TaxTMI 
TaxTMI 
2019 (2) TMI 1613
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly erred in confirming the addition u/s 92 of Rs. 2,78,02,502/- to the income of appellant in respect of the international transactions of sale of chemical products viz. TTC, MBTC &DBTO by appellant to its Associated Enterprises ('AEs') 3. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the Ld. TPO/AO's approach of rejecting the Transactional Net Margin Method ("TNNM") as the most appropriate method. 4. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the Ld. TPO/AO's approach of adopting the Comparable Uncontrolled Price ("CUP") method as the most appropriate method. 5. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not allowing following appropriate adjustments claimed by the appellant for material differences in contractual terms, underlying commercial circumstances, functions, risks and other economic factors between appellant's transactions with AEs vis-a-vis appellant's transactions with non-AEs, while applying the CUP method. i) Adjustment on account of business volume differences. ii) Adjustment for advance payment rec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nal CUP was the most appropriate method and it has been used all along in the earlier years. The reasoning adopted by the TPO was like this. It was noted that the assessee had sold 40% of its products to the associated enterprises, and earned margin of PBIT/Cost at 2.07%, as against the sale of 70% of its products in the immediately preceding year and earning margin of PBIT/Cost at - 3.26%. The TPO computed the total cost per kg for each type of chemicals and compared it with average sale rate to AEs so as to compute the GP/Cost (%) and noted that "the assessee has charged very nominal margin to the AEs". Coming to the Internal TNMM adopted by the assessee and the TPO's view that the basis of allocating the overheads was not clear, it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these are directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee further submitted that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns impressed the TPO. The TPO noted the objections of the assessee for the application of Internal CUP but rejected the same mainly on the ground that "since 2003-04, the assessee company has been using internal CUP as the most appropriate method" and "the assessee company has shifted from internal CUP method to internal TNMM without giving any appropriate reasons. So the contention of the assessee is rejected". As regards the justification of TNMM on the ground that the volume of sales to the AEs is several times higher than the sale to non AEs, the TPO observed that "it means that the assessee has sold huge volume to AEs at a lower rate and shifted the huge profits from India to other countries" and, therefore, "the contention of the assessee is not acceptable". As regards the credit period and advance payments, the TPO observed, on a superficial note again, "contention of the assessee is considered but is not acceptable because in USA and UK market, the price of TTC, MBTC and DBTC are higher than non AE price rate". As regards guaranteed purchase of 50% production, the TPO observed that "it is seen that the assessee has been earning profits only from the non AE transactions (and....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... This, according to the CIT(A), indicated that the sale to USA based AE was much above the arm's length price. Learned CIT(A) observed that the "appellant has not explained the vast difference between the prices charged for the same chemical from two AEs in the same period" and, therefore, "the adjustment claimed by the appellant and the calculation done by the appellant to arrive at ALP after adjustments is not acceptable" and "determination by the TPO of the transactions to be average sale price to non AEs over the year, without carrying out the adjustments, is upheld". Learned CIT(A) nevertheless reduced the ALP adjustment to Rs. 2,78,02,502 by observing as follows: 3.3.2 Appellant's contentions in para 3.2.2 of its submissions regarding mistakes in quantification of transfer pricing addition under CUP method by Id. TPO are now taken up. It is pointed out by the appellant that for the products MBTC and DBTO, TPO compared consolidated average price for both the AEs with non-AE average price. Each sale transaction to the AEs constituted a separate international transaction, arm's length price of which was required to be determined in accordance with Section 92 of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ferred method because of one of the essential prerequisite for application of any method of ascertaining the ALP is the inputs necessary for that purpose. Whatever may be inherent edge of the direct methods of determining arm's length price of an international transaction over indirect methods of determining the arm's length price of international transactions, selection of the most appropriate method for determining arm's length price under the transfer pricing provisions, in a particular fact situation, is not an academic exercise which can be decided de hors the peculiar facts of that situation, and, therefore, there cannot be any straight-jacket formulas holding application of a particular method in case of a particular type of product or service. While rule 10B(1) of the Income Tax Rules 1962, provides that arm's length price in relation to an international transaction shall be determined by any of the methods, "being the most appropriate method", set out therein, Rule 10 C(1) provides the mechanism for selecting the most appropriate method "which is best suited to the facts and circumstances of each particular transaction" and "which provides the most reliable measure of arm'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....djustments, therefore, does take the method outside the ambit of most appropriate method. Quite clearly, therefore, unless suitable reliable data inputs necessary for application of a particular method, as CUP in this case, are available, CUP method cannot be said to be most appropriate methods on the facts of this case. Let us, therefore, first examine whether sufficient inputs were indeed available. 11. At the outset, it is important to note that what has been relied upon by the TPO is Internal CUP data but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intra-AE transactions and independent transactions. This approach, though in the case of application of Cost Plus Method, has been rejected by a coordinate bench of this Tribunal in the case of ACIT Vs Tara Ultimo Pvt Ltd [(2012) 143 TTJ 91 (Mum)], though the same reasoning will be equally applicable in respect of the CUP as well as the computation mechanism, in that respect, is materially similar. In this case, speaking through one of us (i.e. the Vice President), the coordinate bench had observed as follows: The way this rule works, the benchmark gross pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... method requires comparison of mark up on costs on transactions with AEs vis-a-vis mark up on costs on transactions with non AEs [Emphasis, by underlining, supplied by us now] 12. It is also important to note that the TPO has justified application of internal CUP on the basis of deviations in prices at which products are sold to different AEs and, by implication, using one intra AE price to bench the other intra AE price. That is wholly incorrect. It is well settled in law that it is only an uncontrolled price which can be compared with controlled price and used for any benchmarking. This position has been well summarized in a coordinate bench decision in the case of Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 138/35 taxmann.com 177 (Ahd.), and we are in considered agreement with the same. 13. When comparing the prices of products sold in intra AE transactions vis-à-vis independent transactions, it is not sufficient to compare the prices de hors the economic circumstances in which the respective AE and non AE transactions take place. This principle is beyond any doubt or controversy. In the OECD Guidelines for Multinational Enterprises an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sheet showing 17 months advance payment but rejects it as agreement refers to only 120 days advance payment. That does not belittle the fact that whatever may have been payment terms under the intra AE agreement, the payment was actually received substantially in advance. The question we must ask ourselves is that whether such substantial advance payments, which ensure availability of working capital to the assessee, can be compared with normal business transactions allowing, on the contrary, credit period to the customers. The answer is clearly in negative as the economic circumstances in which these two sets of transactions operate are substantially different. The very character of these transactions is different. 15. It is also important to bear in mind the undisputed fact that the AE had an obligation to buy at least 50% of its products and the assessee was reseller rather than an end user. These contractual terms and the difference in functions also seriously affect the comparability. The reasons given by the CIT(A) for rejecting these variations are wholly superficial and devoid of any legally sustainable merits. The variations in quantities between the AEs and the non AE....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., for this reason alone, CUP method ceases to be workable on the facts of this case. The contradiction in the approach is also evident from the fact that the CIT(A) has upheld application of CUP method on the sole basis that accurate adjustments can be made to take care of variations in the intra AE and independent transactions but then one of the points made before us, in the written submissions, is that "if total adjustment of 36% claimed in those years was allowed, prices would come down to such unrealistic levels that one of the international transaction, including sales to non AEs, were made anywhere neat them". Clearly, there is no meeting ground between these diametrically opposed stands by the authorities. As regards the decision of coordinate bench in the case of Serdia Pharmaceuticals (supra), that was a case in which no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. 16. A lot of emphasis has been placed on the fact that the assessee on its own was using the Internal CUP method in past, and, there was, thus, no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. All that has been relied upon is internal CUP and for the detailed reasons set out by the CIT(A), which meets our approval, these CUP inputs were not reliable enough. In any case, differences due to variations in FAR due to nature of trade relationship with AEs have not been accounted for and suitable adjusted. The external CUP inputs are not even referred to and relied upon by the TPO. There are no other independent comparable transactions brought to the analysis by the TPO or the learned Commissioner (DR). All these factors put together donot make out a case for application of CUP in this case. Not only that there is no justification, beyond vague generalities, for CUP in the present case and not only that that CUP method application mechanism is incorrect, we find that sufficient quantity of reliable CUP inputs are not available on the facts of this case. that In the light of these discussions, as also bearing in mind entirety of the case, we donot see legally sustainable merits in the case of the learned Commiss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee had further submitted that "in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects". We have noted that the TPO did not have any specific comment on this request and he simply rejected the explanation of assessee as "not accepted". In appeal also, no specific adjustments were suggested to the allocations made in the segmental accounts and the discussions were confined to generalities. In these circumstances, we see no reasons to disturb the internal TNMM adopted by the assessee. We, therefore, delete the impugned ALP adjustment of Rs. 2,78,02,502. 21. Ground nos. 2 to 5 are thus allowed in the terms indicated above. 22. Ground no. 6 is not pressed in view of retrospective inser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the fact that the amount amortized during the year represented expenditure for repairs and replacements only and not a capital expenditure as held by the Ld. A.O. The Ld. CIT(A) ought to have allowed the claim made by the appellant by treating the same as revenue expenditure. 28. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision in assessee's own case of the assessment year 2006- 07 wherein the coordinate bench has, inter alia, observed as follows: It has come on record that the assessee has in fact incurred the impugned sums on plant building's roof repair. The authorities below have taken strong cognizance to the effect that it has itself estimated benefits of above repairs to continue for a period of four years. We find this approach to be wholly unreasonable since this is not the lower authorities' case that the assessee's repairs in question have in any manner added any structure or asset of permanent nature conferring it an enduring benefit. We further find Hon'ble Apex Court in the case of Taparia Tools Limited vs. JCIT (2015) 372 ITR 605 (SC) has accepted a similar proposition that allowabi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l expenditure is alien to the tax jurisprudence. Enduring benefit is a test often resorted to but enduring benefit does not mean benefit beyond one year and it is not of unqualified application such as in replacement repairs. Glass line replacement cannot be an acquisition of independent asset or anything other than replacement repairs. Similarly, battery and valve cannot be treated as standalone assets and are in the nature of replacements. The remaining expenses are small expenses and integral to the R&D facilities maintenance. In any case, the authorities below have not assigned any specific reasons, beyond the vague generalities, for treating these expenses as capital expenditure. In view of these discussions and bearing in mind entirety of the case, we uphold this plea of the assessee as well. The Assessing Officer is, accordingly, directed to delete the disallowance of Rs. 23,14,803 on account of repairs and replacement. 34. Ground no. 8 is thus allowed. 35. In the result, the appeal of the assessee is allowed. 36. We now take up the appeal filed by the Assessing Officer. 37. Grievance raised in the appeal of the Assessing Officer is as follows: On the fa....