Gulbrandsen Chemicals Private Limited, Baroda V. The Dy.CIT.,Circle-1(1), Baroda

ITA 2276/AHD/2013

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6398 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 5 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 22-05-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 10-09-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K SINGH SUBHASH BAINS; MSA KHAN REVENU
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 271(1)(c); 143(3); 274; 92

Judgement Text

ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR VP AND MAHAVIR PRASAD JM] ITA NO.: 2276/AHD/ 2013 ASSESSMENT YEAR: 2008-09 GULBRANDSEN CHEMICALS PVT LTD ..APPELLAN T ON COASTAL HIGHWAY, PO MUJPUR TAL PADRA VADODARA 391 440 [PAN: AABCG 0812 A] VS DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 1(1), VADODARA ..........RESPONDEN T APPEARANCES BY S N SOPARKAR, SHARAD JAIN, BANDISH SOPARKAR AND PAR IN SHAH FOR THE ASSESSEE V K SINGH, SUBHASH BAINS AND MSA KHAN FOR THE REVENUE DATE OF CONCLUDING THE HEARING : NOVEMBER 13, 2018 DATE OF PRONOUNCEMENT : FEBRUARY 12, 2019 O R D E R PER PRAMOD KUMAR, VP: 1. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HA S CHALLENGED CORRECTNESS OF THE ORDER DATED 11 TH JUNE 2013, IN THE MATTER OF ASSESSMENT UNDER SECTI ON 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2008- 09. 2. GRIEVANCES RAISED IN THE APPEAL ARE AS FOLLOWS: 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ('CIT(A)') GRO SSLY ERRED IN CONFIRMING THE ADDITION U/S 92 OF THE INCOME-TAX ACT MADE BY T HE LEARNED ASSESSING OFFICER ('AO')/TRANSFER PRICING OFFICER (TPO) OF RS.5,55, 56,963/- TO THE INCOME OF APPELLANT IN RESPECT OF THE INTERNATIONAL TRANSACTI ONS OF SALE OF CHEMICAL PRODUCTS VIZ. ANH AND MBTC BY APPELLANT TO ITS ASSOCIATED EN TERPRISES ('AES') GULBRANDSEN CHEMICALS INC., USA AND GULBRANDSEN EC LIMITED, UK. 2. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) GROSSLY ERRED IN UPHOLDING THE LD. TPO/AO'S APPROA CH OF REJECTING THE TRANSACTIONAL NET MARGIN METHOD ('TNNM') AS THE MO ST APPROPRIATE METHOD. 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT (A) GROSSLY ERRED IN UPHOLDING THE LD. TPO/AO'S APPROA CH OF ADOPTING THE ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 2 OF 11 COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD AS TH E MOST APPROPRIATE METHOD. 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT (A) GROSSLY ERRED IN NOT ALLOWING FOLLOWING COMPARABILI TY ADJUSTMENTS CLAIMED BY THE APPELLANT FOR MATERIAL DIFFERENCES IN CONTRACTUAL T ERMS, UNDERLYING COMMERCIAL CIRCUMSTANCES, FUNCTIONS, RISKS AND OTHER ECONOMIC FACTORS BETWEEN APPELLANT'S TRANSACTIONS WITH AES VIS-A-VIS APPELLANT'S TRANSAC TIONS WITH NON-AES, WHILE APPLYING THE CUP METHOD. I. ADJUSTMENT ON ACCOUNT OF BUSINESS VOLUME DIFF ERENCES. II. ADJUSTMENT FOR ADVANCE PAYMENT RECEIVED FROM AE. III. ADJUSTMENT FOR MARKETING AND SELLING EXPENSES NOT REQUIRED TO BE INCURRED FOR AE SALES VIS-A-VIS NON AE SALES. IV. ADJUSTMENT FOR CREDIT RISK NOT REQUIRED TO BO RNE BY APPELLANT FOR AE SALES VIS-A-VIS NON AE SALES. V. ADJUSTMENT FOR INTEREST FREE ECB LOAN RECEIVE D FROM AE. 5. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT (A) GROSSLY ERRED IN UPHOLDING LD. TPO/AO'S APPROACH OF NOTIONALLY INCREASING THE SALES REALIZATION FROM NATIONAL TITANIUM DIOXIDE CO MPANY LIMITED BY 10% ON ACCOUNT OF VOLUME FACTOR FOR ESTABLISHING THE COMPA RABILITY FOR BENCHMARKING INTERNATIONAL TRANSACTIONS OF SALE OF ANH UNDER CUP METHOD. 6. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) GROSSLY ERRED IN UPHOLDING THAT UNDER CUP METHOD T HE LD. TPO/AO HAS CORRECTLY MADE THE COMPARISON OF PRICES IN US DOLL AR INSTEAD OF INDIAN RUPEES. 7. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT (A) GROSSLY ERRED IN NOT ALLOWING THE BENEFIT OF ARM'S LENGTH PRICE RANGE OF +/- 5% PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT AN D THEREBY IGNORING MAKING OF THE TRANSFER PRICING ADJUSTMENT WITH REFERENCE TO L OWER END OF AFORESAID +/- 5% RANGE. 8. IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) GROSSLY ERRED IN NOT CONSIDERING THE FOREIGN EXCHAN GE GAIN OR LOSS ARISING ON ACCOUNT OF BUSINESS TRANSACTIONS AS OPERATING INCOM E FOR COMPUTATION OF OPERATING MARGIN IN LD. TPO'S ALTERNATIVE AND WITHO UT PREJUDICE WORKING IN HIS TRANSFER PRICING ORDER U/S 92CA(3). 9. 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. ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 3 OF 11 3. WHEN THIS APPEAL WAS TAKEN UP FOR HEARING, LEARN ED REPRESENTATIVES FAIRLY SUBMITTED THAT WHATEVER WE DECIDE ON THE CROSS APPEAL FOR THE ASSESSMENT YEAR 2007-08, WHICH WERE HEARD ALONG WITH THIS APPEAL, WILL APPLY MUTATIS MUTANDIS ON THIS APPEAL AS WELL. 4. VIDE OUR ORDER OF EVEN DATE, WE HAVE ALLOWED THE APPEAL OF THE ASSESSEE, FOR THE ASSESSMENT YEAR 2007-08, AND OBSERVED AS FOLLOWS: 5. THE MATERIAL FACTS AND CIRCUMSTANCES OF THE CASE ARE LIKE THIS. THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF EW LIMITED, MAURITI US- A GROUP ENTITY OF GULBRANDSEN INC, USA AND GULBRANDSEN EU LIMITED UK INASMUCH AS THE S HAREHOLDERS OF EW LIMITED, I.E. PETER GULBRANDSEN AND DONALD GULBRANDSEN, ARE ALSO MAJORITY SHAREHOLDERS OF GULBRANDSEN INC, USA AND GULBRANDSEN EU LIMITED UK. THE ASSESSE E IS ENGAGED IN THE MANUFACTURING OF CHEMICALS FOR ITS DIVERGENT INDUSTRIAL CUSTOMERS, I TS PRODUCT RANGE INCLUDES ALUMINIUM CHLORIDE ANHYDROUS (ANH), MENO N BUTYL TRICHLORIDE (MBTC), STANNIC CHLORIDE (TTC), DIBUTYL TIN OXIDE (DBTO)/ DIBUTYL TIN TIN DILAURAT E (DBTAA) AND TRI CHLORO BENZENE AND THESE PRODUCTS ARE SUPPLIED TO THE INDUSTRIES I NCLUDING PETROCHEMICAL INDUSTRY, PHARMACEUTICAL AND CHEMICAL INTERMEDIATE USERS. THE ASSESSEE HAS ALSO SOLD THESE PRODUCTS TO ITS AES, NAMELY GULBRANDSEN CHEMICALS INC, USA, AND GULBRANDSEN EU LIMITED, UK. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE MA TTER REGRADING ASCERTAINMENT OF ARMS LENGTH PRICE WAS REFERRED TO THE TRANSFER PRICING O FFICER. THE TRANSFER PRICING OFFICER NOTICED THAT THE ASSESSEE HAD, DEVIATING FROM THE S TAND TAKEN IN THE EARLIER YEARS IN WHICH INTERNAL CUP METHOD WAS ADOPTED FOR BENCHMARKING TH E SALE TO THE AES, COMPUTED THE ARMS LENGTH PRICE OF THESE TRANSACTIONS ON THE BASIS OF TRANSACTIONAL NET MARGIN METHOD (TNMM). IN EFFECT THUS, THE ASSESSEE MOVED, IN THE CURRENT YEAR, FROM INTERNAL CUP TO TNMM. THIS, HOWEVER, DID NOT FIND FAVOUR WITH THE TPO. THE TPO WAS OF THE VIEW, FOR THE DETAILED REASONS SET OUT IN HIS ORDER, THAT, GIVEN THE FACTS OF THE CASE, THE INTERNAL CUP WAS THE MOST APPROPRIATE METHOD AND IT HAS BEEN USED ALL ALONG I N THE EARLIER YEARS. THE REASONING ADOPTED BY THE TPO WAS LIKE THIS. IT WAS NOTED THA T THE ASSESSEE HAD SOLD 40% OF ITS PRODUCTS TO THE ASSOCIATED ENTERPRISES, AND EARNED MARGIN OF PBIT/COST AT 2.07%, AS AGAINST THE SALE OF 70% OF ITS PRODUCTS IN THE IMMEDIATELY PRECEDING YEAR AND EARNING MARGIN OF PBIT/COST AT -3.26%. THE TPO COMPUTED THE TOTAL COST PER KG FOR EACH TYPE OF CHEMICALS AND COMPARED IT WITH AVERAGE SALE RATE TO AES SO AS TO COMPUTE THE GP/COST (%) AND NOTED THAT THE ASSESSEE HAS CHARGED VERY NOMINAL MARGIN TO THE AES. COMIN G TO THE INTERNAL TNMM ADOPTED BY THE ASSESSEE AND THE TPOS VIEW THAT THE BASIS OF ALLO CATING THE OVERHEADS WAS NOT CLEAR, IT WAS EXPLAINED BY THE ASSESSEE THAT REVENUE AND EXPENSES HAVE BEEN ALLOCATED ON ACTUAL BASIS WHEREVER THESE ARE DIRECTLY ALLOCABLE, AND WHEREVER THESE ARE NOT DIRECTLY ALLOCABLE, THE ALLOCATION HAS BEEN DONE ON THE BASIS OF APPROPRIAT E ALLOCATION KEY SUCH AS RATION OF SALES QUANTITY, SALES REVENUE, TOTAL REVENUE. IT WAS ALSO EXPLAINED THAT THE SEGMENTAL DETAILS HAVE BEEN RECONCILED WITH ENTITY LEVEL AUDITED ACCOUNTS. THE ASSESSEE FURTHER SUBMITTED THAT IN CASE IF IN YOUR VIEW THERE ARE ANY INAPPROPRIATE CO ST ALLOCATIONS, WE WOULD APPRECIATE IF YOU CAN KINDLY LET US KNOW WHICH COST ALLOCATIONS ARE N OT APPROPRIATE AND WHY THESE ARE NOT APPROPRIATE SO THAT WE CAN ACCORDINGLY CLARIFY AND EXPLAIN ON THOSE ASPECTS. WHILE THE TPO DID NOT HAVE ANY SPECIFIC COMMENT ON THIS REQUEST, HE SIMPLY REJECTED THE EXPLANATION OF ASSESSEE AS NOT ACCEPTED. IT WAS ALSO EXPLAINED TO THE TPO THAT THE CUP METHOD IS NOT REALLY APPROPRIATE TO THE FACTS OF THIS CASE AS THE ASSESSEE HAS LONG TERM BUSINESS ARRANGEMENTS WITH THE AES, WHEREAS THERE ARE NO SUC H LONG TERM ARRANGEMENTS WITH NON AES AND THAT THE CONTRACTUAL, ECONOMIC, COMMERCIAL, FUN CTIONAL AND RISK PROFILE DIFFERENCES, BETWEEN THE AE TRANSACTIONS VIS--VIS NON AE TRANSA CTIONS, MAKE THE COMPARISON OF PRICES IRRELEVANT. THE ATTENTION WAS INVITED TO THE FACT T HAT, AS ALSO STATED IN OECD GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATORS, A PPLICATION OF CUP METHOD REQUIRES ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 4 OF 11 HIGH DEGREE OF COMPARABILITY NOT ONLY IN THE PRODUC TS SOLD AND SERVICES PROVIDED BUT ALSO IN THE ECONOMIC