Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: due date for vat payment :: Central Excise rule to resale the machines to a new company :: form 3cd :: TDS :: TAX RATES - GOODS TAXABLE @ 4% :: list of goods taxed at 4% :: VAT Audit :: VAT RATES :: ACCOUNTING STANDARDS :: cpt :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: articles on VAT and GST in India :: ACCOUNTING STANDARD :: empanelment :: ARTICLES ON INPUT TAX CREDIT IN VAT
 
 
From the Courts »
 Ravneet Takhar Vs. Commissioner Of Income Tax Ix And Ors.
 Jaiprakash Associates Ltd. Vs. Commissioner Of Income Tax
 Formula One World Championship Limited Vs. Commissioner Of Income Tax, International Taxation-3 And Anr.
 Commissioner Of Income Tax International Taxation-3 Delhi Vs. Formula One World Championship Ltd. And Anr.
 Reliance Communications Ltd vs. DDIT (ITAT Mumbai)
  Sushila Devi vs. CIT (Delhi High Court)
 Ashok Prapann Sharma vs. CIT (Supreme Court)a
  Vatsala Shenoy vs. JCIT (Supreme Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 M.K.Overseas Pvt. Ltd. Vs. Pr.Commissioner Of Income Tax-06
 Arshia Ahmed Qureshi Vs. Pr. Commissioner Of Income Tax-21

M/s Orange Business Services India Networks Pvt. Ltd., (Formerly known as Equant Network Services India Pvt. Ltd.), Vs. DCIT, Circle-3, Gurgaon
May, 11th 2015
                 IN THE INCOME TAX APPELLATE TRIBUNAL
                       DELHI BENCH: `I' NEW DELHI

                BEFORE SMT DIVA SINGH, JUDICIAL MEMBER
                                   AND
                   SH.N.K.SAINI, ACCOUNTANT MEMBER

                I.T.A .No.-1201/Del/2015 & SA-169/Del/2015
                        (ASSESSMENT YEAR- 2010-11)
M/s Orange Business Services India         vs DCIT,
Networks Pvt. Ltd., (Formerly known as        Circle-3,
Equant Network Services India Pvt. Ltd.),     Gurgaon
           th
Tower-C, 7 Floor, DLF Infinity Tower,
Phase-II, Cyber City, Sector-25,
Gurgaon, Haryana
PAN-AABCE8124H
(APPELLANT)                                   (RESPONDENT)

                  Appellant by      Kanchun Kaushal, CA &
                                    Oindrila Bala, CA
                  Respondent by     None

                       Date of Hearing          25.03.2015
                    Date of Pronouncement       08 .05.2015

                                    ORDER
PER DIVA SINGH, JM

        By the present appeal the assessee assails the correctness of the order
dated 30.01.2015 passed by the AO in pursuance to the directions of the
Dispute Resolution Panel (hereinafter referred to as 'DRP') on various grounds.
However at the time of hearing, it was his submission that the issue is covered
in assessee's favour by the decision of the ITAT in assessee company's
predecessor's   case   rendered   in ITA   No.-5571/Del/2011    and   ITA   No.-
5896/Del/2012 dt. 15.04.2014 (copy filed in the Court). Reliance thereon it
was submitted has been placed as per Ground No.-3.4 in the present
proceedings.
1.1.    The facts and circumstances, it was submitted, continue to remain the
same.     Inviting attention to Ground No.-3.3 and 3.4 raised in the present
appeal and relying on the judicial precedent cited, it was his submission that
the other grounds would become academic.
1.2.   Accordingly the issue was stated to be covered by the said decision.
1.3. For ready-reference the specific grounds addressed are reproduced
hereunder:-
          3.3.     "disregarding Profit Split Method ('PSM') as the most
          appropriate     method     for  benchmarking       Appellant's
          international transactions based on erroneous reasons and
          instead, applying the Transactional Net Margin Method
          ('TNMM') as the most appropriate method;
          3.4.     disregarding the fact that the judicial precedent in
          the case of the Appellant's predecessor entity Global One
          India Private Limited (ITA nos. 5571/Delj2011 and ITA nos.
          5896/Del/2012) on the application of PSM, adjudicated by
          the Hon'ble Delhi Income Tax Appellate Tribunal is squarely
          applicable in the case of the Appellant."
2.     Before we proceed to address the issues, it is necessary to bring out the
fact that the present appeal filed by the assessee came to be argued on three
different dates by the assessee. The first addressal in the afore-mentioned line
as brought out in the first para was made on 16th March 2015.              The Ld.
Standing counsel for the Revenue appeared not to have the benefit of the
aforesaid decision. Accordingly, in order to afford time to the Revenue to go
through the same, the hearing was adjourned to 19.03.2015. The Ld. AR in the
meantime was also directed to file a synopsis.
2.1.   In the said background the appeal again came up for hearing on
19.03.2015.    On the said dated, the Ld. Standing Counsel for the Revenue
within a few minutes of the start of the Court proceedings made a request for
adjournment in a certain batch of appeals on behalf of the CIT DR, Mr.
A.K.Singh (not then present in the Court). The request was made on the ground
that he, as the Standing Counsel, did not have the authority to represent the
Revenue in the two batches of interconnected 7/8 appeals each. However the
oral request for adjournment was found to be factually incorrect as the two
separate batch of appeals contrary to the submissions of the Ld. Standing
Counsel were infact unconnected with each other. Accordingly after informing
this fact to the Ld. Standing Counsel his oral request for adjournment on
incorrect facts was declined and a pass over was instead given till CIT DR, Mr.
A.K.Singh    was present.      The Ld. Standing Counsel           informed that
Mr.A.K.Singh would be available only on or after at 12.00 Noon.
2.1.1. While proceeding with the other appeals, since lack of authority was
previously pleaded by the Standing Counsel in certain cases, the ld. Standing
Counsel was required to clarify to the Bench first on his authority to argue in
the appeals and stay petitions remaining on the cause list.   However, instead
of clarifying on the issue raised by himself, the Standing Counsel shockingly on
being so questioned walked out of the Court while shouting that he cannot
argue.
2.1.2. Hence, considering that the Revenue was left unrepresented        in the
Court, the Court proceedings were directed to be stopped in the interest of the
Revenue. The Court re-assembled only on the arrival of Ld. CIT DR (Transfer
Pricing), Mr. A.K.Singh. However, some time after the re-commencement of the
hearing, the Ld. Standing Counsel had walked back in the Court for a few
minutes and again walked out. The Ld. AR for the benefit of Ld. CIT DR, Mr. A.
K. Singh re-iterated his submissions and relied upon the synopsis filed for the
benefit of the Revenue. On the completion of his submission, the Revenue was
required to respond. Both the Ld. Standing Counsel as well as the Ld.CIT DR,
Mr. A. K. Singh were present at that time to address the Departmental stand
but neither responded to Ld. AR's     submissions.    Instead, the Ld. CIT DR
sought time. Time was granted again for the benefit of hearing the Revenue's
response and matter was adjourned to 25.03.2015. It is unfortunate to note
that during the hearing in the subsequent matters on the said date, the ld. CIT
DR also walked out from the Court when his objections to the Court's recording
in the proceedings in regard to the mis-demeanor of the Standing Counsel was
declined as recorded in the Court proceedings of the matters on the said date.
In the facts of the present case however Ld. CIT DR had sought time which was
granted.
2.2.   The appeal accordingly came up for hearing on 25.03.2015 on the
request of the Ld. CIT DR. However on the said date, Ld. CIT DR again sought
time though in writing setting out the following reasons:-
       "In this connection, we respectfully submit that the CIT(DR) who is to
       appear before the Hon'ble Bench is not available in the afternoon.
       Because of certain prior engagement."
                                                          (emphasis provided)
2.3.   No one was present on behalf of the Revenue to address the "certain prior
engagement" which interfered with his earlier request for adjournment which
was specifically sought in order to afford him opportunity to put the Revenue's
position on record. It is further seen that till the date of passing this order, no
request has been made by the department seeking time to address the issues.
It therefore becomes evident that instead of gainfully utilising the time granted
in good faith to the Ld. Standing Counsel/CIT DR so that they can address the
issues, the time so sought was not utilised for the stated purpose and the
concerned Ld. Standing Counsel/CIT DR instead opted to, carrying on the
transgression committed in the Court earlier and chose to leave the Revenue
unrepresented thereby abdicating their onerous responsibilities. The faith of
the Court in the genuineness of the requests on behalf of the Revenue for
adjournments necessarily entailsed not only wasting of valuable time of the
Court but also government resources and expenses. Yet he trust so reposed in
the genuineness of the requests was found to be misplaced and abused. Hence
in the facts of the case, on the completion of the Ld. AR's arguments, the
adjournment request was rejected as the Court functioning cannot be allowed
to be obstructed ad-infinitum by the whims & fancies of persons who are
reluctant to work where admittedly more than reasonable time had already
been given to the Revenue who still chose to remain unrepresented.              The
application was rejected holding as under:-
       "Rejected in view of the fact that the Ld. AR had argued his appeal on
       16th March 2015 and in order to accommodate Revenue adj. To 19th
       march 2015. Ld. AR argued it again on the said date due to change of
       DR in view of the above where the department is avoiding hearing the
       petition is rejected. Ld. AR heard stay becomes infructuous. No
       coercive action till the passing of the order.   Read out in the Tribunal.
       Typed copy to be provided as per Rules"
          Sd/-                                                       Sd/-
       (N.K.SAINI)                                             (DIVA SINGH)
       ACCOUNTANT MEMBER                                   JUDICIAL MEMBER
3.     Thus in the afore-mentioned background, the present appeal came up to
be argued three times by the Ld. AR where despite opportunities provided in
good faith repeatedly to the Revenue the Revenue, through its standing counsel
and Ld. CIT DR (International Taxation) chose not to advance any arguments
whatsoever in support of the impugned order.               Thus, in the absence of any
submission from the Revenue the appeal is being decided ex-parte qua the
Revenue on the basis of material available on record. We can only observe with
surprise the tolerance of indiscipline by the Appropriate authorities who appear
to have chosen to give their tacit compliance to the behaviour by evidently not
taking day to day Reports of their performance and have allowed such a
situation to continue by not addressing the patent dereliction of official duties
evident in the behaviour of their representatives which borders on contempt of
the Court.
4.     Reverting to the facts of the case, Ld. AR addressing Ground Nos.3.3 &
3.4, has submitted that in the facts of the present case the issue is covered in
assessee's favour by virtue of the aforesaid order of the Tribunal in Global One
India Private Limited (ITA nos. 5571/Del/2011 and ITA nos. 5896/Del/2012).
The said order it has been stated had been cited before the DRP however the
DRP's order is silent on the issue as a result of this the AO while passing the
final order did not address it.
4.1.   For ready-reference, attention has been invited to the internal page 11 of
the DRP's order dated 22.12.2014. Inviting attention to the submissions dated
02.12.2014 annexed at page 169-220 of the appeal set and Paper Book
including page 48        which are copy of these aforesaid submissions dated
02.12.2014 also placed at Paper Book page 1-52 of the Paper Book. Based on
the aforesaid pages, it has been submitted that the point at issue is covered in
assessee's favour.
4.2.   Addressing the facts it has been submitted that the assessee formerly
known as Equant Network Services India Pvt. Ltd. as has been taken note of
by the AO in his order dated 11.03.2014 u/s 143(3)/144C was the successor
entity of Global One India Private Limited (hereinafter referred to as "GOIPL")
wherein the order of the Tribunal is available.
4.3.   The assessee it was submitted had taken over the business operation of
GOIPL post the GOIPL's Board       decision of ceasing GOIPL operations in FY
2008-09.
4.4.   The assessee it was submitted has all along claimed that it follows the
same business model, undertakes the same operations, services the same
Equant group clients and employs the same management personnel and
employees as was done by GOIPL.
4.5.   In the facts of GOIPL also it was submitted the assessee had applied the
profits split method (hereinafter referred to as "PSM") which on similar
reasoning was not approved of by the Transfer Pricing Officer (hereinafter
referred to as 'TPO'). The TPO in the facts of the assessee's predecessors case
i.e. GOIPL also considered transactional net margin method (hereinafter
referred to as "TNMM") as the most appropriate method (hereinafter referred to
as "MAM") on similar reasoning as in the facts of the present case.
4.6.   Accordingly it was his prayer that in the facts of the present case also
following the decision of the Co-ordinate Bench in similar facts and
circumstances in the case of the predecessor of the assessee, PSM may be
directed to be held as the most appropriate method.
5.     We have heard the submissions advanced on behalf of the assessee and
note that for one reason or the other             the Revenue chose to remain
unrepresented despite adequate opportunity. Being of the view that the Court
proceedings cannot be allowed to be held at ransom at the dictates of persons
reluctant to discharge their assigned duty, the present appeal is being decided
ex-parte qua the Revenue as per the relevant Court proceedings of the various
dates which have been summed up in the earlier part of this order.
5.1.   The relevant facts of the case as borne out from the record are that the
assessee declared an income of Rs.6,95,61,820/- by way of electronically filing
its return which was subjected to scrutiny assessment. A reference to the TPO
was made by the AO to determine the Arm's Length Price u/s 92CA(3) of the
Act in respect of the international transaction entered into by the assessee in
the year under consideration. It is seen that the TPO proposed an adjustment
u/s 92CA of Rs.17.41 crore odd. The assessee availing of the statutory remedy
filed objections before the DRP wherein reliance was placed on the order of the
predecessor of the assessee. The DRP rejected the assessee's objections posed
to the TPO's order and held that the TNMM is the most appropriate method as
opposed to profit split method relied upon by the assessee.
5.2.   Pursuant to this order, the appeal has been filed.
5.3.   Considering the prayer of the assessee addressed vide Ground No.-3.3 to
3.4, wherein reliance has been placed on the order of the Co-ordinate Bench in
the case of GOIPL, stated to be predecessor of the assessee, we find that the Ld.
AR has specifically invited our attention to the objections filed before the DRP
(copy at pages 1 to 52), Annexure-I of the same at page 48 reads as under:-
       "Annexure 1 - Note on transfer of business operations to Equant
       Networks India Private Limited
       Global One India Pvt. Ltd. (`GOIPL'), incorporated under the laws
       of India, was a 100% subsidiary of Equant BV. GOIPL was
       engaged in providing internet and related network services to
       the group's customers in India. The services offered by the GOIPL
       included internet direct connections, installation/configuration of
       routers etc., and support solutions developed around the basic network
       services.

