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Income Tax Appellate Tribunal, AHMEDABAD D BENCH, AHMEDABAD
Per Pramod Kumar, VP:
These cross appeals for the assessment year 2007-08 which are directed against the order dated 2nd January 2012 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961. We will first take up the appeal filed by the assessee.
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Ground no. 1 is general in nature and does not call for any specific adjudication. In any case, no arguments were raised in support of the same. Ground no. 1 is thus dismissed for want of prosecution.
In ground nos. 2 to 5, which we will take up together, the assessee has raised the following grievances;
In the facts and circumstances of the case and in law, the Ld. CIT(A) grossly 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’)
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.
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.
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 received from AE. iii) Adjustment for marketing and selling expenses not required to be incurred for AE sale vis-a-vis Non AE sales.
ITA No.: 874 and 760/Ahd/2012 Assessment years: 2007-08 Page 3 of 21 iv) Adjustment for credit risk not required to borne by appellant for AE sales vis-a-vis Non AE sales. v) Adjustment for reimbursement of R&D cost by AE with 110% mark up. vi) Adjustment for interest free ECB Loan received from AE.
The short issue that we must begin with adjudicating, so far as the above grounds of appeal are concerned, as to which is the most appropriate method for ascertainment of arm’s length price on the facts of this case. Learned representatives fairly agree that in the event of this grievance being upheld, all other issues will be rendered academic.
The material facts and circumstances of the case are like this. The assessee company is a wholly owned subsidiary of EW Limited, Mauritius- a group entity of Gulbrandsen Inc, USA and Gulbrandsen EU Limited UK inasmuch as the shareholders of EW Limited, i.e. Peter Gulbrandsen and Donald Gulbrandsen, 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 regrading 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 facts of the case, the internal 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
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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 “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”. While the TPO did not have any specific comment on this request, he simply rejected the explanation of assessee as “not accepted”. It was also explained to the TPO that the CUP method is not really appropriate to the facts of this case as the assessee has long term business arrangements with the AEs, whereas there are no such long term arrangements with non AEs and that the contractual, economic, commercial, functional and risk profile differences, between the AE transactions vis-à-vis non AE transactions, make the comparison of prices irrelevant. The attention was invited to the fact that, as also stated in OECD Guidelines for Multinational Enterprises and Tax Administrators, application of CUP method “requires high degree of comparability 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,
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on an average, 17 months advance payment for the purchases while non AEs are extended 60-90 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 AEs. None of these submissions 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) at least 50% guaranteed selling to AEs mean that the assessee is making loss and shifting the profits from India to other countries”. On reimbursement of R&D costs also, the Assessing Officer did only observe, in rather general terms, that the plea is “not acceptable because the assessee has sold the products to its AEs at very lower rate and shifted the profits from India to outside India” The same was the comment in respect of interest free ECB loans from the AEs. As for the need of adjustment on account of various factors, the TPO simply observed that “the assessee has charged very nominal margin to its AEs (and) therefore, there is no any issue for any adjustment”. He then proceeded to make the adjustment by observing as follows:
Computation of Arm’s Length Price
Product Sales to AE Sales to Sales to non-AE Difference Adjustmen Quantity (kgs) AE : uncontrolled t
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Avg. rate price rate
TTC 113800 227 253 26 2958800
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/-
It was in this backdrop that the impugned ALP adjustment was made by the Assessing Officer. Aggrieved by the arm’s length price adjustment, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) observed that “regardless of merits in the adjustments made by the appellant, fact remains that adjustments to make uncontrolled and controlled transactions comparable were possible in appellant’s case” and went on to add that “further, it is an accepted position that CUP is a superior method to other methods, if available” as “was also held in the case of Serdia Pharmaceuticals India Pvt Ltd by Mumbai ITAT (2011) 44 SOT 391 (Mum)”. Even as the learned CIT(A) held that adjustments were possible, he rejected the same, 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 free ECB loans, and all such factors. The TPO also observed that there is a huge difference between sale price of MDTC to its USA based AE and UK based AE inasmuch as the same product was sold to US based AE for Rs 412.95 and to UK based AE for Rs 370.13. 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
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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 I.T. Act. The Comparable Uncontrolled Price (CUP) for each of the 4 chemicals was determined by the TPO to be the average sale price charged by appellant to non-AEs. Each transaction of sale of chemicals to the AEs needed to be benchmarked with reference to the CUP and if the CUP exceeded the sale price to AE for a particular transaction, only then transfer pricing adjustment was warranted. TPO's approach in working out adjustment on the basis of consolidated average sale price for both AEs for MBTC & DBTO was therefore erroneous. AE-wise aggregation of transactions for each chemical for the purpose of benchmarking and working out transfer pricing adjustment is however acceptable in this case, since it does not result into an outcome different from transaction-wise benchmarking. Thus, only AE-wise segregation of sale transactions for each chemical needs to be done. Appellant's submissions in 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.
The assessee is aggrieved and is in further appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. We have also perused the detailed written submissions filed by the learned DR.
It is by now a reasonably well-established legal proposition that as long as it is reasonably possible to apply a direct method of ascertaining the arm’s length price of a transaction, such a direct method will have an edge over application of indirect method of ascertaining the arm’s length price. This principle has been reiterated in a large number of decisions of the coordinate benches, such as in the case of ACIT Vs MSS India Ltd [(2009)
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32 SOT 132 (Pune) and Serdia Pharmaceuticals India Pvt Ltd VS ACIT [(2011) 44 SOT 391 (Mum)]. 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 (TNMM). That does not, and cannot, however mean that whatever be the fact situation, CUP is always a preferred 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’s length price of the international transaction”. Rule 10C(2) further provides that in selecting the most appropriate method as specified in rule 10C(1), certain factors are to be taken into account:
(a) the nature and class of the international transaction;
(b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;
(c) the availability, coverage and reliability of data necessary for application of the method;
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(d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions;
(e) the extent to which reliable and accurate adjustments can be made to 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]
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 indeed be made. The inability to make suitable adjustments, 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.
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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 profit is to be applied on each transaction with the AEs , while, for computing the benchmark, one could take into account a series of same or similar transactions. In other words, while setting the benchmark, one can take into account several transactions with unrelated enterprise on what can be termed as 'global basis', essentially in respect of same or similar property or services though, the benchmark so arrived at cannot be applied on the global basis i.e. the average of gross profit earned from same or similar transactions with AEs. The application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of cost plus method is also evident from the plain wordings of Rule 10 B as well. Any other view of the matter will result in incongruities. For example, if our average mark up to unrelated enterprises is 20 per cent. and we charge a mark-up 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 mark-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 paper-book, 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,
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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 comparing gross profit on sales, whereas the 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]
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.
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 and Tax Administrators, it is clearly stated that application of CUP method “requires high degree of comparability 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”. In the UN Transfer Pricing Manual, it is observed that “degree of comparability between controlled and uncontrolled transactions is typically determined on the basis of a number of attributes of the transactions or parties that could materially affect prices or profits and the adjustment that can be made to account for differences” and then it is observed that “these
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attributes, which are usually referred to as the five comparability factors, include: (i) Characteristics of the property or service transferred; (ii) Functions performed by the parties taking into account 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.
We have noted huge and crucial variations in payment terms of the transactions with the AEs vis-a-vi 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 2005-06, 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 facilitate appellant’s purchases, working capital etc which, in turn, ensured uninterrupted supply to the AE”. He does accept that he was given analysis 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.
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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 AEs cannot be ignored either. There is no dispute that there is huge variations in quantities sold to the AEs vis-à-vis the quantities sold to the non-AEs but the CIT(A) has rejected the plea on the basis that “there is no consistent pattern or correlation between the volume and sale prices” and that “there is no reference to any volume discount in the agreement”. That is again a superficial approach. Whether there is a mention of the volume discount or not or whether there is always a direct relation between the prices and volumes, the fact remains that the transactions with such huge variations, as in this case, cannot be considered to be comparable transactions and that is the consistent 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, 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 the impact of absolutely fundamental variations in the terms of the intra AE and non AE transactions, and since accurate adjustments cannot be made, for this reason alone, CUP
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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.
