TaxTMI 
TaxTMI 
2020 (2) TMI 1389
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..../AHD/2012 filed by the revenue and ITA No. 874/AHD/2012 filed by the assessee. 4.Since common issues are arising in these appeals, the same were heard analogously and are being disposed of by this common order. For the sake of convenience, Tax Appeal No. 753 of 2019 is treated as the lead matter. 5. The revenue has proposed the following three questions of law as substantial questions of law for the consideration of this Court so far as Tax Appeal Nos. 752 of 2019 and 753 of 2019 are concerned, which pertains to A.Y. 2007-08: (a) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in deleting the upward adjustment of Rs. 2,78,02,502/made by the AO/TPO and confirmed by CIT (A) on account of Transfer Pricing adjustments in respect of international transactions of sale of chemical products by the assessee to its Associated Enterprises (Aes)? (b) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in rejecting the TPO's approach of rejecting the Transactional Net Margin Method (TNMM) and adopting Comparable Uncontrolled Price (CUP) Method as Most Appropriate Method (....
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....randsen, are also majority shareholders of Gulbrandsen Inc, USA and Gulbrandsen EU Limited UK. The assessee is engaged in the manufacturing of chemicals for its divergent industrial customers, its product range includes Aluminium Chloride Anhydrous (ANH), Meno N Butyl Trichloride (MBTC), Stannic Chloride (TTC), Dibutyl Tin Oxide (DBTO)/ Dibutyl Tin Tin Dilaurate (DBTAA) and Tri Chloro Benzene and these products are supplied to the industries including petrochemical industry, pharmaceutical and chemical intermediate users. The assessee has also sold these products to its AEs, namely Gulbrandsen Chemicals Inc, USA, and Gulbrandsen EU Limited, UK. During the course of assessment proceedings, the matter regarding ascertainment of arm's length price was referred to the Transfer Pricing Officer. The Transfer Pricing Officer noticed that the assessee had, deviating from the stand taken in the earlier years in which internal CUP method was adopted for benchmarking the sale to the AEs, computed the arm's length price of these transactions on the basis of Transactional Net Margin Method (TNMM). In effect thus, the assessee moved, in the current year, from internal CUP to TN....
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....ability not only in the products sold and services provided but also in the economic circumstances in which the respective AE and non AE transactions take place". It was thus submitted that the economic circumstances in which sales have taken place with the AEs are not at all comparable with the economic circumstances in which non AE sales have taken place. It was also explained that the AEs, to which the assessee has sold the products, are resellers whereas non AEs are end consumers, and that while these AEs are located in US and UK, the non AE customers are in Asia and Middle East. Emphasis thus was placed on the fact that the geographical location of markets was different and the comparison was thus inappropriate. It was also highlighted that the volume of sales to the AEs was substantially higher than sales to non AEs. The attention was also invited to the fact that while AEs make, on an average, 17 months advance payment for the purchases while non AEs are extended 6090 days credit period. It was thus contended that there was no credit risk to AE sales. The assessee further pointed out that the AEs also reimburse the assessee the basic research and development costs with 110% ....
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.... MBTC 351036 371.41 465.18 93.77 32316646 DBTO 56852 351.84 409.27 57.43 3265010 Total Transfer Pricing Adjustment Rs. 3,91,40,456/- 6.5. Being aggrieved by the upward Arm's Length Price adjustment (ALP) made by the Assessing Officer on the basis of the order passed by the TPO, the assessee carried the matter in appeal before the CIT (A). 6.6. However, CIT (A) confirmed the order passed by the Assessing Officer observing that, 'regardless of merits into adjustments made by the appellant, the fact remains that adjustment to make control and uncontrolled transactions comparable were possible in appellant's case. It was also observed that, "further, it is an accepted position that CUP is a superior method to other methods, if available." The CIT (A) relying upon the decision of the Tribunal in case of Serdia Pharmaceuticals India Pvt. Ltd. v. ACIT by Mumbai ITAT reported in (2011) 44 SOT 391 (Mum.) and held that the adjustments were possible but same were rejected on the merits including in respect of volume discount, credit terms, marketing and selling function and consequent costs, credit risk, reimbursement of R & D co....
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....respect of DBTA sale also have merit and are accepted. Accordingly, transfer pricing adjustment of Rs. 2,78,02,502/worked out by the appellant is directed to be substituted in place of adjustment of Rs. 3,91,40,456/worked out by TPO subject to verification by the AO of arithmetical correctness of the working done by the appellant." 6.7. The assessee being aggrieved and dissatisfied by the order passed by the CIT (A) carried appeal before the Tribunal, whereas, the Revenue also filed a crossappeal for the reduction of ALP adjustment made by the CIT (A). The Tribunal considered the question as to which is the most appropriate method for ascertainment of Arm's Length Price in the facts of the case. The Tribunal considered the well established principle that as long as it is reasonably possible to apply direct method of ascertaining the Arm's Length Price of a transaction, such a direct method will have an edge over application of an indirect method of ascertaining the Arm's Length Price. The Tribunal relied upon the decision of the coordinate Bench of the Tribunal in case of ACIT v. MSS India Ltd. reported in (2009) 32 SOT 132 (Pune) and Serdia Pharmaceuticals India Pvt. Ltd. (supr....
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....account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method [Emphasis, by underlining, supplied by us] 10.What is clear from the above analysis is that a method of determining arm's length price, to be held as a 'most appropriate method' (MAM), should be, as provided in rule 10C(1), a method "which is best suited to the facts and circumstances of each particular transaction" and a method and "which provides the most reliable measure of arm's length price of the international transaction". Under rule 10C(2)(c), "the availability, coverage and reliability of data necessary for application of the method" is one of the crucial factors determining suitability of a method of determination of arm's length price in a particular fact situation. Similarly, it is also important to determine whether accurate adjustments can be made for the differences between the international transactions and the comparable uncontrolled transactions, and unless such adjustments c....
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....lated enterprises is 20 per cent. and we charge a markup of 2 per cent in one transaction with AE and 38 per cent in another transaction with the AE, both these transactions, by applying the mark up on global basis, will meet the test of ALP whereas in the first case, the mark up charged is certainly not a markup resulting in an ALP. In this particular case, for example, the normal mark up in transactions with has been computed at 16.31 per cent. and the average of mark up on sales to AEs having been taken at 17.08 per cent. entire sales to AEs has been taken at ALP, but, the mark up in the many cases is clearly less than benchmark. To give one example, at page 221 of the paperbook, margin of 14.15 per cent (4 invoices), 13.95 per cent. 13.81 per cent. 14 per cent (4 invoices), 14.14 per cent (2 invoices), and 14.16 per cent is given by assessee's own computation, and, on the same page, on one invoice, the assessee has shown a margin as high as 27 per cent. The cost plus method, therefore, has not been correctly applied. In any case, one of the most important input, i.e. diamond, has been imported at a price for which no ALP documentation is available and the price of imports h....
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....ccount assets employed and risks assumed, in short referred to as the "functional analysis" (iii) Contractual terms; (iv) Economic circumstances; and (v) Business strategies pursued". Clearly, therefore, the significant variations in economic circumstances and contractual terms can take seemingly comparable transactions outside the ambit of comparability." 6.8. After considering the aforesaid principles, the Tribunal applied the same to the facts of the case, as under: "14. We have noted huge and crucial variations in payment terms of the transactions with the AEs visavi transactions with non AEs. The CIT(A) has rejected the adjustments in this respect on account of irrelevant factors such as assessee claiming only 8% adjustment in the financial year 200506, as against 20% adjustment sought in this year, even though the transactions were under the same agreement. That is immaterial. What is material is that there is huge difference in the payment terms. The CIT(A) has also noted the deviations in the advance payment terms of 120 days under the agreement and the actual advance payment of 17 months on average. He has also noted that in three invoices on non-AEs t....
