TMI Blog2019 (2) TMI 1613X X X X Extracts X X X X X X X X Extracts X X X X ..... he related method cannot be said to be most appropriate method. In our considered view, the application of CUP method was indeed not justified on the facts of the present case. The intra AE transactions, on the facts of this case, were so fundamentally different in character in economic circumstances and contractual terms, that these cannot be compared with the independent transactions entered into by the assessee. We, therefore, reject the stand of the authorities below on this issue. The assessee has applied TNMM by comparing the profits on transactions with AEs and the non AEs and no specific defects have been pointed out in the allocation of costs in the segmental accounts which are duly reconciled with entity level consolidated accounts. Dealing with the Internal TNMM adopted by the assessee the TPO had expressed the view that the basis of allocating the overheads was not clear, in response to which it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these are directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e platform, Oxygen Sensor, Hydrogen Butene Sensor and Ultrasonic Thickness Tester - HELD THAT:- As evidence from a plain look at the nature of expenditure, overwhelming part of the expenses is clearly in the nature of replacement and repairs and the mere fact that its benefit will be beyond one year cannot be reason enough to decline the treatment as revenue expenditure. This threshold of benefit being beyond one year for an expense to be treated as capital expenditure is alien to the tax jurisprudence. Enduring benefit is a test often resorted to but enduring benefit does not mean benefit beyond one year and it is not of unqualified application such as in replacement repairs. Glass line replacement cannot be an acquisition of independent asset or anything other than replacement repairs. Similarly, battery and valve cannot be treated as standalone assets and are in the nature of replacements. The remaining expenses are small expenses and integral to the R D facilities maintenance. In any case, the authorities below have not assigned any specific reasons, beyond the vague generalities, for treating these expenses as capital expenditure. - Decided in favour of assessee. - ITA No.: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing and selling expenses not required to be incurred for AE sale vis-a-vis Non AE sales. iv) Adjustment for credit risk not required to borne by appellant for AE sales vis-a-vis Non AE sales. v) Adjustment for reimbursement of R D cost by AE with 110% mark up. vi) Adjustment for interest free ECB Loan received from AE. 4. The short issue that we must begin with adjudicating, so far as the above grounds of appeal are concerned, as to which is the most appropriate method for ascertainment of arm s length price on the facts of this case. Learned representatives fairly agree that in the event of this grievance being upheld, all other issues will be rendered academic. 5. The material facts and circumstances of the case are like this. The assessee company is a wholly owned subsidiary of EW Limited, Mauritius- a group entity of Gulbrandsen Inc, USA and Gulbrandsen EU Limited UK inasmuch as the shareholders of EW Limited, i.e. Peter Gulbrandsen and Donald Gulbrandsen, are also majority shareholders of Gulbrandsen Inc, USA and Gulbrandsen EU Limited UK. The assessee is engaged in the manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submitted that in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects . While the TPO did not have any specific comment on this request, he simply rejected the explanation of assessee as not accepted . It was also explained to the TPO that the CUP method is not really appropriate to the facts of this case as the assessee has long term business arrangements with the AEs, whereas there are no such long term arrangements with non AEs and that the contractual, economic, commercial, functional and risk profile differences, between the AE transactions vis- -vis non AE transactions, make the comparison of prices irrelevant. The attention was invited to the fact that, as also stated in OECD Guidelines for Multinational Enterprises and Tax Administrators, application of CUP method requires high degree of comparability not only in the products sold and services provided but also in the economic circumstances in which the respective AE and non AE transactions take place . It was thus s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions (and) at least 50% guaranteed selling to AEs mean that the assessee is making loss and shifting the profits from India to other countries . On reimbursement of R D costs also, the Assessing Officer did only observe, in rather general terms, that the plea is not acceptable because the assessee has sold the products to its AEs at very lower rate and shifted the profits from India to outside India The same was the comment in respect of interest free ECB loans from the AEs. As for the need of adjustment on account of various factors, the TPO simply observed that the assessee has charged very nominal margin to its AEs (and) therefore, there is no any issue for any adjustment . He then proceeded to make the adjustment by observing as follows: 10. Computation of Arm s Length Price Product Sales to AE Quantity ( kgs) Sales to AE : Sales to non-AE uncontrolled Difference Adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment claimed by the appellant and the calculation done by the appellant