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 good reason to deviate from the same. It is for this main reason that the application of TNMM has been declined by the authorities below. Nothing, however, turns on this plea. What is before us is the question as to which method is most appropriate method for ascertaining the arm’s length in the present year. We donot see how this question is to be adjudicated simply on the basis of what has been accepted by the assessee, on his own, as the most appropriate method in the earlier years. Such a choice of method in the earlier years, in our humble understanding, cannot act as an estoppel against the assessee. In our considered view, the decision as to what is the most appropriate method 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.
As we do so, we may also add that one of the decisions relied upon by the assessee was in the case of DCIT Vs Dishman Pharmaceuticals & Chemicals Ltd and vice versa [(45 SOT 37 (2011)]. While dealing with a subsequent year’s appeal, for the assessment year
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………… the nature of trade relationship in the sense of its impact on the functions, asset and risks assumed by the AEs which will have the crucial bearing on the prices. Unless these vital factors are taken into account, and suitable adjustments are made in the available CUP inputs, the application of CUP has no usefulness. The variations in nature of relationship affecting the FAR analysis is not even disputed by the revenue and rule 10 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”. 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. 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 Commissioner (DR) and we reject his plea that on the facts and in the circumstances of this case, CUP method is required to be applied. In any case, the issue is squarely covered by the
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decision of the coordinate benches, in favour of the assessee, and having perused these decisions and material on record, we are not inclined to take any other view of the matter than the view so taken by the coordinate benches. We have also noted that Hon’ble High Court is already seized of the matter and it is only a matter of time that Their Lordships take a call on the matter. Given this situation, even if we had any reservations on the correctness of the coordinate bench decision, which we donot have anyway, the matter could not have been referred for the constitution of a special bench and this division bench could not have taken a different view of the matter. That is what is the settled legal position. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline interfere in the matter.
We see no reasons to take any other view of the matter in this case. The decisions of the coordinate benches in the above cases hold good in the present context as well.
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.
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 been pointed out in the allocation of costs in the segmental accounts which are duly reconciled with entity level consolidated accounts. We have also noted that dealing with the Internal TNMM adopted by the assessee the TPO had expressed the view that the basis of allocating the overheads was not clear, in response to which 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
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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.
Ground nos. 2 to 5 are thus allowed in the terms indicated above.
Ground no. 6 is not pressed in view of retrospective insertion of Explanation to Section 92(2).
Ground no. 6 is dismissed as not pressed.
In ground no. 7, the assessee has raised the following grievance:
In the facts and circumstances of the case and in law, the Ld. lCIT(A) erred in not allowing the entire amount of Rs. 1,29,56,391/- as debited under the head Research and Development Expenditure in the Profit & Loss Account and claimed in the assessment proceedings as against a wrong claim of Rs. 53,76,524/- in the computation of income. The Ld. CIT(A) wrongly held that such claim could not be made without filing a revised return of income.
As far as this grievance of the assessee is concerned, the related claim for deduction was made before the CIT(A) for the first time and, as such, learned CIT(A) rejected the same on the ground that this claim should have been made by way of revised income tax returns in the light of Hon’ble Supreme Court’s judgment in the case of Goetze India Limited (284 ITR 323) but then, as learned CIT(A) has himself observed that there are binding judicial
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precedents “regarding powers of the Tribunal to admit additional grounds or claims even when no revised return was filed”. Learned representatives do not dispute the powers of the Tribunal to admit a new claim at this stage of proceedings either. In the case of NTPC Limited Vs CIT (229 ITR 383) has categorically observed that “The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law”. In view of these discussions, and bearing in mind entirety of the case, we deem it fit and proper to admit the claim of the assessee but remit the same to the file of the Assessing Officer for adjudication on merits in accordance with the law, by way of a speaking order and after giving a fair and reasonable opportunity of hearing to the assessee. Ordered, accordingly.