CIRCUMSTANCES IN WHICH THE RESPECTIVE AE AND NON AE TRANSACTIONS TAKE PLACE. IT WAS THUS SUBMITTED THAT THE ECONOMIC CIRCUMSTANC ES IN WHICH SALES HAVE TAKEN PLACE WITH THE AES ARE NOT AT ALL COMPARABLE WITH THE ECONOMIC CIRCUMSTANCES IN WHICH NON AE SALES HAVE TAKEN PLACE. IT WAS ALSO EXPLAINED THAT THE AE S, TO WHICH THE ASSESSEE HAS SOLD THE PRODUCTS, ARE RESELLERS WHEREAS NON AES ARE END CON SUMERS, AND THAT WHILE THESE AES ARE LOCATED IN US AND UK, THE NON AE CUSTOMERS ARE IN A SIA AND MIDDLE EAST. EMPHASIS THUS WAS PLACED ON THE FACT THAT THE GEOGRAPHICAL LOCATI ON OF MARKETS WAS DIFFERENT AND THE COMPARISON WAS THUS INAPPROPRIATE. IT WAS ALSO HIGH LIGHTED THAT THE VOLUME OF SALES TO THE AES WAS SUBSTANTIALLY HIGHER THAN SALES TO NON AES. THE ATTENTION WAS ALSO INVITED TO THE FACT THAT WHILE AES MAKE, ON AN AVERAGE, 17 MONTHS ADVAN CE PAYMENT FOR THE PURCHASES WHILE NON AES ARE EXTENDED 60-90 DAYS CREDIT PERIOD. IT WAS T HUS CONTENDED THAT THERE WAS NO CREDIT RISK TO AE SALES. THE ASSESSEE FURTHER POINTED OUT THAT THE AES ALSO REIMBURSE THE ASSESSEE THE BASIC RESEARCH AND DEVELOPMENT COSTS WITH 110% MARK UP UNDER LONG TERM BUSINESS ARRANGEMENT, OVER AND ABOVE THE SALE PRICE, AND THA T THE ASSESSEE HAS ALSO BENEFITED FROM INTEREST FREE ECB LOANS FROM THE AES. NONE OF THES E SUBMISSIONS IMPRESSED THE TPO. THE TPO NOTED THE OBJECTIONS OF THE ASSESSEE FOR THE AP PLICATION OF INTERNAL CUP BUT REJECTED THE SAME MAINLY ON THE GROUND THAT SINCE 2003-04, THE ASSESSEE COMPANY HAS BEEN USING INTERNAL CUP AS THE MOST APPROPRIATE METHOD AND T HE ASSESSEE COMPANY HAS SHIFTED FROM INTERNAL CUP METHOD TO INTERNAL TNMM WITHOUT GIVING ANY APPROPRIATE REASONS. SO THE CONTENTION OF THE ASSESSEE IS REJECTED. AS REGARD S THE JUSTIFICATION OF TNMM ON THE GROUND THAT THE VOLUME OF SALES TO THE AES IS SEVERAL TIME S HIGHER THAN THE SALE TO NON AES, THE TPO OBSERVED THAT IT MEANS THAT THE ASSESSEE HAS SOLD HUGE VOLUME TO AES AT A LOWER RATE AND SHIFTED THE HUGE PROFITS FROM INDIA TO OTHER COUNTR IES AND, THEREFORE, THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE. AS REGARDS THE CREDIT PERIOD AND ADVANCE PAYMENTS, THE TPO OBSERVED, ON A SUPERFICIAL NOTE AGAIN, CONTENTION OF THE ASSESSEE IS CONSIDERED BUT IS NOT ACCEPTABLE BECAUSE IN USA AND UK MARKET, THE PRICE OF TTC, MBTC AND DBTC ARE HIGHER THAN NON AE PRICE RATE. AS REGARDS GUARANTEED PUR CHASE OF 50% PRODUCTION, THE TPO OBSERVED THAT IT IS SEEN THAT THE ASSESSEE HAS BEE N EARNING PROFITS ONLY FROM THE NON AE TRANSACTIONS (AND) AT LEAST 50% GUARANTEED SELLING TO AES MEAN THAT THE ASSESSEE IS MAKING LOSS AND SHIFTING THE PROFITS FROM INDIA TO OTHER C OUNTRIES. ON REIMBURSEMENT OF R&D COSTS ALSO, THE ASSESSING OFFICER DID ONLY OBSERVE, IN RA THER GENERAL TERMS, THAT THE PLEA IS NOT ACCEPTABLE BECAUSE THE ASSESSEE HAS SOLD THE PRODUC TS TO ITS AES AT VERY LOWER RATE AND SHIFTED THE PROFITS FROM INDIA TO OUTSIDE INDIA TH E SAME WAS THE COMMENT IN RESPECT OF INTEREST FREE ECB LOANS FROM THE AES. AS FOR THE NE ED OF ADJUSTMENT ON ACCOUNT OF VARIOUS FACTORS, THE TPO SIMPLY OBSERVED THAT THE ASSESSEE HAS CHARGED VERY NOMINAL MARGIN TO ITS AES (AND) THEREFORE, THERE IS NO ANY ISSUE FOR ANY ADJUSTMENT. .. 6. IT WAS IN THIS BACKDROP THAT THE IMPUGNED ALP AD JUSTMENT WAS MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE ARMS LENGTH PRICE ADJUST MENT, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. T HE CIT(A) OBSERVED THAT REGARDLESS OF MERITS IN THE ADJUSTMENTS MADE BY THE APPELLANT, FA CT REMAINS THAT ADJUSTMENTS TO MAKE UNCONTROLLED AND CONTROLLED TRANSACTIONS COMPARABLE WERE POSSIBLE IN APPELLANTS CASE AND WENT ON TO ADD THAT FURTHER, IT IS AN ACCEPTED POS ITION THAT CUP IS A SUPERIOR METHOD TO OTHER METHODS, IF AVAILABLE AS WAS ALSO HELD IN THE CAS E OF SERDIA PHARMACEUTICALS INDIA PVT LTD BY MUMBAI ITAT (2011) 44 SOT 391 (MUM). EVEN AS T HE LEARNED CIT(A) HELD THAT ADJUSTMENTS WERE POSSIBLE, HE REJECTED THE SAME, ON THE MERITS, INCLUDING IN RESPECT OF VOLUME DISCOUNT, CREDIT TERMS, MARKETING AND SELLING FUNCT ION AND CONSEQUENT COSTS, CREDIT RISK, REIMBURSEMENT OF R&D COSTS, INTEREST FREE ECB LOANS , AND ALL SUCH FACTORS. THE TPO ALSO OBSERVED THAT THERE IS A HUGE DIFFERENCE BETWEEN SA LE PRICE OF MDTC TO ITS USA BASED AE AND UK BASED AE INASMUCH AS THE SAME PRODUCT WAS SOLD T O US BASED AE FOR RS 412.95 AND TO UK BASED AE FOR RS 370.13. THIS, ACCORDING TO THE C IT(A), INDICATED THAT THE SALE TO USA BASED AE WAS MUCH