to arrive at ALP after adjustments is not acceptable and determination by the TPO of the transactions to be average sale price to non AEs over the year, without carrying out the adjustments, is upheld . Learned CIT(A) nevertheless reduced the ALP adjustment to ₹ 2,78,02,502 by observing as follows: 3.3.2 Appellant s contentions in para 3.2.2 of its submissions regarding mistakes in quantification of transfer pricing addition under CUP method by Id. TPO are now taken up. It is pointed out by the appellant that for the products MBTC and DBTO, TPO compared consolidated average price for both the AEs with non-AE average price. Each sale transaction to the AEs constituted a separate international transaction, arm's length price of which was required to be determined in accordance with Section 92 of the I.T. Act. The Comparable Uncontrolled Price (CUP) for each of the 4 chemicals was determined by the TPO to be the average sale price charged by appellant to non-AEs. Each transaction of sale of chemicals to the AEs needed to be benchmarked with reference to the CUP and if the CUP exceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth price of an international transaction over indirect methods of determining the arm s length price of international transactions, selection of the most appropriate method for determining arm s length price under the transfer pricing provisions, in a particular fact situation, is not an academic exercise which can be decided de hors the peculiar facts of that situation, and, therefore, there cannot be any straight-jacket formulas holding application of a particular method in case of a particular type of product or service. While rule 10B(1) of the Income Tax Rules 1962, provides that arm s length price in relation to an international transaction shall be determined by any of the methods, being the most appropriate method , set out therein, Rule 10 C(1) provides the mechanism for selecting the most appropriate method which is best suited to the facts and circumstances of each particular transaction and which provides the most reliable measure of arm s length price of the international transaction . Rule 10C(2) further provides that in selecting the most appropriate method as specified in rule 10C(1), certain factors are to be taken into account: ( a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early, therefore, unless suitable reliable data inputs necessary for application of a particular method, as CUP in this case, are available, CUP method cannot be said to be most appropriate methods on the facts of this case. Let us, therefore, first examine whether sufficient inputs were indeed available. 11. At the outset, it is important to note that what has been relied upon by the TPO is Internal CUP data but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intra-AE transactions and independent transactions. This approach, though in the case of application of Cost Plus Method, has been rejected by a coordinate bench of this Tribunal in the case of ACIT Vs Tara Ultimo Pvt Ltd [(2012) 143 TTJ 91 (Mum)], though the same reasoning will be equally applicable in respect of the CUP as well as the computation mechanism, in that respect, is materially similar. In this case, speaking through one of us (i.e. the Vice President), the coordinate bench had observed as follows: The way this rule works, the benchmark gross profit is to be applied on each transaction with the AEs , while, for comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions with AEs vis-a-vis mark up on costs on transactions with non AEs [ Emphasis, by underlining, supplied by us now] 12. It is also important to note that the TPO has justified application of internal CUP on the basis of deviations in prices at which products are sold to different AEs and, by implication, using one intra AE price to bench the other intra AE price. That is wholly incorrect. It is well settled in law that it is only an uncontrolled price which can be compared with controlled price and used for any benchmarking. This position has been well summarized in a coordinate bench decision in the case of Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 138/35 taxmann.com 177 (Ahd.), and we are in considered agreement with the same. 13. When comparing the prices of products sold in intra AE transactions vis- -vis independent transactions, it is not sufficient to compare the prices de hors the economic circumstances in which the respective AE and non AE transactions take place. This principle is beyond any doubt or controversy. In the OECD Guidelines for Multinational Enterprises and Tax Administra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eet showing 17 months advance payment but rejects it as agreement refers to only 120 days advance payment. That does not belittle the fact that whatever may have been payment terms under the intra AE agreement, the payment was actually received substantially in advance. The question we must ask ourselves is that whether such substantial advance payments, which ensure availability of working capital to the assessee, can be compared with normal business transactions allowing, on the contrary, credit period to the customers. The answer is clearly in negative as the economic circumstances in which these two sets of transactions operate are substantially different. The very character of these transactions is different. 15. It is also important to bear in mind the undisputed fact that the AE had an obligation to buy at least 50% of its products and the assessee was reseller rather than an end user. These contractual terms and the difference in functions also seriously affect the comparability. The reasons given by the CIT(A) for rejecting these variations are wholly superficial and devoid of any legally sustainable merits. The variations in quantities between the AEs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade, for this reason alone, CUP method ceases to be workable on the facts of this case. The contradiction in the approach is also evident from the fact that the CIT(A) has upheld application of CUP method on the sole basis that accurate adjustments can be made to take care of variations in the intra AE and independent transactions but then one of the points made before us, in the written submissions, is that if total adjustment of 36% claimed in those years was allowed, prices would come down to such unrealistic levels that one of the international transaction, including sales to non AEs, were made anywhere neat them . Clearly, there is no meeting ground between these diametrically opposed stands by the authorities. As regards the decision of coordinate bench in the case of Serdia Pharmaceuticals (supra), that was a case in which no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. 16. A lot of emphasis has been placed on the fact that the assessee on its own was using the Internal CUP method in past, and, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. All that has been relied upon is internal CUP and for the detailed reasons set out by the CIT(A), which meets our approval, these CUP inputs were not reliable enough. In any case, differences due to variations in FAR due to nature of trade relationship with AEs have not been accounted for and suitable adjusted. The external CUP inputs are not even referred to and relied upon by the TPO. There are no other independent comparable transactions brought to the analysis by the TPO or the learned Commissioner (DR). All these factors put together donot make out a case for application of CUP in this case. Not only that there is no justification, beyond vague generalities, for CUP in the present case and not only that that CUP method application mechanism is incorrect, we find that sufficient quantity of reliable CUP inputs are not available on the facts of this case. that In the light of these discussions, as also bearing in mind entirety of the case, we donot see legally sustain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue and expenses have been allocated on actual basis wherever these are directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee had further submitted that in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects . We have noted that the TPO did not have any specific comment on this request and he simply rejected the explanation of assessee as not accepted . In appeal also, no specific adjustments were suggested to the allocations made in the segmental accounts and the discussions were confined to generalities. In these circumstances, we see no reasons to disturb the internal TNMM adopted by the assessee. We, therefore, delete the impugned ALP adjustment of ₹ 2,78,02,502. 21. Ground nos. 2 to 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the disallowance of an amount of ₹ 3,32,012/- claimed as amortized in the accounts in complete disregard of the fact that the amount amortized during the year represented expenditure for repairs and replacements only and not a capital expenditure as held by the Ld. A.O. The Ld. CIT(A) ought to have allowed the claim made by the appellant by treating the same as revenue expenditure. 28. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision in assessee s own case of the assessment year 2006- 07 wherein the coordinate bench has, inter alia, observed as follows: It has come on record that the assessee has in fact incurred the impugned sums on plant building s roof repair. The authorities below have taken strong cognizance to the effect that it has itself estimated benefits of above repairs to continue for a period of four years. We find this approach to be wholly unreasonable since this is not the lower authorities case that the assessee s repairs in question have in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the nature of expenditure, overwhelming part of the expenses is clearly in the nature of replacement and repairs and the mere fact that its benefit will be beyond one year cannot be reason enough to decline the treatment as revenue expenditure. This threshold of benefit being beyond one year for an expense to be treated as capital expenditure is alien to the tax jurisprudence. Enduring benefit is a test often resorted to but enduring benefit does not mean benefit beyond one year and it is not of unqualified application such as in replacement repairs. Glass line replacement cannot be an acquisition of independent asset or anything other than replacement repairs. Similarly, battery and valve cannot be treated as standalone assets and are in the nature of replacements. The remaining expenses are small expenses and integral to the R D facilities maintenance. In any case, the authorities below have not assigned any specific reasons, beyond the vague generalities, for treating these expenses as capital expenditure. In view of these discussions and bearing in mind entirety of the case, we uphold this plea of the assessee as well. The Assessing Officer is, accordingly, directed to delet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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