TMI Blog2008 (1) TMI 445X X X X Extracts X X X X X X X X Extracts X X X X ..... which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. If the taxpayer wishes to take foreign AE as a tested party , then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer. As noted, the taxpayer has carried out several separate transactions with 17 AEs situated in different continents. It could have been appreciated if a particular entity in a particular country was sought to be computed with some similar entity in that very country as geographical situations in several ways influence the transfer pricing. It is quite evident that Assessing Officer did not apply his mind or carry any inquiry or investigation. Therefore, his order was erroneous insofar as prejudicial to the interest of the revenue. The Commissioner therefore was fully justified in exercising his power under section 263 and in setting aside the assessment with directions to re-do the exercise of transfer pricing. However, Shri Vohra vehemently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing and made an assessment without application of mind. Accordingly, powers by Commissioner under section 263 were rightly exercised. Even if for the sake of argument, it is accepted that reference to TPO is not mandatory and instructions not binding; on peculiar facts of this case, as discussed, the assessment made without application of mind for purposes of section 263 was erroneous and prejudicial to the interest of the revenue. The ld. CIT rightly exercised his jurisdiction under section 263 in this case. Cases relating to non-application of provision of section 144B or other procedural errors stand on a different footing as basic jurisdiction to make assessment rests with the Assessing Officer. There is marked difference between purpose of transfer pricing regulations and scheme involved in section 144B, now deleted. At any rate, we have referred in detail to statutory provisions and material on record to show that assessment made was erroneous and prejudicial to the interest of the revenue. We, therefore, do not find any substance in above argument of Shri Vohra. Commissioner u/s 263 has power to, pass such order thereon as the circumstances of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 with directions to the Assessing Officer for the fresh determination of Arm's Length Price of international transaction with AEs in the light of his directions. 2. The facts of the case are that the tax-payer is a multinational company carrying on the business of manufacture and sale of pharmaceutical products as one of the leading concerns in India. It submitted its return disclosing income of Rs. 3,30,64,05,014 for assessment year 2004-05 (F.A. 2003-04). The tax-payer admittedly carried international transactions worth Rs. 1435,03,46,825 to which provision of transfer pricing was attracted in the relevant year. This figure was disclosed in the audit report filed in Form 3CEB along with the Return. A copy of said report is available at page 1-14 of the paper book of the tax-payer placed before the Appellate Tribunal. The Assessing Officer took up the assessment and examined various questions involved in the case of the tax-payer under section 35B, 35(2AB) and 35(2AA) and under Chapter VI-A etc. He found as recorded in the assessment order that 62 per cent of tax-payer's turnover represents export of drugs and pharmaceuticals products to overseas markets. The tax-payer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price' was not referred to the Transfer Pricing Officer as required by Instruction No. 3 of 2003 dated 20.5.03. It is further observed that the Transactional Net Margin Method (TNMM) was used by the assessee taking Operating Profit upon Sales as Profit Level Indicator (PLI). For this purpose, the assessee has taken overseas entities as 'tested parties' and their margins on mean basis and compared the same with mean of identified comparables. The approach of the assessee is not in consonance with Rule 10B(2) and Rule 10B(3) of the I.T. Rules, considering the diverse conditions in which A.E.s are operating. Hence, treating the tested parties to be A.E.s of the assessee bunched in a group does not go well with the law and spirit of the Transfer Pricing legislation in force in India. Thus the method of determining of ALP employed by the assessee does not appear to be correct. However in the assessment order, the assessee's version has been accepted without considering the points mentioned above. 2. Considering the aforesaid, to arrive at the ALP of the International Transactions, the assessee should have been made the tested party in the assessment order. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Your's faithfully (Kalyan Chand) Commissioner of Income-tax-V, New Delhi 5. The show-cause notice was replied by the tax-payer. It claimed that show-cause notice was defective as date of the assessment was wrongly mentioned. As regards transfer pricing issue, it was pointed out that the tax-payer (RLL) is involved in multiple operations which, inter alia, include complex research and development, manufacturing operation at various locations, quality control processes besides owning valuable intangibles. On the other hand, its AEs are engaged in sales and distribution activities, few are engaged in secondary manufacturing. AEs assume less risk as compared to RLL. On the merit of transfer pricing, the assessee submitted as under:- It is evident that the Legislature intended to ensure that international transactions with AEs took place at a price that was not detrimental to revenue in India, i.e., the price charged by an Indian party for goods and services provided to an AE situated outside India was not lower than the market price on account of their rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort was received by the assessee after the show cause notice from the Excise Department. No charge of any underpaid excise duty on account of under valuation or wrong classification was made against the taxpayer. Therefore, non-examination of Central Excise Audit Report could not make assessment erroneous so as to empower the CIT to invoke the provisions of section 263. 