ABOVE THE ARMS LENGTH PRICE. LEA RNED CIT(A) OBSERVED THAT THE APPELLANT HAS NOT EXPLAINED THE VAST DIFFERENCE BE TWEEN THE PRICES CHARGED FOR THE SAME ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 5 OF 11 CHEMICAL FROM TWO AES IN THE SAME PERIOD AND, THER EFORE, THE ADJUSTMENT CLAIMED BY THE APPELLANT AND THE CALCULATION DONE BY THE APPELLANT TO ARRIVE AT ALP AFTER ADJUSTMENTS IS NOT ACCEPTABLE AND DETERMINATION BY THE TPO OF THE TR ANSACTIONS TO BE AVERAGE SALE PRICE TO NON AES OVER THE YEAR, WITHOUT CARRYING OUT THE ADJ USTMENTS, IS UPHELD. LEARNED CIT(A) NEVERTHELESS REDUCED THE ALP ADJUSTMENT TO RS 2,78, 02,502 BY OBSERVING AS FOLLOWS: 3.3.2 APPELLANTS CONTENTIONS IN PARA 3.2.2 OF ITS SUBMISSIONS REGARDING MISTAKES IN QUANTIFICATION OF TRANSFER PRICING ADDITION UNDER C UP METHOD BY ID. TPO ARE NOW TAKEN UP. IT IS POINTED OUT BY THE APPELLANT THAT FOR THE PRODUC TS MBTC AND DBTO, TPO COMPARED CONSOLIDATED AVERAGE PRICE FOR BOTH THE AES WITH NO N-AE AVERAGE PRICE. EACH SALE TRANSACTION TO THE AES CONSTITUTED A SEPARATE INTER NATIONAL TRANSACTION, ARM'S LENGTH PRICE OF WHICH WAS REQUIRED TO BE DETERMINED IN ACCORDANCE W ITH SECTION 92 OF THE I.T. ACT. THE COMPARABLE UNCONTROLLED PRICE (CUP) FOR EACH OF THE 4 CHEMICALS WAS DETERMINED BY THE TPO TO BE THE AVERAGE SALE PRICE CHARGED BY APPELLA NT TO NON-AES. EACH TRANSACTION OF SALE OF CHEMICALS TO THE AES NEEDED TO BE BENCHMARKED WI TH REFERENCE TO THE CUP AND IF THE CUP EXCEEDED THE SALE PRICE TO AE FOR A PARTICULAR TRAN SACTION, ONLY THEN TRANSFER PRICING ADJUSTMENT WAS WARRANTED. TPO'S APPROACH IN WORKING OUT ADJUSTMENT ON THE BASIS OF CONSOLIDATED AVERAGE SALE PRICE FOR BOTH AES FOR MB TC & DBTO WAS THEREFORE ERRONEOUS. AE-WISE AGGREGATION OF TRANSACTIONS FOR EACH CHEMIC AL FOR THE PURPOSE OF BENCHMARKING AND WORKING OUT TRANSFER PRICING ADJUSTMENT IS HOWEVER ACCEPTABLE IN THIS CASE, SINCE IT DOES NOT RESULT INTO AN OUTCOME DIFFERENT FROM TRANSACTION-W ISE BENCHMARKING. THUS, ONLY AE-WISE SEGREGATION OF SALE TRANSACTIONS FOR EACH CHEMICAL NEEDS TO BE DONE. APPELLANT'S SUBMISSIONS IN RESPECT OF DBTA SALE ALSO HAVE MERIT AND ARE ACC EPTED. ACCORDINGLY, TRANSFER PRICING ADJUSTMENT OF RS.2,78,02,502/- WORKED OUT BY THE AP PELLANT IS DIRECTED TO BE SUBSTITUTED IN PLACE OF ADJUSTMENT OF RS.3,91,40,456/- WORKED OUT BY TPO SUBJECT TO VERIFICATION BY THE AO OF ARITHMETICAL CORRECTNESS OF THE WORKING DONE BY THE APPELLANT. 7. THE ASSESSEE IS AGGRIEVED AND IS IN FURTHER APPE AL BEFORE US. 8. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF APPLIC ABLE LEGAL POSITION. WE HAVE ALSO PERUSED THE DETAILED WRITTEN SUBMISSIONS FILED BY THE LEARNED D R. 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 ASC ERTAINING THE ARMS LENGTH PRICE OF A TRANSACTION, SUCH A DIRECT METHOD WILL HAVE AN EDGE OVER APPLICATION OF INDIRECT METHOD OF ASCERTAINING THE ARMS LENGTH PRICE. THIS PRINCIPLE HAS BEEN REITERATED IN A LARGE NUMBER OF DECISIONS OF THE COORDINATE BENCHES, SUCH AS IN THE CASE OF ACIT VS MSS INDIA LTD [(2009) 32 SOT 132 (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) METHOD WILL HAV E AN EDGE OVER AN INDIRECT METHOD LIKE TRANSACTIONAL NET MARGIN METHOD (TNMM). THAT D OES NOT, AND CANNOT, HOWEVER MEAN THAT WHATEVER BE THE FACT SITUATION, CUP IS ALWAYS A PREFERRED METHOD BECAUSE OF ONE OF THE ESSENTIAL PREREQUISITE FOR APPLICATION OF ANY METHO D OF ASCERTAINING THE ALP IS THE INPUTS NECESSARY FOR THAT PURPOSE. WHATEVER MAY BE INHEREN T EDGE OF THE DIRECT METHODS OF DETERMINING ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION OVER INDIRECT METHODS OF DETERMINING THE ARMS LENGTH PRICE OF INTERNATIONA L TRANSACTIONS, SELECTION OF THE MOST APPROPRIATE METHOD FOR DETERMINING ARMS LENGTH PRI CE UNDER THE TRANSFER 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, T HERE CANNOT BE ANY STRAIGHT-JACKET FORMULAS HOLDING APPLICATION OF A PARTICULAR METHOD IN CASE OF A PARTICULAR TYPE OF PRODUCT OR SERVICE. WHILE RULE 10B(1) OF THE INCOME TAX RULES 1962, PR OVIDES THAT ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHODS, BEING THE MOST APPROPRIATE METHOD, SET OUT THEREIN, RULE 10 C(1) PROVIDES THE MECHANISM FOR SELECTING THE ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 6 OF 11 MOST APPROPRIATE METHOD WHICH IS BEST SUITED TO T HE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR TRANSACTION AND WHICH PROVIDES THE MOS T RELIABLE MEASURE OF ARMS 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), CER TAIN FACTORS ARE TO BE TAKEN INTO ACCOUNT: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRAN SACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASS ETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJ USTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INT O SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTI ONS 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 MOST APPROPRIATE METHOD (M AM), SHOULD BE, AS PROVIDED IN RULE 10C(1), A METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR TRANSACTION AND A METHOD AND WHICH PROVIDES THE M OST RELIABLE MEASURE OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. UNDER RUL E 10C(2)(C), THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF TH E METHOD IS ONE OF THE CRUCIAL FACTORS DETERMINING SUITABILITY OF A METHOD OF DETERMINATIO N OF ARMS LENGTH PRICE IN A PARTICULAR FACT SITUATION. SIMILARLY, IT IS ALSO IMPORTANT TO DETE RMINE WHETHER ACCURATE ADJUSTMENTS CAN BE MADE FOR THE DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, AND UNLESS SUCH ADJUSTME NTS CAN BE MADE THE RELATED METHOD CANNOT BE SAID TO BE MOST APPROPRIATE METHOD. WE HA VE ALREADY SEEN AS TO HOW, IN THE CIT(A)S ANALYSIS, SUITABLE ADJUSTMENTS COULD NOT B E MADE EVEN THOUGH IN HIS OPENING OBSERVATIONS IN THE OPERATIVE PORTION OF THE ORDER, HE STATED THAT SUITABLE ADJUSTMENTS CAN INDEED BE MADE. THE INABILITY TO MAKE SUITABLE ADJU STMENTS, THEREFORE, DOES TAKE THE METHOD OUTSIDE THE AMBIT OF MOST APPROPRIATE METHOD. QUIT E CLEARLY, THEREFORE, UNLESS SUITABLE RELIABLE DATA INPUTS NECESSARY FOR APPLICATION OF A PARTICULAR METHOD, AS CUP IN THIS CASE, ARE AVAILABLE, CUP METHOD CANNOT BE SAID TO BE MOST APPROPRIATE METHODS ON THE FACTS OF THIS CASE. LET US, THEREFORE, FIRST EXAMINE WHETHER SUFF ICIENT 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 RATHER THAN TAKING THE C OMPARABLE UNCONTROLLED PRICE OF THE TRANSACTION, THE TPO HAS COMPARED AVERAGE OF INTRA- AE TRANSACTIONS AND INDEPENDENT TRANSACTIONS. THIS APPROACH, THOUGH IN THE CASE OF APPLICATION OF COST PLUS METHOD, HAS BEEN REJECTED BY A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS TARA ULTIMO PVT LTD [(2012) 143 TTJ 91 (MUM)], THOUGH THE SAME REASONIN G WILL BE EQUALLY APPLICABLE IN RESPECT OF THE CUP AS WELL AS THE COMPUTATION MECHANISM, IN THAT RESPECT, IS MATERIALLY SIMILAR. IN THIS CASE, SPEAKING THROUGH ONE OF US (I.E. THE VIC E PRESIDENT), THE COORDINATE BENCH HAD OBSERVED AS FOLLOWS: ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 7 OF 11 THE WAY THIS RULE WORKS, THE BENCHMARK GROSS PROFIT IS TO BE APPLIED ON EACH TRANSACTION WITH THE AES , WHILE, FOR COMPUTING THE BENCHMARK, ONE C OULD TAKE INTO ACCOUNT A SERIES OF SAME OR SIMILAR TRANSACTIONS. IN OTHER WORDS, WHILE SETTING THE BENCHMARK, ONE CAN TAKE INTO ACCOUNT SEVERAL TRANSACTIONS WITH UNRELATED ENTERPRISE ON W HAT CAN BE TERMED AS 'GLOBAL BASIS', ESSENTIALLY IN RESPECT OF SAME OR SIMILAR PROPERTY OR SERVICES THOUGH, THE BENCHMARK SO ARRIVED AT CANNOT BE APPLIED ON THE GLOBAL BASIS I. E. THE AVERAGE OF GROSS PROFIT EARNED FROM SAME OR SIMILAR TRANSACTIONS WITH AES. THE APPLICAT ION OF CPM HAS TO BE ON TRANSACTION BASIS RATHER THAN ON GLOBAL BASIS, AND THIS FUNDAMENTAL S CHEME OF COST PLUS METHOD IS ALSO EVIDENT FROM THE PLAIN WORDINGS OF RULE 10 B AS WELL. ANY O THER VIEW OF THE MATTER WILL RESULT IN INCONGRUITIES. FOR EXAMPLE, IF OUR AVERAGE MARK UP TO UNRELATED ENTERPRISES IS 20 PER CENT. AND WE CHARGE A MARK-UP OF 2 PER CENT IN ONE TRANSA CTION 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 WHEREAS IN THE FIRST CASE , THE MARK UP CHARGED IS CERTAINLY NOT A MARK-UP RESULTING IN AN ALP. IN THIS PARTICULAR CAS E, FOR EXAMPLE, THE NORMAL MARK 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 TAKEN AT 17.08 PER CENT. ENTIRE SALES TO AES HAS BEEN TAKEN AT ALP, BUT, THE MARK UP IN THE MANY CASES IS CLEARLY LESS THAN BENCHMARK. TO GIVE 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 INVOICES), 14.14 PER CENT (2 INVOICE S), AND 14.16 PER CENT IS GIVEN BY ASSESSEE'S OWN COMPUTATION, AND, ON THE SAME PAGE, ON ONE INVO ICE, THE ASSESSEE HAS SHOWN A MARGIN AS HIGH AS 27 PER CENT. THE COST PLUS METHOD, THEREFOR E, HAS NOT BEEN CORRECTLY APPLIED. IN ANY CASE, 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 IMP ORTS HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF COSTS AS WELL. THE COSTS OF INPUTS H AVE NOT BEEN VERIFIED EITHER. NO EFFORTS