TMI Blog2015 (1) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... sole or decisive factor - the assessee was producing the same products for its AEs as it was producing for independent enterprises but that was all so far as similarities were concerned - The FAR profile was not the same, the contract terms were not the same, the economic circumstances were not the same and the business strategies were not the same - necessary precondition for application of CPM, i.e. finding normal mark up of profit in comparable uncontrolled transactions, could not have been fulfilled - when uncontrolled transactions were not comparable, the normal mark up on profit on such transactions could not have been relevant either. The authorities below were not justified in holding that the cost plus method was the most appropriate method on the facts of this case - one of the necessary ingredient for application of CPM, i.e. normal mark up of profit in the comparable uncontrolled transactions- whether internal or external, was not available as no comparable uncontrolled transactions were brought on record by the authorities below - What was brought on record as an internal comparable uncontrolled transaction, i.e. manufacturing for the domestic independent enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tated to be ascertainment of ALP on the basis of the TNMM. It appears that in an alarming number cases, these audit reports, rather than painting a true and fair picture of the relevant facts, tend to epitomize the art of constant hedging and manoeuvring by the professionals so as they stay within the confines of permissible professional conduct and are yet able to sidestep the inconvenient realities. - I.T.A. Nos. 5648, 5649 and 5650/Del/12, I.T.A. Nos. 5987, 5988 and 5989/Del/12, I.T.A. No. 5224/Del/10 - - - Dated:- 31-12-2014 - I. C. Sudhir JM And Pramod Kumar AM,JJ. For the Appellant : Kanchan Kaushal, alongwith Ravi Sharma and Sankalp Sharma For the Respondent : Peeyush Jain ORDER Per Pramod Kumar AM: 1. Out of these seven appeals, first six appeals are cross appeals, filed by the assessee as also the Assessing Officer, against a consolidated order dated 11th September 2012 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as the Act ], for the assessment years 2003-04, 04-05 and 05-06. The seventh appeal is assessee s appeal against order dated 29th October 2010 passed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction capacity, the assessee also produced the same products for its AEs abroad. So far as the assessment year 2003-04 is concerned, the transfer pricing study noted that the assessee s operating loss has come down from 76.21% to 39.17% due to reduced capacity underutilization, and that it was so done with the help of exports to AEs abroad. The TP study, inter alia, noted as follows: The losses were on account of lack of demand in the domestic market and substantial underutilization of existing capacity. However, the loss has decreased during the year due to improvement in the capacity utilization. Wrigley India has produced 554 metric tonnes during the financial year ended on March 2003 as against installed capacity of 1951 metric tonnes i.e. a capacity utilization rate of 28 percent. The improvement in the capacity utilization as compared to 12 percent is on account of increased demand in the export market. Breakeven analysis portrays the relationship between the cost of production, volume of production and the sales value. The breakeven point is the level of sales at which the company would neither earn profit nor incur losses. Based on the information made available to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate method, on account of inconsistency in cost accounting practices between the comparable uncontrolled transaction and controlled transaction . Ironically, even as the assessee was admittedly following cost plus method of billing to the AEs, the cost plus method was rejected for determination of the arm s length price. Be that as it may, as none of these direct method were found to be most appropriate method for determining the arm s length price and as Profit Split Method (PSM) was also found unsuitable for the reason that neither it was a case of transfer of unique intangibles nor a situation dealing with multiple inter-related transactions which cannot be separated , the assessee finally resorted to the Transactional Net Margin Method (TNMM), for want of applicability of all other methods of ascertaining the arm s length price, for benchmarking its sales transactions with the AEs. The assessee thus adopted TNMM with operative profit on operating cost (OP/OC) as the profit level indicator. The assessee selected eight comparables, namely Britannia Industries Limited, Cadbury India Limited, Cremica Agro Foods Limited, Parry s Confectionary Limited, Priya Food Products Ltd, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic sales. It was noted that the assessee had achieved 41.29% of mark upon costs so far as its domestic sales was concerned, and, accordingly, the arm s length price of the products exported to AEs should also have been cost plus 41.29%. It was on this basis that an ALP adjustment of ₹ 2,71,55,592 was recommended in the TPO s order. Similar ALP adjustment, based on the same reasoning and on materially similar facts- barring the variations in figures, were also required by the TPO s orders for the assessment years 2004-05 and 2005-06. 8. In 2006-07, there were some noticeable deviations in the TP study but conclusions remained the same. The TP study specifically mentioned, as pricing policy, that for sale of goods made by the Wrigley India, the company changes on Cost Plus (cost plus 7.5%) basis to the AEs in respect of goods sold to them and that the costs include direct and indirect costs relating to the manufacture of goods . It was also noted that since the Wrigley Group deals in FMCG sector which is characterized by impulsive buying by the consumers, heavy expenditure is required to be made on planning and execution of sales promotion and that these expenditure we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised by the appellant is that the Tribunal did not examine the submission of the appellant that in the succeeding years, i.e. 2007-08, 2008-09 and 2009-10, the Transactional Net Margin Method (TNMM) has been accepted by the Transfer Pricing Officer as the most appropriate method, as against the Cost Plus Method which had been adopted in the present year i.e. 2006-07. It is also been submitted by the learned counsel that in respect of the assessment years 2004-05 and 2005- 06, appeals were pending before the CIT(A) when decision of the DRP as well as the Tribunal in the present case were announced. Subsequently, the CIT(A) has decided the appeals in respect of assessment years 2004-05 and 2005-06 by adopting he Cost Plus method. The appellant has filed appeals in respect of those assessment years which are now pending before the Tribunal. It is contention of the learned counsel that the present matter be remitted to the Tribunal so that all the years could be considered by the Tribunal and a decision could be arrived at as to which is the most appropriate method, namely, whether it is Cost Plus method or whether it is Transactional Net Margin Method. .. we feel that since the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit markup in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm s length price in relation to the supply of the property or provision of services by the enterprise 16. The fundamental input for application of CPM method, next only to ascertainment of historical costs, is ascertainment of the normal mark-up of profit over aggregate of such direct costs and indirect costs in respect of same or similar property or services in a comparable uncontrolled transaction or, of course, a number of such comparable uncontrolled transactions . When compared with CUP method, as against the price of a comparable uncontrolled transaction, one has to find out normal mark up of profit in a comparable uncontrolled transaction. Whether it is price or normal mark up of profit , the starting point of both these exercises in the CUP and the CPM is finding a comparable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esponsibility . 19. In our humble understanding, the answer has to be an emphatic No .The two situations, i.e. sale simplictor of a FMCG product for an overseas AE without any costs being incurred on the marketing and sales promotion amongst the end users, and sale of a FMCG product to a domestic independent enterprises with full responsibilities for marketing and sales promotion amongst the end users, are not comparable transactions in the sense that profitability in the latter cannot be a proper benchmark for profitability in the former. It i s not only in the marketing and sales promotion that the difference lies, but it extends to the fundamental business model itself particularly as the sale is not to an end user, such as in the cases of plant and equipment etc, but to an intermediary who, i n turn, has to sell it to, through yet another tier or tiers of intermediaries, the end user. The sale of products to the non-resident AEs is more akin to contract manufacturing arrangement, while the sale of products to independent enterprises domestically is a regular business entrepreneurial venture. As a matter of fact, it has been one of the arguments of the assessee before us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... underlining, supplied by us] 21. The UN Transfer Pricing Manual, elaborating upon the comparability analysis and which is broadly on the same lines as OECD Transfer Pricing Guidelines in this respect, states as follows: 5.1.5. A controlled and an uncontrolled transaction are regarded as comparable if the economically relevant characteristics of the two transactions and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm s length result. It is recognized that in reality two transactions are seldom completely alike and in this imperfect world, perfect comparables are often not available. It is therefore necessary to use a practical approach to establish the degree of comparability between controlled and uncontrolled transactions. To be comparable does not mean that the two transactions are necessarily identical, but instead means that either none of the differences between them could materially affect the arm s length price or profit or, where such material differences exist, that reasonably accurate adjustments can be made to eliminate their effect. Thus, in determining a reasonable degree of comparability, adjustments may need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrolled transactions were brought on record by the authorities below. What was brought on record as an internal comparable uncontrolled transaction, i.e. manufacturing for the domestic independent enterprises, was uncomparable as the FAR profile was significantly different. Undoubtedly, direct methods of determining ALP, including cost plus method, have an inherent edge over the indirect methods, such as TNMM, but such a preference can come into play only when appropriate comparable uncontrolled transactions can be identified and analysed accordingly. That has not been done in the present case. There is, therefore, no good reason to disturb the TNMM method adopted by the assessee. We have also noted that the TPO himself has accepted the TNMM for the assessment years 2007-08, 2008-09 and 2009-10. Learned Departmental Representative does not dispute that the facts for all these assessment years are similar in material respects. For this reason also, there was no good reason to disturb the ALP determination on the basis of TNMM in respect of the assessment years before us, i.e. 2003-04, 2004-05, 2005-06 and 2006-07. 24. Having held so, we must also point out that the transfer pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red view, are so much devoid of credibility that, instead of deciding the things one way or the other, we have no choice except to remit the matter to the file of the TPO for fresh ascertainment of ALP on the basis of residuary method, i.e. TNMM. 25. In these circumstances, while we hold that, on the facts of this case, the ALP of international transactions with the AEs is to be determined on the basis of TNMM and we vacate the impugned ALP adjustments on the basis of CPM, we also hold that the matter is required to be examined afresh by the TPO in the light of our above observations. We also make it clear that the assessee will be at liberty to justify the ALP determination under the TNMM on such basis as he may deem appropriate and to make all such submissions and to furnish all such evidences in support of thereof, as he may deem fit and proper, and that the TPO will be required to deal with such contentions, submissions and evidences, by way of a speaking order, in accordance with the law and after giving a fair and reasonable opportunity of hearing to the assessee. 26. Accordingly, so far as the transfer pricing issue in all these appeals is concerned, while we uphold th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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