to the judgement

Transcription

to the judgement

http://www.itatonline.org
j
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "H" "THIRD MEMBER", MUMBAI
Before Shri R.S.Syal, Accountant Member
(As Third Member)
ITA No 4608/Mum!2010 . Asst Year 2005-2006
Mls.Tecnimont ICB Private Limited
Tecnimount ICB House
Chincholi Bunder
504 Link Road, Malad (West)
Mumbai - 400 064.
PAN :AAACI2628B.
Vs.
The Addl.Commissioner of Income-tax
Range 9(3)
Mumbai.
(Appellant)
(Respondent)
ITA No 5085/Mum!2010 . Asst Year 2005-2006
The AddI.Commissioner of Income-tax
Range 9(3), Mumbai.
Mls.Tecnimont ICB Private Limited
Mumbai - 400 064.
(Appellant)
(Respondent)
Vs.
CO No.78/Mum!20I I : Asst.Year 2005-2006
-
(Arising out ofiTA No 5085IMum12010)
M/s.Tecnimont ICB Private Limited
The AddI.Commissioner of Income-tax
Mumbai - 400 064.
Range 9(3), Mumbai.
(Cross Objector)
(Respondent)
Vs.
..
Revenue by • Shri Ajlt Kumar Jam
Assessee by : Shri Rajan Vora
d(Ij~te of Hearing : 13.07.2012.
~/:,<" .,5
[]--------ORDER
The following point of difference has been referred to me by the Hon'ble
President U/S 255(4) of the Income-tax Act, 1361:"Whether in the facts and circumstances of the case, the net margin
realizedfrom a transaction with an Associated Enterprise (AE) found
and accepted at Arm's Length Price (ALP) can be taken as a
comparable being an internal comparable for computation of (sic arm) AfoP ofan international transaction with another AE?"
2.
The factual matrix of the case has been elaborately given by my learned
brothers in their respective opinions. StilI, I will briefly recapitulate the facts
which are material for decision on the question referred to me. The assesseecompany is engaged in activities like EPC lumpsum turnkey contracts,
2
ITA Nos.4608 & 50851M/iO & Co. 781M/ii
M/s. Tecnimont ICB Private Limited.
engineering f design services, supervision services, translation services and
feasibility studies. During the year in question, it rendered services to Tecnimont
group concerns through its personnel either from India or by deputation at the
Tecnimont office or at the field construction site. The assessee has a fully owned
subsidiary called ICB Contractors India Private Limited (hereinafter called 'ICB').
This company, in turn, received revenues from JTS Contracting Co. Mallta
(hereinafter called 'JTS') to the tune
total revenues.
of~26.26
crore, which constituted 59% of its
Both the ld. Members have agreed that JTS is an Associated
Enterprise (hereinafter called 'AE') ofICB. The assessee computed Arm's Length
Price (hereinafter called 'ALP') by using Transactional Net Margin Method
(hereinafter 'also called 'TNMM') using Profit Level Indicator (hereinafter called
'PLI') as Operating profit to Cost. In its transfer pricing study, the assessee chose
twelve cases as comparable giving average margin of operating profit to cost at
;;;~t{i\,r?iii:$~~;i;,;'
J~~~/"~H~''''~;~
y~,
:(
.:~
j~<.
;',1t.
15.37%. Theassessee declared that its margin from international transactions with
s at 75.48% on cost was better than the average profit margin on similar base
)~~~
1
<
twelve comparable cases shown by it. The AO made a reference to the Transfer
ricing Officer (hereinafter called 'TPO') u/s 92CA(1). During the course of
'tt';;;,i:'-~#'''''
proceedings before the TPO, the assessee argued that its margin of Operating
-~;;-"'l\1!<.
profit to cost was much higher than the comparable uncontrolled cases and hence
·'Ct",,","fUAll\
its international transaction be accepted at ALP. The TPO, after analyzing the facts
and circumstances of the case and also considering the submissions advanced on
behalf of the assessee, recorded the following conclusions, which are relevant for
answering the question referred to me:-
(i)
Twelve cases considered by the assessee as comparable are
functionally different on end level and hence should be excluded for
benchmarking.
3
(ii)
ITA Nos.4608 & 5085/MiIO & CO. 78/MlII
Mis.Tecnimont ICB Private Limited.
ICB is an internally comparable case which has earned 66.77% profit
margin over total cost. It is only this cost which should be considered
for determining ALP in assessee's case.
(iii) The assessee's contention that ICB had related party transactions of
,
~29.53
crore including ~26.26 crore as receipts from JTS and hence
the same be excluded as controlled transactions, was not acceptable.
3.
That is how the TPO adopted net profit margin over cost at 66.77% for
determining ALP in respect of the payments received by the assessee from its AEs
and resultantly proposed adjustment of
~7.13
crore (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
.).~.q!J'estion
referred to me, as under :-
(a)
The TPO 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 segment level.
(b)