       During financial year ('FY') 2008-09, due to change in Foreign
       Direct Investment (`FDI') norms in India, where in, FDI in any
       telecommunication company had to be restricted to 74% of the GOIPL's
       share capital, the business operations of GOIPL were decided by
       the Board of Directors to be transited under the new FDI and
       regulatory regime and hence to be continued in newly
       incorporated entity compliant with required licenses and
       shareholding pattern.

       A new company, Equant Networks Services India Private
       Limited ('ENSIPL' or 'Assessee' or 'the Company') was incorporated
       in 2007 as a Foreign Investment Promotion Board approved Joint
       Venture Company between EGN B.V., Equant Pte, Limited and Emery
       Technologies Private Limited ('ETPL') in order to ensure the presence of
       the Equant Group in India. EGN B.V. is common shareholder of GOIPL
       and ENSIPL except that in ENSIPL, pursuant to FDI regulation, EGN
       B.v. holds 74% stake as against 100% stake in GOIPL. Rest 26% of the
       share holding in ENSIPL is held by ETPL.

       ENSIPL during the FY 2008-09 obtained licenses from
       Department of Telecommunications (`DOT') to provide services
       under the National Long Distance ('NLD') and International Long
       Distance (`ILD') service categories, in India. The Company
       became operational from August 2008 and is engaged in providing
       data services including IP voice services and related network services
       to the Group's customers in India. The services offered by ENSIPL
       under its NLD & ILD license are layer 2 and layer 3 data services
       which mainly cover IPVPN, MPLS, ATM, Frame Relay, X.25, X.28
       Protocol etc, as was provided by GOIPL.
       During FY 2008-09, both GOIPL and ENSIPL had ISP license.
       However, during the year GOIPL's Board of Directors decided to
       transit the network operations from GOIPL to ENSIPL. As a
       consequence, both the employees of GOIPL were transferred and
       network equipments were sold (following a valuation
       undertaken by a third party valuer) to ENSIPL during the year.
       Further, the operations in GOIPL were            discontinued w.e.f.
       August 8, 2008 and customer were gradually started to be
       served through ENSIPL and a Board resolution was passed to
       cease operations completely in GOIPL w.e.f. March 31, 2009.
       Post FY 2008-09, there was no business in GOIPL at all and
       ENSIPL had taken over servicing the customers of the Equant
       Group.

       ENSIPL, though a distinct entity, took over the business
       operations of GOIPL post the GOIPL's Board decision of ceasing
       GOIPL's operations in FY 2008-09. ENSIPL follows the same
       business model, undertakes the same operations, services the
       same Equant Group clients and employs the same management
       personnel and employees as was done by GOIPL."

                                                        (emphasis provided)

5.4.   A perusal of the same shows that as per the pleadings on record there
can be no doubt that the assessee in the present proceedings has taken over
the business operations of GOIPL after its Board's decision that the              GOIPL
shall cease operations in F.Y.2008-09. It is further seen that the assessee has
repeatedly, before the DRP and also before us, put forth the claim that it
follows the same business model, undertakes the same operations, services the
same Equant Group clients and employs the same management personnel and
employees as was done by GOIPL. The claim has also been put forth that as a
consequence, the employees of GOIPL were transferred and the                      network
equipments of GOIPL were sold (following a valuation undertaken by a third
party valuer) to ENSIPL during the year. The said claim put forth before the
DRP, it is seen, has not been addressed by the said authority. The said claim it
is seen has been made even before us on three different dates by the assessee
which it is seen remains unrebutted by the Revenue. In the absence of any
representation by the department, considering the pleadings of the assessee
and the material available on record, we propose to examine the same.
5.5.   In the said context it is seen that as per para 4.1 of the TPO's order,
Equant    Network     Services,   India   (hereinafter    referred   to   as   "ENSIPL")
subsequently named as M/s Orange Business Services India Networks Pvt. Ltd.
(hereinafter referred to as OBSINPL i.e the assessee) is a company incorporated
under the laws of India.       It is a joint venture company between EGN B.V,
Equant Pte. Ltd. and Emery Technologies Private Limited wherein                EGN B.V.
and Equant Pte. Ltd. are the foreign investors in the joint venture and are part
of the FT Group. ENSIPL was incorporated in the year 2007 and during the
F.Y. 2008-09 and as per the TPO obtained licenses from Department of
Telecommunications to provide services under the NLD and ILD service
categories in India. The Company became operational from August 2008 and is
engaged in providing data services including IP voice services and related
network services to the Group's customers in India.            The services offered by
ENSIPL under its NLD & ILD license as per the Transfer Pricing order are layer
2 and layer 3 data services which mainly cover IPVPN, MPLS, ATM, Frame
Relay, X25, X28 Protocol etc.
5.6.   It is further seen that the TPO enumerated the following functions of the
assessee in para 5.1 :-
       5.1. "Functions Performed by ENSIPL (Taxpayer)
       ENSIPL is one of the operating entities of the group in India. ENSIPL is
       primarily engaged in providing data services and related network
       services to group's customers located in India. The data services
       offered by ENSIPL under the NLD and ILD service categories include
       provision of IP Voice services and related network services and
       services relating to installation/configuration of routers etc. The
       services offered by ENSIPL under its NLD & ILD license are layer 2 and
       layer 3 data services which mainly cover IPVPN, MPLS, ATM, Frame
       Relay X25, X28 Protocol etc.

