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TMI Blog2024 (9) TMI 1688X X X X Extracts X X X X X X X X Extracts X X X X ..... - ITAT CHENNAI] we hold that the impugned overseas entities cannot be regarded as deemed AE s of the assesse. Accordingly, grounds of appeal No.1 to 3 and 6 to 11 raised by the assessee are allowed. Upward TP adjustments made u/s 92CA(3) - determination of ALP by the Ld. TPO - method of ALP to be adopted i.e TNMM - aggregate of transactions with ALPs viz-a-viz individual transactions with AE s challenged - HELD THAT:- We find that the OECD guidelines referred by the assessee comes to its rescue. We further note that a transaction defined in rule 10A(d) includes a number of closely linked transaction. Consequently for a comparability analysis a number of similar transaction may be required to be aggregated as Indian TP regulations do not have any guidelines for aggregation beyond the norm of closely linked transactions, reliance is required to be made to OECD and American guidelines. According to s 482-1-1(f)(2)(i) of the US regulation the combined effect of two or more separate transactions may be considered if such transactions taken as a whole are interrelated. It thus postulates that transactions are to be aggregated when they involve related product / services. We have also no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comprising sale of finished goods (formulations to Orchid Pharmaceuticals) Rs.1,25,11,398/- u/s.14A r.w. rule 8D and Rs.17,36,192/- under disallowance of community development expenses determined taxable income at loss of Rs.260,17,98,996/- vide his order dated 08.07.2021. 3.0 At the outset, the Ld. Counsel for the assessee submitted that grounds of appeal No.1 to 3 and 6 to 11 are all centering around the principal controversy of treatment of assesse's overseas entities as deemed AE's. It was further argued that the same is covered by the decision of this tribunal in assesse's own case for AY-2011-12. Thus, attention was invited to the decision delivered in terms of ITA No.771/Chny/2016 dated 29.11.2016 (76 taxman.com 63). Ld. Counsel for the assessee thus pleaded that the contested matter qua grounds of appeal No.1 to 3 and 6 to 11 be decided considering the same. The Ld. DR wishes to place reliance upon the order of Ld. CIT(A) and the Ld. AO as well as ruling of settlement commission in assesse's own case in earlier years. 4.0 We have heard the rival submissions in the light of material available on records. We have noted that Hon'ble Coordinate Bench of this tribunal in asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other enterprise; or (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or (c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or (g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of knowhow, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise". Section 92(A)(2) only provides illustrations of the cases in which such an enterprise participates in management, capital or control of another enterprise. In other words, what Section 92A (1) decides is the principle on the basis of which one has to examine whether or not two or more enterprise are associated enterprise or not. The principle is, as we have noted above, that one of the enterprise, in relation to other enterprise, participate, directly or indirectly, in the management or control or capital of the other enterprise and that persons who participate in such management, control or capital of both the enterprises are common. As long as an enterprise participates in any of the three aspects of the other enterprise, i.e. (a) management; (b) capital; or (c) control, these enterprises are required to be treated as associated enterprise, as also is the position when common persons participate in management, control or capital of both the enterprises. However, the expression 'participation in management or capital or contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion-participation in capital, participation in management and participation by way control otherwise. First segment consists of clauses (a) to (d), Clause (a) refer to shareholding with 26% of voting power in other enterprise. clause (b) refers to common shareholding with 26% of voting powers in both the enterprise, clause (c) refers to advance by one enterprise to the other to the tune of 51% or more of the books value of the assets of the latter, and clause (d) refers to one enterprise guaranteeing not less than 10% of borrowings of the other enterprise. In all the four situations above, what is clear is that role played by one of the enterprise in the capital of the other enterprise, whether equity capital or loan capital or even by guaranteeing borrowings by the other enterprise, is so significant that one enterprise has de facto control over the other. The second segment, which consists of clause (e) and clause (f), covers participation in management. Clause (e) refers to the situation in which more than half of the board of directors can be appointed by the other enterprise, and clause (f) enterprise refers to the situation in which more than half of the board of directors o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. We will deal with this clause in greater detail a little later but one thing which is immediately discernible is that if this clause is interpreted literally,. even when sales of one enterprise to the other enterprise constitute less than one percent and that other enterprise can influence the prices at which the goods are sold, these two enterprise will be treated as associated enterprises on account of commercial relationship. That is clearly incongruous and in fact absurd because the level of commercial relationship, in such a situation, will be so insignificant that there cannot be any "control" by one of the enterprise over the other, which is a sine qua non for invoking the status of associated enterprises under third limb of test laid down by Section 92A(1). That's clearly a case in which the prescription of section 92A(2) has gone far beyond the mandate of section 92A(1). Be that as it may, let us move on to the last segment of situations dealing with participation in control over the other enterprises, i.e. control by way of relationships other than commercial relationships. Clauses (j), (k) ad (l) deal with this segment. Clause (j) refers to the situation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the assessee has participated in control, capital or management of the other enterprise, the assessee will not be treated as an AE of the other enterprise unless the conditions set out in one of the clauses of section 92A(2) are satisfied. It is in this sense that both the limbs of Section 92A are required to be read together. However, the situation that we are dealing with is exactly contrary to the situation so visualized by us. We have a case in which wordings of Section 92A(2) are admittedly satisfied, but the mandate of section 92A(1) is not satisfied inasmuch as the scale of inter se business relations between the two enterprises is so insignificant, at last than 5% of entire sales, that there is no element of de facto control over the other enterprise so as hold that two enterprises are associated enterprises. 13. We may, at this stage, take note of decision of a coordinate bench of this Tribunal, in the case of Page Industries Ltd. v. Dy. CIT [2016] 159 ITD 680/71 taxmann.com 172 (Bang. - Trib.). That is a case in which the coordinate bench has held that even though the provisions of Section 92A(2)(g) are satisfied in a case, the assessee cannot be treated as an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relationship of an AE, the parameters laid down in both sub-sections (1) and (2) should be fulfilled" and justified this approach by observing that "if we were to hold that there is a relationship of AE, once the requirements of sub-sec.(2) are fulfilled, then the provisions of sub-sec.(1) renders otiose or superfluous" and that "it is well settled canon interpretation of statutes that while interpreting the taxing statute, construction shall not be adopted which renders particular provision otiose". The coordinate bench then further observed that "when interpreting a provision in a taxing statute, a construction, which would preserve the purpose of the provision, must be adopted"., The legal position thus summed up by the coordinate bench is that in a situation in which the conditions, With respect to a set of enterprises, set out in section 92A(1) are clearly not fulfilled, even if the conditions under one of the clauses of section 92A(2) are fulfilled, such enterprises cannot be treated as associated enterprise under section 92A. To the limited extent of the principle so laid down by the coordinate bench, we are in considered agreement with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that does not include "de facto control" as a criterion for association. "Control" in the absence of company law based relationship or in the absence of any formal right to exercise control can be described as "de facto" control. Participation in capital and management can be characterized as "de jure" concepts; concepts covered by company law.' (Emphasis, by underlining, supplied by us]…" 16. While the above observations do seem to be at variance with the plain words of the statutory provision inasmuch as it refers to influence by way of "strong negotiating power" rather than an influence simplictor - as is the apparent scheme of the statutory provision, what is immediately discernible from the above extracts is that the 'de facto' control is the foundation of the wider approach to the concept of 'associated enterprises, and, of course, the impression that one of the ways in which use of expression influence', in concept of associated enterprises under, the transfer pricing, can be rationalized is as dominant influence in the nature of de facto control. The definition of 'associated enterprise' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... along with Section 92(A)(1), in such a situation in which an enterprise does not participate in (a) capital, (b) management, or (c) control of other enterprise, and thus does not fulfil the basic rule under section 92A(1), even if the conditions of Section 92A(2)(i) are fulfilled, these enterprise cannot be treated as 'associated enterprise', In the case before us, it is not even the case of the revenue that the assessee has any participation in management or capital of the other enterprise, nor there is anything to even remotely indicate, much less establish, that one of the enterprise, by way of this commercial relationship, participates in control over the other enterprise. Viewed thus, Northstar, even if it is assumed that it can influence prices and other conditions relating to sale, cannot be treated as associated enterprise of the assessee before us. It is also important to bear in mind the fact that given the context in which the expression "prices and other conditions relating thereto are influenced by such other enterprise" appears in Section 92A(2)(i), this influence has to be something more than influence in the ordinary course of business and In the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise rather than an influence simplictor. If we are to adopt literal meaning of influence, as has been adopted by the authorities below, all the transactions on negotiated prices will be hit by the provisions of Section 92A(2)(i). In the light of the discussions above, the expression 'influence', in the present context, must remain confined to dominant influence which amounts to de facto control. Acceptance of terms of the buyer on commercial considerations, as in this case, cannot be treated as influence of the buyer. It is a commercial decision whether to accept the terms of the buyer, with respect to the price or related conditions, or not. It becomes influence, for the purpose of Section 92A(2)(i), when the seller is placed in such a situation that he has no choice, because of buyer's dominant influence, but to accept it. It is thus clear that context in which a reference is made to the expression 'influence' in section 92A(2)(i) requires this expression to be read as a dominant influence in the sense of control by one enterprise over the other. Given the fact that the assessee's exports through the distribution part constitutes less than 5% of its entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found to be correct. It was rightly held the meaning had to be a dominant influence leading to a de facto control over another enterprise rather than an influence simplicitor. Adoption of literal meaning of influence would lead to all the transactions on the negotiated prices being hit by section 92A(2)(i). Considering a small component of sales exports made to AE's out of its total sales exports, the presumption of the AE being in a dominant position to exercise any "influence" cannot be made. Consequently, in respectful compliance to the decision of the Hon'ble Coordinate Bench of this tribunal in ITA No.771 Supra we hold that the impugned overseas entities cannot be regarded as deemed AE's of the assesse. Accordingly, grounds of appeal No.1 to 3 and 6 to 11 raised by the assessee are allowed. 6.0 The next issue arising from ground of appeal No. 4 & 5 are in respect of upward transfer pricing adjustments made by the TPO vide its order 92CA(3) dated 22.01.2021 proposing adjustments of Rs.2,92,67,546/-. Before the lower authorities the appellant held the view that it had made export sale of supply of finished dosage / formulations to AE's and while doing so it had adopted TNMM me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. He concluded that comparison of margins earned by comparable companies individually to the product wise sales of the appellant, conducted by the TPO was in conformity with the transfer pricing principle. 8.0 The Ld. Counsel for the assessee argued that the product wise bench marking done by the TPO is the only bone of contention and which has resulted in an artificial profit being attributed to the assessee through TP adjustments. It was argued that in a same type of pharmaceutical formulation there can be different products so if the adjustment has to be made it should be done formulation wise and not product wise as a product is merely an offshoot of one particular formulation. It was argued that as TNMM has been agreed to be the most appropriate method and aggregation becomes inherent, it would be appropriate to consider similar international transactions of an entity with its AE in its entirety and to arrive at differential in ALP of the entire transaction. It was proposed that it would not be proper to determine ALP only qua transactions where the assessee has adversely deviated from the ALP. The Ld. Counsel for the assessee argued that OEC guidelines 3.92 to 3.12 of 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulates that transactions are to be aggregated when they involve related product / services. We have also noted that the Hon'ble Coordinate Bench of this tribunal in the case of Mainetti India Pvt. Ltd., ITA No.1789 / Mds / 2011 for AY-2007-08 Supra has, ruling on nearly identical facts postulated that fairness requires that while determining ALP a TPO must consider all transaction i.e those where margins were lower as well as those where margins were higher to arrive at holistic picture. The argument of the Ld. CIT(A) that the said decision is distinguished on the basis of being relevant to CUP method only and not TNMM is misplaced. The Hon'ble Coordinate Bench in principle has decided that in such situations, aggregation of transaction has to be done and that a TPO must consider all transaction i.e those where margins were lower as well as those where margins were higher to arrive fair ALP. True the CUP was involved in the impugned case but the same is irrelevant since the Hon'ble Coordinate Bench decided upon the governing principle of determination of ALP and not on the methodology prescribed in section 92C(1). To this extent the observation of Ld. CIT(A) that decision in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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