Gulbrandsen Chemicals Pvt. Ltd., Baroda V. The Dy. CIT., Circle-1(1), Vadodara

ITA 1216/AHD/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1037 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 24-09-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 18-05-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S N SOPARKAR
• Assessee Lawyers: SU RENDRA KUMAR
• Keywords: Depreciation; Transfer pricing; International transaction; Commercial expediency; Capital expenditure
• Section: 271(1)(c); 274; 143(2); 48; 13; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI PRAMOD KUMAR, HONBLE VICE-PRESIDENT AND SHRI RAJPAL YADAV, HONBLE JUDICIAL MEMBER ITA.NO.1230/AHD/2017 / ASSTT.YEAR : 2009-10 DCIT, CIR.1(1)(1) VADODARA. VS GULBRANDSEN CHEMICALS P.LTD. ON COASTAL HIGHWAY POST OFFICE MUJPUR TAL.-PADRA DIST. VADODARA 391 440. PAN : AABCG 0812 A ITA.NO.1215 AND 1216/AHD/2017 / ASSTT.YEAR : 2009-10 AND 2010-11 GULBRANDSEN CHEMICALS P.LTD. ON COASTAL HIGHWAY POST OFFICE MUJPUR TAL.-PADRA DIST. VADODARA 391 440. PAN : AABCG 0812 A VS DCIT, CIR.1(1)(1) VADODARA. / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SHRI SURENDRA KUMAR, CIT - DR REVENUE BY : SHRI S.N. SOPARKAR, AR / DATE OF HEARING : 24/09/2019 / DATE OF PRONOUNCEMENT: 18/12/2019 !'/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER ASSESSEE AND REVENUE ARE IN CROSS APPEALS AGAINST O RDER OF THE LD.CIT(A)-1, VADODARA DATED 27.2.2017 PASSED FOR TH E ASSTT.YEAR 2009-10; ITA NO.1215, 1216 AND 1230/AHD/2017 2 WHEREAS IN THE ASSTT.YEAR 2010-11, ASSESSEE ALONE I S IMPUGNING ORDER OF THE LD.CIT(A) DATED 28.2.2017. 2. ISSUES AGITATED IN THESE THREE APPEALS ARE INTER -CONNECTED WITH EACH OTHER, AND THEREFORE, WE HEARD THEM TOGETHER AND PR OCEED TO DISPOSE OF BY THEM BY THIS COMMON ORDER. THE GROUNDS OF APPEAL TA KEN BY THE APPELLANT READ AS UNDER: REVENUES APPEAL : A.Y.2009-10 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT APPEALS) ERRED IN DELETING THE VOLUME DISCOUNT ADJU STMENT MADE IN THE PRICE PAID BY NTDCL AND DIRECTING TO RE-DETERMINE THE ALP OF SALE OF ANH. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT (APPEALS) ERRED IN NOT UPHOLDING AND GRANTING A REL IEF TO THE ASSESSEE FROM SPLITTING THE TIME PERIOD BETWEEN APRIL 2008 TO JAN UARY 2009 AND FEBRUARY 2009 TO MARCH 2009 FOR THE PURPOSE OF PRICE COMPARI SON IN CASE OF ANH PRODUCT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT (APPEALS) ERRED IN DELETING THE DISALLOWANCE OF DEP RECIATION TO THE TUNE OF RS. 15,46,130/-, WITHOUT APPRECIATING THE FACT THAT THE AS PER THE PROVISIONS OF 43A THE ASSESSEE COMPANY SHOULD HAVE REDUCED THE AMOUNT OF REIMBURSEMENT FROM THE COST OF ASSET AND SINCE THE EXPENDITURE IS MADE BY GULBRANSEN CHEMICALS INC., USA(GCI), SAME CANNOT BE CAPITALIZED IN THE BOOKS OF ASSESSEE COMPANY. 4. THE APPELLANT CRAVES LEAVE TO ADD TO, AMEND OR A LTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. ASSESSEES APPEAL : 2009-10 1. IN RESPECT OF THE APPELLANT'S INTERNATIONAL TR ANSACTION OF SALE OF CHEMICAL PRODUCTS VIZ. ANH, MBTC AND TTC TO ITS ASSOCIATED E NTERPRISES ('AES') GULBRANDSEN CHEMICALS INC, USA AND GULBRANDSEN EC L IMITED, UK, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ('CIT( A)') GROSSLY ERRED - I. IN UPHOLDING THE LD. TPO/AO'S ACTION OF REJE CTING THE TRANSACTIONAL NET MARGIN METHOD (TNNM') AS THE MOST APPROPRIATE METHO D. ITA NO.1215, 1216 AND 1230/AHD/2017 3 II. IN UPHOLDING THE LD. TPO/AO'S ACTION OF ADO PTING THE COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD AS THE MOST APPRO PRIATE METHOD. III. IN UPHOLDING THE ACTION OF LD.AO/TPO OF NO T ALLOWING FOLLOWING COMPARABILITY ADJUSTMENTS CLAIMED BY THE APPELLANT FOR MATERIAL DIFFERENCES IN CONTRACTUAL TERMS, UNDERLYING COMMERCIAL CIRCUMS TANCES, FUNCTIONS, ASSETS, RISKS AND OTHER ECONOMIC FACTORS BETWEEN AP PELLANT'S TRANSACTIONS WITH AES VIS-A-VIS APPELLANT'S TRANSACTIONS WITH NO N-AES, WHILE APPLYING THE CUP METHOD: A) ADJUSTMENT ON ACCOUNT OF BUSINESS VOLUME DIFFERE NCES. B) ADJUSTMENT FOR ADVANCE PAYMENT RECEIVED FROM AE. C) ADJUSTMENT FOR MARKETING AND SELLING EXPENSES N OT REQUIRED TO BE INCURRED FOR AE SALES VIS-A-VIS NON AE SALES. D) ADJUSTMENT FOR CREDIT RISK NOT REQUIRED TO BE B ORNE BY APPELLANT FOR AE SALES VIS-A-VIS NON AE SALES. E) ADJUSTMENT FOR INTEREST FREE ECB LOAN RECEIVED F ROM AE. IV. IN UPHOLDING THE ACTION OF LD.AO/TPO OF NOT ALLOWING THE ECONOMIC ADJUSTMENTS OF SAVING IN SELLING AND MARKETING COST IN RESPECT OF MBTC AND TTC PRODUCT WHEREAS HE HAS GRANTED THIS ADJUSTMENT FOR THE ANH PRODUCT. V. IN UPHOLDING THE ACTION OF LD.AO/TPO OF NOT GRANTING ECONOMIC ADJUSTMENT FOR ADVANCE PAYMENT IN RESPECT OF INTERN ATIONAL TRANSACTION WITH AE GULBRANDSEN EC LIMITED. LD. THE AUTHORITIES BELO W FAILED TO APPRECIATE THAT AE-GULBRANDSEN CHEMICALS INC., USA MAKES ADVAN CE PAYMENT TO APPELLANT BOTH FOR ITSELF AS WELL AS ON BEHALF OF A E-GULBRANDSEN EC LIMITED. VI. IN UPHOLDING THE ACTION OF LD.AO/TPO OF NOT ALLOWING THE BENEFIT OF ARM'S LENGTH PRICE RANGE OF +/- 5% PROVIDED IN PROV ISO TO SECTION 92C(2) OF THE ACT. VII. IN UPHOLDING THE ACTION OF LD.AO/TPO OF MA KING PRICE COMPARISON ADOPTING THE FOREIGN CURRENCY VALUES OF INTERNATION AL TRANSACTION INSTEAD OF INDIAN RUPEE VALUE AS RECORDED IN BOOKS OF ACCOUNTS OF THE APPELLANT AND REPORTED IN FORM 3CEB. 2. IN RESPECT OF THE INTERNATIONAL TRANSACTION OF AVAILING THE SALES PROMOTION AND MARKETING SERVICES BY APPELLANT FROM ITS AE-GUL BRANDSEN CHEMICALS INC. USA, LD.CIT(A) GROSSLY ERRED IN UPHOLDING THE ACTION OF LD.AO/TPO OF DETERMINING THE NIL ARM'S LENGTH PRICE AND IN MAKIN G CONSEQUENT UPWARD TRANSFER PRICING ADJUSTMENT OF RS.2,24,01,998 U/S 9 2 OF THE ACT IN THIS REGARD. ITA NO.1215, 1216 AND 1230/AHD/2017 4 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD.CIT(A) GROSSLY ERRED IN NOT QUASHING THE LD.AOS ACTION OF INITIATING THE PENALTY PROCEEDINGS U/S.274 R.W.S. 271(1)(C) OF THE ACT. ASSESSEES APPEAL : A.Y.2010-11 1. IN RESPECT OF THE APPELLANT'S INTERNATIONAL TRA NSACTION OF SALE OF CHEMICAL PRODUCTS VIZ. ANH, TTC, DBTO AND TEAL TO ITS ASSOCI ATED ENTERPRISES ('AES') GULBRANDSEN CHEMICALS INC, USA AND GULBRAND SEN EC LIMITED, UK, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) (' CIT(A)') GROSSLY ERRED - I. IN UPHOLDING THE LD. TPO/AO'S ACTION OF REJE CTING THE TRANSACTIONAL NET MARGIN METHOD (TNNM') AS THE MOST APPROPRIATE METHO D. II. IN UPHOLDING THE LD. TPO/AO'S ACTION OF ADO PTING THE COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD AS THE MOST APPRO PRIATE METHOD. III. IN UPHOLDING THE ACTION OF LD.AO/TPO OF NO T ALLOWING FOLLOWING COMPARABILITY ADJUSTMENTS CLAIMED BY THE APPELLANT FOR MATERIAL DIFFERENCES IN CONTRACTUAL TERMS, UNDERLYING COMMERCIAL CIRCUMS TANCES, FUNCTIONS, ASSETS, RISKS AND OTHER ECONOMIC FACTORS BETWEEN AP PELLANT'S TRANSACTIONS WITH AES VIS-A-VIS APPELLANT'S TRANSACTIONS WITH NO N-AES, WHILE APPLYING THE CUP METHOD: A) ADJUSTMENT ON ACCOUNT OF BUSINESS VOLUME DIFFERE NCES. B) ADJUSTMENT FOR-CREDIT RISK NOT REQUIRED TO BE B ORNE BY APPELLANT FOR AE SALES VIS-A-VIS NON AE SALES. C) ADJUSTMENT FOR INTEREST FREE ECB LOAN RECEIVED FROM AE. IV. IN UPHOLDING THE ACTION OF LD.AO/TPO OF MAK ING PRICE COMPARISON ADOPTING THE FOREIGN CURRENCY VALUES OF INTERNATION AL TRANSACTION INSTEAD OF INDIAN RUPEE VALUE AS RECORDED IN BOOKS OF ACCOUNTS OF THE APPELLANT AND REPORTED IN FORM 3CEB. 2. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) GROSSLY ERRED IN NOT QUASHING THE LD. AO'S ACTION O F INITIATING THE PENALTY PROCEEDINGS U/S 274 R.W.S. 271(1)(C) OF THE ACT. 3. GROUND NO.1 OF THE ASSESSEES APPEAL IN BOTH THE YEARS IS INTER- CONNECTED WITH GROUND NO1 AND 2 OF THE REVENUES AP PEAL. THEREFORE, WE TAKE ALL THESE GROUNDS TOGETHER, AND THEY READ AS U NDER: ITA NO.1215, 1216 AND 1230/AHD/2017 5 4. FACTS ON ALL VITAL POINTS ARE COMMON IN BOTH ASS ESSMENT YEARS. THEREFORE, FOR THE FACILITY OF REFERENCE, WE TAKE U P FACTS FROM THE ASSTT.YEAR 2009-10. THE ASSESSEE HAS FILED ITS RETURN OF INCO ME ELECTRONICALLY ON 28.9.2009 DECLARING TOTAL INCOME AT RS.2,55,06,290/ -. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND N OTICE UNDER SECTION 143(2) WAS ISSUED ON 19.8.2010, WHICH WAS DULY SERVED ON I T. ALONG WITH RETURN, THE ASSESSEE HAS FILED FORM NO.3CEB ON 30.9.2009. A PE RUSAL OF THIS REPORT, IT REVEALED TO AO THAT THERE ARE INTERNATIONAL TRANSAC TIONS ISSUES, AND A REFERENCE TO THE TPO IS REQUIRED UNDER SECTION 92CA(1)OF THE INCOME TAX ACT. ACCORDINGLY, THE LD.AO HAS MADE A REFERENCE TO THE TPO. 5. IT EMERGES OUT FROM THE RECORD THAT THE ASSESSEE AT THE RELEVANT TIME WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CHEMICA LS VIZ. ALUMINUM CHLORIDE ANHYDROUS (ANH), MONO-N-BUTYL TIN TRICHLOR IDE (MBTC). IT SUPPLIES TO INDUSTRIES INCLUDING PETROCHEMICALS IND USTRY, PHARMACEUTICAL, CHEMICAL MANUFACTURERS AND INTERMEDIATE MANUFACTURE RS. THE LD.TPO NOTICED FOLLOWING INTERNATIONAL TRANSACTION UNDERTAKEN BY T HE ASSESSEE WITH ITS ASSOCIATE ENTERPRISE (AE). THEY READ AS UNDER: NATURE AMOUNT SALE OF FINISHED GOODS (CHEMICAL AND HOODS) 70,00,88,244/- PURCHASE OF RAW MATERIAL 19,23,545/- REIMBURSEMENT OF EXPENSES 80,33,761/- AVAILING OF SELLING, DISTRIBUTION AND MARKETING SERVICES 2,24,01,998/- 6. BEFORE THE LD.TPO, THE ASSESSEE HAS FILED TRANSF ER PRICE STUDY REPORT, AND OTHER DOCUMENTS WHICH WERE REQUIRED. ON AN ANA LYSIS OF THE TP STUDY REPORT, THE LD.TPO HAS ISSUED A DETAILED SHOW CAUSE NOTICE. HE POINTED OUT THAT WITH REGARD TO INTERNATIONAL TRANSACTION OF SA LE OF FINISHED GOODS, THE ITA NO.1215, 1216 AND 1230/AHD/2017 6 ASSESSEE HAS BENCHMARKED THESE TRANSACTIONS USING T RANSACTIONAL NET MARGIN METHOD (TNMM), STATING TO BE THE MOST APPROPRIATE M ETHOD ON THE FACTS AND CIRCUMSTANCES OF THE CASE. ACCORDING TO THE TPO, T HESE TRANSACTIONS WERE AGGREGATED WITH ALL OTHER INTERNAL TRANSACTIONS BY THE ASSESSEE BY SUBMITTING THAT ALL THE TRANSACTIONS ARE CLOSELY LINKED AND AR OSE FROM LONG TERM BUSINESS CONTRACT WITH THE AES. HE FURTHER FOUND THAT SIMIL AR SALES TO NON-AES WERE ALSO MADE IN THE YEAR UNDER CONSIDERATION, AND INTE RNAL TNMM WAS SELECTED FOR BENCHMARKING THESE TRANSACTIONS. THE RETURN ON TOTAL COST I.E. RATIO OF OPERATING PROFIT TO THE TOTAL COST WAS SELECTED AS THE PROFIT LEVEL INDICATOR (PLI) FOR AE SEGMENT WAS 11.10% AS COMPARED TO THE PLI OF NON-AE SEGMENT BEING 2.60%. IT IS PERTINENT TO NOTE THAT THE ASS ESSEE HAS SOLD FOLLOWING SEVEN CHEMICALS DURING THIS YEAR TO THE AE AS WELL AS NON -AE. NAMES OF CHEMICAL READ AS UNDER: S.NO NAME OF THE CHEMICAL 1 ALUMINIUM CHLORIDEANHYDROUS (ANH) 2 MONO BUTYL TIN CHLORIDE(MBTC) 3 MONO BUTYL TIN CHLORIDE( MBTC) CF-200) 4 TETRA BUTYL TIN CHLORIDE 5 DIBUTYL TIN OXIDE 6 TRI ETHYL ALUMINUM 7 STANNIC CHLORIDE (TTC) 7. ON AN ANALYSIS OF THE REPORT, THE LD.TPO HAS REJ ECTED THE TP STUDY REPORT OF THE ASSESSEE, AND OBSERVED THAT INSTEAD O F INTERNAL TNMM THE ASSESSEE SHOULD HAVE APPLIED CUP METHOD TO BENCHMAR K THIS TRANSACTION. HE HIGHLIGHTED SALE OF EACH CHEMICAL, AND HOW THE CUP OUGHT TO HAVE BEEN APPLIED BY THE ASSESSEE. FOR REFERENCE PURPOSE, WE TAKE NOTE OF HIS REASONING GIVEN IN THE SHOW CAUSE NOTICE FOR THE PURPOSE OF F IRST CHEMICAL I.E. ALUMINIUM CHLORIDE ANHYDROUS (ANH), WHICH READS AS UNDER: ITA NO.1215, 1216 AND 1230/AHD/2017 7 1. ALUMINIUM CHLORIDE ANHYDROUS(ANH) 1.1 FROM THE PERUSAL OF DETAILS SUBMITTED IT IS SEEN THAT THE AVERAGE PER UNIT PRICE RECEIVED FROM THE AE ON THIS PRODUCT IS AS FO LLOWS : SNO. NAME OF THE AE QUANTITY (KGS) AMOUNT(USD/EURO) RATE PERIOD 1. GULBRANDS CHEMICAL INC 22,89,620 USD 21,63,647 $ 0.945 APRIL 08 TO MARCH 09 2. GULBRANDSEN EC 1,10,440 1,41,103 1.277 APRIL 08 TO MARCH 09 - USD 186792: 15 $1.691 APRIL O8 TO MARCH 09 =1.3238 USD FOR THE PERIOD FROM APRIL 08 TO MARCH 09.DETAILS TAKEN FROM HTTP://WWW.X- RATES.COM/AVERAGE/?FROM=EUR&TO=USD&AMOUNT=L&YEAR=20 09 I .2 FROM THE PERUSAL OF SIMILAR DETAILS SUBMITTED FOR NON AE TRANSACTIONS, IT IS SEEN THAT ALMOST 95% OF THE SALES ARE TO ONE ENTITY I.E. NATIONAL TITANIUM DIOXIDE COMPANY LTD FOR WHICH THE DETAILS ARE AS FOLLOWS: SL.NO. NAME OF THE AE QUANTITY(KGS) AMOUNT(USD) RATE PERIOD 1. NATIONAL - TITANIUM DIOXIDE COMPANY LTD. 3711840 4300944.8 $1.159 APRIL 08 TO JAN 09 2. NATIONAL TITANIUM DIOXIDE COMPANY LTD. 671920 478879.2 $0.173 JAN 09 TO MARCH 09 1.3 WHILE SUBMITTING THE DETAILS FOR ADJUSTMENT, TH E ASSESSEE HAS CLAIMED ADJUSTMENT ON ACCOUNT OF LARGE VOLUME BEING SOLD TO ASSOCIATE ENTERPRISE. HOWEVER IN THIS CASE, IT IS SEEN THAT THE QUANTITY OF CHEMI CAL SOLD TO NON ASSOCIATE ENTERPRISE IS MORE THAN THE QUANTITY SOLD TO THE ASSOCIATE ENT ERPRISE. VIDE LETTER DATED 18.10.2012, THE ASSESSEE HAS SUBMITTED THAT VOLUME DISCOUNT OF-20.98% IS EMBEDDED IN THE PRICE CHARGED TO THIS ENTITY I.E. N ATIONAL TITANIUM DIOXIDE COMPANY LTD VIZ-A-VIZ OTHER ENTITY ON ACCOUNT OF LA RGE PURCHASE ORDER. TAKING THESE FACTS INTO CONSIDERATION IT IS CLEAR THAT INS TEAD OF VOLUME DISCOUNT BEING GRANTED TO ASSOCIATE ENTERPRISE, IT HAS BEEN GRANTE D TO THE NON ASSOCIATE ENTERPRISE I.E.- NATIONAL -TITANIUM- DIOXIDE COMPANY LTD. CONS IDERING THE LARGE VOLUME BOUGHT BY THIS ENTERPRISE VIS A VIS THE AE, THE ASS ESSEE MUST HAVE GRANTED ATLEAST ITA NO.1215, 1216 AND 1230/AHD/2017 8 10% VOLUME DISCOUNT TO THIS ENTITY. THEREFORE IT I S PROPOSED TO PROPOSED TO MODIFY THE PER UNIT PRICE RECEIVED FROM NON ASSOCIATE E NTERPRISE TO ACCOUNT FOR THE 10% VOLUME-DISCOUNT. 1.4 ADJUSTMENT FOR ADVANCE PAYMENT THE ASSESSEE HAS SUBMITTED THAT THE AE, GULBRANDSEN CHEMICAL INC HAS PROVIDED AN AVERAGE 5 MONTHS ADVANCE PAYMENT TO THE ASSESSEE AND CORRESPONDING REDUCTION IN PRICE SHOULD BE ALLOWED IN RESPECT OF SUCH GRANT OF ADVANCE MONEY. THE SAME CLAIM WAS MADE IN PROCEEDINGS BEFORE DRP F OR A.Y. 2006-07 AND IN LAST YEAR WHERE IT WAS DISALLOWED. IT IS THEREFORE PROPO SED NOT TO ALLOW THIS ADJUSTMENT THIS YEAR ALSO. 1.5. ADJUSTMENT FOR MARKETING AND SELLING EXPENS ES THE ASSESSEE HAS CLAIMED ADJUSTMENT FOR MAR KETING AND SELLING EXPENDITURE WHICH NEED TO BE INCURRED BY IT FOR MAKING NON AE S ALES. IN THIS YEAR THE ASSESSEE HAS SUBMITTED THAT AN AGREEMENT HAS BEEN ENTERED IN TO WITH THE ASSOCIATED ENTERPRISE, THROUGH WHICH THE ASSESSEE IS PAYING CO MMISSION AT THE RATE OF 5% ON ITS NON AE SALES TO THE ASSOCIATED ENTERPRISE, FOR MARKETING ACTIVITIES UNDERTAKEN BY THE ASSOCIATE ENTERPRISE ON THE. ASSESSEE'S BEHALF, IN RESPECT OF NON AE SALES. FOR THE REASONS DESCRIBED BELOW IN THE NOTICE, IT WAS F OUND THAT THE ASSESSEE COULD NOT SUBSTANTIATE THE INCURRING OF SUCH EXPENDITURE BY T HE ASSOCIATE ENTERPRISE ON ITS BEHALF AS ALSO IT COULD NOT SUBSTANTIATE THE BASIS FOR THE PAYMENT OF COMMISSION AT THE RATE OF'-5%. THE IN VIEW OF THE FACT THAT THE' ASSESSEE COULD NOT SUBSTANTIATE THE ACTUAL CARRYING OUT OF ANY SUCH ACTIVITY BY THE ASS OCIATE ENTERPRISE, IT IS PROPOSED THAT NO ADJUSTMENT SHOULD BE GRANTED ON THIS HEAD. 1.6.RISK ADJUSTMENT ASSESSEE'S CLAIM THAT IT BEAR NIL RISK IN RESPECT O F ASSESSEE SALE TRANSACTIONS TO AE WHILE IT BEAR CREDIT RISK IN RESPECT OF SALES TO NO N AE. TO EXAMINE THIS ASSERTION, THE DETAILS OF BAD DEBT INCURRED BY THE ASSESSEE IN RES PECT OF NON AE EXPORT TRANSACTIONS WERE CALLED AND FROM THE PERUSAL OF TH E SAME IT IS SEEN THAT THE ASSESSEE INCURRED NIL BAD DEBT IN RESPECT OF EXPORT TRANSACTIONS FOR THE PERIOD COVERING F.Y 2005-06 TO 2008-09. THUS, IT CAN BE SE EN THAT THE ASSESSEE HAD NOT INCURRED ANY BAD DEBT IN RESPECT OF EXPORT TRANSACT IONS FOR. ANY OF THE PRODUCT AND ON THIS GROUND NO ADJUSTMENT FOR CREDIT RISK IS PR OPOSED TO BE GRANTED. 1.7 ADJUSTMENT FOR INTEREST FREE ECB LOAN THE ASSESSEE HAS ASKED FOR AN ADJUSTMENT OF INTERES T NOT CHARGED BY THE ASSOCIATE ENTERPRISE ON GRANT OF ECB LOAN TO THE ASSESSEE, FO R WHICH THE AVERAGE OUTSTANDING AMOUNT DURING THE YEAR, THE VIEW WAS RS.20,62,96,00 /-. TAKING THE INTEREST RATE OF 12% PER ANNUM, THE SAVING IN INTEREST COST WAS CALC ULATED AT RS.2,47,55,616/- AND THE CORRESPONDING PER UNIT BENEFIT FROM THE AMOUNT WAS CALCULATED AT RS. 7.54 PER KG FOR EACH PRODUCT. IN ORDER TO EXAMINE THE ADJUST MENT THE DETAILS OF ECB AND ITS AGREEMENT WERE CALLED. FROM THE PERUSAL OF THE AGRE EMENT, IT SEEN THAT THE ECB LOAN WAS GRANTED TO BE UTILISED FOR ARRANGEMENT OF NEW PROJECT, WORKING CAPITAL REQUIREMENT AND REPAYMENT OF_EXISTING LOAN. FURTHE R IT-IS SEEN THAT THE AGREEMENT ITA NO.1215, 1216 AND 1230/AHD/2017 9 DID NOT CONTAIN ANY CLAUSE RELATED TO REDUCTION OF PRICE OF THE PRODUCT TO BE PURCHASED BY THE AE FROM THE ASSESSEE. ON THE CONTR ARY IT IS SEEN THAT THE INTEREST IS WAIVED OFF BY THE AE SINCE THE ASSESSEE, ALLOWED THE AE TO PURCHASE ITS PRODUCTS IN LARGE QUANTITY THEREBY ALLOWING THE AE TO HAVE A SSURED SOURCE OF PURCHASE OF PRODUCTS REQUIRED BY ITSELF. THUS BECOMES CLEAR THA T THE QUID PRO QUO OF INTEREST WAIVER BY THE AE IS THE ASSURANCE OF COMMITTED SALE S BY THE ASSESSEE TO AE. IN SUCH A SCENARIO, THERE DOES NOT REMAIN ANY REQUIREMENT F OR THE ASSESSEE TO GRANT REDUCTION IN PRICE TO THE AE IN CONSIDERATION FOR N ON CHARGING OF INTEREST, IN SUCH A SCENARIO THERE IS NO NEED FOR ANY ADJUSTMENT ON THI S GROUND. THE CALCULATION OF AVERAGE RATE PER UNIT IN THE CAS E OF NON AE, AFTER THE ADJUSTMENT, IS AS FOLLOWS SLNO. NAME OF THE NON AE RATE VOLUME ADJUSTMENT BEING 10% ADJUSTED RATE (RATE/90%) PERIOD 1. NATIONAL TITANIUM DIOXIDE COMPANY LTD 1.159 0.128 1.287 APR 08- TOJAN 09 THUS, IT IS SEEN THAT ON FOB PRICE OF USD 0.945 PER UNIT FOR THE PERIOD APRIL 08 TO JANUARY 2009 FOR GULBRANDSEN CHEMICALS INC, THE FO B PRICE PER UNIT IN THE CASE OF NON AE TRANSACTIONS COMES TO USD 1.287. TAKING T HESE FIGURES INTO ACCOUNT, IT IS PROPOSED TO BENCH MARKING THE SALE TRANSACTION OF A NH TO AE (GULBRANDSEN CHEMICALS INC) BY TAKING AVERAGE RATE OF USD 1.287 PER UNIT INSTEAD OF USD 0.945 PER UNIT. 8. THUS, THE AO WAS OF THE OPINION THAT SINCE INTER NAL CUP IS AVAILABLE, THEREFORE, THERE IS NO NEED TO APPLY TNMM FOR BENCH MARKING THESE TRANSACTIONS. QUA CHANGE OF METHOD, THE ASSESSEE HAS RAISED VARIOUS OBJECTIONS. IT WAS POINTED OUT THAT IF THAT METHOD IS TO BE ADOPTED, THEN VARIOUS ADJUSTMENTS IN THE SHAPE OF ADJUSTMENT FOR ADVANCE PAYMENT, ADJUSTMENT FOR MARKETING AND SELLING EXPENSES, RISK ADJUSTMENT, ADJUSTMENT FOR INTEREST FREE ECB LOAN ARE TO BE GRANTED WHILE BENCHMARKING SALE OF CHEMICALS ANH. WITH REGARD TO OTHER CHEMICALS, SIM ILAR OBJECTIONS WERE TAKEN, AND IN MOST OF THE SALES, OBJECTION WITH REG ARD TO ADJUSTMENT FOR MARKETING AND SELLING EXPENSES, ADJUSTMENT FOR CRED IT RISK, AND ADJUSTMENT FOR ADVANCE PAYMENTS WERE CALLED FOR. THE LD.TPO REJE CTED ALL THE CONTENTIONS ITA NO.1215, 1216 AND 1230/AHD/2017 10 OF THE ASSESSEE. HE RECOMMENDED UPWARD ADJUSTMENT OF RS.7,99,59,176/- WITH REGARD TO INTERNATIONAL TRANSACTIONS OF SALE O F FINISHED GOODS. 