THE DCIT, CIRCLE-1(1)(1), VADODARA vs. GULBRANDSEN CHEMICALS PVT. LTD, VADODARA

5."Whether in facts and circumstances of the case as well as in law, the Ld.CIT(A) was justified in allowing adjustments of saving in selling and marketing cost in respect of TEAL products claimed by the. assesses which is contrary to the provisions of Rule I OH 6. "Whether in facts and circumstances of the case as well as in law, the Ld. CIT(A) was justified in allowing the transaction of sale of TEAL Chemical to Reliance Industries Ltd., as comparable uncontrolled transactions for benchmarking the transaction of sale of Teal chemical products by assessee to ABs ?" 7. "Whether in facts and circumstances of the case as well as in law, the Id. CIT(A) was justified in rejecting the TPO's approach of price comparison in foreign currency value of international transaction without appreciating the fact that the price compared in foreign currency is actual value and the price determined in Indian Rupee have impact of currency conversion rate and there by the same is contrary to the provisions of Rule 10B of Income Tax Rules. "

8. Whether in facts and circumstances of the case and in law, the Ld, CIT(A) was justified in allowing benefit of ALP price range of+/- 5% claimed by the assessee which is contrary to the provisions of section 92C(2) of Income Tax Act ?" 9. "Whether in facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the adjustment made by the TPO amounting Rs.1,76,49,394/- on account of benchmarking of sales promotion and marketing services availed by assessee claimed to have been paid by the assessee ?"

10. "Whether in facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the facts that the assessee had failed to benchmark the transactions with Us AE as per Law thereby failing to discharge the primary onus cast upon it by the Act ?" 11. "Whether in facts and circumstances of the case and in law, the Ld. CIT(A) was justified in allowing aggregation of transaction which is contrary to the provisions of section 92 C of the Income Tax Act and Rule WA to 10C of 'the Income Tax Rules ?" 12. "Whether in facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition of Rs.11,17,079/- towards excess depreciation claimed on the ground that the cost of plant and machinery was required to be reduced, despite the said addition was in consonance to the provisions of section 43A of the I. T. Act, 1961." 4. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.

4.1 However, the TPO was not satisfied with the working of the assessee on the reasoning that the arm length price should be calculated with respect to sales of different chemicals made to the associated enterprises. As such, the TPO has not allowed the aggregation of the sales of different chemicals made by the assessee to the associated enterprises. Thus, the TPO adopted the cup method for determining the ALP for each product separately and independently. As such the TPO calculated the upward adjustments to be made with respect to the sales made to the associate enterprises for ₹ 1,26,30,767.00 which was added to the total income of the assessee.

5. Aggrieved assessee preferred an appeal to the learned CIT-A who deleted the upward adjustment made by the TPO/AO by observing that the ITAT in the own case of the assessee for the assessment years 2009-10 and 2010-11 in & 1216/AHD/2017 has directed to adopt the TNMM as the most appropriate method.

6. Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.

9. 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 AC1T Vs MSS India Ltd [(2009) 32 SOT 132 (Pune) and Serdia Pharmaceutical India Pvt Ltd VS ACIT 1(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(!) 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; (d) the degree of comparability existing between the international 'transaction and the uncontrolled transaction and between the 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]

13. When comparing the prices of products sold in intra AE transactions vis-a-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 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. 14. 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 dearly 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. 15. It is also important to bear in mind the undisputed fact that the AE had an obligation to buy at least 50% of its products and the assessee was reseller rather than an end user. These contractual terms and the difference in functions also seriously affect the comparability. The reasons given by the CIT(A) for rejecting these variations are wholly superficial and devoid of any legally sustainable merits. The variations in quantities between the AEs and the non AEs cannot be ignored either. There is no dispute that there is huge variations in quantities sold to the AEs vis-a-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 a/so 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 alt. We cannot consider the price of the product in isolation with a/I 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 Rule 10 B(l)(a)(H) 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 method ceases to be workable on t/?e 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 Serdis 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.

12. Since there is no disparity on facts, more particularly, when the Id.CIT(A) has not made any detailed analysis except putting reliance upon the order of his predecessor in the Asstt. Year 2007-08 and 2008-09, therefore, we are of the view that the issue is squarely covered in favour of the assessee by the order of the Tribunal passed in the Asstt .Year 2008-09 (supra). Respectfully following the order of Co- ordinate Bench, we delete the impugned ALP adjustment of Rs.7,99,59,176/-. Since we have upheld the computation of ALP of international transaction of sale of finished goods according to TNMM method, consequently, ground no.1 and 2 of the Revenue’s appeal would be redundant.” The decision being binding in nature, the same has been considered for disposing the ground raised by the appellant. Since, the facts in the present case are identical in the assessment year under consideration, hence, respectfully following the decision of the Hon’ble Tribunal, the addition made on this count is deleted. The appellant succeeds on Ground no.1 & five sub grounds.

9.1 Before us, no material has been placed on record by the ld. DR to demonstrate that the decisions of Tribunal that were followed by the Ld.CIT(A) while dismissing the appeals of Revenue have been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. In view of the above, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed.