ARE MADE TO SHOW THAT THE TERMS OF SALE TO THE AES AND ALL OTHER RELEVANT FACTORS ARE MATERIALLY SIMILAR VIS-A-VIS THE TRANSACTIONS WITH INDEPENDENT ENTERPRISES. THE CPM IS APPLIED BY COMPARING GROSS PROFIT ON SALES, WHEREAS THE METHOD REQUIRES COMPARISON OF MARK UP ON COSTS ON TRANSACTIONS 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 PRICES AT WHICH PRODUCTS ARE SOLD TO DIFFERENT AES AND, BY IMPLICATION, USING ONE INTRA AE PRICE TO BENCH THE OTHER INTRA AE PRICE. THAT IS WHOLLY INCORRECT. IT IS WELL SETTLED IN LAW THAT IT IS ONL Y AN UNCONTROLLED PRICE WHICH CAN BE COMPARED WITH CONTROLLED PRICE AND USED FOR ANY BENCHMARKING . THIS POSITION HAS BEEN WELL SUMMARIZED IN A COORDINATE BENCH DECISION IN THE CA SE OF SABIC INNOVATIVE PLASTIC INDIA (P.) LTD. V. DY. CIT [2013] 59 SOT 138/35 TAXMANN.COM 17 7 (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 C OMPARE THE PRICES DE HORS THE ECONOMIC CIRCUMSTANCES IN WHICH THE RESPECTIVE AE AND NON AE TRANSACTIONS TAKE PLACE. THIS PRINCIPLE IS BEYOND ANY DOUBT OR CONTROVERSY. IN THE OECD GUI DELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATORS, IT IS CLEARLY STATED THAT A PPLICATION OF CUP METHOD REQUIRES HIGH DEGREE OF COMPARABILITY NOT ONLY IN THE PRODUCTS SO LD AND SERVICES PROVIDED BUT ALSO IN THE ECONOMIC CIRCUMSTANCES IN WHICH THE RESPECTIVE AE A ND NON AE TRANSACTIONS TAKE PLACE. IN THE UN TRANSFER PRICING MANUAL, IT IS OBSERVED THAT DEGREE OF COMPARABILITY BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTIONS IS TYPICAL LY DETERMINED ON THE BASIS OF A NUMBER OF ATTRIBUTES OF THE TRANSACTIONS OR PARTIES THAT COUL D MATERIALLY AFFECT PRICES OR PROFITS AND THE ADJUSTMENT THAT CAN BE MADE TO ACCOUNT FOR DIFFEREN CES AND THEN IT IS OBSERVED THAT THESE ATTRIBUTES, WHICH ARE USUALLY REFERRED TO AS THE FI VE COMPARABILITY FACTORS, INCLUDE: (I) CHARACTERISTICS OF THE PROPERTY OR SERVICE TRANSFER RED; (II) FUNCTIONS PERFORMED BY THE PARTIES TAKING INTO ACCOUNT ASSETS EMPLOYED AND RISKS ASSUM ED, IN SHORT REFERRED TO AS THE FUNCTIONAL ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 8 OF 11 ANALYSIS (III) CONTRACTUAL TERMS; (IV) ECONOMIC CI RCUMSTANCES; AND (V) BUSINESS STRATEGIES PURSUED. CLEARLY, THEREFORE, THE SIGNIFICANT VARIA TIONS IN ECONOMIC CIRCUMSTANCES 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 CI T(A) HAS REJECTED THE ADJUSTMENTS IN THIS RESPECT ON ACCOUNT OF IRRELEVANT FACTORS SUCH AS AS SESSEE CLAIMING ONLY 8% ADJUSTMENT IN THE FINANCIAL YEAR 2005-06, AS AGAINST 20% ADJUSTMENT S OUGHT IN THIS YEAR, EVEN THOUGH THE TRANSACTIONS WERE UNDER THE SAME AGREEMENT. THAT IS IMMATERIAL. WHAT IS MATERIAL IS THAT THERE IS HUGE DIFFERENCE IN THE PAYMENT TERMS. THE CIT(A) HAS ALSO NOTED THE DEVIATIONS 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 THR EE INVOICES ON NON-AES THE CREDIT PERIOD WAS 60 DAYS BUT THEN HE DECLINES TO TREAT THESE EVI DENCE AS SUPPORT FOR THE CLAIM THAT IN ALL CASES SIMILAR CREDITS WERE GIVEN. HOWEVER, WHAT IS CLEAR THAT THERE IS CLEARLY SIGNIFICANT VARIATION IN PAYMENT TERMS. AS A MATTER OF FACT, AT PAGE 29, LEARNED CIT(A) HIMSELF NOTES THAT AS PER THE AGREEMENT, ADVANCE PAYMENT WAS TO FACIL ITATE APPELLANTS PURCHASES, WORKING CAPITAL ETC WHICH, IN TURN, ENSURED UNINTERRUPTED S UPPLY 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 THE FACT THAT WHATEVER MAY HAVE BEEN PAYMENT TERMS UNDER THE INTRA AE AGREEMEN T, THE PAYMENT WAS ACTUALLY RECEIVED SUBSTANTIALLY IN ADVANCE. THE QUESTION WE MUST ASK OURSELVES IS THAT WHETHER SUCH SUBSTANTIAL ADVANCE PAYMENTS, WHICH ENSURE AVAILABILITY OF WORK ING CAPITAL TO THE ASSESSEE, CAN BE COMPARED WITH NORMAL BUSINESS TRANSACTIONS ALLOWING , ON THE CONTRARY, CREDIT PERIOD TO THE CUSTOMERS. THE ANSWER IS CLEARLY IN NEGATIVE AS THE ECONOMIC CIRCUMSTANCES IN WHICH THESE TWO SETS OF TRANSACTIONS OPERATE ARE SUBSTANTIALLY 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 PRODUCTS AND THE ASSESSE E WAS RESELLER RATHER THAN AN END USER. THESE CONTRACTUAL TERMS AND THE DIFFERENCE IN FUNCT IONS ALSO SERIOUSLY AFFECT THE COMPARABILITY. THE REASONS GIVEN BY THE CIT(A) FOR REJECTING THESE VARIATIONS ARE WHOLLY SUPERFICIAL AND DEVOID OF ANY LEGALLY SUSTAINABLE M ERITS. THE VARIATIONS IN QUANTITIES BETWEEN THE AES AND THE NON AES CANNOT BE IGNORED EITHER. T HERE IS NO DISPUTE THAT THERE IS HUGE 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 THAT THE RE IS NO CONSISTENT PATTERN OR CORRELATION BETWEEN THE VOLUME AND SALE PRICES AND THAT THERE IS NO REFERENCE TO ANY VOLUME DISCOUNT IN THE AGREEMENT. THAT IS AGAIN A SUPERFICIAL APP ROACH. WHETHER THERE IS A MENTION OF THE VOLUME DISCOUNT OR NOT OR WHETHER THERE IS ALWAYS A DIRECT RELATION BETWEEN THE PRICES AND VOLUMES, THE FACT REMAINS THAT THE TRANSACTIONS WIT H SUCH HUGE VARIATIONS, AS IN THIS CASE, CANNOT BE CONSIDERED TO BE COMPARABLE TRANSACTIONS AND THAT IS THE CONSISTENT APPROACH IN BENCHMARKING ANALYSIS. THE SCALE OF TRANSACTIONS IS AN IMPORTANT ECONOMIC FACTOR AFFECTING THE COMPARABILITY. WE HAVE ALSO NOTED THAT THE AES HAVE REIMBURSED R&D COSTS, WITH MARK UP, TO THE ASSESSEE. THE AES HAVE ALSO GIVEN INTERE ST FREE ECB LOANS. THESE ARE ALSO EQUALLY IMPORTANT FACTORS. WHEN WE TAKE THE TRANSACTIONS WI TH THE 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 COMPARABLE AT ALL. WE CANNOT CONSIDER THE PRICE OF THE PRODUCT IN ISOLATION WITH ALL THESE FACTORS, AND THAT IS THE REASON WHY THE COMPARABILITY UNDER CUP CEASES TO BE RELEVANT A S 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 FOR DIFFERENCES, IF ANY, BETWEE N THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRI CE IN THE OPEN MARKET BUT THEN WHILE CIT(A) UPHOLD THE APPLICATION OF CUP METHOD ON THE GROUND THAT ADJUSTMENTS CAN INDEED BE ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 9 OF 11 MADE, HE REJECTS THE ADJUSTMENTS ON MERITS. THAT IS CLEARLY INCONGRUOUS. WHEN HE ADMITS THAT NO ADJUSTMENTS CAN BE MADE ON MERITS, THE VERY FOUN DATION OF HIS DECISION TO UPHOLD APPLICATION OF CUP METHOD CEASES TO HOLD GOOD. IN A NY 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 ACCURATE ADJUSTMENTS CANNOT BE MADE, FOR THIS REASON ALONE, CUP METHOD CEASES TO BE WORKABLE ON THE FACTS OF THIS C ASE. THE CONTRADICTION IN THE APPROACH IS ALSO EVIDENT FROM THE FACT THAT THE CIT(A) HAS UPHE LD APPLICATION OF CUP METHOD ON THE SOLE BASIS THAT ACCURATE ADJUSTMENTS CAN BE MADE TO TAKE CARE OF VARIATIONS IN THE INTRA AE AND INDEPENDENT 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 UNREALISTIC LEVELS THAT ONE OF THE INTERNATIONAL TRANSACTION, INCLUDING SALES TO NON AES, WERE MADE ANYWHERE NEAT THEM. CLEARLY, THERE IS NO MEETING GROUND BETWEEN THESE DIAMETRICALLY OPPOSED STANDS B Y THE AUTHORITIES. AS REGARDS THE DECISION OF COORDINATE BENCH IN THE CASE OF SERDIA PHARMACEUTICALS (SUPRA), THAT WAS A CASE IN WHICH NO 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 THE 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, TH US, NO GOOD REASON TO DEVIATE FROM THE SAME. IT IS FOR THIS MAIN REASON THAT THE APPLICATI ON OF TNMM HAS BEEN DECLINED BY THE AUTHORITIES BELOW. NOTHING, HOWEVER, TURNS ON THIS PLEA. WHAT IS BEFORE US IS THE QUESTION AS TO WHICH METHOD IS MOST APPROPRIATE METHOD FOR ASCERTA INING THE ARMS LENGTH IN THE PRESENT YEAR. WE DONOT SEE HOW THIS QUESTION IS TO BE ADJUD ICATED SIMPLY ON THE BASIS OF WHAT HAS BEEN ACCEPTED BY THE ASSESSEE, ON HIS OWN, AS THE M OST APPROPRIATE METHOD IN THE EARLIER YEARS. SUCH A CHOICE OF METHOD IN THE EARLIER YEARS , IN OUR HUMBLE UNDERSTANDING, CANNOT ACT AS AN ESTOPPEL AGAINST THE ASSESSEE. IN OUR CONSIDE RED VIEW, THE DECISION AS TO WHAT IS THE MOST APPROPRIATE METHOD ON THE FACTS OF THIS CASE I S TO BE TAKEN IN THE LIGHT OF THE FACTS AND MATERIAL ON RECORD BEFORE US IN THE PRESENT YEAR. T HE PAST CONDUCT OF THE ASSESSEE, WITH REGARD TO THE SELECTION OF THE MOST APPROPRIATE MET HOD FOR ASCERTAINING ARMS LENGTH PRICE FOR THE PRESENT ASSESSMENT YEAR, IS NOT REALLY DECISIVE . WE, THEREFORE, REJECT THIS PLEA OF THE REVENUE AUTHORITIES 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 YEA RS APPEAL, FOR THE ASSESSMENT YEAR 2010-11, AND REITERATING THE STAND EARLIER TAKEN BY THE TRIBUNAL, VIDE ORDER DATED 31ST DECEMBER 2018, THE TRIBUNAL HAS, INTER ALIA, OBSERV ED AS FOLLOWS THE NATURE OF TRADE RELATIONSHIP IN THE SENSE OF ITS IMPACT ON THE FUNCTIONS, ASSET AND RISKS ASSUMED BY THE AES WHICH WILL HAVE THE CRUCIA L BEARING ON THE PRICES. UNLESS THESE VITAL FACTORS ARE TAKEN INTO ACCOUNT, AND SUITABLE ADJUST MENTS ARE MADE IN THE AVAILABLE CUP INPUTS, THE APPLICATION OF CUP HAS NO USEFULNESS. T HE VARIATIONS IN NATURE OF RELATIONSHIP AFFECTING THE FAR ANALYSIS IS NOT EVEN DISPUTED BY THE REVENUE AND RULE 10 B(1)(A)(II) ITSELF PROVIDES THAT SUCH PRICE IS ADJUSTED TO ACCOUNT FO R DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCON TROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET. AS REGARDS THE