Pr. CIT vs. Toll Global Forwarding India Pvt Ltd (Delhi High Court)

CUP method can be applied by comparing a pricing formulae, rather than the pricing quantification in amount. Rule 10AB inserted w.e.f. 01.04.2012 is beneficial in nature and so retrospective w.e.f. 01.04.2002

Jan 1, 2016

The assessee followed the 50:50 business model of sharing residual profits in equal ratio with the service provider at the other end of the transaction i.e. at the consignee’s end in the case of export transaction and at consigner’s end in the case of import transaction. This is a standard practice in the Industry. Even with respect to transactions with unrelated parties in this line of activity, it is admitted practice to share the residual profit in equal ratio. The assessee accordingly claimed that its’ transactions with the AE are at arms length as per the CUP method. However, though there is a standard formulae for computing the consideration, the data regarding precise amount charged or received for precisely the same services is not available for comparison. The TPO held that as data about exactly the same amount having been charged for exactly the same service in the uncontrolled transactions has not been furnished by the assessee, it is not a fit case for application of CUP and applied TNMM. On appeal by the assessee, the Tribunal upheld the claim of the assessee. On appeal by the department to the High Court, the High Court dismissed the appeal by holding that “the Court finds the order of the ITAT to be well reasoned and researched. The legal principles governing the determination of ALP in a TP adjustment exercise have been expounded lucidly by the ITAT in the impugned orders”. The findings of the Tribunal were as follows:

(i) Transfer pricing should not be viewed as a source of revenue. It is an anti-abuse measure in character and all it does is to ensure that the transactions are not so artificially priced, with the benefit of inter se relationship between associated enterprises, so as to deprive a tax jurisdiction of its due share of taxes. Our transfer pricing legislation as also transfer pricing jurisprudence duly recognize this fundamental fact and ensure that such pedantic and unresolved procedural issues, as have arisen in this case due to limitations of the prescribed methods of ascertaining arm’s length price, are not allowed to come in the way of substantive justice, particularly when it is beyond reasonable doubt that there is no influence of intra AE relationship on the determination of prices in respect of intra AE transactions. A pedantic approach in determination of arm’s length price, which serves letter of the law but leads to the conclusion diametrically opposed to the spirit of the law, has to be deprecated. We are in considered agreement with this school of thought.

(ii) The connotations of ‘price’, as set out in rule 10 B(1)(a) are required to be taken to be something much broader than the expression ‘amount’ inasmuch as it is required to cover not only quantification of price in terms of an amount but also in terms of a formulae according to which the price is quantified. Such an interpretation is a very purposive and realistic interpretation.

(iii) As one can come to the conclusion, under any method of determining the arm’s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm’s length price. The price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression ‘price which….would have been charged on paid” is used in rule 10BA, dealing with this method, in this method the place of “price charged or paid”, as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm’s length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle, meets the test of arm’s length price determination under rule 10AB as well.

(iv) Rule 10B(1)(f) inserted vide notification dated 23rd May 2012 is not a residual method in the sense that it is not a condition precedent for the application of this method that all other methods set out in s. 92C (1)(a) to 92C(1)(e) and as elaborated under rule 10B(1)(a) to (e), must fail and only then this method can be applied. This method is at par with all other methods of determining the arm’s length price as set out in sections 92C(1)(a) to (f), and, in terms of Section 92C(2), the most appropriate method, referred to in Section 92C(1), “shall be applied, for determination of arm’s length price, in the manner prescribed”. Therefore, as long as the method covered by rule 10AB, which is duly covered by Section 92C(1) satisfies the test of being the ‘most appropriate method’, it can be applied to a fact situation. The expression ‘ price which….would have been charged on paid” is used in rule 10BA, dealing with this method, in this method the place of “price charged or paid”, as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm’s length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle, meets the test of arm’s length price determination under rule 10BA as well.

(v) Though rule 10BA as also the corresponding enabling rule 10B(1)(f) are inserted by the Income Tax (Sixth Amendment) Rules 2012 and are specifically stated to be effective from 1st April 2012, i.e. assessment year 2012-13 onwards, it has to be treated as being retrospective in view of the law laid down in Vatika Townships that a legislation conferring a benefit but without inflicting a corresponding detriment would warrant it to be given a retrospective effect. As rule 10BA, confers the benefit of an additional method of ascertaining arm’s length price and, inter alia, relaxes the rigour of CUP method, it can only be retrospective in effect and effective from 1st April 2002.

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