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.
|