ICB is functionally different inasmuch as it entered into the
project business executing various electrical and instrumentation
projects while the assessee's international transactions are in relation
to service segment.
'c)
Transactions of ICB with JTS constituted related party
transactions and hence the case of ICB should be excluded from the
comparable cases.
4
(d)
ITA Nos.4608 & S08SIMIIO & Co. 781M/II
. M/s.TecnimontiCB Private Limited.
On the basis of remaining ten comparable cases, the assessee's
transactions with its AEs and its margin on cost at 75.48% or even
44.21 % , was at arm's length and hence no addition was warranted.
4.
The learned AM in his opinion held that JTS is AE of ICB and hence the
transactions between them constitute controlled transactions. In that view of the
matter, he ruled out the case ICB for determining the ALP in respect of the
assessee's international transactions. It was further held that the learned CIT(A)
was justified in accepting ten out of twelve cases considered by the assessee in its
transfer pricing
study as comparable because the assessee had given segmental
I
data whereas the TPO rejected these cases due to non-comparability at the entity
level. He, therefore, declined to interfere with the view of the ld. CIT(A) in this
regard, thereby dismissing the appeal of the Revenue. On the other hand, the
le:<!me:d JM did not agree with the reasons as well as finding of the learned AM on
t\1~,\;!ssue
of internal comparable. The sum and substance of his finding is that
a transaction with AE is found and accepted at ALP, then such comparable
saction can also be considered for determining ALP in respect of other cases
aving transactions with its AEs. By applying this logic to the present situation, he
opined that since the transactions between ICB and JTS were found to be at ALP,
there was ho reason to ignore such internally comparable transaction for
determining ALP in respect of the assessee's international transactions. He held
that the contrary view of the ld. CIT(A) on this issue, as upheld by the ld. AM,
was not sustainable. On all other issues, he agreed with the opinion of the ld. AM.
In the final analysis, he allowed the appeal of the Revenue. That is how this matter
has come up before me as third member.
5.
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
5
ITA Nos.4608 & 5085/M/IO & CO. 78/MllJ
Mis.Tecnimont lCB Private Limited
realized from a transaction with an AE, found and accepted at ALP, can be taken
as a comparable being an internal comparable for computation of ALP of an
international transaction with another AE. To be more specific and in the present
context, the precise question is whether the case of rCB can be considered for
determining,ALP in the case of the assessee's international transactions when the
transactions of rCB with JTS are controlled transactions and the arm's length
margin in that case has been accepted at 66.77%.
6.
The ld. AR, at the very outset, submitted that it was not essential for the
Division Bench to delve into the question as to whether or not a comparable
controlled transaction of rCB could be considered for benchmarking. He stated
that the Id. ClT(A) gave one of the reasons for deleting the addition that the case of
rCB was not comparable to the assessee and the Members of the Division Bench
3",
accepted this .plea reiterated on behalf of the assessee during the course of
""_~"~'"::"'" ;,:":~}/:.;;~,~;\,'c
.
f
..
"''I-''~A?~pceedings
f
u/s 254(1).
It was thus stated that the reference made to the third
'<, -~-~";;\'
:,~;; ";~_
\l~Fber for consideration and decision itself was infructuous. On a specific query
t!~~1))jIraw my attention towards the finding recorded by the Id. Members in their
: :~~l;;})#
\~~j;~"tF'c~?i;~~spective opinions that the case of rCB is incomparable,
. ',.,,,>"
the ld. AR referred to
certain portions of the opinion of the Id. AM, which in his view constituted an
inference as to the finding given in favour of the assessee. I have thoroughly
perused the opinion given by the Id. AM. There is no verdict of the ld. AM on the
comparability or otherwise of the case of rCB with the assessee. The ld. JM also
did not express his view on this aspect of the matter. He simply dissented with the
opinion of the ld. AM on the question of considering a controlled transactions of
rCB for determining ALP of the assessee's international transactions.
It is
observed that the Id. CIT(A) ordered to delete the addition by adducing three
reasons. One of such reasons was that the case of rCB was not comparable with
that of the assessee. The Id. AM, affirmed the conclusion of the ld. CrT(A), by
mainly holding that rCB and JTS were associated enterprises and as such the
I
II
il
6
,
ITA Nos.4608 & 50851lvUIO & C0.78IMI1I
