AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (11) TMI 844
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....ted enterprises. This issue is raised by way of the following interconnected grounds of appeal: Ground 2: The learned DRP and the learned AO. following the directions of the DRP, erred on facts and in law, in upholding the learned TPO's stance of rejecting the Comparable Uncontrolled Pr ice method chosen by the appellant as the most appropriate method to benchmark its international transactions with the AEs, in TP documentation report for the year (maintained under section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962) to substantiate that its international transactions of provision/ receipt of freight forwarding services to/from AEs during the year were at arm's length, and selecting the Transactional Net Margin Method instead. Ground 3: The learned DRP and the learned AO, following the directions of the DRP, erred on facts and in law, in upholding the learned TPO's stance of disregarding the benchmarking approach adopted by the appellant in its TP documentation report for the year to substantiate that its international transactions of provision/receipt of freight forwarding services to/from AEs during the year were at arm's length, without any cogent evidence,....
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....a part of deliverables sold to overseas customers by the assessee's AEs as also unrelated third party agents abroad. In respect of the cases in which services are rendered to the overseas customers, the assessee receives these shipments from such AEs or independent third party associates, obtains customs clearance at the port of entry, and organizes delivery of these consignments to the consignees in India. In essence, thus, the assessee, along with its associated enterprise, offers multi modal transportation services to business to business shippers through global freight forwarding services. The company is having two types of international transactions - (a) arranging import of cargo from other countries to India by air and sea transportation and delivering the same to consignees in India; (b) arranging export of cargo from India to other countries by air and sea transportation wherein consignments are picked up in India by assessee and are sent to destination as per instruction of shippers/consigners for the purpose of delivering to consignees through its associated enterprises abroad. While the assessee controls pricing to the end customers in domestic market, pricing for end c....
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.... an arm's length price adjustment of Rs. 2,09,00,179, but, for the reasons we will set out in a short while, it is not really necessary to go into fine points about adjustments under TNMM in this case. Suffice to note that CUP was rejected at the assessment stage. Based on the arm's length adjustment so recommended by the TPO, the Assessing Officer proposed to frame the assessment. The assessee was not satisfied with the assessment so proposed by the Assessing Officer and did raise the grievances before the Dispute Resolution Panel but without any success. It was in this backdrop that an arm's length price adjustment of Rs. 2,09,00,179 was made in the assessment order. The assessee is aggrieved and is in appeal before us. 4. We have heard the rival contention, perused the material available on record, and duly considered factual matrix of the case in the light of the applicable legal position. 5. We find that in the present case it is not really even in dispute that in this field of business activity, the 50:50 business model (i.e. the business model of sharing residual profits in equal ratio with the service provider at the other end of the transaction i.e. at the consignee's en....
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....or between the enterprises entering into such transactions, which could materially affect the price in the open market; and (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction. 8. A quick look at the above definition of arm's length price determination does indeed give an impression that unless the amount charged for similar uncontrolled transaction is the same as international transaction between the AEs, the CUP method cannot come into play. In other words, in a case in which the data is not available for price for the same product or service in an uncontrolled situation, the CUP method cannot be applied. 9. In the present case, however, admittedly, the assessee has not even made any efforts to demonstrate nor claimed that actual amount charged for comparable services rendered to, or received from, associated enterprise is the same as in the case of the independent enterprise, but the assessee's case is that the amount charged for comparable services rendered to, or received from, associated enterprise is computed on the basis of the same resi....
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.... reliance on CUP method. When the matter travelled in appeal before the CIT(A), it was, inter alia, contended that "CUP method is most direct and reliable way to apply the arm's length price and is preferable over all other methods" and that "Since CUP is the most direct method, it should be used to test the arm's length nature of transactions of the assessee. Learned CIT(A) noted that the assessee "had produced agency agreements between the Geologistic group and unrelated parties which are substantially the same" and that "the profit split information contained in all the agreements (50:50) is typical of the industry, i.e. standard formulae for logistics and freight forwarding service providers". Learned CIT(A) was of the view that the TPO had "ignored this crucial aspect of the business as well as orders of his predecessors and hence arrived at an erroneous finding". Learned CIT(A) also referred to, and relied upon, decision of the Tribunal in the case of ACIT Vs MSS India Pvt Ltd (25 DTR 119) in support of the proposition that TNMM should be applied only when standard methods, such as CUP, fail. He thus concluded that, "a valid CUP exist for benchmarking the international transa....
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....gated and then reduced from the gross receipts. The residual was shared in the ratio of 50:50 between the entity of origin country and the entity of destination country. Initially, the assessee had adopted the TNMM but subsequently, vide letter dated 3rd October, 2006, the assessee pleaded for adoption of CUP method stating that the terms and conditions applicable to the companies were the same for agents and third parties affiliates. However, TPO did not accept this plea. In appeal, learned CIT (A) upheld the stand of the assessee. When Assessing Officer carried the matter in further appeal, a coordinate bench, adjudicating upon the grievances so raised by the Assessing Officer, held as follows: 6. The short controversy before us is to determine the ALP in respect of transactions between the assessee and its AEs towards receipt/payment of freight. The assessee shared profit in the ratio of 50:50 both on the payments made by it and the receipts of freight from its AEs. We have perused the submissions and the finding of the learned CIT (A) on the functions performed, assets employed and risk undertaken by both the AEs in such transactions. The learned DR could not controvert such f....
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....nterpretat ion. 14. The conclusion so arrived, even without the benefit of too elaborate a discussions on the legal framework enabling such, what may seem at the first sight, extended meaning to the expression 'price', meet our considered concurrence. In coming to this conclusion, we may have different, or many different, sets of specific reasons, as analysed elsewhere in this order, but that does not dilute our highest respect for these judicial precedent s from the coordinate benches. 15. It is useful to bear in mind the fact that as against the use of expression 'amount' in the US Transfer Pricing Regulations (Interestingly, unlike the reference to 'price' as a comparator in the Indian TP regulations, OECD Transfer Pricing Guidelines and UN Transfer Pricing Manual, US transfer pricing regulation 482-3(b) refers to 'amount' as a comparator as it states that, "(t)he comparable uncontrolled price method evaluates whether the amount charged in a controlled transaction is arm's length by reference to the amount charged in a comparable uncontrolled transaction ".) dealing with CUP analysis, which have pioneered transfer pricing legislation worldwide, our domestic transfer pricin....
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....omputing the amount rather than the amount itself. Other examples can be found in pricing financial derivatives and other financial assets. For instance the price of inflation-linked government securities in several countries is quoted as the actual price divided by a factor representing inflation since the security was issued. The examples can be endless but the common thread in all these examples could be the reality that t he expression 'price', in certain situations, extends well beyond the specific amounts. In certain business models, a business associate performs the services in consideration of sharing residual profits in a certain manner, and, as such, the price for those services would be this share in the residual profit. 18. Viewed thus, the stand taken by the authorities that CUP cannot be applied in such cases, because of non availability of data in terms of comparable amount having been charged for the same service, loses its relevance. Be that as it may, for the reasons we will set out in a short while, even this aspect of the matter may be somewhat academic at this stage. 19. It is also important to bear in mind the fact that what we are dealing with at present is....
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....s effectually circumventing taxes. Thus, purpose of transfer pricing rules, is to verify whether the prices at which an international transaction has been carried out is comparable with the market value of the underlying asset or commodity or service. It may be true that difficulties might arise in ascertaining the fair market value, but such difficulties should not be a reason for not adapting the rules and methods prescribed in this regard. This might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction. A water-tight attitude of interpretation of the prescribed methods will defeat the very purpose of enactment of transfer pricing rules and regulations and also detrimentally affect the effective and fair administration of an international tax regime'. [Emphasis by underlining supplied by us] 22. Viewed thus, adopting a pedantic approach in determination of arm's length price, which serves letter of the law but leads to the conclusion diametrically opposed to the spirit of the law, has to be deprecated. We are in considered agreement with this school of thought. To that extent, the methods of determination of arm's length pr....
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....taining the arm's length method should be applied. In the case of Serdia Pharmaceuticals Pvt Ltd Vs ACIT (44 SOT 391), a coordinate bench of the Tribunal has observed that,"....even as the transfer pricing legislation does not provide for an order of preference of methods of determining ALP, such an order of preference being drawn up is an integral, though somewhat subliminal, part of the process of determining the ALP" and that whenever a direct method of ascertaining arm's length price can be used, it should be preferred over an indirect method. In view of these discussions, method under rule 10BA, which is a direct method of ascertaining arm's length price- as is the case with Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM) and Cost Plus Method (CPM), has an inherent edge over indirect methods such as Transactional Net Margin Method (TNMM) and Profit Split Method (PSM) . 25. In effect, thus, it would appear that as long as one can come to the conclusion, under any method of determining the arm's length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant facto....
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....a benefit, in the context of it to be given a retrospective operation" and that "The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra & Ors. (2006) 6 SCC 286. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature." Their Lordships also noted that this retrospectively being attached to benefit the persons, is sharp contrast with the provision imposing some burden or liability where the presumption attaches towards prospectivity. 27. It may appear to be some kind of a dichotomy in the tax legislation but the well settled legal position is that when a legislation confers a benefit on the taxpayer by relaxing the rigour of pre-amendment law, and when such a benefit appears to have been the objective pursued by the legislature, it would a purposive interpretation giving it a retrospective effect but when a tax legislation imposes a liability or a burden, the effect of such a legislative provision can only be prospective. What logically follows from the law so settled by a constitutional....