TMI Blog2013 (9) TMI 595X X X X Extracts X X X X X X X X Extracts X X X X ..... net profit margin realised by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction, i.e., a transaction between non-associated enterprises. The arm's length price can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction. Internal comparable, being the subsidiary company of the assessee company, be taken as comparable for computing the ALP for an international transaction – Held that:- Arm's length price represents the true value of transaction or profitability as will be there in the ordinary course without having any regard to the relationship between the concerns - Arm's length price of the transaction or the arm's length profit cannot be considered as benchmark for the purposes of making comparison in other cases – Legislature restricted the ambit only to uncontrolled transactions for computing the arm's length price in respect of international transactions between two associate enterprises - The basic purpose behind the transfer pricing provisions is to ensure that the multinational companies do not arrange their intra group cross border transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the learned Commissioner of Income-tax (Appeals) has erred in deleting addition of Rs. 8,42,54,187 by holding that the transactions of M/s. ICBC, a wholly owned subsidiary of the assessee, are not comparable for bench marking international transaction of the assessee. 3. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in holding that the assessee's transactions with its associated enterprises, and the margins at 75.48 per cent./44.21 per cent. are at arm's length. The short issue that we are required to adjudicate in this appeal, as the learned representatives agree, is whether or not the Commissioner of Income-tax (Appeals)'s was justified in deleting the arm's length price adjustment of Rs 8,42,54,187 and, more specifically, in rejecting ICBC as a valid comparable for benchmarking the assessee's international transactions. All the three grounds of appeal deal touch upon different facets of these issues, and we will, therefore, take up all these grounds of appeal together. Briefly stated, the material facts are like this. The assessee-company is stated to be an equal stakes joint venture bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial variances in functional and FAR profile. The plea of the assessee that the-ICBC had significant intra associate enterprise transactions was rejected, and it was observed that "an unrelated party M/s. JTS Japan holds 55 per cent. of the shares in JTS Contracting Co." and "Since a majority stake in company JTS Contracting Co is held by an independent party, its transactions with ICBC can be considered as at arm's length". It was noted that the assessee's functional profile and that of the ICBC is materially similar and while the assessee has earned a margin of 44.21 per cent., the ICBC has earned a margin of 66.77 per cent. on the net costs. The Transfer Pricing Officer thus concluded that "the ICBC is selected as an internal comparable under transactional net margin method, using the operating profit to total cost as the profit level indicator" and that "as it (ICBC) has earned a profit margin over total costs at 66.77 per cent., while the assessee has earned a margin of 44.21 per cent., the arm's length margin is held to be 66.77 per cent. and the amount of adjustment to the total income is calculated as Rs.8,42,54,187". This arm's length price adjustment was, accordingly, made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctions performed by the appellant, the adoption of ICBC as an internal comparable is not appropriate. As such ICBC is excluded from the list of comparables. As a consequence, on the basis of remaining comparable companies, the appellant's transactions with its associate enterprise and its margins at 75.85 per cent. or even 44.21 per cent. on cost is held to be at arm's length. In view of the above, the addition so made of Rs. 8,32,54,187 is deleted. The learned Commissioner of Income-tax (Appeals) also took up the issue regarding rejection of comparability analysis by the Transfer Pricing Officer, so far as the external comparables given by the assessee in its transfer pricing study are concerned. He noted that while TCE Consulting Engineers Ltd. was rejected by the Transfer Pricing Officer on the ground that its functionally different inasmuch as it provides consultancy services and executes projects in diverse areas, whereas the assessee had included it on the ground that the comparable entity provides engineering consultancy services for power projects and other industrial projects. He also took note of the assessee's contention that, as noted by the Transfer Pricing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pricing Officer as 'persistent loss makers' are not necessarily making losses on year to year basis. It is seen that the appellant has included Rites Ltd. and Water and Power Consultancy Services Ltd. as comparables which has shown high profits (30.22 per cent. and 25.21 per cent. respectively) despite the fact that these are Government of India enterprises. Since these two comparables operate in different economic sectors (primarily government or public sector) and markets (captive) and so can have different levels of profitability. The Transfer Pricing Officer, therefore, was justified in rejecting these two as comparables. To sum up, the action of the Transfer Pricing Officer in rejecting the appellant's comparables (except Rites Ltd. and Water and Power Consultancy Ltd.) is not proper. Accordingly, the companies selected by the appellant, except two, in transfer pricing analysis can be taken as comparables for the purposes of the transfer pricing analysis." The Assessing Officer is aggrieved of the relief so granted by the Commissioner of Income-tax (Appeals) and is in appeal before us. The learned Departmental representative's basic plea, apart from relying upon the stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e undertaken by a comparable, it ceases to be a valid comparable for the purposes of ascertainment of the arm's length price by the transactional net margin method. It is pointed out that in the transfer pricing order, no specific defects are pointed out in the comparables given by the assessee and these are rejected on the basis that functional profile is not the same, but then what the Transfer Pricing Officer clearly overlooked was that when segmental data is taken, entity level functional comparison is irrelevant. It as also pointed out that the Assessing Officer himself has accepted that the transactional net margin method is more tolerant to functional differences, and, therefore, unless the Transfer Pricing Officer demonstrates that the functional differences are too basic, the comparability cannot be rejected. Reliance is then placed on the order of the Commissioner of Income-tax (Appeals) and the contentions before him are reiterated. We are also taken through the submissions made before the authorities below from time to time and the transfer pricing study. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since more than 50 per cent. of JTS Contracting Co's equity is held by an unrelated party, i.e., JTS Japan, it can be treated as an unrelated party, we can only point out that the test for an enterprise being associated enterprise has nothing to do with majority shares being held by an unrelated party, since section 92A(2) categorically provides that, inter alia, two enterprises will be deemed to be associated enterprises when as much as when these enterprises have 26 per cent. holding, directly or even indirectly, by the same person or enterprise. The criterion adopted by the Assessing Officer is thus devoid of legally sustainable basis. As regards reliance on co-ordinate Bench's decision in the case of NGC Network (India) P. Ltd. [2011] 56 DTR (Mum) (Trib) 1, we have noted that there had no occasion to take note of, or deal with, the specific provisions of the statute, as discussed above, and learned Departmental representative has also fairly accepted the same. In view of these discussions, the Commissioner of Income-tax (Appeals) was quite justified in rejecting ICBC as a valid comparable. Coming to the comparables cited by the assessee, all but two of which have been accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer. In the result, the appeal filed by the Assessing Officer is dismissed. We now take up the appeal filed by the assessee. In the first and second grounds of appeal, which are somewhat interconnected, the assessee has raised the following grievances: The learned Commissioner of Income-tax (Appeals) has erred in confirming the addition of Rs. 85,18,813 being transfer pricing adjustment on account of five per cent. mark up on the amount of reimbursement of expenses received by the appellant from its associated enterprises. The learned Commissioner of Income-tax (Appeals) has erred in not deciding on the ground of appeal preferred by the appellant and thereby not confirming that the amount of reimbursements received by the appellant from its associate enterprises does not form part of the appellant's cost base, while computing the operating margin of the appellant. To adjudicate on these grievances, only a few material points need to be taken note of. The assessee had incurred certain expenses on the travel related costs of its employees which were deputed to its associated enterprises on different projects. As per the agreement, the assessee was entitled to recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer to grant the consequential relief, if any. The appeal filed by the assessee is thus partly allowed for statistical purposes in the terms indicated above. As regards the cross-objection, in view of the pending retrospective amendment in section 92C(2) in this year's budget, the issue is now practically academic. There is no point in adjudicating upon the same. The cross-objection is thus dismissed as infructuous. In the result, while the appeal by the Assessing Officer and cross-objection by the assessee are dismissed, the appeal filed by the assessee is partly allowed for statistical purposes in the terms indicated above. Vijay Pal Rao (Judicial Member).