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....stent approach in benchmarking analysis. The scale of transactions is an important economic factor affecting the comparability. We have also noted that the AEs have reimbursed R&D costs, with mark up, to the assessee. The AEs have also given interest free ECB loans. These are also equally important factors. When we take the transactions with the AEs in the light of these surrounding economic and contractual realities, in our considered view, the transactions with non AEs, on the facts of this case and as a whole, are not comparable at all. We cannot consider the price of the product in isolation with all these factors, and that is the reason why the comparability under CUP ceases to be relevant as these factors are clearly missing in non AE transactions. We have also noted that Rule10 B(1)(a)(ii) itself provides that "such price is adjusted to account for 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 price in the open market" but then while CIT(A) uphold the application of CUP method on the ground that adjustments can indeed be made....
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....d on the facts of this case is to be taken in the light of the facts and material on record before us in the present year. The past conduct of the assessee, with regard to the selection of the most appropriate method for ascertaining arm's length price for the present assessment year, is not really decisive. We, therefore, reject this plea of the revenue authorities as well." 6.9. The Tribunal thereafter referred to the decision of the Coordinate Bench relied on behalf of the assessee in the case of DCIT v. Dishman Pharmaceuticals & Chemicals Ltd. reported in 45 SOT 37 (2011), wherein, the Tribunal considering the factors relating to the determination of Most Appropriate Method for computing ALP adjustments and came to the conclusion that CUP method cannot be applied in each and every case. The Tribunal, therefore, in the facts of the case, held as under: "19. In view of the above discussions and following the consistent view being taken by the coordinate benches, in our considered view, the application of CUP method was indeed not justified on the facts of the present case. The intra AE transactions, on the facts of this case, were so fundamentally di....
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....e transactions of assessee with AEs vis-à-vis the transactions of the assessee with non-AEs while applying the CUP method as under: i. Adjustment on account of business volumes difference. ii. Adjustment for advance payment received from AE. iii. Adjustment for making and selling expenses not required to be incurred for AE sales vis-à-vis non AE sales. iv. Adjustment for credit risk not required to be borne by the assessee for AE sales vis-à-vis non AE sales. v. Adjustment for interest free ECB loan received from AE. 6.2. Mr. Varun Patel further submitted that, Indian Transfer Pricing Regulations as well as OECD guidelines state that the transactional profit method should ideally be applied on a transaction to transaction basis, but in appropriate situation transactions may be grouped or aggregated. It was submitted that, the relevant controlled transactions may best be aggregated if it is impractical to analyze all profits of each individual transactions or if such transactions are so interrelated that this is the most reliable means of benchmarking the outcome of the transaction against the arm's length outcome.....
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....ind that the appellant company has earned average hourly rate from its AE business at Rs. 274.39 per hour. As against the same, the average hourly rate from Non AE business was Rs. 108.82 per hour. Thus, the average hourly rate earned from AE business was more than Non AE business. The only reason for rejecting the assessee's contention is that the pricing mechanism in case of AE as well as Non AEs was different; therefore, CUP is not applicable. In our considered opinion, merely because pricing mechanism is different, internal CUP should not have been rejected. 12. We find that the TPO has mentioned in the order that the risk profile of AE and non AE is entirely different. In our considered opinion, reasonable accurate adjustment cannot be made for such risk differences and if the risk adjustment is made, the same would further reduce the average hourly rate charged from AE which is, as mentioned elsewhere, lower than the average hourly rate charged from AE. Therefore, in our understanding of the facts, internal CUP should have been accepted as most appropriate method." 6.1 Similarly, the identical issue related to internal TNMM method was also ....
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....relevant base" is compared with " the net profit margin realised by the enterprise ( i.e. the assessee) or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base" of course, subject to comparability adjustments which could affect the amount of net profit margin in uncontrolled conditions. It is not at all necessary, as the authorities below seem to suggest, that such net profit computations, in the case of internal comparables (i.e. assessee's transactions with independent enterprise), are based on the audited books of accounts or the books of accounts regularly maintained by the assessee. hi our considered view, all that is necessary for the purpose of computing arm's length price, under TNMM on the basis of internal comparables, is computation of net profit margin, subject to comparability adjustments affecting net profit margin of uncontrolled transactions, on the same parameters for the transactions with AEs as well as Non AEs, i.e. independent enterprises, and as long as the net profits earned from the controlled transactions are the same or higher than the net profits earned on ....
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.... However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with non AEs, on the ground that the volume of business with non AEs was too small vis-a-vis business with AEs. In view of these discussions, as also bearing in mind entirety of the case, the assessee was quite justified in adopting internal TNMM and comparing the profit earned on its transactions with AEs with profit earned with non-AEs. Accordingly, the ALP adjustment of Rs. 2,72,42,940/deserves to be deleted. We order so. The assessee gets the relief accordingly. 15. The Tribunal Hyderabad Bench in the case of NTT Data Global Delivery Services Limited. 63 taxmann.com 92 had taken a similar view and followed the findings given in the case of Lummus Technology Heat Transfer BV (supra)." 6.2 Respectfully following the same we are of the view that assessee rightly benchmarked the transaction by choosing the internal CUP method as most appropriate method and alternatively also rightly benchmarked the....
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....ed TNMM by comparing the profits on transactions with the AE and the Non-AEs and no specific defects have been pointed out in the allocation of costs in the segmental accounts which are duly reconciled with entity level consolidated accounts, and in such circumstances, the method adopted by the assessee was considered as Most Appropriated Method. It was also submitted that the Tribunal has also given a finding that the application of CUP method was not justified on the facts of the present case, as the intra AE transactions were fundamentally different in character in economic circumstances and contractual terms and these cannot be compared with the independent transactions entered into by the assessee. 7.3. It was therefore submitted that, the difference of opinion between the Tribunal and that of CIT (A) and TPO as to appropriateness of one or other methods cannot perse be a ground for interference because appropriateness of the method unless shown by the contrary to Rules, specially Rule 10B and 10C of the Rules, the same cannot be considered as substantial question of law under Section 260A of the Act, 1961. In support of his submissions, learned Senior Advocate placed re....
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....he facts of the case as stated in paras14 and 15 of the impugned order reproduced hereinabove, has come to the conclusion that the internal TNMM adopted by the assessee is just and proper. 10. In decision of Principal Commissioner of Incometax, Gandhinagar v. Tudor India (P.) Ltd. (supra) this Court has considered the entire scheme of the transfer pricing and has observed as under: "11. The Karnataka High Court, in the case of Pr. Commissioner of Income Tax, Bangalore & Ors. vs. Softbrands India P. Ltd., reported in (2018) 406 ITR 513 had the occasion to consider the special provisions relating to the Avoidance of Tax in ChapterX of the Act comprising of Sections 92 to 94B with regard to the assessment to be done for the computation of income from international transactions on the principles of "Arm's Length Price" (ALP) and the relevant Rules for computation of such income under the aforesaid provisions of ChapterX in the form of Rule 10A to 10E in the Income Tax Rules, 1962. We may quote the relevant portion of the judgment; "Perspective of International Trade and Transactions: 4. With the ever increasing international Trade and transactions, par....
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....sed its prima facie opinion as regards the transfer pricing adjustments. "Prima Facie Opinion: 15. We are of the considered opinion that this entire exercise of making Transfer Pricing Adjustments on the basis of the comparables is nothing but a matter of estimate of a broad and fair guesswork of the Authorities based on relevant material brought before the Authorities including the Appellate Tribunal, but nonetheless the Tribunal being the final fact finding body remains so for this Special Chapter X also and therefore, unless this Court is satisfied that a substantial question of law is arising from the order of the Tribunal, the appeal under Section 260A cannot be entertained at the instance by either the Revenue or the Assessee and the exercise of fact finding or 'Arm's Length Price' determination or 'Transfer Pricing Adjustments' should be allowed to become final with a quietus at the hands of the final fact finding body, i.e. the Tribunal." 14. The Court, thereafter, undertook a comparative analysis of Section 260A of the Act, 1961, Section 100 and Section 103 of the CPC and proceeded to observe as under: "16. We would a....
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....nal [before the date of establishment of the National Tax Tribunal], if the High Court is satisfied that the case involves a substantial question of law. (2) [The [Principal Chief Commissioner or] Chief Commissioner or the [Principal Commissioner or] Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this subsection shall be-] (a) filed within one hundred and twenty days from the date on which the order appealed against is [received by the assessee or the [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner]; (b) [*******] (c) in the form of a memorandum or appeal precisely stating therein the substantial question of law Involved. [(2A) The High Court may admit an appeal after the expiry of the period of one hundred and twenty days referred to in Clause (a) of subsection (2), if it is satisfied that there was sufficient cause for not filing the same within that period.] (3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that quest....
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....of law, not formulated by it, if it is satisfied that the case involves such question." Section 103 Power of High Court to determine issues of fact In any second appeal, the High Court may, if the evidence on the record is sufficient, determine any issue necessary for the disposal of the appeal, (a) which has not been determined by the lower Appellate Court or both by the Court of first instance and the lower Appellate Court, or (b) which has been wrongly determined by such Court or Courts by reason of a decision on such question of law as is referred to in section 100." What is a Substantial Question of Law? 20. From a bare comparison of the provisions quoted above and as discussed in various judgments of the Constitutional Courts, which we will refer in brief herein below, it is clear that the Scheme of both Section 260A in Income Tax Act, 1961 and Section 100 r/w. Section 103 of the Code of Civil Procedure are in pari materia and in same terms. 21. The existence of a substantial question of law is sine qua non for maintaining an appeal before the High Court. While the appeal to High Court under Section 260A of the Act may be ....
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.... as is referred to in Subsection (1)'. Therefore, even if an issue which has not been determined by the Tribunal, which was required to be so determined in terms of the answer to the substantial question of law given by the High Court, such an issue not determined by the Tribunal could also be decided by the High Court with reference to Clause (a) and more so, if such an issue has been wrongly decided according to the answer given by the High Court to such a substantial question of law, then also the High Court can set it right to fall in line with the answer given by the High Court to such a substantial question of law raised before it and determined by it in terms of Clause (b) thereof. 25. Subsection (6) of Section 260A of the Act, therefore, does not give any extended power, beyond the parameters of the substantial question of law to the High Court to disturb the findings of fact given by the Tribunal below. 26. Subsection (7) inserted in Section 260A of the Act by the Finance Act of 1999 with effect from 01/06/1999 after a period of about 8 months of substituting the new provisions of Section 260A to the Act as they now stand by Finance Act of 1998, with ....
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....appeal. However the Law Commission noticed a plethora of conflicting judgments. It noted that in dealing with second appeals, the courts were devising and successfully adopting several concepts such as, a mixed question of fact and law, a legal inference to be drawn from facts proved, and even the point that the case has not been properly approached by the courts below. This was creating confusion in the minds of the public as to the legitimate scope of second appeal under Section 100 and had burdened the High courts with an unnecessarily large number of second appeals. Section 100 was, therefore, suggested to be amended so as to provide that the right of second appeal should be confined to cases where a question of law is involved and such question of law is a substantial one. (See Statement of Objects and Reasons.) The Select Committee to which the Amendment Bill was referred felt that the scope of second appeals should be restricted so that litigations may not drag on for a long period. Reasons, of course, are not required to be stated for formulating any question of law under subsection (4) of Section 100 of the Code; though such reasons are to be recorded under provis....
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....ise to a question of law. (ii) The High Court should be satisfied that the case involves a substantial question of law, and not a mere question of law. A question of law having a material bearing on the decision of the case (that is, a question, answer to which affects the rights of parties to the suit) will be a substantial question of law, if it is not covered by any specific provisions of law or settled legal principle emerging from binding precedents, and involves a debatable legal issue. A substantial question of law will also arise in a contrary situation; where the legal position is clear, either on account of express provisions of law or binding precedents, but the Court below has decided the matter, either ignoring or acting contrary to such legal principle. In the second type of cases, the substantial question of law arises not because the law is still debatable, but because the decision rendered on a material question, violates the settled position of law. (iii) The general rule is that High Court will not interfere with the concurrent findings of the courts below. But it is not an absolute rule. Some of the wellrecognised exceptions are where ....