Jo.1Is. Tecnimont ICB Private Limited.
profit margin realised by ICB from such controlled transactions could not be used
for determining the ALP of the assessee's international transactions.
It is
imperative to bear in mind that if in a given case, CIT(A) sustains or deletes an
addition by examining the issue from more than one angle, all of which are
mutually exclusive
and the tribunal upholds such sustenance or deletion by
considering and deciding the issue from one of such angles, it cannot be impliedly
inferred that the reasoning of the CIT(A) 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 ttibunal subscribed to or negated various angles adopted by the CIT(A)
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 CIT(A) is upheld by
considenng the issue from one of the angles only, it is the approval of view of the
"LW"~:"~I-'}'''Ha~". authority
ca~ng,
by the tribunal from that angle alone. The other angles
be claimed as impliedly considered and decided by the tribunal unless there
sllJtl\\C:letlt hint in the four corners of order itself or other proceedings of the
:,,/:~.~J1~.fl
directly related to the case duly signed by the Members,
';'~:~4.\'i;.;;;~dtecIS[{m
to indicate a
on such other angle(s). Adverting to the facts of the instant case, it is seen
that the ld. AM, who rendered the leading opinion, did not specifically hold
"
anything about the comparability
1
or otherwise of the case of ICB with the
assessee. He observed that the TPO has rightly held that TNMM is tolerant to
functional differences between two concerns to some extent. In that view of the
matter, if some decision of the tribunal on this aspect is to be inferred, it is that he
approved the view of the TPO that the case ofICB was not incomparable with that
of the assessee because of the adoption of the TNMM for determining ALP, which
method takes care of minor functional differences.
Further, the ld. JM also
proceeded with the inference that the ld. AM has held the case of ICB to be
comparable. He expressed the dissenting opinion only on the question of whether
the controlled transactions of ICB can be considered for benchmarking, which pre-
7
ITA Nos.4608 & 5085/MIIO & CO. 78/MlIl
MIs.Tecnimont ICB Private Limited.
supposes the acceptance as to the comparability of this case. If either of the ld.
Members had accepted the case of ICB as incomparable, then the matter would
have ended there alone and such case would have gone out of reckoning for
determining the ALP. No point would have been left then to consider the question
of controlled ,or uncontrolled transactions of such incomparable case. The fact that
both the ld. Members have considered the case of ICB for the purposes of
comparison automatically implies that they held it to be comparable. They differed
only on the question of consideration of the controlled transactions of this
comparable case of ICB.
It is further relevant to note that both the ld. Members
have unanimously framed the question referred to uJs 255(4), which is about the
inclusion or exclusion of the controlled transactions of ICB. It demonstrates that
there was unison between both the ld. Members that the case ofICB is comparable.
In the otherwise possibility, there would have been one more preliminary question
for reference to the third member as to whether the case of ICB is comparable or
t. As both'the ld. Members have referred to only one question reproduced above,
re can be no foundation for contending at this stage that the case of ICB is not
mparable. All the relevant facts discussed above are clear pointer to the fact that
the ld. Members impliedly held the case of ICB to be comparable. This
contention raised on behalf of the assessee is, thus, jettisoned.
7.
The ld. AR 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 percent 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 ld. AR stated that the transactions of the ICB were not capable of being
characterized 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
8
ITA Nos. 4608 & 5085/MIIO & CO. 78/M/II
MIs.Tecnimont ICB Private Limited.
pertinent query, the ld. AR failed to draw my attention towards any categorical
finding given by the ld. Members on this aspect of the matter. I have meticulously
perused the opinion of the ld. AM but failed to find out any decision given by him
in this regard. The ld. JM has impliedly rejected this contention of the assessee,
which is evident from the fact that.he has strongly accentuated on comparing the
case of ICB for benchmarking on the premise that it is an internal comparable.
Further, the ld. AM also did not disagree with the ld. JM on this aspect of the
matter as is perceptible from the question proposed by both the ld. Members, which
does not dispute this finding recorded by the ld. JM.
8.
At this juncture I will like to clarify that the scope of proceedings before the
third member is confined to the question referred to by both the members of the
Division Bench. It is neither permissible nor desirable on the part of the third
>.'<.p1ember to examine the issues on which there is no divergence of opinion between
.' /\(}i~~ members 'of the division bench. His jurisdiction extends to the question referred
U~! im. On all other matters, the proceedings are final qua the third member. What
\" "not open for consideration by the third member is equally not open for arguments
by the rival parties. The parties before the tribunal are debarred from tossing up
any issue before the third member other than that which has been referred to him.
No matter or aspect of the matter already decided or left undecided by the division
bench, except the one on which the members of the division bench have recorded
dissent and framed question, can be assailed before the third member. His scope is
restricted to rendering decision on such point or points on which the members have
differed, nothing more nothing less. This position is amply manifest from the
language of section 255(4) which provides that: 1fthe members ofa Bench differ
in opinion on any point, the point shall be decided according to the opinion of the
majority, if there is a majority, but if the members are equally divided, they shall
state the point or points on which they differ, and the case shall be referred by the
,
President of the Appellate Tribunal for hearing on such point or points by one or
9
ITA Nos.4608 & 5085/MilO & Co. 78/Mlll
Mis. Tecnimont ICB Private Limited.
more of the other members of the Appellate Tribunal, and such point or points
shall be decided according to the opinion of the majority of the members of the
Appellate Tribunal who have heard the case, including those who first heard it.' A
bare perusal of this provision indicates that
'if the members of a
bench differ in
opinion on any point', then such point' shall be referred 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
c/iscw;sicJn it ,is. clear that the above point raised by the Id. AR also does not require
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 ALP. In this regard, section 92(1)
provides that any income arising from an international transaction shall be
computed having regard to the ALP. 'International transaction' has been defined in
section 92B(1) to mean' transactions between two or more associated enterprises,
either or both of whom are non-residents
.'. Coming back to the determination
of income arising from an international transaction on ALP, we require to visit
section 92C which deals with the computation of arm's length price. Sub-section
(I) provides that ALP in relation to an international transaction shall be determined
by any ofthe methods prescribed, being the most appropriate method having regard
to the nature of transaction and or class of transaction or class of associated persons
10
ITA Nos. 4608 & 5085/lvi/fO & CO 78/M/ll
Mrs.Tecnimont K'B Private Limited
or functions performed by such persons or such other relevant factors as the Board
may prescribe. This section makes a mention of five methods in specific and one in
general for determining the ALP. The specific methods are - (a) comparable
uncontrolled price method, (b) resale price method, (c) cost plus method, (d) profit
.split method, and (e) transactional net margin method; and the general method has
been set out as "(1) such other method as may be prescribed by the Board". The
modalities for working out the ALP in relation to these five specified methods have
been given distinctly in Rule lOR The assessee in the instant case adopted
transactional net margin method for benchmarking its international transactions.
The applicability of such method has not been disputed by the TPO. Thus it
becomes relevant to consider the mandate of Rule lOB(e), which provides for the
determination of ALP under TNMM in the following manner ;-
"JOB. Determination of arm's length price under section 92C.-(J)
For the purposes of sub-section (2) of section 92C, the arm's length
price in relation to an international transaction shall be determined
by any of the following methods, being the most appropriate method,
in the following manner, namely : (e) transactional net margin method, by which,(i) the net profit margin realised by the enterprise from an
international transaction entered into with an associated enterprise is
computed in relation to costs incurred or sales effected or assets
employed or to be employed by the enterprise 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
ofsuch 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 ofnet profit margin in the open market
11
ITA Nos.4608 & 5085/M/IO & CO. 78/M/II
Mrs.Tecnimont ICE Private Limited
(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. "
10.
Clause (i) of Rule I OB( e) stipulates that net profit margin from an
international transaction with an AE is computed in relation to cost incurred or
sales effected or assets employed etc. Clause (ii) is material for the present
purpose. It provides that the net profit margin realized 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. The 'base' of this
provision takes one back to clause (i) which refers to cost incurred or sales
effected or assets
employed or to be employed. On splitting clause (ii) into two
,
':Marts. it divulges that the reference is made to internal and external comparables.
part of clause (ii) refers to 'the net profit margin realised by the enterprise ....
a comparable uncontrolled transaction' and the other part talks of 'the net
margin realised ....by an uncontrolled enterprise from a comparable
uncontrolled transaction'. It transpires that whereas the first part refers to the
profit margin from internal comparable uncontrolled transactions, the second part
refers to profit margin from an external comparable uncontrolled transaction. Thus
it is discernible that what is to be compared under this method is profit from a
comparable uncontrolled transaction. The word 'comparable' may encompass
intemal comparable or external comparable. There is cue in the rule itself as to
preference to be given to internal comparable uncontrolled transactions vis-a-vis
externally comparable uncontrolled transactions. It is because the delegated
legislature has firstly referred to the net profit margin realized by the enterprise
(internal) from a comparable uncontrolled transaction and, thereafter, it points
towards net profit margin realized by an unrelated enterprise (external) from a
12
ITA Nos.4601:! & 5085/M/10 & CO 78/M/11
Mrs. Tecnimont ICB Private Limited
comparable uncontrolled transaction. Thus where potential comparable is
available in the shape of an uncontrolled transaction of the same assessee, it is
likely to have higher degree of comparability vis-a-vis comparables identified
amongst the uncontrolled transactions of third parties. The underlying object
behind computing ALP of an international transaction is to find out the profits
which such enterprise would have earned if the transaction had been with some
third party instead of related party. When the data is available showing profit
margin of that enterprise itself from a third party, it is always safe and advisable
to have recourse
to such internal comparable case. The reason is patent that the
f
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 neutralized when comparison is made with internal comparable.
x consequenti, it follows that an internal comparable uncontrolled transaction is
e noteworthy vis-a-vis its counterpart i.e, external comparable.
, 1;.;),1
, ",d
s
Reverting to the question of making companson of net profit margin of
rnally or externally comparable case from uncontrolled transaction, it can be
seen that clause (ii) of Rule IOB(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 clause
(iii) of Rule lOB(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 uncontrolled transaction is
adjusted to account for difference, if any, between the international transaction and
the comparable uncontrolled transaction. When the net profit margin from a
comparable uncontrolled transaction is adjusted in the light of clause (iii) of Rule
IOB(e), the resulting figure constitutes benchmark, which is then taken into
13
ITA Nos.4608 & 50851MIlO & CO.781MIl I
Mis.Tecnimont lCB Private Limited.
account to arrive at an ALP in relation to the international transaction entered into
by the assessee with its AEs. Thus it is evident that Rule 10B(e) vividly refers to
making a comparison of net profit margin with some comparable 'uncontrolled
transaction'.
,
There is no reference to making a comparison of an assessee's
international transactions with a comparable controlled transaction. Comparable
may be internal or external, but in any case such comparable must be that of
uncontrolled transaction or number of such uncontrolled transactions.
12.
In fact, the entire scheme of determining ALP of an international
transaction is based on making comparison with certain comparable uncontrolled
transactions. It is more glaring from the command of Rule lOB given in all the
methods which have been prescribed uls nC(l) for determining ALP. The first
method is 'comparable uncontrolled price method'.
•.••..• y,
Procedure for determining
ALP under this method is given in Rule 10B(a). As the very name of the method
\;.2;,\\tself suggests that the price charged or paid for the property 'ina comparable
transaction' is identified. Such price in a comparable uncontrolled
transaction is adjusted on account of differences, if any. The consequential price
is taken as benchmark for considering the assessee's international transactions
with its AEs. The second method is 'resale price method'. The procedure for
determining price under this method is given in Rule 1OB(b). Under this method,
the price at which property purchased or services obtained by the enterprise from
an AE is resold or are provided to 'an unrelated enterprise' is identified. This
method also compares the gross profit margin in a controlled transaction with the
,
gross profit margin in an uncontrolled transaction based on specific functions
performed. Next is 'cost plus method'. The modus operandi for determining of
ALP under this method is provided in section lOB(c) which again refers to making
comparison with 'uncontrolled transaction'.
14
13.
ITA Nos. 4608 & 5085/k1l10 & CO. 78/11'1111
M/s.Tecnimont lCB Private Limited.
A brief overview of various methods prescribed for determining ALP
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 ALP 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 realized by an enterprise with the net
profit realized from a comparable uncontrolled transaction.
14.
What is an 'uncontrolled transaction' has been clearly defined under
Rule IOA(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
it is a transaction between two non-associated enterprises. If the transaction is
two associated enterprises, it goes out of the ambit of 'uncontrolled
saction' under Rule lOA. When section 92C is read along with Rules lOB(e)
d lOA, it becomes abundantly clear that in computing ALP under the
r
transactional net margin method, a comparison of the assessee's net profit margin
from international transactions with its AEs has necessarily to be made with that
of the net profit margin realized by the same enterprise or an unrelated enterprise
from a comparable but definitely uncontrolled transaction i.e, a transaction
between non-associated enterprises. 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 international transaction with
comparable uncontrolled transaction, by no sheer logic a comparable controlled
transaction can be employed for the purposes of making comparison. There is no
warrant for diluting the prescription given by the statute or rules when such
15
ITA Nos. 4608 & 5085/M/Io & CO. 78/M/Il
Mrs.Tecnimont ICB Private Limited.
prescription itself serves the ends of justice properly and is infallible. If the view
of the Revenue that a controlled transaction should not be shunted out for the
purposes of benchmarking, is accepted, then all the relevant provisions contained
in Chapter )f.. 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 the comparison is made again with net profit margin realized from
transactions between two AEs, instead of third parties. it may demonstrate the
same cooked results in both the situations, thereby leaving no scope for any
adjustment.
frustrated.
,
In this eventuality, the very object of such provisions will be
Thus it follows that the ALP can be determined only by making
'cornparison with a comparable uncontrolled transaction and not a comparable
transaction.
15.
There is one more dimension of this case. The transactions between ICB
and ITS are not only controlled, but the profit margin of ICB also passed through
the examination by the TPO, who declared it at arm's length. The ld. DR contended
that once controlled transactions are verified by the TPO and found at ALP, then
the difference between controlled and controlled transactions is obliterated.
Canvassing this point further, he accentuated that even though the transactions
between ICB and ITS were controlled, still they constituted a good basis for
comparison as the TPO found them at arm's length.
16.
This contention of the ld. DR 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
16
ITA Nos.4608 & 5085/M/1O & Co. 78/M/ll
Mrs. Tecnimont ICE Private Limited.
intra group cross border transactions in such a way as to reduce the incidence of tax
in India. A multinational company, having concerns across the world, may resort
to pricing the intra group transactions in such a manner that lower income gets
offered in countries with high tax rates and higher income gets reflected in
countries with lower tax rates, so that its overall tax liability is shrinked. If the tax
rates in India are relatively higher vis-a-vis the other country, say A, and the
international transaction is between the concerns in India and country A, there may
be an attempt on the part of multinational company to value the transaction in such
a way that the income to be offered in India gets sliced away and corresponding
income is increased in the hands of the company situated in country A. There may
a converse situation as well. It may also happen that the tax rates in India are lower
than the other country, say B, and the international transaction is between the
concerns in India and country B. In such a situation, the multinational company
may attempt to value the transaction in such a manner that the income to be offered
India is swelled, thereby reducing the corresponding income in the hands of the
pany situated in country B. It is palpable that in both such situations, the value
uunsacuon between the associated enterprises is tailor-made to suit the overall
,;Yi"h'rp"t
of the, multinational company. It does not represent the transaction at its
true value. In the first situation, the receipt from the transaction recorded in India
will be lower and its ALP will be higher. In the second situation, the receipt from
the transaction recorded in India will be higher but the benchmark price will be
lower. Whereas the first situation will necessitate the making of an addition on
account of transfer pricing adjustment in the hands of Indian company, the second
situation will not permit any deduction in the declared income of the such Indian
concern to that extent. It is so because if the ALP is higher than the value of the
transaction recorded in the books of account, it requires making addition on
account of transfer pricing adjustment. However, in the opposite situation, there is
no mandate for reducing the income. In such a second situation, the receipt from
the transaction recorded shall be considered at ALP, notwithstanding the fact that it
17
IS
ITA Nos. 4608 & 5085/MiIO & Co. 78/MiI I
Mis. Tecnimont ICB Private Limited
at exaggerated figure when compared with a comparable uncontrolled
transaction. 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 (I) 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
whereas in the first situation, the ALP represents the true value of transaction
as will be there in the ordinary course without having any regard to
relationship between the concerns, it is not so in the second situation. In the
/cC'."W'
case, even though the value of transaction or profitability will be at more than
111)<,1l\O'
level, still it will be described as the ALP. In such later case, the ALP of the
transaction or the arm's length profit cannot be considered as benchmark for the
purposes of making comparison in other cases. That appears to be the probable
reason for which the legislature has ignored the controlled transactions,
though at ALP,
even
and restricted the ambit only to uncontrolled transactions for
computing ALP in respect of international transactions between two AEs.
17.
I, therefore, answer the question referred to me u/s 255(4) in negative by
holding that the net profit margin realized from a transaction with an AE cannot be
taken as a comparable being internal comparable for computation of ALP of an
international transaction with another AE even though the net margin from a
transaction with AE is found and accepted at ALP.
18
18.
ITA Nos.4608 & 5085/MllO.& Co. 781M/ii
Mrs.Tecnimont lCB Private Limited.
Before parting with this matter, I consider it my duty to record that the ld.
AR relied on certain decisions including DCB India Pvt. Ltd. VS. ACIT (2009)
121 ITD 131 (Mum), Bayer. Material Science Pvt. Ltd. VS. Addtl. CIT (2012)TIL-09-ITAT-MUM-TP and DCIT VS. BP India Services P. Ltd. (2011) 133 lTD
526 (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 ACIT
VS. NGC Network (India) (P.) Ltd. (2011) 56 DTR (Mum)(Trib) 1 to buttress his
I
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 Id. Representatives before me.
For the foregoing reasons I agree with the view expressed by the learned
The Registry of the Tribunal is directed to place this matter before the
lvision benoh for passing an order in accordance with majority view.
Sd/(R.S.Syal)
ACCOUNTANT MEMBER
th
Mumbai : 17 July, 2012.
Devdas*
19
Copy
~
2.
3.
4.
.. 5.
6.
ITA Nos. 4608 & 5085/M/IO & Co. 78/lvVlJ
Mis. Tecnimont lCB Private Limited.
to:
The Appellant.
The Respondent.
The CIT concerned
.~
The CIT(A)-XV, Mumbai. :2-D
The DR/ITAT, Mumbai,
Guard File.
TRUE COPY.
By Order
Assistant Registrar, ITA T, Mumbai.

to the judgement

Transcription

Similar documents

RE/MAX vs. THE INDUSTRY

Morgan Stanley Smith Barney Benefit Access Quick

AISD AMEX Purchasing Card Corporate Account Reconciliation

Nina Roket

Clinical Practice Procedures: Assessment/Glasgow Coma Scale

ICB Sample credit Report

Danske eBank user manual

Presentazione di PowerPoint

Read/View - Bane Marketing and Communications

Layout 2 - Scotiabank

The 2015 ICB Prospectus