8. Without prejudice to the above claim, the tax-payer contended that initiation of action under section 263 was without jurisdiction and bad in law. The section cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. In support of the submission, reliance was placed on decision of ITAT Pune Bench in case of Fattechand Rajmal Jain v. IAC [1997] 60 ITD 47. 9. In its reply, the taxpayer further contended that overseas AE's of the tax-payer were rightly taken as tested parties and their margin of profit was compared with mean of profit margin of identified comparable. This was in consonance with Rule 10B(2) and Rule 10B(3) of Income-tax Rules. The tax-payer claimed that it did not compare the margin of its overseas AE on mean basis bunched in a group as stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L and the local (overseas) approvals and registrations for products sold in those markets are also obtained by RLL. The AEs render only support to RLL for obtaining these approvals and registrations. The overseas AEs undertake secondary manufacturing activity, develop and maintain the marketing network, assist RLL in obtaining product approvals/registrations and undertake the relevant administrative functions. 10. It was stated that for management support to its subsidiaries, the tax-payer was normally charging royalty from the entity receiving services. The assessee further stated as under:- Since RLL undertakes a very significant part of the entire range of activities of a pharmaceutical company i.e., product development, manufacture and export of pharmaceutical products, it assumes all risks and rewards for this. It was explained that the AEs undertake secondary manufacturing/trading activities and undertake the normal risks associated with running of their business. 11. It is claimed that the details of assets employed were also furnished by the tax-payer. With reference to four Indian companies taken as comparable by the ld. CIT in the show-cause notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notice of your goodself cannot be considered as base for any alleged adjustment under section 92 of the Act. 13. In the light of above, tax-payer claimed that assessment made by the Assessing Officer could not be treated as erroneous and prejudicial to the interest of the revenue. 14. The taxpayer accordingly submitted that assessment order be upheld and proceeding taken under section 263 of the Act be dropped. 15. Ld. CIT examined the objections raised on behalf of the taxpayer. He accepted that there was a clerical error in noting the date of the assessment order, which was wrongly mentioned as '30-3-2006' instead of correct date of 30-3-2005. On the question of failure of the Assessing Officer to refer the matter of Arm's Length Price to the Transfer Pricing Officer, the ld. CIT relied upon Instruction No. 3 of 2003 of CBDT and decision of Jurisdictional High Court in the case of Sony India (P.) Ltd v. CBDT [2007] 288 ITR 52 (Delhi). He reproduced certain portion of the decision wherein it has been observed that the classification brought about by Instruction No. 3 is based on a straightforward recognizable basis giving no room for confusion. Transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue inasmuch as the matter could not be examined by the TPO as instructed by the Board in Instruction No. 3, as mentioned above, having regard to the fact that the international transaction was more than Rs. 5 crores. 18. The Commissioner (CIT) further examined transfer pricing report filed during the assessment proceedings and the data utilized in that report. He found that financial results of us based companies having US SIC codes were utilized. The database made no mention that companies taken for comparability analysis are based in the same jurisdiction. For example it is not clear whether for comparison of Ranbaxy-PRP (Peru) S.A.C. Peru, the comparable companies taken were that based in the same geographical jurisdiction. The ld. CIT listed defects in the report as per items (a) and (b) of his order. He held that the claim of tax-payer could not be accepted on the face of it without further inquiry and verification. He also held that the Assessing Officer did not inquire as to why companies having different business profiles or business lines came up in data base as admitted in the report. According to him, this needed explanation and it was also not clear why loss mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22. As regards the claim of the assessee that average operating profit margin of the tax-payer was much higher at 26.51 per cent against average margin of profit (17.26 per cent) of 20 companies operating in India and that in the margin of profit shown in the show-cause notice, non-business profit like profit from partnership, sale of fixed assets/investment was also included, the ld. CIT held that these questions involved verification of facts which can be taken at the level of Assessing Officer/TPO. 23. In the ultimate analysis, the ld. CIT set aside the assessment with the following observations:- As discussed above, I have concluded that the Assessment Order passed by the Assessing Officer is erroneous insofar as prejudicial to the interest of Revenue on three counts i.e., non-reference of the case to TPO, taking overseas AEs of assessee as tested party and non-consideration of findings of Audit of Central Excise Department. The Assessment Order is, therefore, set aside on these three issues. The Assessing Officer will examine the issues afresh on these points and reframe the assessment order in this regard after giving proper opportunity to the assessee. The Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... summary manner can be stated as under:- (i) That the assessment order was neither erroneous nor prejudicial to the interest of the revenue and, therefore, ld. CIT had no justifiable reason to assume jurisdiction under section 263 of the Act to revise the same. (ii) That decision in the case of Sony (India) Ltd. has clearly laid down that Circular No. 3 of CBDT did not affect the jurisdiction and discretion of the Assessing Officer under section 92CA(1) to refer or not to refer the matter of transfer pricing to the Transfer Pricing Officer (TPO). The Assessing Officer was fully competent to determine the question whether international transactions with AE was carried at Arm's Length. (iii) That the decision of the Special Bench of the Tribunal in the case of Aztec Software Technology Services Ltd v. Asstt. CIT [2007] 294 ITR (AT) (Bang.) 32 was contrary to the decision of Delhi High Court in the case of Sony India (P.) Ltd.'s case and, therefore, cannot be considered to be good law. (iv) That even if it is held that Assessing Officer was duty bound to refer the question of determination of Arm's Length Price to the Transfer Pricing Officer, the non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case. Provisions of transfer pricing had no application whatsoever. This was another ground on which impugned order should be set aside. 26. Ld. DR, on the other hand, supported the impugned order of the CIT, which according to her was fully justified in the light of legal and factual errors committed by the Assessing Officer, which caused prejudice to the interest of the revenue. She further argued that the matter was fully covered in favour of the revenue as per the Special Bench decision in the case of Aztec Software Technology Services Ltd. 27. We have given careful thought to the rival submissions of the parties. There can be no dispute that powers under section 263 can be invoked only when assessment is established to be erroneous and prejudicial to the interest of the revenue. It cannot be invoked merely for making a fishing inquiry. The ld. Counsel for the taxpayer is also right in arguing that assessment cannot be revised merely because another reasonable view of the matter is possible in the case. At the same time, it is a settled law that assessment made without conducting proper inquiry and investigation as enjoined by law and warranted in the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 (Cal.); CIT v. Kiran Debi Singhee [1967] 65 ITR 501 (Cal.); CIT v. Mahavar Traders [1996] 220 ITR 167 (MP); CIT v. Everest Cold Storage [1996] 220 ITR 241 (MP) and Duggal and Co. v. CIT [1996] 220 ITR 456 (Delhi), etc. It was not disputed by Shri Ajay Vohra, ld. Counsel appearing for the tax-payer that an assessment would be erroneous and prejudicial to the interest of the revenue if it is made without application of mind or without making proper inquiries into the facts and without considering statutory regulations applicable thereon. His submission was that Assessing Officer was not duty bound to refer the question of determination of Arm's Length Price to the Transfer Pricing Officer (TPO) as he has ample power and discretion to carry that exercise. Even if it was necessary to refer the matter to the TPO, such failure was merely procedural and on account of the same, assessment could not be treated as erroneous and prejudicial to the interest of the revenue. On facts of the case, we see no justification to accept above argument of ld. Counsel of the taxpayer. The revenue has been able to establish fully that assessment in this case was made without considering relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case where there are some differences or variations to make two transactions commercially comparable, for the purpose of benchmarking. The adjustments are suggested to achieve the object of testing and trying to see if both the parties or/and the transactions are similar or nearly similar. 23. In the case of DIT (International taxation) v. Morgan Stanley Co. Inc. 292 ITR 416, the Hon'ble Supreme Court after considering relevant Indian regulations on transfer pricing made some pertinent observations which are noted as under:- The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. X X X The impugned ruling is correct in principle in so far as an associated enterprise, that also constitutes a P.E., has been remunerated on an arm's length basis taking to account all the risk/taking functions of the enterprise. X X X where the transaction between the two are held to be at arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the P.E. The situation would be different if the transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences . Further rule 10B(1)(e) of Income-tax Act providing for determination of Arm's Length Price under section, 92C required that following steps are to be taken while applying TNMM after selection and evaluation of controlled transactions. It is as under:- (e) transactional net margin method, by which,- (i) the net profit margin realized by the enterprise from an international transactions entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar comparable with similar characteristics. 27. After the selection of the comparables, best method of determining Arm's Length Price is selected. Thereafter, functional analysis is carried to identify functions, risk and assets of uncontrolled transactions and comparison is carried with characteristics of the controlled transaction. This is necessary to find whether comparable selected are really comparable and reliable. Comparison based on functional analysis include economically significant activities and responsibilities undertaken or to be undertaken by the independent and associated enterprises. The structure and organization of the group and more particularly the judicial relationship between different entities of same group are to be seen. The function that need to be identified while carrying comparison as per OECD guidelines include design, manufacturing, assembling, research and development, servicing, purchasing, distribution, marketing, advertising, transportation, financial and management activities. It is also necessary to examine as to what is the principal function of the entities. The analysis of comparison should consider total assets employed and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of employees, operating expenses to sale, cost of sales. 28. In the present case, there is agreement between the parties that Transaction Net Margin Method for determination of Arm's Length Price was the most appropriate method. It was attempted to be applied by both the parties. 31. It is worthwhile to refer again to provisions of sub-rules (2) and (3) of Rule 10B of Income-tax Rules as under:- 10B. Determination of arm's length price under section 92C- (1) ** (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely: (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware Technology Services Ltd., where after considering Indian regulations and regulations of several other countries, it has been held that such initial burden is on the assessee to show that transfer of goods and services is at ALP. Facts given by the taxpayer 35. The Assessing Officer (AO) in the instant case accepted above audit report and taxpayer's transfer pricing study without raising any objection or query. But the ld. CIT rejected above report/study and gave direction for further investigation and enquiry. The tax-payer did not give in the report or in any other paper/document specific characteristics of the transactions, of property transferred or services provided except for giving the amount of the transactions merely mentioning that pharmaceuticals were sold either in the shape of dosages or API, technical know-how etc. From what is stated in the audit report, no information relating to correctness of transfer pricing could be gathered nor mechanism of Arm's length price applied. The taxpayer is manufacturing and selling pharmaceutical products. It is manufacturing medicines mostly for human consumption. Such medicines have specific names. It is rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give description of the international transaction as numerous products and voluminous transactions were carried out by it. Can this be a ground for holding back the information about the description of the transactions? Now, if quantity and volume of goods transferred or services is not disclosed, can anybody find the price charged for goods? Therefore, it is clear that the taxpayer did not wish to give either name or volume of goods on which the price shown was charged by the assessee in transactions with its Associated Enterprises (AEs). The Assessing Officer did not bother that basic and fundamental information to consider application of transfer pricing formulation was not available in this case. He did not bother to examine Note No. 2 or see its implications. He accepted what was stated by the taxpayer in the Note furnished in the fag end of March 2005 and completed the assessment four days thereafter on 30-3-2005. The Assessing Officer failed to examine fundamental questions relating to application of transfer pricing regulations, i.e., characteristic of transactions. 37. As regards application of TNMM method, the taxpayer in the audit report stated as under:- Note- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of July 1995. In our opinion, para 3.27 has been taken by TPO out of context. In the Guidelines the strength and weaknesses of the Transaction Net Margin Method has been compared with other methods and one strong point stated has been overemphasized by the T.P.O. This is what has been stated in para 3.27:- '3.27 One strength of the transactional net margin method is that net margins (e.g. return on assets, operating income to sales, and possibly other measures of net profit) are less affected by transactional differences than is the case with price, as used in the CUP Method. The net margins also may be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, enterprises may have a wide range of gross profit margins but sill earn broadly similar levels of net profits.' 36.3 Extracts from other Paras 3.29, 3.34, 3.35, 3.37 and 3.39 of the same guidelines would clearly show that the inference drawn is one-sided. These paras are as under:- '3.29 There are also a number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion methods, the effect of these factors may be eliminated as a natural consequence of insisting upon greater product and function similarity. 3.37 Assume, for example, that a taxpayer sells top quality video cassette records to an associated enterprise, and the only profit information available on comparable business activities is on generic medium quality VCR sales. Assume that the top quality VCR market is growing in its sales, has a high entry barrier, has a small number of competitors, and is with wide possibilities for product differentiation. All of the differences are likely to have material effect on the profitability of the examined activities and compared activities, and in such a case would require adjustment. As with other methods, the reliability of the necessary adjustments will affect the reliability of the analysis. It should be noted that even if two enterprises are in exactly the same industry, the profitability may differ depending on their market shares, competitive positions, etc. 3.39 The transactional net margin method may afford a practical solution to otherwise insoluble transfer pricing problems if it is used sensibly and with appropriate adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de difference in the ratio of operating margins between 3.16 per cent to 37.89 per cent in final selection of comparable by the T.P.O., is a clear pointer to the fact that the selection made was faulty. It was imperative for the TPG to carry on further analysis and evaluation of companies selected and to see whether this variation is on account of FAR etc. The OECD guideline on this point is as under:- '1.47 Where the application of one or more methods produces a range of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of the points may not be as reliable as the data used to establish the other points in the range or that the deviation may result from features of the comparable data that require adjustments. In such cases, further analysis of those points may be necessary to evaluate their suitability for inclusion in any arm's length range.' It is evident from above that even as per OECD guidelines while applying TNMM method not only comparability of transactions are to be kept in view but FAR analysis is also to be considered in evaluation. Enterprises carrying same functions in different economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin earned by comparable overseas companies at 14.88 per cent. The other AEs earn a margin which is lower than the margin earned by Ohm Laboratories and hence meet with the arm's length principle. 9.5-4 When we refer to Annexure 7, we find the following details:- 41. On consideration of above submissions/details we do not find detail of job profile/or of location of 8 companies in the above chart or other record. What constituted Turnover and Total cost of comparable and each of foreign AEs were important in order to see reliability of data for comparison, but these were left out and not disclosed. Only from column Currency one can presume that comparable companies were operating in Europe, America or Malaysia (RM). These companies are taken as comparable to taxpayer's foreign enterprises because these were manufacturing drugs in some part of the world. The taxpayer had transferred goods or services to its 17 associated enterprises detailed above spread over different continents operating in different environments which are significant factors as noted hereinafter. The taxpayer did not furnish details of transaction nor claimed that some or similar tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above aspects. 42.0n the grouping of all the transactions and selection of the tested party, the taxpayer, in its note to the Assessing Officer, had submitted as under:- 8.1 Grouping of transactions .- When assessing whether cross border related party transactions are at arm's length, either of the following transfer pricing methods may be applied to the relevant transactions: Transfer based approach To each separate transaction that occurs, i.e., for every invoice raised; or Aggregation approach To all cross border related party transactions as a single group of transactions. This occurs by aggregating: (a) Only the cross border related party transactions, or (b) All of the entity's transactions. In this regard, Rule 10A(d) of the Income-tax Rules defines the terms transaction to include a number of closely linked transactions. Further, the transaction-wise arm's length method could be more appropriate where CUP method is to be applied. However, given the range of transactions and services involved it would not be appropriate to apply the arm's length price on a transaction-by-transaction basis. In such a scenario, aggre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stand of the taxpayer is as under:- 8.2 In order to identify the Most Appropriate Method for establishing the arm's length price, determination of the tested party plays a key role, since one needs to identify comparables and compare the same with the transfer prices of the tested party. The tested party is generally the participant in the international transaction whose transfer price/profitability attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments and for which reliable data regarding uncontrolled comparable companies can be located. Consequently, in most cases, the tested party will be the least complex of the transacting AEs and does not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparable companies. Any transaction involves at least two enterprises. In the instant case, the first enterprise is RLL and the other enterprises are the overseas AEs. The Most Appropriate Method for determining the arm's length price can be determined/applied with reference to either RLL or its AEs. The enterprise to which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken as a single transaction for comparison and conclusion of Arm's Length Price is drawn. As noted earlier, the aggregation is done by the taxpayer observing the primary activity of RLL constitute only cross border related party operation . This assertion is factually wrong as multifarious activities are carried by RLL. On facts, no justification is shown for clubbing fundamentally separate and independent transactions carried at different times and related to different parties situated in different continents. 46.The taxpayer is wrong in selecting overseas AEs as tested party for purposes of comparison to apply TP regulations. Shri Vohra, ld. Counsel for the taxpayer has vehemently contended that out of two entities in a group, one which is less complex and own no intangibles is to be adopted as a tested party for comparison. According to him, the ld. Commissioner was wrong in taking the taxpayer as a tested party and comparing its result with other Indian pharmaceutical companies. It was contended that the taxpayer assessee on account of its assets, R D and numerous activities was a complicated enterprise as compared with foreign AEs not possessing any valuable intangi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though not taken into consideration in the sweeping comparison of entities in 17 countries in this case, the Market and economic conditions of enterprises in different geographies widely differ from one and other. This cannot be disputed. US transfer price regulations emphasise their relative importance for comparison as under:- Economic conditions.- Determining the degree of comparability between controlled and uncontrolled transactions requires a comparison of the significant economic conditions that could affect the prices that would be charged or paid, or the profit that would be earned in each of the transactions. These factors include: (A) The similarity of geographical markets; (B) The relative size of each market, and the extent of the overall economic development in each market; (C) The level of the market (e.g., wholesale, retail, etc.); (D) The relevant market shares for the products, properties, or services transferred or provided; (E) The location-specific costs of the factors of production and distribution; (F) The extent of competition in each market with regard to the property or services under review; (G) The economic condition of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the support functions and services to its AEs in addition to the sale of the pharmaceutical products. Such support or service is not rendered by RLL to third parties in transactions entered into with them. Moreover, the third parties do not inherit the right to convert the API procured from RLL to a Ranbaxy brand dosage form, while the overseas AEs of RLL convert the API into Ranbaxy brand dosage form. In view of the above, the exports made to its AEs and the exports to non-AEs are not comparable and it can be said that no direct, reliable internal comparable exists. 52. It is evident from above that the uncontrolled transactions carried out by the taxpayer were available. These transactions were not taken into account as in those cases, according to the taxpayer, it did not undertake risk of success or failure of product which were undertaken in transactions with its associated concern. Success or failure of a product is normal incident of business. If terms here were different, these needed examination. Whether above risk did affect the comparable price and to what extent and so, what adjustments were required to be made is/was a pertinent question which was required t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t locations are operating under different market condition and economic realities. Evidence on record clearly show that some AEs are making huge losses whereas others are making marginal profit or slightly more. How entities with different market and economic conditions could be taken as if it is single entity like that of taxpayer. Therefore, the taxpayer was not right in not selecting itself as a tested party. 53. On examination of above facts, it is clear that the taxpayer failed to give specific details of international transactions carried out with 17 AEs although required to be given as per TP regulation noted above. The pretext was the involvement of numerous products and voluminous transaction . This untenable plea has already been rejected for reasons which need not be repeated again. Next step is selection of reliable comparables. Uncontrolled transaction carried out by the taxpayers were available but not considered as comparable because with related AEs additional risks were undertaken by taxpayer. If it is done as per normal business practice, no adjustment is needed. But if it is abnormal favour to an associated enterprise, as it appears to be, the question was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order concluded as under on transfer pricing as under in Para 7.1:- 7.1 In response to the above, the assessee has filed a note along with its letter dated 24-3-2005 and has also produced a copy of transfer pricing document prepared by M/s. RSM Advisory Services Pvt. Ltd. The assessee has also produced copies of audited accounts of the above AEs for the year 2003 as well as documents/information maintained in support of the TP. After going through the report filed in Form No. 3CEB, transfer pricing documents and other details/information furnished, it is observed that M/s. RSM Advisory Services Pvt. Ltd. after analyzing the com parable data compiled from EXTL Hoovers Online and doing functional assets and risks analysis, have reached to the conclusion that as compared to the other prescribed methods, in case of the assessee, TNMM is the Most Appropriate Method. The net margins realized by the uncontrolled comparable companies were identified on similar type of transactions applying the TNMM method. On comparison of the transfer prices charged by the assessee from its Associated Enterprises and net margins thereon, in respect of these international transactions, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer found higher declared margin of profit as per books? It is quite obvious from Assessing Officer's concluding remarks that for various reasons, he failed to apply mind to the issues that arose before him. Therefore, on facts, it will not be wrong to conclude that the Assessing Officer did not understand the complicated questions he was required to consider in five days between 24-3-2005 and 30-3-2005 and committed errors in passing order without understanding the case pleaded or the statutory provisions. 56. We agree with the ld. Counsel for the taxpayer that transfer pricing involves approximation. A real transaction ordinarily is sought to be compared with situation of a hypothetical willing buyer of a comparable transaction and several presumptions and adjustments are required to be made. From above it cannot follow that result of transfer pricing exercise must be blindly accepted although these look patently absurd and unrealistic. In India clear rule is that any interpretation of rule leading to absurdity or inconsistency is to be avoided. Here in the present case, it would be absurd to accept that goods and services transferred in all the 17 cases were at arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer. 59. We are required to examine correctness of the claim of the taxpayer that its foreign AEs were rightly adopted as tested parties for comparison and application of TNMM method. As noted earlier, the taxpayer has carried out several separate transactions with 17AEs situated in different continents. It could have been appreciated if a particular entity in a particular country was sought to be computed with some similar entity in that very country as geographical situations in several ways influence the transfer pricing. 60. From above facts, it is quite evident that Assessing Officer did not apply his mind or carry any inquiry or investigation. Therefore, his order was erroneous insofar as prejudicial to the interest of the revenue. The Commissioner therefore was fully justified in exercising his power under section 263 and in setting aside the assessment with directions to re-d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said order cannot be held to be erroneous and prejudicial to the interest of the revenue. The Assessing Officer took a possible view and where a reasonable possible view is taken, the Commissioner has no power to revise such assessment under section 263 of the Income-tax Act. He has cited the decision of Supreme Court in the case of CIT v. Max India Ltd. [2008] 166 Taxman 188 to support the contention that power under section 263 cannot be exercised where Assessing Officer had taken a possible view consistent with law prevailing at the relevant time. He has also relied upon the decision of Punjab and Haryana High Court in support of his contention. 64. We have given careful thought to the above submission of Shri Vohra. Under section 92CA(1), the Assessing Officer, if he considers it necessary or expedient so to do, may, with the previous approval of the Commissioner, refer to the computation of Arm's Length Price in relation to international transaction under section 92C to the Transfer Pricing Officer. However, the CBDT, in exercise of its power under section 119 of the Income-tax Act, issued Instruction No. 3 dated 25-5-2003 to all its officers. The relevant portion of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment. The threshold limit of Rs. 5 crores will be reviewed depending upon the workload of the TPOs. The work relating to selection of cases for scrutiny and reference to TPO on the above basis in respect of pending returns filed for the assessment year 2002-03 should be completed by 30-6-2003. It is not in dispute that abovesaid Circular was issued by CBDT under section 119 of the Income-tax Act. Aforesaid section authorizes the Board to issue orders, instructions and directions to Income-tax authorities as it may deem fit for proper administration of the Income-tax Act. Authorities are duty bound to observe and execute orders, instructions and directions of the Board. Under sub-section (2) clause (a) it is provided that where the Board considers it necessary and expedient for purpose of proper and efficient management of the work of assessment and collecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less than Rs. 5 crores cannot be referred to the Transfer Pricing Officer by the Assessing Officer. Ultimately, any exercise of discretion by the Assessing Officer is bound to be judicially reviewed by the statutory appellate authorities as well as by the courts. Therefore, it is not as if there is no check on the exercise of discretion by the Assessing Officer. 38. ** 39. For these reasons, we hold that the impugned Instruction No. 3 dated 20-5-2003 issued by the Central Board of Direct Taxes is consistent with the statutory objective underlying section 92CA(1) and acts as a guidance to the Assessing Officer in the exercise of discretion in referring an international transaction to the Transfer Pricing Officer for determination of its ALP. It is neither arbitrary nor unreasonable, and is not ultra vires the Act. 67. It was accordingly contended that decision of Special Bench of ITAT in the case of Aztec Software Technology Services Ltd.'s is contrary to the decision of Hon'ble Delhi High Court in the case of Sony India (P.) Ltd. and that power of the Assessing Officer to carry out exercise and determine Arm's Length Price has remained unaffected and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions of a high value require a careful examination to determine if the declared price is in fact an acceptable ALP. It may not be expedient for the Assessing Officer to efficiently deal with the assessment involving such an exercise. In that sense it achieves the expeditious disposal of the assessment by the Assessing Officer if the exercise is referred for a specialized determination by the Transfer Pricing Officer. The classification certainly bears a nexus to this objective. We are of the considered view that the challenge to the impugned instruction on the ground of suspect classification must fail. 70. It is clear from above that validity of instruction was upheld, reason and need for making reference to TPO of international transaction exceeding Rs. 5 crore was emphasized. 71. We are astonished at the submission of Shri Vohra to the effect that it is still open to the Assessing Officer even in cases where value of international transaction exceeded Rs. 5 crore to refer or not to refer the matter to the TPO as the instructions did not affect discretion vested in the Assessing Officer. If it was so, then what was the need to challenge the instructions and its c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to non-application of provision of section 144B or other procedural errors stand on a different footing as basic jurisdiction to make assessment rests with the Assessing Officer. There is marked difference between purpose of transfer pricing regulations and scheme involved in section 144B, now deleted. At any rate, we have referred in detail to statutory provisions and material on record to show that assessment made was erroneous and prejudicial to the interest of the revenue. We, therefore, do not find any substance in above argument of Shri Vohra. 73. The other contention of Shri Vohra that decision of Hon'ble Delhi High Court and Special Bench were not available to the Assessing Officer at the relevant time when assessment was made is also of no avail. The Assessing Officer was duty bound to consider statutory provisions and rules and examine relevant facts and circumstances of the case. This was not done as explained above and, therefore, section 263 of Income-tax Act was rightly applied. 74. We have further discussed in detail as to why foreign enterprise of the taxpayer could not be taken as tested party. It would have been more reasonable and logical to compare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceutical company requires detailed investigation/verification, which could not possibly have been carried by the ld. CIT under section 263. Therefore, instead of rejecting the claim of the taxpayer, he has asked the TPO to look into the said claim. We do not find any legal infirmity in the approach of the ld. CIT. The taxpayer had vehemently claimed that its margin of profit is higher than Indian comparables (uncontrolled transaction) in respect of international transaction. This question in the light of order of CIT is wide open and can be considered and determined by TPO/Assessing Officer. 76. In the light of above discussion, we do not find any error in the approach of the ld. CIT. We confirm his action. We have tried to record all the facts and circumstances placed before us. In the process, to meet the claim of the assessee that there was no error or no prejudice was caused by assessment order of the Assessing Officer, we have gone into depth to see what was placed before the Assessing Officer and how the matter was dealt by him. In this process, certain facts not mentioned by ld. CIT have also been recorded. But we must make it clear that it was not our intention to go ..... X X X X Extracts X X X X X X X X Extracts X X X X
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