Garware Polyester Ltd. v. Asstt. CIT

Case Laws Analysis
Followed Emami Ltd. v. Commissioner of Income-tax 2012 TaxPub(DT) 0452 (Cal-HC)
Followed Jt. CIT v. Rolta India Ltd. 2011 TaxPub(DT) 0806 (SC)
Relied CIT v. Nalwa Sons Investments Ltd. 2010 TaxPub(DT) 2208 (Del-HC)
Followed CIT v. Reliance Petroproducts (P) Ltd. 2010 TaxPub(DT) 1683 (SC)
Followed CIT v. Ajanta Pharma Ltd. 2009 TaxPub(DT) 1714 (Bom-HC)
Relied Meteor Satellite Ltd. v. Income Tax Officer 1980 TaxPub(DT) 0633 (Guj-HC)

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The Tax PublishersI. T. A. Nos. 4189 & 4418/Mum/2010 & 4444/Mum/2011 2013 TaxPub(DT) 1477 (Mum-Trib) : (2013) 143 ITD 0087 : (2013) 023 ITR (Trib) 0549 INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Applicability of comparable uncontrolled price method (CUP)--Assessee was engaged in business of manufacture and sale of plain polyester films, sun control films, metalised films and other varieties of polyester films. Assessee was selling its products not only at local level but also involved in export to various countries. In so far as sale to countries like Russia, South Arabia, Turkey, Singapore, Japan and other parts of world were concerned, assessee had been selling directly to third parties through non-associate enterprises' foreign agents. As regards U. S. and U. K. markets were concerned, assessee had set-up wholly owned subsidiary, namely, GPIL in U. K. GPF, U. S. A. On transfer pricing analysis, TPO held that approach of assessee for comparing local sale price in Indian market with price charged from associate enterprises was not a correct approach because comparable uncontrolled price method can be applied only when products are absolutely similar to each other or where adjustments can be accurately made for those differences. He also held that geographical differences were taken care of when multiple country non-associate enterprises sales were effected. *Held:* Not justified. On facts of case, TPO was directed to examine ALP after adopting transactional net margin method (TNMM) and carry out fresh comparability analysis as CUP method was not suitable. Assessee has bench marked its international transactions with its associate enterprises by applying comparable uncontrolled price method, wherein average price charged to associate enterprises have been compared with the average export prices charged to local customers in India. The Transfer Pricing Officer has rejected the assessee's comparison of export sales charged to associate enterprises with local sales price and compared the average non-associate enterprises export price with the price charged to two associate enterprises. The Commissioner (Appeals) accepted the contentions of the assessee that the Transfer Pricing Officer has failed to take into consideration the geographical, economical market differences where the associate enterprises and non-associate enterprises agents are carrying out their business activities. He also appreciated that the export price of the proceeds varies considerably from country to country and specifically in a developed market of the U. S. and the U. K. in comparison to Asian and African countries. He analysed the prices and also the nature of market which has been advertum discussed in detail in the foregoing paragraphs. However, after having come to the conclusion that the Transfer Pricing Officer's approach is not correct and he has not taken into account the vital factor of geographical, economical market differences, held that even the assessee's approach is also not acceptable as the geographical difference does exists between the Indian market on one hand and American and European markets on the other hand. Thus, on the same logic, he rejected the assessee's approach for benchmarking the arm's length price of its transactions with the associate enterprises. [Para 17] After having rejected the approach of the Transfer Pricing Officer as well as the assessee, he admitted that there are no direct comparable un-control transactions to benchmark the arm's length price of the associate enterprises as their market prices prevailing in the concerned geographical countries, i.e., the U. S. A. and Europe has to be seen subject to certain adjustment of expenses. The sale prices charged to such third party unrelated customers represents comparable uncontrolled prices on aggregate basis in the respective comparable market under comparable circumstances. He even went to analyse the profit ratio and operating expenses of the associate enterprises and held that these associate enterprises are running into losses and no third party will carry such business at loss. In this manner, the Commissioner (Appeals) has made these associate enterprises as tested parties and without looking into the independent comparables operating in the same kind of products in the said countries, he accepted the operating margin of the associate enterprises. This is where the Commissioner (Appeals) went on a wrong footing and incorrect approach. Once the Commissioner (Appeals) accepted that the comparable uncontrolled price is the appropriate method, then he