derived at ₹ 74.92%. 14. The TPO rejected the internal TNMM analysis on the basis that as the appellant has made operating loss in non AE business, the transactions with non AEs are not at independent rates and they have been undertaken only to increase capacity utilization. The total turnover of Non AE segment of ₹ 5.67 lacs as against the turnover of ₹ 1909.60 lacs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not at all necessary that such a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit. We are, therefore, of the view that the authorities below were in error in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained in the normal course of business. As regards vague generalizations by the TPO to the effect that these accounts are manipulated, that allocation basis of expenses is unfair and that these accounts conceal true profitability, we find that these observations are too sweeping and generalized the observations to have any merits. In any event, learned counsel for the assessee has painstakingly taken us through the segmental accounts, pointed out the basis of allocation of the expenses. We have noted that the allocation of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project. We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, the appeal of the assessee is allowed. 6.5. It was also submitted that the Tribunal has failed to consider that the assessee has not taken into account very important factor for determination of the ALP on the basis of the determination of the price in different geographies as compared to sale of products to associate enterprise of the assessee, then non-associated enterprises of the assessee situated in the different parts of the world. It was submitted that, non-AE situated in non-developed countries or charge at a lesser price in the sale of products to AE situated in countries, viz. USA which are developed countries. The difference on this account needs to be considered, which has not been taken into account by the assessee. It was further submitted that, in economics, Purchasing Power Parity (PPP) is a condition between countries where an amount of money has the same purchasing power in different countries. Considering the PPP, instead of making any reduction in Non-AE price due to adjustments, the assessee was required to increase the Non-AE price which is not being taken into account for the purposes of calculation of ALP. 6.6. It was therefore submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pal Commissioner of Income-Tax-6 v. Make My Trip India (P.) Ltd. reported in (2017) 399 ITR 297 (Delhi). 7.4. Learned Senior Advocate further relied upon the decision of the Coordinate Bench of this Court in the case of Principal Commissioner of Incometax, Gandhinagar v. Tudor India (P.) Ltd. reported in (2019) 11 taxman.com 450 (Gujarat) to submit that the entire scheme of the transfer pricing has been considered by this court and as such the Tribunal has come to the conclusion on the basis of the material on record as per the provision for the transfer pricing in the act,1961. It was therefore submitted that no interference is required to be made in the impugned order of the Tribunal as no substantial question of law arises there from. 8. Having heard the learned advocates appearing for the receptive parties and having gone through the material on record, it appears from the facts of the case that the Tribunal considering the material on record has given the finding of fact that the TNMM applied by the assessee is the correct method and the application of CUP method was not justified, in view of the fact that intra AE transactions were fundamentally different in character i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a where many big, small and medium size Software Industries have their Offices and Units in this Software Industry, and Bengaluru is a hub of this Service Industry and essentially the Indian Companies have business linkages with large Companies spread worldwide particularly in the Western Hemisphere of the Globe. 5. The implementation of the Tax laws in this field in a smooth, clear and quick manner is of utmost importance to build an image of an efficient Tax Administration both at Departmental level and in Judicial Courts so that the economic activity in such borderless trade thrives and enures to the benefit of the Indian economy at large and Software Industry in particular. While the special provisions have been made for computation of 'Arm's Length Price' to arrive at a fair assessment of income taxable in the hands of the Indian Resident Companies and these special provisions also provide for an elaborate and indepth analysis of huge data of the comparable cases of other similarly situated Companies to arrive at a fair 'Arm's Length Price' and for that, Special Cells and designated Authorities have been created under the Income Tax Act, 1961, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court under Section 260A of the Act is locked with the words Substantial questions of law and the key to open that lock to maintain such appeal can only be the perversity of the findings of the Tribunal in these type of cases and the perversity in the findings not only averred by the appellant before this Court but, established on the basis of cogent material which was available before the Authorities below including the Tribunal and the findings arrived at by the Tribunal can be so held to be perverse within the well settled parameters for determining the same as perverse. It is not allowed to either of the parties, i.e. the Assessee or the Revenue to invoke the jurisdiction of this Court under Section 260A of the Act merely because the Tribunal comes to reverse or modify the findings given by the lower Authority, viz. Transfer Pricing Officer (TPO) or Dispute Resolution Panel (DRP) which comprises of three Commissioners and the Revenue or the assessee may feel dissatisfied, because of the reversal or modification of such findings by the Tribunal resulting in leaving out of certain comparables or adding on of certain comparables for determining the 'Arm's Length Pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolve such question: Provided that nothing in this subsection shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. (5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. (6) The High Court may determine any issue which ( a) has not been determined by the Appellate Tribunal; or (b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in subsection (1). [(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this Section.] Sections 100 and 103 of the Code of Civil Procedure, 1908 read thus: Section 100 Second Appeal. (1) Save as otherwise expressly provided in the body of this Code or by any other law for the ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate Court disposing of an appeal against the Judgment and Decree of a Trial Court, but nonetheless it is the third round of consideration at the level of the High Court, where the facts and law both have been screened, discussed and analyzed by the Authorities or the Courts below and therefore the tenor and color of the words substantial question of law in both these enactments remains the same. 22. The High Court has power to not only formulate the substantial questions of law and rather it has the duty to do so and can also frame additional substantial questions of law at a later stage, if such a substantial question of law is involved in the appeal before it under these provisions and the appeal should be heard and decided only on such substantial questions of law after allowing the parties to address their arguments on the same. The extended power given to the High Courts to decide even an issue under Subsection (6) of Section 260A of the Income Tax Act, which is in pari materia with Section 103 of the Civil Procedure Code and which says that the High Courts may determine any issue which (a)has not been determined by the Tribunal or (b) has been wrongly determined by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27. The insertion of Subsection (7) in Section 260A of the Act does not give any new or extended powers to the High Court and the preexisting provisions from Subsection (1) to Subsection (6) in Section 260A of the Act already had all the trappings of Sections 100 and 103 of the Civil Procedure Code. Case Laws on Substantial Question of Law: 28. In the leading and the first and foremost case on the interpretation of Section 100 of the Code of Civil Procedure Code, the Constitution Bench of the Hon'ble Supreme Court in the case of Sir Chunilal V. Mehta and Sons Limited Vs. Century Spinning and Manufacturing Co. Limited AIR 1962 SC 1314, held in para.6 as under: 6. We are in general agreement with the view taken by the Madras High Court and we think that while the view taken by the Bombay High Court is rather narrow the one taken by the former High Court of Nagpur is too wide. The proper test for determining whether a question of law raised in the case is substantial would, in our opinion, be whether it is of general public importance or whether if directly and substantially affects the rights of the parties and if so whether it is either an open questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal, of sound worth, important or considerable. It is to be understood as something in contradistinction with technical, of no substance or consequence, or academic merely. However, it is clear that the legislature has chosen not to qualify the scope of substantial question of law by suffixing the words of general importance as has been done in many other provisions such as Section 109 of the Code or Article 133(1)(a) of the Constitution. The substantial question of law on which a second appeal shall be heard need not necessarily be a substantial question of law of general importance. In Guran Ditta v. T. Ram Ditta , the phrase substantial question of law as it was employed in the last clause of the then existing Section 110 CPC (since omitted by the Amendment Act, 1973) came up for consideration and their Lordships held that it did not mean a substantial question of general importance but a substantial question of law which was involved in the case as between the parties. In Sir Chunilal V. Mehta Sons Ltd. v. Century Spg. And Mfg. Co. Ltd. the Constitution Bench expressed agreement with the following view taken by a Full Bench of the Madras High Court in Rimmalapudi Subba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut also refers to any case, where the evidence, taken as a whole, is not reasonably capable of supporting the finding. 31. In the case of Vijay Kumar Talwar Vs. Commissioner of Income Tax, Delhi, [2011] 1 SCC 673, comparing the provisions of Section 260A of the Act with Section 100 of the Civil Procedure Code, the Hon'ble Supreme Court held that in the absence of demonstrated perversity in the findings of the Tribunal, the Court cannot interfere and a finding of fact may give rise to a substantial question of law, only if it is perverse. Paragraphs 23 and 25 of the said judgment is quoted below for ready reference: 23. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread. (See Madan Lal v. Gopi Narendra Gopal Vidyarthi V. Rajat Vidyarthi, Commr. Of Customs v. Vijay Dasharath Patel, Metroark Ltd. v. CCE and W.B. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... popular and widely adopted Method for determining the 'Arm's length price' in which the Operating Profit Margin of comparable Companies are considered by the Authorities and applied to the cases of the Assessees to determined the 'Arm's Length Price' and make Transfer Pricing Adjustments. Rules 10A, 10AB, 10B, 10C 10CA of the Income Tax Rules, 1962 prescribe the manner for working out 'Arm s Length Price' under aforesaid prescribed Methods. 37. Section 92CA of the Act envisages that the Assessing Authority, if he considers necessary or expedient so to do, he can with the previous approval of the Principal Commissioner, refer the computation of 'Arm's Length Price' to Transfer Pricing Officer (TPO), another Departmental Authority only, who is supposed to have special knowledge and training for computing the 'Arm's Length Price' in the international transactions. The Report of the Transfer Pricing Officer is binding on the Assessing Authority as per Section 92CA (4) of the Act, but where the Assessee raises an objection against the Draft Assessment Order of the Assessing Authority based on such Report of the Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrongly applied, particularly qua Turnover Filter giving a far too wide or narrower range of comparables or even though comparable Entities were functionally different entities from the Entities in the list of Departmental comparables, as against the comparables sought to be provided by the assessees but the Revenue Department generally insists on their inclusion to get high profit ratio leading to higher Transfer Pricing adjustments, whereas the assessee would like to keep the comparables in a narrower range to justify its Transfer Pricing Analysis and profits declared. 42. In sum and substance, we find that such an exercise having been undertaken by the Authorities below may have resulted not only in high pitched Transfer Pricing Adjustments in the declared profits of the Assessee, but a flood of such appeals go before the Tribunal itself where finally the inclusion or exclusion of comparables has been determined by the Tribunal on due analysis giving its own reasons. 43. The contention raised before us that in view of some different views taken by the Tribunal by different Benches at different places, the present appeals under Section 260A of the Act deserve to be ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial question of law in any particular case to determine the aspects of determination of 'Arm's Length Price' as is sought to be raised before us. 17. The Court, thereafter, expressed its concern for giving primacy to the Tribunal in the area of fact finding. 46. Undoubtedly, the Income Tax Tribunal is the final and highest fact finding body under the Act. It is manned by Expert Members (Judicial Members are selected from District Judges or Advocates and Accountant Members selected from practicing Chartered Accountants or persons of CIT level in the Department). Therefore this quasijudicial forum is expected and as some of the nicely articulated Judgments and Orders from the Tribunal would indicate, the Orders passed by the Tribunal should normally put an end and quietus to the findings of facts and factual aspects of assessment. The lower Revenue Authorities cannot be allowed to make it their prestige issue, if their stand is not upheld by the Tribunal and agitate against their Orders before the higher Courts by resort to Section 260A or Section 261 of the Act merely because they are dissatisfied with the findings of facts by the Tribunal. 47. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltilayer litigation at multiple Fora. After the lengthy process of the same, the matter reaches the Tribunal which also takes its own time to decide such appeals. In the course of this dispute resolution, much has already been lost in the form of time, manhours and money, besides giving an adverse picture of the sluggish Dispute Resolution process through these channels. If appeals under Section 260A of the Act were to be lightly entertained by High Court against the findings of the Tribunal, without putting it to a strict scrutiny of the existence of the substantial questions of law, it is likely to open the floodgates for this litigation to spill over on the dockets of the High Courts and up to the Supreme Court, where such further delay may further cause serious damage to the demand of expeditious judicial dispensation in such cases. Conclusion: 55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92C(2), the ALP shall be determined by any one of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) resale price method, (iii) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the subrule (1) of Rule 10B. The following three steps have been prescribed: - (a) comparable uncontrolled price method, by which, (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; (iii) the adjusted price arrived at under subclause (ii) is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e structured. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that there are usuall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition stronger. In the case of Sassoon J. David Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred wholly, necessarily and exclusively for the purposes of business in order to merit deduction. Pursuant to public protest, the word necessarily was omitted from the section. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. Even Rule 10B(1)(a) does not author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs. 11. We are of the view that in view of above dictum of law the findings of fact recorded by the Tribunal in the impugned order cannot be termed as perverse or contrary to the evidence on record. The Tribunal has taken into consideration the voluminous documentary evidence on record for the purpose of coming to the conclusion of adoption of TNMM by the assessee as the Most Appropriate Method of arriving at ALP. The Delhi High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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