I.T.A. No.: 6279/Del/2012
Assessment year: 2008-09
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IN THE INCOME TAX APPELLATE TRIBUNAL,
DELHI I BENCH, NEW DELHI
[Coram : Pramod Kumar AM and Rajpal Yadav JM]
I.T.A. No. : 6279/Del/2012
Assessment year: 2008-09
Tilda Riceland Pvt Ltd ………………….Appellant
Eros Corporate Towers, Level 15
Nehru Place, New Delhi 110 019
[PAN : AAACU0649N]
Vs.
Assistant Commissioner of Income Tax
Circle 16(1), New Delhi …………….…Respondent
Appearances by:
Deepak Chopra, for the appellant
Peeyush Jain and YK Verma, for the respondent
Date of concluding the hearing : December 24, 2013
Date of pronouncing the order : February 21, 2014
O R D E R
Per Pramod Kumar:
1. This is an appeal fi led by the taxpayer against the assessment order
dated 15 t h November 2012 passed by the Assessing Officer under section
143(3) r.w.s. 144 C of the Income Tax Act, 1961 ( hereinafter referred to
as ‘the Act’) , for the assessment year 2008 -09.
2. The core issue that we are required to adjudicate in this appeal is
whether or not the Assessing Officer was justif ied in making an arm’s
length price (ALP) adjustment of Rs. 26,07,70,513 under section 92 C of
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the Act. To decide this core issue, we also have to deal with the question
as to which method, on the facts and in the circumstances of this case, is
the most appropriate method of determining the ALP, and certain applied
aspects relating to ALP determination mechanism under such a method.
For the records, however, we deem it appropriate to reproduce the
grievances raised by the appellant, as set out in the me morandum of
appeal, as follows:
1. The learned Assistant Commissioner of Income Tax Circle -
16(1), New Delhi (“the Assessing Officer” or the “AO”) / Hon’ble
Dispute Resolution Panel (“DRP”) have erred in confirming the order
passed u/s 92CA(3) of the Income Tax Act, 1961 (“Act”) making an
addition of Rs.26,07,70,513 to the total income of the appellant on
account of adjustment in the arm’s length price determined by the
learned Transfer Pricing Officer (“TPO”) and the arm’s length price
determined by the Appellant for the international transaction
entered into by the appellant with its associated enterprises.
2. The DRP has erred in concurring with findings of the AO/TPO
and disregarding the economic analysis undertaken by the appellant
for establishing the arm’s length price of the international
transactions without appropriate justification and mechanically
relying on the order under section 92CA(3) of the Act passed by the
TPO.
3. The TPO/AO/DRP have erred in law and on facts of the case in
rejecting Comparable Uncontrolled Price (CUP) Method as the Most
Appropriate method (MOM) and subsequently applying Transactional
Net Margin Method (TNMM) as the MOM over the CUP Method as
adopted by the appellant for the purpose of benchmarking its
international transactions with its associated enterprises.
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4. (a) The TPO/AO have further erred in law on facts of the case
in applying, and DRP has erred in confirming, an export turnover
filter of 25% while applying TNMM as the MOM, as against 50%
proposed by the Assessee, without providing any cogent reasons for
the same.
(b) Further the TPO/AO/DRP has erred in rejecting the one
company (‘RT Exports Ltd. ’) identified by the TPO in the show cause
notice, without providing cogent reasons.
5. The DRP has erred in law on the facts of the case in excluding
entire ‘Other Income’ amounting to Rs.85,030,000 while computing
the operating margin of the Assessee without appreciating that a
significant portion of the ‘Other Income’ is intrinsically linked to the
business operation of the Assessee and hence should be considered as
part of the operating income.
6. The TPO/AO/DRP have erred in law and on facts of the case in
not allowing appropriate adjustments for difference in working
capital employed by the Appellant vis -à-vis the comparable
companies.
7. The TPO/AO/DRP have erred in law and on facts of the case in
not allowing appropriate adjustments for granting the adjustment
for difference in the capacity utilization and excess depreciation of
the Assessee vis-à-vis the comparable companies.
8. The TPO/AO/DRP have erred in not computing the adjustment
proportionate to the value of international transactions.
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9. The DRP/TPO/AO have erred in not providing the benefit of the
arm’s length range as provided under provis o to Section 92C for
purpose of computing the arms length price under Section 92F of the
Act.
10. That on facts and in laws, the AO erred in holding that the
Appellant has furnished inaccurate particulars of income in respect
of each item of disallowance /additions and in initiating penalty
proceedings under section 274 read with section 271 of the Act.”
3. The relevant material facts are as follows. The assessee before us
is an exporter of brown basmati rice and milled basmati rice to its
associated enterprises. The assessee procures paddy, stores, processes/
mills, packs and exports various kinds of rice. During the relevant
previous year, the assessee’s exports of basmati rice and non -basmati
rice to the AEs was Rs 367,50,02,759 and Rs 7,48,79,4 75 respectively. It
is not in dispute that the orders placed by the AEs were priced on the
basis of market trends, and that, during the relevant previous year, there
were no fixed price contracts. In the course of the assessment
proceedings, the determination of arm’s length price of these
transactions with the AEs was referred to the Transfer Pricing Officer.
The TPO noted, as set out in his order dated 25 t h October 2011, that the
transfer pricing approach adopted by the assessee was as follows:
The assessee exports different varieties of rice, viz traditional
basmati rice, evolved basmati rice, raw milled basmati rice,
sella milled basmati rice , raw brown basmati rice, sona maoori
rice and permal rice to countries in European Union, United
States and Middle Eastern countries. The assessee has accepted
CUP as the most appropriate method. The comparison has been
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done between the prices charged by the assessee and rates
prevailing in the international market as reported in “Daily
Export Port Data- April 2007 to March 2008” compiled by TIPS
Software Services Pvt Ltd, Mumbai. On the basis of comparison,
it has been established that both the prices are similar and,
therefore, the transactions are at an arm’s length.
4. As for the nature of comparables r elied upon in the transfer pricing
study, it was stated by the assessee that “ for industry data, we looked
for the information from publicly available data on the similar
transactions entered into by the unrelated parties in India ” , that “
(w)e obtained and relied on the ‘Daily Export Port Data – April 2007-
March 2008’ (hereinafter referred to as ‘database’) compiled by Tips
Software Services Pvt Ltd Mumbai with respect to export of Basmati
Rice from India to EU, ME, and North America/ US and export of ot her
varieties of rice, viz. Sona Masoori and Permal Rice to North
America/ US, ME” and that “the database provides quantum, price,
date, quantity and the type of rice exported by parties in India to
parties in EU, ME and North America ”. The exports were categorised on
the basis of different products and different markets and in the light of
manner and format in which data was available. While applying the CUP
method, transactions with regard to the organic rice were eliminated as
pricing of organic rice commands a premium vis -à-vis non organic rice.
The transact ions in units other than MTs and quantities less than 10 MTs
were also eliminated. The average price was adopted on quarterly basis
since monthly average could result in distortions due to fewer
comparables and extraneous factors.
5. This approach, however, did not find favour with the Transfer
Pricing Officer. He observed that the working of arm’s length price,
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which was done by adopting the quarterly average prices and adjusting
the same for tolerance band of + 5%, is based on certain filters, and that
“while applying CUP, it is essential that the comparability between
controlled and uncontrolled transactions should not be only judged
from the point of view of product comparability, but should also take
into consideration the effect on price of other broader business
functions”. It was also noted that “ where differences exist between
controlled and uncontrolled transactions or between the enterprises
undertaking these transactions, it may be dif ficult to determine
reasonable accurate adjustments to eliminate the effect on price ”.
The Transfer Pricing Officer was further of the view that the assessee has
relied upon the data furnished by Tips Software Services Pvt Ltd but the
said company “ is a private company and the quotes (given by Tips
Software) are not covered within the provisions of Rule 10D(3)”. The
TPO was further of the view that “ the criteria adopted for arriving at
the CUP price by the assessee, in its TP report, shows that the filter s
have been applied to arrive at CUP ”, that “as per the provision in the
income tax statute and several decisions of higher appellate bodies,
it is inferred that under CUP method, stringent comparability is
required” and that “transactions cannot be compar ed if there are
geographical differences, differences in quality of products ”. The TPO
also noted that there are various adjustments made to the CUP data on
account of factors like adopting quarterly analysis, eliminating
transactions with extra ordinary h igh prices etc. It was in this backdrop
that the TPO required the assessee to show cause as to why the CUP data
not being reliable, the TPO should not reject the CUP as most appropriate
method on the facts of this case. The TPO then proceeded to refer to
TNMM for being applied to this case and the comparable date for that
purpose.
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6. It was contended by the assessee that the CUP, being a direct and
traditional method, is preferable over an indirect method like the TNMM .
Reliance was placed, in support o f this proposition, on judicial precedents
in the cases of ACIT Vs MSS India Pvt Ltd (123 TTJ 657), Serdia
Pharmaceuticals Pvt Ltd Vs ACIT (136 TTJ 129) , Clear Plus India Pvt
Ltd Vs DCIT (ITA No. 3944/Del/2010), and Coastal Energy Pvt Ltd Vs
ACIT (12 ITR Trib 347).
7. The TPO was, however, of the view that in terms of the OECD
Guidelines, an uncontrolled transaction is comparable to a controlled
transaction, for the purpose of CUP met hod and where products are not
exactly the same, only if either none o f the differences between the
transactions being compared or between the enterprise undertaking
those transactions could materially affect the price, or, if where
differences do affect the price , reasonably accurate adjustments could be
made to eliminate the effect of such differences. He also referred to rule
10C(2)(e) of the Income Tax Rules 1962, in selecting the most
appropriate method, the extent to which reliable and accurate
adjustments can be made for differences is an important factor in
selecting the most appropriate method. While the TPO did note that “ the
product data compiled in the TIPS database is taken from custom
data relating to rice, but also specifies the variety and brand of
basmati/ non basmati rice” , the TPO was of the view that ‘ brand’ of rice
was an important factor which cannot be quantified for adjustment. He
observed that. “the adjustments carried out by the assessee to the
price of the uncontrolled transaction cannot quantify the price
which ‘Tilda’ brand would command in th e markets in EU countries,
USA, Middle East compared to any other brand in TIPS data ”. The TPO
was of the view that , “ the characteristics of the property being such that
even economic adjustment, like the value of the brand, cannot bring on
parity the controlled and uncontrolled transaction, then such
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uncontrolled transactions would not be comparable by application of CUP
method”. While rejecting the application of CUP method on the facts of
this case, the TPO concluded as follows:
As the characteristics of these goods vary specially because of
the brand name associated with each of various varieties of
rice, in such a situation, economic adjustments cannot bring on
parity between the controlled and uncontrolled transactions,
such uncontrolled transact ion applied by the assessee is not
comparable by using the CUP method, and, hence, rejected .
8. The TPO then proceeded to determine the arm’s length price on the
basis of the Transactional Net Margin Method (TNMM) on the entity level,
but, for the reasons we will set out in a short while, it is not really
relevant to take note of the facts so far as this aspect of the matter is
concerned. Suffice to note that based on TPO’s ALP determination under
the TNMM and on the basis of comparables of some entitie s engaged in
similar activity, an adjustment of Rs. 26,07,70,513 was finally made by
the Assessing Officer. The assessee did take up, inter alia, grievance
against rejection of CUP method before the Dispute Resolution Panel, but
without any success. The DRP rejected this grievance, and, while doing so,
observed as follows:
We have considered the contentions of the assessee. As
mentioned above, the data relied by the assessee has been
obtained from database maintained by a private company. 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.
Further, in a commodity like Basmati rice, it is very difficult to
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find the exact comparables which can meet the stringent
standards required for application of CUP method. The price of
rice varies depending on the area where it is grown, the
variety, the aroma and size of the rice grains. The same variety
grown in Dehradun would fetch a different price as compared to
that grown in Punjab or Haryana. The price also fluctuates from
time to time almost on weekly basis. Therefore, this Panel is in
agreement with the opinion of the AO that CUP is not the most
appropriate method to be used in this kind of business.
Accordingly, these grounds of objection s are rejected.
9. The assessee is aggrieved, inter alia , of rejection of the CUP method
on the facts of this case, and is in appeal before us.
10. We have heard the rival contentions, perused the material on
record and duly considered factual matrix o f the case in the light of the
applicable legal position.
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 10 D(3) is
only illustrative in nature and it merely describes the information,
required to be maintained by the assessee under section 92 D, “ shall be
supported by authentic documents, which may include the following (
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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 i llustrative 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, in stead 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.
12. 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 custom 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
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Rule 10D(3) does not allow the use of private databases” but did not
note of the glaringly i llustrative, 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 authoriti es 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.
13. As regards learned DRP’s additional observa tion 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 shoul d 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, d onot 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 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
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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 class ification, 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 geo graphical 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 donot
materially affect the prices of uncontrolled trans actions due to large size
of comparables and the same geographical consumption market being
covered by the comparables, can be ignored.
14. 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 en sure that day
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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 limited comparables being available for the same.
Transfer Pricing is not a perfect science but we stil l 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 Pvt Ltd Vs ACIT (136 TTJ 139) :
60. The thrust of learned counsel’s argume nts 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.
61. This issue is no longer res integr a. In the case of Asstt. CIT
vs. MSS India (P) Ltd. (2009) 123 TTJ (Pune) 657 : (2009) 25
DTR (Pune)(Trib) 1 : (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 t here 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
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(i.e. , TNMM and profit split method) are treat ed 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 Co -
ordinate 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.
62. 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 transa ctional 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 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
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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.
63. It will , however, be stretching the things too far to suggest
that in the 2010 version of OECD Guid elines, 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 esta blishing 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 di rectly
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
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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….. .. . ."
64. 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 transacti on 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 witho ut 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
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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 inter -
relationship 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 reje cted by the TPO
and the DRP.
17. However, having held that the CUP method is indeed the most
appropriate method on the facts of this c ase, and that the compilation of
daily exports port data does constitute a reasonable source of inputs, we
have to point out some apparent errors, which came to the light during
the course of hearing before us, in the application of this method.
18. The first thing we have noticed is that the assessee h as 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 10 B (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 10 B(1)((a)(ii i) is used in
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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 ACIT vs Tara Ultimo Pvt
Ltd (143 TTJ 91) , 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 transact ions. 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 arr ived 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 -upto
unrelated enterprises is 20 per cent, and we charge a mark -up
of 2 per cent in one transaction with AE and 3 8 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
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mark-up resulting in an ALP. In this particular cas e, 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
19. 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
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quartile ranges, is normally not pe rmissible under the scheme of
determination of ALP under the CUP method. However, we donot 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 o ur 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 restore d to the file of the Assessing Officer in
the light of our observations above.
20. As we have approved the application of CUP method in principle, on
the facts of this case, we see no need to deal with the issues relating
application of TNMM method and t he comparables selected for the said
purpose. All those issues are academic in the present context.
21. In the result, the appeal is allowed for statistical purposes in the
terms indicated above. Pronounced in the open court today on 21s t day
of February, 2014.
Sd/xx S d/xx
Rajpal Yadav Pramod Kumar
(Judicial Member) (Accountant Member)
New Delhi, the 21s t day of February, 2014
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Copies to : (1) The appellant
(2) The respondent
(3) D R P
(4) CIT(A)
(5) Departmental Representative
(6) Guard File
By order etc
Deputy/ Assistant Registrar
Income Tax Appellate Tribunal
Delhi benches, New Delhi
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