TaxTMI 
TaxTMI 
2016 (7) TMI 248
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....21,73,85,388/- as against returned business loss amounting to Rs. 27,17,58,649/-. 2. That on the facts of the case and in law, the Hon'ble CIT (A) has erred in sustaining the order passed by learned Assistant Commissioner of Income Tax (OSD), CIT -V ("Ld. ACIT") dated October 22, 2010 and rejecting Comparable Uncontrolled Price ("CUP") method as the most appropriate method ("MAM") applied by the Appellant for the purposes of benchmarking the international transactions entered into with its Associated Enterprises ("AE"). 2.1. That on the facts of the case and in law, the Hon'ble CIT(A) has summarily without assigning any reason whatsoever, grossly erred in concluding that a substantial portion of the international transactions entered into by the Appellant with its AE are unjustifiable in terms of Section 92 of the Income Tax Act, 1961. 2.1.1. That on the facts of the case and in law, the Hon'ble CIT (A) has erred in stating that: "In view of the totality of the case, TPO was right in not considering some of the price quotations given by the appellant because substantial part of the international transaction would have gone unjustified under Section 92 of the....
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....erred in stating that: "It is pertinent to mention here that claim of the assessee to somehow apply CUP method is based on a covert objective of hiding the loss incurred by the assessee in a trading business which gets unmasked while using TNMM. I therefore reject the objection of the assesee in this regard and I am of the considered view that TNMM shall be the most appropriate method for benchmarking the international transaction in this case." 3.2. That on the facts of the case and in law, the Hon'ble CIT(A)/ Ld. TPO have erred in adopting the net profit margin (PBIT/Total expense) at the entity level and the same is contrary to Rules 10B(e)(i) of the Income Tax Rules, 1962 which permits computation of ALP by taking profit level indicator ('PLI') at transaction level. 3.2.1. That on the facts and circumstances of the case and in law, the Hon'ble CIT(A)/ Ld. TPO have erred in ignoring the fact that international transactions with the AE constitute a very small portion of the Appellant's business. 3.3 .That on the facts of the case and in law, the Hon'ble CIT(A)/ Ld. TPO have not carried out proper Functional, Asset and Risk ('FAR')....
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....nt revised the return of income at a loss of Rs. 27,17,58,649/-. 5. The assessee has entered into following international transactions of export and import of goods and they were benchmarked using CUP method as the most appropriate method for these transactions. The reference was made to ld TPO to determine arm‟s length price u/s 92CA(3) in respect of these international transactions. The ld TPO rejected the CUP method as most appropriate method adopted by the assessee and considered TNMM as the most appropriate method for benchmarking international transactions. The ld TPO also took PBT/ sales as the PLI which is (-) 13.73% in case of the assessee. Ld TPO selected 17 comparables, which are engaged in trading in agricultural crops and trade in minerals and energy sources. The international transactions and its benchmarking is as under:- Sr No Transactions of Export Nature of Transaction Amount (in INR) Most appropriate method as per TP documentation Method adopted by TPO 1 Export of Soya Bean Meals Export 25824331 CUP TNMM 2 Export of chemicals Export 46396 CUP TNMM 3 Export of Iron Ore Export 416548930 C....
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....as laid emphasis not only on the product comparability but also on broader business functions of the comparables. According to ld TPO CUP data provided by the assessee does not support for functional comparability. Further, ld TPO was also of the view that data provided by the assessee is not covered within the provisions of Rule 10D(3) of the Income Tax Rules, 1962. Hence, he rejected the CUP method. On appeal before the ld CIT(A), he confirmed the rejection of CUP method by the ld TPO holding that transactions compared should be an actual transaction and not a hypothetical or yet to be undertaken on the date of comparison. Further, according to ld CIT(A) the contract between the third parties and AE also cannot be taken as data for CUP method. 10. On appeal before us it was submitted by the ld AR that for AY 2006-07 on identical facts and circumstances the ITAT has held that the CUP is the most appropriate method for benchmarking trading transactions. During the course of hearing assessee submitted a chart wherein the assessee justified that trading transactions of the assessee are at arm‟s length based on certain external CUPs and internal CUPs. He further submitted tha....
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....nsaction were sale of traded goods and purchases of traded goods as it is in the present year before us also. The Hon‟ble Bench has held as under:- "4. We have heard the rival submissions and perused the relevant material on record. It is observed that the foremost point of difference between the assessee and the Revenue is the application of the most appropriate method and then the selection of comparables under TNMM. Whereas the assessee adopted CUP as the most appropriate method, the Revenue rejected it and insisted on the application of TNMM. The viewpoint canvassed by the Revenue in such rejection is that the necessary details required for the application of CUP method were not forthcoming from the assessee‟s side. Several Benches of the Tribunal has held that CUP is the most appropriate method in case of trading transactions provided the uncontrolled transactions relied by the assessee are really comparable and necessary data requiring adjustments, if any, is available. Internal CUP has been held as more appropriate than the external CUP. The net effect of this discussion is that if the assessee‟s similar transactions with non Associated enterprises are a....
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....estored to the file of TPO instead of DRP, who had also failed to appreciate the contentions made before him. We can observe from the order of the TPO as well that though detailed submissions were filed before him, but those have not been appropriately considered while proposing the addition of Rs. 7.23 crores. The ld. DR, though relied on the impugned order but suggested that if the matter was to be sent back then it should go to the TPO instead of DRP. Considering the entire conspectus of the case, we are of the considered opinion that the ends of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of TPO. We order accordingly. However, we do not approve, in principle, the contention of the ld. AR that quotations etc. or the price as per some publications can be considered for benchmarking the assessee‟s international transactions under the CUP method. The comparison is required to be done with the actual uncontrolled transactions and not quotations etc. If the assessee succeeds in providing appropriate data relevant for comparison under the CUP method, then the TPO should determine the ALP under the CUP method. If however....
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....ore, even before the Hon‟ble Gujarat High court the quotations were accepted as external CUPs. The Hon‟ble Gujarat High Court has held as under:- "3. Questions B to D pertain to computation of Arms Length Price. The Transfer Pricing Officer (hereinafter referred to as 'the TPO') adopted Comparable Uncontrolled Prices (CUP) method. In the process, the assessee had presented two sets of prices claiming them to be comparable. One set of transactions relied on by the assessee was supplied by Malaysian Palm Oil Board (hereinafter referred to as 'the MPOB'). Simultaneously, the assessee also relied on the quotations by one Oil World, an organisation based in Germany. The assessee adopted the average of two sets of prices and claimed that the price variance between the assessee's transaction and the average of two sets of prices did not exceed 5% and, therefore, no additions were necessary. The TPO, however, took into account only the rates mentioned by the MPOB and totally discarded the rates quoted by the German organisation. He, therefore, rejected the arithmetic mean of two sets of the prices in order to determine the Arms Length Price. This was on t....
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....uous plant which is also an important factor for considering the ALP and due weightage is required to be given while comparing the rates given by MPOB. Even the average price paid by the appellant is lower than average price on the basis of rates of MPOB. Therefore, in view of these facts, circumstances and the legal position the AO/TPO were not justified in making the adjustment to the purchase price and, accordingly, the addition on account of adjustment of the price is hereby deleted. Accordingly, this ground is decided in favour of the appellant." 5. The matter was carried in appeal before the Tribunal by the Revenue. The Tribunal confirmed the view of the CIT (Appeals) and, hence, this appeal. 6. Having heard the learned counsel for the parties we notice that the determination of Arms Length Price under section 92C of the Act is to be done as per the Rules contained in Rule 10B Clause A to subsection 10. Rule 10B of the Rules pertains to CUP method. Rule 10D pertains to 'Information and documents to be kept and maintained under section 92D'. Sub rule (3) provides inter alia that the information specified in sub rule (1) shall be supported by authentic documents, ....
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....s we refer to the release of new guidance on cross border commodity transactions by OECD on its Base Erosion and Profit Shifting (BEPS) plan actions 8 and 10, 2015 Final Reports, wherein there is an addition to Chapter II of the Transfer Pricing Guidelines relating to commodity transactions [ Extracted from OECD publication Aligning Transfer pricing Outcomes with value creation OECD 2015] as under:- The following paragraphs are added to Chapter II of the Transfer Pricing Guidelines, immediately following paragraph 2.16. 2.16A Subject to the guidance in paragraph 2.2 for selecting the most appropriate transfer pricing method in the circumstances of a particular case, the CUP method would generally be an appropriate transfer pricing method for establishing the arm‟s length price for the transfer of commodities between associated enterprises. The reference to "commodities" shall be understood to encompass physical products for which a quoted price is used as a reference by independent parties in the industry to set prices in uncontrolled transactions. The term "quoted price" refers to the price of the commodity in the relevant period obtained in an international or domesti....
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....ce for the commodity may be relevant. Where there are differences between the conditions of the controlled transaction and the conditions of the uncontrolled transactions or the conditions determining the quoted price for the commodity that materially affect the price of the commodity transactions being examined, reasonably accurate adjustments should be made to ensure that the economically relevant characteristics of the transactions are comparable. Contributions made in the form of functions performed, assets used and risks assumed by other entities in the supply chain should be compensated in accordance with the guidance provided in these Guidelines. 2.16D In order to assist tax administrations in conducting an informed examination of the taxpayer‟s transfer pricing practices, taxpayers should provide reliable evidence and document, as part of their transfer pricing documentation, the price-setting policy for commodity transactions, the information needed to justify price adjustments based on the comparable uncontrolled transactions or comparable uncontrolled arrangements represented by the quoted price and any other relevant information, such as pricing formulas used, ....
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....ration. It would be important to permit resolution of cases of double taxation arising from application of the deemed pricing date through access to the mutual agreement procedure under the applicable Treaty." [ underline supplied by us] 16. Therefore respectfully following the decision of Hon‟ble Gujarat High Court and drawing support from OECD BEPS Action Plan , we are of the view that even the „quoted prices‟ which is authentic may be acceptable as per Rule 10D(3) of the Income Tax Rules for comparability analysis. 17. The ld AR has also submitted that now the „sixth method‟ has been prescribed by the board as per Rule 10D (1)(f) and which is held to be retrospective with effect from when transfer pricing provisions were introduced in India. For this ld DR relied on the decision of the coordinate bench in Toll Global Forwarding India Pvt. Ltd. Vs. DCIT (supra) which held as under:- "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 th....
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....he CUP method, have an inherent edge over indirect methods, such as TNMM, and, therefore, as long as it is possible to do so, a direct method of ascertaining 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....
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....rospective". Their Lordships then further observed that, "In Government of India & Ors. v. Indian Tobacco Association (2005) 7 SCC 396 the doctrine of fairness was held to be relevant factor to construe a statute conferring 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 inability where the presumption attaches towards prospectively. 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 g....
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....see about the most appropriate method for benchmarking , the appeal of the revenue becomes infructuous and hence, dismissed. 22. In the result the appeal of the assessee in ITA No. 3132/Del/2013 is partly allowed and the appeal of the revenue in ITA No. 3155/Del/2013 is dismissed. ITA No 6470/Del/2012 A Y 2008-09 23. This appeal is preferred by the assessee against the order of the ld Assessing Officer, dated 30.10.2012 u/s 143(3) read with section 144 C of the Income Tax Act for the AY 2008-09 incorporating the direction passed on 03.08.2012 by the Dispute Resolution Panel-II, New Delhi. 24. The brief facts of the case is that the assessee filed its return of income on 29.03.2010 showing income of Rs. 755107/-. During the year the assessee entered into following transactions with its AE and benchmarked it as under:- Nature of international transactions Method applied Amount (in INR) Export of Iron Ore CUP 460948307 Export of chemical 56924750/- Export of cotton 1682336173 Export of pulses 14228519 Import of vegetable oil 323693950 Import of chemical 149325359 Import of coal 503027489 Commission received on sale o....
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.... the Hon'ble DRP erred both on fact and law in accepting the Ld. TPO's observations that the benchmarking exercise conducted by the Appellant consisted of many infirmities. 3.1. That the Ld.AO/Ld.TPO/Hon'ble DRP and Ld. TPO without appreciating the facts of the case and the underlying documentation has erred holding that the instances of the comparable and other information provided by the Appellant during the course of the proceedings are not relevant for the purposes of ALP. 3.2. That on the facts of the case and in law, the Ld. AO/Ld. TPO Hon'ble DRP has erred in concluding that application of CUP for the purposes of determination of ALP requires strict identity thereby misconstruing the Rule 10B(l)(a)(ii) of the Income-tax Rules, 1962 ("the Rules"). 3.3. That on the facts of the case, the Ld. AO/Ld. TPO/Hon'ble DRP has erred in holding that the Appellant has not carried out any adjustments in the analysis. 3.3.1.That on the facts of the case the Ld.AO/Ld. TPO/Hon'ble DRP has erred in not taking in consideration adjustments on account of Inco-terms made by Appellant. 3.4. That on the facts of the case the Ld. AO/Ld. TPO/DRP has erred in pro....