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Income Tax Appellate Tribunal, DELHI BENCH ―I-2‖: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
These are the two appeals pertaining to one assessee for different years involving common facts; therefore, those were argued together and disposed of by this common order.
ITA number 441/Del/2017 is filed for AY 2012-13 by the assessee (M/s TRL Riceland private limited (formerly known as Tilda Riceland private limited) against the order passed by The Additional Commissioner Of Income Tax, Special Range – 9, New Delhi (The Learned Assessing Officer/AO) passed u/s 143 (3) read with Section 144C (13) of The Income Tax Act, 1961 (The Act) on 20/11/2016 which incorporated the adjustment proposed by the Learned Additional Commissioner Of Income Tax, Transfer Pricing Officer – 3 (2) New Delhi [ the Ld TPO] as per order u/s 92CA (3) of the Act dated 30/11/2016 on which the learned Dispute Resolution Panel – 2, New Delhi [ Ld DRP] passed its direction on 10/05/2016 and thereafter Assessment order was passed. Ld TPO proposed adjustment to the international transaction of the sale of Rice amounting to ₹ 2,422,889,000/–, arm’s-length price of which was determined by the learned Transfer Pricing Officer at ₹ 2,670,216,194 making the proportionate adjustment u/s 92CA(3) of the Act of ₹ 193,657,087/- which was confirmed by the learned Dispute Resolution Panel. This is the only dispute in this appeal. 3. Assessee has raised the following grounds of appeal in Assessment Year 2012-13:- “Impugned Assessment Order dated 29.11.2016 passed under section 143(3) read with section 144C of the Income-tax Act, 1961 („the Act‟) pursuant to directions of Dispute Resolution Panel under section 144C(5) of the Act dated 10.10.2016, is erroneous and not in accordance with provisions of law inter- alia on the following Grounds, which are without prejudice to each other:
1. Ld. AO / TPO / DRP have erred in making an addition of INR 19,36,57,087/- under chapter X of the Act.
2. Ld. AO/ TPO/ DRP have erred in law in facts and circumstances of the present case by rejecting application of Comparable Uncontrolled Price („CUP‟) method as the most appropriate method and further in not deleting the adjustment under Chapter X.
3. Ld. AO/DRP have erred in not considering application of CUP method and not dealing with objections to approach adopted by TPO.
4. Ld. AO/ TPO/ DRP have erred in law in facts and circumstances of the present cases by applying Transactional Net Margin Method („TNMM‟) method as the most appropriate method.
5. Ld. AO / TPO / DRP have erred by not accepting the economic analysis undertaken by Appellant and in accepting / rejecting comparables by applying incorrect filters and comparability criteria.
6. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case by applying inappropriate filters for selection/ rejection of comparables.
7. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case, by wrongly selecting/ rejecting certain comparables in the final list of comparables and computing incorrect margins for these comparables.
8. Ld. AO/ TPO/ DRP have erred in law and in facts in considering gain/ loss foreign exchange fluctuations as „non-operating‟ in nature.
9. Ld. AO/ TPO/ DRP have erred in law and in facts in not granting adjustment for difference in capacity utilization of Appellant and comparable companies and adjustment for unabsorbed fixed asset cost of Appellant.
10. Ld. AO has erred by alleging that the Assessee has furnished inaccurate particulars of income, thereby proposing to initiate penalty proceedings under Section 271(1)(C) of the Act. The above grounds are independent and without prejudice to each other. The Appellant craves to leave to add, withdraw, amend or vary the above grounds of appeal before or at the time of hearing.”
