TaxTMI 
TaxTMI 
2011 (2) TMI 99
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....s i.e., uncontrolled transaction. (b) The Commissioner of Income-tax (Appeals) failed to appreciate the CUP method provide for comparison of controlled transaction with uncontrolled transaction subject to adjustments to the price of uncontrolled transaction to carve out differences between this two type of transaction. (c) On the facts & circumstances of the appellant's case, the Commissioner of Income-tax (Appeals) further erred in determining arm's length price payable to Arvind Worldwide Inc. by comparing it with controlled transactions entered into with another Associated Enterprises namely Arvind Worldwide (Mauritius) Inc. instead of comparing international/controlled transaction with uncontrolled transaction. II. On the facts and in the circumstances of the case and on merits of the case, the order passed by the Commissioner of Income-tax (Appeals) is bad even on merits on following counts: (a) The Commissioner of Income-tax (Appeals) having concluded that the Arvind Worldwide Inc., an Associated Enterprise rendered more comprehensive services as compare to Non-Related Parties to whom commission was paid @ 5%, grossly erred in....
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....e is not claimed in the Return of Income. The Appellant craves leave to add, amend, alter vary and/or withdraw any or all the above ground or grounds of appeal either before or during the course of hearing of the appeal. 1. The Ld. CIT(A) has erred in law and on facts in directing to restrict the addition on account of Arm's Length Price at Rs. 7,47,310 as against Rs. 2,90,64,166 made by the T.P.O. 2. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of AO. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the AO be restored. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. ITA No. 2917/A/07-AY 03-04 [Revenue] 1. The CIT(A) erred in law and on facts in directing to delete the disallowance of Rs. 43,07,259 on account of Arms Length Price. 2. On the facts and in the circumstances of the case and in law, the CIT(A) ought to have upheld the order of the AO. The appellant prays that the order of the CIT(A) on the above grounds be set aside a....
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....s were performed by AE as against only procuring orders by NRP(Non-Related Party); (ii) AEs were responsible for the amount to be realized after the order is executed. No such responsibility on the NRP; (iii) AEs were not entitled to receive commission if the sales amount of the order procured by it was not realized while NRP was paid commission irrespective of the fact that the sales amount was realized or not; and (iv) the major commission of Rs. 8.38 crores was paid to Arvind Worldwide (Mauritius) Inc. and the average of which works out 4.2% which is below the comparative average. The commission paid to Arvind Worldwide Inc. USA though paid @ 6.2% was only Rs. 0.21 crores. 2.1. It was further submitted that the commission was paid to the AEs after realization of proceeds of the orders procured by the AEs and they had followed the cup method while determining the ALP. It was mentioned that the subsidiaries had incurred huge losses because of their large administrative set up and dealings on account of the parent company. Therefore, there was no question of excess payment of commission on this score. Since the assessee did not furnish any ....
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.... no corporate keeps the hard copy of E-mails. However, the assessee has produced some sample correspondences out of the mails retrieved. 7. Various contention of the assessee are considered as follows: (a) The contention of the assessee that the non-related party is confined to only procurement of orders and forward it to the assessee for execution, is not correct. No corporate body pays 2.8% commission just for procurement of orders. In order to earn the commission, the agent has to do many more functions and in fact the non-related party might be doing the similar functions which have been claimed to have been done by the AE because of the simple reason that these functions are interlinked and cannot be done in isolation. Further, the assessee has not produced any agreement with the non-related party to show that the non-related party was confined to only procurement of orders. The assessee has relied on the agreement with the AE in support of its claim that the AE is rendering many more services than the non-related party. In the absence of any written agreement with the non related party, it is difficult to believe that the AE was rendering many more services ....
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.... associated enterprise and (g) documents normally issued in connection with various transaction under the accounting practices followed. In the light of the aforesaid provisions of Rule 10D(1) and (3) the assessee's explanation is examined. By letter dated 14.1.2005, the assessee was asked to furnish documentary evidence in support of extraordinary functions performed by the Associated Enterprise vis-a-vis non related parties. Vide its letter dated. 17.2.2005 the assessee has submitted the explanation regarding higher commission payment to the Associated enterprise. Relating to the documentary evidence, the assessee has stated that the major communications with its AE were through E mail or telephonic conversation. And further stated that no corporate keeps the hard copy of E-mails and the older E-mails are deleted from the data base. However, the assessee has stated that some E-mails were retrieved from the archived database and furnished the copies of E-mails. I have gone through the copies of these E-mails. They are in the nature of routine correspondence between the Associated Enterprise and the assessee relating to the business transactions. By no stretch of imagination, th....
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....ew order booking, market trend, fashion trend, technical support, payment follow-up, new customer, interaction with foreign Government authorities, follow-up of insurance claim etc." In the preceding year the TPO had made specific observations as follows l That the assessee had not furnished any written agreement with the unrelated parties, so the TPO had stated that, "In the absence of any written agreement with the non-related party, it is difficult to believe that the AE was rendering many more services than the non-related party. l The TPO had thus concluded that "the assessee could not furnish documentary support to justify higher rate of commission to the Associated Enterprises." In the present year the assessee has l Furnished sample copies of agreement with the Non-AEs to whom it is paying commission @ 3%., ('Category 1' parties) l Furnished sample copies of agreements with the Non-AEs to whom it is paying commission @5%., ('Category 2' parties) However it is seen that despite performing identical functions both the AEs have been compensated differently. The copie....
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.... 1.70 of the 1995 OECD Report indicates that evidence from enterprises engaged in controlled transactions with associated enterprises may be useful in understanding the transaction under review or as a pointer to further investigation. The dealings between associated enterprises, for comparison, can also be used in the cases of last resort where: (1) There is sufficient data available to demonstrate their reliability; and (2) Related party comparable data provides the most reliable available data upon which to determine or estimate an arm's length outcome. Thus in the present case, reliable data regarding comparable transaction is available, therefore, comparable price method (by using prices/rates of a controlled transaction) is the most direct and reliable method. In this case related party comparable data provides the most reliable available data upon which to determine or estimate an arm's length outcome, because thereon are no uncontrolled transactions in the same category. As the assessee has paid commission at a lower rate (4.93%) to an AE (Arvind Worldwide INC, USA) for performing the same functions, it is held that the commission of 4....
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....the addition to Rs. 7,47,310 in the AY 2002-03 in the following terms:- "2.3 I have considered the submission for the appellant, facts of the case and order u/s. 92CA(3) of the Act passed by Addl. CIT (Transfer Pricing-3), Mumbai. The Addl. CIT(TPO) has applied CUP method for considering arms length price of commission paid to Arvind Worldwide Inc. Mauritius and Arvind Worldwide Inc. USA. The total commission paid to Arvind Worldwide Inc. Mauritius comes to 4.2% while to Arvind Worldwide Inc. USA it comes to 6.2%. The TPO has taken total average commission of large number of non-related enterprises and has made adjustment by restricting this commission to 2.8%. The comparison of the TPO of the average commission of all non-related parties taken together is neither fully justified nor in accordance with the principle of CUP method; because under the CUP method, the comparison will have to be made with each transaction of similarly placed non-related party. There is no fixed commission given to non-related enterprises. These non-related enterprises have given commission ranging from 1% to 10% depending upon the volume of business, services rendered, location of party, country and ....
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....bsp; It would inform the AML about the best practices followed by similar textile manufacturers in the international market It would also inform the AML about the marketing strategy adopted by other suppliers of similar product, collect market related data, information on key buying factors. The AE would also carry out market research/survey from time to time The AE would canvass for the textile products of the parent company through various promotion techniques and bear the expenditure for such promotion and marketing. And for which the parent company shall have to provide specifications and marketing material like design, brochures, samples etc. free of charge to the AE. 2.3.1 These AEs were not agent simplicitor and not simply obtaining the orders and forwarding to the H.O. These AEs were providing comprehensive and wider services as per agreements. I have also seen the various e-mails and correspondence which substantiate that the AEs were rendering various services which are mentioned in the agreements. While non-related parties are simply working as agent for procuring the orders to....
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....lated parties and even non-related parties have been paid commission @ 5% and more in many cases. Considering these facts and legal position, TPO was not justified in restricting the commission payment to 2.8% which was the average of commission paid to all non-related parties taken together. However, I find that the services rendered by both AEs are similar and agreements are also similar. Therefore, there was no justification for giving higher commission @ 6.2% to Arvind Worldwide Inc. USA than to Arvind Worldwide Inc. Mauritius, which was given @ 4.2%. Therefore, following the internal CUP method it will be justifiable to make adjustment in respect of commission paid to Arvind Worldwide Inc. USA and the commission paid in excess of 4.2% will be disallowed. Such disallowance will come to Rs. 7,47,310. Therefore, the upward adjustment cost of the commission paid will be restricted to Rs. 7,47,310 only and the rest of the amount will be deleted. Therefore, this ground is partly allowed." 4. Similarly, in AY 2003-04, the learned CIT(A) deleted the addition in the following terms:- "5.4 I have carefully considered this aspect. I find that the Transfer Pricing Officer has made t....
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....e assessee is in appeal against upholding of the addition to the extent of Rs. 7,47,310 in the AY 2002-03.The learned DR while carrying us through the orders of the TPO and the AO supported their findings. On the other hand, the learned AR on behalf of the assessee contended that even though the learned CIT(A) in AY 2002-03 determined the payment of commission @ 4.2% to Arvind Worldwide Inc., USA as ALP on the ground that the commission at the rate of 4.2% was paid to Arvind Worldwide Inc., Mauritius, the TPO and AO themselves found that the payment of commission @ 4.93% to Arvind Worldwide Inc., USA to be at ALP in the AY 2003-04. Since nature of services rendered by AEs was same in the two assessment years, the learned CIT(A) was not justified in upholding the addition to the extent of Rs. 7,47,310 in the AY 2002-03. The learned AR pointed out that the rate of commission was fixed for each of the year separately in terms of agreement dated 1-04-98 placed at page 23 of the paper book and even non-related parties were paid commission at the rate of 5% to 10%. While carrying us through pages 43 to 61 of the paper book for AY 2002-03, the ld. AR added that determination of ALP by ado....
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....for the differences. The Legislature in India, in order to determine true income of the assessee, have prescribed certain universally accepted methodologies to compute arm's length price under the Act and the Rules made thereunder. The most appropriate method referred to in sub-section (1) of section 92C of the Act is applied, for determination of arm's length price, in the manner prescribed. In terms of provisions of sec.92F (ii) of the Act 'Arm's Length Price' means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. There is no dispute that in the instant case CUP method, one of the prescribed method, was considered to be the most appropriate method by the assessee and the TPO in determining the ALP in respect of international transactions relating to payment of commission to the aforesaid two AEs. CUP method as described in Rule 10B(a) of the IT Rules,1962 reads as follows: "(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 tran....
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.... is on the assessee to select the most appropriate method and has to be substantiated by the assessee by an appropriate documentation as also as to why the selected method is considered best suited to the facts and circumstances of the international transaction and as to how it provides the most reliable result of the ALP. Rule 10C(2) of the I.T. Rules,1962 lays down the factors to be considered in selection of most appropriate method. After selection of most appropriate method, the next step is to collect the inputs for computing arm's length price under that method. The question arises as to who has the onus of collecting and furnishing the requisite inputs for determining the ALP. In terms of provisions of section 92D of the Act, the assessee entering into international transaction is required to keep and maintain information and documents as are prescribed in the Rule 10D of the Income-tax Rules, 1962, which reads as under: "10D (1) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely:- (a) a description of the ownership structure of the assessee enterprise with details of share....
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....sed in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions; (k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price; (l) details of the adjustments, if any, made to transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to the total income for tax purposes; (m) any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price." 6.3. Having regard to the aforesaid statutory provisions, including provisions of sections 271AA & 271G of the Act, it is apparent that burden to establish that international transaction was entered in to at ALP is on the assessee. The assessee is duty bound to furnish comparable transactions, apply appropriate method for determination of ALP and justify the same by producing ....
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.... the opinion that the price charged in international transaction has not been determined in accordance with sub-sections (1) and (2) or information and documents relating to the international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D of the Income-tax Act and the rules made thereunder; or the information or data used in computation of the Arms length price is not reliable correct; or the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D. If anyone of such circumstances exists, the Assessing Officer may reject the price adopted by the assessee and determine the Arms length Price in accordance with the same rules." 6.4. In case revenue authorities are not satisfied with the ALP and the supporting documents/information furnished by the assessee, the authorities have ample power to determine the same and make suitable adjustments. In the process of determining Arm's Length Price, the first important factor to consider is the specific characteristics of services r....
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....CIT(A),the non-related enterprises were given commission ranging from 1% to 10% depending upon the volume of business, services rendered, location of party, country and various economic consideration and under the CUP method, the AO was required to examine the transaction with each of non-related party and if the services rendered and the economic consideration were same, only then that could have been taken as comparable uncontrolled transaction. But as already pointed out by us, onus is on the assessee to establish ALP of the transaction and not on the AO. The ld. CIT(A) concluded that the AEs have rendered much wider services than what have been provided by the non-related parties to the assessee and were paid commission @ 5% and the TPO has not brought any material on record to substantiate that all non-related parties have also rendered the same services which the AEs have rendered. Though the ld. CIT(A) observed that in order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions, it is necessary to compare attributes of the transactions of enterprises that would affect conditions in arm length dealings an....
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....ions carried in similar circumstances. In the absence of relevant FAR analysis and economic analysis in the light of relevant data of comparable controlled or uncontrolled transactions carried in same or similar circumstances, we are of the opinion that the ALP furnished by the assessee did not meet the statutory requirements. The ld. C.I.T. (Appeals) also failed to consider that burden of proof to show that the International Transactions were Arm's Length transactions, was on the assessee and no such findings emerge as to whether the same was discharged. The ld. CIT(A),in fact, did not examine, on the touchstone of parameters set out in Rules 10C(2) and 10B(1) of the IT Rules,1962, as to which method should for determining the arms length price will be most appropriate method on the facts of this case. The nature and class of international transactions, and other relevant factors, were required to be looked into. None of these important aspects of the matter have been dealt with by the ld. CIT(A) at all. That certainly is not judicious approach in dealing with the issue as to what should be the correct arms length price on the facts of this case. Once a particular method is found ....
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....t ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authorities, addition on account of "adjustments" cannot be deleted. This is because the mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the assessee is specifically accepted, the appellate authorities on the basis of material available on record have to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between and ALP of international transaction has to be determined in every case. Evaluation of transactions is the most important part of transfer pricing and the AO in this case failed to carry the same in accordance with law. It has vitiated determination of A.L.P. The CIT(A) also adopted similar approach and did not examine merits of the case from the right perspective, as discussed above. Needless to reiterate that the arm's length principle is usually applied by comparing the 'conditions (e.g....
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....any of the prescribed methods as most appropriate method. In nutshell, the ld. CIT(A) should by way of a speaking order bring out clearly as to how the price determined by him is ALP in respect of the transactions entered into by the assessee with its AE. Be that as it may, a fair and reasonable Arm's Length Price should be determined. Consequently, ground nos. I & II in the appeal of the assessee for the AY 2002-03 & ground no.1 in the appeals of the Revenue for the AYs 2002-03 & 2003-04 are disposed of. 7. As regards ground no. III in the appeal of the assessee for the AY 2002-03 relating to write off of Rs. 102.25 crores, there is no discussion in the assessment order. On appeal, the ld. CIT(A) found that neither the claim was made in the computation of income nor any revised return was filed. Since the issue did not emanate from the assessment order, the ld. CIT(A) did not entertain the ground. 7.1. Though the assessee has raised a ground in the appeal before us, the ld. AR did not even whisper before us about this ground. Since the ld. AR did not make any submissions on this ground nor relevant facts are available on records, apparently, this ground was not pressed befor....