has to examine whether there are any internal comparables or any external comparables. In the present case, once he has held that there are no internal comparables, he was required to look into external comparables operating or dealing with the similar products under similar terms in a similar market conditions where these associate enterprises are operating, which he failed to do and simply accepted the trading results of the associate enterprises. Under the comparable uncontrolled price method, the price of the goods or services is directly compared with the price in un control transactions under similar conditions. Internal comparable uncontrolled price would be available if the assessee or its group entity enters into a comparable transaction with unrelated party where the goods or services under consideration are same or similar. On the other hand, there could be an external comparable uncontrolled price if a transaction between two independent enterprises involves comparable goods or services under comparable conditions. The comparable uncontrolled price method also requires a very high degree of comparability with regard to the quality of products or services, contractual terms, level of the market, geographical market in which the transaction takes place and host of other factors. [Para 18] Once the Commissioner (Appeals) found that there are so much of variables for applying either internal comparable uncontrolled prices and has not applied external comparable uncontrolled price, probably, due to this factor, then the entire application of comparable uncontrolled price fails in this case. The Commissioner (Appeals) cannot go to examine, independently the operating expenditure and operating profits of the associate enterprises for determining the arm's length price. A comparability analysis has to be carried out for determining the arm's length price. The provisions of section 92C provides computation of arm's length price and envisages that the arm's length price in relation to an international transaction shall be determined by any of the methods prescribed therein, being the most appropriate method having regard to the nature of transactions or class of transactions or class of associated persons or functions performed to such persons. For this purpose, six methods have been spelt out. Sub-section (2) of section 92C provides that the most appropriate method referred to in sub-section (1) shall be applied for determination of arm's length price. Thus, for computation on examining of arm's length price, one of the most appropriate methods has to be applied. Once the comparable uncontrolled price method fails in this case, then it was required by the Commissioner (Appeals) to look into for other appropriate methods. Now, the question is what should be the most appropriate method. At the time of hearing, both parties agreed that in case comparable uncontrolled price method fails, then transactional net margin method can be adopted as most appropriate method, wherein the arm's length price is determined by comparing the operating profit relative to appropriate base, viz., cost as well as asset of the tested party with the operating profit of an uncontrol party engaged in comparable transactions. Accordingly impugned order passed by the Commissioner (Appeals) is set aside and restore the matter to the file of the TPO and direct him to examine the arm's length price after adopting transactional net margin method and carry out fresh comparability analysis. [Para 18] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersI. T. A. Nos. 4189 & 4418/Mum/2010 & 4444/Mum/2011
2013 TaxPub(DT) 1477 (Mum-Trib) : (2013) 143 ITD 0087 : (2013) 023 ITR (Trib) 0549

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Applicability of comparable uncontrolled price method (CUP)--Assessee was engaged in business of manufacture and sale of plain polyester films, sun control films, metalised films and other varieties of polyester films. Assessee was selling its products not only at local level but also involved in export to various countries. In so far as sale to countries like Russia, South Arabia, Turkey, Singapore, Japan and other parts of world were concerned, assessee had been selling directly to third parties through non-associate enterprises' foreign agents. As regards U. S. and U. K. markets were concerned, assessee had set-up wholly owned subsidiary, namely, GPIL in U. K. GPF, U. S. A. On transfer pricing analysis, TPO held that approach of assessee for comparing local sale price in Indian market with price charged from associate enterprises was not a correct approach because comparable uncontrolled price method can be applied only when products are absolutely similar to each other or where adjustments can be accurately made for those differences. He also held that geographical differences were taken care of when multiple country non-associate enterprises sales were effected. Held: Not justified. On facts of case, TPO was directed to examine ALP after adopting transactional net margin method (TNMM) and carry out fresh comparability analysis as CUP method was not suitable.

Assessee has bench marked its international transactions with its associate enterprises by applying comparable uncontrolled price method, wherein average price charged to associate enterprises have been compared with the average export prices charged to local customers in India. The Transfer Pricing Officer has rejected the assessee's comparison of export sales charged to associate enterprises with local sales price and compared the average non-associate enterprises export price with the price charged to two associate enterprises. The Commissioner (Appeals) accepted the contentions of the assessee that the Transfer Pricing Officer has failed to take into consideration the geographical, economical market differences where the associate enterprises and non-associate enterprises agents are carrying out their business activities. He also appreciated that the export price of the proceeds varies considerably from country to country and specifically in a developed market of the U. S. and the U. K. in comparison to Asian and African countries. He analysed the prices and also the nature of market which has been advertum discussed in detail in the foregoing paragraphs. However, after having come to the conclusion that the Transfer Pricing Officer's approach is not correct and he has not taken into account the vital factor of geographical, economical market differences, held that even the assessee's approach is also not acceptable as the geographical difference does exists between the Indian market on one hand and American and European markets on the other hand. Thus, on the same logic, he rejected the assessee's approach for benchmarking the arm's length price of its transactions with the associate enterprises. [Para 17] After having rejected the approach of the Transfer Pricing Officer as well as the assessee, he admitted that there are no direct comparable un-control transactions to benchmark the arm's length price of the associate enterprises as their market prices prevailing in the concerned geographical countries, i.e., the U. S. A. and Europe has to be seen subject to certain adjustment of expenses. The sale prices charged to such third party unrelated customers represents comparable uncontrolled prices on aggregate basis in the respective comparable market under comparable circumstances. He even went to analyse the profit ratio and operating expenses of the associate enterprises and held that these associate enterprises are running into losses and no third party will carry such business at loss. In this manner, the Commissioner (Appeals) has made these associate enterprises as tested parties and without looking into the independent comparables operating in the same kind of products in the said countries, he accepted the operating margin of the associate enterprises. This is where the Commissioner (Appeals) went on a wrong footing and incorrect approach. Once the Commissioner (Appeals) accepted that the comparable uncontrolled price is the appropriate method, then he has to examine whether there are any internal comparables or any external comparables. In the present case, once he has held that there are no internal comparables, he was required to look into external comparables operating or dealing with the similar products under similar terms in a similar market conditions where these associate enterprises are operating, which he failed to do and simply accepted the trading results of the associate enterprises. Under the comparable uncontrolled price method, the price of the goods or services is directly compared with the price in un control transactions under similar conditions. Internal comparable uncontrolled price would be available if the assessee or its group entity enters into a comparable transaction with unrelated party where the goods or services under consideration are same or similar. On the other hand, there could be an external comparable uncontrolled price if a transaction between two independent enterprises involves comparable goods or services under comparable conditions. The comparable uncontrolled price method also requires a very high degree of comparability with regard to the quality of products or services, contractual terms, level of the market, geographical market in which the transaction takes place and host of other factors. [Para 18] Once the Commissioner (Appeals) found that there are so much of variables for applying either internal comparable uncontrolled prices and has not applied external comparable uncontrolled price, probably, due to this factor, then the entire application of comparable uncontrolled price fails in this case. The Commissioner (Appeals) cannot go to examine, independently the operating expenditure and operating profits of the associate enterprises for determining the arm's length price. A comparability analysis has to be carried out for determining the arm's length price. The provisions of section 92C provides computation of arm's length price and envisages that the arm's length price in relation to an international transaction shall be determined by any of the methods prescribed therein, being the most appropriate method having regard to the nature of transactions or class of transactions or class of associated persons or functions performed to such persons. For this purpose, six methods have been spelt out. Sub-section (2) of section 92C provides that the most appropriate method referred to in sub-section (1) shall be applied for determination of arm's length price. Thus, for computation on examining of arm's length price, one of the most appropriate methods has to be applied. Once the comparable uncontrolled price method fails in this case, then it was required by the Commissioner (Appeals) to look into for other appropriate methods. Now, the question is what should be the most appropriate method. At the time of hearing, both parties agreed that in case comparable uncontrolled price method fails, then transactional net margin method can be adopted as most appropriate method, wherein the arm's length price is determined by comparing the operating profit relative to appropriate base, viz., cost as well as asset of the tested party with the operating profit of an uncontrol party engaged in comparable transactions. Accordingly impugned order passed by the Commissioner (Appeals) is set aside and restore the matter to the file of the TPO and direct him to examine the arm's length price after adopting transactional net margin method and carry out fresh comparability analysis. [Para 18]