TMI Blog2015 (10) TMI 2793X X X X Extracts X X X X X X X X Extracts X X X X ..... of Gemstone [ 2015 (11) TMI 185 - ITAT AHMEDABAD] . Respectfully following this decision, we hold that the 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. As the matter is being remitted to the assessment stage, it will be open to the assessee to take such other plea, on merits, on ascertainment of ALP under the TNMM as the assessee may deem fit and the same will have to be disposed of by way of a speaking order, in accordance with the law and after giving a fair and reasonable opportunity of hearing to the assessee. All those issues regarding computation part, as on now, are quite academic and wholly hypothetical. - I.T.A. No.: 2857/Ahd/2012 - - - Dated:- 30-10-2015 - Pramod Kumar AM and S S Godara JM Suhail Dutt, alongwith P K Agrawal, for the appellant. Jigar Rawal, Himanshu Sharma alongwith Sanjay Agarwal for the respondent. ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (₹ 14,27,786) and Pino Bisazza Glass Pvt Ltd (₹ 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 treated as valid comparable for CUP method inasmuch such prices must be in respect of the transactions with unrelated parties, whereas these entities were admitted 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 proceeded to reject the TNMM and adopt CPM for determining the arm s length price. While doing so and accepting the position that the requisite data was not available at the point of time when the transfer pricing documentation was prepared, the TPO also observed that the non availability of data at the time of preparation of the transfer pricing document need not fetter the application of correct method . It was in this backdrop and after obtaining the requisite informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trolled 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 admitted position between the tax payer and the tax collector that there is no comparable uncontrolled transaction due to the nature of transaction being such that it is ordinarily between associated enterprises, in such a case, a transaction between two associated enterprises at arm's length price, though technically called 'controlled transaction', would partake of the character of 'uncontrolled transaction' for the purposes of determining the ALP in a later in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merging 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 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 entered in an uncontrolled manner between some other associated enterprises, for the purposes of benchmarking of such a transaction. 8. However, the same learned Member, as a Third Member in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 opinion - does not make much difference. . Viewed thus, a Third Member may not really be bound by the decisions of division benches and the Third Member decision may 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 purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hierarchical position of the forum at which the judicial officer is placed and not the judicial officer himself. A Third Member decision, as we have noted above in the light of Hon'ble Delhi High Court's judgment in the case of P C Puri(supra), is a de facto full bench decision and a view does seem possible that it is not, therefore, bound by division bench decisions- including, of course, the orders the Third Member himself may have authored on behalf of the division benches. In any case, no one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nonresident 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 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 if every other m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08;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 analyse net margins, a more consistent measured profit level indicator than gross margins in case of accounting differences. 10. In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that the 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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