9. WHILE WORKING OUT THE ALLEGED UPWARD ADJUSTMENT, THE LD.TPO FURTHER OBSERVED THAT WITH REGARD TO SALE OF ANH, THE ASSES SEE HAS SOLD PRODUCT IN BULK TO NON-AE VIZ. NATIONAL TITANIUM DIOXIDE COMPA NY LTD. (NTDCL). THE QUANTITIES SOLD TO THESE CONCERNS HAVE BEEN NOT ICED BY US WHILE EXTRACTING THE RELEVANT PART OF THE SHOW CAUSE OF THE TPO. HE FOUND THAT SINCE LARGE VOLUME WAS SOLD TO THESE CONCERNS ALSO, THEREFORE, THERE SHOULD BE SOME ADJUSTMENT IN RATE ON ACCOUNT OF LARGE VOLUME OF SA LES. HE ADJUSTED THE RATE OF 10%. IN OTHER WORDS, SINCE LARGE VOLUME OF FINI SHED GOODS WAS SOLD TO NON-AE ALSO, AND THEREFORE, FILTER OF VOLUME ADJUST MENT WAS APPLIED TO THIS RATE. THE RATE WAS 1.159$ PER KG. BETWEEN APRIL 20 08 TO JAN. 2009. HE REDUCED THIS RATE BY 10% AND ADJUSTED RATE WAS WORK ED AT 1.287. THE LD.CIT(A) DID NOT UPHOLD THIS ADJUSTMENT IN THE RAT E REQUIRED TO BE ADOPTED FOR CALCULATING ARMS LENGTH PRICE OF SALE OF ANH CHEMI CALS. IN OTHER WORDS, THE LD.CIT(A) THOUGH UPHELD THE APPLICATION OF CUP METH OD, BUT DID NOT UPHELD ANY ADJUSTMENT IN THE RATE OF ANH CHEMICALS SOLD TO NON-AE I.E. NTDCL. AFTER ORDER OF THE LD.CIT(A), THE LD.AO WAS REQUIRE D TO WORK OUT RATE REQUIRED TO BE APPLIED FOR CALCULATION OF ALP OF ANH, WHICH WAS EQUIVALENT TO THE RATE AT WHICH IT WAS SOLD TO NON-AE. THIS ASPECT HAS BE EN CHALLENGED BY THE REVENUE IN ITS GROUND NO.1 AND 2. ON APPEAL, THE L D.CIT(A) DID NOT EXAMINE THE ISSUE IN DETAIL, RATHER OBSERVED THAT IDENTICAL ASPECTS CONSIDERED IN THE ASSTT.YEAR 2007-08, AND THEREFORE, THE LD.CIT(A) FO LLOWED THE ORDER OF HIS PREDECESSOR IN THE ASSTT.YEAR 2007-08, AND UPHELD T HE ADJUSTMENT MADE BY THE LD.TPO. THE DISCUSSION MADE BY THE LD.CIT(A) O N THIS ISSUE READ AS UNDER: 5. SO FAR AS GROUND NO.1 AND 2 ARE CONCERNED, THE SAME ARE IN RELATION TO THE ADJUSTMENT MADE IN ARMS' LENGTH PRICE OF INTERN ATIONAL TRANSACTIONS BY THE TPO. THE APPELLANT IS ENGAGED IN THE BUSINESS O F MANUFACTURING OF ITA NO.1215, 1216 AND 1230/AHD/2017 11 CHEMICALS. THE PRODUCT RANGE INCLUDES ALUMINIUM CHL ORIDE ANHYDROUS (ANH), MONO-N-BUTYL TIN TRICHLORIDE (MBTC), STANNIC CHLORIDE AND TRI CHLORO BENZENE. IT IS A SUPPLIER TO INDUSTRIES INCL UDING PETROCHEMICAI INDUSTRY, PHARMACEUTICAL AND CHEMICAL MANUFACTURERS . DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT ENTERED INTO FOL LOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES): NATURE AMOUNT SALE OF FINISHED GOODS (CHEMICAL AND HOODS) 70,00,88,244/- PURCHASE OF RAW MATERIAL 19,23,545/- REIMBURSEMENT OF EXPENSES 80,33,761/- AVAILING OF SELLING, DISTRIBUTION AND MARKETING SER VICES 2,24,01,998/- 5.1. THE AO OBTAINED THE TRANSFER PRICING STUDY REP ORT AND OTHER DOCUMENTS FROM THE APPELLANT. THE APPELLANT ALSO FILED DETAIL ED SUBMISSION TO JUSTIFY THE ARMS' LENGTH PRICE COMPUTED IN RESPECT OF INTERNATI ONAL TRANSACTIONS. IN RESPECT OF THE ARMS' LENGTH NATURE OF THE TRANSACTI ONS, IT WAS NOT FOUND TO BE ACCEPTABLE BY THE TPO AND HE ACCORDINGLY, ISSUED A SHOW CAUSE NOTICE ON 29.12.2012. THE RELEVANT PARTS OF THIS NOTICE ARE R EPRODUCED IN PARA 14 OF THE TPOS ORDER. THE OBJECTIONS OF TPO CAN BE SUMM ARIZED AS FOLLOWS: I) THE APPELLANT HAD BENCH MARKED THE INTERNA TIONAL TRANSACTIONS REPRESENTING SALE OF FINISHED GOODS TO THE ASSOCIAT E ENTERPRISE BY USING TRANSACTIONAL NET MARGIN METHOD (TNMM). SINCE , SIMILAR SALES TO NON ASSOCIATE ENTERPRISES WERE ALSO MADE I N THE YEAR UNDER CONSIDERATION, HENCE, INTERNAL TNMM WAS SELECTED BY THE APPELLANT FOR BENCH MARKING OF THIS TRANSACTION. IN THE OPINI ON OF THE TPO, THIS BENCH MARKING PROCEDURE WAS NOT ACCEPTABLE AND ACCO RDINGLY, HE PROPOSED TO APPLY CUP METHOD TO BENCH MARK THESE TR ANSACTIONS. IN THE SHOW CAUSE NOTICE HE HAS ALSO DESCRIBED THE IMP LEMENTATION OF THE USE OF THIS METHOD ON PRICES OF DIFFERENT PRODUCTS AND THE ADJUSTMENTS AND THEIR APPLICABILITY. II) THE TPO ALSO DID NOT ALLOW ANY ADJUSTMENT FOR VOLUME, MARKETING AND SELLING EXPENSES, CREDIT RISK AND ADV ANCE PAYMENT TO THE APPELLANT COMPANY. III) THE TPO ALSO DISCUSSED THE PAYMENT OF MARK ETING COMMISSION AND STATED THAT THE PAYMENT OF SUCH MARKETING COMMI SSION SHOULD BE BENCH MARKED AT NIL. ITA NO.1215, 1216 AND 1230/AHD/2017 12 5.2. THE APPELLANT SUBMITTED ITS WRITTEN REPLY TO T HE SHOW CAUSE NOTICE VIDE LETTER DATED 09.01.2013. THE CONTENTIONS RAISED BY THE APPELLANT HAD BEEN REPRODUCED IN PARAGRAPH 5 OF THE TPO'S ORDER. THE T PO HAS GIVEN REPLIES TO THE APPELLANT'S CONTENTIONS IN PARAGRAPH 6 OF HIS O RDER. HE FINALLY HELD THAT CUP METHOD IS APPLICABLE TO BENCH MARKING THESE TRA NSACTIONS. 5.3. DURING THE COURSE OF THE APPELLATE PROCEEDINGS , I HAVE CONSIDERED THE APPELLANT'S SUBMISSION AND THE TPOS OBSERVATIONS. S O FAR AS THE ISSUE RELATING TO THE METHOD TO BE ADOPTED FOR BENCH MARK ING OF TRANSACTIONS RELATED TO SALE OF FINISHED GOODS IS CONCERNED, IN THE EARLIER ASSESSMENT ORDERS ALSO, THE APPELLANT HAD ADOPTED INTERNAL TNM M METHOD FOR THIS PURPOSE. BUT IN THE ASSESSMENT ORDER, THE TPO ADOPT ED CUP METHOD. SUCH ACTION OF THE AO HAS BEEN UP HELD BY THE DRP IN ITS ORDER FOR AY 2006-07, IN THE APPELLATE ORDER PASSED BY MY PREDECESSOR IN APP EAL NO. CAB- I/186/2010-11 DATED 02.01.2012 FOR AY 2007-08 AND I N THE APPELLATE ORDER FOR AY 2008-09, PASSED IN APPEAL NO. CAB-IV/200/201 2-13 DATED 11.06.2013 PASSED BY THE CIT(A)-IV, BARODA. SINCE, THE FACTS ARE SIMILAR, HENCE, THE REJECTION OF INTERNAL TNMM METHOD AND AD OPTION OF CUP METHOD, THE APPELLANT HAS FILED DETAILED SUBMISSION AGAINST THE ACTION OF THE AO OF REJECTING THE INTERNAL TNMM METHOD ADOPTED BY THE A PPELLANT AND THEREAFTER APPLYING CUP METHOD TO SALE OF INDIVIDUAL PRODUCTS FOR BENCH MARKING THE SALE OF THESE PRODUCTS AS HAS BEEN DONE BY THE TPO IS UPHELD. ACCORDINGLY, GROUND NO.1.1.1 AND 1.1.2 ARE DISMISSED. 10. THE LD.COUNSEL FOR THE ASSESSEE AT THE VERY OUT SET SUBMITTED THAT IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL IN T HE ASSTT.YEAR 2008-09. THE LD.CIT(A) HAS UPHELD THE ORDER OF HIS PREDECESSOR I N THE ASSTT.YEAR 2007-08 AND 2008-09. THE TRIBUNAL DID NOT APPROVE THE ACTI ON OF THE LD.REVENUE AUTHORITIES IN THE ASSTT.YEAR 2008-09 AND HELD THAT CUP METHOD IS NOT REQUIRED TO BE APPLIED FOR BENCHMARKING OF TRANSACT ION FOR SALE OF FINISHED GOODS. THUS, ACCORDING TO THE LD.COUNSEL FOR THE A SSESSEE, THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY ORDER OF THE TRIBUNAL PASSED IN THE ITA NO.2276/AHD/2013 FOR A.Y.2008-09. THE LD.D R WAS UNABLE TO CONTROVERT THE CONTENTIONS OF THE LD.COUNSEL FOR TH E ASSESSEE. 11. WE HAVE DULY CONSIDERED RIVAL SUBMISSIONS AND G ONE THROUGH THE RECORD CAREFULLY. WE FIND THAT IDENTICAL CHEMICALS WERE SOLD IN THE IMMEDIATELY PRECEDING YEAR. THE ASSESSEE HAS BENCH MARKED ITS TRANSACTION BY ITA NO.1215, 1216 AND 1230/AHD/2017 13 APPLYING TNMM METHOD THAT HAS BEEN CHANGED BY THE T PO AND HE DETERMINED ALP BY FOLLOWING CUP METHOD. THIS CHANG E OF METHOD DID NOT MEET APPROVAL OF THE TRIBUNAL IN THE ASSTT.YEAR 200 8-09. THE DISCUSSION MADE BY THE TRIBUNAL READS AS UNDER: 8. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF APPLICABLE LEGAL POSITION. WE HAVE ALSO PERUSED THE DETAILED W RITTEN SUBMISSIONS FILED BY THE LEARNED DR. 9. IT IS BY NOW A REASONABLY WELL-ESTABLISHED LEGAL PROPOSITION THAT AS LONG AS IT IS REASONABLY POSSIBLE TO APPLY A DIRECT METHOD OF ASCERTAINING THE ARMS LENGTH PRICE OF A TRANSACTIO N, SUCH A DIRECT METHOD WILL HAVE AN EDGE OVER APPLICATION OF INDIRE CT METHOD OF ASCERTAINING THE ARMS LENGTH PRICE. THIS PRINCIPLE HAS BEEN REITERATED IN A LARGE NUMBER OF DECISIONS OF THE COORDINATE BE NCHES, SUCH AS IN THE CASE OF ACIT VS MSS INDIA LTD [(2009) 32 SOT 13 2 (PUNE) AND SERDIA PHARMACEUTICALS INDIA PVT LTD VS ACIT [(2011 ) 44 SOT 391 (MUM)]. GOING BY THIS PRINCIPLE, ALL OTHER THINGS B EING EQUAL, A DIRECT METHOD LIKE COMPARABLE UNCONTROLLED PRICE (CUP) MET HOD WILL HAVE AN EDGE OVER AN INDIRECT METHOD LIKE TRANSACTIONAL NET MARGIN METHOD (TNMM). THAT DOES NOT, AND CANNOT, HOWEVER M EAN THAT WHATEVER BE THE FACT SITUATION, CUP IS ALWAYS A PRE FERRED METHOD BECAUSE OF ONE OF THE ESSENTIAL PREREQUISITE FOR AP PLICATION OF ANY METHOD OF ASCERTAINING THE ALP IS THE INPUTS NECESS ARY FOR THAT PURPOSE. WHATEVER MAY BE INHERENT EDGE OF THE DIREC T METHODS OF DETERMINING ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION OVER INDIRECT METHODS OF DETERMINING THE ARMS LENGTH PR ICE OF INTERNATIONAL TRANSACTIONS, SELECTION OF THE MOST A PPROPRIATE METHOD FOR DETERMINING ARMS LENGTH PRICE UNDER THE TRANSF ER PRICING PROVISIONS, IN A PARTICULAR FACT SITUATION, IS NOT AN ACADEMIC EXERCISE WHICH CAN BE DECIDED DE HORS THE PECULIAR FACTS OF THAT SITUATION, AND, THEREFORE, THERE CANNOT BE ANY STRAIGHT-JACKET FORM ULAS HOLDING APPLICATION OF A PARTICULAR METHOD IN CASE OF A PAR TICULAR TYPE OF PRODUCT OR SERVICE. WHILE RULE 10B(1) OF THE INCOME TAX RULES 1962, PROVIDES THAT ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHO DS, BEING THE MOST APPROPRIATE METHOD, SET OUT THEREIN, RULE 10 C(1) PROVIDES THE MECHANISM FOR SELECTING THE MOST APPROPRIATE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTI CULAR TRANSACTION AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AR MS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. RULE 10C(2) FURT HER PROVIDES THAT IN SELECTING THE MOST APPROPRIATE METHOD AS SPECIFIED IN RULE 10C(1), CERTAIN FACTORS ARE TO BE TAKEN INTO ACCOUNT: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANS ACTION; ITA NO.1215, 1216 AND 1230/AHD/2017 14 (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAK ING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF D ATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN TH E INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BE TWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUS TMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INT ERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F ) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD [EMPHASIS, BY UNDERLINING, SUPPLIED BY US] 10. WHAT IS CLEAR FROM THE ABOVE ANALYSIS IS THAT A METHOD OF DETERMINING ARMS LENGTH PRICE, TO BE HELD AS A MO ST APPROPRIATE METHOD (MAM), SHOULD BE, AS PROVIDED IN RULE 10C(1 ), A METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCE S OF EACH PARTICULAR TRANSACTION AND A METHOD AND WHICH PROVIDES THE M OST RELIABLE MEASURE OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. UNDER RULE 10C(2)(C), THE AVAILABILITY, COVERAGE A ND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD IS ON E OF THE CRUCIAL FACTORS DETERMINING SUITABILITY OF A METHOD OF DETE RMINATION OF ARMS LENGTH PRICE IN A PARTICULAR FACT SITUATION. SIMILA RLY, IT IS ALSO IMPORTANT TO DETERMINE WHETHER ACCURATE ADJUSTMENTS CAN BE MADE FOR THE DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTI ONS AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, AND UNLESS SU CH ADJUSTMENTS CAN BE MADE THE RELATED METHOD CANNOT BE SAID TO BE MOST APPROPRIATE METHOD. WE HAVE ALREADY SEEN AS TO HOW, IN THE CIT(A)S ANALYSIS, SUITABLE ADJUSTMENTS COULD NOT BE MADE EV EN THOUGH IN HIS OPENING OBSERVATIONS IN THE OPERATIVE PORTION OF TH E ORDER, HE STATED THAT SUITABLE ADJUSTMENTS CAN INDEED BE MADE. THE I NABILITY TO MAKE SUITABLE ADJUSTMENTS, THEREFORE, DOES TAKE THE METH OD OUTSIDE THE AMBIT OF MOST APPROPRIATE METHOD. QUITE CLEARLY, TH EREFORE, UNLESS SUITABLE RELIABLE DATA INPUTS NECESSARY FOR APPLICA TION OF A PARTICULAR METHOD, AS CUP IN THIS CASE, ARE AVAILABLE, CUP MET HOD CANNOT BE SAID TO BE MOST APPROPRIATE METHODS ON THE FACTS OF THIS CASE. LET US, THEREFORE, FIRST EXAMINE WHETHER SUFFICIENT INPUTS WERE INDEED AVAILABLE. 11. AT THE OUTSET, IT IS IMPORTANT TO NOTE THAT WHA T HAS BEEN RELIED UPON BY THE TPO IS INTERNAL CUP DATA BUT THEN RATHE R THAN TAKING THE COMPARABLE UNCONTROLLED PRICE OF THE TRANSACTION, T HE TPO HAS COMPARED AVERAGE OF INTRA-AE TRANSACTIONS AND INDEP ENDENT ITA NO.1215, 1216 AND 1230/AHD/2017 15 TRANSACTIONS. THIS APPROACH, THOUGH IN THE CASE OF APPLICATION OF COST PLUS METHOD, HAS BEEN REJECTED BY A COORDINATE BENC H OF THIS TRIBUNAL IN THE CASE OF ACIT VS TARA ULTIMO PVT LTD [(2012) 143 TTJ 91 (MUM)], THOUGH THE SAME REASONING WILL BE EQUALLY A PPLICABLE IN RESPECT OF THE CUP AS WELL AS THE COMPUTATION MECHA NISM, IN THAT RESPECT, IS MATERIALLY SIMILAR. IN THIS CASE, SPEAK ING THROUGH ONE OF US (I.E. THE VICE PRESIDENT), THE COORDINATE BENCH HAD OBSERVED AS FOLLOWS: THE WAY THIS RULE WORKS, THE BENCHMARK GROSS PROFIT IS TO BE APPLIED ON EACH TRANSACTION WITH THE AES , WHILE, FOR COMPU TING THE BENCHMARK, ONE COULD TAKE INTO ACCOUNT A SERIES OF SAME OR SIMILAR TRANSACTIONS. IN OTHER WORDS, WHILE SETTING THE BEN CHMARK, ONE CAN TAKE INTO ACCOUNT SEVERAL TRANSACTIONS WITH UNRELAT ED ENTERPRISE ON WHAT CAN BE TERMED AS 'GLOBAL BASIS', ESSENTIALLY I N RESPECT OF SAME OR SIMILAR PROPERTY OR SERVICES THOUGH, THE BENCHMARK SO ARRIVED AT CANNOT BE APPLIED ON THE GLOBAL BASIS I.E. THE AVER AGE OF GROSS PROFIT EARNED FROM SAME OR SIMILAR TRANSACTIONS WITH AES. THE APPLICATION OF CPM HAS TO BE ON TRANSACTION BASIS RATHER THAN O N GLOBAL BASIS, AND THIS FUNDAMENTAL SCHEME OF COST PLUS METHOD IS ALSO EVIDENT FROM THE PLAIN WORDINGS OF RULE 10 B AS WELL. ANY OTHER VIEW OF THE MATTER WILL RESULT IN INCONGRUITIES. FOR EXAMPLE, IF OUR A VERAGE MARK UP TO UNRELATED ENTERPRISES IS 20 PER CENT. AND WE CHARGE A MARK-UP OF 2 PER CENT IN ONE TRANSACTION WITH AE AND 38 PER CENT IN ANOTHER TRANSACTION WITH THE AE, BOTH THESE TRANSACTIONS, B Y APPLYING THE MARK UP ON GLOBAL BASIS, WILL MEET THE TEST OF ALP WHERE AS IN THE FIRST CASE, THE MARK UP CHARGED IS CERTAINLY NOT A MARK-UP RESU LTING IN AN ALP. IN THIS PARTICULAR CASE, FOR EXAMPLE, THE NORMAL MA RK UP IN TRANSACTIONS WITH HAS BEEN COMPUTED AT 16.31 PER CE NT. AND THE AVERAGE OF MARK UP ON SALES TO AES HAVING BEEN TAKE N AT 17.08 PER CENT. ENTIRE SALES TO AES HAS BEEN TAKEN AT ALP, BU T, THE MARK UP IN THE MANY CASES IS CLEARLY LESS THAN BENCHMARK. TO G IVE ONE EXAMPLE, AT PAGE 221 OF THE PAPER-BOOK, MARGIN OF 14.15 PER CENT (4 INVOICES), 13.95 PER CENT. 13.81 PER CENT. 14 PER CENT (4 INVO ICES), 14.14 PER CENT (2 INVOICES), AND 14.16 PER CENT IS GIVEN BY ASSESS EE'S OWN COMPUTATION, AND, ON THE SAME PAGE, ON ONE INVOICE, THE ASSESSEE HAS SHOWN A MARGIN AS HIGH AS 27 PER CENT. THE COST PLU S METHOD, THEREFORE, HAS NOT BEEN CORRECTLY APPLIED. IN ANY C ASE, ONE OF THE MOST IMPORTANT INPUT, I.E. DIAMOND, HAS BEEN IMPORTED AT A PRICE FOR WHICH NO ALP DOCUMENTATION IS AVAILABLE AND THE PRICE OF IMPORTS HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF COSTS AS WELL. THE COSTS OF INPUTS HAVE NOT BEEN VERIFIED EITHER. NO EFFORTS ARE MADE TO SHOW THAT THE TERMS OF SALE TO THE AES AND ALL OTHER RELEVANT FAC TORS ARE MATERIALLY SIMILAR VIS-A-VIS THE TRANSACTIONS WITH INDEPENDENT ENTERPRISES. THE CPM IS APPLIED BY COMPARING GROSS PROFIT ON SALES, WHEREAS THE ITA NO.1215, 1216 AND 1230/AHD/2017 16 METHOD REQUIRES COMPARISON OF MARK UP ON COSTS ON T RANSACTIONS WITH AES VIS-A-VIS MARK UP ON COSTS ON TRANSACTIONS WITH NON AES [EMPHASIS, BY UNDERLINING, SUPPLIED BY US NOW] 12. IT IS ALSO IMPORTANT TO NOTE THAT THE TPO HAS J USTIFIED APPLICATION OF INTERNAL CUP ON THE BASIS OF DEVIATIONS IN PRICE S AT WHICH PRODUCTS ARE SOLD TO DIFFERENT AES AND, BY IMPLICATION, USIN G ONE INTRA AE PRICE TO BENCH THE OTHER INTRA AE PRICE. THAT IS WHOLLY I NCORRECT. IT IS WELL SETTLED IN LAW THAT IT IS ONLY AN UNCONTROLLED PRIC E WHICH CAN BE COMPARED WITH CONTROLLED PRICE AND USED FOR ANY BEN CHMARKING. THIS POSITION HAS BEEN WELL SUMMARIZED IN A COORDINATE B ENCH DECISION IN THE CASE OF SABIC INNOVATIVE PLASTIC INDIA (P.) LTD . V. DY. CIT [2013] 59 SOT 138/35 TAXMANN.COM 177 (AHD.), AND WE ARE IN CONSIDERED AGREEMENT WITH THE SAME. 13. WHEN COMPARING THE PRICES OF PRODUCTS SOLD IN I NTRA AE TRANSACTIONS VIS--VIS INDEPENDENT TRANSACTIONS, IT IS NOT SUFFICIENT TO COMPARE THE PRICES DE HORS THE ECONOMIC CIRCUMSTANC ES IN WHICH THE RESPECTIVE AE AND NON AE TRANSACTIONS TAKE PLACE. T HIS PRINCIPLE IS BEYOND ANY DOUBT OR CONTROVERSY. IN THE OECD GUIDEL INES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATORS, I T IS CLEARLY STATED THAT APPLICATION OF CUP METHOD REQUIRES HIGH DEGRE E OF COMPARABILITY NOT ONLY IN THE PRODUCTS SOLD AND SER VICES PROVIDED BUT ALSO IN THE ECONOMIC CIRCUMSTANCES IN WHICH THE RES PECTIVE AE AND NON AE TRANSACTIONS TAKE PLACE. IN THE UN TRANSFER PRICING MANUAL, IT IS OBSERVED THAT DEGREE OF COMPARABILITY BETWEE N CONTROLLED AND UNCONTROLLED TRANSACTIONS IS TYPICALLY DETERMINED O N THE BASIS OF A NUMBER OF ATTRIBUTES OF THE TRANSACTIONS OR PARTIES THAT COULD MATERIALLY AFFECT PRICES OR PROFITS AND THE ADJUSTM ENT THAT CAN BE MADE TO ACCOUNT FOR DIFFERENCES AND THEN IT IS OBSERVED THAT THESE ATTRIBUTES, WHICH ARE USUALLY REFERRED TO AS THE FI VE COMPARABILITY FACTORS, INCLUDE: (I) CHARACTERISTICS OF THE PROPER TY OR SERVICE TRANSFERRED; (II) FUNCTIONS PERFORMED BY THE PARTIE S TAKING INTO ACCOUNT ASSETS EMPLOYED AND RISKS ASSUMED, IN SHORT REFERRED TO AS THE FUNCTIONAL ANALYSIS (III) CONTRACTUAL TERMS; (IV) ECONOMIC CIRCUMSTANCES; AND (V) BUSINESS STRATEGIES PURSUED . CLEARLY, THEREFORE, THE SIGNIFICANT VARIATIONS IN ECONOMIC C IRCUMSTANCES AND CONTRACTUAL TERMS CAN TAKE SEEMINGLY COMPARABLE TRA NSACTIONS OUTSIDE THE AMBIT OF COMPARABILITY. 14. WE HAVE NOTED HUGE AND CRUCIAL VARIATIONS IN PA YMENT TERMS OF THE TRANSACTIONS WITH THE AES VIS-A-VI TRANSACTIONS WITH NON AES. THE CIT(A) HAS REJECTED THE ADJUSTMENTS IN THIS RESPECT ON ACCOUNT OF IRRELEVANT FACTORS SUCH AS ASSESSEE CLAIMING ONLY 8 % ADJUSTMENT IN THE FINANCIAL YEAR 2005-06, AS AGAINST 20% ADJUSTME NT SOUGHT IN THIS YEAR, EVEN THOUGH THE TRANSACTIONS WERE UNDER THE S AME AGREEMENT. ITA NO.1215, 1216 AND 1230/AHD/2017 17 THAT IS IMMATERIAL. WHAT IS MATERIAL IS THAT THERE IS HUGE DIFFERENCE IN THE PAYMENT TERMS. THE CIT(A) HAS ALSO NOTED THE DE VIATIONS IN THE ADVANCE PAYMENT TERMS OF 120 DAYS UNDER THE AGREEME NT AND THE ACTUAL ADVANCE PAYMENT OF 17 MONTHS ON AVERAGE. HE HAS ALSO NOTED THAT IN THREE INVOICES ON NON-AES THE CREDIT PERIOD WAS 60 DAYS BUT THEN HE DECLINES TO TREAT THESE EVIDENCE AS SUPPORT FOR THE CLAIM THAT IN ALL CASES SIMILAR CREDITS WERE GIVEN. HOWEVER, W HAT IS CLEAR THAT THERE IS CLEARLY SIGNIFICANT VARIATION IN PAYMENT T ERMS. AS A MATTER OF FACT, AT PAGE 29, LEARNED CIT(A) HIMSELF NOTES THAT AS PER THE AGREEMENT, ADVANCE PAYMENT WAS TO FACILITATE APPELL ANTS PURCHASES, WORKING CAPITAL ETC WHICH, IN TURN, ENSURED UNINTER RUPTED SUPPLY TO THE AE. HE DOES ACCEPT THAT HE WAS GIVEN ANALYSIS SHEET SHOWING 17 MONTHS ADVANCE PAYMENT BUT REJECTS IT AS AGREEMENT REFERS TO ONLY 120 DAYS ADVANCE PAYMENT. THAT DOES NOT BELITTLE TH E FACT THAT WHATEVER MAY HAVE BEEN PAYMENT TERMS UNDER THE INTR A AE AGREEMENT, THE PAYMENT WAS ACTUALLY RECEIVED SUBSTA NTIALLY IN ADVANCE. THE QUESTION WE MUST ASK OURSELVES IS THAT WHETHER SUCH SUBSTANTIAL ADVANCE PAYMENTS, WHICH ENSURE AVAILABI LITY OF WORKING CAPITAL TO THE ASSESSEE, CAN BE COMPARED WITH NORMA L BUSINESS TRANSACTIONS ALLOWING, ON THE CONTRARY, CREDIT PERI OD TO THE CUSTOMERS. THE ANSWER IS CLEARLY IN NEGATIVE AS THE ECONOMIC C IRCUMSTANCES IN WHICH THESE TWO SETS OF TRANSACTIONS OPERATE ARE SU BSTANTIALLY DIFFERENT. THE VERY CHARACTER OF THESE TRANSACTIONS IS DIFFERENT. 15. IT IS ALSO IMPORTANT TO BEAR IN MIND THE UNDISP UTED FACT THAT THE AE HAD AN OBLIGATION TO BUY AT LEAST 50% OF ITS PRODUC TS AND THE ASSESSEE WAS RESELLER RATHER THAN AN END USER. THESE CONTRAC TUAL TERMS AND THE DIFFERENCE IN FUNCTIONS ALSO SERIOUSLY AFFECT THE C OMPARABILITY. THE REASONS GIVEN BY THE CIT(A) FOR REJECTING THESE VAR IATIONS ARE WHOLLY SUPERFICIAL AND DEVOID OF ANY LEGALLY SUSTAINABLE M ERITS. THE VARIATIONS IN QUANTITIES BETWEEN THE AES AND THE NO N AES CANNOT BE IGNORED EITHER. THERE IS NO DISPUTE THAT THERE IS H UGE VARIATIONS IN QUANTITIES SOLD TO THE AES VIS--VIS THE QUANTITIES SOLD TO THE NON-AES BUT THE CIT(A) HAS REJECTED THE PLEA ON THE BASIS T HAT THERE IS NO CONSISTENT PATTERN OR CORRELATION BETWEEN THE VOLUM E AND SALE PRICES AND THAT THERE IS NO REFERENCE TO ANY VOLUME DISCO UNT IN THE AGREEMENT. THAT IS AGAIN A SUPERFICIAL APPROACH. W HETHER THERE IS A MENTION OF THE VOLUME DISCOUNT OR NOT OR WHETHER TH ERE IS ALWAYS A DIRECT RELATION BETWEEN THE PRICES AND VOLUMES, THE FACT REMAINS THAT THE TRANSACTIONS WITH SUCH HUGE VARIATIONS, AS IN T HIS CASE, CANNOT BE CONSIDERED TO BE COMPARABLE TRANSACTIONS AND THAT I S THE CONSISTENT APPROACH IN BENCHMARKING ANALYSIS. THE SCALE OF TRA NSACTIONS IS AN IMPORTANT ECONOMIC FACTOR AFFECTING THE COMPARABILI TY. WE HAVE ALSO NOTED THAT THE AES HAVE REIMBURSED R&D COSTS, WITH MARK UP, TO THE ASSESSEE. THE AES HAVE ALSO GIVEN INTEREST FREE ECB LOANS. THESE ARE ALSO EQUALLY IMPORTANT FACTORS. WHEN WE TAKE THE TR ANSACTIONS WITH THE ITA NO.1215, 1216 AND 1230/AHD/2017 18 AES IN THE LIGHT OF THESE SURROUNDING ECONOMIC AND CONTRACTUAL REALITIES, IN OUR CONSIDERED VIEW, THE TRANSACTIONS WITH NON AES, ON THE FACTS OF THIS CASE AND AS A WHOLE, ARE NOT COMP ARABLE AT ALL. WE CANNOT CONSIDER THE PRICE OF THE PRODUCT IN ISOLATI ON WITH ALL THESE FACTORS, AND THAT IS THE REASON WHY THE COMPARABILI TY UNDER CUP CEASES TO BE RELEVANT AS THESE FACTORS ARE CLEARLY MISSING IN NON AE TRANSACTIONS. WE HAVE ALSO NOTED THAT RULE10 B(1)(A )(II) ITSELF PROVIDES THAT SUCH PRICE IS ADJUSTED TO ACCOUNT FO R DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT TH E PRICE IN THE OPEN MARKET BUT THEN WHILE CIT(A) UPHOLD THE APPLICATIO N OF CUP METHOD ON THE GROUND THAT ADJUSTMENTS CAN INDEED BE MADE, HE REJECTS THE ADJUSTMENTS ON MERITS. THAT IS CLEARLY INCONGRUOUS. WHEN HE ADMITS THAT NO ADJUSTMENTS CAN BE MADE ON MERITS, THE VERY FOUNDATION OF HIS DECISION TO UPHOLD APPLICATION OF CUP METHOD CEASES TO HOLD GOOD. IN ANY CASE, HAVING PERUSED THE MATERIAL ON RECORD, WE ARE OF THE CONSIDERED VIEW THAT ACCURATE ADJUSTMENTS CANNOT BE MADE TO NULLIFY THE IMPACT OF ABSOLUTELY FUNDAMENTAL VARIATIONS IN THE TERMS OF THE INTRA AE AND NON AE TRANSACTIONS, AND SINCE ACCURAT E ADJUSTMENTS CANNOT BE MADE, FOR THIS REASON ALONE, CUP METHOD C EASES TO BE WORKABLE ON THE FACTS OF THIS CASE. THE CONTRADICTI ON IN THE APPROACH IS ALSO EVIDENT FROM THE FACT THAT THE CIT(A) HAS U PHELD APPLICATION OF CUP METHOD ON THE SOLE BASIS THAT ACCURATE ADJUSTME NTS CAN BE MADE TO TAKE CARE OF VARIATIONS IN THE INTRA AE AND INDE PENDENT TRANSACTIONS BUT THEN ONE OF THE POINTS MADE BEFORE US, IN THE WRITTEN SUBMISSIONS, IS THAT IF TOTAL ADJUSTMENT OF 36% CL AIMED IN THOSE YEARS WAS ALLOWED, PRICES WOULD COME DOWN TO SUCH UNREALI STIC LEVELS THAT ONE OF THE INTERNATIONAL TRANSACTION, INCLUDING SAL ES TO NON AES, WERE MADE ANYWHERE NEAT THEM. CLEARLY, THERE IS NO MEET ING GROUND BETWEEN THESE DIAMETRICALLY OPPOSED STANDS BY THE A UTHORITIES. AS REGARDS THE DECISION OF COORDINATE BENCH IN THE CAS E OF SERDIA PHARMACEUTICALS (SUPRA), THAT WAS A CASE IN WHICH N O DISPUTE WAS RAISED WITH RESPECT TO THE COMPARABLES CASES EXCEPT ON ACCOUNT OF QUALITY FOR WHICH SUITABLE ADJUSTMENT WAS ALLOWED. THIS PRECEDENT, THEREFORE, DOES NOT OFFER ANY HELP TO THE CASE OF T HE REVENUE. 16. A LOT OF EMPHASIS HAS BEEN PLACED ON THE FACT T HAT THE ASSESSEE ON ITS OWN WAS USING THE INTERNAL CUP METHOD IN PAST, AND, THERE WAS, THUS, NO GOOD REASON TO DEVIATE FROM THE SAME. IT I S FOR THIS MAIN REASON THAT THE APPLICATION OF TNMM HAS BEEN DECLIN ED BY THE AUTHORITIES BELOW. NOTHING, HOWEVER, TURNS ON THIS PLEA. WHAT IS BEFORE US IS THE QUESTION AS TO WHICH METHOD IS MOS T APPROPRIATE METHOD FOR ASCERTAINING THE ARMS LENGTH IN THE PRE SENT YEAR. WE DONOT SEE HOW THIS QUESTION IS TO BE ADJUDICATED SI MPLY ON THE BASIS OF WHAT HAS BEEN ACCEPTED BY THE ASSESSEE, ON HIS OWN, AS THE MOST ITA NO.1215, 1216 AND 1230/AHD/2017 19 APPROPRIATE METHOD IN THE EARLIER YEARS. SUCH A CHO ICE OF METHOD IN THE EARLIER YEARS, IN OUR HUMBLE UNDERSTANDING, CAN NOT ACT AS AN ESTOPPEL AGAINST THE ASSESSEE. IN OUR CONSIDERED VI EW, THE DECISION AS TO WHAT IS THE MOST APPROPRIATE METHOD ON THE FACTS OF THIS CASE IS TO BE TAKEN IN THE LIGHT OF THE FACTS AND MATERIAL ON RECORD BEFORE US IN THE PRESENT YEAR. THE PAST CONDUCT OF THE ASSESSEE, WITH REGARD TO THE SELECTION OF THE MOST APPROPRIATE METHOD FOR ASCERT AINING ARMS LENGTH PRICE FOR THE PRESENT ASSESSMENT YEAR, IS NO T REALLY DECISIVE. WE, THEREFORE, REJECT THIS PLEA OF THE REVENUE AUTH ORITIES AS WELL. 17. AS WE DO SO, WE MAY ALSO ADD THAT ONE OF THE DE CISIONS RELIED UPON BY THE ASSESSEE WAS IN THE CASE OF DCIT VS DISHMAN PHARMACEUTICALS & CHEMICALS LTD AND VICE VERSA [(45 SOT 37 (2011)]. WHILE DEALING WITH A SUBSEQUENT YEARS APPEAL, FOR THE ASSESSMENT YEAR 2010-11, AND REITERATING THE STAND EARLIER TAKEN BY THE TRIB UNAL, VIDE ORDER DATED 31ST DECEMBER 2018, THE TRIBUNAL HAS, INTER A LIA, OBSERVED AS FOLLOWS THE NATURE OF TRADE RELATIONSHIP IN THE SENSE OF ITS IMPACT ON THE FUNCTIONS, ASSET AND RISKS ASSUMED BY THE AES W HICH WILL HAVE THE CRUCIAL BEARING ON THE PRICES. UNLESS THESE VITAL F ACTORS ARE TAKEN INTO ACCOUNT, AND SUITABLE ADJUSTMENTS ARE MADE IN THE A VAILABLE CUP INPUTS, THE APPLICATION OF CUP HAS NO USEFULNESS. T HE VARIATIONS IN NATURE OF RELATIONSHIP AFFECTING THE FAR ANALYSIS I S NOT EVEN DISPUTED BY THE REVENUE AND RULE 10 B(1)(A)(II) ITSELF PROVI DES THAT SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BET WEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING IN TO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRI CE IN THE OPEN MARKET. AS REGARDS THE DECISION OF COORDINATE BENC H IN THE CASE OF SERDIA PHARMACEUTICALS (SUPRA), THAT WAS A CASE IN WHICH NO DISPUTE WAS RAISED WITH RESPECT TO THE COMPARABLES CASES EX CEPT ON ACCOUNT OF QUALITY FOR WHICH SUITABLE ADJUSTMENT WAS ALLOWED. THIS PRECEDENT, THEREFORE, DOES NOT OFFER ANY HELP TO THE CASE OF T HE REVENUE. ALL THAT HAS BEEN RELIED UPON IS INTERNAL CUP AND FOR THE DE TAILED REASONS SET OUT BY THE CIT(A), WHICH MEETS OUR APPROVAL, THESE CUP INPUTS WERE NOT RELIABLE ENOUGH. IN ANY CASE, DIFFERENCES DUE T O VARIATIONS IN FAR DUE TO NATURE OF TRADE RELATIONSHIP WITH AES HAVE N OT BEEN ACCOUNTED FOR AND SUITABLE ADJUSTED. THE EXTERNAL CUP INPUTS ARE NOT EVEN REFERRED TO AND RELIED UPON BY THE TPO. THERE ARE N O OTHER INDEPENDENT COMPARABLE TRANSACTIONS BROUGHT TO THE ANALYSIS BY THE TPO OR THE LEARNED COMMISSIONER (DR). ALL THESE FAC TORS PUT TOGETHER DONOT MAKE OUT A CASE FOR APPLICATION OF CUP IN THI S CASE. NOT ONLY THAT THERE IS NO JUSTIFICATION, BEYOND VAGUE GENERA LITIES, FOR CUP IN THE PRESENT CASE AND NOT ONLY THAT THAT CUP METHOD APPLICATION MECHANISM IS INCORRECT, WE FIND THAT SUFFICIENT QUA NTITY OF RELIABLE ITA NO.1215, 1216 AND 1230/AHD/2017 20 CUP INPUTS ARE NOT AVAILABLE ON THE FACTS OF THIS C ASE. THAT IN THE LIGHT OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIR ETY OF THE CASE, WE DONOT SEE LEGALLY SUSTAINABLE MERITS IN THE CASE OF THE LEARNED COMMISSIONER (DR) AND WE REJECT HIS PLEA THAT ON TH E FACTS AND IN THE CIRCUMSTANCES OF THIS CASE, CUP METHOD IS REQUIRED TO BE APPLIED. IN ANY CASE, THE ISSUE IS SQUARELY COVERED BY THE DECI SION OF THE COORDINATE BENCHES, IN FAVOUR OF THE ASSESSEE, AND HAVING PERUSED THESE DECISIONS AND MATERIAL ON RECORD, WE ARE NOT INCLINED TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY THE COORDINATE BENCHES. WE HAVE ALSO NOTED THAT HONBLE HIGH COURT IS ALREADY SEIZED OF THE MATTER AND IT IS ONLY A MATTER OF TIM E THAT THEIR LORDSHIPS TAKE A CALL ON THE MATTER. GIVEN THIS SIT UATION, EVEN IF WE HAD ANY RESERVATIONS ON THE CORRECTNESS OF THE COOR DINATE BENCH DECISION, WHICH WE DONOT HAVE ANYWAY, THE MATTER CO ULD NOT HAVE BEEN REFERRED FOR THE CONSTITUTION OF A SPECIAL BEN CH AND THIS DIVISION BENCH COULD NOT HAVE TAKEN A DIFFERENT VIEW OF THE MATTER. THAT IS WHAT IS THE SETTLED LEGAL POSITION. IN VIEW OF THESE DIS CUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE APPROVE TH E CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A) AND DECLINE INTERF ERE IN THE MATTER. 18. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER IN THIS CASE. THE DECISIONS OF THE COORDINATE BENCHES IN TH E ABOVE CASES HOLD GOOD IN THE PRESENT CONTEXT AS WELL. 19. IN VIEW OF THE ABOVE DISCUSSIONS AND FOLLOWING THE CONSISTENT VIEW BEING TAKEN BY THE COORDINATE BENCHES, IN OUR CONSI DERED VIEW, THE APPLICATION OF CUP METHOD WAS INDEED NOT JUSTIFIED ON THE FACTS OF THE PRESENT CASE. THE INTRA AE TRANSACTIONS, ON THE FAC TS OF THIS CASE, WERE SO FUNDAMENTALLY DIFFERENT IN CHARACTER IN ECONOMIC CIRCUMSTANCES AND CONTRACTUAL TERMS, THAT THESE CANNOT BE COMPARE D WITH THE INDEPENDENT TRANSACTIONS ENTERED INTO BY THE ASSESS EE. WE, THEREFORE, REJECT THE STAND OF THE AUTHORITIES BELOW ON THIS I SSUE. 20. WE HAVE NOTED THAT THE ASSESSEE HAS APPLIED TNM M BY COMPARING THE PROFITS ON TRANSACTIONS WITH AES AND THE NON AE S AND NO SPECIFIC DEFECTS HAVE BEEN POINTED OUT IN THE ALLOCATION OF COSTS IN THE SEGMENTAL ACCOUNTS WHICH ARE DULY RECONCILED WITH E NTITY LEVEL CONSOLIDATED ACCOUNTS. WE HAVE ALSO NOTED THAT DEAL ING WITH THE INTERNAL TNMM ADOPTED BY THE ASSESSEE THE TPO HAD E XPRESSED THE VIEW THAT THE BASIS OF ALLOCATING THE OVERHEADS WAS NOT CLEAR, IN RESPONSE TO WHICH IT WAS EXPLAINED BY THE ASSESSEE THAT REVENUE AND EXPENSES HAVE BEEN ALLOCATED ON ACTUAL BASIS WHEREV ER THESE ARE DIRECTLY ALLOCABLE, AND WHEREVER THESE ARE NOT DIRE CTLY ALLOCABLE, THE ALLOCATION HAS BEEN DONE ON THE BASIS OF APPROPRIAT E ALLOCATION KEY SUCH AS RATION OF SALES QUANTITY, SALES REVENUE, TO TAL REVENUE. IT WAS ALSO EXPLAINED THAT THE SEGMENTAL DETAILS HAVE BEEN RECONCILED WITH ITA NO.1215, 1216 AND 1230/AHD/2017 21 ENTITY LEVEL AUDITED ACCOUNTS. THE ASSESSEE HAD FUR THER SUBMITTED THAT IN CASE IF IN YOUR VIEW THERE ARE ANY INAPPROPRIAT E COST ALLOCATIONS, WE WOULD APPRECIATE IF YOU CAN KINDLY LET US KNOW W HICH COST ALLOCATIONS ARE NOT APPROPRIATE AND WHY THESE ARE N OT APPROPRIATE SO THAT WE CAN ACCORDINGLY CLARIFY AND EXPLAIN ON THOS E ASPECTS. WE HAVE NOTED THAT THE TPO DID NOT HAVE ANY SPECIFIC C OMMENT ON THIS REQUEST AND HE SIMPLY REJECTED THE EXPLANATION OF A SSESSEE AS NOT ACCEPTED. IN APPEAL ALSO, NO SPECIFIC ADJUSTMENTS WERE SUGGESTED TO THE ALLOCATIONS MADE IN THE SEGMENTAL ACCOUNTS AND THE DISCUSSIONS WERE CONFINED TO GENERALITIES. IN THESE CIRCUMSTANC ES, WE SEE NO REASONS TO DISTURB THE INTERNAL TNMM ADOPTED BY THE ASSESSEE. . 5. THERE ARE SOME VARIATIONS IN THIS YEAR, SUCH AS THE ADVANCE PAYMENT IN THIS YEAR IS FOR 13.97 MONTHS ON AN AVERAGE, AS EVI DENT FROM THE CALCULATIONS AT PAGES 149-150 OF THE PAPER BOOK, AND SUCH AS THE FACT THAT THERE HAVE NO SALES OF CERTAIN PRODUCTS TO NON AES AT ALL AND YET INTERNAL CUP MECHANISM HAS BEEN ADOPTED. THESE VARIATIONS WILL, HOWEVER, N OT HAVE ANY IMPACT ON THE CONCLUSIONS ARRIVED AT BY US. WE, THEREFORE, SE E NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER FOR THIS ASSESSMENT YEAR. IN ANY CASE, THAT APPROACH IS NOT EVEN DISPUTED BY THE PARTIES BEFORE US. 6. WE, THEREFORE, UPHOLD THE PLEA OF THE ASSESSEE A ND DELETE THE IMPUGNED ALP ADJUSTMENT WHICH WAS MADE BY ADOPTING INTERNAL CUP METHOD AND REJECTING THE TNMM ADOPTED BY THE ASSESSEE FOR BENC HMARKING THE SALES TO AES. ONCE WE HOLD SO, ALL OTHER ISSUES RAISED IN TH E APPEAL ARE RENDERED INFRUCTUOUS CALLING FOR NO ADJUDICATION BY US. 12. SINCE THERE IS NO DISPARITY ON FACTS, MORE PART ICULARLY, WHEN THE LD.CIT(A) HAS NOT MADE ANY DETAILED ANALYSIS EXCEPT PUTTING RELIANCE UPON THE ORDER OF HIS PREDECESSOR IN THE ASSTT.YEAR 2007-08 AND 2008-09, THEREFORE, WE ARE OF THE VIEW THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL PASSED IN THE ASSTT.YEAR 2008-09 (SUPRA). RESPECTFULLY FOLLOWING THE ORDER OF CO-ORDINATE BEN CH, WE DELETE THE IMPUGNED ALP ADJUSTMENT OF RS.7,99,59,176/-. SINCE WE HAVE UPHELD THE COMPUTATION OF ALP OF INTERNATIONAL TRANSACTION OF SALE OF FINISHED GOODS ACCORDING TO TNMM METHOD, CONSEQUENTLY, GROUND NO.1 AND 2 OF THE REVENUES APPEAL WOULD BE REDUNDANT. ITA NO.1215, 1216 AND 1230/AHD/2017 22 13. AS FAR AS ASSTT.YEAR 2010-11 IS CONCERNED, WE F IND THAT IN THAT YEAR THE ASSESSEE HAS SOLD FINISHED GOODS VIZ. CHEMICALS AT RS.110,66,61,363/-. THESE TRANSACTIONS ALONG WITH OTHER WERE RECOMMENDED TO T HE TPO FOR DETERMINATION OF ALP. ON ANALYSIS OF THE DETAILS, THE LD.TPO FOUND THAT IN THIS YEAR, THE ASSESSEE HAS SOLD FIVE CHEMICALS VIZ . ANH, MBTC, DBTO, TEAL, AND TTC. OUT OF THE FIVE CHEMICALS, HE RECOM MENDED ADJUSTMENT QUA THE ALP OF FOUR CHEMICALS, VIZ. ANH, TTC, DBTO, AND TTC. OTHER ANALYSIS FOR CHANGE OF METHOD ETC. ARE IDENTICAL AS WAS IN A SSTT.YEAR 2009-10. THE LD.TPO HAS RECOMMENDED BY WAY OF ADJUSTMENT OF RS.3 ,75,85,686/-. THEREFORE, IN VIEW OF OUR DISCUSSION ON THIS ISSUE IN THE ASSTT.YEAR 2009-10, THIS ADDITION ALSO DESERVES TO BE DELETED IN THE AS STT.YEAR 2010-11 ALSO. THEREFORE, WE ALLOW FIRST FOLD OF GRIEVANCE RAISED BY THE ASSESSEE IN GROUND NO.1 IN BOTH THE YEARS, AND REJECT GROUND NO.1 AND 2 TAKEN BY THE REVENUE. 14. NEXT ITEM FOR WHICH ALP ADJUSTMENT WAS RECOMMEN DED BY THE TPO IS WITH REGARD TO PAYMENT MADE FOR AVAILING OF SALES P ROMOTION AND MARKETING SERVICES AMOUNTING TO RS.2,24,01,998/-. THE LD.TPO WORKED OUT ALV OF THIS EXPENDITURE AT NIL. HE HAS ASSIGNED THREE REASONS FOR TAKING ALP OF THIS TRANSACTION AS NIL. 15. BRIEF FACTS OF THE CASE ARE THAT UPTO THE ASSTT .YEAR 2008-09, THE AE OF THE ASSESSEE DID NOT CHARGE ANY SALES AND MARKETING COMMISSIONS TO THE ASSESSEE FOR THE SERVICES. IN THE YEAR UNDER CONSI DERATION I.E. 2009-10, AN AGREEMENT WAS EXECUTED ON 31.7.2008 BETWEEN THE ASS ESSEE AND ITS AE WHEREBY IT WAS PROVIDED THAT ON THESE SERVICES, THE ASSESSEE WOULD PAY A COMMISSION TO THE AE AT THE RATE OF 5% ON NON-AE EX PORT SALE OF THE ASSESSEE. COPY OF THIS AGREEMENT IS AVAILABLE ON P AGE NO.198 OF THE PAPER BOOK. THE ASSESSEE HAS BENCHMARKED THIS INTERNAL T RANSACTION BY APPLYING TNMM METHOD. THE LD.TPO WHILE DETERMINING ALP OF T HIS TRANSACTION AT ITA NO.1215, 1216 AND 1230/AHD/2017 23 NIL, ASSIGNED THREE REASONS VIZ. (A) NO DOCUMENTARY EVIDENCE OF THE RELEVANT YEAR WAS FURNISHED TO CONCLUSIVELY PROVE THAT AE RE NDERED SERVICES; (B) NO DOCUMENTARY EVIDENCE PRODUCED TO SUPPORT THE APPROP RIATENESS OF RATE OF COMMISSION, AND (C) APPELLANT FAILED TO ESTABLISH R EQUIREMENT OF SERVICES. 16. THE LD.TPO THEREAFTER RECOMMENDED UPWARD ADJUST MENT OF RS.2,24,01,998/-. IN OTHER WORDS, EXPENSES CLAIMED BY THE ASSESSEE FOR THESE SERVICES WERE RECOMMENDED FOR DISALLOWANCE, WHICH E NHANCED TAXABLE INCOME OF THE ASSESSEE. APPEAL TO THE CIT(A) DID N OT BRING ANY RELIEF TO THE ASSESSEE. 17. BEFORE US, THE LD.COUNSEL FOR THE ASSESSEE HAS FILED SYNOPSIS POINTING OUT HOW THIS EXPENDITURE HAS WRONGLY BEEN DISALLOWE D TO THE ASSESSEE. IN HIS FIRST FOLD OF CONTENTIONS, HE SUBMITTED THAT TO TAK E THE ALP OF THIS TRANSACTION AT NIL, ON THE STRENGTH OF THE ABOVE REASONING, IS BEYOND THE JURISDICTION OF THE TPO. IT WAS NOT JOB OF THE TPO TO ASCERTAIN WH ETHER THE SERVICES RENDERED WERE REQUIRED BY THE ASSESSEE; WHAT IS THE RATE REQ UIRED TO BE PAID BY THE ASSESSEE; OR HE CANNOT DOUBT THE GENUINENESS OF THE SERVICES. HIS JOB WAS TO DETERMINE THE ALP OF SUCH TYPE OF SERVICES. IN OTH ER WORDS, THE LD.TPO OUGHT TO HAVE BEEN ASSUMED RENDERING OF SUCH SERVICES BY THE AE, AND OUGHT TO HAVE DETERMINED THE MARKET PRICE OF SUCH SERVICES. IF THE SERVICES ACTUALLY HAVE NOT BEEN RENDERED OR AVAILED BY THE ASSESSEE, THEN IT WAS FOR THE AO TO EXAMINE THIS ASPECT UNDER SECTION 37OF THE INCOME T AX ACT. FOR BUTTRESSING HIS CONTENTIONS, HE RELIED UPON THE FOLLOWING JUDGM ENTS: I) CIT VS. CUSHMAN AND WAKEFIELD (INDIA) P.LTD., 46 TA XMNAN.COM 317 (DEL) II) CIT VS. LEVER INDIA EXPORTS LTD., 78 TAXMANN.COM 88 (BOM) III) COMMISSIONER OF INCOME-TAX VS EKL APPLIANCES LTD ([ 2012] 24 TAXMANN.COM 199 (DELHI) (PARA 19) ITA NO.1215, 1216 AND 1230/AHD/2017 24 IV) DRESSER-RAND INDIA (P.) LTD. VS. ADD. CIT, RANGE-6( 2), MUMBAI ([2011] 13 TAXMANN.COM 82 (MUMBAI-ITAT) (PARA 8) 18. WITH REGARD TO HIS SECOND FOLD OF CONTENTIONS, HE SUBMITTED A DETAILED NOTE POINTING OUT AS TO HOW THE REQUIREMENT OF THIS SERVICE AROSE; HOW IT HAS ENTERED INTO AN AGREEMENT FOR AVAILING THE SERVICES . HE MADE REFERENCE TO CERTAIN EMAILS EXHIBITING THE FACT OF SERVICES, AND THEREAFTER JUSTIFIED THE RATE OF COMMISSION PAID BY THE ASSESSEE FOR THE SERVICES . THIS NOTE READS AS UNDER: 2) AS TO REQUIREMENT OF SERVICES: 2.1. THE APPELLANT MANUFACTURES CHEMICAL PRODU CTS AND SELLS THEM MAINLY IN INTERNATIONAL MARKET TO NON-AE CUSTOMERS ALSO. IN ORDER TO DEVELOP THE EXPORT MARKET AND CUSTOMERS, THE APPELL ANT AVAILS THE MARKETING AND SELLING SERVICES OF ITS AE AS THE APP ELLANT DOES NOT HAVE ITS OWN SALES AND MARKETING TEAM FOR EXPORT MARKET AND IT IS COST EFFECTIVE FOR THE APPELLANT TO AVAIL THE SERVICES F ROM ITS AE WHO ALSO MANUFACTURES AND SELLS SIMILAR CHEMICAL PRODUCTS IN INTERNATIONAL MARKET AND HAS NECESSARY RESOURCES TO DO SELLING AN D MARKETING ACTIVITY. 2.2. THE NATURE OF THE SERVICES PROVIDED BY TH E AE IS SET OUT IN THE SELLING AND MARKETING SERVICE AGREEMENT AT PG.198 O F PB AND FURTHER ELABORATED AT PARA 4.2.1.3 OF TPSR AT PG.82 OF PB. 2.3. LD. TPO HAS NO JURISDICTION TO QUESTION T HE COMMERCIAL EXPEDIENCY OF THE TRANSACTION. RELIANCE IS PLACED O N CASE LAWS MENTIONED IN CLAUSE B.2(L) ABOVE. 3) AS TO RENDITION OF SERVICES: 3.1. THE FOLLOWING DOCUMENTS FURNISHED TO LD. TPO/CIT(A) AMPLY ESTABLISHES THAT THE AE HAS IN FACT RENDERED THE SE RVICES AND THE TRANSACTION IS A BONAFIDE TRANSACTION: A) SELLING AND MARKETING SERVICE AGREEMENT BETWEE N THE APPELLANT AND THE AE PLACED AT PAGE 198 OF PB. B) EMAIL COMMUNICATIONS BETWEEN APPELLANTS' EMPLO YEES AND AE'S MARKETING AND SALES TEAM AS WELL AS BETWEEN AE AND NON-AE CUSTOMERS ITA NO.1215, 1216 AND 1230/AHD/2017 25 OF THE APPELLANT PLACED AT PG. 455 TO PG. 463 AND P G. 352 TO PG. 365 OF PB. FROM THESE EMAIL COMMUNICATIONS, IT IS CLEARLY DISCERNIBLE THAT THE AE IS RENDERING SALES AND MARKETING SERVICES TO APP ELLANT EVEN IN THE PERIOD PRIOR TO AND SUBSEQUENT TO THE YEAR UNDER CO NSIDERATION. THE EMAIL COMMUNICATIONS FOR THE YEAR UNDER CONSIDERATI ON COULD NOT BE FURNISHED TO LOWER AUTHORITIES BECAUSE AS PER THE A PPELLANTS CORPORATE POLICY (PLACED AT PAGE 366 OF PB), THE EMAILS FOR T HE RELEVANT YEAR WERE NOT READILY AVAILABLE AS THE SAME WERE ALREADY PURGED/DELETED/REMOVED FROM THE SYSTEM. C) THE COPIES OF NON-AE CUSTOMERS PURCHASE ORDERS WHERE NAMES OF AE'S MARKETING EMPLOYEES/CONTACT DETAILS ARE MENTIO NED ALONG WITH THE COPIES OF THE RELEVANT INVOICES OF THE APPELLANT AG AINST SUCH PURCHASE ORDERS (PLACED AT PG. 439 TO PG. 454 OF PB). THE RE FERENCE ON THESE PURCHASE ORDERS TO THE NAMES OF MARKETING EMPLOYEES OF THE AE AND THEIR TELEPHONE AND FAX NUMBERS EVIDENCES THAT THE AE'S EMPLOYEES WERE LIASONING WITH THOSE INTERNATIONAL CUSTOMERS F OR THE SALE OF APPELLANTS PRODUCTS. D) THE AE ALSO AVAILED SERVICES OF SUB-AGENTS IN INTERNATIONAL MARKET IN THE IMMEDIATELY SUCCEEDING YEAR TO PROMOTE AND S ELL THE APPELLANTS PRODUCTS IN EXPORT MARKET. TO SUCH SUB-AGENTS, THE AE PAID COMMISSION RANGING FROM 4% TO 5%. THE COPIES OF THESE DEBIT NO TES FOR COMMISSION AND CORRESPONDING INVOICES RAISED BY THE APPELLANT ON ITS EXPORT CUSTOMERS FOR WHICH AE PAID COMMISSION TO SUCH SUB- AGENTS ARE PLACED AT PG. 464 TO 481 OF THE PB. THESE DOCUMENTARY EVID ENCES CLEARLY ESTABLISHES THAT AE INCURS SUB-AGENTS EXPENSE FOR P ROMOTING APPELLANTS EXPORT SALES, IN ADDITION TO INCURRING ITS OWN ESTA BLISHMENT EXPENSES FOR PROMOTING THE APPELLANTS PRODUCT IN EXPORT MARKET. E) THE AE ALSO TRANSFERRED SOME OF ITS EXISTING C USTOMERS TO THE APPELLANT FOR INCREASING THE APPELLANTS EXPORT SALE S. THE DOCUMENTS TO ESTABLISH THIS FACT ARE PLACED AT PG. 337 TO 351 OF PB. IT IS TO BE NOTED THAT THIS FACT IS ALSO ACKNOWLEDGED BY LD. TPO IN H IS TP ORDER (PARA B.4 AT PG.144 OF PB) AND ACCORDINGLY LD. TPO HAS AL LOWED A SELLING AND MARKETING ADJUSTMENT OF 1% WHILE BENCHMARKING T HE ANH PRODUCT SALE TRANSACTION. IT IS ALSO TO BE NOTED THAT THE M AJORITY OF THE SELLING COMMISSION PAID TO AE IS IN RESPECT OF EXPORT SALES TO NTDCL I.E. THE CUSTOMER TRANSFERRED BY THE AE. F) LD. TPO HAS NOT ESTABLISHED THAT AE HAS NOT R ENDERED THE SERVICES AND NEITHER LD. TPO BROUGHT ON RECORD ANY DOCUMENTS TO ESTABLISH THAT THE AE HAS NOT RENDERED THE SERVICE. ITA NO.1215, 1216 AND 1230/AHD/2017 26 CASE LAWS FOR RENDITION OF SERVICE. I. IT IS NOT NECESSARY THAT ALL THE SERVICES SHALL BE EVIDENCED BY SOME DOCUMENT. COPY OF THE AGREEMENTS BETWEEN THE P ARTIES COULD ESTABLISH THE FACTUM OF SERVICES HAVING BEEN RENDERED BY THE AE. RELIANCE IS PLACED ON COMMISSIONER OF INCOM E-TAX, JALANDHAR-1, JALANDHAR VS. MAX INDIA LTD. ([2016] 7 5 TAXMANN.COM 268 (PUNJAB & HARYANA), HC-PUNJAB AND HARYANA) (PARA 23 TO 26) II. IT IS A SUFFICIENT COMPLIANCE BY THE ASSESSEE TO DISCHARGE ITS INITIAL ONUS OF ESTABLISHING RENDITION OF SERVICE I F THE APPELLANT PLACES ON RECORD THE RELEVANT AGREEMENT WITH THE AE PURSUANT TO WHICH SERVICES FROM AE ARE AVAILED. RELIANCE IS PLA CED ON DUROVALVES INDIA (P.) LTD. V ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-I, AURANGABAD ([2015] 63 TAXMANN.COM 173, PU NE-TRIB) (PARA 8 TO 8.1) III. IT IS NOT ALWAYS POSSIBLE TO ESTABLISH THE RE NDITION OF SERVICES BY THE AE WITH DOCUMENTARY EVIDENCES. RELIANCE IS PLAC ED ON TNS INDIA (P) LIMITED V/S ACIT ([2014] 48 TAXMANN.COM 1 28 (HYDERABAD-TRIB) (PARA 16 TO 17.1) IV. THE FAILURE OF THE APPELLANT TO BRING ON RECOR D THE DOCUMENTARY EVIDENCES ESTABLISHING THE RENDITION OF SERVICES DO ES NOT ON ITS OWN AUTOMATICALLY LEAD TO THE CONCLUSION THAT AE HA S NOT RENDERED THE SERVICES UNLESS THE LD. TPO BRINGS ON RECORD THE EVIDENCES TO THE CONTRARY. RELIANCE IS PLACED ON PR INCIPAL COMMISSIONER OF INCOME-TAX, DELHI-2 VS BLUE SCOPE S TEEL INDIA (P). LTD. ([2019] 103 TAXMANN.COM 340 (DELHI), HC- DEL) (PARA 4 TO 6) 3.2. THE DETAILS OF APPELLANTS' NON-AE EXPORTS OVER A PERIOD OF TIME UPTO FY 08-09 IS PLACED AT PG. 265 OF PB. IT CAN BE SEEN THAT THE APPELLANTS EXPORT SALES HAVE CONSIDERABLY INCREASED FROM RS. 9 CRORES APPROXIMATELY IN FY 05-06 TO RS.44.56 CR IN FY 08-0 9 AND THE APPELLANT IMMENSELY BENEFITTED DUE TO MARKETING AND SELLING EFFORTS OF THE AE. IT IS TO BE SEEN IN THE CONTEXT THAT THE AP PELLANT DOES NOT HAVE ANY IN HOUSE EXPORT SALES AND MARKETING RESOURCES. 3.3. IN THE SUCCEEDING YEAR I.E. AY 10-11, TH E APPELLANT FURNISHED SIMILAR DOCUMENTARY EVIDENCES IN SUPPORT OF ARMS LE NGTH PRICING OF ITA NO.1215, 1216 AND 1230/AHD/2017 27 SELLING AND MARKETING COMMISSION AS WELL AS FOR EST ABLISHING THE FACTUM OF AE HAVING RENDERED THE SERVICES. IN AY 10 -11 THE LD. TPO HAS ACCEPTED THESE DOCUMENTS AS CONCLUSIVE PROOF OF THESE FACTS AND DID NOT MAKE ANY TP ADJUSTMENT FOR SELLING COMMISSION. COPY OF TPO ORDER FOR AY 10-11 IS PLACED AT PG. 499 OF PB AND R ELEVANT PARA 6.6 IS AT PG. 562 OF PB. 4) AS TO RATE OF COMMISSION: 4.1. THE AE INCURS OPERATING EXPENSES IN THE FORM OF MARKETING EMPLOYEES SALARIES, TRAVELLING EXPENSES, COST OF PA RTICIPATION IN INTERNATIONAL EXHIBITION AND TRADE FAIRS, ESTABLISH MENT AND OVERHEAD EXPENSES FOR MARKETING DEPARTMENT, FOR PROMOTING TH E APPELLANTS PRODUCTS IN EXPORT MARKET, APART FROM PAYMENT OF CO MMISSION TO SUB- AGENTS. 4.2. THE AE ITSELF PAYS COMMISSION TO SUB-AGEN TS AT THE RATE OF 4% TO 5% FOR MARKETING AND SELLING THE APPELLANTS PROD UCTS. THIS IS EVIDENCED BY THE DEBIT NOTES OF SUB-AGENTS PLACED A T PG. 464 TO PG. 481 OF THE PB. 4.3. THOUGH THESE DEBIT NOTES RELATE TO THE PE RIOD AFTER MARCH 2009 HOWEVER IT DOES REASONABLY SHOW THE COMMISSION RATE S PREVAILING IN FY 08-09 AS, UNLIKE PRODUCT PRICES, THE BROKERAGE RATE S DO NOT SUBSTANTIALLY CHANGE YEAR ON YEAR. 4.4. THE FACT THAT IN FY 08-09 THE AE DID NOT PAY ANY COMMISSION TO THE SUB-AGENTS DOES NOT MEAN THAT AE IS NOT ENTITLE D TO RECEIVE SELLING COMMISSION FROM THE APPELLANT. IN FY 08-09, THE AE UNDERTOOK THESE ACTIVITIES ON ITS OWN WITHOUT TAKING HELP OF ANY SU B-AGENT FOR CERTAIN GEOGRAPHIES AND HENCE IT IS ENTITLED TO ARM'S LENGT H COMMISSION AT THE RATE OF 5%. THE AES COMMISSION IS NOT DEPENDENT ON AE HAVING PAID COMMISSION TO ITS SUB-AGENT. IT IS AT THE DISCRETIO N OF THE AE TO TAKE THE HELP OF SUB-AGENT OR NOT. 5) THE LD. TPO HIMSELF HAS ACCEPTED THE PAY MENT OF SELLING COMMISSION AT 5% TO AE AT ARM'S LENGTH IN THE VERY SUCCEEDING YEAR I.E. AY 10-11 BASED ON SAME SET OF DOCUMENTARY EVIDENCES . PLEASE REFER TO PARA 6.6 OF TPO ORDER FOR AY 10-11 (PG. 562 OF PB). IT CANNOT BE THE CASE THAT IN THE SUCCEEDING YEAR THE TRANSACTION IS CONSIDERED AT ARM'S LENGTH AND IN IMMEDIATELY PRECEDING YEAR IT IS CONS IDERED AS NOT AT ARM'S LENGTH, THOUGH THE PAYMENTS ARE UNDER THE SAM E AGREEMENT, TO THE SAME AE AND FOR THE SAME SERVICES. RULE OF CONS ISTENCY SHALL APPLY. ITA NO.1215, 1216 AND 1230/AHD/2017 28 RELIANCE IS PLACED ON RADHASOAMI SATSANG V. COMMISS IONER OF INCOME- TAX ([1992] 60 TAXMAN 248 (SC)) (PARA 13). 6) THE LD. TPO CANNOT DETERMINE THE ALP AT NIL. RELIANCE IS PLACED ON THE CASE LAWS CITED IN CLAUSE B.2(L) ABOV E. IT IS WORTH NOTING THAT LD. AO HAS ACCEPTED THIS TRANSACTION TO BE BON AFIDE AND ALSO ACCEPTED THAT AE HAS RENDERED THE SERVICES AND, CON SEQUENTLY, THE LD. AO HAS NOT MADE ANY DISSALLOWANCE U/S 3 7 OF THE AC T. 7) THE FACT THAT THE AE HAS NOT CHARGED SEL LING COMMISSION IN EARLIER YEARS, THOUGH IT HAS PROVIDED SUCH SERVICES EVEN IN THE EARLIER YEAR, CANNOT BE THE BASIS FOR DETERMINING NIL ALP I N THE CURRENT YEAR UNDER CONSIDERATION WHEN THE SELLING COMMISSION IS ACTUALLY CHARGED. RELIANCE IS PLACED ON THE FOLLOWING CASES: I. IMC GLOBAL TECHNOLOGY SERVICES PVT. LTD. VS . THE INCOME TAX OFFICER, WARD 1(4), PUNE (ITA NO. 976/PUN/2015, PUNE- ITAT) (PARA 13) II. DRESSER-RAND INDIA (P.) LTD. VS. ADD. CIT, RANGE-6(2), MUMBAI ([2011] 13 TAXMANN.COM 82 (MUMBAI-ITAT) (PAR A 8). 8) THE APPELLANT'S DETAILED SUBMISSION ON T HIS GROUND NO.2 REGARDING SELLING COMMISSION, AS MADE TO LD. CIT(A) , ARE PLACED AT PG. 419 TO 428 OF PB, WHICH MAY BE REFERRED. 19. ON THE OTHER HAND, THE LD.DR RELIED UPON ORDER OF THE LD.TPO. HOWEVER, HE COULD NOT CONTROVERT PROPOSITION LAID D OWN IN THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. CUS HMAN AND WAKEFIELD (INDIA) P.LTD., 46 TAXMANN.COM 317 (DELHI) AND HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. LEVER INDIA EXPORTS LTD., 78 TAXMANN.COM 38 (BOM). 20. WE HAVE DULY CONSIDERED RIVAL SUBMISSIONS AND G ONE THROUGH THE RECORD CAREFULLY. AS FAR AS FIRST FOLD OF CONTENTI ON IS CONCERNED, THE LD.TPO CANNOT QUESTION THE REQUIREMENT OF SERVICES AND ALS O TO ASCERTAIN RENDERING OF SERVICES. HIS JURISDICTION IS CONFINED TO QUANTIFI CATION OF ALP. WE FIND THAT THIS ASPECT IS SQUARELY COVERED BY THE DECISIONS RE FERRED BY THE LD.COUNSEL FOR THE ASSESSEE, MORE PARTICULARLY, DECISION OF HONBL E BOMBAY HIGH COURT IN ITA NO.1215, 1216 AND 1230/AHD/2017 29 THE CASE OF LEVER INDIA EXPORTS LTD. (SUPRA) AS WEL L AS THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. CUSHMAN AND WAKEFIELD (SUPRA). APART FROM THE ABOVE, WE FIND THAT THE ASSESSEE HAS PRODUCED EVIDENCE IN THE SHAPE OF AGREEMENT BETWEEN IT AND THE AE SHOWING TH AT AE WOULD CHARGE COMMISSION AT THE RATE OF 5% ON NON-AE EXPORT SALES FOR RENDERING THESE SERVICES. THE ASSESSEE HAS NOT DEBITED OTHER EXPEN DITURE FOR MARKETING AND SALES WITH REGARD SALES MADE TO NON-AE. IT IS ALSO PERTINENT TO NOTE THAT TURNOVER OF THE ASSESSEE HAS INCREASED WITH REGARD TO NON-AE SALES ALSO. ITS EXPORT SALES TO NON-AE HAVE INCREASED FROM RS.9 CRO RES APPROX. IN F.Y.2005- 06 TO RS.44.56 CRORES IN THE F.Y.2008-09. THEREFOR E, TAKING INTO CONSIDERATION THE COMPLETE DETAILS, WE ARE OF THE V IEW THAT NO ADJUSTMENT COULD HAVE BEEN MADE AT THE RECOMMENDATION OF THE T PO ON THIS ISSUE BECAUSE IT WAS NOT IN THE JURISDICTION OF THE TPO T O QUESTION REQUIREMENT OF SERVICES, AND ALSO ASCERTAIN RENDITION OF SERVICES, AND ON THESE TWO REASONING, HE CANNOT BENCHMARK THE ALP OF THESE SERVICES AT NI L. IT IS ALSO PERTINENT TO OBSERVE THAT IN A.Y.2010-11, ASSESSEE HAS PAID RS.1 60,16,780/- TO ITS AE FOR THESE SERVICES AND THAT TRANSACTION WAS REFERRED TO THE TPO. THE LD.TPO DID NOT RECOMMEND ANY ADJUSTMENT IN A.Y.2010-11. THEREF ORE, NO ADJUSTMENT IS REQUIRED IN THE ASSTT.YEAR 2009-10. WE ALLOW THIS G ROUND ALSO, AND DELETE ADJUSTMENT RECOMMENDED AT RS.2,24,01,998/-. ACCORD INGLY, GROUND NO.2 OF THE ASSESSEES APPEAL IN THE ASSTT.YEAR 2009-10 IS ALLOWED. 21. GROUND NO.3 IN THE ASSTT.YEAR 2009-10 IS CONNEC TED WITH GROUND NO.2 OF THE ASSESSEES APPEAL IN THE ASSTT.YEAR 2010-11. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS CHALLENGED INITIATION OF PENALTY P ROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. TO OUR MIND THESE GROUNDS AR E PREMATURE AT THIS STAGE. IN CASE ANY PENALTY PROCEEDINGS WOULD BE UNDERTAKEN AGAINST THE ASSESSEE, THEN IT COULD TAKE INDEPENDENT OPPORTUNITY TO CONTE ST THEM. AT THIS STAGE, BOTH ITA NO.1215, 1216 AND 1230/AHD/2017 30 THE GROUNDS ARE PREMATURE AND WE REJECT THEM. APPE ALS OF THE ASSESSEE ARE PARTLY ALLOWED. 22. GROUND NO.2 IN THE REVENUES APPEAL. 23. IN THIS GROUND OF APPEAL, REVENUE HAS PLEADED T HAT THE LD.CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF DEPRECIATION AMOUNTING TO RS.15,46,130/-. 24. BRIEF FACTS OF THE CASE ARE THAT IN THE ACCOUNT ING YEAR RELEVANT TO THE ASSTT.YEAR 2007-08, THE ASSESSEE-COMPANY HAS ACCOUN TED FOR AN AMOUNT OF RS.1,42,66,483/- TO PLANT & MACHINERY ACCOUNT ON DE BIT NOTE RAISED BY GULBRANDSEN CHEMICALS INC. USA. THE AO WAS OF THE OPINION THAT IT IS THE REIMBURSEMENT OF CAPITAL EXPENDITURE FROM GULBRANDS EN, USA AND THEREFORE, IT SHOULD NOT BE CAPITALIZED FOR CLAIMING THE DEPRE CIATION. WHEREAS THE STAND OF THE ASSESSEE WAS THAT IT WAS AN EXPENDITURE INCU RRED BY GULBRANDSEN ON BEHALF OF THE ASSESSEE TOWARDS PROFESSIONAL FEES FO R SETTING UP OF THE PLANT & MACHINERY, TRAVELLING COST OF ARCHITECT ETC. THUS, IT WAS THE EXPENDITURE WHICH WAS INCURRED ON BEHALF OF THE ASSESSEE, AND IT WAS REQUIRED TO BE CAPITALIZED. THE AO DID NOT ACCEPT THE STAND AND REDUCED THE DEP RECIATION PROPORTIONATELY. ON APPEAL, THE LD.CIT(A) UPHOLD THIS ACTION OF THE AO IN THE ASSTT.YEAR 2007- 08 AND 2008-09. 25. DISSATISFIED WITH THE ACTION OF THE REVENUE, TH E ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE TRIBUNAL VIDE ITA HO.91 5 & 917/AHD/2015. BOTH THESE APPEALS HAVE BEEN ALLOWED. IT WAS HOLD THAT IT IS THE EXPENDITURE WHICH WAS INCURRED ON BEHALF OF THE ASSESSEE, AND IT IS R EQUIRED TO BE CAPITALIZED. IN THE ASSTT.YEAR 2009-10, THE LD.CIT(A) HAS ALLOWED C APITALIZATION OF THIS EXPENDITURE AND ALSO GRANTED DEPRECIATION. ITA NO.1215, 1216 AND 1230/AHD/2017 31 26. WITH THE ASSISTANCE OF LD.REPRESENTATIVES, WE H AVE GONE THROUGH THE RECORD. WE FIND THAT THIS ISSUE IS SQUARELY COVERE D IN FAVOUR OF THE ASSESSEE BY ORDER OF ITAT IN THE ASSTT.YEAR 2007-08 AND 2008 -09. THE EXPENDITURE OF RS.1,42,66,483/- WAS ALLOWED TO BE CAPITALIZED IN T HE COST OF PLANT & MACHINERY AND DEPRECIATION WAS GRANTED. IN VIEW OF THE ABOVE TRIBUNALS ORDER IN THE ASSTT.YEARS 2007-08 AND 2008-09, WE AR E OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE FINDING OF THE LD .CIT(A). THIS GROUND OF APPEAL IS REJECTED. APPEAL OF THE REVENUE IS REJEC TED. 27. IN THE COMBINED RESULT, BOTH APPEALS OF THE ASS ESSEE ARE PARTLY ALLOWED, AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 18 TH DECEMBER, 2019 AT AHMEDABAD. SD/- SD/- ( PRAMOD KUMAR ) VICE-PRESIDENT (RAJPAL YADAV) JUDICIAL MEMBER