-On perusal of the order of the learned brother and after giving my deep thought on the issue involved reasoning and conclusion of the learned Accountant Member, I do not agree with the view, reasons and the finding of the learned Accountant Member on the issue of internal comparable. The expression of international transaction as provided in the provisions section 92B means the transaction between 2 or more associated enterprises either or both of whom are non-residents. Such transaction may be in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction." Thus, as per Chapter X read with rule 10B any income that arises from the international transaction shall be computed having regard to the arm's length price. An international transaction is required to be tested at the arm's length price irrespective of genuineness of the actual price of the transaction. In the case of international transaction, the Legislature has shifted the burden of proof from tax authority to the assessee to establish and show that the transaction with the associate enterprise was at the arm's length price on the basis of documents maintained and file by the assessee. It is incumbent upon the assessee to satisfy the tax authorities that the transaction with the associate enterprise was of the arm's length price and in support of its claim ; the assessee has to produce all the relevant records including transfer pricing study having margin comparables to arrive at the arm's length price. Thus, as per the provisions of transfer pricing, as envisaged in Chapter X of the Income-tax Act read with rule 10B of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h price. The conditions, as stipulated under the provisions of transfer pricing law is that the comparable transactions should not be between the associate enterprises and therefore, there is no such embargo for a transaction between the assessee and its different associate enterprises and margin of which is found at the arm's length price and accepted by the Revenue for considering the same as comparable for computing the arm's length price of international transaction between the assessee and another associate enterprise. However, if is not permissible under the provisions of transfer pricing that a transaction between two associate enterprise (say between A and B) may be at the arm's length price can be taken as comparable for determining the arm's length price for a transaction between the other associate enterprise (say ; C and D). In other words, a transaction between the associate enterprise, if found and accepted at the arm's length price, cannot be a comparable for different enterprise but the said transaction once found at the arm's length price can be the best comparable being an internal comparable for computation of the arm's length price of a transaction of the same e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilarly, the fully owned subsidiary of the assessee also had similar transactions with other associate enterprise. The net profit margin of transaction between the subsidiary of the assessee and associate enterprise has been accepted by the Assessing Officer to be at the arm's length price and the same was adopted as the arm's length price of the transaction of the assessee with other associate enterprise. It is not open to the assessee to say that the price charged from one associate enterprise should not be adopted as the arm's length price of the international transaction with another associate enterprise when all other factors are the same. For instance, an enterprise has two similar or identical transactions with two associated enterprises. In such a situation where an assessee is having international transaction with two associate enterprises and realising the same net profit margin from both transactions, can it be possible either for the Revenue or for the assessee to accept one of such transaction at the arm's length price and deny the other one'. Similarly, when a transaction with associate enterprise is found and accepted to be at the arm's length price, then net prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the assessee has worked out the arm's length price on the basis of transactions relating to the comparable for the assessment year 2002-03 as at the relevant point of time complete details in respect of the assessment year 2003-04 were not available. In our view when the facts and figures in relation to the relevant assessment year, i.e., the assessment year 2003-04 are now available then the transfer pricing adjustments have to be computed based on the said facts and figures. In case working is to be made on the basis of figures for the assessment year 2002-03, then in our view the transactions in the assessee's own case for the said year which have been found to be at arm's length in that year should be adopted as basis as the business being same, it will give better results. Merely because the transaction is with an associate enterprise cannot be the ground to reject it as a comparable when the transaction is at arm s length. However as we have held earlier, in our view it will be most appropriate to compare the transactions for the same year, i.e., assessment year 2003-04 for which the figures are available in respect of comparables which have already been accepted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of the arm's length price of an international transaction with another associate enterprise ? 2. In view of the fact that one of us has relied upon a Division Bench order (i.e. Asst. CIT v. NGC Network (India) P. Ltd. [2011] 56 DTR (Mum) (Trib) 1), in support of the respective stand and as there are decisions supporting the contrary view by other division benches (viz., Skoda Auto India P. Ltd. v. Asst. CIT [2009] 30 SOT 319 (Pune)), it will be appropriate that the point of difference is referred to a Bench of Three Members, under section 255(4) of the Act. The Registry is directed to place this reference, along with case records, for appropriate orders before the hon'ble President. Order of Third Member R. S. Syal (Accountant Member).-The following point of difference has been referred to me by the hon'ble President under section 255(4) of the Income-tax Act, 1961 : "Whether, on the facts and circumstances of the case, the net margin realised from a transaction with an associated enterprise (AE) found and accepted at the arm's length price (ALP) can be taken as a comparable being an internal comparable for computation of (sic arm) arm's length price of an int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y different on end level and hence should be excluded for benchmarking. (ii) ICB is an internally comparable case which has earned 66.77 per cent. profit margin over total cost. It is only this cost which should be considered for determining the arm's length price in the assessee's case. (iii) The assessee's contention that ICB had related party transactions of Rs. 29.53 crores including Rs. 26.26 crores as receipts from JTS and hence the same be excluded as controlled transactions, was not acceptable. That is how the Transfer Pricing Officer adopted net profit margin over cost at 66.77 per cent. for determining the arm's length price in respect of the payments received by the assessee from its associate enterprises and resultantly proposed adjustment of Rs. 7.13 crores (after rectification). The assessee contested the addition before the learned first appellate authority, who deleted the addition by holding, in so far as it is relevant for answering the question referred to me, as under : (a) The Transfer Pricing Officer was wrong in rejecting all the twelve comparable cases cited by the assessee on entity level. Ten cases out of such twelve are functionally comparable on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not sustainable. On all other issues, he agreed with the opinion of the learned Accountant Member. In the final analysis, he allowed the appeal of the Revenue. That is how this matter has come up before me as Third Member. I have heard the rival submissions and perused the relevant material on record in the light of precedents relied on. From the question referred to me, it is apparent that I have been called upon to answer as to whether the net margin realised from a transaction with an associate enterprise, found and accepted at the arm's length price, can be taken as a comparable being an internal comparable for computation of the arm's length price of an international transaction with another associate enterprise. To be more specific and in the present context, the precise question is whether the case of ICB can be considered for determining, the arm's length price in the case of the assessee's international transactions when the transactions of ICB with JTS are controlled transactions and the arm's length margin in that case has been accepted at 66.77 per cent. The learned authorised representative, at the very outset, submitted that it was not essential for the Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asoning of the Commissioner of Income-tax (Appeals) on other angles also got automatically decided in line with the decision on angle so decided. There can be no question of any implied consideration of other angles as well. In order to ascertain as to whether the Tribunal subscribed to or negated various angles adopted by the Commissioner of Income-tax (Appeals) to sustain or delete an addition, it is necessary to find out view of the Tribunal in on all such angles distinctly. If the conclusion drawn by the Commissioner of Income-tax (Appeals) is upheld by considering the issue from one of the angles only, it is the approval of view of the first appellate authority by the Tribunal from that angle alone. The other angles cannot be claimed as impliedly considered and decided by the Tribunal unless there is sufficient hint in the four corners of order itself or other proceedings of the Bench directly related to the case duly signed by the Members, to indicate a decision on such other angle(s). Adverting to the facts of the instant case, it is seen that the learned Accountant Member, who rendered the leading opinion, did not specifically hold anything about the comparability or otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised on behalf of the assessee is, thus, jettisoned. The learned authorised representative next argued that the transactions between ICB and JTS were wrongly considered as internal comparable of the assessee. He stated that even though ICB is a hundred per cent. subsidiary of the assessee-company, still the transactions of ICB could not be described as the transactions of the assessee as both are separate entities. In view of the fact that ICB is different from the assessee, the learned authorised representative stated that the transactions of the ICB were not capable of being characterised as the internal transactions of the assessee- company. He put forth that once the ICB is held to be separate from the assessee, its controlled or uncontrolled transactions cease to be internal comparable of the assessee. On a pertinent query, the learned authorised representative failed to draw my attention towards any categorical finding given by the learned Members on this aspect of the matter. I have meticulously perused the opinion of the learned Accountant Member but failed to find out any decision given by him in this regard. The learned Judicial Member has impliedly rejected this cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to the Third Member and "such point" shall be decided in consonance with the view expressed by the Third Member. The jurisdiction of the Third Member starts from the "point" which is referred to him and ends at rendering decision on "such point". In the light of the clear mandate given by the Legislature, it is crystal clear that the third member's authority extends only to the point on which the members have differed and such difference has been so referred to him. It is impermissible to him to take up any point for consideration and decision, either suo motu or at the instance of the parties, other than that which has been referred to him. In view of the foregoing discussion it is clear that the above point raised by the learned authorised representative also does not require any consideration or decision at my end. Accordingly, I will now proceed to answer the question referred to me. Chapter X with a marginal note "Special provisions relating to avoidance of tax", inter alia, contains sections 92 to 92F dealing with computation of income from international transactions having regard to the arm's length price. In this regard, section 92(1) provides that any income arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market: (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction." Sub-clause (i) of rule 10B(e) stipulates that net profit margin from an international transaction with an associate enterprise is computed in relation to cost incurred or sales effected or assets employed, etc. Sub-clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is patent that the various factors having bearing on the quality of output, assets employed, input cost, etc., continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralised when comparison is made with internal comparable. Ex consequential, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart, i.e. external comparable. Reverting to the question of making comparison of net profit margin of internally or externally comparable case from uncontrolled transaction, it can be seen that sub-clause (ii) of rule 10B(e) unequivocally mandates for making a comparison with "uncontrolled transaction" or a number of such transactions. The word "comparable" used in the provision to describe internal or external comparable, is succeeded by the words "uncontrolled transaction". When sub-clause (iii) of rule 10B(e) is examined, it becomes lucid that there is reference to the net profit margin arising, again in "comparable uncontrolled transaction". It provides that the net profit margin arising in comparable uncontrolle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method is provided in rule 10B(c) which again refers to making comparison with "uncontrolled transaction". A brief overview of various methods prescribed for determining the arm's length price clearly divulges that the comparison is always sought to be made of the assessee's international transactions with comparable "uncontrolled transactions". One common factor permeating through various methods for determining the arm's length price is comparison of the assessee's international transactions with those of third parties similarly situated. The essence is that the comparison is sought with "uncontrolled transaction". The transactional net margin method is no exception in this regard. It also contemplates comparison of net profit realised by an enterprise with the net profit realised from a comparable uncontrolled transaction. What is an "uncontrolled transaction" has been clearly defined under rule 10A(a) to mean "a transaction between enterprises other than associated enterprises whether resident or non-resident". A plain reading of the meaning given to the expression "uncontrolled transaction" leaves no room for any doubt that it is a transaction between two non-associated e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable uncontrolled transaction and not a comparable controlled transaction. There is one more dimension of this case. The transactions between ICB and JTS are not only controlled, but the profit margin of ICB also passed through the examination by the Transfer Pricing Officer, who declared it at arm's length. The learned Departmental representative contended that once controlled transactions are verified by the Transfer Pricing Officer and found to be at the arm's length price, then the difference between controlled and uncontrolled transactions is obliterated. Canvassing this point further, he accentuated that even though the transactions between ICB and JTS were controlled, still they constituted a good basis for comparison as the Transfer Pricing Officer found them at arm's length. This contention of the learned Departmental representative albeit sounds attractive at the first blush, but on closer examination, fails to endure. The basic purpose behind the transfer pricing provisions is to ensure that the multinational companies do not arrange their intra group cross border transactions in such a way as to reduce the incidence of tax in India. A multinational company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action. This is what has been laid down in sub-section (3) of section 92. Whereas sub-section (1) of section 92 provides that "any income arising from an international transaction shall be computed having regard to the arm's length price", sub-section (3) provides that : "the provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into." From the above discussion it is vivid that whereas in the first situation, the arm's length price represents the true value of transaction or profitability as will be there in the ordinary course without having any regard to the relationship between the concerns, it is not so in the second situation. In the later case, even though the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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