TaxTMI 
TaxTMI 
TaxTMI 
2020 (2) TMI 1389
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....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 (MAM)? (c) Whether in the facts and circumstances of the case, the....
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....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 TNMM. This, however, did not find favour with the TPO. The TPO was of the view, for the detailed reasons set out in his order, that, given the f....
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....lace". 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% mark up under long term business arrangement, over and above the sale price, and that the assessee has also benefited from interest free ECB loans from the ....
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.... 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 costs, interest from ECB loan and all such factors. As the TPO observed that there is a huge difference between the sale price of Meno N Butyl Trichloride i.e. MBTC to its USA based AE and UK based AE, inasmuch as the sam....
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....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. (supra) and has observed as under: "...Going by this principle, all other things being equal, a direct method like Comparable Uncontrolled Price (CUP) method will have an edge over an indirect method like Transactional Net Margin Method (....
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.... [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 can be made the related method cannot be said to be most appropriate method. We have already seen as to how, in the CIT(A)'s analysis, suitable adjustments could not be made even though in his opening observations in the operative portion of the order, he stated that suitable adjustments can....
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....up 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 have been taken into account in computation of costs as well. The costs of inputs have not been verified either. No efforts are made to show that the terms of sale to the AEs and all other relevant factors are materially similar vis-a-vis the transactions with independent enterprises. The CPM is applied by compa....
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....he 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 the credit period was 60 days but then he declines to treat these evidence as support for the claim that in all cases similar credits were given. However, what is clear that there is clearly significant variation in payment terms. As a matter of fact, at page 29, learned CIT(A) himself notes that "as per the agreement, advance payment was to facili....
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....he 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, he rejects the adjustments on merits. That is clearly incongruous. When he admits that no adjustments can be made on merits, the very foundation of his decision to uphold application of CUP method ceases to hold good. In any case, having perused the material on record, we are of the considered view that accurate adjustments cannot be made to nullify th....
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....thorities 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 different in character in economic circumstances and contractual terms, that these cannot be compared with the independent transactions entered into by the assessee. We, therefore, reject the stand of the authorities below on this issue. 20. We have noted that the assessee has applied TNMM by comparing the profits on transactions with AEs and the non AEs and no specific defects have ....
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.... 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. Reference was made to Rule 10A (d) of the Income Tax Rules, 1962 (for short 'the Rules'), wherein, it is defined that "transaction" includes a number of closely linked transactions. It was therefore submitted that if the appropriate method adopted by the assessee by applying TNMM is to be given any credence then in case of any enterprise all its international transaction would be closely interlinked because all the transaction ....
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....inion, 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 raised in assessee's own appeal of assessment year 200910 in Effective Teleservices (P.) Ltd. (supra) where issue was decided in favour of assessee by the ITAT vide order dated 16012018 by observing as under: "13. For the sake of completeness of the adjudication, rejection of internal TNMM analysis undertaken by the appellant during the course of transfer pricing assessment should not have been rejected. We find that the appellant company has provided identical services to AE as well as non A....
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....'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 uncontrolled transactions, no ALP adjustments are warranted. It is not at all necessary that such a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit. We are, therefore, of the view that the authorities below were in error in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained in the normal course of business. As regards vague generalizations by the TPO to....
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....e 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 internal TNMM method as most appropriate method to determine the ALP. Accordingly, the appeal of the assessee is allowed." 6.5. It was also submitted that the Tribunal has failed to consider that the assessee has not taken into account very important factor for determination of the ALP on the basis of the determination of the price in different geographies as compared to sale of products to associate enterprise of the assessee, then non-associated enterprises of the assessee situated in the different parts of the world. It was submitted that....
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....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 reliance upon the decision of the Delhi High Court in the case of Principal Commissioner of Income-Tax-6 v. Make My Trip India (P.) Ltd. reported in (2017) 399 ITR 297 (Delhi). 7.4. Learned Senior Advocate further relied upon the decision of the Coordinate Bench of this Court in the case of Principal Commissioner of Incometax, Gandhinagar v. Tudor India (P.) Ltd. reported in (2019) 11 taxman.com 450 (Gujarat) to submit that the entire scheme of the transfer pricing has been considered by this court and as such the Tribunal has come to the conclusion on the basi....
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.... 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, particularly, in the Software Industries and Bangalore, being the Silicon Valley of India where many big, small and medium size Software Industries have their Offices and Units in this Software Industry, and Bengaluru is a hub of this Service Industry and essentially the Indian Companies have business linkages with large Companies spread worldwide particularly in the Western Hemisphere of the Globe. 5. The implementation of the Tax laws in this field in a smooth, clear and quick manner is of utmost importance to build an image of an efficient Tax Administration both at Departmental level a....
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....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 analyze the provisions of Section 260A of the Act in a little more detail but we are of the firm opinion that the entry into the High Court under Section 260A of the Act is locked with the words "Substantial questions of law" and the key to open that lock to maintain such appeal can only be the perversity of the findings of the Tribunal in these type of cases and the perversity in the findings not only averred by the appellant before this Court but, established on the basis of cogent material which was available before the Authorities below including the Tribunal and the findings arrived at by the Tribunal can be so held to be perverse within the well settled param....
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.... 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 question. (4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question: Provided that nothing in this subsection shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. (5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. (6) The High Court may determine any issue which ( a) has not been determined by the....
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.... 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 a First appeal in the sense from the order of final fact finding by the Tribunal under the Income Tax Act, whereas the Second Appeal on substantial question of law before High Court under Section 100 would lie against the Judgment and Decree of the first Appellate Court disposing of an appeal against the Judgment and Decree of a Trial Court, but nonetheless it is the third round of consideration at the level of the High Court, where the facts and law both have been screened, discussed and analyzed by the Authorities or the Courts below and therefore the tenor and color of the words "substantial question of law" in both these enactments remains the same. 22. The High Court has power to not only formulate the substantial questions of law and rather it has the duty to do so and can also frame additional substantial questions of law at a later stage, if such a substantial question of l....
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....ribunal 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 effect from 01/10/1998 was only to clarify and support that the parameters of Sections 100 & 103 of the Civil Procedure Code and other provisions of Civil Procedure Code relating to appeals of High Court shall apply to the appeals under Section 260A of the Income Tax Act also. 27. The insertion of Subsection (7) in Section 260A of the Act does not give any new or extended powers to the High Court and the preexisting provisions from Subsection (1) to Subsection (6) in Section 260A of the Act already had all the trappings of Sections 100 and 103 of the Civil Procedure Code. Case Laws on Substantial Question of Law: 28. In the leading and the first and foremost case on the interpretation of Section 100 of the Code of Civil Procedure Code, the Constitution Bench of the Hon'ble Supreme Court in the case of Sir Chunilal V. Mehta and Sons Limited Vs. Century Spinning and Manufacturing Co. Limited AIR 1962 SC 1314....
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....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 proviso to subsection (5) while exercising power to hear on any other substantial question of law, other than the one formulated under subsection (4). 12. The phrase "substantial question of law", as occurring in the amended substantial, as qualifying "question of law", means of having substance, essential, real, of sound worth, important or considerable. It is to be understood as something in contradistinction with technical, of no substance or consequence, or academic merely. However, it is clear that the legislature has chosen not to qualify the scope of "substantial question of law" by suffixing the words "of general importance" as has been done in many other provisions such as Section 109 of the Code or Article 133(1)(a) of the Constitution. The substantial question of law on which a second appeal shall be heard need not necessarily be a substantial question of law of general importance. In Guran Ditta v. T. Ram Ditta", the phrase "substantial question of law" as it was e....
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....ere with the concurrent findings of the courts below. But it is not an absolute rule. Some of the wellrecognised exceptions are where (i) the courts below have ignored material evidence or acted on no evidence; (ii) the courts have drawn wrong inferences from proved facts by applying the law erroneously; or (iii) the courts have wrongly cast the burden of proof. When we refer to "decision based on no evidence", it not only refers to cases where there is a total dearth of evidence, but also refers to any case, where the evidence, taken as a whole, is not reasonably capable of supporting the finding." 31. In the case of Vijay Kumar Talwar Vs. Commissioner of Income Tax, Delhi, [2011] 1 SCC 673, comparing the provisions of Section 260A of the Act with Section 100 of the Civil Procedure Code, the Hon'ble Supreme Court held that in the absence of demonstrated perversity in the findings of the Tribunal, the Court cannot interfere and a finding of fact may give rise to a substantial question of law, only if it is perverse. Paragraphs 23 and 25 of the said judgment is quoted below for ready reference:" 23. A finding of fact may give rise to a substantial question of law, inter ....
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....parable Uncontrolled Principles Method (CUP); Clause (b): Resale Price Method (RP) Clause (c): Cost Plus Method (CP) Clause (d): Profit Split Method (PS) Clause (e): Transactional Net Margin Method (TNMM); and Clause (f): such other Method as may be prescribed by the Board. 36. It appears from the true facts of the various cases before us and the arguments of the learned counsels that the TNNM Method appears to be the most popular and widely adopted Method for determining the 'Arm's length price' in which the Operating Profit Margin of comparable Companies are considered by the Authorities and applied to the cases of the Assessees to determined the 'Arm's Length Price' and make Transfer Pricing Adjustments. Rules 10A, 10AB, 10B, 10C & 10CA of the Income Tax Rules, 1962 prescribe the manner for working out 'Arm's Length Price' under aforesaid prescribed Methods. 37. Section 92CA of the Act envisages that the Assessing Authority, if he considers necessary or expedient so to do, he can with the previous approval of the Principal Commissioner, refer the computation of 'Arm's Length Price' to Transfer Pricing Officer (TPO), ano....
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....s the pairing and matching such comparables with the Transfer Pricing Analysis of the profit margins given by the Assessee himself during the course of determination of such 'Arm's Length Price'. 41. The shades of arguments raised by both the sides before us in these appeals and most of which have been filed by the Revenue are that either the wrong Filters have been applied or Filters have been wrongly applied, particularly qua Turnover Filter giving a far too wide or narrower range of comparables or even though comparable Entities were functionally different entities from the Entities in the list of Departmental comparables, as against the comparables sought to be provided by the assessees but the Revenue Department generally insists on their inclusion to get high profit ratio leading to higher Transfer Pricing adjustments, whereas the assessee would like to keep the comparables in a narrower range to justify its Transfer Pricing Analysis and profits declared. 42. In sum and substance, we find that such an exercise having been undertaken by the Authorities below may have resulted not only in high pitched Transfer Pricing Adjustments in the declared profits of the A....
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....existence of a substantial question of law involved in the matter. The key of exfacie perversity of the findings of the Tribunal duly established with the relevant evidence and facts. Unless it is so, no other key or for that matter, even the inconsistent view taken by the Tribunal in different cases depending upon the relevant facts available before it cannot lead to the formation of a substantial question of law in any particular case to determine the aspects of determination of 'Arm's Length Price' as is sought to be raised before us. " 17. The Court, thereafter, expressed its concern for giving primacy to the Tribunal in the area of fact finding. "46. Undoubtedly, the Income Tax Tribunal is the final and highest fact finding body under the Act. It is manned by Expert Members (Judicial Members are selected from District Judges or Advocates and Accountant Members selected from practicing Chartered Accountants or persons of CIT level in the Department). Therefore this quasijudicial forum is expected and as some of the nicely articulated Judgments and Orders from the Tribunal would indicate, the Orders passed by the Tribunal should normally put an end and quietus to....
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.... Authorities that what has been declared by them is true and fair disclosure and much of the Transfer Pricing Adjustments is not required but the Tax Authorities have their own view on the other side and the effort on the part of the Tax Revenue Authorities is always to extract more and more revenue. This process of making huge Transfer Pricing Adjustments results in multilayer litigation at multiple Fora. After the lengthy process of the same, the matter reaches the Tribunal which also takes its own time to decide such appeals. In the course of this dispute resolution, much has already been lost in the form of time, manhours and money, besides giving an adverse picture of the sluggish Dispute Resolution process through these channels. If appeals under Section 260A of the Act were to be lightly entertained by High Court against the findings of the Tribunal, without putting it to a strict scrutiny of the existence of the substantial questions of law, it is likely to open the floodgates for this litigation to spill over on the dockets of the High Courts and up to the Supreme Court, where such further delay may further cause serious damage to the demand of expeditious judicial dispens....
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....g the payment of brand fee/ royalty. The CUP method which in its expanded form is known as "comparable uncontrolled price" method is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an international transaction. Rule 10B(1) says that for the purposes of Section 92C(2), the ALP shall be determined by any one of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) resale price method, (iii) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the subrule (1) of Rule 10B. The following three steps have been prescribed: - "(a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;....
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....ompounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while ....
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....ge restructuring of legitimate business transactions. The reason for characterisation of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee ....
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....ext of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only conditi....
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....d to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs." 11. We are of the view that in view of above dictum of law the findings of fact recorded by the Tribunal in the impugned order cannot be termed as perverse or contrary t....