       For the provision of these services, ENSIPL utilizes the global network
       footprint for connecting the customers outside the Indian territory.
       ENSIPL also provides Equant's fully managed support solutions
       developed around the basic internet services offered by the Company.

       ENSIPL has separate teams in India that are engaged in undertaking
       sales and marketing activities and that undertaking filed operations
       viz installation/configuration of routers etc and fully managed support
       solutions developed around the basic network services. Further,
       ENSIPL also owns and deploys necessary network equipments."

5.7.   In the facts of the present case, we find that repeatedly the assessee vide
reply dated 17.01.2014 before the TPO and before the DRP has advanced the
arguments that PSM          was the most appropriate method as its correct
application, satisfies the conditions.         Namely, (a) that the international
transactions should involve the transfer of unique intangibles and (b) there are
multiple international transactions which are so interrelated or integrated that
they cannot be evaluated separately.
5.8.   In order to support its claim that the services rendered by the group
entities are interrelated, it has been submitted that it is engaged in providing
data services and related network services to customers in India; Globally, the
Equant Group is a recognized leader in telecom services and provides global,
integrated and customized communication infrastructure solutions that enable
the key business processes of its customers; Customers contracts of the Group
are for provision of integrated services on Equant Group's network which is
spread across the globe; in many cases the customers of Equant Group have
one decision maker, the head office, which is usually located in one country
and Equant Group deals directly with one location to complete the sales
contract and invoice the customer centrally for all services in all countries;
generally, only one Equant Group entity records the revenues generated from
the multinational customer; underlying costs of providing services are
generated across the span of the Equant Group, which creates a mismatch
between where the revenue is recorded and where the expenses are incurred to
provide the services; in some cases, the customers' decision-makers are spread
between different countries, and require the services to be billed between more
than one location, but not necessarily all the locations where the services are
provided- this again results in a mismatch between where the revenues are
recorded and where the services are provided; each of the entities in the Equant
Group is reliant upon the other functions to generate global profits or losses for
Equant Group, the services and investments made by each of these entities are
of a non-routine nature; the Key Industry Success Factors for the business of
the Equant Group are stated to be : a) Price           Competition; b) network
capability; c) global footprint/ span; d) performance reliability; e) Service
Quality; and f) Value added services/ solutions offered. The various operating
entities of the Equant Group own/ deploy the necessary leg of the network
footprint in their respective country/ jurisdiction.
5.9.   A perusal of the facts as considered by the Co-ordinate Bench in GOIPL
show that the facts in the case of GOIPL were also identical. The TPO in the
present proceedings also considered the fact that similar facts were there in the
preceding years as the company had barely started its operations in August,
2008 and started realizing revenue from December, 2008 onwards and infact
value to Network depreciation was given only in the month of March 2009 and
it is for this reason the TPO holds      that despite application of PSM by the
assessee, no adverse inference was drawn by the Revenue in the earlier year as
the revenues earned during the 1st 4 months of its operations were considered
to be not significant. The TPO on facts in the present case has also concluded
that merely because revenues were insignificant accordingly interference in the
method was not done in the facts of the present case. It is held by him that
merely on the basis of this fact alone does not mean that PSM as a method had
been accepted by the Revenue. It is seen that the TPO has further held that
every year has to be looked at afresh as the concept of res-judicata does not
apply in transfer pricing proceedings.
5.9.1. A perusal of the order of the Co-ordinate Bench shows that identical reasoning and fact has been considered by the Co-ordinate Bench and the departmental stand taken has not been accepted. 5.9.2. For ready-reference, we extract the relevant finding:- "The Transfer Pricing Officer, had after a detail enquiry in the earlier assessment years, accepted "PSM" as the "MAM". This being so, in our view, rejection of this method on the ground that resjudicata does not apply to income tax proceedings is not correct. Recently, the Hon'ble Supreme Court, in the case of CIT vs. Excel Industries Ltd. has held that "the revenue cannot be allowed to Flip-flop on the issue. Consistency should be a rule rather than an exception". There are a number of other decisions on this issue. Suffice it to say that, the T.P.O., in this case, has not brought out any valid reasons to depart from the earlier view of his Predecessor." (emphasis provided) 5.10. It is also seen that the stand taken by the TPO in the facts of the present case to justify his action that TP proceedings shall be conducted based on the provisions of the Indian Transfer pricing regulations and the judicial guidance provided by the Indian judiciary rejecting the supporting argument of the assessee that as a method PSM has been accepted in other tax jurisdictions has also not been approved of by the Co-ordinate Bench. 5.10.1. Similar reasoning was considered by the Co-ordinate Bench and rejected in the following words:- 19.2. "The TPO's opinion, that acceptance of "PSM" in other jurisdictions as of no consequence, to our mind, is also incorrect. No doubt, the arm's length price has to be determined with reference to the Indian Transfer Pricing regulations only. At the same time, guidance can be taken from OECD commentaries, UN guidelines and other such literature.. The Hon'ble Supreme Court, on a number of occasions, did refer to Commentaries of OECD, UN etc., while arriving at conclusions. One such case is, Azadi Bachao Andolan, 184 CTR SC 450. Even the Indian transfer Pricing Regulation recognize this aspect, as evident from the introduction of Rule 10 AB, which allows the use of any other method which is generally accepted, for determining ALP." 5.11. It is further seen that the assessee in support of its justification for PSM as the most appropriate method even before the TPO as per the afore-said letter dated 17.01.2014 (which has been extracted in the TPO's order also) relying on its T.P. Study has submitted that each 'Key value driver' is measured as: (i) Network Operations: The value of the contribution made to network operations by each entity is determined as a sum of the following four items. · Network deprecation: Based on the financials of each entity. · Network personnel cost: Staff costs relating to personnel engaged in network related activities. · Historical investment in the network: Historical investment in the network is measured by the accumulated unabsorbed investments in the network made by Equant Network Systems Ltd. ("ENSYS") an Equant Group Company in Ireland. · Foregone performance payments: Prior to the execution of a Memorandum of Understanding ("MOU") on September 10, 2004 effective January 1, 2004 amongst all Equant entities, a prior inter- company transfer pricing agreement with ENSYS required ENSYS to compensate each entity within the Group for the network cost incurred by each entity including depreciation of capital equipment and bought in costs. In addition, each entity was to receive a Performance Payment, provided the Equant share price met a desired target. Any performance payments that may become due to the Group entities have been foregone by the entities, as they are now participating in the RPSM and the previous agreement has been terminated. Such foregone performance payments (if any) represent an investment by the Group entities in the on-going network operations. (ii) Sales and Marketing Operations: The sales and marketing operations undertaken by each entity within the Group are measured by the staff costs of the personnel engaged in sales and marketing related activities. (ii) Field Operations: The field operations undertaken by each entity within the Group are measured by the staff costs of the personnel working in the relevant field operation functions." 5.11.1. A perusal of the GOIPL's order passed by the Co-ordinate Bench shows that similar submission was not accepted even in the facts of assessee's predecessor's case as a justification for PSM as the MAM by the TPO in the facts of that case also for the reason that according to the TPO in the facts of the present case as well as the GOIPL, the T.P. Study Report did not show any unique intangibles or value added services being provided by the assessee. He has been of the view that only some routine exercises have been mentioned that any service provider would undertake to continue in business. Moreover, no patents/copyrights were found to be held in these intangibles. As in GOIPL's case herein also the TPO took the position that a unique intangible is one that adds value to the existing set up. In the facts of the present case as in GOIPL's case the TPO held that no evidence of any new business practice, a new marketing strategy, a new technological development or anything of this kind that can be stated to have been developed by it that can be said to have added value to the business of the assessee. 5.11.2.It is seen that these objections have also been considered by the Co- ordinate Bench who did not agree with the above stated stand of the TPO for rejecting assessee's stand for using PSM as MAM and the Co-ordinate Bench also rejected the TPO's justification for using TNMM. 5.12. Similarly the argument of the assessee that the provision of network services is a three stage process wherein (i) the network signal first reaches a point in India called the Point of Supply; (ii) From there it travels to a 'landing station' where the distance between the point of supply and the landing station may be maintained by the assessee or it may be outsourced; and (iii) The last part where from the landing station to the terminal of the customer is called 'last mile connectivity'. The TPO considering the claim held that this is almost always outsourced to another service provider and infact the assessee depended upon other unrelated entities to complete its business activity which facts accordingly to him led to the conclusion that no unique intangible was provided by the assessee to the business. 5.12.1.These objections of the TPO it is seen were also there in GOIPL's case and they have not found favour by the Co-ordinate Bench who at internal page 40 of the order considering the TPO's objection that the assessee has not put forth any evidence that it had unique intangibles it was held that "PSM" can be adopted as "MAM" under the domestic TP Regulations even in cases involving multiple interrelated international transactions, which cannot be evaluated separately for determining ALP of any one transaction. The Co- ordinate Bench further held that when the transaction involved contributions of multiple entities and are integrated and interrelated and they cannot be separately evaluated for the purpose of determining ALP of any one transaction, the "PSMP" is the "MAM". 5.12.2.The Co-ordinate Bench also held that use of unique intangibles is not a must for adopting "PSM". Considering the facts of the present case it was held that "in any event, we have considered the facts of this case and we have, elsewhere in this order, given a finding that the assessee does possess unique intangibles in the field of data transfer and communications, and comparing the operations with a simple E Mail and as a plug in operator is not factually correct. If the assessee is held to be a simple Email operator, then it is to be explained as to why reputed global enterprises would pay them for data transmission, when E Mail is free. The assessee does offer unique services as compared to an ordinary Email service and it is these unique services which are its intangibles." 5.13. Thus, it is seen that the above finding also deals with the objections of the TPO in the present proceedings that the assessee's business does not have any integration with the other group entities. The objection of the TPO in the present proceeding in para 9 namely that the assessee's business does not have any integration with the other group entities and the assessee runs its business independently in India. The reasoning of the TPO that for the deployment of third party entities for the proliferation of its network services, there is nothing on record to show that the assessee is getting any help or leverage from the other group entities and that the assessee is operating in India as a standalone entity for setting up the operational requirements in India as a justification for applying TNMM has also been considered by the Co- ordinate Bench in para 18.3 and for the following reasons set out in para 18.4 it was disagreed with:- 18.4. "In our view, the TPO has erred on facts. The revenues in the case of the assessee are generated in a transaction where there is contribution from multiple entities. It is true that the assessee runs its business independently in India. This leads to a conclusion that the assessee is an independent entrepreneur . But when a transaction is integrated and interrelated and when costs are incurred by multiple entities and the revenues are to be apportioned to multiple entities, then the factual conclusions of the T.P.O have to be vacated." 5.14. It is also seen that similar reason of the TPO has been considered by the Co-ordinate Bench as justification for resorting to TNMM namely that the general reason advanced by the assessee that business losses are due to Business start up; Poor management; Deliberate business strategy; Economic downturn; Business cycle stage; Excessive financial risk; Effect of government intervention according to the TPO did not address the losses made. Similarly the explanation of the assessee not accepted by the TPO that there is no loyalty to any particular service provider as far as customers are concerned and the argument that there is continuous erosion of margins for telecommunication industry rejected by the TPO as facts common to all entities operating in the domain of provision of internet services and cannot be unique to only the assessee. 5.14.1. The order of the Co-ordinate Bench it is seen has considered the reasoning of the TPO and over ruling the TPO's views the arguments of the assessee have been accepted. 5.15. Similarly the reasoning of the TPO in the facts of the present case which is identical to the TPO's reasoning in GOIPL's case wherein on considering the terms and agreements the conclusion drawn by the TPO that no independent entity would have agreed to such terms nor would it have agreed to be tied down by the financial performance of another entity/entities over which/whom it has little or no control have also been considered by the Co-ordinate Bench and disagreed with. 5.15.1. These issues have been considered by the Co-ordinate Bench in para 20.1 & 20.2 in the following manner:- 20.1." We also hold that the factum of the assessee having a loss is no ground to reject "PSM" as the "MAM". The decision as to what is the "MAM" does not depend on the factor as to whether an assessee has a loss or has a profit. On the objection of the T.P.O. rejecting the allocation done by the Administrator, we find that the arrangement with the AE under the agreement demonstrates that the administrator does not have absolute discretionary power to determine inter group payment. The agreement provides that disputes, if not reasonably resolved, can be referred for arbitration. Thus, the conclusion drawn by the T.P.O. is erroneous. In our view, this cannot be a ground for rejection of PSM. The conclusion of the T.P.O. that the PSM is adopted only to camouflage the loss at the net level, is merely an allegation which, in our view, is not substantiated or demonstrated by the T.P.O. and hence is devoid of merit. 20.2. When determining as to which is the MAM, the TPO is required to primarily examine the functional profile of the assessee and the nature of the international transaction and having undertaken such an exercise, we are of the view the "PSM" is the "MAM"." 5.16. Thus on a careful reading of the order of the Co-ordinate Bench juxta- posed with the reasoning and conclusion of the TPO upheld by the DRP which remain the same in the present proceedings also, it is seen that the Co-ordinate Bench came to the following conclusions in the following paras set out below:- 18.4. "In our view, the TPO has erred on facts. The revenues in the case of the assessee are generated in a transaction where there is contribution from multiple entities. It is true that the assessee runs its business independently in India. This leads to a conclusion that the assessee is an independent entrepreneur. But when a transaction is integrated and interrelated and when costs are incurred by multiple entities and the revenues are to be apportioned to multiple entities, then the factual conclusions of the T.P.O have to be vacated. 18.5. Transaction Net Margin method compares the profit margin of tax payer arising from a non arm's length transaction, or a group of such similar transactions, with the profit margin realized by the assessee with its A.E. on a similar transaction whereas the PSM allocates operating profits or losses from controlled transactions, on the principle of relative contributions made by each party in creating the combined revenues. 18.7. In our view the argument of the assessee, that in cases where there are commercial losses, TNMM cannot be applied, cannot be accepted as a general rule. To this extent, we agree with the conclusions of the T.P.O. T.N.M.M. can be applied even in cases where there are commercial or other losses. At best, suitable adjustments may be asked for. On the role of the administrator we will be discussing the same separately. 18.8. The next objection of the assessee is that TNMM cannot be used for bench marking returns earned by the number of complex entities/entrepreneur, where each make valuable unique contributions. The TPO has not specifically dealt with this objection of the assessee. We find much force in this contention of the assessee and agree with the same. We are supported by OECD Guidelines, on this issue. At para 2.59 of the OECD Guidelines it is stated as follows: A transactional net margin method is unlikely to be reliable if each party to a transaction makes valuable, unique contributions, see paragraph 2.4. In such a case, a transactional profit split method will generally be the most appropriate method,( see paragraph 2.109)." In such a case, a transactional profit split method will generally be the Most Appropriate Method."" 5.17. A reading of the order in GOIPL's case further shows that the view so take was only after considering the judicial precedent laid down by the Special Bench in the case of Aztech Software and Technology Services Ltd. vs ACIT 107 ITD in para 17.3; and the OECD in Transfer Pricing Guidelines for multi- national enterprises and tax administration; and United Nations practical Manual on Transfer Pricing for developing countries; US Transfer Pricing by Harlow N.Higinbotamo; "Practical Guide to US Transfer Pricing" by R.T.Cole the Co-ordinate Bench and only then after deliberating on the methodology and jurisprudence available thereon the conclusions had been arrived. These deliberation are extracted hereunder for ready-reference:- 17.3. "Before us there are two methods for consideration, i.e. PSM and TNMM. The Special Bench of the Tribunal, in the case of Aztech Software and Technologies Services Ltd. vs. ACIT, reported in 107 ITD, at page , states as follows: "Profit Split Method (PSM) Rule 10B (1) (d) prescribes PSM as follows: (i) The combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined; (ii) The relative contribution made by each of the associated enterprises to the earning of such combines net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in the similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub clause(ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction; 181. This method may be applicable in case where transactions involved transfer of unique, intangible or any multiple interrelated international transactions, which cannot be evaluated separately for determining the ALP of any one transaction. 182. The profit split method first identifies the profit to be split for the associated enterprise from the controlled transactions in which the associated enterprises are engaged. It then splits those profits between the associated enterprises on an economically valid basis that approximates the divisions of profits that would have been anticipated and reflected in an agreement transactions or a residual profit intended to represent the profit that cannot readily be assigned to one of the parties, such as the profit arising from high value, sometimes unique, intangibles. 183. The contribution of each enterprise is based upon a functional analysis and valued to the extent possible by any available reliable external market data. The functional analysis is an analysis of the functions performed (taking into account assets used and risks assumed) by each enterprise. The external market criteria may include, for example, profit split percentages or returns observed among independent enterprises with comparable functions." 17.4. The OECD transfer pricing guideline for multinational enterprises and tax administration in Chapter 2 on transfer pricing methods, at page 93, para C.1 states as follows: "C.1 In general 2.108 The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the "combined profits"). References to "profits" should be taken as applying equally to losses. See paragraphs 2.124-2.131 for a discussion of how to measure the profits to be split. It then splits those combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. See paragraphs 2.132-2.145 for a discussion of how to split the combined profits." 17.5. On residual analysis analyses, it is stated as follows: "C.3.2.2 Residual analyses 2.121 A residual analysis divides the combined profits from the controlled transactions under examination in two stages. In the first stage, each participant is allocated an arm's length remuneration for its non-unique contributions in relation to the controlled transactions in which it is engaged. Ordinarily this initial remuneration would be determined by applying one of the traditional transaction methods or a transactional net margin method, by reference to the remuneration of comparable transactions between independent enterprises. Thus, it would generally not account for the return that would be generated by any unique and valuable contribution by the participants. In the second stage, any residual profit (or loss) remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances, following the guidance as described at paragraphs 2.132-2.145 for splitting the combined profits. 2.122. An alternative approach to how to apply a residual analysis could seek to replicate the outcome of bargaining between independent enterprises in the free market. In this context, in the first stage, the initial remuneration provided to each participant would correspond to the lowest price an independent seller reasonably would accept in the circumstances and the highest price that the buyer would be reasonably willing to pay. Any discrepancy between these two figures could result in the residual profit over which independent enterprises would bargain. In the second stage, the residual analysis therefore could divide this pool of profit based on an analysis of any factors relevant to the associated enterprises that would indicate how independent enterprises might have split the difference between the seller's minimum price and the buyer's maximum price. 2.123 In some cases an analysis could be performed, perhaps as part of a residual profit split or as a method of splitting profits in its own right, by taking into account the discounted cash flow to the parties to the controlled transactions over the anticipated life of the business. One of the situation in which this may be an effective method could be where a start-up is involved, cash flow projections were carried out as part of assessing the viability of the project, and capital investment and sales could be estimated with a reasonable degree of certainty. However, the reliability of such an approach will depend on the use of an appropriate discount rate, which should be based on market benchmarks. In this regard, it should be noted that industry wide risk premiums used to calculate the discount do not distinguish between particular companies let alone segments of business, and estimates of the relative timing of receipts can be problematic. Such an approach, therefore, would require considerable caution and should be supplemented where possible by information derived from other methods." 17.6. The United Nations ­ Practical Manual on Transfer Pricing for Developing Countries ­ Chapter VI ­ Transfer Pricing Methods, states as follows: "6.3.13.1. The Profit Split Method is typically applied when both sides of the controlled transaction contributes significant intangible property. The profit is to be divided such as is expected in a joint venture relationship. 6.3.13.2. The Profit Split Method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction(or in controlled transactions that it is appropriate to aggregate) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. Figure 5 illustrate this. 6.3.13.3 The Profit Split Method starts by identifying the profits to be divided between the associated enterprises from the controlled transactions. Subsequently, these profits are divided between the associated enterprises based on the relative value of each enterprise's contribution, which should reflect the functions performed, risks incurred and assets used by each enterprise in the controlled transactions. External market date (e.g. profit split percentages among independent enterprises performing comparable functions) should be used to value each enterprise's contribution, if possible, so that the division of combined profits between the associated enterprises is in accordance with that between independent enterprises performing functions comparable to the functions performed by the associated enterprises. The Profit Split Method is applicable to transfer pricing issues involving tangible property, intangible property, intangible property, trading activities or financial services. 17.7. Residual analysis is stated as follows: 6.314.7 The Residual Profit Split Method is used more in practice than the contribution approach for two reasons. Firstly, the residual approach breaks up a complicated transfer pricing problem into two manageable steps. The first step determines a basic return for routine functions based on comparables. The second step analysis returns to often unique intangible assets based not on comparables but on relative value which is, in many cases, a practical solution. Secondly, potential conflict with the tax authorities is reduced by using the tow step residual approach since it reduces the amount of profit that is to be split in the potentially more controversial second step. 6.3.17.3. In step 1 of the residual analysis, a basic return for the manufacturing function is determined for Company A and Company B. Specially a benchmarking analysis is performed to search for comparable independent manufactures which do not own valuable intangible property. The residual profit, which is the combined profits of company A and company B after deducting the basis (arm's length ) return for the manufacturing function, is then divided between Company A and Company B. This allocation is based on relative R & D expense which are assumed to be a reliable key to measure the relative value of each company's intangible property. Subsequently, the net profits of Company A and Company B are calculated in order to work back to a transfer price." 17.8. In "Practical Guide to U.S. Transfer Pricing by Robert T Cole, Chapter 10, PSM authored by arlow N.Higinbotham, pg nos.10-52, it is stated as follows: "Thus, to summarize, RPSM provides a test of arm's length transfer pricing between value- added stages of an integrated enterprise that is consistent with the separate enterprise standard under conditions of resource mobility and competitive capital and product markets. By valuing functional activities and capital in terms of the competitive norms of the market place, RPSM attributes extra- normal profit or loss in proportion to the relative investment cost (or other valuation) of the non-routine intangible assets to which such extraordinary profits pertains. This approach is consistent with the IRS statutory objective u/s 482 of requiring consideration for intangible property transferred in a controlled transaction to be commensurate with the income attributable to the intangible. It is also consistent with the result that would obtain at arm's length under a hypothetical joint venture agreement between the different parties contributing their respective investments of functional and entrepreneurial capital." 17.9. Residual Profit Split Method in the book U.S.Transfer Pricing by HARLOW N.HIGINBOTAM at Chapter 10, it is stated as follows: 10.04 Residual Profit Split Method As illustrated in Figure 10-2, RPSM proceeds in two steps: Step 1: Functional capital is provided a return derived from data for functional comparables, i.e. independent companies performing similar routine manufacturing or distribution functions; and Step 2:The remaining "residual" operating profit or loss is allocated based on residual, "entrepreneurial" capital so as to equalize the rate of return on such capital, adjusted for market differences in the cost of capital. In actual practice, implementation of the RPSM concept outlined above involves the determination of a number of interrelated valuations of functional and entrepreneurial activities in different countries and economic circumstances. The existing IRS regulations provide relatively little specific guidance concerning these valuations, and thus leave open the question of how best to determine the "relative value of each controlled taxpayer's contribution to the success of the relevant business activity in a manner that reflects the functions performed, risks assumed, and resources employed by each participant in the relevant business activity, consistent with the comparability provisions of 1.482- 1(d) (3)." 18. We now consider TNMM. In Aztek Software and Technology Services (supra) the TNMM is stated as follows. "Transactional Net Margin Method (TNMM) : Rule 10(B)(1)(e) describes TNMM as under: (i) The net profit margin realized 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 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; (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 of net profit margin in the open market; (iv) The net profit margin realized 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. The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an AE on similar operation. Under this method, the net profit margin realized by an AE from an international transaction is computed in relation to a particular factor such as costs incurred, sales, assets utilized etc. The net profit margin realized by an AE is compared with net profit margin of the uncontrolled transactions to arrive at the ALP. The TNMM is similar to RPM and CPM to the extent that it involves comparison of margin earned in a controlled situation with margins earned from comparable uncontrolled situation. The only difference is that, in the RPM and CPM methods, comparison is of margins of gross profits and whereas in TNMM the comparison is on margins of net profit. TNMM requires comparison between net margins derived from the operations of the uncontrolled parties and net margins derived by an AE from similar operations. Net margin is indicated by the rate of return on sales or cost or operating assets, and this forms the basis for TNMM. A functional analysis of the tested party or the independent actions are comparable and the adjustments that are required to be made to obtain reliable results. The tested party would have to consider other factors, like cost of assets of comparable companies, etc. while applying the return on assets measure. Ordinarily, the tested party, has to be the party provided services because it is on the basis of rate of return on sales or cost or operating assets that transactional margin is computed. These parameters generally available in the case of party providing service. 18.1. The, in its review of comparability and methods, dt. 22nd July,2010 in Part III B Transactional Net Margin Method, B I, page 33, paras 2.58 to 2.59, held as under. "B. Transactional net margin method B.1. In general 2.58 The transactional net margin method examines the net profit relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9 ­ 3.12). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particular that the net profit indicator of the tax payer from the controlled transaction ( or transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) should ideally be established by reference to the net profit indicator that the same tax payer earns in comparable uncontrolled transactions, i.e. by reference to "internal comparables" (see paragraphs 3.27-3.35). A functional analysis of the controlled and uncontrolled transactions is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results. Further, the other requirements for comparability, and in particular those of paragraphs 2.69-2.75, must be applied. 2.59. A transactional net margin method is unlikely to be reliable if each party to a transaction makes valuable, unique contributions, see paragraph 2.4. In such a case, a transactional profit split method will generally be the most appropriate method, see paragraph 2.109. However, a one-sided method (traditional transaction method or transactional net margin method) may be applicable in cases where one of the parties makes all the unique contributions involved in the controlled transaction, while the other party does not make any unique contribution. In such a case, the tested party should be the less complex one. See paragraphs 3.18-3.19 for a discussion of the notion of tested party." 18.2. In the working draft of a chapter of the practical Manual in Transfer Pricing for Developing Countries, in Chapter 5 Transfer Net Margin Method is discussed at para 2.1. "Transactional Net Margin method 2.1. Definition and choice of tested party The transactional net margin method (`TNMM') is a profit based method that can be used to apply the arm's length principle. The TNMM can be applied on either the related party manufacturer or the related party distributor as the tested party for transfer pricing purposes. The TNMM examines the net profit margin relative to an appropriate base (e.g.costs, sales, assets) that a tax payer realizes from a controlled transaction (or transactions that are appropriate to be aggregated). The profit margin indicators are discussed in paragraph 2.3 below. The TNMM compares the net profit margin (relative to an appropriate base) that the tested party earns in the controlled transactions to the same net profit margins earned by the tested party in comparable uncontrolled transactions or alternatively, by independent comparable companies. As such, the TNMM is a more indirect method than the cost plus/resale price method that compares gross margins. It is also a much more indirect method than the CUP method that compares prices, because it uses net profit margins to determine (arm's length) prices. One should bear in mind that many factors may affect net profit margins, but may have nothing to do with transfer pricing. The TNMM is used to analyse transfer pricing issues involving tangible property, intangible property or services. When the TNMM is applied on controlled transactions involving tangible property, the tested party in the analysis can either be the related party manufacturer or the related party distributor. The choice of the tested party depends on the availability of comparable data. This usually implies that the TNMM is applied to the least complex of the related parties involved in the controlled transaction, because generally more comparable data will then be in existence and fewer adjustments will be required to account for differences in functions and risks between the controlled and uncontrolled transactions. In addition, the tested party should not own valuable intangible property. This, by the way, is also the reason why it is recommended to select the least complex entity for the application of the cost plus method or resale price method." 18.3. The Transfer Pricing , in the case at hand, has applied the TNMM method. While doing so, at para 3.7, he considered the objection of the assessee to the use of TNMM as the MAM. He observed as follows: "that the assessee's business does not has any integration with the other group entities has already brought in sufficient details in the earlier part of this order. The assessee runs its business independently in India. For the deployment of their party entities for the proliferation of its network services, there is nothing on record to show that the assessee is getting any help or leverage from the other group entities. The assessee is negotiating with the Indian regularators all by itself. The assessee is operating in India as a standalone entity for setting up the operational requirements in India. Therefore, there is no case to say that TNMM does not qualify to be the MAM for its reason." 5.18. It is only after the above marathon discussion that the afore-quoted conclusion in para 18.4 to 18.8 reproduced in the earlier part of this order have been arrived at leading to finally holding in para 19 and 19.1 that the TPO's rejection of PSM as the MAM on facts was incorrect. 5.19. It is also seen that considering the facts, the Co-ordinate Bench has held that cost incurred by the assessee was available on record in the audited books maintained. In para 20.2 the Co-ordinate Bench holds that the TPO when determining as to which is the MAM, is required to primarily examine the functional profile of the assessee and the nature of the international transaction. The Co-ordinate Bench held that the said exercise has been done by them and thereafter they have arrived at the conclusion that "PSM" is the "MAM". The Co-ordinate Bench's finding that if the TPO was of the view that PSM has not been correctly applied then this conclusion did not justify rejection of the method. The Co-ordinate Bench on the facts which in the facts of the present case continued to remain the same had infact concluded that the assessee has applied Residency Profit Split Method. Considering the legal position thereon the Co-ordinate Bench remitted the matter back to the TPO with speaking directions and it is this direction which is sought to be repeated by the assessee herein also in the facts of the present case. For ready-reference we first extract the relevant deliberation by the Co-ordinate Bench:- 20.5. "The assessee in this case has adopted `residuary profit split method'. As explained in various commentaries, residual PSM involves: i) Determination of routine return ii) Allocation of residuary profits. At the stage of determination of routine profits, as already stated, bench marking has to be done by the assessee, with reliable external market data from uncontrolled transactions." 5.20. It is further seen that in paras 20.6 to para 20.10 the Co-ordinate Bench after discussing the facts vis-à-vis the rules in the absence of a direct reference to the issue of allocation of residuary profits in the Rules under the Statute the Co-ordinate Bench in para 20.11 and para 2.12 directed the TPO to determine ALP by adopting Residual PSM as MAM by allocating residual profits based on the relative value of each enterprise's contribution, as suggested by various commentaries considered. In para 20.13, the Co-ordinate Bench makes reference to the Amendment in Rule 10AB by the IT (Sixth Amendment) Rules 2012 w.e.f 01.04.2012 under the sub-head "other method of determination of ALP". 5.20.1.The aforesaid paras are extracted herein for ready-reference:- 20.6. Coming to the allocation of residuary profits, in our view, though the Rules do suggest that benchmarking should be done with external uncontrolled transactions, we find that this is an impossibility in this case, as it is not possible to get a comparable. On a perusal of the various commentaries, we are of the view that such allocation can be done, based on how much each independent enterprise might have contributed. Relative contribution has to be determined, based on key value drivers. Bench marking at this stage is not practicable as comparables having similar, multiple, interrelated and integrated transactions, would be difficult to find. Thus, in our view, in such a situation, a harmonious interpretation of the provisions is required to make the rule workable, so as to achieve the desired result of determination of the "ALP". The secondary stage of allocation of Residuary Profits is to be done on the basis of contribution of each entity, as stated in the commentaries and Guidelines referred above, as these are generally accepted. 20.7. The argument of the Ld. Counsel of the assessee that the provisions have to be read down cannot be accepted, as law has to be interpreted as provided in the statute. Nevertheless, to make the provisions workable, a harmonious interpretation is the requirement, as held by the Supreme Court in CIT vs. J.H.Gotla, reported in 156 ITR 985. Such harmonious interpretation, in our view, does not tantamount to misreading the provisions, or to the reading down of a provision. Both the OECD Transfer Pricing Guidelines as well as the UN Draft Method of Transfer Pricing for Developing Countries, suggest that an allocation of residual profits under PSM should be done, based on contributions by each entity. 20.8. We have already extracted the OECD Transfer Pricing Guidelines at para 17.4. At para 2.121, it is stated as follows: "In the second stage, any residual profit (or loss) remaining after the first stage division would be allocated among the parties based on an analysis of the facts and circumstances, following the guidance as described at paragraphs 2.32 to 2.145 for splitting the combined profits. The paragraphs read as follows. "C.3.4. How to split the combined profits C.3.4.1. In general 2.132 : The relevance of comparable uncontrolled transactions or internal data and the criteria used to achieve an ;arm's length division of the profits depend on the facts and circumstances of the case. It is therefore not desirable to establish a prescriptive list of criteria or allocation keys. See paragraphs 2.115-2.117 for general guidance on the consistency of the determination of the splitting factors. In addition, the criteria or allocation keys used to split the profit should: · Be reasonably independent of transfer pricing policy formulation, i.e. they should be based on objective data (e.g. sales to independent parties), not on data relating to the remuneration of controlled transactions (e.g. sales to associated enterprises), and · Be supported by comparables data, internal data, or both. C.3.4.2 Reliance on data from comparable uncontrolled transactions 2.133 One possible approach is to split the combined profits based on the division of profits that actually results from comparable uncontrolled transactions. Examples of possible sources of information on uncontrolled transactions that might usefully assist the determination of criteria to split the profits, depending on the facts and circumstances of the case, include joint venture arrangements between independent parties under which profits are shared, such as development projects in the oil and gas industry; pharmaceutical collaborations, co-marketing or co-promotion agreements; arrangements between independent music record labels and music artists; uncontrolled arrangements in the financial services sector; etc. C.3.4.3 Allocation keys
2.134 In practice, the division of the combined profits under a transactional profit split method is generally achieved using one or more allocation keys. Depending on the facts and circumstances of the case, the allocation key can be a figure (e.g. a 30%-70% split based on evidence of a similar split achieved between independent parties in comparable transactions), or a variable (e.g. relative value of participant's marketing expenditure or other possible keys as discussed below). Where more than one allocation key is used, it will also be necessary to weight the allocation keys used to determine the relative contribution that each allocation key represents to the earning of the combined profits. 2.135 In practice, allocation keys based on assets/capital (operating assets, fixed assets, intangible assets, capital employed) or costs (relative spending and/or investment in key areas such as research and development, engineering, marketing) are often used. Other allocation keys based for instance on incremental sales, headcounts (number of individuals involved in the key functions that generate value to the transaction), time spent by a certain group of employees if there is a strong correlation between the time spent and the creation of the combined profits, number of servers, data storage, floor area of retail points, etc. may be appropriate depending on the facts and circumstances of the transactions. Asset-based allocation keys 2.136 Asset-based or capital-based allocation keys can be used where there is a strong correlation between tangible or intangible assets or capital employed and creation of value in the context of the controlled transaction. See paragraph 2.145 for a brief discussion of splitting the combined profits by reference to capital employed. In order for an allocation key to be meaningful, it should be applied consistently to all the parties to the transaction. See paragraph 2.98 for a discussion of comparability issues in relation to asset valuation in the context of the transactional net margin method, which is also valid in the context of the transactional profit split method. 2.137 One particular circumstance where the transactional profit split method may be found to be the most appropriate method is the case where each party to the transaction contributes valuable, unique intangibles. Intangible assets pose difficult issues in relation both to their identification and to their valuation. Identification of intangibles can be difficult because not all valuable intangible assets are legally protected and registered and not all valuable intangible assets are recorded in the accounts. An essential part of a transactional profit split analysis is to identify what intangible assets are contributed by each associated enterprise to the controlled transaction and their relative value. Guidance on intangible property is found at Chapter VI of these Guidelines. See also the examples in the Annex to Chapter VI "Examples to illustrate the Transfer Pricing Guidelines on intangible property and highly uncertain valuation". Cost-based allocation keys 2.138 An allocation key based on expenses may be appropriate where it is possible to identify a strong correlation between relative expenses incurred and relative value added. For example, marketing expenses may be an appropriate key for distributors-marketers if advertising generates material marketing intangibles, e.g. in consumer goods where the value of marketing intangibles is affected by advertising. Research and development expenses may be suitable for manufacturers if they relate to the development of significant trade intangibles such as patents. However, if, for instance, each party contributes different valuable intangibles, then it is not appropriate to use a cost-based allocation key unless cost is a reliable measure of the relative value of those intangibles. Remuneration is frequently used in situations where people functions are the primary factor in generating the combined profits. 2.139 Cost-based allocation keys have the advantage of simplicity. It is however not always the case that a strong correlation exists between relative expenses and relative value, as discussed in paragraph 6.27. One possible issue with cost based allocation keys is that they can be very sensitive to accounting classification of costs. It is therefore necessary to clearly identify in advance what costs will be taken into account in the determination of the allocation key and to determine the allocation key consistently among the parties. Timing issues 2.140 Another important issue is the determination of the relevant period of time from which the elements of determination of the allocation key (e.g. assets, costs, or others) should be taken into account. A difficulty arises because there can be a time lag between the time when expenses are incurred and the time when value is created, and it is sometimes difficult to decide which period's expenses should be used. For example, in the case of a cost-based allocation key, using the expenditure on a single-year basis may be suitable for some cases, while in some other cases it may be more suitable to use accumulated expenditure (net of depreciation or amortization, where appropriate in the circumstances) incurred in the previous as well as the current years. Depending on the facts and circumstances of the case, this determination may have a significant effect on the allocation of profits amongst the parties. As noted at paragraphs 2.116-2.117 above, the selection of the allocation key should be appropriate to the particular circumstances of the case and provide a reliable approximation of the division of profits that would have been agreed between independent parties. C.3.4.4 Reliance on data from the taxpayer's own operations ("internal data") 2.141 Where comparable uncontrolled transactions of sufficient reliability are lacking to support the division of the combined profits, consideration should be given to internal data, which may provide a reliable means of establishing or testing the arm's length nature of the division of profits. The types of such internal data that are relevant will depend on the facts and circumstances of the case and should satisfy the conditions outlined in this Section and in particular at paragraphs 2.116-2.117 and 2.132. They will frequently be extracted from the taxpayers' cost accounting or financial accounting. 2.142 For instance, where an asset-based allocation key is used, it may be based on data extracted from the balance sheets of the parties to the transaction. It will often be the case that not all the assets of the taxpayers relate to the transaction at hand and that accordingly some analytical work is needed for the taxpayer to draw a "transactional" balance sheet that will be used for the application of the transactional profit split method. Similarly, where cost-based allocation keys are used that are based on data extracted from the taxpayers' profit and loss accounts, it may be necessary to draw transactional accounts that identify those expenses that are related to the controlled transaction at hand and those that should be excluded from the determination of the allocation key. The type of expenditure that is taken into account (e.g. salaries, depreciation, etc.) as well as the criteria used to determine whether a given expense is related to the transaction at hand or is rather related to other transactions of the taxpayer (e.g. to other lines of products not subject to this profit split determination) should be applied consistently to all the parties to the transaction. See also paragraph 2.98 for a discussion of valuation of assets in the context of the transactional net margin method where the net profit is weighted to assets, which is also relevant to the valuation of assets in the context of a transactional profit split where an asset based allocation key is used. 2.143 Internal data may also be helpful where the allocation key is based on a cost accounting system, e.g. headcounts involved in some aspects of the transaction, time spent by a certain group of employees on certain tasks, number of servers, data storage, floor area of retail points, etc. 2.144 Internal data are essential to assess the values of the respective contributions of the parties to the controlled transaction. The determination of such values should rely on a functional analysis that takes into account all the economically significant functions, assets and risks contributed by the parties to the controlled transaction. In those cases where the profit is split on the basis of an evaluation of the relative importance of the functions, assets and risks to the value added to the controlled transaction, such evaluation should be supported by reliable objective data in order to limit arbitrariness. Particular attention should be given to the identification of the relevant contributions of valuable intangibles and the assumption of significant risks and the importance, relevance and measurement of the factors which gave rise to these valuable intangibles and significant risks. 2.145 One possible approach not discussed above is to split the combined profits so that each of the associated enterprises participating in the controlled transactions earns the same rate of return on the capital it employs in that transaction. This method assumes that each participant's capital investment in the transaction is subject to a similar level of risk, so that one might expect the participants to earn similar rates of return if they were operating in the open market. However, this assumption may not be realistic. For example, it would not account for conditions in ;capital markets and could ignore other relevant aspects that would be revealed by a functional analysis and that should be taken into account in a transactional profit split." Para 6.3.14 ­ Step 2: Allocation of Residual Profit (i.e. profit remaining after step 1) between the associated enterprises based on the facts and circumstances. If the residual profit is attributable to intangible property then the allocation of this profit should be based on the relative value of each enterprise's contributions of intangible property. 20.9. In the UN Transfer Pricing Manual, Chapter VI, at para ` 6.3.17.4, it is stated as follows. "The PSM involves the determination of the factors that bring about the combined profit, setting a relative weight to each factor and calculating the allocation of profits between the associated enterprises. The contribution analysis is difficult to apply, because external market data that reflect how independent enterprises would allocate the profits in similar circumstances is usually not available. The first step of the residual analysis often involves the use of the TNMM to calculate a return and is not, in itself, more complicated than the typical application of TNMM. The second step is, however, an additional step and often raises difficult additional issues relating to the valuation of intangibles. 20.10. In the text for transfer pricing regulations of US Treasury, it is given as follows. "Allocate residual profit. The allocation of income to the controlled taxpayers' routine contributions will not reflect profits attributable to the controlled group's valuable intangible property where similar property is not owned by the uncontrolled taxpayers from which the market returns are derived. Thus, in cases where such intangibles are present there normally will be an unallocated residual profit after the allocation of income described in paragraph(c)(3)(i)(A) of this section. Under this second step, the residual profit generally should be divided among the controlled taxpayers based upon the relative value of their contributions of intangible property to the relevant business activity that was not accounted for as a routine contribution. The relative value of the intangible property contributed by each taxpayer may be measured by external market benchmarks that reflect the fair market value of such intangible property. Alternatively, the relative value of intangible contributions may be estimated by the capitalized cost of developing the intangibles and all related improvements and updates, less an appropriate amount of amortization based on the useful life of each intangible. Finally, if the intangible development expenditures of the parties are relatively constant over time and the useful life of the intangible property of all parties is approximately the same, the amount of actual expenditures in recent years may be used to estimate the relative value of intangible contributions. If the intangible property contributed by one of the controlled taxpayers is also used in other business activities(such as transactions with other controlled taxpayers), an appropriate allocation of the value of the intangibles must be made among all the business activities in which it is used." 20.11. A perusal of the above demonstrates that there is a general consensus on the principles of allocation of residual surplus. Hence, we are inclined to accept the following submissions of the assessee. "1. It is an admitted fact that as per rule 10B(1)(d) of the IT Rules, India prescribes that an assessee can adopt - a. either a contribution PSM, namely where the entire systems profits are split amongst the various AEs, who are parties to the transactions in question; or b. a residual PSM, namely where each of the AEs, who are parties to the transactions in question, are first assigned routine/ basic returns for the routine functions performed by them; and thereafter, the residual profits are split amongst the AEs, however, in a manner that whether or not an assessee adopts a contribution PSM or a residual PSM, the profits, would need to be split amongst the various AEs, who are parties to the transactions in question, on the basis of reliable external market data, which indicates how unrelated parties would have split such profits in similar circumstances. 2. In other words, as per rule 10B(l)(d) of the IT Rules, a contribution or residual PSM would need to be supplemented by a comparable PSM. 3. The terminologies, namely "contribution PSM", "residual PSM" and "comparable PSM", have not been used in the IT Act or Rules, however, they can be found in the TP guidelines of OECD [paragraphs 2.108 to 2.1491 and UN [paragraphs 6.3.13.1 to 6.3.181, by referring to the similarity of the manner of application of the said methods, as contained in the OECD and UN TP guidelines; and also in the IT Rules. 4. Having said that, PSM prescribed by the IT Rules of India is quite unique, as compared to both OECD and UN TP guidelines, namely that both OECD and UN provide flexibility to the taxpayer to adopt any of the following sub-methods under the overall PSM, namely contribution PSM, residual PSM or comparable PSM, whereas, the Indian IT Rules mandatorily require a taxpayer to adopt a comparable PSM to supplement either a contribution or residual PSM. 5. Such prescription to mandatorily use comparable PSM to split entrepreneurial profits, by the Indian TP regulations, actually would make the PSM virtually redundant in most cases, since, it is not possible to obtain reliable market data on third party behavior in the matter of splitting profits, except for in some rare cases of joint venture arrangements. However, in cases of transactions involving either ITA contribution or exploitation of intangibles by all the parties to the transaction or where such transactions are extremely interrelated, of the types as in the case of the appellant, where knowledge of third party behavior is impossible to possess, but where the case otherwise deserves the treatment of PSM, then the prescription to mandatorily use a comparable PSM would render the whole machinery of PSM under the Indian TP regulations a nullity & impossible to be implemented. 6. This is exactly what the UN has provided in its TP guidelines relating to comparable PSM, namely that such method is seldom used, since reliable external market date on third party behavior in the matter of splitting profits are often not available [paragraph 6.3.15 of UN TP guidelines]. 7. Describing the comparable PSM, the OECD held in its guidelines that external data for comparable PSM can be available in cases of joint venture agreements between independent parties under which profits are shared, such as development projects in the oil and gas industry; pharmaceutical collaborations; co-marketing or co-promotion agreements; arrangements between independent music record labels and music artists; uncontrolled arrangements in the financial services sector; etc [paragraph 2.133 of the OECD TP guidelines]. 8. Thus, typically, comparable PSM can be applied in industries, where joint venture arrangements exist. However, for industries, like the one of telecommunication connectivity services carried on by the Equant or Global One Group, where the key intangible used by the Group is the proprietary network, without which the services cannot be rendered; and thus existence of joint venture arrangements between third parties is not conceivable, the application of comparable PSM would be an impossibility. 9. The OECD further acknowledges that where comparable uncontrolled transactions of sufficient reliability are lacking to support the division of the combined profits, consideration should be given to internal data, which may provide a reliable means of establishing or testing the arm's length nature of the division of profits, meaning that resort to either contribution or residual PSM may be made, without the same having to pass through the compulsory rigors of comparable PSM [paragraph 2.141 of the OECD TP guidelines]. 10. Further, many of the global TP specialists have commented on the lack of reliable third party data, which often renders comparable PSM impossible to apply for splitting profits amongst related parties, except for in the limited cases of joint venture arrangements and determination of royalty, where again, the split of profits between the licensor and the licensee can be discernible on the face of accounts. Extracts from a few of the said articles/ books are reproduced below for ease of reference - a. J.P. Warner and H.B. McCawley, Transfer Pricing: The Code and the Regulations, note 70, at A-144; and T. Horst. Profit Split Methods 0,60 Tax Notes (1993), at 335 - "The comparable profit split method is rarely applied, as information on comparable reference transactions will not normally be available." b. Transfer Pricing and Corporate Taxation: Problems, Practical Implications - Chapter 3.5 - page 31 - Authored by Elizabeth A. King- " .... Practitioners rarely use comparable profit split method, because pairs of sufficiently comparable companies can rarely be found." c. Practical Guide to U.S. Transfer Pricing, Robert T. Cole, Chapter 10, Profit Split Method authored by Harlow N. Higinbotham; Page number 10-52: - "Numerous commentators have cited difficulties in identifying and documenting information on comparable independent transactions as potentially insurmountable obstacle to the practical realization of CPSM. This pessimistic viewpoint overlooks a relatively voluminous body of evidence and experience in the intellectual property area where such calculations are routinely, if somewhat roughly, applied in valuing license transactions". d. Transfer Pricing Rules and Compliance Handbook - Page number 33 - 0.2 Comparable Profit Split Method - Authored by Marc M. Levey, C. Wrappe Steven and Steven C. Wrappe - " .... The use of comparable profit split method will be limited because it will typically be difficult to find comparable companies engaged in transactions that are similar to those of both the buyer and the seller, and data delineating how the independent parties shared the combined profits from a comparable transaction rarely exists. Finding a comparable transaction is made more difficult because the regulations provide that the comparability degree of similarity not only of the function, risk, but also of contractual terms." 11. In view of the above discussions emanating from the OECD and UN TP guidelines; and also commentaries of several transfer pricing experts, it is evident that comparable PSM is rarely used internationally in view of lack of reliable external data with respect to third party behavior to split profits; and OECD and UN clearly give taxpayers an option to adopt anyone of the three sub- methods under the overall PSM, namely contribution PSM, residual P'SM and comparable PSM, without requiring the contribution and residual PSMs to mandatorily pass through the sanity of comparable PSM, being a mandate given under the Indian TP regulations, in the form of rule10OB(I)(d) of the IT Rules. Thus, such compulsory mandate would render the entire mechanism PSM unworkable in India, even in the most deserving of cases. 12. It is a golden and accepted rule of jurisprudence that an interpretation, which makes a statute or rule unworkable or impossible to be complied with, should be avoided; and recourse need to have to the interpretation, which would make the statute or rule workable and also subserve the purpose for which it has been enacted. In this connection, reference is invited to the ruling of the Hon'ble Supreme Court in the case of Superintendent of Taxes vs. Onkarmal Nathumal Trust [AIR 1975 SC 2065], where it has been held that "The law in its most positive and peremptory injunctions, is understood to disclaim, as it does in its general aphorisms, all intention of compelling performance of that which is impossible" ... where the law creates a duty or charge, and the party is disabled to perform it, without any default in him, and has no remedy over, there the law will in general excuse him; and though impossibility of performance is in general no excuse for not performing an obligation which a party has expressly undertaken by contract, yet when the obligation is one implied by law, impossibility of performance is a good excuse. 13. The requirement contained in rule 10B(1)(d) of the IT Rules of mandatory adoption of comparable PSM in all cases of PSM is a lacuna, which renders the entire scheme or mechanism of PSM virtually redundant, otiose and impossible to comply with even in the most deserving of cases, namely where there can be no doubt that the AEs, who are parties to the transactions in question, contribute and exploit nonroutine or unique intangibles, or the transactions are so interrelated that they cannot be evaluated separately for the purposes of determining the ALP thereof. 14. Now, it is submitted that such lacuna is curable even by maintaining, and without disturbing the overall spirit and concept of PSM, as enshrined in rule 10B(1)(d) of IT Rules, and as also understood in the OECD and UN TP guidelines, through interpreting rule 10B(1)(d) in a manner that the same provides an option and not compulsory mandate to apply a comparable PSM in a case where reliable external data to gauge third party behavior is impossible to be obtained. 15. In this connection, reference is invited to the ruling of the Hon'ble SC rendered in the case of M.Pentiah and others vs. Muddala Veeramallappa and others (1961 AIR 1107), where the Hon'ble Court quoted with approval, the famous words on interpretation of statutes said by Lord Denning in the case of Seaford Court Estates Ltd. Vs. Asher(1), namely : "When a defect appears a Judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of Parliament.............. and then he must supplement the written word so as to give "force and life" to the intention of the legislature. ..........A judge should ask himself the question how, if the makers of the Act had themselves come across this ruck in the texture of it, they would have straightened it out? He must then do as they would have done. A Judge must not alter the material of which the Act is woven, but he can and should iron out the creases." 16. In other words, in case the Hon'ble Tribunal perceives that the requirement contained in rule 10B(1)(d) of the IT Rules of mandatory adoption of comparable PSM in all cases of PSM actually renders the entire scheme or mechanism of PSM virtually redundant, otiose and impossible to comply with, even in the most deserving of cases, namely where there can be no doubt that the AEs, who are parties to the transactions in question, contribute and exploit non routine or unique intangibles, or the transactions are so inter related that they cannot be evaluated separately for the purpose of determining the ALP thereof, however where reliable external data to gauge third party behavior is impossible to be obtained, then the requirement for adoption of comparable PSM should be dispensed with, and the assessee should be given an option to adopt a residual or contribution PSM, when such sub-methods of PSM are otherwise accepted globally, both under the OECD and UN TP guidelines, and also in rule 10B(1)(d) itself. 17. It is submitted that applying such an interpretation would not tantamount to altering the overall mechanism of PSM under the Indian TP regulations, but would merely supplement life and force into rule 10B(1)(d) of the IT Rules, in order to make the mechanism of PSM actually workable in India, and not rendered otiose on the ground of impossibility of performance." 20.12. In view of the above discussion, we are of the considered opinion that the TPO, should determine the ALP by adopting residual PSM as the MAM and by allocating residual profits based on the relative value of each enterprise's contribution, as suggested in various commentaries." 20.13. In any event, the legislature has introduced Rule 10AB by the IT(Sixth Amendment) Rules, 2012 w.e.f. 1.4.2012 under the sub head "Other method of determination of ALP". This is extracted for ready reference. "Rule 10AB: For the purposes of clause (f) of sub section(1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts." While introducing the Amendment the CBDT Circular is referred to below. "The Central Board of Direct Taxes, vide Notification No.18/2012 (F.No.142/5/2012-TLP) dt. 25th May,2012 introduced the sixth method in TP, referred to as the "Other Method," with effect from 1st April,2012, i.e. on and from the Assessment Year 2012-13, through inserting rule 10AB, read with clause (f) of rule 10B(1) of the IT Rules. The said "Other Method" is like an omnibus or residual one, in the sense that it refers to any method, which takes into account the price charged or paid or which would have been charged or paid, for similar uncontrolled transactions, with or between non-AEs, would have been charged or paid, for similar uncontrolled transactions, with or between non AEs, under similar circumstances, considering all the relevant facts. Thus, the said "Other Method" would ideally operate where none of the methods specified under the IT Act and Rules would apply, with reference to the descriptions/definitions provided in rule 10B(1) of the IT Rules, yet there is a compelling need to arrive at the ALP of any transaction between AEs, as per the requirements of the TP regulations, couched in Chapter X of the IT Act." Though the note does not indicate much as to the purpose, it can be seen that the purpose and objective of introduction of this rule is to determine the "arm's length price", whenever the methods suggested result in practical difficulties by adopting generally accepted methods which are not specifically listed. It is a procedural provision aimed at arriving at the "ALP". Thus, in our, it is retroactive. "ALP", ideally, should be the same, in the previous years, as in the subsequent years when the facts and circumstances are the same, irrespective of the method adopted for arriving at the same. One cannot be heard saying that the "ALP" arrived by one method cannot be acceptable for the earlier year as that method was not notified by the CBDT. In our view, "Arms Length Price" should be the same, with minor variations. When a new method is allowed, with the objective of enabling determination of the proper ALP, in our comprehension, such a provision operates retroactively, and can be used to determine the ALP in the earlier assessment years also. When the aim and object of introducing a Rule allowing the assessee to adopt any other method for determining the ALP, by introducing S.10AB, is to remove unintended practical difficulties and only to enable proper determination of the ALP, the Rule, in our view, has to be considered as retroactive and, thus, retrospective. 20.14. The Ld. Counsel for the assessee has relied on the decision of I.T.A.T. Chennai Bench in the case of Acendas India P.Ltd. vs. DCIT in ITA 1736/Mds/2011 and the decision of the Bangalore Bench of the Tribunal in the case of Tally Solutions P.Ltd. vs. DCIT in ITA 1235/Bng/2010, for the proposition that suitable adjustments and methodology prescribed for evaluation of an international transaction are permissible and that the prescribed methods may not be rigidly followed, as was done in those cases.. He has also relied on the decision of Hon'ble Supreme Court in the case of Allied Motors P. Ltd. vs. CIT, 224 ITR 677(SC). 20.15. These decisions support the contentions of the assessee. Thus, we hold that Rule 10AB can be applied for the impugned AYs also, for determining the ALP." 5.21. Accordingly on a consideration of the issues on the limited plea of the assessee, we find that the claim of the assessee that the issue is covered by the order of the Co-ordinate Bench in GOIPL being the predecessor to the assessee is found to be correct. In the absence of any submission whatsoever on the part of the Revenue despite more than adequate opportunities having been provided, we find on our independent study of the reasoning available on record brought out in the TPO's order which has been upheld by the DRP that in the face of similarity of reasoning which already stands considered in the case of GOIPL, the issue needs to be restored back to the TPO with identical directions. Needless to say that the TPO before passing the order shall give the assessee a reasonable opportunity of being heard. Only thereafter, the TPO shall decide the issues following the clear directions given by the Co-ordinate Bench by way of a speaking order in accordance with law. Accordingly, Ground No.-3.3 of the assessee are allowed for statistical purposes. The remaining grounds become academic as such do not require any adjudication. 6. In the result, the appeal of the assessee is allowed for statistical purposes. The order is pronounced in the open court on 08th of May 2015. Sd/- Sd/- (N.K.SAINI) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 08 /05/2015 *Amit Kumar* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI Date 1. Draft dictated on 10 & 17 PS .04.2015 2. Draft placed before author 17, 20, 22 PS .04.2015 3. Draft proposed & placed before JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the .05.2015 PS/PS Sr.PS/PS 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk .05.2015 PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.
 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Team

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions