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Gemstone Glass Pvt Ltd Versus Joint Commissioner of Income Tax Mehsana Range, Mehsana

2015 (11) TMI 185 - ITAT AHMEDABAD

Transfer pricing adjustment - selection of most appropriate method - TNMM or CUP or CPM - Held 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 asses .....

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MM is that there is often available data in the public domain about the net 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 don .....

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d 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 purposes. - I.T.A. No.: 3223/Ahd/11 and 2858/Ahd/12 - Dated:- 30-10-2015 - Pramod Kumar AM and S S Godara JM For The Appellant : Suhail Dutt, alongwith P K Agrawal For The Respondent : Jigar Rawal, Himanshu Sharma alon .....

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ppeal is dated 22th October 2012 passed by the Assessing Officer under the same statutory provisions, for the assessment year 2007-08. 2. The short issue that we really need to adjudicate in these cases is as to what is the most appropriate method, on the facts of this case, for determining the arm s length price of the exports made by the assessee to its associated enterprises (AEs) abroad. 3. While the assessee has contended that the transactional net margin method (TNMM) is the most appropria .....

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acturing glass mosaic products and selling the same to its AEs. During the course of the proceedings before the TPO for the assessment year 2007-08, it was noted that the assessee has used transactional net margin method to determine the arm s length price. It was also noted that the companies selected by the assessee as comparables, for the purposes of TNMM, were manufacturing glass bottles, kitchen glass wares, insulated glass, laminated glass etc but then these products are completely differe .....

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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 .....

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d related parties, was rejected on the ground that the transaction of the assessee was with resident Indian companies and there is no motive for tax avoidance . While adopting the CUP method, the TPO referred to assessee s stand to the effect that there are no major players in similar decorative glass products in India.....(and).. there are limitations on availability of data pertaining to the similar decorative product industry , and justified adoption of CUP method on the ground that transacti .....

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he TPO rejected the same by observing that it is seen that the assessee company has sold its products at lower rate to the European market but the European market (in which AEs are based) is a premium market for luxurious good like the decorative products manufactured by the assessee and rate of these products should be higher than the (rates prevailing in) Indian market . On the basis of this reasoning and adopting the price at which the same products are sold to group entities in India as the .....

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gly, the ALP adjustment of ₹ 5,09,77,309 was upheld. The assessee is aggrieved and is in further appeal before us. As for the assessment year 2008-09, the TPO noted the contention of the assessee that the TNMM is most appropriate 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 . .....

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ice, 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 proceeded to reject the TNMM and adopt CPM for determining the arm s l .....

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04. Once again, aggrieved, inter alia, by this change of method of ascertaining the arm s length price, the assessee carried the grievances before the DRP. Once again, DRP rejected the grievances of the assessee. While doing so, the DRP, inter alia, observed that .....We must concede that perfect data for comparability analysis is rarely available (irrespective of) whichever method is selected. In such circumstances, the assessee s argument that CPM should be rejected because perfect data is not .....

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e at which the entity has sold the same product to an independent enterprises is a sine qua non for application of internal CUP. It is so for the reason that Rule 10 B(1)(a) provides that under comparable uncontrolled price method, as a first step, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified. Rule 10A(a), on the other hand, defines uncontrolled transaction a transaction between e .....

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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 defi .....

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horities below. In our considered view, whether the transactions are with associated enterprises resident in India or with associated enterprises resident outside India, the prices at which such transactions are entered into with such enterprises cannot be taken as comparable uncontrolled price for the purpose of determining the arm s length price. 7. As for the question as to whether the transactions with associated enterprises can, in any situations, be considered as a valid input for ascertai .....

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tter refers to the situation in which two unconnected independent enterprise deal with each other. In other words, even in the case of internal CUP', the arm's length price to be adopted is the price, subject to admissible adjustments, at which the similar transactions are carried out between the assessee and an independent enterprise. Internal CUP has nothing to do with the margins earned by the same enterprises from other transactions, as is the case before us. Learned CIT(A)'s rel .....

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ntrolled transactions can only be considered. Since, the transactions of the predecessor company i.e. GE India Pvt. Ltd. were not uncontrolled transactions, but were transactions made with Associated Enterprises under controlled conditions……". Yet these controlled transactions were treated as good comparables. Bayer Material Science was also a case in which transactions between associated enterprises were used as comparables for benchmarking, and this action was upheld by the .....

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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 fr .....

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r of 'uncontrolled transaction' for the purposes of determining the ALP in a later international transaction between two AEs. In such a situation, no fetters can be placed on the powers of the TPO to consider such comparable controlled transaction - having adorned the garb of uncontrolled transaction -for the purposes of benchmarking. If the contention of the ld. A.R. is accepted that controlled transaction should be altogether shunted out for the purpose of transfer pricing provision, e .....

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sions is to prevent the avoidance of tax in the international transactions by ascertaining the arm's length price. These provisions are basically for the assistance of the Revenue as is evident from sec. 92(3) which mandates that the provisions ofthis section shall not apply in a case where the computation of income under subsection (1) or the determination of allowance for any expense or interest under that sub-section or determination of any cost or expense allocated or apportioned has the .....

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ALP, 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 fr .....

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s. 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 to defeating the object of these provisions. When the very purpose of these provisions is to determine arm's length price and there is admittedly no record of any uncontrolled transaction, in our considered opinion, it is perfectly in order to consider a controlled transaction genuinely ente .....

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tive, however, urges us to follow the view taken by the Bayer Material Science (supra) and ignore the Third Member decision in the case of Technimont ICB (supra). In a written note filed before us, it is submitted that "In this regard, it is important to note that in the Third Member decision in Technimont ICB India (P) Ltd. case, curiously no discussion is made onthe earlier judgments delivered in the cases of NGC Network and Bayer Material Science. This assumes significance in this case b .....

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been referred to the Special Bench instead of deciding the same issue in two different ways that too without distinguishing the earlier judgment…….Consequently, the extreme view taken in the Technimont judgment is incorrect, impractical and against the spirit of several judgments delivered by different Benches of Tribunals on this issue". We are not swayed by these submissions, and see no legally sustainable merits in the same. As far as the question of binding nature of thes .....

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nch 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 .....

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ay be seen as overruling not only the dissenting views but also unanimous decisions of the division benches. Learned Third Member, in his majority view in the case of Technimont (supra), had stated as follows: 14. ..................There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise's internationa .....

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ed in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If th .....

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rtually overruled his own view in a division bench. As he did so, he was not oblivious of the division bench order that he was departing from, as evident from his following closing remarks: 18. Before parting with this 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) .....

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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 hierarchical position of the forum at which the judicial officer is placed and not the judi .....

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njamin N Cardozo, one of the most distinguished US Chief Justices, in his classic book The Nature of Judicial Process' (Yale University Press; first published in Dec 1921; online version at http://www.constitution.org/cmt/cardozo/jud proc.htm) beautifully puts it as I own that it is a good deal of a mystery to me how judges, of all persons in the world, should put their faith in dicta. A brief experience on the bench was enough to reveal to me all sorts of cracks and crevices and loopholes i .....

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ench decision. Learned counsel submits that even if Bayer decision (supra) is to be implemented on merits, the assessee's case will not be covered. That aspect of the matter is, however, academic now. The course of action adopted by the authorities below, in adopting the net margin @ 8.95%, on the basis of results shown by the GEII's plastic division, is unsustainable in law, and we vacate the same. However, we have noted that the learned CIT(A) has declined to deal with all other issues .....

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ations, 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 grou .....

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TPO himself abandoned the CUP method and resorted to cost plus method. 9. As for the cost plus method being applied to the facts of this case, we have noted that the DRP has conceded that appropriate data for the application of cost plus method is not available and yet they have approved adopted of the CPM because, according to the DRP, appropriate data is not available for the TNMM either. It is difficult to understand the logic of this approach. CPM is not a residuary method in the sense that .....

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s 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 .....

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his issue, it may be relevant to refer to following observations in the UN s Transfer Pricing Manual: TNMM is usually applied with respect to broad comparable functions rather than particular controlled transactions. Returns to these functions are typically measured by a PLI in the form of a net margin that arguably will be affected by factors unrelated to arm s length pricing. Consequently, one might expect the TNMM to be a relatively disfavoured method. Nevertheless TNMM is typically applied w .....

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