TMI Blog2014 (11) TMI 844X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the TPO - even in a situation in which the comparables were the formulas on the basis of which exact quantification for price of services was done, it could be accepted as a price for the purposes of application of CUP method of ascertaining arm’s length price - when connotations of ‘price’ under rule 10B(1)(a) are treated to include not only an amount stated in monetary terms but also a mechanism in terms of a formulae to arrive at consideration, such an interpretation is certainly a very purposive and realistic interpretation. As long as one can come to the conclusion, under any method of determining the arm’s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm’s length price - the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount - the business model adopted by the assessee, in principle, meets the test of arm’s length price determination under rule 10BA as well - the operation of rule 10BA, which confers th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year (maintained under section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962) to substantiate that its international transactions of provision/ receipt of freight forwarding services to/from AEs during the year were at arm s length, and selecting the Transactional Net Margin Method instead. Ground 3: The learned DRP and the learned AO, following the directions of the DRP, erred on facts and in law, in upholding the learned TPO s stance of disregarding the benchmarking approach adopted by the appellant in its TP documentation report for the year to substantiate that its international transactions of provision/receipt of freight forwarding services to/from AEs during the year were at arm s length, without any cogent evidence, facts or basis whatsoever. Ground 4: The learned DRP and the learned AO, following the directions of the DRP, erred on facts and in law, in upholding the learned TPO s stance of not appreciating that the pricing basis followed by the appellant in respect of its international transactions of provision/receipt of freight forwarding services to/from AEs is in line with well accepted/prevalent business models followed in the global/Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, along with its associated enterprise, offers multi modal transportation services to business to business shippers through global freight forwarding services. The company is having two types of international transactions (a) arranging import of cargo from other countries to India by air and sea transportation and delivering the same to consignees in India; (b) arranging export of cargo from India to other countries by air and sea transportation wherein consignments are picked up in India by assessee and are sent to destination as per instruction of shippers/consigners for the purpose of delivering to consignees through its associated enterprises abroad. While the assessee controls pricing to the end customers in domestic market, pricing for end customers in connection with consignment picked up abroad is essentially determined by the associate abroad. However, in line with, what are stated to be, the global practices followed by the similar companies in freight forwarding industry, the profits earned, after deducting transportation costs, by the assessee and its AEs or independent third party business associates, in respect of import and export of cargo are shared in a 50:50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt so proposed by the Assessing Officer and did raise the grievances before the Dispute Resolution Panel but without any success. It was in this backdrop that an arm s length price adjustment of ₹ 2,09,00,179 was made in the assessment order. The assessee is aggrieved and is in appeal before us. 4. We have heard the rival contention, perused the material available on record, and duly considered factual matrix of the case in the light of the applicable legal position. 5. We find that in the present case it is not really even in dispute that in this field of business activity, the 50:50 business model (i.e. the business model of sharing residual profits in equal ratio with the service provider at the other end of the transaction i.e. at the consignee s end in the case of export transaction and at consigner s end in the case of import transaction ), is a standard practice. In other words, even with respect to the transaction with unrelated parties in this line of activity, it is admitted practice to share the residual profit in equal ratio and that is precisely the assessee claimed to have been adopted with the associated enterprise as well. The trouble however is that whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n impression that unless the amount charged for similar uncontrolled transaction is the same as international transaction between the AEs, the CUP method cannot come into play. In other words, in a case in which the data is not available for price for the same product or service in an uncontrolled situation, the CUP method cannot be applied. 9. In the present case, however, admittedly, the assessee has not even made any efforts to demonstrate nor claimed that actual amount charged for comparable services rendered to, or received from, associated enterprise is the same as in the case of the independent enterprise, but the assessee s case is that the amount charged for comparable services rendered to, or received from, associated enterprise is computed on the basis of the same residual profit sharing formulae as in the case of the independent enterprise. The connotations of price , as set out in rule 10 B(1)(a) are thus required to be taken to be something much broader than the expression amount inasmuch as it is required to cover not only quantification of price in terms of an amount but also in terms of a formulae according to which the price is quantified. The question that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had produced agency agreements between the Geologistic group and unrelated parties which are substantially the same and that the profit split information contained in all the agreements (50:50) is typical of the industry, i.e. standard formulae for logistics and freight forwarding service providers . Learned CIT(A) was of the view that the TPO had ignored this crucial aspect of the business as well as orders of his predecessors and hence arrived at an erroneous finding . Learned CIT(A) also referred to, and relied upon, decision of the Tribunal in the case of ACIT Vs MSS India Pvt Ltd (25 DTR 119) in support of the proposition that TNMM should be applied only when standard methods, such as CUP, fail. He thus concluded that, a valid CUP exist for benchmarking the international transaction in this case as conditions are identical and that To sum up, the appellant s contention on CUP method supported with third party agreements and the understanding of the comparable level of functions performed, asset used and risk borne by the original company and the destination company has merit. As such I am in agreement that the risk and rewards of the business is to be shared in 50:50 rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agents and third parties affiliates. However, TPO did not accept this plea. In appeal, learned CIT (A) upheld the stand of the assessee. When Assessing Officer carried the matter in further appeal, a coordinate bench, adjudicating upon the grievances so raised by the Assessing Officer, held as follows: 6. The short controversy before us is to determine the ALP in respect of transactions between the assessee and its AEs towards receipt/payment of freight. The assessee shared profit in the ratio of 50:50 both on the payments made by it and the receipts of freight from its AEs. We have perused the submissions and the finding of the learned CIT (A) on the functions performed, assets employed and risk undertaken by both the AEs in such transactions. The learned DR could not controvert such finding that the functions performed, assets employed and risk undertaken in both the AEs is same. The assessee paid certain sum to its AEs abroad for doing the work similar to which it did for which it received freight revenue from its AEs. The crux of the matter is that in both the situations, the total receipts are taken on one hand, from which all the expenses incurred in connection with the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat does not dilute our highest respect for these judicial precedent s from the coordinate benches. 15. It is useful to bear in mind the fact that as against the use of expression amount in the US Transfer Pricing Regulations (Interestingly, unlike the reference to price as a comparator in the Indian TP regulations, OECD Transfer Pricing Guidelines and UN Transfer Pricing Manual, US transfer pricing regulation 482-3(b) refers to amount as a comparator as it states that, (t)he comparable uncontrolled price method evaluates whether the amount charged in a controlled transaction is arm's length by reference to the amount charged in a comparable uncontrolled transaction .) dealing with CUP analysis, which have pioneered transfer pricing legislation worldwide, our domestic transfer pricing regulation, as against the OECD Transfer Pricing Guidelines (OECD Transfer Pricing Guidelines 2010 recognizes mechanism of CUP method, in paragraph 2.13, as (t)he CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services in a comparable uncontrolled transaction in comparable circumstances ) and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these examples could be the reality that t he expression price , in certain situations, extends well beyond the specific amounts. In certain business models, a business associate performs the services in consideration of sharing residual profits in a certain manner, and, as such, the price for those services would be this share in the residual profit. 18. Viewed thus, the stand taken by the authorities that CUP cannot be applied in such cases, because of non availability of data in terms of comparable amount having been charged for the same service, loses its relevance. Be that as it may, for the reasons we will set out in a short while, even this aspect of the matter may be somewhat academic at this stage. 19. It is also important to bear in mind the fact that what we are dealing with at present is a classic case in which while there is no, and there cannot be any, dispute, even at the assessment stage, that the terms at which the assessee has entered into the arrangements with the AEs are the same as the terms at which the assessee has entered into arrangements with the independent enterprise, there are still some procedural issues, with regard to application of methods of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not adapting the rules and methods prescribed in this regard. This might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction. A water-tight attitude of interpretation of the prescribed methods will defeat the very purpose of enactment of transfer pricing rules and regulations and also detrimentally affect the effective and fair administration of an international tax regime . [Emphasis by underlining supplied by us] 22. Viewed thus, adopting a pedantic approach in determination of arm s length price, which serves letter of the law but leads to the conclusion diametrically opposed to the spirit of the law, has to be deprecated. We are in considered agreement with this school of thought. To that extent, the methods of determination of arm s length prices have to be essentially implemented in a reasonable and pragmatic manner so as to achieve its laudable objectives without any collateral damage. 23. The lawmakers have also not been oblivious of this compelling need of a certain degree of flexibility in the methods of determining arm s length price. Central Board of Direct Taxes, vide notification dated 23rd May 2012, has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process of determining the ALP and that whenever a direct method of ascertaining arm s length price can be used, it should be preferred over an indirect method. In view of these discussions, method under rule 10BA, which is a direct method of ascertaining arm s length price- as is the case with Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM) and Cost Plus Method (CPM), has an inherent edge over indirect methods such as Transactional Net Margin Method (TNMM) and Profit Split Method (PSM) . 25. In effect, thus, it would appear that as long as one can come to the conclusion, under any method of determining the arm s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm s length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression price which .would have been charged on paid is used in rule 10BA, dealing with this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be retrospective in nature. Their Lordships also noted that this retrospectively being attached to benefit the persons, is sharp contrast with the provision imposing some burden or liability where the presumption attaches towards prospectivity. 27. It may appear to be some kind of a dichotomy in the tax legislation but the well settled legal position is that when a legislation confers a benefit on the taxpayer by relaxing the rigour of pre-amendment law, and when such a benefit appears to have been the objective pursued by the legislature, it would a purposive interpretation giving it a retrospective effect but when a tax legislation imposes a liability or a burden, the effect of such a legislative provision can only be prospective. What logically follows from the law so settled by a constitutional bench of Hon ble Supreme Court, is that the operation of rule 10BA, which confers the benefit of an additional method of ascertaining arm s length price and, inter alia, relaxes the rigour of CUP method, can only be retrospective in effect. In our considered view, therefore, rule 10BA is to be held as effective from 1st April 2002, i.e. the time when transfer pricing provisions were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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