10. The next issue raised by the Revenue in ground Nos. 9 to 11 is that the learned CIT- A erred in deleting the addition made by the AO/TPO for ₹ 1,76,49,394.00 representing the marketing commission expenses which was taken as nil.

11. The assessee in the year under consideration claimed to have incurred an expense of ₹1,76,49,394.00 in the name of the associated enterprises which was monitoring/ tracking the activities of the assessee. However the AO/TPO was of the view that such activity of the associated enterprises is in the nature of shareholder activity. Furthermore, there was no detail furnished by the associate enterprises relating to the expenses incurred by it for monitoring/tracking the activities of the assessee. Accordingly, the AO/TPO held that there was no need to incur any expense in the name of marketing commission and therefore the same was disallowed by way of upward adjustment of ₹ 1,76,49,394.00 which was added to the total income of the assessee.

12. Aggrieved assessee preferred an appeal to the learned CIT-A who deleted the upward adjustment made by the TPO/AO by observing that the ITAT in the own case of the assessee for the assessment years 2009-10 and 2010-11 in & 1216/AHD/2017 has directed to adopt the TNMM as the most appropriate method.

14. Both the learned DR and AR before us vehemently supported the order of the authorities below as favourable to them.

I have carefully considered the material facts and also the decision the Hon'ble ITAT. The issue is identical and the facts are also identical, The Hon'ble ITAT vide its order in & 1216/AHD/2017 for the AY 2009-10 and AY 2010-11 held that TNMM is the most appropriate method in the case of sales commission and granted relief accordingly. The relevant part of the order is reproduced as under:

"20. We, have duly considered rival submissions and gone through the record carefully. As far as first fold of, contention is concerned, the Id. TPO cannot question the requirement of services and a/so to ascertain rendering of services. His jurisdiction is confined to quantification of ALP. We find that this aspect is squarely covered by the decisions referred by the Id. counsel for the assesses, more particularly, decision of Hon 'b/e Bombay High Court in the case of Lever India Exports Ltd. (supra) as we/1 as the decision of Hon 'b/e Delhi High Court in the case of CIT Vs. Cushman and Wakefield (supra). Apart from the above, we find that the assessee has produced evidence in the shape of agreement between it and the AE showing that AE would charge commission at the rate of X%''0n non-AE export sales/for rendering these services. The assesses has not debited other-expenditure for marketing and sales with regard sales made to non-AE. It is a/so pertinent to note that turnover of the assessee has increased with regard to non-AE sales a/so. Its export sales to non-AE have increased from Rs.9 crores approx. in F.Y.2005-06 to Rs,44.56 crores in the F. Y.2008-09. Therefore, taking into consideration the complete details, we are of the view that no adjustment been made at the recommendation of the TPO on this issue because it was not in the jurisdiction of the TPO to question requirement of services, and also ascertain rendition of services, and on these two reasoning, he cannot benchmark the ALP of these services at NIL. It is also pertinent to observe that In A.Y.2Q10-11, assessee has paid Rs. 160,16,780/- to its AE for these services and that transaction was referred to the TPO The Id TPO did not recommend any adjustment in A.Y.2010-11. Therefore, no adjustment is required in the Asstt. Year 2009-10. We allow this ground a/so, and delete adjustment recommended at Rs.2,24,01,998/-." The decision being binding in nature, the same has been considered for disposing the ground raised by the appellant. Since, the facts in the present case are identical in the assessment year under consideration, hence, respectfully following the decision of the Hon'ble Tribunal, addition made on this count is deleted. The appellant succeeds on Ground No.2 and also sub grounds.

15.1 Before us, no material has been placed on record by the ld. DR to demonstrate that the decisions of Tribunal that were followed by the Ld.CIT(A) while dismissing the appeals of Revenue have been set aside / stayed or overruled by the higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of earlier years nor has placed any contrary binding decision in its support. In view of the above, we do not find any infirmity in the order of the learned CIT-A. Hence the ground of appeal of the revenue is hereby dismissed.

16. The issue raised by the Revenue in ground No. 12 is that the learned CIT-A erred in deleting the addition made by the AO for Rs. 11,17,079.00 representing the excess depreciation claimed by the assessee.

17. The AO during the assessment proceedings found that the assessee was given reimbursement of capital expenses in the earlier years amounting to ₹ 1,42,66,483.00 but the assessee has not reduced the same from the cost of the plant and machineries. Thus, it was found that the assessee has claimed excess depreciation in the earlier years as well as in the year under consideration. The amount of excess depreciation for the year under consideration was calculated by the AO at Rs. 11,17,079.00 which was disallowed and added back to the total income of the assessee.

18. Aggrieved assessee preferred an appeal to the learned CIT-A who deleted the upward disallowance made by the AO by observing that the ITAT in the own case of the assessee for the assessment years 2007-08 in & 917/AHD/2015.

19. Being aggrieved by the order of the learned CIT-A, the Revenue is in appeal before us.

20. Both the learned DR and AR before us vehemently supported the order of the authorities below as favourable to them.

15. In view of the above discussion, we allow this ground of appeal. Since, the facts are identical in the present case, respectfully following the order of the Tribunal, the addition on this count is hereby deleted. The appellant succeeds on Ground no.3.

Order pronounced in the Court on 11/05/2022 at Ahmedabad.