4. Brief facts of the case shows that assessee is engaged in the business of paddy purchases, rice milling and export of rice. The range of Basmati rice products manufactured by the assessee includes Traditional and evolved (raw and sella) Page | 2 Browne Basmati rice, raw and sella milled Basmati rice. It caters the principal market in European Union and Middle East. Approximately, it is stated that 75% of its production has been exported and remaining are sold in the domestic market through a network of distributors. For the impugned assessment year assessee filed its return of income on 29th of 5. November 2012 declaring loss of ₹ 34,82,54,122. The case of the assessee was picked up for scrutiny and as assessee has entered into an international transaction, the case of the assessee was referred to the learned transfer pricing officer for determining arm’s-length price of the international transaction. The assessee has entered into international transaction of sale of Basmati rice of Rs. 183,95,38,249 and also sale of non-basmati [ Sona Massoorie] rice of Rs 5,52,31,625 which was stated to be at arm’s-length by adopting the Most Appropriate Method [ MAM] of Comparable Uncontrolled Price [CUP] method. For this Analysis for sale of rice assessee relied on the daily export data of April 2011 to March 2012 which was procured from customs and compiled in TIPPS database. The assessee claims that the database provides quantum, Price, date, quantity and the type of rice exported by parties in India to parties in European Union, Middle East and North America. Assessee also claims that in its transfer pricing study it has given due consideration for the product differences, geographic differences and eliminated the same by considering data for similar variety of rice being exported to similar destination. Thus it was stated that the international transactions entered into by the assessee are at arm’s-length.
The learned transfer pricing officer examined the transfer pricing study report of the assessee and by order dated 30 January 2016 proposed an adjustment of ₹19,36,48,433 to the arm’s-length price of the transaction related to sale of Basmati rice rejecting the use of CUP method as the most appropriate method. He proposed transactional net margin method [ TNMM] as the most appropriate method. He also modified the comparability analysis submitted by assessee using the transactional net margin method. He identified seven comparable companies who have the average operating margin of 6.92% on operating profit and computed the assessee’s operating margin at (-) 2.99%. Since the operating margin of the assessee was lower than the operating margin of the comparable companies, he computed the arm’s-length price of the Basmati rice sold and found that it is understated by a sum of ₹ 193,648,433/– and therefore this adjustment was proposed.
Based on this the draft assessment order was passed on 3 March 2016 incorporating the above adjustment. The total income of the assessee was assessed in the draft assessment order at the loss of ₹ 154,597,035 against the returned loss of ₹ 348,254,122.
The assessee filed an objection before the learned dispute resolution panel – 2, New Delhi. The learned dispute resolution panel with respect to the most appropriate method conquered with the view of the learned transfer pricing officer in rejecting the CUP method as most appropriate method and held that transactional net margin method is the most appropriate method. The reason given by the learned dispute resolution panel was that CUP requires high degree of comparability between the controlled and uncontrolled transaction and further the product data compiled in the tips database even after making some adjustment did not give reliable results and therefore it would not be appropriate to compare the adjusted CUP data with the controlled transaction. Thus the adoption of the most appropriate method of transactional net margin method was upheld. It was further held that since there is a need to find a reasonable number of comparables and that transactional net margin method is a method which is more accommodative whereas liberal export turnover ratio is appropriate, export turnover filter adopted by the learned transfer pricing officer at the rate of 25% against the request of the assessee to move up to 50% was also upheld. The DRP also upheld the comparables and also directed the learned transfer pricing officer to examine the claim of the assessee with respect to some of the comparables. It dismissed the ground of capacity utilisation adjustment as same was not substantiated on the basis of audited reliable data. Accordingly the findings of the learned transfer pricing officer was upheld. Based on this the final assessment order u/s 143 (3) read with Section 144C (13) of the act was passed on 29/11/2016. 9. During the course of assessment proceedings, assessee filed application dated 28 July 2019 the assessee has made a request for admission of an additional ground of appeal as Under:- ―that on the facts and circumstances of the case and in law, for the application of CUP method, benefit of set of be allowed, for the value of international transactions where the appellant has transacted at a price higher than the arm’s- length price with the transactions wherein the appellant’s transaction value was lower than ALP.‖ Page | 4
10. The assessee submits that the relevant facts for deciding the above-mentioned grounds are already on record and does not require any fresh examination of the facts and therefore it should be admitted.
On the merits of the case the learned authorised representative submitted that the only issue that arises in this appeal is what is the most appropriate method for determining the arm’s-length price of the export of rice made by the assessee. He submitted that assessee has adopted CUP as the most appropriate method, whereas the learned transfer pricing officer and DRP has held that transactional net margin method is the most appropriate method. He submitted that this issue is covered in favour of the assessee by the decision of the coordinate bench for assessment year 2008 – 09 in assessee’s own case. He referred to the order of the coordinate bench in assessee’s own case wherein it has been held that for assessment year 2008 – 09 CUP is the better method and the tips database was held to be proper. He further submitted that the order for that year of the coordinate bench was dragged before honourable High Court where only issue was with respect to the most appropriate method which has been admitted by the honourable High Court and is pending for decision. Be that as it may, but in fact the order of the coordinate bench covers the issue in favour of the assessee for assessment year 2008 2009 that the CUP method is the most appropriate method. He submitted that there is no change in the facts and circumstances of the case and therefore same should be followed. He referred to page number 18 of the order the learned transfer-pricing officer wherein the issue of the coordinate bench decision in assessee’s own case for earlier year was pointed out to him but it was stated that as the revenue is before the honourable High Court, he adopted transactional net margin method as the most appropriate method. 12. He further submitted that assessee has raised an additional ground of appeal
for granting of the set of losses, where the assessee has shown high sale price compared to the benchmark sale price. It was stated that subsequent to the decision of the coordinate bench in assessee’s own case for assessment year 2008 – 09 on 21. February 2014, honourable Delhi High Court in case of Sony Ericsson upheld claim for set off of such claim of losses Against those transactions which are below the ALP. He made specific reference to paragraph number 140 of that decision. He stated that this development was brought to the notice of the learned transfer pricing officer and the learned dispute resolution panel also, however same was disregarded. Therefore he stated that Page | 5 the assessee prays for appropriate direction to work out the CUP on principle approved by the honourable jurisdictional High Court. He further referred to the decision of the coordinate bench in ITA number 2064/del/2014 in case of SRF Ltd where identical issue has been decided. He further submitted that this issue has been raised before the learned transfer pricing officer which is demonstrated at page number 19 of the order of the learned transfer pricing officer but same has not been considered.
13. He further referred to page number 149 of the appeal set wherein a table is placed demonstrating the sale of goods by assessee to its associated enterprise showing value and the quantity. The learned authorised representative stated that for the purpose of working out the difference the learned transfer pricing officer has taken the highest price of industry for the day to benchmark the price of the assessee and thereafter has worked out the difference. He referred to the last column of the table, l where the differences worked out and stated that where there is no difference the learned transfer pricing officer has not considered the negative but has only made an addition of the positive items.
14. The learned departmental representative vehemently objected the argument of the assessee and relied heavily upon the orders of the lower authorities. Coming to the order of the coordinate bench in assessee’s own case for assessment year 2008 – 09 he made a specific reference to paragraph number 18 of the order wherein the approach of the assessee of determining arm’s-length price of its transaction with the associated enterprise by comparing average export price by the assessee to its AEs with the average uncontrolled export price. The coordinate bench held that it is patently incorrect method. He further referred that the coordinate bench held that it is not open to the assessee to compare the average price and his transaction with associated enterprise with average price in uncontrolled transaction. He further referred to paragraph number 19 of that order stating that where the assessee has excluded exceptionally high prices in the cup method was not accepted and the determination of ALP was restored to the file of the assessing officer. With respect to the claim of the assessee to get set-off of the price where it is higher than the arm’s-length price it was submitted that it is Saddled with many issues as assessee is selling highest quality as per statement of the assessee itself. Any adjustment that is to be made has to be in the framework of the law.
We have carefully considered the rival contention and perused the orders of the lower authorities. Page | 6
Firstly coming to the additional ground raised
by the assessee we find that this is a legal ground raised by the assessee, no fresh facts are required to be investigated, we admit the same.
17. The only issue in this appeal is a matter of dispute between the assessee and the revenue is that whether the most appropriate method for determining the arm’s-length price should be CUP method as adopted by the assessee or transactional net margin method as determined by the learned transfer pricing officer and upheld by the learned dispute resolution panel. We find that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee’s own case [[2014] 42 taxmann.com 400 (Delhi - Trib.) When the coordinate bench with respect to the most appropriate method has held as Under:- “11. We have noted that the information inputs given by the Tips Software, on the facts of this case, are inputs with regard to the information publicly available with the customs department at the different ports. These inputs are not the independent 'quotes', as referred to by the TPO, but only compilation of the data available in public domain. In our considered view, the Transfer Pricing Officer was clearly in error in rejecting these inputs on the ground that such information is not covered by Rule 10D(3) for the simple reason that Rule 10D(3) is only illustrative in nature and it merely describes the information, required to be maintained by the assessee under section 92D, "shall be supported by authentic documents, which may include the following (i.e. documents specified therein)". The logic employed by the Transfer Pricing Officer is that since databases compiled by private entities is not included in rule 10 D(3), such databases cannot be relied upon by the assessee. This logic is clearly fallacious inasmuch as an item not being included in illustrative list of required documents does not take outside the ambit of 'acceptable document' for the required purposes. In any event, all that Tips Software does is to collect the data, compile the same in easy to refer format and make it available to the end-user of such data online (www.tipsexim.com) or on electronic media, but this data, nonetheless, is public data maintained by the customs department at various ports. It was also open to the Transfer Pricing Officer to, if he had any doubts, call for further information from this database supplier and examine authenticity of the data so furnished. Yet, instead of doing so, he summarily rejected the data as unreliable on a technical ground which, as we have seen above, is not tenable in law.
We have also seen that the information so furnished by the database used by the assessee is fairly comprehensive information, including description and prices as per invoices presented to customs - a fact noted by the TPO himself, which can be cross-checked and verified, in case of doubts. The TPO has, at page 11 of the transfer pricing order, himself stated that "the product data compiled in the TIPS database is taken from customs data relating to rice, but also specifies the variety and brand of basmati/ non basmati-rice". In these circumstances, the vague doubts expressed by the TPO on the relevance of this database are clearly unfounded. His action is incorrect in law as indeed inappropriate to the facts of this case. Therefore, in our considered view, the Transfer Pricing Officer was clearly in error in rejecting the information inputs received from the Tips Software and the database made available by the said entity. The DRP laid so much of emphasis on the observation that the assessee has "not been able to rebut the argument of the TPO that Rule 10D(3) does not allow the use of private databases" but did not note of the glaringly illustrative, rather than exhaustive, character of the documents listed in the said rule. As a quasi-judicial authority, and while pursing the goal of justice, one cannot remain at the mercy of the wisdom of representatives of the parties appearing before such an authority; it is bounden duty of every quasi-judicial authority to appreciate the scope of the legal provisions and apply them in letter and in spirit. We uphold the grievance of the assessee to the extent the authorities below have indeed erred in summarily rejecting assessee's reliance on the database, with respect to information publicly available with customs department at various ports, compiled by a private entity.
As regards learned DRP's additional observation that, "Further, in a commodity like Basmati rice, it is very difficult to find the exact comparables which can meet the stringent standards required for application of CUP method", we are unable to see any merits in this approach either. Undoubtedly, product comparability should be closely examined in applying the CUP Method as a price may be materially influenced by differences between the goods in the controlled and uncontrolled transactions, but product comparability does not require the comparables to be exactly the same. The product categorization has been done on the basis of reasonable generic description, and the product being generic in nature, such categorization in reasonable and sufficient. Generic goods, even under different brand names, do not cease to be comparable with each other- unless the impact of brand or other intangibles is so substantial that it distorts the comparison altogether. In any event, even if there are minor variations in prices of generic goods, such Page | 8 factors are adequately taken care of by average in the case of large size of comparables, as is the situation before us. As noted in the UN Transfer Pricing Manual for Developing Countries, with which we are in considered agreement, "the CUP Method is appropriate especially in cases where an independent enterprise buys or sells products that are identical or very similar to those sold in the controlled transaction …. ". It would, therefore, indeed seem that for the purpose of applying CUP method would be, a reasonable classification, which could justifiably define the prices, would suffice. We have also noted that the assessee has done categorization of basmati rice, as evident from pages 352 and 253 of the transfer pricing study filed before us, in three broad geographical categories and seven sub-categories, and of non- basmati rice in four broad geographical categories and six sub- categories. Let us also not forget that the classification is done on the basis of geographical markets and normally the products sold in a geographical market, due to sheer competitive forces, are broadly similar. It is also useful to refer to certain observations made in UN Transfer Pricing Manual, with which we are in considered agreement, to the effect that "External comparables may be difficult to find in practice unless the transactions involve a fairly common and homogeneous product or service. However, the advantages of the CUP Method are great enough to warrant a significant effort to apply the method as not to be influenced by minor variations in the fine points about product quality". Viewed thus, even if there be some minor variations in the quality even under the elaborate categorization of rice varieties, such variations, which do-not materially affect the prices of uncontrolled transactions due to large size of comparables and the same geographical consumption market being covered by the comparables, can be ignored.
As for rejection of CUP method on the ground that prices of uncontrolled transactions often fluctuate on weekly and even daily basis. The TPO himself has noted in his order, the assessee did not have any contractual arrangement and these were market driven prices on which the exports to AEs took place. It is also important to bear in mind the fact that the assessee has taken average of a quarter so as to ensure that day-to-day variations in prices do not distort the comparability. Neither there is any specific objection to this averaging, nor has the TPO suggested any better alternative to this approach. In our humble understanding, this method does provide for a reasonable, even if not perfect, solution to the distortion which may creep in case comparison of prices is done on day-to-day basis, and due to Page | 9 limited comparables being available for the same. Transfer Pricing is not a perfect science but we still have to choose a less imperfect alternative from the various alternatives available.
15. Coming to the inherent edge that direct methods have over indirect methods of determining the arm's length principle, which justifies selection of CUP method as the most appropriate method, we may refer to the following observations made by a coordinate bench in the case of Serdia Pharmaceuticals (P.) Ltd. (supra): '60. The thrust of learned counsel's arguments is that since transfer pricing legislation does not provide for any order of preference in selection of the most appropriate method, no such order of preference—direct or implied, can be exercised by us either.
This issue is no longer res integra. In the case of Asstt. CIT v. MSS India (P.) Ltd. (2009) 32 SOT 132 (Pune), a Co- ordinate Bench of this Tribunal, speaking through one of us (i.e. the AM), had, inter alia, observed that "While there is no particular order or priority of methods which the assessee must follow, and no method can invariably be considered to be more reliable than others, on a conceptual note, transactional profit methods (i.e., TNMM and profit split method) are treated as methods of last resort which are pressed into service only when the standard methods, which are also termed as 'traditional methods' (i.e., CUP method, resale price method and cost plus method) cannot be reasonably applied". It was noted by the Coordinate Bench that the OECD Guidelines also recognize this approach, and the Bench expressed its considered agreement with this approach. We are in considered agreement with the views so expressed by the Co-ordinate Bench. In our considered view, the traditional transaction methods have an inherent edge over the traditional profit methods in most of the situations, and, therefore, wherever both the methods can be applied in an equally reliable manner, traditional transaction methods are to be preferred over traditional profit methods.
We are alive to the fact that in the 2010 version of OECD Guidelines, OECD has done away with hierarchical approach in selecting the method for determination of ALP. The OECD has abandoned its earlier position that transactional profit methods may be used "to approximate arm's length conditions when traditional transactional methods cannot be reliably applied alone, or exceptionally cannot be applied at all". In sharp contrast to the said Page | 10 observation, 2010 OECD Guidelines, in para 2.4, recognize that "there are situations when transactional profit methods are found to be more suitable (vis-a-vis traditional transactional methods)" such as, in a situation, "where each of the party makes a unique contribution in relation to controlled transaction, or where the parties engage in highly integrated activities". This change in OECD approach is quite in line with Indian transfer pricing legislation which requires selection of most appropriate method rather than the method being picked up in the order of priority. To this extent, the approach of OECD and Indian transfer pricing legislation is now quite in harmony with each other.
It will, however, be stretching the things too far to suggest that in the 2010 version of OECD Guidelines, all the methods of determining the ALP have been placed at par with each other. The change in the OECD Guidelines, as we see it, is in respect of the order in which suitability of the methods is to be considered and in recognition of the fact that there can be situations in which transactional profit methods can have an edge over traditional transactional methods. However, wherever transactional profit methods as also traditional transactional methods can be applied in equally reliable manner, the OECD Guidelines still consider the traditional transactional methods to be preferable, as is evident from following observations in para 2.3 of the OECD Guidelines 2010 : "2.3 Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between AEs are at arm's length. This is because any difference in the price of a controlled transaction from the price of a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the AEs, and the arm's length conditions can be established by directly substituting the price in comparable uncontrolled transaction for the price of the controlled transaction. As a result, where, taking into account the criteria established in para 2.2, a traditional transaction method and a tradition profit method can be applied in a equally reliable manner, the traditional transaction method is to be preferred over traditional profit method. Moreover, where, taking into account the criteria established in para 2.2, the CUP method and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred… " Page | 11
In other words, therefore, even as there may not be any order of preference in which methods of determining the ALP must be considered, the traditional transaction methods, and particularly CUP, have an edge in the sense that all things being equal, CUP and traditional transaction methods are preferred over the transaction profit method. We are broadly in agreement with these views. Whether we proceed on the basis that there is an order of preference in which transfer pricing methods are to be applied, or whether we proceed without any such priority order, the fact remains that as long as CUP method can be reasonably applied in determining the ALP of an international transaction in a particular fact situation, and unless another method is proven to be more reliable a method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. The reason is simple. When AEs enter into a transaction at such conditions in commercial and financial terms, which are different from commercial and financial terms imposed in comparable transaction between independent enterprises, the differences in these two sets of conditions in financial and commercial terms are attributed to inter-relationship between the AEs, and it is this impact of inter-relationship between the AEs that is sought to be neutralized by the transfer pricing regulations. As long as CUP method can be reliably applied on the facts of a case, it does offer most direct method of neutralizing the impact of interrelationship between AEs on the price at which the transactions have been entered into by such AEs.' 16. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the ALP determination under CUP Method on the basis of 'Daily Export Port Data - April 2007- March 2008', by adopting quarterly averages, was wrongly rejected by the TPO and the DRP.‖
Both the parties agreed that there is no change in the facts and circumstances of the case. In view of the above facts and respectfully following the decision of the coordinate bench in case of the assessee itself for assessment year 2008 – 09 we hold that CUP method is the most appropriate method for benchmarking the international transactions of the assessee. Accordingly on this issue we reverse the orders of the learned transfer pricing officer as well as the direction of the learned dispute resolution panel. Accordingly, ground numbers 2 – 4 of the appeal are allowed.
19. In view of our decision in the above ground number 2 – 4 of the appeal, the ground number 5 – 9 does not require any adjudication. Further ground number 10 is against the initiation of the penalty proceedings which is premature in nature and therefore same are dismissed.
Now we come to the additional ground raised
by the assessee stating that where the cup method is adopted, assessee should get benefit of set of where the assessee is has transacted at a price lower than and arm’s-length price. We find that this issue is also been considered by the coordinate bench in assessee’s own case for assessment year 2008 – 09 in paragraph number 18 and 19 of the order as Under:-
18. The first thing we have noticed is that the assessee has determined arm's length price of its transactions with the AEs by comparing average export price by the assessee to its AEs with the average uncontrolled export price. This approach is patently incorrect inasmuch as while under rule 10B (1)(a)(i), it is indeed open to compute ALP on the basis of price charged in a comparable controlled transaction or 'a number of such transactions', but the arm's length price so computed is, under rule 10B(1)(a)(iii), taken as arm's length price in respect of property transferred in the international transaction. The expression 'the international transaction' referred to in rule 10B(1)(a)(iii) is used in singular and does not permit taking into account, unlike rule 10B(1)(a)(i), 'a number of such transactions'. While averaging is thus permissible for the uncontrolled transactions, each international transaction is to be taken on standalone basis. In our humble understanding, it is not open to the assessee to compare the average price in his transactions with AEs with average price in uncontrolled transactions. Dealing with a somewhat similar issue, though in the context of cost plus method of ascertaining the arm's length price, a coordinate bench of this Tribunal, in the case of Asstt. CIT v. Tara Ultimo (P.) Ltd. [2011] 47 SOT 401/13 taxmann.com 184 (Mum.), has explained this principle 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 CPM is also evident from the plain wordings of r. 10B 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 Page | 13 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 p. 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, the assessee has shown a margin as high as 27 per cent. The CPM, 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. In view of these discussions, the CIT(A) was in error in upholding assessee's computation of ALP by CPM."
The second thing that we has been noticed is that the assessee has excluded exceptionally high prices. In our considered view, the CUP method does not allow exclusion of high priced sale instances, unless such high prices could be explained by differences of product or commercial terms. In any event, exclusion of extreme cases, such as in quartile ranges, is normally not permissible under the scheme of determination of ALP under the CUP method. However, we do not wish to give any findings, as assessee has not been given effective opportunity of hearing on this issue, in this respect beyond stating that we are remitting the matter to the file of the Assessing Officer for fresh determination of arm's length price under the CUP method, and while so determining the ALP, the observations made above, as also in preceding paragraphs, shall be duly considered. During the course of our hearing, this proposition was put to the learned representatives, and learned representatives fairly agreed to accept these directions. In effect, thus, the CUP method is upheld in principle but the determination of ALP, under the CUP method, is restored to the file of the Assessing Officer in the light of our observations above.”
Further we have gone through the manner of determining the arm’s-length price by the learned transfer pricing officer. He has compared the F of the value of a particular date of international transaction of the assessee and compared it with the highest price of industry for the day. We do not find any logic to compare the highest price of the day of the industry. We find that assessee has exported Page | 14 a specific quality of rice i.e. Sona Masoori and given the date wise detail. Further we also find that when the goods are exported on 29th of April 2011, the learned transfer pricing officer has taken the same rate which he has taken for 26 April 2011. Further the claim of the assessee is that they are interlinked transactions and therefore they should be clubbed together. The assessee has relied upon the decision of honourable Delhi High Court 2015] 55 taxmann.com 240 (Delhi)/[2015] 231 Taxman 113 (Del.) wherein it has been held as Under:- 144. Question of set off would only arise in case two transactions are separate and arm's length price should be computed separately. It would not arise for consideration in cases where there are closely linked or continuous international transactions. Yet, there may be a third category of cases, where the assessee perceives and files his report in form 92E treating the international transaction as one or as continuous or an interconnected package, but the Revenue perceives and believes that the transaction is not one, but should be segregated for the purpose of computation of arm's length price. For the present reasoning, we will assume and accept that the position of the Revenue is correct and the 'aggregation' made by the assessee is wrong. In such cases, it would be grossly unfair and inequitable not to apportion or segregate the transactions as declared in a reasonable and logical manner. It would be conspicuously wrong and incorrect to treat the segregated transactional value as 'NIL' when in fact the two AEs had treated the international transactions as a package or a single one and contribution is attributed to the aggregate package. It is noticeable that sub-section (3) to Section 92 does not make reference to the computation of the form 92E but makes reference to the books of account and computation on the basis of the entries in the books of account. It stipulates that the computation made under sub-section (2) or (2A) shall not have effect of reducing the income or increasing the losses as declared on the basis of the said entries. Income or loss is the net figure which is computed after taking into account the business activities undertaken by the assessed AE which will have reference to the declared bundled/packaged international transaction.”
However as we have upheld that the cup method is the most appropriate method for determination of the arm’s-length price, and the whole issue set- aside to the file of the learned assessing officer, the assessee may raise this issue before the learned transfer pricing officer at the time of three determination of the arm’s-length price. Therefore this ground of appeal is also set-aside to the file of the learned assessing officer/transfer pricing officer where the assessee is at liberty to raise the above issue. The learned transfer pricing officer may examine the claim of the assessee after giving a proper opportunity
of hearing. In the result additional ground raised by the assessee is allowed for statistical purposes.
23. In the result appeal of the assessee is allowed for statistical purposes.
24. The Assessee has raised the following grounds of appeal in for Assessment Year 2013-14:- Impugned Assessment Order dated 30.06.2017 passed under section 143(3) read with section 144C of the Income-tax Act, 1961 („the Act‟) pursuant to directions of Dispute Resolution Panel under section 144C(5) of the Act dated 05.05.2017, is erroneous and not in accordance with provisions of law inter- alia on the following Grounds, which are without prejudice to each other:
1. That on facts and circumstances of the case and in law, final assessment order passed by the Assessing Officer (“AO”) is in complete disregard of the provisions of Section 144C(13) of the Income tax Act, 1961 (the “Act”) inasmuch that the AO failed to pass the said Order in conformity with the binding and mandatory directions issued by the Dispute Resolution Panel (“DRP”) and consequently the Order is nonest, illegal and bad in law.
2. Ld. AO / TPO / DRP have erred in making an addition of INR 16,98,96,186/- under chapter X of the Act in respect of international transaction pertaining to sale of rice.
3. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case by rejecting application of Comparable Uncontrolled Price („CUP‟) method as the most appropriate method and further in not deleting the adjustment under Chapter X in respect of international transaction pertaining to sale of rice.
4. Ld. AO/DRP have erred in not considering application of CUP method and not dealing with objections to approach adopted by TPO in respect of international transaction pertaining to sale of rice.
5. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present cases by applying Transactional Net Margin Method („TNMM‟) method as the most appropriate method in respect of international transaction pertaining to sale of rice.
6. Ld. AO / TPO / DRP have erred by not accepting the economic analysis undertaken by Appellant in respect of international transaction pertaining to sale of rice.
7. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case by considering companies that are not comparable to the Appellant in respect of international transaction pertaining to sale of rice.
8. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case in applying an export turnover filter of 25% as against 50% proposed by the Appellant without providing any cogent reasons.
9. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case by not making suitable adjustments to account for differences in the working capital of the Appellant vis-a-vis the comparable companies without providing any cogent reasons.
10. Ld. AO / TPO erred in finalizing the assessment without giving effect to the directions of the DRP in gross violation of the provisions of Section Page | 16 144C(13) of the Act by not allowing capacity utilization adjustment as directed to be allowed by the DRP.
11. Ld. AO/ TPO/ DRP have erred in law and in facts and circumstances of the present case by not making suitable adjustment for unabsorbed fixed cost of Appellant.
12. Ld. AO/ TPO/ DRP have erred in law and in facts in by using single year data instead of multiple year data and determining the arm‟s length margins / prices using data pertaining only to FY 2012-13.
13. Ld. AO erred on facts and in law in making an addition of INR 16,99,68,743 to the book profits of the Appellant for the purposes of Section 115JB of the Act and thereby assessing the book profits of the Appellant at INR 5,73,80,449 without appreciating that book profits of a company cannot be adjusted except as provided in Explanation 1 of Section 115JB(2) and transfer pricing adjustment is not one of the classes of adjustments provided in that explanation.
14. Ld. AO erred on facts and in law in making an addition of INR 16,99,68,743 to the book profits of the Appellant without appreciating that such addition was not proposed in the draft assessment order.
15. Ld. AO has erred by alleging that the Appellant has furnished inaccurate particulars of income, thereby proposing to initiate penalty proceedings under Section 271(1)(C) of the Act.”
Both the parties agreed that the facts of this case are identical to the facts in the case of the assessee for assessment year 2012 – 13. They submitted that there arguments are also similar and the bone of contention is the most appropriate method. As we have already held following the decision of the coordinate bench in assessee’s own case for assessment year 2008 – 09, while deciding the appeal of the assessee for assessment year 2012 – 13 that CUP is the most appropriate method for determination of the arm’s-length price of the international transaction. For similar reasons and with similar direction we hold so and set-aside whole issue back to the file of the learned transfer pricing officer to determine the arm’s-length price of the international transaction adopting the cup method. The assessee is at liberty to raise all the issues with respect to the computation and determination of ALP Under that method.
Therefore, the appeal of the assessee for assessment year 2013 – 14 is also allowed for statistical purposes.