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....s in income arising from international transactions which shall be computed having regard to the 'Arm's Length Price' (Sec.92). 33. Section 92A defines an 'Associate Enterprise' viz., the Company which participates directly or indirectly, or through one or more intermediaries, in its Management or control or Capital of the other Enterprise by holding more than 26% of the share holding in such other Enterprises and satisfy the other criterias as stated in Section 92A of the Act. 34. The word 'International Transaction' is defined in Section 92B of the Act. 35. The most important provision concerning us in this batch of cases is Section 92C of the Act which provides for 'Computation of Arm's Length Price' and the said provision stipulates that the 'Arm's Length Price' in relation to the international transactions shall be determined by following any of these methods enumerated in Section 92C of the Act which is considered to be the 'Most Appropriate Method' by the Authorities under the Act. The methods provided are: Clause (a): Comparable Uncontrolled Principles Method (CUP); Clau....
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....ellate Tribunal to pass such orders on the appeals 'as it thinks fit' after giving an opportunity of hearing to both the parties. 38. From the aforesaid Scheme of assessment with regard to international transactions, it is clear that the process of determination of 'Arm's Length Price' has to be undertaken by the Expert Wing of the Income Tax Department which is manned by Transfer Pricing Officer (TPO) and at the higher level by a Collegium of three Commissioners in the form of Dispute Resolution Panel (DRP) whose orders on questions of facts are appealable before the highest fact finding body, viz., the Appellate Tribunal. 39. The process of determination of 'Arm's Length Price' as observed above, necessarily takes into account the comparable cases of other similarly situated or nearly similarly situated Corporate Entities whose data are in public domain or on the Data Bases like Prowess and Capital Line Data Base etc. " 16. The Court, thereafter, proceeded to discuss whether any substantial question of law could be said to be involved in the matter. "No Substantial Question of Law Arises in these Cases: ....
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....Section 260A of the Act. This Court is only concerned with the question of law and that too a substantial one, which has a well defined connotations as explained above and findings of facts arrived at by the Tribunal in these type of assessments like any other type of assessments in other regular assessment provisions of the Act, viz. Sections 143, 147 etc. are final and are binding on this Court. While dealing with these appeals under Section 260A of the Act, we cannot disturb those findings of fact under Section 260A of the Act, unless such findings are exfacie perverse and unsustainable and exhibit a total nonapplication of mind by the Tribunal to the relevant facts of the case and evidence before the Tribunal. 45. Otherwise if the High Court takes the path of making such a comparative analysis and pronounces upon the questions as to which Filter is good and which comparable is really comparable case or not, it will drag the High Courts into a whirlpool of such Data analysis defeating the very purpose and purport of the provisions of Section 260A of the Act. Therefore what we observed above appears to us to be the sustainable view that the key to the lock for e....
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....e, it would obviously be wrong and perverse. The very word "comparable" means that the Group of Entities should be in a homogeneous Group. They should not be wildly dissimilar or unlike or poles apart. Such wild comparisons may result in the best judgment assessment going haywire and directionless wild, which may land up the findings of the Tribunal in the realm of perversity attracting interference under Section 260A of the Act." 18. In the last, the Court concluded as under: "The procedure of assessment under Chapter X relating to international transactions as indicated above is already a lengthy one and involves multiple Authorities of the Department. A huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by the Authorities of the Department and through the process of Transfer Pricing Officer (TPO) and Disp....
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....on, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed. 57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260A of the Act before this Court." 19. The Delhi High Court, in the case of CIT vs. EKL Appliances Ltd., reported in (2012) 345 ITR 241 (Delhi), in context ....
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....de between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm's length principle of pricing follows the approach of treating the members of a multinational enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm's length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below: " 1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than ....
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....expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transactio....
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....purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: " We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is t....
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....in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnis....