Appeal Details
Counselvise Citation
120120114 RSA 2015
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 month(s) 6 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-05-2015
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
I
Assessment Year
2010-2011
Appeal Filed On
02-03-2015
Judgement Text
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 NETWORKS PVT. LTD., (FORMERLY KNOWN AS EQUANT NETWORK SERVICES INDIA PVT. LTD.), TOWER-C, 7 TH FLOOR, DLF INFINITY TOWER, PHASE-II, CYBER CITY, SECTOR-25, GURGAON, HARYANA PAN-AABCE8124H (APPELLANT) VS DCIT, CIRCLE-3, GURGAON (RESPONDENT) APPELLANT BY KANCHUN KAUSHAL, CA & OINDRILA BALA, CA RESPONDENT BY NONE ORDER PER DIVA SINGH, JM BY THE PRESENT APPEAL THE ASSESSEE ASSAILS THE CORR ECTNESS OF THE ORDER DATED 30.01.2015 PASSED BY THE AO IN PURSUANCE TO T HE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO A S 'DRP') ON VARIOUS GROUNDS. HOWEVER AT THE TIME OF HEARING, IT WAS HIS SUBMISS ION THAT THE ISSUE IS COVERED IN ASSESSEES FAVOUR BY THE DECISION OF THE ITAT IN ASSESSEE COMPANYS PREDECESSORS CASE RENDERED IN ITA NO.-5571/DEL/201 1 AND ITA NO.- 5896/DEL/2012 DT. 15.04.2014 (COPY FILED IN THE COU RT). 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, CON TINUE TO REMAIN THE SAME. INVITING ATTENTION TO GROUND NO.-3.3 AND 3.4 RAISED IN THE PRESENT DATE OF HEARING 25.03.2015 DATE OF PRONOUNCEMENT 08 .05.2015 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 T HE 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 REASO NS AND INSTEAD, APPLYING THE TRANSACTIONAL NET MARGIN METH OD ('TNMM') AS THE MOST APPROPRIATE METHOD; 3.4. DISREGARDING THE FACT THAT THE JUDICIAL PRECE DENT IN THE CASE OF THE APPELLANT'S PREDECESSOR ENTITY GLOB AL ONE INDIA PRIVATE LIMITED (ITA NOS. 5571/DELJ2011 AND I TA NOS. 5896/DEL/2012) ON THE APPLICATION OF PSM, ADJUDICAT ED 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 NEC ESSARY 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 ADDRESS AL IN THE AFORE-MENTIONED LINE AS BROUGHT OUT IN THE FIRST PARA WAS MADE ON 16 TH MARCH 2015. THE LD. STANDING COUNSEL FOR THE REVENUE APPEARED NOT TO HA VE THE BENEFIT OF THE AFORESAID DECISION. ACCORDINGLY, IN ORDER TO AFFOR D TIME TO THE REVENUE TO GO THROUGH THE SAME, THE HEARING WAS ADJOURNED TO 19.0 3.2015. THE LD. AR IN THE MEANTIME WAS ALSO DIRECTED TO FILE A SYNOPSIS. 2.1. IN THE SAID BACKGROUND THE APPEAL AGAIN CAME UP FO R HEARING ON 19.03.2015. ON THE SAID DATED, THE LD. STANDING CO UNSEL FOR THE REVENUE WITHIN A FEW MINUTES OF THE START OF THE COURT PROC EEDINGS 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 REQU EST 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 AP PEALS EACH. HOWEVER THE ORAL REQUEST FOR ADJOURNMENT WAS FOUND TO BE FACTUA LLY INCORRECT AS THE TWO SEPARATE BATCH OF APPEALS CONTRARY TO THE SUBMISSIO NS OF THE LD. STANDING COUNSEL WERE INFACT UNCONNECTED WITH EACH OTHER. A CCORDINGLY AFTER INFORMING THIS FACT TO THE LD. STANDING COUNSEL HIS ORAL REQU EST FOR ADJOURNMENT ON INCORRECT FACTS WAS DECLINED AND A PASS OVER WAS IN STEAD 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 LAC K OF AUTHORITY WAS PREVIOUSLY PLEADED BY THE STANDING COUNSEL IN CERTA IN 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 CAU SE LIST. HOWEVER, INSTEAD OF CLARIFYING ON THE ISSUE RAISED BY HIMSELF, THE S TANDING 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 UNREP RESENTED IN THE COURT, THE COURT PROCEEDINGS WERE DIRECTED TO BE ST OPPED IN THE INTEREST OF THE REVENUE. THE COURT RE-ASSEMBLED ONLY ON THE ARRIV AL 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 I N THE COURT FOR A FEW MINUTES AND AGAIN WALKED OUT. THE LD. AR FOR THE B ENEFIT OF LD. CIT DR, MR. A. K. SINGH RE-ITERATED HIS SUBMISSIONS AND RELIED UPO N THE SYNOPSIS FILED FOR THE BENEFIT OF THE REVENUE. ON THE COMPLETION OF HIS S UBMISSION, 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 ADDRES S THE DEPARTMENTAL STAND BUT NEITHER RESPONDED TO LD. ARS SUBMISSIONS. IN STEAD, THE LD. CIT DR SOUGHT TIME. TIME WAS GRANTED AGAIN FOR THE BENEFI T OF HEARING THE REVENUES RESPONSE AND MATTER WAS ADJOURNED TO 25.03.2015. IT IS UNFORTUNATE TO NOTE THAT DURING THE HEARING IN THE SUBSEQUENT MATTERS O N THE SAID DATE, THE LD. CIT DR ALSO WALKED OUT FROM THE COURT WHEN HIS OBJECTIO NS TO THE COURTS RECORDING IN THE PROCEEDINGS IN REGARD TO THE MIS-DEMEANOR OF THE STANDING COUNSEL WAS DECLINED AS RECORDED IN THE COURT PROCEEDINGS OF TH E 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 DA TE, LD. CIT DR AGAIN SOUGHT TIME THOUGH IN WRITING SETTING OUT THE FOLLOWING RE ASONS:- IN THIS CONNECTION, WE RESPECTFULLY SUBMIT THAT TH E CIT(DR) WHO IS TO APPEAR BEFORE THE HONBLE 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 ADD RESS THE CERTAIN PRIOR ENGAGEMENT WHICH INTERFERED WITH HIS EARLIER REQUE ST FOR ADJOURNMENT WHICH WAS SPECIFICALLY SOUGHT IN ORDER TO AFFORD HIM OPPO RTUNITY TO PUT THE REVENUES POSITION ON RECORD. IT IS FURTHER SEEN THAT TILL T HE DATE OF PASSING THIS ORDER, NO REQUEST HAS BEEN MADE BY THE DEPARTMENT SEEKING TIM E TO ADDRESS THE ISSUES. IT THEREFORE BECOMES EVIDENT THAT INSTEAD OF GAINFU LLY 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 CH OSE TO LEAVE THE REVENUE UNREPRESENTED THEREBY ABDICATING THEIR ONEROUS RESP ONSIBILITIES. THE FAITH OF THE COURT IN THE GENUINENESS OF THE REQUESTS ON BEH ALF 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 MIS PLACED AND ABUSED. HENCE IN THE FACTS OF THE CASE, ON THE COMPLETION OF THE LD. ARS ARGUMENTS, THE ADJOURNMENT REQUEST WAS REJECTED AS THE COURT FUNCT IONING CANNOT BE ALLOWED TO BE OBSTRUCTED AD-INFINITUM BY THE WHIMS & FANCIE S OF PERSONS WHO ARE RELUCTANT TO WORK WHERE ADMITTEDLY MORE THAN REASON ABLE 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 A RGUED HIS APPEAL ON 16 TH MARCH 2015 AND IN ORDER TO ACCOMMODATE REVENUE ADJ . TO 19 TH MARCH 2015. LD. AR ARGUED IT AGAIN ON THE SAID DAT E DUE TO CHANGE OF DR IN VIEW OF THE ABOVE WHERE THE DEPARTMENT IS AVO IDING HEARING THE PETITION IS REJECTED. LD. AR HEARD STAY BECOMES IN FRUCTUOUS. NO COERCIVE ACTION TILL THE PASSING OF THE ORDER. RE AD 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 PRESEN T APPEAL CAME UP TO BE ARGUED THREE TIMES BY THE LD. AR WHERE DESPITE O PPORTUNITIES PROVIDED IN GOOD FAITH REPEATEDLY TO THE REVENUE THE REVENUE, T HROUGH ITS STANDING COUNSEL AND LD. CIT DR (INTERNATIONAL TAXATION) CHOSE NOT T O ADVANCE ANY ARGUMENTS WHATSOEVER IN SUPPORT OF THE IMPUGNED ORDER. THUS, IN THE ABSENCE OF ANY SUBMISSION FROM THE REVENUE THE APPEAL IS BEING DEC IDED EX-PARTE QUA THE REVENUE ON THE BASIS OF MATERIAL AVAILABLE ON RECOR D. WE CAN ONLY OBSERVE WITH SURPRISE THE TOLERANCE OF INDISCIPLINE BY THE APPRO PRIATE AUTHORITIES WHO APPEAR TO HAVE CHOSEN TO GIVE THEIR TACIT COMPLIANCE TO TH E 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 ADDRESS ING GROUND NOS.3.3 & 3.4, HAS SUBMITTED THAT IN THE FACTS OF THE PRESE NT CASE THE ISSUE IS COVERED IN ASSESSEES FAVOUR BY VIRTUE OF THE AFORESAID ORDER OF THE TRIBUNAL IN GLOBAL ONE INDIA PRIVATE LIMITED (ITA NOS. 5571/DEL/2011 AND I TA NOS. 5896/DEL/2012). THE SAID ORDER IT HAS BEEN STATED HAD BEEN CITED BE FORE THE DRP HOWEVER THE DRPS ORDER IS SILENT ON THE ISSUE AS A RESULT OF T HIS 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 DRPS ORDER DATED 22.12.2014. INVITING ATTENTI ON TO THE SUBMISSIONS DATED 02.12.2014 ANNEXED AT PAGE 169-220 OF THE APPEAL SE T AND PAPER BOOK INCLUDING PAGE 48 WHICH ARE COPY OF THESE AFORESAI D SUBMISSIONS DATED 02.12.2014 ALSO PLACED AT PAPER BOOK PAGE 1-52 OF T HE PAPER BOOK. BASED ON THE AFORESAID PAGES, IT HAS BEEN SUBMITTED THAT THE POINT AT ISSUE IS COVERED IN ASSESSEES FAVOUR. 4.2. ADDRESSING THE FACTS IT HAS BEEN SUBMITTED THAT TH E 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 GOIPLS BOARD DECISION OF CEASING G OIPL OPERATIONS IN FY 2008-09. 4.4. THE ASSESSEE IT WAS SUBMITTED HAS ALL ALONG CLAIME D THAT IT FOLLOWS THE SAME BUSINESS MODEL, UNDERTAKES THE SAME OPERATIONS , SERVICES THE SAME EQUANT GROUP CLIENTS AND EMPLOYS THE SAME MANAGEMEN T PERSONNEL AND EMPLOYEES AS WAS DONE BY GOIPL. 4.5. IN THE FACTS OF GOIPL ALSO IT WAS SUBMITTED THE AS SESSEE HAD APPLIED THE PROFITS SPLIT METHOD (HEREINAFTER REFERRED TO AS P SM) WHICH ON SIMILAR REASONING WAS NOT APPROVED OF BY THE TRANSFER PRICI NG OFFICER (HEREINAFTER REFERRED TO AS 'TPO'). THE TPO IN THE FACTS OF TH E ASSESSEES PREDECESSORS CASE I.E. GOIPL ALSO CONSIDERED TRANSACTIONAL NET MARGIN METHOD (HEREINAFTER REFERRED TO AS TNMM) AS THE MOST APPROPRIATE METH OD (HEREINAFTER REFERRED TO AS MAM) ON SIMILAR REASONING AS IN THE FACTS OF T HE 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 O F 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 PRE SENT 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 T HE 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 ASSESSME NT. A REFERENCE TO THE TPO WAS MADE BY THE AO TO DETERMINE THE ARMS LENGTH P RICE U/S 92CA(3) OF THE ACT IN RESPECT OF THE INTERNATIONAL TRANSACTION ENT ERED 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 AVAIL ING OF THE STATUTORY REMEDY FILED OBJECTIONS BEFORE THE DRP WHEREIN RELIANCE WA S PLACED ON THE ORDER OF THE PREDECESSOR OF THE ASSESSEE. THE DRP REJECTED THE ASSESSEES OBJECTIONS POSED TO THE TPOS ORDER AND HELD THAT THE TNMM IS THE MO ST APPROPRIATE METHOD AS OPPOSED TO PROFIT SPLIT METHOD RELIED UPON BY THE A SSESSEE. 5.2. PURSUANT TO THIS ORDER, THE APPEAL HAS BEEN FILED. 5.3. CONSIDERING THE PRAYER OF THE ASSESSEE ADDRESSED V IDE 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 OB JECTIONS 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 OPERATIO NS 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 S ERVICES 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 AROUN D 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 7 4% OF THE GOIPL'S SHARE CAPITAL, THE BUSINESS OPERATIONS OF GOIPL WERE DECIDED BY THE BOARD OF DIRECTORS TO BE TRANSITED UNDER THE NE W FDI AND REGULATORY REGIME AND HENCE TO BE CONTINUED IN NEWL Y INCORPORATED ENTITY COMPLIANT WITH REQUIRED LICENSE S AND SHAREHOLDING PATTERN. A NEW COMPANY, EQUANT NETWORKS SERVICES INDIA PRIVA TE LIMITED ('ENSIPL' OR 'ASSESSEE' OR 'THE COMPANY') WAS INCORPORATED IN 2007 AS A FOREIGN INVESTMENT PROMOTION BOARD APPROVED JO INT VENTURE COMPANY BETWEEN EGN B.V., EQUANT PTE, LIMIT ED AND EMERY TECHNOLOGIES PRIVATE LIMITED ('ETPL') IN ORDER TO E NSURE THE PRESENCE OF THE EQUANT GROUP IN INDIA. EGN B.V. IS COMMON SHARE HOLDER OF GOIPL AND ENSIPL EXCEPT THAT IN ENSIPL, PURSUANT TO FDI R EGULATION, 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 INTERN ATIONAL 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 RELAT ED NETWORK SERVICES TO THE GROUP'S CUSTOMERS IN INDIA. THE SERVICES OFF ERED 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 LI CENSE. 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 TRANS FERRED AND NETWORK EQUIPMENTS WERE SOLD (FOLLOWING A VALUATION UNDERTAKEN BY A THIRD PARTY VALUER) TO ENSIPL DURIN G 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 PA SSED TO CEASE OPERATIONS COMPLETELY IN GOIPL W.E.F. MARCH 3 1, 2009. POST FY 2008-09, THERE WAS NO BUSINESS IN GOIPL AT ALL AND ENSIPL HAD TAKEN OVER SERVICING THE CUSTOMERS OF TH E EQUANT GROUP. ENSIPL, THOUGH A DISTINCT ENTITY, TOOK OVER THE BUS INESS OPERATIONS OF GOIPL POST THE GOIPL'S BOARD DECISION OF CEASING GOIPL'S OPERATIONS IN FY 2008-09. ENSIPL FOLLOWS TH E SAME BUSINESS MODEL, UNDERTAKES THE SAME OPERATIONS, SER VICES THE SAME EQUANT GROUP CLIENTS AND EMPLOYS THE SAME MANA GEMENT PERSONNEL AND EMPLOYEES AS WAS DONE BY GOIPL. (EMPHASIS PROVIDED) 5.4. A PERUSAL OF THE SAME SHOWS THAT AS PER THE PLEADI NGS ON RECORD THERE CAN BE NO DOUBT THAT THE ASSESSEE IN THE PRESENT PR OCEEDINGS HAS TAKEN OVER THE BUSINESS OPERATIONS OF GOIPL AFTER ITS BOARDS DECISION THAT THE GOIPL SHALL CEASE OPERATIONS IN F.Y.2008-09. IT IS FURTH ER 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 SAM E OPERATIONS, SERVICES THE SAME EQUANT GROUP CLIENTS AND EMPLOYS THE SAME MANA GEMENT PERSONNEL AND EMPLOYEES AS WAS DONE BY GOIPL. THE CLAIM HAS ALSO BEEN PUT FORTH THAT AS A CONSEQUENCE, THE EMPLOYEES OF GOIPL WERE TRANSFERRE D AND THE NETWORK EQUIPMENTS OF GOIPL WERE SOLD (FOLLOWING A VALUATIO N UNDERTAKEN BY A THIRD PARTY VALUER) TO ENSIPL DURING THE YEAR. THE SAID C LAIM 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 DIFFE RENT DATES BY THE ASSESSEE WHICH IT IS SEEN REMAINS UNREBUTTED BY THE REVENUE. IN THE ABSENCE OF ANY REPRESENTATION BY THE DEPARTMENT, CONSIDERING THE P LEADINGS 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 TPOS ORDER, EQUANT NETWORK SERVICES, INDIA (HEREINAFTER REFERRE D TO AS ENSIPL) SUBSEQUENTLY NAMED AS M/S ORANGE BUSINESS SERVICES INDIA NETWORKS PVT. LTD. (HEREINAFTER REFERRED TO AS OBSINPL I.E THE ASSESSE E) IS A COMPANY INCORPORATED UNDER THE LAWS OF INDIA. IT IS A JOINT VENTURE COM PANY BETWEEN EGN B.V, EQUANT PTE. LTD. AND EMERY TECHNOLOGIES PRIVATE LIM ITED WHEREIN EGN B.V. AND EQUANT PTE. LTD. ARE THE FOREIGN INVESTORS IN T HE JOINT VENTURE AND ARE PART OF THE FT GROUP. ENSIPL WAS INCORPORATED IN THE YE AR 2007 AND DURING THE F.Y. 2008-09 AND AS PER THE TPO OBTAINED LICENSES F ROM DEPARTMENT OF TELECOMMUNICATIONS TO PROVIDE SERVICES UNDER THE NL D AND ILD SERVICE CATEGORIES IN INDIA. THE COMPANY BECAME OPERATIONA L FROM AUGUST 2008 AND IS ENGAGED IN PROVIDING DATA SERVICES INCLUDING IP VOI CE SERVICES AND RELATED NETWORK SERVICES TO THE GROUPS CUSTOMERS IN INDIA. THE SERVICES OFFERED BY ENSIPL UNDER ITS NLD & ILD LICENSE AS PER THE TRANS FER PRICING ORDER ARE LAYER 2 AND LAYER 3 DATA SERVICES WHICH MAINLY COVER IPVP N, MPLS, ATM, FRAME RELAY, X25, X28 PROTOCOL ETC. 5.6. IT IS FURTHER SEEN THAT THE TPO ENUMERATED THE FOL LOWING FUNCTIONS OF THE ASSESSEE IN PARA 5.1 :- 5.1. FUNCTIONS PERFORMED BY ENSIPL (TAXPAYER) ENSIPL IS ONE OF THE OPERATING ENTITIES OF THE GROU P IN INDIA. ENSIPL IS PRIMARILY ENGAGED IN PROVIDING DATA SERVICES AND RE LATED NETWORK SERVICES TO GROUP'S CUSTOMERS LOCATED IN INDIA. THE DATA SERVICES OFFERED BY ENSIPL UNDER THE NLD AND ILD SERVICE CA TEGORIES 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 LICE NSE ARE LAYER 2 AND LAYER 3 DATA SERVICES WHICH MAINLY COVER IPVPN, MPL S, ATM, FRAME RELAY X25, X28 PROTOCOL ETC. FOR THE PROVISION OF THESE SERVICES, ENSIPL UTILIZE S 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 OFFERE D 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 F ULLY MANAGED SUPPORT SOLUTIONS DEVELOPED AROUND THE BASIC NETWORK SERVIC ES. FURTHER, ENSIPL ALSO OWNS AND DEPLOYS NECESSARY NETWORK EQUI PMENTS. 5.7. IN THE FACTS OF THE PRESENT CASE, WE FIND THAT REP EATEDLY THE ASSESSEE VIDE REPLY DATED 17.01.2014 BEFORE THE TPO AND BEFORE TH E 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 IN TERRELATED OR INTEGRATED THAT THEY CANNOT BE EVALUATED SEPARATELY. 5.8. IN ORDER TO SUPPORT ITS CLAIM THAT THE SERVICES RE NDERED BY THE GROUP ENTITIES ARE INTERRELATED, IT HAS BEEN SUBMITTED TH AT IT IS ENGAGED IN PROVIDING DATA SERVICES AND RELATED NETWORK SERVICES TO CUSTO MERS IN INDIA; GLOBALLY, THE EQUANT GROUP IS A RECOGNIZED LEADER IN TELECOM SERV ICES AND PROVIDES GLOBAL, INTEGRATED AND CUSTOMIZED COMMUNICATION INFRASTRUCT URE SOLUTIONS THAT ENABLE THE KEY BUSINESS PROCESSES OF ITS CUSTOMERS; CUSTOM ERS 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 CUSTOMER S OF EQUANT GROUP HAVE ONE DECISION MAKER, THE HEAD OFFICE, WHICH IS USUAL LY LOCATED IN ONE COUNTRY AND EQUANT GROUP DEALS DIRECTLY WITH ONE LOCATION T O 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 PRO VIDING SERVICES ARE GENERATED ACROSS THE SPAN OF THE EQUANT GROUP, WHIC H 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 SERVIC ES TO BE BILLED BETWEEN MORE THAN ONE LOCATION, BUT NOT NECESSARILY ALL THE LOCA TIONS 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 GENERA TE 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 F ACTORS 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 VARIO US OPERATING ENTITIES OF THE EQUANT GROUP OWN/ DEPLOY THE NECESS ARY LEG OF THE NETWORK FOOTPRINT IN THEIR RESPECTIVE COUNTRY/ JURISDICTION . 5.9. A PERUSAL OF THE FACTS AS CONSIDERED BY THE CO-ORD INATE 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 S IMILAR FACTS WERE THERE IN THE PRECEDING YEARS AS THE COMPANY HAD BARELY STARTED I TS OPERATIONS IN AUGUST, 2008 AND STARTED REALIZING REVENUE FROM DECEMBER, 2 008 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 A PPLICATION OF PSM BY THE ASSESSEE, NO ADVERSE INFERENCE WAS DRAWN BY THE REV ENUE 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 PRES ENT CASE HAS ALSO CONCLUDED THAT MERELY BECAUSE REVENUES WERE INSIGNIFICANT ACC ORDINGLY INTERFERENCE IN THE METHOD WAS NOT DONE IN THE FACTS OF THE PRESENT CAS E. IT IS HELD BY HIM THAT MERELY ON THE BASIS OF THIS FACT ALONE DOES NOT MEA N 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 CONCEP T OF RES-JUDICATA DOES NOT APPLY IN TRANSFER PRICING PROCEEDINGS. 5.9.1. A PERUSAL OF THE ORDER OF THE CO-ORDINATE BENCH SH OWS THAT IDENTICAL REASONING AND FACT HAS BEEN CONSIDERED BY THE CO-OR DINATE BENCH AND THE DEPARTMENTAL STAND TAKEN HAS NOT BEEN ACCEPTED. 5.9.2. FOR READY-REFERENCE, WE EXTRACT THE RELEVANT FIND ING:- THE TRANSFER PRICING OFFICER, HAD AFTER A DETAIL E NQUIRY IN THE EARLIER ASSESSMENT YEARS, ACCEPTED PSM AS THE MAM. THIS BEING SO, IN OUR VIEW, REJECTION OF THIS METHOD ON THE GROUND THAT R ESJUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS IS NOT CORRECT. RECENTLY, THE HONBLE SUPREME COURT, IN THE CASE OF CIT VS. EXCEL INDUSTR IES LTD. HAS HELD THAT THE REVENUE CANNOT BE ALLOWED TO FLIP-FL OP 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 SHAL L BE CONDUCTED BASED ON THE PROVISIONS OF THE INDIAN TRANSFER PRICING REGULATIO NS AND THE JUDICIAL GUIDANCE PROVIDED BY THE INDIAN JUDICIARY REJECTING THE SUPP ORTING 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 BE NCH. 5.10.1. SIMILAR REASONING WAS CONSIDERED BY THE CO-ORDINATE BENCH A ND REJECTED IN THE FOLLOWING WORDS:- 19.2. THE TPOS OPINION, THAT ACCEPTANCE OF PSM IN OTHER JURISDICTIONS AS OF NO CONSEQUENCE, TO OUR MIND, IS ALSO INCORRECT. NO DOUBT, THE ARMS LENGTH PRICE HAS TO BE DETERMINED WITH REFERENCE TO THE INDIAN TRANSFER PRICING REGULATIONS ONLY. AT TH E SAME TIME, GUIDANCE CAN BE TAKEN FROM OECD COMMENTARIES, UN GU IDELINES AND OTHER SUCH LITERATURE.. THE HONBLE SUPREME COURT, ON A NUMBER OF OCCASIONS, DID REFER TO COMMENTARIES OF OECD, UN ET C., WHILE ARRIVING AT CONCLUSIONS. ONE SUCH CASE IS, AZADI BACHAO ANDO LAN, 184 CTR SC 450. EVEN THE INDIAN TRANSFER PRICING REGULATION RE COGNIZE THIS ASPECT, AS EVIDENT FROM THE INTRODUCTION OF RULE 10 AB, WHI CH ALLOWS THE USE OF ANY OTHER METHOD WHICH IS GENERALLY ACCEPTED, FOR D ETERMINING 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 T POS 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 CONTRIBUT ION MADE TO NETWORK OPERATIONS BY EACH ENTITY IS DETERMINED AS A SUM OF THE FOLLOWING FOUR ITEMS. NETWORK DEPRECATION: BASED ON THE FINANCIALS OF E ACH ENTITY. NETWORK PERSONNEL COST: STAFF COSTS RELATING TO P ERSONNEL ENGAGED IN NETWORK RELATED ACTIVITIES. HISTORICAL INVESTMENT IN THE NETWORK: HISTORICAL INVESTMENT IN THE NETWORK IS MEASURED BY THE ACCUMULATED UNABSORB ED INVESTMENTS IN THE NETWORK MADE BY EQUANT NETWORK SYSTEMS LTD. (ENSYS') AN EQUANT GROUP COMPANY IN IRELAND. FOREGONE PERFORMANCE PAYMENTS: PRIOR TO THE EXECU TION OF A MEMORANDUM OF UNDERSTANDING (MOU') ON SEPTEMBER 10 , 2004 EFFECTIVE JANUARY 1, 2004 AMONGST ALL EQUANT ENTITI ES, A PRIOR INTER- COMPANY TRANSFER PRICING AGREEMENT WITH ENSYS REQUI RED ENSYS TO COMPENSATE EACH ENTITY WITHIN THE GROUP FOR THE NET WORK COST INCURRED BY EACH ENTITY INCLUDING DEPRECIATION OF CAPITAL EQ UIPMENT AND BOUGHT IN COSTS. IN ADDITION, EACH ENTITY WAS TO RECEIVE A PERFORMANCE PAYMENT, PROVIDED THE EQUANT SHARE PRICE MET A DESI RED 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 INVESTME NT 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 GRO UP ARE MEASURED BY THE STAFF COSTS OF THE PERSONNEL ENGAGED IN SALE S AND MARKETING RELATED ACTIVITIES. (II) FIELD OPERATIONS: THE FIELD OPERATIONS UNDERT AKEN 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 GOIPLS ORDER PASSED BY THE CO-ORD INATE BENCH SHOWS THAT SIMILAR SUBMISSION WAS NOT ACCEPTED EVEN IN THE FACTS OF AS SESSEES PREDECESSORS CASE AS A JUSTIFICATION FOR PSM AS TH E MAM BY THE TPO IN THE FACTS OF THAT CASE ALSO FOR THE REASON THAT ACCORDI NG TO THE TPO IN THE FACTS OF THE PRESENT CASE AS WELL AS THE GOIPL, THE T.P. ST UDY REPORT DID NOT SHOW ANY UNIQUE INTANGIBLES OR VALUE ADDED SERVICES BEING PR OVIDED BY THE ASSESSEE. HE HAS BEEN OF THE VIEW THAT ONLY SOME ROUTINE EXERCIS ES HAVE BEEN MENTIONED THAT ANY SERVICE PROVIDER WOULD UNDERTAKE TO CONTIN UE IN BUSINESS. MOREOVER, NO PATENTS/COPYRIGHTS WERE FOUND TO BE HELD IN THE SE INTANGIBLES. AS IN GOIPLS 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 GOIPLS CASE THE TPO HELD THAT NO EVIDENCE OF ANY N EW BUSINESS PRACTICE, A NEW MARKETING STRATEGY, A NEW TECHNOLOGICAL DEVELOP MENT OR ANYTHING OF THIS KIND THAT CAN BE STATED TO HAVE BEEN DEVELOPED BY I T 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 CON SIDERED BY THE CO- ORDINATE BENCH WHO DID NOT AGREE WITH THE ABOVE STA TED STAND OF THE TPO FOR REJECTING ASSESSEES STAND FOR USING PSM AS MAM AND THE CO-ORDINATE BENCH ALSO REJECTED THE TPOS JUSTIFICATION FOR USING TNM M. 5.12. SIMILARLY THE ARGUMENT OF THE ASSESSEE THAT THE PR OVISION 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 SU PPLY AND THE LANDING STATION MAY BE MAINTAINED BY THE ASSESSEE OR IT MAY BE OUTS OURCED; 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 C LAIM HELD THAT THIS IS ALMOST ALWAYS OUTSOURCED TO ANOTHER SERVICE PROVIDER AND I NFACT 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 TH ERE IN GOIPLS CASE AND THEY HAVE NOT FOUND FAVOUR BY THE CO-ORDINATE BENCH WHO AT INTERNAL PAGE 40 OF THE ORDER CONSIDERING THE TPOS OBJECTIO N THAT THE ASSESSEE HAS NOT PUT FORTH ANY EVIDENCE THAT IT HAD UNIQUE INTANGIBL ES IT WAS HELD THAT PSM CAN BE ADOPTED AS MAM UNDER THE DOMESTIC TP REGUL ATIONS EVEN IN CASES INVOLVING MULTIPLE INTERRELATED INTERNATIONAL TRANS ACTIONS, WHICH CANNOT BE EVALUATED SEPARATELY FOR DETERMINING ALP OF ANY ONE TRANSACTION. THE CO- ORDINATE BENCH FURTHER HELD THAT WHEN THE TRANSACTI ON INVOLVED CONTRIBUTIONS OF MULTIPLE ENTITIES AND ARE INTEGRATED AND INTERRE LATED 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 T HE 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 A SSESSEE DOES POSSESS UNIQUE INTANGIBLES IN THE FIELD OF DATA TRANSFER AN D COMMUNICATIONS, AND COMPARING THE OPERATIONS WITH A SIMPLE E MAIL A ND 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 WH Y REPUTED GLOBAL ENTERPRISES WOULD PAY THEM FOR DATA TRANSMISSION, W HEN 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 ASSESSE E'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 ASSESS EE'S BUSINESS DOES NOT HAVE ANY INTEGRATION WITH THE OTHER GROUP ENTITIES AND THE ASSESSEE RUNS ITS BUSINESS INDEPENDENTLY IN INDIA. THE REASONING OF T HE TPO THAT FOR THE DEPLOYMENT OF THIRD PARTY ENTITIES FOR THE PROLIFER ATION OF ITS NETWORK SERVICES, THERE IS NOTHING ON RECORD TO SHOW THAT THE ASSESSE E 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 OPE RATIONAL REQUIREMENTS IN INDIA AS A JUSTIFICATION FOR APPLYING TNMM HAS ALS O BEEN CONSIDERED BY THE CO- ORDINATE BENCH IN PARA 18.3 AND FOR THE FOLLOWING R EASONS 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 THA T THE ASSESSEE RUNS ITS BUSINESS INDEPENDENTLY IN INDIA. THIS LEADS TO A CO NCLUSION THAT THE ASSESSEE IS AN INDEPENDENT ENTREPRENEUR . BUT WHEN A TRANSACTION IS INTEGRATED AND INTERRELATED AND WHEN COSTS ARE INCU RRED BY MULTIPLE ENTITIES AND THE REVENUES ARE TO BE APPORTIONED TO MULTIPLE ENTITIES, THEN THE FACTUAL CONCLUSIONS OF THE T.P.O HAVE TO B E 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 BUSINE SS LOSSES ARE DUE TO BUSINESS START UP; POOR MANAGEMENT; DELIBERATE BUSINESS STRATEGY; ECON OMIC DOWNTURN; BUSINESS CYCLE STAGE; EXCESSIVE FINANCIAL RISK; EFFECT OF GOVERNMENT INTERVENTION ACCORDING TO THE TPO DID NOT ADDRESS T HE 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 CUSTOM ERS ARE CONCERNED AND THE ARGUMENT THAT THERE IS CONTINUOUS EROSION OF MARGIN S 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 C ONSIDERED THE REASONING OF THE TPO AND OVER RULING THE TPOS VIEW S 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 TPOS REASONING IN GOIPLS CASE WHEREIN ON CONSIDERING THE TERMS AND AGREEMENTS THE CONCLUSION DRAWN BY THE TP O 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 CONSIDER ED BY THE CO-ORDINATE BENCH AND DISAGREED WITH. 5.15.1. THESE ISSUES HAVE BEEN CONSIDERED BY THE CO-ORDINA TE 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 A S TO WHAT IS THE MAM DOES NOT DEPEND ON THE FACTOR AS TO WHETHER A N 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 T HE ADMINISTRATOR DOES NOT HAVE ABSOLUTE DISCRETIONARY POWER TO DETER MINE INTER GROUP PAYMENT. THE AGREEMENT PROVIDES THAT DISPUTES, IF N OT REASONABLY RESOLVED, CAN BE REFERRED FOR ARBITRATION. THUS, TH E CONCLUSION DRAWN BY THE T.P.O. IS ERRONEOUS. IN OUR VIEW, THIS CANNOT B E 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 ME RELY AN ALLEGATION WHICH, IN OUR VIEW, IS NOT SUBSTANTIATED OR DEMONST RATED 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 ASS ESSEE AND THE NATURE OF THE INTERNATIONAL TRANSACTION AND HAVING UNDERTA KEN 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-O RDINATE 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 FOLL OWING 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 THA T THE ASSESSEE RUNS ITS BUSINESS INDEPENDENTLY IN INDIA. THIS LEADS TO A CO NCLUSION THAT THE ASSESSEE IS AN INDEPENDENT ENTREPRENEUR. BUT WHEN A TRANSACTION IS INTEGRATED AND INTERRELATED AND WHEN COSTS ARE INCU RRED BY MULTIPLE ENTITIES AND THE REVENUES ARE TO BE APPORTIONED TO MULTIPLE ENTITIES, THEN THE FACTUAL CONCLUSIONS OF THE T.P.O HAVE TO B E VACATED. 18.5. TRANSACTION NET MARGIN METHOD COMPARES THE PR OFIT MARGIN OF TAX PAYER ARISING FROM A NON ARMS LENGTH TRANSACTION, OR A GROUP OF SUCH SIMILAR TRANSACTIONS, WITH THE PROFIT MARGIN REALIZ ED BY THE ASSESSEE WITH ITS A.E. ON A SIMILAR TRANSACTION WHEREAS THE PSM ALLOCATES OPERATING PROFITS OR LOSSES FROM CONTROLLED TRANSAC TIONS, ON THE PRINCIPLE OF RELATIVE CONTRIBUTIONS MADE BY EACH PARTY IN CRE ATING THE COMBINED REVENUES. 18.7. IN OUR VIEW THE ARGUMENT OF THE ASSESSEE, THA T IN CASES WHERE THERE ARE COMMERCIAL LOSSES, TNMM CANNOT BE APPLIED , CANNOT BE ACCEPTED AS A GENERAL RULE. TO THIS EXTENT, WE AGRE E WITH THE CONCLUSIONS OF THE T.P.O. T.N.M.M. CAN BE APPLIED E VEN IN CASES WHERE THERE ARE COMMERCIAL OR OTHER LOSSES. AT BEST, SUIT ABLE 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 TN MM CANNOT BE USED FOR BENCH MARKING RETURNS EARNED BY THE NUMBER OF C OMPLEX ENTITIES/ENTREPRENEUR, WHERE EACH MAKE VALUABLE UNI QUE CONTRIBUTIONS. THE TPO HAS NOT SPECIFICALLY DEALT WITH THIS OBJECT ION OF THE ASSESSEE. WE FIND MUCH FORCE IN THIS CONTENTION OF THE ASSESS EE AND AGREE WITH THE SAME. WE ARE SUPPORTED BY OECD GUIDELINES, ON T HIS ISSUE. AT PARA 2.59 OF THE OECD GUIDELINES IT IS STATED AS FO LLOWS: A TRANSACTIONAL NET MARGIN METHOD IS UNLIKELY TO BE RELIABLE IF EACH PARTY TO A TRANSACTION MAKES VALUABLE, UNIQUE CONTR IBUTIONS, SEE PARAGRAPH 2.4. IN SUCH A CASE, A TRANSACTIONAL PROF IT SPLIT METHOD WILL GENERALLY BE THE MOST APPROPRIATE METHOD,( SEE PARA GRAPH 2.109). IN SUCH A CASE, A TRANSACTIONAL PROFIT SPLIT METHOD WI LL GENERALLY BE THE MOST APPROPRIATE METHOD. 5.17. A READING OF THE ORDER IN GOIPLS CASE FURTHER SHOW S THAT THE VIEW SO TAKE WAS ONLY AFTER CONSIDERING THE JUDICIAL PRECED ENT LAID DOWN BY THE SPECIAL BENCH IN THE CASE OF AZTECH SOFTWARE AND TECHNOLOGY SERVICES LTD. VS ACI T 107 ITD IN PARA 17.3; AND THE OECD IN TRANSFER PRIC ING GUIDELINES FOR MULTI- NATIONAL ENTERPRISES AND TAX ADMINISTRATION; AND UN ITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES ; US TRANSFER PRICING BY HARLOW N.HIGINBOTAMO; PRACTICAL GUIDE TO US TRANSF ER 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-REFE RENCE:- 17.3. BEFORE US THERE ARE TWO METHODS FOR CONSIDER ATION, I.E. PSM AND TNMM. THE SPECIAL BENCH OF THE TRIBUNAL, IN THE CASE OF A ZTECH SOFTWARE AND TECHNOLOGIES SERVICES LTD. VS. ACIT, R EPORTED 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 ENTERPRIS ES ARISING FROM THE INTERNATIONAL TRANSACTION IN WHICH THEY AR E 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 O R TO BE EMPLOYED AND RISKS ASSUMED BY EACH ENTERPRISE AND ON THE BAS IS OF RELIABLE EXTERNAL MARKET DATA WHICH INDICATES HOW SUCH CONTR IBUTION WOULD BE EVALUATED BY UNRELATED ENTERPRISES PERFORMING COMPA RABLE FUNCTIONS IN THE SIMILAR CIRCUMSTANCES; (III) THE COMBINED NET PROFIT IS THEN SPLIT AMONGST THE ENTERPRISES IN PROPORTION TO THEIR RELATIVE CONTRIBUTIONS, AS EVAL UATED UNDER SUB CLAUSE(II); (IV) THE PROFIT THUS APPORTIONED TO THE ASSESSEE IS TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION; 181. THIS METHOD MAY BE APPLICABLE IN CASE WHERE TR ANSACTIONS INVOLVED TRANSFER OF UNIQUE, INTANGIBLE OR ANY MULT IPLE INTERRELATED INTERNATIONAL TRANSACTIONS, WHICH CANNOT BE EVALUAT ED SEPARATELY FOR DETERMINING THE ALP OF ANY ONE TRANSACTION. 182. THE PROFIT SPLIT METHOD FIRST IDENTIFIES THE P ROFIT TO BE SPLIT FOR THE ASSOCIATED ENTERPRISE FROM THE CONTROLLED TRANSACTI ONS 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 HA VE BEEN ANTICIPATED AND REFLECTED IN AN AGREEMENT TRANSACTIONS OR A RES IDUAL PROFIT INTENDED TO REPRESENT THE PROFIT THAT CANNOT READILY BE ASSI GNED TO ONE OF THE PARTIES, SUCH AS THE PROFIT ARISING FROM HIGH VALUE , SOMETIMES UNIQUE, INTANGIBLES. 183. THE CONTRIBUTION OF EACH ENTERPRISE IS BASED U PON A FUNCTIONAL ANALYSIS AND VALUED TO THE EXTENT POSSIBLE BY ANY A VAILABLE RELIABLE EXTERNAL MARKET DATA. THE FUNCTIONAL ANALYSIS IS AN ANALYSIS OF THE FUNCTIONS PERFORMED (TAKING INTO ACCOUNT ASSETS USE D AND RISKS ASSUMED) BY EACH ENTERPRISE. THE EXTERNAL MARKET CR ITERIA MAY INCLUDE, FOR EXAMPLE, PROFIT SPLIT PERCENTAGES OR RETURNS OB SERVED AMONG INDEPENDENT ENTERPRISES WITH COMPARABLE FUNCTIONS. 17.4. THE OECD TRANSFER PRICING GUIDELINE FOR MULTINATION AL ENTERPRISES AND TAX ADMINISTRATION IN CHAPTER 2 ON TRANSFER PRICING METHODS, AT PAGE 93, PARA C.1 STATES AS FOL LOWS: C.1 IN GENERAL 2.108 THE TRANSACTIONAL PROFIT SPLIT METHOD SEEKS T O 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 ENTERPRISE S WOULD HAVE EXPECTED TO REALIZE FROM ENGAGING IN THE TRANSACTIO N OR TRANSACTIONS. THE TRANSACTIONAL PROFIT SPLIT METHOD FIRST IDENTIF IES THE PROFITS TO BE SPLIT FOR THE ASSOCIATED ENTERPRISES FROM THE CONTR OLLED 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 BAS IS THAT APPROXIMATES THE DIVISION OF PROFITS THAT WOULD HAV E BEEN ANTICIPATED AND REFLECTED IN AN AGREEMENT MADE AT ARMS LENGTH. SEE PARAGRAPHS 2.132-2.145 FOR A DISCUSSION OF HOW TO SPLIT THE CO MBINED PROFITS. 17.5. ON RESIDUAL ANALYSIS ANALYSES, IT IS STATED AS FOLL OWS: C.3.2.2 RESIDUAL ANALYSES 2.121 A RESIDUAL ANALYSIS DIVIDES THE COMBINED PROF ITS FROM THE CONTROLLED TRANSACTIONS UNDER EXAMINATION IN TWO ST AGES. IN THE FIRST STAGE, EACH PARTICIPANT IS ALLOCATED AN ARMS LENGT H REMUNERATION FOR ITS NON-UNIQUE CONTRIBUTIONS IN RELATION TO THE CON TROLLED TRANSACTIONS IN WHICH IT IS ENGAGED. ORDINARILY THIS INITIAL REMUNE RATION WOULD BE DETERMINED BY APPLYING ONE OF THE TRADITIONAL TRANS ACTION METHODS OR A TRANSACTIONAL NET MARGIN METHOD, BY REFERENCE TO TH E REMUNERATION OF COMPARABLE TRANSACTIONS BETWEEN INDEPENDENT ENTERPR ISES. THUS, IT WOULD GENERALLY NOT ACCOUNT FOR THE RETURN THAT WOU LD BE GENERATED BY ANY UNIQUE AND VALUABLE CONTRIBUTION BY THE PARTICI PANTS. IN THE SECOND STAGE, ANY RESIDUAL PROFIT (OR LOSS) REMAINI NG 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 T HE COMBINED PROFITS. 2.122. AN ALTERNATIVE APPROACH TO HOW TO APPLY A RE SIDUAL ANALYSIS COULD SEEK TO REPLICATE THE OUTCOME OF BARGAINING B ETWEEN INDEPENDENT ENTERPRISES IN THE FREE MARKET. IN THIS CONTEXT, IN THE FIRST STAGE, THE INITIAL REMUNERATION PROVIDED TO EACH PARTICIPANT W OULD CORRESPOND TO THE LOWEST PRICE AN INDEPENDENT SELLER REASONABLY W OULD 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 INDE PENDENT ENTERPRISES WOULD BARGAIN. IN THE SECOND STAGE, THE RESIDUAL AN ALYSIS THEREFORE COULD DIVIDE THIS POOL OF PROFIT BASED ON AN ANALYS IS OF ANY FACTORS RELEVANT TO THE ASSOCIATED ENTERPRISES THAT WOULD I NDICATE HOW INDEPENDENT ENTERPRISES MIGHT HAVE SPLIT THE DIFFER ENCE BETWEEN THE SELLERS MINIMUM PRICE AND THE BUYERS MAXIMUM PRIC E. 2.123 IN SOME CASES AN ANALYSIS COULD BE PERFORMED, PERHAPS AS PART OF A RESIDUAL PROFIT SPLIT OR AS A METHOD OF SPLITT ING PROFITS IN ITS OWN RIGHT, BY TAKING INTO ACCOUNT THE DISCOUNTED CASH F LOW TO THE PARTIES TO THE CONTROLLED TRANSACTIONS OVER THE ANTICIPATED LI FE OF THE BUSINESS. ONE OF THE SITUATION IN WHICH THIS MAY BE AN EFFECT IVE METHOD COULD BE WHERE A START-UP IS INVOLVED, CASH FLOW PROJECTIONS WERE CA RRIED OUT AS PART OF ASSESSING THE VIABILITY OF THE PROJECT, AND CAPITAL INVESTMENT AND SALES COULD BE ESTIMATED WITH A REASONABLE DEGREE OF CERT AINTY. HOWEVER, THE RELIABILITY OF SUCH AN APPROACH WILL DEPEND ON THE USE OF AN APPROPRIATE DISCOUNT RATE, WHICH SHOULD BE BASED ON MARKET BENC HMARKS. IN THIS REGARD, IT SHOULD BE NOTED THAT INDUSTRY WIDE RISK PREMIUMS USED TO CALCULATE THE DISCOUNT DO NOT DISTINGUISH BETWEEN P ARTICULAR COMPANIES LET ALONE SEGMENTS OF BUSINESS, AND ESTIMATES OF TH E RELATIVE TIMING OF RECEIPTS CAN BE PROBLEMATIC. SUCH AN APPROACH, THER EFORE, WOULD REQUIRE CONSIDERABLE CAUTION AND SHOULD BE SUPPLEME NTED WHERE POSSIBLE BY INFORMATION DERIVED FROM OTHER METHODS. 17.6. THE UNITED NATIONS PRACTICAL MANUAL ON TRANSFER P RICING FOR DEVELOPING COUNTRIES CHAPTER VI TRANSFER PR ICING METHODS, STATES AS FOLLOWS: 6.3.13.1. THE PROFIT SPLIT METHOD IS TYPICALLY APP LIED WHEN BOTH SIDES OF THE CONTROLLED TRANSACTION CONTRIBUTES SIGNIFICA NT 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 ELIMINAT E THE EFFECT ON PROFITS OF SPECIAL CONDITIONS MADE OR IMPOSED IN A CONTROLL ED TRANSACTION(OR IN CONTROLLED TRANSACTIONS THAT IT IS APPROPRIATE TO A GGREGATE) BY DETERMINING THE DIVISION OF PROFITS THAT INDEPENDEN T ENTERPRISES WOULD HAVE EXPECTED TO REALIZE FROM ENGAGING IN THE TRANS ACTION OR TRANSACTIONS. FIGURE 5 ILLUSTRATE THIS. 6.3.13.3 THE PROFIT SPLIT METHOD STARTS BY IDENTIFY ING THE PROFITS TO BE DIVIDED BETWEEN THE ASSOCIATED ENTERPRISES FROM THE CONTROLLED TRANSACTIONS. SUBSEQUENTLY, THESE PROFITS ARE DIVID ED BETWEEN THE ASSOCIATED ENTERPRISES BASED ON THE RELATIVE VALUE OF EACH ENTERPRISES CONTRIBUTION, WHICH SHOULD REFLECT THE FUNCTIONS PE RFORMED, RISKS INCURRED AND ASSETS USED BY EACH ENTERPRISE IN THE CONTROLLED TRANSACTIONS. EXTERNAL MARKET DATE (E.G. PROFIT SPL IT PERCENTAGES AMONG INDEPENDENT ENTERPRISES PERFORMING COMPARABLE FUNCT IONS) SHOULD BE USED TO VALUE EACH ENTERPRISES CONTRIBUTION, IF PO SSIBLE, SO THAT THE DIVISION OF COMBINED PROFITS BETWEEN THE ASSOCIATED ENTERPRISES IS IN ACCORDANCE WITH THAT BETWEEN INDEPENDENT ENTERPRISE S 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 PROP ERTY, 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 MO RE IN PRACTICE THAN THE CONTRIBUTION APPROACH FOR TWO REASONS. FIRSTLY, THE RESIDUAL APPROACH BREAKS UP A COMPLICATED TRANSFER PRICING P ROBLEM INTO TWO MANAGEABLE STEPS. THE FIRST STEP DETERMINES A BASIC RETURN FOR ROUTINE FUNCTIONS BASED ON COMPARABLES. THE SECOND STEP ANA LYSIS RETURNS TO OFTEN UNIQUE INTANGIBLE ASSETS BASED NOT ON COMPARA BLES BUT ON RELATIVE VALUE WHICH IS, IN MANY CASES, A PRACTICAL SOLUTION. SECONDLY, POTENTIAL CONFLICT WITH THE TAX AUTHORITIES IS REDU CED BY USING THE TOW STEP RESIDUAL APPROACH SINCE IT REDUCES THE AMOUNT OF PROFIT THAT IS TO BE SPLIT IN THE POTENTIALLY MORE CONTROVERSIAL SECO ND STEP. 6.3.17.3. IN STEP 1 OF THE RESIDUAL ANALYSIS, A BAS IC RETURN FOR THE MANUFACTURING FUNCTION IS DETERMINED FOR COMPANY A AND COMPANY B. SPECIALLY A BENCHMARKING ANALYSIS IS PERFORMED TO S EARCH FOR COMPARABLE INDEPENDENT MANUFACTURES WHICH DO NOT OW N VALUABLE INTANGIBLE PROPERTY. THE RESIDUAL PROFIT, WHICH IS THE COMBINED PROFITS OF COMPANY A AND COMPANY B AFTER DEDUCTING THE BASI S (ARMS LENGTH ) RETURN FOR THE MANUFACTURING FUNCTION, IS THEN DIVI DED BETWEEN COMPANY A AND COMPANY B. THIS ALLOCATION IS BASED O N RELATIVE R & D EXPENSE WHICH ARE ASSUMED TO BE A RELIABLE KEY TO M EASURE THE RELATIVE VALUE OF EACH COMPANYS INTANGIBLE PROPERT Y. SUBSEQUENTLY, THE NET PROFITS OF COMPANY A AND COMPANY B ARE CALCULAT ED IN ORDER TO WORK BACK TO A TRANSFER PRICE. 17.8. IN PRACTICAL GUIDE TO U.S. TRANSFER PRICING BY ROB ERT T COLE, CHAPTER 10, PSM AUTHORED BY ARLOW N.HIGINBOTH AM, PG NOS.10-52, IT IS STATED AS FOLLOWS: THUS, TO SUMMARIZE, RPSM PROVIDES A TEST OF ARMS LENGTH TRANSFER PRICING BETWEEN VALUE- ADDED STAGES OF AN INTEGRATE D ENTERPRISE THAT IS CONSISTENT WITH THE SEPARATE ENTERPRISE STANDARD UN DER CONDITIONS OF RESOURCE MOBILITY AND COMPETITIVE CAPITAL AND PRODU CT MARKETS. BY VALUING FUNCTIONAL ACTIVITIES AND CAPITAL IN TERMS OF THE COMPETITIVE NORMS OF THE MARKET PLACE, RPSM ATTRIBUTES EXTRA- N ORMAL PROFIT OR LOSS IN PROPORTION TO THE RELATIVE INVESTMENT COST (OR O THER VALUATION) OF THE NON-ROUTINE INTANGIBLE ASSETS TO WHICH SUCH EXTRAOR DINARY PROFITS PERTAINS. THIS APPROACH IS CONSISTENT WITH THE IRS STATUTORY OBJECTIVE U/S 482 OF REQUIRING CONSIDERATION FOR INTANGIBLE P ROPERTY TRANSFERRED IN A CONTROLLED TRANSACTION TO BE COMMENSURATE WITH TH E INCOME ATTRIBUTABLE TO THE INTANGIBLE. IT IS ALSO CONSISTE NT WITH THE RESULT THAT WOULD OBTAIN AT ARMS LENGTH UNDER A HYPOTHETICAL J OINT VENTURE AGREEMENT BETWEEN THE DIFFERENT PARTIES CONTRIBUTIN G THEIR RESPECTIVE INVESTMENTS OF FUNCTIONAL AND ENTREPRENEURIAL CAPIT AL. 17.9. RESIDUAL PROFIT SPLIT METHOD IN THE BOOK U.S.TRANSF ER 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 DER IVED FROM DATA FOR FUNCTIONAL COMPARABLES, I.E. INDEPENDENT COMPANIES PERFORMING SIMILAR ROUTINE MANUFACTURING OR DISTRIBUTION FUNCTIONS; AN D STEP 2:THE REMAINING RESIDUAL OPERATING PROFIT OR LOSS IS AL LOCATED BASED ON RESIDUAL, ENTREPRENEURIAL CAPITAL SO AS TO EQUALI ZE THE RATE OF RETURN ON SUCH CAPITAL, ADJUSTED FOR MARKET DIFFERENCES IN THE COST OF CAPITAL. IN ACTUAL PRACTICE, IMPLEMENTATION OF THE RPSM CONC EPT OUTLINED ABOVE INVOLVES THE DETERMINATION OF A NUMBER OF INTERRELA TED VALUATIONS OF FUNCTIONAL AND ENTREPRENEURIAL ACTIVITIES IN DIFFER ENT COUNTRIES AND ECONOMIC CIRCUMSTANCES. THE EXISTING IRS REGULATION S PROVIDE RELATIVELY LITTLE SPECIFIC GUIDANCE CONCERNING THESE VALUATION S, AND THUS LEAVE OPEN THE QUESTION OF HOW BEST TO DETERMINE THE REL ATIVE VALUE OF EACH CONTROLLED TAXPAYERS CONTRIBUTION TO THE SUCCESS O F THE RELEVANT BUSINESS ACTIVITY IN A MANNER THAT REFLECTS THE FUN CTIONS PERFORMED, RISKS ASSUMED, AND RESOURCES EMPLOYED BY EACH PARTI CIPANT IN THE RELEVANT BUSINESS ACTIVITY, CONSISTENT WITH THE COM PARABILITY PROVISIONS OF 1.482- 1(D) (3). 18. WE NOW CONSIDER TNMM. IN AZTEK SOFTWARE AND TECHNOL OGY 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 ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB CLAU SE (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 TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE 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 ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. THE TNMM REQUIRES ESTABLISHING COMPARABILITY AT A B ROAD FUNCTIONAL LEVEL. IT REQUIRES COMPARISON BETWEEN NET MARGINS D ERIVED FROM THE OPERATION OF THE UNCONTROLLED PARTIES AND NET MARGI N DERIVED BY AN AE ON SIMILAR OPERATION. UNDER THIS METHOD, THE NET PR OFIT MARGIN REALIZED BY AN AE FROM AN INTERNATIONAL TRANSACTION IS COMPU TED IN RELATION TO A PARTICULAR FACTOR SUCH AS COSTS INCURRED, SALES, AS SETS UTILIZED ETC. THE NET PROFIT MARGIN REALIZED BY AN AE IS COMPARED WIT H NET PROFIT MARGIN OF THE UNCONTROLLED TRANSACTIONS TO ARRIVE AT THE A LP. THE TNMM IS SIMILAR TO RPM AND CPM TO THE EXTENT THAT IT INVOLV ES COMPARISON OF MARGIN EARNED IN A CONTROLLED SITUATION WITH MARGIN S EARNED FROM COMPARABLE UNCONTROLLED SITUATION. THE ONLY DIFFERE NCE IS THAT, IN THE RPM AND CPM METHODS, COMPARISON IS OF MARGINS OF GR OSS PROFITS AND WHEREAS IN TNMM THE COMPARISON IS ON MARGINS OF NET PROFIT. TNMM REQUIRES COMPARISON BETWEEN NET MARGINS DERIVE D FROM THE OPERATIONS OF THE UNCONTROLLED PARTIES AND NET MARG INS DERIVED BY AN AE FROM SIMILAR OPERATIONS. NET MARGIN IS INDICATED BY THE RATE OF RETURN ON SALES OR COST OR OPERATING ASSETS, AND TH IS 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 W OULD HAVE TO CONSIDER OTHER FACTORS, LIKE COST OF ASSETS OF COMP ARABLE COMPANIES, ETC. WHILE APPLYING THE RETURN ON ASSETS MEASURE. ORDINA RILY, THE TESTED PARTY, HAS TO BE THE PARTY PROVIDED SERVICES BECAUS E IT IS ON THE BASIS OF RATE OF RETURN ON SALES OR COST OR OPERATING ASS ETS THAT TRANSACTIONAL MARGIN IS COMPUTED. THESE PARAMETERS GENERALLY AVAI LABLE 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 ME THOD, 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 T HE 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 PA RAGRAPHS 3.9 3.12). THUS, A TRANSACTIONAL NET MARGIN METHOD OPER ATES IN A MANNER SIMILAR TO THE COST PLUS AND RESALE PRICE METHODS. THIS SIMILARITY MEANS THAT IN ORDER TO BE APPLIED RELIABLY, THE TRANSACTI ONAL NET MARGIN METHOD MUST BE APPLIED IN A MANNER CONSISTENT WITH THE MANNER IN WHICH THE RESALE PRICE OR COST PLUS METHOD IS APPLI ED. THIS MEANS IN PARTICULAR THAT THE NET PROFIT INDICATOR OF THE TAX PAYER FROM THE CONTROLLED TRANSACTION ( OR TRANSACTIONS THAT ARE A PPROPRIATE TO AGGREGATE UNDER THE PRINCIPLES OF PARAGRAPHS 3.9-3. 12) SHOULD IDEALLY BE ESTABLISHED BY REFERENCE TO THE NET PROFIT INDIC ATOR 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 TRANSAC TIONS IS REQUIRED TO DETERMINE WHETHER THE TRANSACTIONS ARE COMPARABLE A ND WHAT ADJUSTMENTS MAY BE NECESSARY TO OBTAIN RELIABLE RES ULTS. FURTHER, THE OTHER REQUIREMENTS FOR COMPARABILITY, AND IN PARTIC ULAR 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 PROF IT SPLIT METHOD WILL GENERALLY BE THE MOST APPROPRIATE METHOD, SEE PARAG RAPH 2.109. HOWEVER, A ONE-SIDED METHOD (TRADITIONAL TRANSACTIO N METHOD OR TRANSACTIONAL NET MARGIN METHOD) MAY BE APPLICABLE IN CASES WHERE ONE OF THE PARTIES MAKES ALL THE UNIQUE CONTRIBUTIO NS INVOLVED IN THE CONTROLLED TRANSACTION, WHILE THE OTHER PARTY DOES NOT MAKE ANY UNIQUE CONTRIBUTION. IN SUCH A CASE, THE TESTED PARTY SHOU LD BE THE LESS COMPLEX ONE. SEE PARAGRAPHS 3.18-3.19 FOR A DISCUSS ION 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 CH APTER 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 P ROFIT BASED METHOD THAT CAN BE USED TO APPLY THE ARMS LENGTH PRINCIPL E. THE TNMM CAN BE APPLIED ON EITHER THE RELATED PARTY MANUFACTURER OR THE RELATED PARTY DISTRIBUTOR AS THE TESTED PARTY FOR TRANSFER PRICIN G PURPOSES. THE TNMM EXAMINES THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BASE (E.G.COSTS, SALES, ASSETS) THAT A TAX PAYER RE ALIZES FROM A CONTROLLED TRANSACTION (OR TRANSACTIONS THAT ARE AP PROPRIATE TO BE AGGREGATED). THE PROFIT MARGIN INDICATORS ARE DISCU SSED IN PARAGRAPH 2.3 BELOW. THE TNMM COMPARES THE NET PROFIT MARGIN (RELATIVE T O 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 INDE PENDENT COMPARABLE COMPANIES. AS SUCH, THE TNMM IS A MORE INDIRECT MET HOD THAN THE COST PLUS/RESALE PRICE METHOD THAT COMPARES GROSS MARGIN S. IT IS ALSO A MUCH MORE INDIRECT METHOD THAN THE CUP METHOD THAT COMPARES PRICES, BECAUSE IT USES NET PROFIT MARGINS TO DETERMINE (AR MS LENGTH) PRICES. ONE SHOULD BEAR IN MIND THAT MANY FACTORS MAY AFFEC T NET PROFIT MARGINS, BUT MAY HAVE NOTHING TO DO WITH TRANSFER P RICING. 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 MANUFA CTURER OR THE RELATED PARTY DISTRIBUTOR. THE CHOICE OF THE TESTED PARTY D EPENDS ON THE AVAILABILITY OF COMPARABLE DATA. THIS USUALLY IMPLI ES THAT THE TNMM IS APPLIED TO THE LEAST COMPLEX OF THE RELATED PARTIES INVOLVED IN THE CONTROLLED TRANSACTION, BECAUSE GENERALLY MORE COMP ARABLE 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 ENTIT Y FOR THE APPLICATION OF THE COST PLUS METHOD OR RESALE PRICE METHOD. 18.3. THE TRANSFER PRICING , IN THE CASE AT HAND, H AS 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 ASSESSEES BUSINESS DOES NOT HAS ANY INTE GRATION WITH THE OTHER GROUP ENTITIES HAS ALREADY BROUGHT IN SUFFICI ENT DETAILS IN THE EARLIER PART OF THIS ORDER. THE ASSESSEE RUNS ITS B USINESS INDEPENDENTLY IN INDIA. FOR THE DEPLOYMENT OF THEIR PARTY ENTITIE S 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 O THER GROUP ENTITIES. THE ASSESSEE IS NEGOTIATING WITH THE INDIAN REGULAR ATORS ALL BY ITSELF. THE ASSESSEE IS OPERATING IN INDIA AS A STANDALONE ENTITY FOR SETTING UP THE OPERATIONAL REQUIREMENTS IN INDIA. THEREFORE, T HERE IS NO CASE TO SAY THAT TNMM DOES NOT QUALIFY TO BE THE MAM FOR ITS RE ASON. 5.18. IT IS ONLY AFTER THE ABOVE MARATHON DISCUSSION THA T THE AFORE-QUOTED CONCLUSION IN PARA 18.4 TO 18.8 REPRODUCED IN THE E ARLIER PART OF THIS ORDER HAVE BEEN ARRIVED AT LEADING TO FINALLY HOLDING IN PARA 19 AND 19.1 THAT THE TPOS 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 HOL DS 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 O F THE INTERNATIONAL TRANSACTION. THE CO-ORDINATE BENCH HELD THAT THE S AID EXERCISE HAS BEEN DONE BY THEM AND THEREAFTER THEY HAVE ARRIVED AT THE CON CLUSION THAT PSM IS THE MAM. THE CO-ORDINATE BENCHS FINDING THAT IF THE TPO WAS OF THE VIEW THAT PSM HAS NOT BEEN CORRECTLY APPLIED THEN THIS CONCLU SION 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 HA D 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 W HICH IS SOUGHT TO BE REPEATED BY THE ASSESSEE HEREIN ALSO IN THE FACTS OF THE PRE SENT CASE. FOR READY-REFERENCE WE FIRST EXTRACT THE RELEVANT DELIBERATION BY THE C O-ORDINATE BENCH:- 20.5. THE ASSESSEE IN THIS CASE HAS ADOPTED RESID UARY 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, A S 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 20.1 0 THE CO-ORDINATE BENCH AFTER DISCUSSING THE FACTS VIS--VIS THE RULES IN T HE 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 DIREC TED THE TPO TO DETERMINE ALP BY ADOPTING RESIDUAL PSM AS MAM BY ALLOCATING R ESIDUAL PROFITS BASED ON THE RELATIVE VALUE OF EACH ENTERPRISES CONTRIBUTIO N, AS SUGGESTED BY VARIOUS COMMENTARIES CONSIDERED. IN PARA 20.13, THE CO-ORD INATE 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 MET HOD 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 DO NE 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 DETERM INED, BASED ON KEY VALUE DRIVERS. BENCH MARKING AT THIS STAGE IS NOT P RACTICABLE 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 PROVI SIONS IS REQUIRED TO MAKE THE RULE WORKABLE, SO AS TO ACHIEVE THE DESIRE D RESULT OF DETERMINATION OF THE ALP. THE SECONDARY STAGE OF ALLOCATION OF RESIDUARY PROFITS IS TO BE DONE ON THE BASIS OF CON TRIBUTION OF EACH ENTITY, AS STATED IN THE COMMENTARIES AND GUIDELINE S REFERRED ABOVE, AS THESE ARE GENERALLY ACCEPTED. 20.7. THE ARGUMENT OF THE LD. COUNSEL OF THE ASSESS EE THAT THE PROVISIONS HAVE TO BE READ DOWN CANNOT BE ACCEPTED, AS LAW HAS TO BE INTERPRETED AS PROVIDED IN THE STATUTE. NEVERTHELES S, 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, D OES NOT TANTAMOUNT TO MISREADING THE PROVISIONS, OR TO THE READING DOW N OF A PROVISION. BOTH THE OECD TRANSFER PRICING GUIDELINES AS WELL A S 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 P RICING GUIDELINES AT PARA 17.4. AT PARA 2.121, IT IS STATED AS FOLLOW S: IN THE SECOND STAGE, ANY RESIDUAL PROFIT (OR LOSS) REMAINING AFTE R 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 TR ANSACTIONS OR INTERNAL DATA AND THE CRITERIA USED TO ACHIEVE AN ; ARMS LENGTH DIVISION OF THE PROFITS DEPEND ON THE FACTS AND CIRCUMSTANCE S 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 GEN ERAL GUIDANCE ON THE CONSISTENCY OF THE DETERMINATION OF THE SPLITTI NG FACTORS. IN ADDITION, THE CRITERIA OR ALLOCATION KEYS USED TO SPLIT THE P ROFIT SHOULD: BE REASONABLY INDEPENDENT OF TRANSFER PRICING POL ICY 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 UNCONTROLL ED TRANSACTIONS 2.133 ONE POSSIBLE APPROACH IS TO SPLIT THE COMBINE D PROFITS BASED ON THE DIVISION OF PROFITS THAT ACTUALLY RESULTS FROM COMPARABLE UNCONTROLLED TRANSACTIONS. EXAMPLES OF POSSIBLE SOU RCES OF INFORMATION ON UNCONTROLLED TRANSACTIONS THAT MIGHT USEFULLY AS SIST THE DETERMINATION OF CRITERIA TO SPLIT THE PROFITS, DEP ENDING ON THE FACTS AND CIRCUMSTANCES OF THE CASE, INCLUDE JOINT VENTURE AR RANGEMENTS BETWEEN INDEPENDENT PARTIES UNDER WHICH PROFITS ARE SHARED, SUCH AS DEVELOPMENT PROJECTS IN THE OIL AND GAS INDUSTRY; P HARMACEUTICAL COLLABORATIONS, CO-MARKETING OR CO-PROMOTION AGREEM ENTS; ARRANGEMENTS BETWEEN INDEPENDENT MUSIC RECORD LABEL S 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 PRO FITS UNDER A TRANSACTIONAL PROFIT SPLIT METHOD IS GENERALLY ACHI EVED USING ONE OR MORE ALLOCATION KEYS. DEPENDING ON THE FACTS AND CI RCUMSTANCES 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 INDEPE NDENT PARTIES IN COMPARABLE TRANSACTIONS), OR A VARIABLE (E.G. RELAT IVE VALUE OF PARTICIPANT'S MARKETING EXPENDITURE OR OTHER POSSIB LE KEYS AS DISCUSSED BELOW). WHERE MORE THAN ONE ALLOCATION KE Y IS USED, IT WILL ALSO BE NECESSARY TO WEIGHT THE ALLOCATION KEYS USE D TO DETERMINE THE RELATIVE CONTRIBUTION THAT EACH ALLOCATION KEY REPR ESENTS TO THE EARNING OF THE COMBINED PROFITS. 2.135 IN PRACTICE, ALLOCATION KEYS BASED ON ASSETS/ CAPITAL (OPERATING ASSETS, FIXED ASSETS, INTANGIBLE ASSETS, CAPITAL EM PLOYED) OR COSTS (RELATIVE SPENDING AND/OR INVESTMENT IN KEY AREAS S UCH AS RESEARCH AND DEVELOPMENT, ENGINEERING, MARKETING) ARE OFTEN USED. OTHER ALLOCATION KEYS BASED FOR INSTANCE ON INCREMENTAL S ALES, HEADCOUNTS (NUMBER OF INDIVIDUALS INVOLVED IN THE KEY FUNCTION S THAT GENERATE VALUE TO THE TRANSACTION), TIME SPENT BY A CERTAIN GROUP OF EMPLOYEES IF THERE IS A STRONG CORRELATION BETWEEN THE TIME SPEN T AND THE CREATION OF THE COMBINED PROFITS, NUMBER OF SERVERS, DATA STORA GE, 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 I NTANGIBLE ASSETS OR CAPITAL EMPLOYED AND CREATION OF VALUE IN THE CONTE XT OF THE CONTROLLED TRANSACTION. SEE PARAGRAPH 2.145 FOR A BRIEF DISCUS SION OF SPLITTING THE COMBINED PROFITS BY REFERENCE TO CAPITAL EMPLOYED. IN ORDER FOR AN ALLOCATION KEY TO BE MEANINGFUL, IT SHOULD BE APPLI ED 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 VALI D IN THE CONTEXT OF THE TRANSACTIONAL PROFIT SPLIT METHOD. 2.137 ONE PARTICULAR CIRCUMSTANCE WHERE THE TRANSAC TIONAL PROFIT SPLIT METHOD MAY BE FOUND TO BE THE MOST APPROPRIATE METH OD IS THE CASE WHERE EACH PARTY TO THE TRANSACTION CONTRIBUTES VAL UABLE, UNIQUE INTANGIBLES. INTANGIBLE ASSETS POSE DIFFICULT ISSUE S IN RELATION BOTH TO THEIR IDENTIFICATION AND TO THEIR VALUATION. IDENTI FICATION OF INTANGIBLES CAN BE DIFFICULT BECAUSE NOT ALL VALUABLE INTANGIBL E ASSETS ARE LEGALLY PROTECTED AND REGISTERED AND NOT ALL VALUABLE INTAN GIBLE ASSETS ARE RECORDED IN THE ACCOUNTS. AN ESSENTIAL PART OF A TR ANSACTIONAL PROFIT SPLIT ANALYSIS IS TO IDENTIFY WHAT INTANGIBLE ASSET S ARE CONTRIBUTED BY EACH ASSOCIATED ENTERPRISE TO THE CONTROLLED TRANSA CTION AND THEIR RELATIVE VALUE. GUIDANCE ON INTANGIBLE PROPERTY IS FOUND AT CHAPTER VI OF THESE GUIDELINES. SEE ALSO THE EXAMPLES IN THE A NNEX TO CHAPTER VI 'EXAMPLES TO ILLUSTRATE THE TRANSFER PRICING GUIDEL INES ON INTANGIBLE PROPERTY AND HIGHLY UNCERTAIN VALUATION'. COST-BASED ALLOCATION KEYS 2.138 AN ALLOCATION KEY BASED ON EXPENSES MAY BE AP PROPRIATE WHERE IT IS POSSIBLE TO IDENTIFY A STRONG CORRELATION BET WEEN RELATIVE EXPENSES INCURRED AND RELATIVE VALUE ADDED. FOR EXAMPLE, MAR KETING EXPENSES MAY BE AN APPROPRIATE KEY FOR DISTRIBUTORS-MARKETER S IF ADVERTISING GENERATES MATERIAL MARKETING INTANGIBLES, E.G. IN C ONSUMER GOODS WHERE THE VALUE OF MARKETING INTANGIBLES IS AFFECTE D BY ADVERTISING. RESEARCH AND DEVELOPMENT EXPENSES MAY BE SUITABLE F OR MANUFACTURERS IF THEY RELATE TO THE DEVELOPMENT OF SIGNIFICANT TRADE INTANGIBLES SUCH AS PATENTS. HOWEVER, IF, FOR INSTA NCE, EACH PARTY CONTRIBUTES DIFFERENT VALUABLE INTANGIBLES, THEN IT IS NOT APPROPRIATE TO USE A COST-BASED ALLOCATION KEY UNLESS COST IS A RE LIABLE MEASURE OF THE RELATIVE VALUE OF THOSE INTANGIBLES. REMUNERATION I S FREQUENTLY USED IN SITUATIONS WHERE PEOPLE FUNCTIONS ARE THE PRIMARY F ACTOR 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 CORRELATI ON 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 COST S. 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 DETERMINA TION OF THE ALLOCATION KEY (E.G. ASSETS, COSTS, OR OTHERS) SHOU LD BE TAKEN INTO ACCOUNT. A DIFFICULTY ARISES BECAUSE THERE CAN BE A TIME LAG BETWEEN THE TIME WHEN EXPENSES ARE INCURRED AND THE TIME WH EN VALUE IS CREATED, AND IT IS SOMETIMES DIFFICULT TO DECIDE WH ICH 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 M AY BE SUITABLE FOR SOME CASES, WHILE IN SOME OTHER CASES IT MAY BE MOR E SUITABLE TO USE ACCUMULATED EXPENDITURE (NET OF DEPRECIATION OR AMO RTIZATION, WHERE APPROPRIATE IN THE CIRCUMSTANCES) INCURRED IN THE P REVIOUS AS WELL AS THE CURRENT YEARS. DEPENDING ON THE FACTS AND CIRCU MSTANCES OF THE CASE, THIS DETERMINATION MAY HAVE A SIGNIFICANT EFF ECT ON THE ALLOCATION OF PROFITS AMONGST THE PARTIES. AS NOTED AT PARAGRA PHS 2.116-2.117 ABOVE, THE SELECTION OF THE ALLOCATION KEY SHOULD B E 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 OP ERATIONS ('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, WHI CH MAY PROVIDE A RELIABLE MEANS OF ESTABLISHING OR TESTING THE ARM'S LENGTH NATURE OF THE DIVISION OF PROFITS. THE TYPES OF SUCH INTERNAL DAT A THAT ARE RELEVANT WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND SHOULD SATISFY THE CONDITIONS OUTLINED IN THIS SECTION AND IN PART ICULAR AT PARAGRAPHS 2.116-2.117 AND 2.132. THEY WILL FREQUENTLY BE EXTR ACTED 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 SHE ETS 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 THA T 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 AL LOCATION KEYS ARE USED THAT ARE BASED ON DATA EXTRACTED FROM THE TAXP AYERS' PROFIT AND LOSS ACCOUNTS, IT MAY BE NECESSARY TO DRAW TRANSACT IONAL ACCOUNTS THAT IDENTIFY THOSE EXPENSES THAT ARE RELATED TO THE CON TROLLED TRANSACTION AT HAND AND THOSE THAT SHOULD BE EXCLUDED FROM THE DET ERMINATION OF THE ALLOCATION KEY. THE TYPE OF EXPENDITURE THAT IS TAK EN INTO ACCOUNT (E.G. SALARIES, DEPRECIATION, ETC.) AS WELL AS THE CRITER IA USED TO DETERMINE WHETHER A GIVEN EXPENSE IS RELATED TO THE TRANSACTI ON AT HAND OR IS RATHER RELATED TO OTHER TRANSACTIONS OF THE TAXPAYE R (E.G. TO OTHER LINES OF PRODUCTS NOT SUBJECT TO THIS PROFIT SPLIT DETERMINA TION) 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 PROFI T IS WEIGHTED TO ASSETS, WHICH IS ALSO RELEVANT TO THE VALUATION OF ASSETS IN THE CONTEXT OF A TRANSACTIONAL PROFIT SPLIT WHERE AN ASSET BASE D ALLOCATION KEY IS USED. 2.143 INTERNAL DATA MAY ALSO BE HELPFUL WHERE THE A LLOCATION 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 VAL UES OF THE RESPECTIVE CONTRIBUTIONS OF THE PARTIES TO THE CONTROLLED TRAN SACTION. THE DETERMINATION OF SUCH VALUES SHOULD RELY ON A FUNCT IONAL ANALYSIS THAT TAKES INTO ACCOUNT ALL THE ECONOMICALLY SIGNIFICANT FUNCTIONS, ASSETS AND RISKS CONTRIBUTED BY THE PARTIES TO THE CONTROL LED TRANSACTION. IN THOSE CASES WHERE THE PROFIT IS SPLIT ON THE BASIS OF AN EVALUATION OF THE RELATIVE IMPORTANCE OF THE FUNCTIONS, ASSETS AND RI SKS TO THE VALUE ADDED TO THE CONTROLLED TRANSACTION, SUCH EVALUATIO N SHOULD BE SUPPORTED BY RELIABLE OBJECTIVE DATA IN ORDER TO LI MIT ARBITRARINESS. PARTICULAR ATTENTION SHOULD BE GIVEN TO THE IDENTIF ICATION OF THE RELEVANT CONTRIBUTIONS OF VALUABLE INTANGIBLES AND THE ASSUM PTION OF SIGNIFICANT RISKS AND THE IMPORTANCE, RELEVANCE AND MEASUREMENT OF THE FACTORS WHICH GAVE RISE TO THESE VALUABLE INTANGIBLES AND S IGNIFICANT RISKS. 2.145 ONE POSSIBLE APPROACH NOT DISCUSSED ABOVE IS TO SPLIT THE COMBINED PROFITS SO THAT EACH OF THE ASSOCIATED ENT ERPRISES PARTICIPATING IN THE CONTROLLED TRANSACTIONS EARNS THE SAME RATE OF RETURN ON THE CAPITAL IT EMPLOYS IN THAT TRANSACTIO N. THIS METHOD ASSUMES THAT EACH PARTICIPANT'S CAPITAL INVESTMENT IN THE TRANSACTION IS SUBJECT TO A SIMILAR LEVEL OF RISK, SO THAT ONE MIG HT EXPECT THE PARTICIPANTS TO EARN SIMILAR RATES OF RETURN IF THE Y WERE OPERATING IN THE OPEN MARKET. HOWEVER, THIS ASSUMPTION MAY NOT BE RE ALISTIC. FOR EXAMPLE, IT WOULD NOT ACCOUNT FOR CONDITIONS IN ;CA PITAL MARKETS AND COULD IGNORE OTHER RELEVANT ASPECTS THAT WOULD BE R EVEALED BY A FUNCTIONAL ANALYSIS AND THAT SHOULD BE TAKEN INTO A CCOUNT 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 BA SED ON THE FACTS AND CIRCUMSTANCES. IF THE RESIDUAL PROFIT IS ATTRIB UTABLE TO INTANGIBLE PROPERTY THEN THE ALLOCATION OF THIS PROFIT SHOULD BE BASED ON THE RELATIVE VALUE OF EACH ENTERPRISES CONTRIBUTIONS O F 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 EN TERPRISES. THE CONTRIBUTION ANALYSIS IS DIFFICULT TO APPLY, BECAUS E EXTERNAL MARKET DATA THAT REFLECT HOW INDEPENDENT ENTERPRISES WOULD ALLO CATE THE PROFITS IN SIMILAR CIRCUMSTANCES IS USUALLY NOT AVAILABLE. THE FIRST STEP OF THE RESIDUAL ANALYSIS OFTEN INVOLVES THE USE OF THE TNM M TO CALCULATE A RETURN AND IS NOT, IN ITSELF, MORE COMPLICATED THAN THE TYPICAL APPLICATION OF TNMM. THE SECOND STEP IS, HOWEVER, A N ADDITIONAL STEP AND OFTEN RAISES DIFFICULT ADDITIONAL ISSUES RELATI NG 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 P ROFITS 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 SU CH INTANGIBLES ARE PRESENT THERE NORMALLY WILL BE AN UNALLOCATED RESID UAL PROFIT AFTER THE ALLOCATION OF INCOME DESCRIBED IN PARAGRAPH(C)(3)(I )(A) OF THIS SECTION. UNDER THIS SECOND STEP, THE RESIDUAL PROFIT GENERAL LY SHOULD BE DIVIDED AMONG THE CONTROLLED TAXPAYERS BASED UPON THE RELAT IVE VALUE OF THEIR CONTRIBUTIONS OF INTANGIBLE PROPERTY TO THE RELEVAN T BUSINESS ACTIVITY THAT WAS NOT ACCOUNTED FOR AS A ROUTINE CONTRIBUTIO N. THE RELATIVE VALUE OF THE INTANGIBLE PROPERTY CONTRIBUTED BY EACH TAXP AYER MAY BE MEASURED BY EXTERNAL MARKET BENCHMARKS THAT REFLECT THE FAIR MARKET VALUE OF SUCH INTANGIBLE PROPERTY. ALTERNATIVELY, T HE RELATIVE VALUE OF INTANGIBLE CONTRIBUTIONS MAY BE ESTIMATED BY THE CA PITALIZED COST OF DEVELOPING THE INTANGIBLES AND ALL RELATED IMPROVEM ENTS AND UPDATES, LESS AN APPROPRIATE AMOUNT OF AMORTIZATION BASED ON THE USEFUL LIFE OF EACH INTANGIBLE. FINALLY, IF THE INTANGIBLE DEVELOP MENT EXPENDITURES OF THE PARTIES ARE RELATIVELY CONSTANT OVER TIME AND T HE USEFUL LIFE OF THE INTANGIBLE PROPERTY OF ALL PARTIES IS APPROXIMATELY THE SAME, THE AMOUNT OF ACTUAL EXPENDITURES IN RECENT YEARS MAY B E USED TO ESTIMATE THE RELATIVE VALUE OF INTANGIBLE CONTRIBUTIONS. IF THE INTANGIBLE PROPERTY CONTRIBUTED BY ONE OF THE CONTROLLED TAXPAYERS IS A LSO 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 W HICH IT IS USED. 20.11. A PERUSAL OF THE ABOVE DEMONSTRATES THAT THE RE IS A GENERAL CONSENSUS ON THE PRINCIPLES OF ALLOCATION OF RESIDU AL 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 ENTI RE 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, WH O ARE PARTIES TO THE TRANSACTIONS IN QUESTION, ARE FIRST ASSIGNED RO UTINE/ BASIC RETURNS FOR THE ROUTINE FUNCTIONS PERFORMED BY THEM; AND TH EREAFTER, THE RESIDUAL PROFITS ARE SPLIT AMONGST THE AES, HOWEVER , IN A MANNER THAT WHETHER OR NOT AN ASSESSEE ADOPTS A CONTRIBUTION PS M OR A RESIDUAL PSM, THE PROFITS, WOULD NEED TO BE SPLIT AMONGST TH E 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 COM PARABLE PSM. 3. THE TERMINOLOGIES, NAMELY 'CONTRIBUTION PSM', 'R ESIDUAL 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 [PAR AGRAPHS 2.108 TO 2.1491 AND UN [PARAGRAPHS 6.3.13.1 TO 6.3.181, BY R EFERRING TO THE SIMILARITY OF THE MANNER OF APPLICATION OF THE SAID METHODS, AS CONTAINED IN THE OECD AND UN TP GUIDELINES; AND ALS O 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 GUIDELIN ES, NAMELY THAT BOTH OECD AND UN PROVIDE FLEXIBILITY TO THE TAXPAYE R TO ADOPT ANY OF THE FOLLOWING SUB-METHODS UNDER THE OVERALL PSM, NA MELY CONTRIBUTION PSM, RESIDUAL PSM OR COMPARABLE PSM, WHEREAS, THE I NDIAN IT RULES MANDATORILY REQUIRE A TAXPAYER TO ADOPT A COMPARABL E 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 REGULATIO NS, ACTUALLY WOULD MAKE THE PSM VIRTUALLY REDUNDANT IN MOST CASES, SIN CE, IT IS NOT POSSIBLE TO OBTAIN RELIABLE MARKET DATA ON THIRD PA RTY BEHAVIOR IN THE MATTER OF SPLITTING PROFITS, EXCEPT FOR IN SOME RAR E CASES OF JOINT VENTURE ARRANGEMENTS. HOWEVER, IN CASES OF TRANSACTIONS INV OLVING EITHER ITA CONTRIBUTION OR EXPLOITATION OF INTANGIBLES BY ALL THE PARTIES TO THE TRANSACTION OR WHERE SUCH TRANSACTIONS ARE EXTREMEL Y INTERRELATED, OF THE TYPES AS IN THE CASE OF THE APPELLANT, WHERE KN OWLEDGE OF THIRD PARTY BEHAVIOR IS IMPOSSIBLE TO POSSESS, BUT WHERE THE CASE OTHERWISE DESERVES THE TREATMENT OF PSM, THEN THE PRESCRIPTIO N TO MANDATORILY USE A COMPARABLE PSM WOULD RENDER THE WHOLE MACHINE RY OF PSM UNDER THE INDIAN TP REGULATIONS A NULLITY & IMPOSSI BLE 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 I N CASES OF JOINT VENTURE AGREEMENTS BETWEEN INDEPENDENT PARTIES UNDE R WHICH PROFITS ARE SHARED, SUCH AS DEVELOPMENT PROJECTS IN THE OIL AND GAS INDUSTRY; PHARMACEUTICAL COLLABORATIONS; CO-MARKETING OR CO-P ROMOTION 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 GUIDELI NES]. 8. THUS, TYPICALLY, COMPARABLE PSM CAN BE APPLIED I N INDUSTRIES, WHERE JOINT VENTURE ARRANGEMENTS EXIST. HOWEVER, FOR INDU STRIES, 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 CAN NOT BE RENDERED; AND THUS EXISTENCE OF JOINT VENTURE ARRANGEMENTS BE TWEEN THIRD PARTIES IS NOT CONCEIVABLE, THE APPLICATION OF COMPARABLE P SM WOULD BE AN IMPOSSIBILITY. 9. THE OECD FURTHER ACKNOWLEDGES THAT WHERE COMPARA BLE 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 O F ESTABLISHING OR TESTING THE ARM'S LENGTH NATURE OF THE DIVISION OF PROFITS, MEANING THAT RESORT TO EITHER CONTRIBUTION OR RESIDUAL PSM MAY B E MADE, WITHOUT THE SAME HAVING TO PASS THROUGH THE COMPULSORY RIGORS O F 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 REND ERS COMPARABLE PSM IMPOSSIBLE TO APPLY FOR SPLITTING PROFITS AMONGST R ELATED PARTIES, EXCEPT FOR IN THE LIMITED CASES OF JOINT VENTURE ARRANGEME NTS 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. PROFI T SPLIT METHODS 0,60 TAX NOTES (1993), AT 335 - 'THE COMPARABLE PROFIT S PLIT METHOD IS RARELY APPLIED, AS INFORMATION ON COMPARABLE REFERENCE TRA NSACTIONS WILL NOT NORMALLY BE AVAILABLE.' B. TRANSFER PRICING AND CORPORATE TAXATION: PROBLEM S, PRACTICAL IMPLICATIONS - CHAPTER 3.5 - PAGE 31 - AUTHORED BY ELIZABETH A. KING- ' .... PRACTITIONERS RARELY USE COMPARABLE PROFIT SPLIT ME THOD, 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. HIGINBOTH AM; PAGE NUMBER 10-52: - 'NUMEROUS COMMENTATORS HAVE CITED DIFFICUL TIES IN IDENTIFYING AND DOCUMENTING INFORMATION ON COMPARABLE INDEPENDE NT TRANSACTIONS AS POTENTIALLY INSURMOUNTABLE OBSTACLE TO THE PRACT ICAL REALIZATION OF CPSM. THIS PESSIMISTIC VIEWPOINT OVERLOOKS A RELATI VELY VOLUMINOUS BODY OF EVIDENCE AND EXPERIENCE IN THE INTELLECTUAL PROPERTY AREA WHERE SUCH CALCULATIONS ARE ROUTINELY, IF SOMEWHAT ROUGHL Y, 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 T HAT ARE SIMILAR TO THOSE OF BOTH THE BUYER AND THE SELLER, AND DATA DE LINEATING HOW THE INDEPENDENT PARTIES SHARED THE COMBINED PROFITS FRO M A COMPARABLE TRANSACTION RARELY EXISTS. FINDING A COMPARABLE TRA NSACTION 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 TRA NSFER PRICING EXPERTS, IT IS EVIDENT THAT COMPARABLE PSM IS RAREL Y USED INTERNATIONALLY IN VIEW OF LACK OF RELIABLE EXTERNA L 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 SU B- 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 COMPARABL E PSM, BEING A MANDATE GIVEN UNDER THE INDIAN TP REGULATIONS, IN T HE FORM OF RULE10OB(I)(D) OF THE IT RULES. THUS, SUCH COMPULSO RY 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 JURISPRUDEN CE THAT AN INTERPRETATION, WHICH MAKES A STATUTE OR RULE UNWOR KABLE OR IMPOSSIBLE TO BE COMPLIED WITH, SHOULD BE AVOIDED; AND RECOURS E NEED TO HAVE TO THE INTERPRETATION, WHICH WOULD MAKE THE STATUTE OR RULE WORKABLE AND ALSO SUBSERVE THE PURPOSE FOR WHICH IT HAS BEEN ENA CTED. IN THIS CONNECTION, REFERENCE IS INVITED TO THE RULING OF T HE HON'BLE SUPREME COURT IN THE CASE OF SUPERINTENDENT OF TAXES VS. ON KARMAL NATHUMAL TRUST [AIR 1975 SC 2065], WHERE IT HAS BEEN HELD TH AT 'THE LAW IN ITS MOST POSITIVE AND PEREMPTORY INJUNCTIONS, IS UNDERS TOOD TO DISCLAIM, AS IT DOES IN ITS GENERAL APHORISMS, ALL INTENTION OF COMPELLING PERFORMANCE OF THAT WHICH IS IMPOSSIBLE' ... WHERE THE LAW CREA TES A DUTY OR CHARGE, AND THE PARTY IS DISABLED TO PERFORM IT, WITHOUT AN Y DEFAULT IN HIM, AND HAS NO REMEDY OVER, THERE THE LAW WILL IN GENERAL E XCUSE HIM; AND THOUGH IMPOSSIBILITY OF PERFORMANCE IS IN GENERAL N O EXCUSE FOR NOT PERFORMING AN OBLIGATION WHICH A PARTY HAS EXPRESSL Y 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 O F PSM IS A LACUNA, WHICH RENDERS THE ENTIRE SCHEME OR MECHANIS M OF PSM VIRTUALLY REDUNDANT, OTIOSE AND IMPOSSIBLE TO COMPL Y 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 QUESTIO N, CONTRIBUTE AND EXPLOIT NONROUTINE OR UNIQUE INTANGIBLES, OR THE TR ANSACTIONS ARE SO INTERRELATED THAT THEY CANNOT BE EVALUATED SEPARATE LY FOR THE PURPOSES OF DETERMINING THE ALP THEREOF. 14. NOW, IT IS SUBMITTED THAT SUCH LACUNA IS CURABL E EVEN BY MAINTAINING, AND WITHOUT DISTURBING THE OVERALL SPI RIT AND CONCEPT OF PSM, AS ENSHRINED IN RULE 10B(1)(D) OF IT RULES, AN D AS ALSO UNDERSTOOD IN THE OECD AND UN TP GUIDELINES, THROUG H INTERPRETING RULE 10B(1)(D) IN A MANNER THAT THE SAME PROVIDES A N OPTION AND NOT COMPULSORY MANDATE TO APPLY A COMPARABLE PSM IN A C ASE WHERE RELIABLE EXTERNAL DATA TO GAUGE THIRD PARTY BEHAVIO R IS IMPOSSIBLE TO BE OBTAINED. 15. IN THIS CONNECTION, REFERENCE IS INVITED TO THE RULING OF THE HONBLE SC RENDERED IN THE CASE OF M.PENTIAH AND OTHERS VS. MUDDALA VEERAMALLAPPA AND OTHERS (1961 AIR 1107), WHERE THE HONBLE COURT QUOTED WITH APPROVAL, THE FAMOUS WORDS ON INTERPRET ATION OF STATUTES SAID BY LORD DENNING IN THE CASE OF SEAFORD COURT E STATES LTD. VS. ASHER(1), NAMELY : WHEN A DEFECT APPEARS A JUDGE CANNOT SIMPLY FOLD H IS HANDS AND BLAME THE DRAFTSMAN. HE MUST SET TO WORK ON THE CON STRUCTIVE TASK OF FINDING THE INTENTION OF PARLIAMENT.. AND THEN HE MUST SUPPLEMENT THE WRITTEN WORD SO AS TO GIVE FORCE AN D LIFE TO THE INTENTION OF THE LEGISLATURE. .A JUDGE SHOULD AS K HIMSELF THE QUESTION HOW, IF THE MAKERS OF THE ACT HAD THEMSELV ES COME ACROSS THIS RUCK IN THE TEXTURE OF IT, THEY WOULD HAVE STRAIGHT ENED IT OUT? HE MUST THEN DO AS THEY WOULD HAVE DONE. A JUDGE MUST NOT A LTER THE MATERIAL OF WHICH THE ACT IS WOVEN, BUT HE CAN AND SHOULD IR ON OUT THE CREASES. 16. IN OTHER WORDS, IN CASE THE HONBLE TRIBUNAL PE RCEIVES THAT THE REQUIREMENT CONTAINED IN RULE 10B(1)(D) OF THE IT R ULES OF MANDATORY ADOPTION OF COMPARABLE PSM IN ALL CASES OF PSM ACTU ALLY RENDERS THE ENTIRE SCHEME OR MECHANISM OF PSM VIRTUALLY REDUNDA NT, OTIOSE AND IMPOSSIBLE TO COMPLY WITH, EVEN IN THE MOST DESERVI NG OF CASES, NAMELY WHERE THERE CAN BE NO DOUBT THAT THE AES, WHO ARE P ARTIES TO THE TRANSACTIONS IN QUESTION, CONTRIBUTE AND EXPLOIT NO N ROUTINE OR UNIQUE INTANGIBLES, OR THE TRANSACTIONS ARE SO INTER RELAT ED 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 AS SESSEE SHOULD BE GIVEN AN OPTION TO ADOPT A RESIDUAL OR CONTRIBUT ION 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 INTERPRET ATION WOULD NOT TANTAMOUNT TO ALTERING THE OVERALL MECHANISM OF PSM UNDER THE INDIAN TP REGULATIONS, BUT WOULD MERELY SUPPLEMENT LIFE AN D FORCE INTO RULE 10B(1)(D) OF THE IT RULES, IN ORDER TO MAKE THE MEC HANISM 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 T HE CONSIDERED OPINION THAT THE TPO, SHOULD DETERMINE THE ALP BY A DOPTING RESIDUAL PSM AS THE MAM AND BY ALLOCATING RESIDUAL PROFITS B ASED ON THE RELATIVE VALUE OF EACH ENTERPRISES CONTRIBUTION, A S 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 UND ER THE SUB HEAD OTHER METHOD OF DETERMINATION OF ALP. THIS IS EXT RACTED FOR READY REFERENCE. RULE 10AB: FOR THE PURPOSES OF CLAUSE (F) OF SUB S ECTION(1) OF SECTION 92C, THE OTHER METHOD FOR DETERMINATION OF THE ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE A NY 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 ENTERPR ISES, UNDER SIMILAR CIRCUMSTANCES, CONSIDERING ALL THE RELEVANT FACTS. WHILE INTRODUCING THE AMENDMENT THE CBDT CIRCULAR I S REFERRED TO BELOW. THE CENTRAL BOARD OF DIRECT TAXES, VIDE NOTIFICATI ON 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, WI TH EFFECT FROM 1ST APRIL,2012, I.E. ON AND FROM THE ASSESSMENT YEAR 20 12-13, THROUGH INSERTING RULE 10AB, READ WITH CLAUSE (F) OF RULE 1 0B(1) OF THE IT RULES. THE SAID OTHER METHOD IS LIKE AN OMNIBUS OR RESID UAL ONE, IN THE SENSE THAT IT REFERS TO ANY METHOD, WHICH TAKES INT O 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 TRANSACTI ONS, WITH OR BETWEEN NON AES, UNDER SIMILAR CIRCUMSTANCES, CONSIDERING A LL 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 PU RPOSE, IT CAN BE SEEN THAT THE PURPOSE AND OBJECTIVE OF INTRODUCTION OF THIS RULE IS TO DETERMINE THE ARMS LENGTH PRICE, WHENEVER THE ME THODS SUGGESTED RESULT IN PRACTICAL DIFFICULTIES BY ADOPTING GENERA LLY ACCEPTED METHODS WHICH ARE NOT SPECIFICALLY LISTED. IT IS A PROCEDUR AL PROVISION AIMED AT ARRIVING AT THE ALP. THUS, IN OUR, IT IS RETROACT IVE. ALP, IDEALLY, SHOULD BE THE SAME, IN THE PREVIOUS YEARS, AS IN TH E SUBSEQUENT YEARS WHEN THE FACTS AND CIRCUMSTANCES ARE THE SAME, IRRE SPECTIVE OF THE METHOD ADOPTED FOR ARRIVING AT THE SAME. ONE CANNOT BE HEARD SAYING THAT THE ALP ARRIVED BY ONE METHOD CANNOT BE ACCE PTABLE 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 ENAB LING DETERMINATION OF THE PROPER ALP, IN OUR COMPREHENSION, SUCH A PRO VISION OPERATES RETROACTIVELY, AND CAN BE USED TO DETERMINE THE ALP IN THE EARLIER ASSESSMENT YEARS ALSO. WHEN THE AIM AND OBJECT OF I NTRODUCING 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 DETERMINATIO N OF THE ALP, THE RULE, IN OUR VIEW, HAS TO BE CONSIDERED AS RETROACT IVE 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 AD JUSTMENTS AND METHODOLOGY PRESCRIBED FOR EVALUATION OF AN INTERNA TIONAL 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 HONBLE SUPREME COURT IN THE CASE OF AL LIED MOTORS P. LTD. VS. CIT, 224 ITR 677(SC). 20.15. THESE DECISIONS SUPPORT THE CONTENTIONS OF T HE ASSESSEE. THUS, WE HOLD THAT RULE 10AB CAN BE APPLIED FOR THE IMPUG NED AYS ALSO, FOR DETERMINING THE ALP. 5.21. ACCORDINGLY ON A CONSIDERATION OF THE ISSUES ON TH E LIMITED PLEA OF THE ASSESSEE, WE FIND THAT THE CLAIM OF THE ASSESSEE TH AT THE ISSUE IS COVERED BY THE ORDER OF THE CO-ORDINATE BENCH IN GOIPL BEING THE P REDECESSOR TO THE ASSESSEE IS FOUND TO BE CORRECT. IN THE ABSENCE OF ANY SUBM ISSION WHATSOEVER ON THE PART OF THE REVENUE DESPITE MORE THAN ADEQUATE OPPO RTUNITIES HAVING BEEN PROVIDED, WE FIND ON OUR INDEPENDENT STUDY OF THE R EASONING AVAILABLE ON RECORD BROUGHT OUT IN THE TPOS ORDER WHICH HAS BEE N UPHELD BY THE DRP THAT IN THE FACE OF SIMILARITY OF REASONING WHICH ALREAD Y 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 P ASSING THE ORDER SHALL GIVE THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. O NLY THEREAFTER, THE TPO SHALL DECIDE THE ISSUES FOLLOWING THE CLEAR DIRECTI ONS 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 ALLOW ED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 08 TH 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 R EGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 10 & 17 .04.2015 PS 2. DRAFT PLACED BEFORE AUTHOR 17, 20, 22 .04.2015 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS .05.2015 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.
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