Ground no. 7 is thus allowed for statistical purposes in the terms indicated above.
In ground no. 8, the assessee has raised the following grievance:
In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of an amount of Rs. 3,32,012/- claimed as amortized in the accounts in complete disregard of 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.
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
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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 allowability of revenue expenditure claim cannot be denied merely on the ground that the same has been amortized or claimed for over a period of years. We accordingly accept assessee’s corresponding substantive ground and direct the Assessing Officer to delete the impugned disallowance. This substantive ground succeeds.
Consistent with the view so taken by the coordinate bench, we uphold the plea of the assessee and direct the Assessing Officer to delete this disallowance of Rs 3,32,012.
Ground no. 8 is thus allowed.
In ground no. 9, the assessee has raised the following grievance:
The Ld. CIT(A) erred in not allowing a sum of Rs. 23,14,803/- incurred as revenue expenditure holding the same to be of capital nature. The Ld. CIT(A) ought to have allowed the claim made by the appellant by treating the same as revenue expenditure.
So far as this disallowance is concerned, the disallowance pertains to expenses on account of replacement of glass line (Rs 10,25,000), Ela Battery (Rs 2,08,590), Butterfly valve size 8 (Rs 8,99,699), LPG Burner Torch (Rs 14,008), weight scale platform (Rs 70,521), Oxygen Sensor (Rs 46,058), Hydrogen Butene Sensor (Rs 29,640) and Ultrasonic Thickness Tester (Rs 21,317). These expenses were disallowed by the Assessing Officer on the ground that these expenses being capital in the nature cannot be ruled out. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) confirmed the action of the Assessing Officer by observing that “after going through the said details, it cannot be accepted that entire expenditure in question was towards repairs or replacement of parts only since some of these items were capable of independent functioning and/or
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resulting in enduring benefit otherwise over a period of more than one year”. The assessee is aggrieved and is in further appeal before us.
Having heard the rival contentions and having perused the material on record, we are inclined to uphold this plea of the assessee as well. As evidence from a plain look at the nature of expenditure, overwhelming part of the expenses is clearly in the nature of replacement and repairs and the mere fact that its benefit will be beyond one year cannot be reason enough to decline the treatment as revenue expenditure. This threshold of benefit being beyond one year for an expense to be treated as capital 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.
Ground no. 8 is thus allowed.
In the result, the appeal of the assessee is allowed.
We now take up the appeal filed by the Assessing Officer.
Grievance raised in the appeal of the Assessing Officer is as follows:
On the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) erred in restricting the addition made on account of transfer pricing from Rs. 3,91,40,456/- to Rs. 2,78,02,502/- without examining the arms length nature of this transaction and leaving un-bench marked this transaction,
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contrary to the decision of the Special Bench in the case of Aztee Software & Technology Services Ltd. 107 ITD 141 (BANG), (SB)
The relief granted by the CIT(A), which is impugned in the above ground of appeal, is on account of adjustments in computation of internal CUP prices but as, vide our order on the appeal of the assessee, we have upheld the plea of the assessee against CUP being adopted as the most appropriate method for determination of arm’s length price, this aspect of the matter is now wholly academic. The relief granted by the CIT(A) is now infructuous and irrelevant. We need not adjudicate on the same. Learned representatives also fairly agree on the proposition that in the event of the appeal of the assessee being allowed, the appeal of the Assessing Officer, against partial relief granted by the CIT(A), will be rendered infructuous.
In view of the above discussions, and in the light of the fact that the very application of CUP method on the facts of this case has been held to legally unsustainable, we reject the ground of appeal as infructuous.
The appeal of the Assessing Officer is thus dismissed.
To sum up, while appeal of the assessee is allowed, the appeal of the revenue is dismissed. Pronounced in the open court today on the 12th day of February, 2019.
Sd/- Sd/- Mahavir Prasad Pramod Kumar (Judicial Member) (Vice President) Ahmedabad, dated the 12th day of February, 2019
Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File By order
Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad