TaxTMI 
TaxTMI 
2013 (9) TMI 595
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....n law, learned Commissioner of Income-tax (Appeals) erred in rejecting the comparability analysis made by the Transfer Pricing Officer, and adopted by the Assessing Officer, though it is evident from the Transfer Pricing Officer's order under section 92CA(3) dated April 21, 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 Commissioner of Income-tax (Appeals) 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 bench marking international transaction of the assessee. 3. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in holding that the assessee's transactions with its associated enterprises, and the margins at 75.48 per cent./44.21 per cent. are at arm's length. The short issue that we are required to adjudicate in this appeal, as the learned representatives agree, is whether or not the Commissioner of Income....
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....in risk and functional profile from the assessee for which reasonable accurate adjustments cannot be made". Even as the Transfer Pricing Officer made these observations and as he reproduced the functional profiles of the selected comparables, the Transfer Pricing Officer made a brief reference to the functional profile of the assessee but did not identify the specific material variances in functional and FAR profile. The plea of the assessee that the-ICBC had significant intra associate enterprise transactions was rejected, and it was observed that "an unrelated party M/s. JTS Japan holds 55 per cent. of the shares in JTS Contracting Co." and "Since a majority stake in company JTS Contracting Co is held by an independent party, its transactions with ICBC can be considered as at arm's length". It was noted that the assessee's functional profile and that of the ICBC is materially similar and while the assessee has earned a margin of 44.21 per cent., the ICBC has earned a margin of 66.77 per cent. on the net costs. The Transfer Pricing Officer thus concluded that "the ICBC is selected as an internal comparable under transactional net margin method, using the operating profit to total ....
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....in relation to service segment. The Transfer Pricing Officer, by using ICBC as an internal comparable, has compared two different business lines, viz., project business and service business, which differ significantly in terms of nature of activity, risks involved, etc. Coupled with the fact that there are external comparables available which are broadly similar to the functions performed by the appellant, the adoption of ICBC as an internal comparable is not appropriate. As such ICBC is excluded from the list of comparables. As a consequence, on the basis of remaining comparable companies, the appellant's transactions with its associate enterprise and its margins at 75.85 per cent. or even 44.21 per cent. on cost is held to be at arm's length. In view of the above, the addition so made of Rs. 8,32,54,187 is deleted. The learned Commissioner of Income-tax (Appeals) also took up the issue regarding rejection of comparability analysis by the Transfer Pricing Officer, so far as the external comparables given by the assessee in its transfer pricing study are concerned. He noted that while TCE Consulting Engineers Ltd. was rejected by the Transfer Pricing Officer on the ground that its....
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....broad industry or company averages rather than specific data that are as closely comparable as possible. The appellant had enhanced the comparability standards by referring to the segmental data. For the purpose of determining the arm's length price properly, it is imperative that comparability analysis is more refined. Moreover, the companies rejected by the Transfer Pricing Officer as 'persistent loss makers' are not necessarily making losses on year to year basis. It is seen that the appellant has included Rites Ltd. and Water and Power Consultancy Services Ltd. as comparables which has shown high profits (30.22 per cent. and 25.21 per cent. respectively) despite the fact that these are Government of India enterprises. Since these two comparables operate in different economic sectors (primarily government or public sector) and markets (captive) and so can have different levels of profitability. The Transfer Pricing Officer, therefore, was justified in rejecting these two as comparables. To sum up, the action of the Transfer Pricing Officer in rejecting the appellant's comparables (except Rites Ltd. and Water and Power Consultancy Ltd.) is not proper. Accordingly, the companies ....
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.... of such transactions. It is, therefore, obvious that the profits earned on transactions with associate enterprises cannot be taken into account under the transactional net margin method. A reference is then made to various judicial precedents by the co-ordinate Benches in support of the proposition that wherever significant intra associate enterprise transactions are undertaken by a comparable, it ceases to be a valid comparable for the purposes of ascertainment of the arm's length price by the transactional net margin method. It is pointed out that in the transfer pricing order, no specific defects are pointed out in the comparables given by the assessee and these are rejected on the basis that functional profile is not the same, but then what the Transfer Pricing Officer clearly overlooked was that when segmental data is taken, entity level functional comparison is irrelevant. It as also pointed out that the Assessing Officer himself has accepted that the transactional net margin method is more tolerant to functional differences, and, therefore, unless the Transfer Pricing Officer demonstrates that the functional differences are too basic, the comparability cannot be rejected. R....
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....he Indian transfer pricing legislation. When the profits derived by an enterprises arise out of, significantly or predominantly, intra associate enterprise transactions, the same cannot be taken into account for computation of the arm's length price under the transactional net margin. As regards the observation made by the Transfer Pricing Officer to the effect that since more than 50 per cent. of JTS Contracting Co's equity is held by an unrelated party, i.e., JTS Japan, it can be treated as an unrelated party, we can only point out that the test for an enterprise being associated enterprise has nothing to do with majority shares being held by an unrelated party, since section 92A(2) categorically provides that, inter alia, two enterprises will be deemed to be associated enterprises when as much as when these enterprises have 26 per cent. holding, directly or even indirectly, by the same person or enterprise. The criterion adopted by the Assessing Officer is thus devoid of legally sustainable basis. As regards reliance on co-ordinate Bench's decision in the case of NGC Network (India) P. Ltd. [2011] 56 DTR (Mum) (Trib) 1, we have noted that there had no occasion to take note of, o....
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....nnot 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 arrived at by the Commissioner of Income-tax (Appeals) and decline to interfere in the matter on appeal filed by the Assessing Officer. In the result, the appeal filed by the Assessing Officer is dismissed. We now take up the appeal filed by the assessee. In the first and second grounds of appeal, which are somewhat interconnected, the assessee has raised the following grievances: The learned Commissioner of Income-tax (Appeals) has erred in confirming the addition of Rs. 85,18,813 being transfer pricing adjustment on account of five per cent. mark up on the amount of reimbursement of expenses received by the appellant from its associated enterprises. The learned Commissioner of Income-tax (Appeals) has erred in not deciding on the ground of appeal preferred by the appellant and thereby not confirming that the amount of reimbursements received by the appellant from its associate enterprises does not form part of the appellant's cost bas....
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....gth price adjustment in respect of mark-up cost, and to give relief, if any relief is found admissible. Ground No. 1 allowed for statistical purposes and ground No. 2 is dismissed. In ground No. 3, the assessee has only pressed for the consequential relief, if any. The learned Departmental representative does not oppose this prayer. We, therefore, direct the Assessing Officer to grant the consequential relief, if any. The appeal filed by the assessee is thus partly allowed for statistical purposes in the terms indicated above. As regards the cross-objection, in view of the pending retrospective amendment in section 92C(2) in this year's budget, the issue is now practically academic. There is no point in adjudicating upon the same. The cross-objection is thus dismissed as infructuous. In the result, while the appeal by the Assessing Officer and cross-objection by the assessee are dismissed, the appeal filed by the assessee is partly allowed for statistical purposes in the terms indicated above. Vijay Pal Rao (Judicial Member).-On perusal of the order of the learned brother and after giving my deep thought on the issue involved reasoning and conclusion of the learned Accountan....
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....ncontrolled 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-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction." Thus, as per Chapter X read with rule 10B any income that arises from the international transaction shall be computed having regard to the arm's length price. An international transaction is required to be tested at the arm's length price irrespective of genuineness of the actual price of the transaction. In the case of international transaction, the Legislature has shifted the burden of proof from tax authority to the assessee to establish and show that the transaction with the associate enterprise was at the arm's length price on the basis of documents maintained and file by the assessee. It is incumbent upon the assessee to satisfy the tax authorities that the transaction with the associate....
