Income Tax Appellate Tribunal - Mumbai
Onward Technologies Ltd , vs Assessee on 30 April, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI 'K' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI SANJAY ARORA, AM & SHRI VIJAY PAL RAO, JM
MISCELLANEOUS APPLICATION No. 203/Mum/2013
(Arising from ITA No. 7985/Mum/2010 A. Y - 2006-07)
M/s Onward Technologies Limited, Vs The Dy. Commissioner of Income
2nd Floor, Sterling Centre, Dr. Tax (OSD), Range 8(1)
Annie Besant Road, Worli, Mumbai
Mumbai-400018
(Applicant) (Respondent)
PAN No. AAACO3742J
Assessee by Shri Yogesh A. Thar
Revenue by Shri Ajit Kumar Jain
Date of hearing 13th December 2013
Date of pronouncement 17th January 2013
ORDER
PER VIJAY PAL RAO, JM
This Miscellaneous Application by the assessee for seeking ratification of mistake in the order dated 30.4.2013 of this Tribunal in respect of the finding on the issue whether a foreign party/AE of the assessee can be a tested party for computation of ALP in respect of international transaction carried out by the assessee.
2. The Ld. A.R of the assessee has submitted that the Tribunal while deciding the issue has proceeded on the footing that the TPO has mentioned in his order that the price charged by the assessee is not in accordance with sub-sections (1) and (2) of section 92 of the Act after considering and rejecting the contention of the assessee that a foreign party can be a tested party. However, the TPO has not considered the contention of the assessee as to whether foreign party can be the tested 2 MA 203/M/2013 Onward Technologies Limited party. Indeed, the TPO was under the impression that the assessee has done its TP study on the basis that the assessee is the tested party. The second limb of the argument of the Ld. A.R is that the Tribunal has not considered the decisions relied upon by the assessee in the following cases:
i) Ranbaxy Laboratories Limited Vs ACIT 110 ITD 428
ii) Development Consultants Private Limited Vs DCIT ITA Nos. 79 and 80/Kol/2008
3. Thus, the Ld. A.R has submitted that in view of the decision of Hon'ble Supreme Court in case of Honda Siel Power Products Ltd. Vs CIT 295 ITR 466 non-consideration of a decision placed before the Tribunal is a mistake apparent on record which needs to be rectified. The third limb of the argument of the assessee is on the point that if this Tribunal does not agree with the view taken by the Co-ordinate Bench then the only course that is open would be to make reference for constitution of Special Bench to resolve the controversy. He has also relied upon the decision of Hon'ble Gujarat High Court in case of Affection Investments Ltd. Vs ACIT 326 ITR 255. Thus, the Ld. A.R has urged that the Tribunal may be pleased to rectify the errors crept in the impugned order as pointed out in the Miscellaneous Application. On the other, the Ld. D.R has submitted that the issue is factual in nature and once the TPO has rejected the comparables selected by the assessee as well as the ALP and determine the ALP by considering the separate set of cases as comparables by taking the assessee as a tested party then it cannot be said that the A.O has not considered and decided the issue of foreign party as a tested 3 MA 203/M/2013 Onward Technologies Limited party. He has relied upon the decision of third Member in case of 98 ITD
285.
4. We have considered the rival submissions and carefully perused the relevant record as well as the impugned order. The grievance raised by the assessee in the Miscellaneous Application against the finding of the Tribunal on the issue whether a foreign party/AE of the assessee can be a tested party for determination of ALP. As regards the first contention of the Ld. A.R that the TPO has not considered the contention of the assessee that foreign party can be a tested party, we note that when the ALP determined by the assessee was rejected by the TPO on the ground that it is not as per the provisions of Section 92, this itself shows that the computation of the ALP by considering the foreign party as tested party was found not as per the provisions of Section 92. Therefore, we do not find any merit in the said contention of the assessee. The Tribunal in the impugned order has elaborately discussed and analysed the Transfer Pricing provision as contained u/s 92 of the Income Tax Act as well Rule 10B of the Income Tax Rules 1963 in para 11.2.1 to 11.3 as under:
"11.2. 1 We take up the first contention by which the assessee has compared the profit earned by its foreign AE with outside comparables to prove that the price charged by it from the transactions with the AEs is at ALP. As can he noticed from internal page no. 34 of the TP Study that the assessee is harping on the selection of its AE as tested party on the basis of the US and UK Regulations. We have to decide as to whether the selection of the foreign AE as tested party is correct in the Indian context. For that purpose, we need to visit the provisions of the Chapter X of the Act with the caption "Special Provisions Relating to Avoidance of Tax" dealing with the computation of income from international transactions having regard to ALP. Section 92(1) of the Act provides that : 'Any income arising from an international transaction shall be computed having regard to the 4 MA 203/M/2013 Onward Technologies Limited arm's length price.' The term "international transaction" has been defined in section 92B to mean 'a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or...............' The methodology for the computation of arm's length price has been set out in section 92C(1) to be as per any of the prescribed methods, including 'Transactional net margin method' (TNMM). This method has been admittedly employed by the assessee in the present case as the most appropriate method for determining the ALP in respect of the international transactions under consideration. Sub-section (3) of section 92C provides that: 'Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that--(a) the price charged or paid in an international transaction has not been determined in accordance with sub- sections (1) and (2); or................... the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him.' Rule 10B dealing with the determination of arm's length price under section 92C provides through sub-rule (1) that for the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method. The mechanism for determining ALP under TNMM has been enshrined under clause (e), which states that:
'(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to an other relevant base;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number 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 ;
(ii) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to he the same as the net profit margin referred to in sub-clause (iii).5 MA 203/M/2013
Onward Technologies Limited
(v) the net profit margin thus established is then taken into account to arrive at an ann's length price in relation to the international transaction.' 11.2.2 A conjoint reading of the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such international transaction is required to he determined at ALP; thirdly, the ALP in respect of such international transaction should he determined by one of the prescribed methods, which also include the TNMM. Under this method, 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, which is then compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining ALP of an international transaction under this method is that firstly, the profit rate earned by the assessee from a transaction with its AE is determined (say, profit A), which is then compared with the rate of profit of comparable cases (say, profit B) for ascertaining as to whether profit A is at arm's length vis-a-vis the profit B. If it is not, then the transfer pricing adjustment is made having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit B) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus the calculation of profit B may undergo change with the varying set of comparable cases. However, in so far as calculation of profit A is concerned, there cannot he any dispute as the same has to necessarily result only from the transaction between two or more associated enterprises, as is the mandate of sections 92 read with 92B in juxtaposition to rule 10B. The natural corollary which, thus, follows is that under no situation can the calculation of 'profit A' be substituted with anything other than from the international transaction, that is, a transaction, that is, a transaction between the associated enterprises. So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can he no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee and its foreign AE. It can neither call for also roping in and taxing in India the margin from the activities undertaken by 6 MA 203/M/2013 Onward Technologies Limited the foreign AE nor can it curtail the profit arising out of transaction between the Indian and foreign AE at arm's length. The contention of the Id. AR in considering the profit of the foreign AE as 'profit A' for the purposes of comparison with profit of comparables, being 'profit B', to determine the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree making the substantive section 92 otiose arid the definition of 'internal transaction' u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention, is therefore, repelled.
11.3 Now we espouse the second contention of the Id. AR that the authorities cannot go beyond the overall profit of the group of AEs in determining the ALP of the international transaction. It has been noticed supra that the object of Chapter-X of the Act is to prevent the avoidance of tax from transactions between two or more AEs. Because of such internal relation, the affairs between the AEs are capable of being arranged in such a way so as to reduce the incidence of tax in India. it is with this avowed object that the legislature has come out with the Chapter-X by declaring that an income arising from an international transaction shall be computed having regard to the arm's length price. The matter does not end here. The legislature in its wisdom has inserted section 92C which contains apparatus for the determination of the ALP in respect of international transactions. Sub-section (1) of section 92C provides that: 'The arm's length price in relation to an international transaction shall he determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely; (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may he prescribed by the Board.' Sub-section (2) makes the same position beyond the shadow of any doubt by providing that: The most appropriate method referred to in Sub- section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed. On a careful analysis of the provisions of section 92 read with section 92C it is crystal clear that the ALP is to be determined by any one of the prescribed methods, which is most appropriate under the facts of the case. It is only the choice of one of the prescribed methods 7 MA 203/M/2013 Onward Technologies Limited which has been left to the assessee or the authorities. It is neither open to the assessee nor the TP0 to discard the prescribed methods and invent a new method or apply any other yardstick for determining the ALP. Coming hack to the factual context prevailing before us, it is noticed that the Id. AR is accentuating on considering the overall profit of the group as a whole for the determination of the ALP in respect of the international transactions, which course of action has not been prescribed by the Act or rules under any of the methods governing the assessment year under consideration. As the argument advanced by the Id. AR that the profit of the group of AEs should be kept in view and in no case the TP adjustment should have the effect of breaching the overall profit earned by all the AEs taken as one unit, has no statutory mandate and is not stipulated under any of the prescribed methods. As such, the same is liable to he jettisoned as sans merit. We order accordingly."
5. It is clear from the finding of the Tribunal in the impugned order that the issue has been decided by considering the Transfer Pricing provisions of Chapter-X of the Income Tax Act r.w. Rule 10B. The conclusion arrived by the Tribunal is based on the ambit and scope of the provisions of Chapter-X and Rule 10B. It is pertinent to note that the decision relied upon by the assessee in the case of Ranbaxy Laboratories Limited and Development Consultants Private Limited have not given any finding about the scope of provisions of Chapter-X for determination of the ALP and specifically by considering a foreign entity/associated enterprises of the assessee as tested party. Thus, these decisions as relied upon by the assessee are sub-silentio on the issue of the scope of Indian Transfer Pricing Regulation. Even otherwise under the Indian Transfer Pricing Regulation as contained in the Chapter-X of the Income Tax Act the comparison of international transaction carried out by the assessee is to be made with the uncontrolled and unrelated transaction to arrive at 8 MA 203/M/2013 Onward Technologies Limited arm's length price (ALP). Thus, the commercial/financial effect of an international transaction in the context of the assessee/taxpayer has to be compared with the finance/commercial outcome if the same transaction would have been carried out by the assessee with unrelated third party. In the matter of Transfer Pricing and determination of ALP which is factual in nature the principle of consistency or res judicata is not applicable until and unless the facts and circumstances governing the situation and legal position are identical in each case. The Tribunal in para 16.2 and 16.3 has considered this point as under:
"16.2 The Hon'ble Supreme Court has held in several cases including M.M. Ipoh & Ors. vs CIT (1968) 67 ITR 106 (SC) that:
The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year.' At the same time, it is equally true that the principle of consistency has also been advocated by several Hon'ble courts including the Hon'ble Supreme Court in Radhasoami Satsang Vs CIT (1992) 193 ITR 321 (SC) and the Hon'ble jurisdictional High court in CIT vs. Arthur Andersen & Co. (2009) 318 ITR 229 (Bom) by holding that the decision made in earlier years is binding in subsequent years and should be followed. From the above decisions, it follows that a delicate balance needs to he maintained between the principle of consistency and the rule of res judicata depending upon the facts and the governing legal position prevailing in each ease. At the same time, we want to highlight that the doctrine of estoppel together with its exceptions cannot be ignored. It is trite that there can he no estoppel against the provisions of the Act or the binding interpretation given to such provisions by the judicial forums. This rule has been cited with approval by several courts including the Hon'ble Supreme Court in CIT vs. V. MR.P Firm (1965) 56 ITR 67(SC). Where the facts of a case prima facie show that the authorities took a clearly incorrect view on the provisions of the Act in an earlier year, whether favouring the assessee or the Revenue, it cannot be argued in the subsequent year that the same incorrect approach should be repeated. The Hon'ble Delhi Court in CWT Vs Meattles (P) Ltd. (1984) 156 ITR 569 (Del) has held that the Revenue authorities cannot be stopped from taking a correct view of statutory provisions in a later year.9 MA 203/M/2013
Onward Technologies Limited 16.3 We have elaborately discussed above that how the method employed by the assessee for determining the ALP in respect of international transactions for the year under consideration is contrary to the statutory provisions having no approval from any judicial forum. If such a wrong method has been inadvertently accepted by the TPO in an earlier year, we cannot grant a license to the assessee to continue calculating the ALP in such a grossly erroneous manner in perpetuity. It needs to he discontinued forthwith. We, therefore, reject this contention advanced on behalf of the assessee that the application of such a wrong method he granted a seal of approval on the basis of its acceptance by the TPO in a preceding year."
6. Once the issue has been decided on merits by considering the relevant facts and material then the same cannot be reviewed in the garb of rectification of mistake u/s 254(2). The Tribunal cannot re-evaluate or re-appreciate the evidence and facts in the proceedings u/s 254(2). The scope of section 254(2) is very limited and circumscribed. Only a mistake which is wide apparent, manifest and patent on the face of the order can be rectified u/s 254(2) and not something which can be involved serious circumstances of disputes of question of facts or law can be established by long drawn process of reasoning on the point. Thus, the Tribunal has no power of rectification of mistake u/s 254(2) which amounts to reversal of the order passed after discussing all the facts and statutory provisions in detail.
7. In view of the above facts and circumstances of the case we find that the relief sought in the Miscellaneous Application would certainly amount to review of earlier order which is beyond the jurisdiction of the Tribunal and scope of Section 254(2). Accordingly, we do not find any merit in the Miscellaneous Application filed by the assessee.
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8. In the result, the Miscellaneous Application filed by the assessee is dismissed.
Order pronounced in the open Court on this 17th day of January 2014 Sd/- Sd/-
(SANJAY ARORA) (VIJAY PAL RAO)
Accountant Member Judicial Member
Place: Mumbai: Dated: 17th January 2014
Subodh.
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai