TMI Blog2015 (11) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... profits that comparable independent businesses earn from their trading activities in comparable markets with other third parties. As such, the TNMM often proves easier to apply than, say, the Cost Plus or RPM methods, and TNMM is less sensitive to minor differences in the products being sold. It is also important that the data for application of CPM, as collected by the TPO, was not in public domain and this has been done by collecting information under section 133(6). Such a data could not have been available to the assessee. All shortcomings being equal in the application of the methods of determining the ALP, as at best is the case of the authorities below, the method to be preferred is the method for which necessary inputs are available in the public domain Authorities below indeed erred in not applying the TNMM for ascertaining the arm’s length price of assessee’s transactions with the associated enterprises. We direct the AO/TPO to compute the ALP on the basis of the transactional net margin method. With these directions, we remit the matter to the file to the assessment stage for fresh determination of arm’s length price. - Decided in favour of assessee for statistical pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aesthetic characteristics much different from a glass product manufactured by other companies . It was also noted that the main raw material in the glass industries is Silica but it constitutes less than 3% of the cost of production. The TPO, therefore, proceed to reject the TNMM on the ground that comparable data is not available . An effort was then made by seeking data on the cost analysis of the product sold to AEs and non-AEs so as to apply the internal cost plus method but this effort of the TPO had to aborted for want of relevant data. It was in this background that the TPO proceeded to adopt the CUP method. It was noted that the assessee has, in the relevant previous year, sold the same products to Palladio Glass Pvt Ltd (Rs 14,27,786) and Pino Bisazza Glass Pvt Ltd (Rs 2,15,13,437). Both of these entities are admittedly group companies of the assessee inasmuch as ultimate parent company of the assessee, i.e. Trend Group SpA, holds 33% equity in Palladio Glass Pvt Ltd, 67% equity in Pino Bisazza Glass Pvt Ltd an 99% equity in Gemstone Glass Pvt Ltd, i.e. this assessee. The assessee s contention that the prices at which it has sold goods to these group entities cannot be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate method for determining the ALP. He, however, also noted that in the transfer pricing report filed by the assessee it has been accepted that the cost plus method is the most appropriate method when the business activity is in the nature of contract manufacturing . It was also noted that in the FAR (function, asset and risk) analysis of the assessee has been characterized as contract manufacturer. The Transfer Pricing Officer further noted that the assessee did not choose this method as the most appropriate method since the data corresponding to the normal gross mark ups, as required for the application of cost plus method, was not available in the public domain. He then added that it may be pertinent to mention here that in its reply to the show cause notice, the assessee did not raise any contentions about inappropriateness of CPM as the most appropriate method . It was in this backdrop and relying upon the provisions of Section 92C(3) of the Act and the judicial precedents in the Coca Cola Inc Vs ACIT [(2009) 177 Taxmann 103 (P H)], SAP Labs India Pvt Ltd Vs ACIT [(2011) 44 SOT 156 (Bang)] and Serdia Pharmaceuticals India Pvt Ltd Vs ACIT [(2011) 44SOT 391(Mum)], the TPO p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case, the comparable price adopted for determining the arm s length price is the price at which the assessee has sold the same product to other group entities, which are thus associated enterprises , residents in India. It has been defended by the DRP on the ground that there cannot be any tax avoidance motive in selling the products at an artificial price. In our considered view, however, this aspect of the matter is irrelevant inasmuch as the very definition of uncontrolled transaction under rule 10A excludes the transactions with associated enterprises whether resident or non-resident . Once it is not in dispute that uncontrolled transaction is a statutorily defined term, there is no room for discarding or questioning this definition on the basis of superior logic in an alternative definition. Such heroics are not called for in the process of judicial interpretation. Learned DRP ought to have followed the law as it exists rather than pondering over what the law ought to be, as is inherent in their justification for inclusion of uncontrolled transactions with associated enterprises resident in India. We disapprove the line of reasoning adopted by the authorities below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses were used as comparables for benchmarking, and this action was upheld by the Tribunal. It was in this process that in the case of Bayer Material Science (supra), a coordinate bench of this Tribunal had inter alia observed as follows: 19. It is possible that the nature of international transaction between two associated enterprises may be such which, in normal course, is unusual between independent enterprises. In such a case there will be hardly any comparable uncontrolled case for the purposes of benchmarking of such transaction. The question will arise as to whether in such a situation, the transfer pricing provisions will fail and cease to be applicable and as such the TPO will be compelled to accept the manoeuvred price declared by the assessee. The further question will be as to whether any cognizance can be taken of such controlled transactions for benchmarking. We have observed above that a majority of assesses do not intend to play foul with the Revenue by unnecessarily attempting to reduce the tax liability. In such circumstances the declared income from such international transactions will itself represent the arm's length price. Thus, where it is an admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which shall be ignored and the income shall be computed on the basis of entries made. On the other hand, if the income determined at arm's length price is higher than that emanating from entries in the books of account, then such income at arm's length price, being higher than that from the entries in the books of account, shall be included in the total income of the assessee. It is, therefore, manifest that the higher of income determined at arm's length price or as emerging from the entries made in the books of account, is taken into consideration for computing the total income of an assessee. This sub-section (3) of section 92 when seen in juxtaposition to the Chapter X in which the relevant sections have been resided titled as 'Provisions relating to avoidance of tax', makes it apparent that the purpose behind such provisions is to uncover the arrangement made by the associated enterprises in not reflecting the true profit from the international transactions. If we accept the contention raised by the ld. A.R. that the controlled transactions should be completely ignored in such a situation when there are no uncontrolled transactions at all, it would amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the decision of a division bench and has a greater binding force. It has the same precedence value as that of a special bench. Elaborating this principle, a special bench of this Tribunal, in the case of DCIT Vs Oman International Bank SAOG (100 ITD SB 285), that a Third Member decision is defacto a decision of larger bench, and , in coming to this conclusion, the Special Bench was guided by Hon'ble Delhi High Court's judgment in the case of P C Purivs CIT (584) wherein Their Lordships observed that There is no difference, really speaking, between a Full Bench of three Judges sitting together and this method of referring to the third Judge in the case of a difference of opinion between the two Judges. Whether the first method is adopted or the second, opinion of the majority will be decisive. In this case, there is a formal reference to a third Judge to ascertain his opinion. He is the deciding voice. He turns the scales. The third Judge is the Full Bench. Not alone. But along with the two others, who first heard the case. Whether the three Judges sit at the same time or at different times - two at one time and the third hearing the matter later on a difference of opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s matter, I consider it my duty to record that the ld. AR relied on certain decisions including UCB India (P.) Ltd. v..Asstt. CIT [2009] 121 ITD 131 , Bayer Material Science (P.) Ltd. v. Addl. CIT [2012] 134 ITD 582 and Dy. CIT v. BP India Services (P.) Ltd. [2011] 133 ITD 255 (Mum) in which it has been held that controlled transactions cannot be considered for determining ALP in other transactions. Per contra , the ld. DR has relied on a solitary decision rendered by the Mumbai bench of the tribunal in NGC Network (India) (P.) Ltd. (supra) to buttress his contention that a controlled transaction can also be considered for benchmarking. I do not propose to embark upon these cases separately for discussion, I clarify that my decision in the foregoing paras is founded on the interpretation of the relevant bare provisions of the Act and Rules, without taking any assistance from decisions cited by the rival parties on the point, which differ in their conclusion as stated by the ld. Representatives before me. 10. Learned Departmental Representative's submission that a judicial officer cannot deviate from his own stand does not seem to be correct. What may be material is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he matter, as also bearing in mind entirety of the case, we deem it fit and proper to remit the matter to the file of the CIT(A) for fresh adjudication on merits in the light of above observations, in accordance with the law and by way of a speaking order. There cannot be any good reasons for us to deal with all other issues on merits when learned CIT(A) did not have an occasion to deal with the same at all. Learned CIT(A) has decided the matter on the short legal ground, which we find to be unsustainable in law, and, therefore, we send the matter back to the CIT(A) for proper adjudication. With these observations, matter stands restored to the file of the CIT(A) and all other grounds of appeal stand dismissed as infructuous. 8. It is, therefore, clear that the prices on which the assessee has sold the same products to resident associated enterprises cannot be taken as benchmark for ascertaining the arm s length price of its similar sale transaction with the non-resident enterprises. Once we come to the conclusion that necessary inputs for ascertaining the ALP under CUP are not available, there cannot be any occasion to apply the same. In the assessment year 2008-09, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht expect the TNMM to be a relatively disfavoured method. Nevertheless TNMM is typically applied when two related parties engage in a continuing series of transactions and one of the parties controls intangible assets for which an arm s length return is not easily determined. Since TNMM is applied to the party performing routine manufacturing, distribution or other functions that do not involve control over such intangible assets, it allows the appropriate return to the party controlling unique or difficult ‐ to ‐ value intangible assets to be determined indirectly. TNMM may also be appropriate for use in certain situations in which data limitations on uncontrolled transactions make it more reliable than traditional methods. TNMM may be more attractive if the data on gross margins are less reliable due to accounting differences (i.e. differences in the treatment of certain costs as cost of goods sold or operating expenses) between the tested party and the comparable companies for which no adjustments can be made as it is impossible to identify the specific costs for which adjustments are needed. In such a case, it may be more appropriate to use TNMM to analys ..... X X X X Extracts X X X X X X X X Extracts X X X X
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