9911796707
TMI Blog2012 (7) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 92CA(3) dt. 21st April, 2008, that the comparables relied on by the assessee differ in their risk and functional profile from that of the assessee and thus cannot be accepted as comparable. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting addition of Rs. 8,42,54,187 by holding that the transactions of M/s ICBC, a wholly-owned subsidiary of the assessee, are not comparable for benchmarking international transaction of the assessee. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the assessee's transactions with its AEs, and the margins at 75.48 per cent/44.21 per cent are at arm's length. 3. The short issue that we are required to adjudicate in this appeal, as learned representatives agree, is whether or not the CIT(A) was justified in deleting the ALP adjustment of Rs 8,42,54,187 and, more specifically, in rejecting ICBC as a valid comparable for benchmarking assessee's international transactions. All the three grounds of appeal deal/touch upon different facets of these issues, and we will, therefore, take up all these grounds of appeal together. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus concluded that ......the ICBC is selected as an internal comparable under TNMM, using the operating profit to total cost as the profit level indicator and that as it (ICBC) has earned a profit margin over total costs at 66.77 per cent, while the assessee has earned a margin of 44.21 per cent, the arm's length margin is held to be 66.77 per cent and the amount of adjustment to the total income is calculated as........Rs 8,42,54,187 . This ALP adjustment was, accordingly, made by the AO. 6. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A), upholding the grievance of the assessee and disapproving the selection of ICBC as a valid comparable, observed as follows : I have considered the appellant's submissions/arguments, as well as the TPO's/AO's finding as discussed in their orders. Transfer pricing is a fact of intensive judgmental process which involves a very in depth analysis of facts and underlying economics of the international transaction. The TPO has included the ICBC without going into facts relating to that company. This comparable selected by the TPO is not only functionally dissimilar but also is wholly-owned subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the comparable entity provides engineering consultancy services for power projects and other industrial projects. He also took note of assessee's contention that, as noted by the TPO himself at para 6.2.6 of his order, TNMM is more tolerant to functional differences. He then referred to Geometric Software Solutions Co. Ltd., Pentasoft Technologies Ltd., Artefact Projects Ltd. and Infotech Enterprises Ltd., and noted that while the assessee has adopted segmental data pertaining to segments like 'project', 'engineering division', 'project consultancy', 'consultancy and engineering' and 'engineering, manufacturing and industrial products', the TPO has rejected the same by entity level comparisons. He then referred to the PSU comparables, i.e. Rites Ltd. and Water Power Consultancy Services India Ltd., and noted that while the assessee has taken the segmental data, the TPO has rejected the same on the ground that these are public sector undertakings and multi-disciplinary consultancy organizations. The CIT(A) also noted that Genesys International Corporation Ltd., Motherson Sumi Infotech Designs Ltd. and Kitco Ltd. were rejected by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be used as comparables. He contends, relying upon an observation made in D.P. Mittal's book Law on Transfer Pricing in India , that if the comparability and reliability level is of the high degree, there could perhaps be no objection taking transactions with related parties as truly comparable, that the focus of the transfer pricing is determination of the result and not the details or methodology employed, and a reference is made to some foreign cases in support namely Baush Lomb Inc. vs. IRC 92 Tax Cases 525, Eily Lilly Co vs. United States (1967) 372 F2d 990 and DHL Corporation vs. CIR 1998 TC Memo -461. It is broadly on this conceptual plane that the arguments are advanced. Learned Departmental Representative also referred to a Co-ordinate Bench's decision in the case of Asstt. CIT vs. NGC Network (India) (P) Ltd. (2011) 56 DTR (Mum)(Trib) 1 : (2011) 10 taxmann.com 140 (Mumbai) which, inter alia, observes that merely because the transaction is with an AE, cannot be a ground to reject it as comparable when it is at an arm's length . He contends that when the assessee himself contends that the transactions of ICBC are at arm's length, it cannot be open to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, its direct holding in JTS Contracting Co. is 45 per cent. Let us, in the light of this factual position, take a look at the legal provisions providing for computation of ALP under the transactional net margin method. As r. 10A clearly states, the expression 'uncontrolled transaction', for the purpose of rr. 10B to 10E, means a transaction between enterprises other than AEs, whether resident or non-resident . It is thus free from doubt that so far as transactions between the AEs are concerned, the same are outside the ambit of 'uncontrolled transactions'. The transactions between ICBC and JTSC are clearly such transactions, and these transactions constitute as much as 59 per cent of total revenues. Rule 10B(1)(e), which sets out the mechanism to compute the ALP under the TNMM, provides that the profits earned by the enterprise taken as comparable, from comparable uncontrolled transactions, is to be taken into account. In other words, profits from controlled transactions, which in turn refers to intra-AE transactions, cannot be taken into account in computing ALP under the TNMM. However, when we take ICBC as a comparable in the present case, this is precisely what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were labour intensive but the transactional net margin method is more tolerant to differences in functions , it cannot be open to him to contend that there are slight differences at functional level and, for that reason alone, the comparables should be rejected. In any case, the observations made by the TPO are too vague and generalized to meet any judicial approval. In the absence of any valid grounds, sustainable in law, of rejecting the comparables by the TPO, the CIT(A) was quite justified in upholding the same. The CIT(A) has rejected two variables but the assessee is not in appeal against the same, and we need not deal with the same, nor are there any specific issues raised by the AO. Ideally, the authorities below should have dealt with the comparable adopted by the assessee in a more comprehensive manner and we do feel that there is less than sufficient discussion about the appropriateness of the comparables, but then the AO cannot be allowed to improve upon his case at this stage, and particularly when no specific issues are raised before us, we can do little about it. In view of these discussions, and bearing in mind entirety of the case, we approve the conclusions arrive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent should be confined to the agreed mark-up costs which have not been recovered by the assessee. To this extent, the assessee is entitled to get relief, if any relief is admissible on that count. As for the second issue, i.e. regarding not deciding whether reimbursements should be included in the cost base or not, learned counsel agrees that this aspect of the matter will be academic in the year before us now. We, therefore, decline to deal with the same. With these directions, the matter stands restored to the file of the AO for recomputation of ALP adjustment in respect of mark-up cost, and to give relief, if any relief is found admissible. 16. Ground No. 1 is allowed for statistical purposes and ground No. 2 is dismissed. 17. In ground No. 3, the assessee has only pressed for the consequential relief, if any. Learned Departmental Representative does not oppose this prayer. We, therefore, direct the AO to grant the consequential relief, if any. 18. The appeal filed by the assessee is thus partly allowed for statistical purposes in the terms indicated above. 19. As regards the cross-objection, in view of the pending retrospective amendment in s. 92C(2) in this year's Budget, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-cl. (ii) arising in comparable uncontrolled transactions is adjusted to take into account the 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 amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-cl. (i) is established to be the same as the net profit margin referred to in sub-cl. (iii) (v) the net profit margin thus established is then taken into account to arrive at an ALP in relation to the international transactions. Thus, as per Chapter X r/w r. 10B any income arises from the international transaction shall be computed having regard to ALP. An international transaction is required to be tested at ALP irrespective of genuineness of the actual price of the transaction. In the case of international transaction, legislature has shifted the burden of proving from tax authority to the assessee to establish and show that the transaction w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween unrelated parties other than the assessee. In other words, the condition of uncontrolled transaction between unrelated parties is for external comparable for computation of ALP. The conditions, as stipulated under the provisions of transfer pricing law is that the comparable transactions should not be between the AEs and therefore, there is no such embargo for a transaction between the assessee and its different AEs and margin of which is found at ALP and accepted by the Revenue for considering the same as comparable for computing the ALP of international transaction between the assessee and another AE. 26.1 However, if is not permissible under the provisions of transfer pricing that a transaction between two AEs (say between A B) may be at ALP can be taken as comparable for determining the ALP for a transaction between the other AE (say C D). In other words, a transaction between the AE, if found and accepted at ALP, cannot be a comparable for different enterprise but the said transaction once found at ALP can be the best comparable being an internal comparable for computation of ALP of a transaction of the same enterprise with another AE. 27. Once the net profit margin real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted as ALP of the international transaction with another AE when all other factors are the same. For instance, an enterprise has two similar or identical transactions with two AEs. In such a situation where an assessee is having international transaction with two AEs and realizing the same net profit margin from both the transactions can it be possible either for the Revenue or for the assessee to accept one of such transaction at ALP and deny the other one ? 29. Similarly, when a transaction with AE is found and accepted at ALP, then net profit margin realized from the said transaction cannot be ignored while considering the comparable for the purpose of determining the ALP for another international transaction with another AE. There cannot be two different ALP for two identical international transactions of one assessee. The ALP determined for one transaction out of two identical international transactions would be adopted for the other one. Thus, the internal comparable is the most appropriate to be considered for determining the ALP of the transaction between the assessee and the other AE. 30. A similar view has been taken by the Co-ordinate Bench of the Tribunal in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve held earlier, in our view it will be most appropriate to compare the transactions for the same year i.e., asst. yr. 2003-04 for which the figures are available in respect of comparables which have already been accepted by the Department. We therefore set aside the order of CIT(A) and restore the matter to the file of AO for reworking of the transfer pricing adjustments using TNMM on the basis of facts and figures available for asst. yr. 2003-04 in respect of the comparable selected by the assessee and pass fresh order after allowing opportunity of hearing to the assessee. 30.1 When the findings of the Co-ordinate Bench of the Tribunal is on the issue of appropriate comparable transaction, then it is implied that while deciding such issue all relevant provisions were kept in mind by the Co-ordinate Bench. 31. In the absence of any tangible reasons brought on record by the assessee, it is not permissible to the assessee to take such technical objection against considering the internal comparable being transaction between the related parties. As per the scheme and provisions of transfer pricing legislation, no doubt the external comparable must be of uncontrolled transaction betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to me. The assessee-company is engaged in activities like EPC lump sum turnkey contracts, engineering design services, supervision services, translation services and feasibility studies. During the year in question, it rendered services to Technimont Group concerns through its personnel either from India or by deputation at the Technimont office or at the field construction site. The assessee has a fully owned subsidiary called ICB Contractors India (P) Ltd. (hereinafter called 'ICB'). This company, in turn, received revenues from JTS Contracting Co., Mallta (hereinafter called JTS') to the tune of Rs. 26.26 crores, which constituted 59 per cent of its total revenues. Both the learned Members have agreed that JTS is an AE of ICB. The assessee computed ALP by using TNMM using profit level indicator (hereinafter called 'PLI') as operating profit to cost. In Its transfer pricing study, the assessee chose twelve cases as comparable giving average margin of operating profit to cost at 15.37 per cent. The assessee declared that its margin from international transactions with AEs at 75.48 per cent on cost was better than the average profit margin on similar base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned AM in his opinion held that JTS is AE of ICB and hence the transactions between them constitute controlled transactions. In that view of the matter, he ruled out the case of ICB for determining the ALP in respect of the assessee's international transactions. It was further held that the learned CIT(A) was justified in accepting ten out of twelve cases considered by the assessee in its transfer pricing study as comparable because the assessee had given segmental data whereas the TPO rejected these cases due to non-comparability at the entity level. He, therefore, declined to interfere with the view of the learned CIT(A) in this regard, thereby dismissing the appeal of the Revenue. On the other hand, the learned JM did not agree with the reasons as well as finding of the learned AM on the issue of internal comparable. The sum and substance of his finding is that when a transaction with AE is found and accepted at ALP, then such comparable transaction can also be considered for determining ALP in respect of other cases having transactions with its AEs. By applying this logic to the present situation, he opined that since the transactions between ICB and JTS were foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of ICB with the assessee. The learned JM also did not express his view on this aspect of the matter. He simply dissented with the opinion of the learned AM on the question of considering a controlled transaction of ICB for determining ALP of the assessee's international transactions. It is observed that the learned CIT(A) ordered to delete the addition by adducing three reasons. One of such reasons was that the case of ICB was not comparable with that of the assessee. The learned AM affirmed the conclusion of the learned CIT(A). by mainly holding that ICB and JTS were AEs and as such the profit margin realised by ICB from such controlled transactions could not be used for determining the ALP of the assessee's international transactions. It is imperative to bear in mind that if in a given case, CIT(A) sustains or deletes an addition by examining the issue from more than one angle, all of which are mutually exclusive and the Tribunal upholds such sustenance or deletion by considering and deciding the issue from one of such angles, it cannot be impliedly inferred that the reasoning of the CIT(A) on other angles also got automatically decided in line with the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable case of ICB. It is further relevant to note that both the learned Members have unanimously framed the question referred to under s. 255(4), which is about the inclusion or exclusion of the controlled transactions of ICB. It demonstrates that there was unison between both the learned Members that the case of ICB is comparable. In the otherwise possibility, there would have been one more preliminary question for reference to the Third Member as to whether the case of ICB is comparable or not. As both the learned Members have referred to only one question reproduced above, there can be no foundation for contending at this stage that the case of ICB is not comparable. All the relevant facts discussed above are clear pointer to the fact that both the learned Members impliedly held the case of ICB to be comparable. This contention raised on behalf of the assessee is, thus, jettisoned. 42. The learned Authorised Representative next argued that the transactions between ICB and JTS were wrongly considered as internal comparable of the assessee. He stated that even though ICB is a hundred per cent subsidiary of the assessee company, still the transactions of ICB could not be described ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5(4) which provides that. If the Members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the Members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Tribunal for hearing on such point or points by one or more of the other Members of the Tribunal, and such point or points shall be decided according to the opinion of the majority of the Members of the Tribunal who have heard the case, including those who first heard it,' A bare perusal of this provision indicates that 'if the Members of a Bench differ in opinion on any point', then 'such point' shall be referred to the Third Member and 'such point' shall be decided in consonance with the view expressed by the Third Member. The jurisdiction of the Third Member starts from the 'point' which is referred to him and ends at rendering decision on 'such point'. In the light of the clear mandate given by the legislature, it is crystal clear that the Third Member's authority extends only to the point on which the Mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely : (e) TNMM, by which,-- (i) the net profit margin realised by the enterprise from an international transaction entered into with an AE is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-cl. (ii) arising in comparable uncontrolled transactions is adjusted to take into account the 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 amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-cl. (i) is established to be the same as the net profit margin referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an Internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequents it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart i.e. external comparable. 46. Reverting to the question of making comparison of net profit margin of internally or externally comparable case from uncontrolled transaction, it can be seen that cl. (ii) of r. 10B(e) unequivocally mandates for making a comparison with uncontrolled transaction or a number of such transactions. The word 'comparable' used in the provision to describe internal or exter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the gross profit margin in an uncontrolled transaction based on specific functions performed. Next is 'cost plus method'. The modus operandi for determining of ALP under this method is provided in r. 10B(c) which again refers to making comparison with 'uncontrolled transaction'. 48. A brief overview of various methods prescribed for determining ALP clearly divulges that the comparison is always sought to be made of the assessee's international transactions with comparable 'uncontrolled transactions'. One common factor permeating through various methods for determining ALP is comparison of the assessee's international transactions with those of third parties similarly situated. The essence is that the comparison is sought with 'uncontrolled transaction'. The TNMM is no exception in this regard. It also contemplates comparison of net profit realized by an enterprise with the net profit realised from a comparable uncontrolled transaction. 49. What is an 'uncontrolled transaction' has been clearly defined under r. 10A(a) to mean a transaction between enterprises other than AEs whether resident or non-resident'. A plain reading o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e controlled transaction. 50. There is one more dimension of this case. The transactions between ICB and JTS are not only controlled, but the profit margin of ICB also passed through the examination by the TPO, who declared it at arm's length. The learned Departmental Representative contended that once controlled transactions are verified by the TPO and found at ALP, then the difference between controlled and uncontrolled transactions is obliterated. Canvassing this point further, he accentuated that even though the transactions between ICB and JTS were controlled, still they constituted a good basis for comparison as the TPO found them at arm's length. 51. This contention of the learned Departmental Representative albeit sounds attractive at the first blush, but on closer examination, fails to endure. The basic purpose behind the transfer pricing provisions is to ensure that the multinational companies do not arrange their intra-group cross-border transactions in such a way as to reduce the incidence of tax in India. A multinational company, having concerns across the world, may resort to pricing the intra-group transactions in such a manner that lower income gets offered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP, sub-s. (3) provides that : 'The provisions of this section shall not apply in a case where the computation of income under sub-s. (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-s. (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, 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'. From the above discussion it is vivid that whereas in the first situation, the ALP represents the true value of transaction or profitability as will be there in the ordinary course without having any regard to the relationship between the concerns, it is not so in the second situation. In the later case, even though the value of transaction or profitability will be at more than higher level, still it will be described as the ALP. In such later case, the ALP of the transaction or the arm's length profit cannot be considered as benchmark for the purposes of making comparison in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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