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....f the international transactions should not be between the associate enterprise, which means the comparable transaction should be uncontrolled and between unrelated parties other than the assessee. In other words, the condition of uncontrolled transaction between unrelated parties is for external comparable for computation of the arm's length price. The conditions, as stipulated under the provisions of transfer pricing law is that the comparable transactions should not be between the associate enterprises and therefore, there is no such embargo for a transaction between the assessee and its different associate enterprises and margin of which is found at the arm's length price and accepted by the Revenue for considering the same as comparable for computing the arm's length price of international transaction between the assessee and another associate enterprise. However, if is not permissible under the provisions of transfer pricing that a transaction between two associate enterprise (say between A and B) may be at the arm's length price can be taken as comparable for determining the arm's length price for a transaction between the other associate enterprise (say ; C and D). In other....
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....onal transaction at the arm's length price, then the same can be adopted was at arm's length of the transaction between another associate enterprise and in that case, the assessee is not allowed to object such adoption of the arm's length price. In the case in hand, the assessee carried out the transactions with its associate enterprises. Similarly, the fully owned subsidiary of the assessee also had similar transactions with other associate enterprise. The net profit margin of transaction between the subsidiary of the assessee and associate enterprise has been accepted by the Assessing Officer to be at the arm's length price and the same was adopted as the arm's length price of the transaction of the assessee with other associate enterprise. It is not open to the assessee to say that the price charged from one associate enterprise should not be adopted as the arm's length price of the international transaction with another associate enterprise when all other factors are the same. For instance, an enterprise has two similar or identical transactions with two associated enterprises. In such a situation where an assessee is having international transaction with two associate enterpri....
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....hod. These comparables and the method of computation of the arm's length price has been accepted by the Department in the subsequent assessment year, i.e., 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also. However, it is noted that the assessee has worked out the arm's length price on the basis of transactions relating to the comparable for the assessment year 2002-03 as at the relevant point of time complete details in respect of the assessment year 2003-04 were not available. In our view when the facts and figures in relation to the relevant assessment year, i.e., the assessment year 2003-04 are now available then the transfer pricing adjustments have to be computed based on the said facts and figures. In case working is to be made on the basis of figures for the assessment year 2002-03, then in our view the transactions in the assessee's own case for the said year which have been found to be at arm's length in that year should be adopted as basis as the business being same, it will give better results. Merely because the transaction is with an associate enterprise ....
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....ssues which has come up in appeal before us. This point of difference is as follows : Whether, on the facts and circumstances of the case, the net margin realised from a transaction with an associated enterprise (AE) found and accepted at the arm's length price (ALP) can be taken as a comparable being an internal comparable for computation of the arm's length price of an international transaction with another associate enterprise ? 2. In view of the fact that one of us has relied upon a Division Bench order (i.e. Asst. CIT v. NGC Network (India) P. Ltd. [2011] 56 DTR (Mum) (Trib) 1), in support of the respective stand and as there are decisions supporting the contrary view by other division benches (viz., Skoda Auto India P. Ltd. v. Asst. CIT [2009] 30 SOT 319 (Pune)), it will be appropriate that the point of difference is referred to a Bench of Three Members, under section 255(4) of the Act. The Registry is directed to place this reference, along with case records, for appropriate orders before the hon'ble President. Order of Third Member R. S. Syal (Accountant Member).-The following point of difference has been referred to me by the hon'ble President under section 255(4) of....
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....nsfer Pricing Officer, after analysing the facts and circumstances of the case and also considering the submissions advanced on behalf of the assessee, recorded the following conclusions, which are relevant for answering the question referred to me : (i) Twelve cases considered by the assessee as comparable are functionally different on end level and hence should be excluded for benchmarking. (ii) ICB is an internally comparable case which has earned 66.77 per cent. profit margin over total cost. It is only this cost which should be considered for determining the arm's length price in the assessee's case. (iii) The assessee's contention that ICB had related party transactions of Rs. 29.53 crores including Rs. 26.26 crores as receipts from JTS and hence the same be excluded as controlled transactions, was not acceptable. That is how the Transfer Pricing Officer adopted net profit margin over cost at 66.77 per cent. for determining the arm's length price in respect of the payments received by the assessee from its associate enterprises and resultantly proposed adjustment of Rs. 7.13 crores (after rectification). The assessee contested the addition before the learned first appella....
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.... price, there was no reason to ignore such internally comparable transaction for determining the arm's length price in respect of the assessee's international transactions. He held that the contrary view of the learned Commissioner of Income-tax (Appeals) on this issue, as upheld by the learned Accountant Member, was not sustainable. On all other issues, he agreed with the opinion of the learned Accountant Member. In the final analysis, he allowed the appeal of the Revenue. That is how this matter has come up before me as Third Member. I have heard the rival submissions and perused the relevant material on record in the light of precedents relied on. From the question referred to me, it is apparent that I have been called upon to answer as to whether the net margin realised from a transaction with an associate enterprise, found and accepted at the arm's length price, can be taken as a comparable being an internal comparable for computation of the arm's length price of an international transaction with another associate enterprise. To be more specific and in the present context, the precise question is whether the case of ICB can be considered for determining, the arm's length pric....
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....e Commissioner of Income-tax (Appeals) 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 Commissioner of Income-tax (Appeals) on other angles also got automatically decided in line with the decision on angle so decided. There can be no question of any implied consideration of other angles as well. In order to ascertain as to whether the Tribunal subscribed to or negated various angles adopted by the Commissioner of Income-tax (Appeals) to sustain or delete an addition, it is necessary to find out view of the Tribunal in on all such angles distinctly. If the conclusion drawn by the Commissioner of Income-tax (Appeals) is upheld by considering the issue from one of the angles only, it is the approval of view of the first appellate authority by the Tribunal from that angle alone. The other angles cannot be claimed as impliedly considered and decided by the Tribunal unless there is sufficient hint in the four corners of order itself or other proceed....
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....mbers 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 learned Members impliedly held the case of ICB to be comparable. This contention raised on behalf of the assessee is, thus, jettisoned. 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 as the transactions of the assessee as both are separate entities. In view of the fact that ICB is different from the assessee, the learned authorised representative stated that the transactions of the ICB were not capable of being characterised as the internal transactions of the assessee- company. He put forth that once the ICB is held to be separate from the assessee, its controlled or uncontrolled transactions cease to be internal comparable of the assessee. On a pertinent query, the learned authorised representative fai....
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.... point or points shall be decided according to the opinion of the majority of the members of the Appellate 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 members have differed and such difference has been so referred to him. It is impermissible to him to take up any point for consideration and decision, either suo motu or at the instance of the parties, other than that which has been referred to him. In view of the foregoing discussion it is clear that the above point raised by the learned authorised representative also does not require any consideration or decision at my end. Accordingly, I will now proceed to answer the ques....
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....r, namely :- (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an inter- national transaction entered into with an associated enterprise 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-clause (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-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into accou....
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....s 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 neutralised when comparison is made with internal comparable. Ex consequential, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart, i.e. external comparable. 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 sub-clause (ii) of rule 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 external compara....
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....enterprise" is identified. This method also compares the gross profit margin in a controlled transaction 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 the arm's length price under this method is provided in rule 10B(c) which again refers to making comparison with "uncontrolled transaction". A brief overview of various methods prescribed for determining the arm's length price 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 the arm's length price 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 transactional net margin method is no exception in this regard. It also contemplates comparison of net profit realised by an enterprise with the net profit realised from a comparable uncontrolled transaction. What is an "uncontrolled transaction" has been clearly d....
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....of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus, it follows that the arm's length price can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction. 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 Transfer Pricing Officer, who declared it at arm's length. The learned Departmental representative contended that once controlled transactions are verified by the Transfer Pricing Officer and found to be at the arm's length price, 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 Transfer Pricing Officer found them at arm's length. This contention of the learned Departmental representative albeit sounds attractive at the fi....
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....wever, in the opposite situation, there is no mandate for reducing the income. In a second situation, the receipt from the transaction recorded shall be considered at the arm's length price, notwithstanding the fact that it is at exaggerated figure when compared with a comparable uncontrolled transaction. This is what has been laid down in sub-section (3) of section 92. Whereas sub-section (1) of section 92 provides that "any income arising from an international transaction shall be computed having regard to the arm's length price", sub-section (3) provides that : "the provisions of this section shall not apply in a case where the computation of income under sub-section (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-section (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 whe....