DECISION OF COORDINA TE BENCH IN THE CASE 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 THE REVENUE. ALL THAT HAS BEEN RELIED UPON IS INTERNAL CUP AND FOR THE DETAILED RE ASONS SET OUT BY THE CIT(A), WHICH MEETS OUR APPROVAL, THESE CUP INPUTS WERE NOT RELIABLE EN OUGH. IN ANY CASE, DIFFERENCES DUE TO ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 10 OF 11 VARIATIONS IN FAR DUE TO NATURE OF TRADE RELATIONSH IP WITH AES HAVE NOT BEEN ACCOUNTED FOR AND SUITABLE ADJUSTED. THE EXTERNAL CUP INPUTS ARE NOT EVEN REFERRED TO AND RELIED UPON BY THE TPO. THERE ARE NO OTHER INDEPENDENT COMPARABLE TRANSACTIONS BROUGHT TO THE ANALYSIS BY THE TPO OR THE LEARNED COMMISSIONER (DR). ALL THESE FACTORS PUT TOGETHER DONOT MAKE OUT A CASE FOR APPLICATION OF CUP IN THIS CASE. NOT ONLY THAT THERE IS NO JUSTIFICATION, BEYOND VAGUE GENERALITIES, FOR CUP IN THE PRESENT CASE AND NOT O NLY THAT THAT CUP METHOD APPLICATION MECHANISM IS INCORRECT, WE FIND THAT SUFFICIENT QUA NTITY OF RELIABLE CUP INPUTS ARE NOT AVAILABLE ON THE FACTS OF THIS CASE. THAT IN THE LIGHT OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE DONOT SEE LEGALLY SUS TAINABLE 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 DECISION OF THE COORDINATE BENCHES, IN FAVOUR OF TH E ASSESSEE, AND HAVING PERUSED THESE DECISIONS AND MATERIAL ON RECORD, WE ARE NOT INCLIN ED 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 ONL Y A MATTER OF TIME THAT THEIR LORDSHIPS TAKE A CALL ON THE MATTER. GIVEN THIS SITUATION, EVEN I F WE HAD ANY RESERVATIONS ON THE CORRECTNESS OF THE COORDINATE BENCH DECISION, WHICH WE DONOT HA VE ANYWAY, THE MATTER COULD 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 DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF TH E CASE, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A) AND DECLINE INTERFERE IN T HE MATTER. 18. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER IN THIS CASE. THE DECISIONS OF THE COORDINATE BENCHES IN THE 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 CONSIDERED VIEW, THE APP LICATION OF CUP METHOD WAS INDEED NOT JUSTIFIED ON THE FACTS OF THE PRESENT CASE. THE INT RA AE TRANSACTIONS, ON THE FACTS OF THIS CASE, WERE SO FUNDAMENTALLY DIFFERENT IN CHARACTER IN ECO NOMIC CIRCUMSTANCES AND CONTRACTUAL TERMS, THAT THESE CANNOT BE COMPARED WITH THE INDEP ENDENT TRANSACTIONS ENTERED INTO BY THE ASSESSEE. WE, THEREFORE, REJECT THE STAND OF THE AU THORITIES BELOW ON THIS ISSUE. 20. WE HAVE NOTED THAT THE ASSESSEE HAS APPLIED TNM M BY COMPARING THE PROFITS ON TRANSACTIONS WITH AES AND THE NON AES AND NO SPECIF IC DEFECTS HAVE BEEN POINTED OUT IN THE ALLOCATION OF COSTS IN THE SEGMENTAL ACCOUNTS WHICH ARE DULY RECONCILED WITH ENTITY LEVEL CONSOLIDATED ACCOUNTS. WE HAVE ALSO NOTED THAT DEA LING WITH THE INTERNAL TNMM ADOPTED BY THE ASSESSEE THE TPO HAD EXPRESSED THE VIEW THAT TH E 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 WHEREVER THESE ARE DIRECTLY ALLOCABLE, AND WHEREVER THESE ARE NOT DIRECTLY ALLOCABLE, THE ALLOCATION HAS BEEN DONE ON THE BASIS OF APPROPRIATE ALLOCATION KEY SUCH AS RATION OF SALES QUANTITY, SALES REVENUE , TOTAL REVENUE. IT WAS ALSO EXPLAINED THAT THE SEGMENTAL DETAILS HAVE BEEN RECONCILED WITH ENT ITY LEVEL AUDITED ACCOUNTS. THE ASSESSEE HAD FURTHER SUBMITTED THAT IN CASE IF IN YOUR VIEW THERE ARE ANY INAPPROPRIATE COST ALLOCATIONS, WE WOULD APPRECIATE IF YOU CAN KINDLY LET US KNOW WHICH COST ALLOCATIONS ARE NOT APPROPRIATE AND WHY THESE ARE NOT APPROPRIATE SO TH AT WE CAN ACCORDINGLY CLARIFY AND EXPLAIN ON THOSE ASPECTS. WE HAVE NOTED THAT THE TPO DID N OT HAVE ANY SPECIFIC COMMENT 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 ALLOC ATIONS MADE IN THE SEGMENTAL ACCOUNTS AND THE DISCUSSIONS WERE CONFINED TO GENERALITIES. IN T HESE CIRCUMSTANCES, WE SEE NO REASONS TO DISTURB THE INTERNAL TNMM ADOPTED BY THE ASSESSEE. . ITA NO.: 2276/AHD/2013 ASSESSMENT YEAR: 2008-09 PAGE 11 OF 11 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 EVIDENT FROM THE CAL CULATIONS 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, NOT HAVE ANY IMPACT ON THE CONCLUSIONS ARRIVED AT BY US. WE, THE REFORE, SEE 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 BENCHMARKING THE SALES TO AES. ONCE WE HOLD SO, ALL OTHER ISSUES RAISED IN THE APPEAL ARE RENDERED INFRUCTUOUS CALLI NG FOR NO ADJUDICATION BY US. 7. IN THE RESULT, THE APPEAL IS ALLOWED IN THE TERM S INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THE 12 TH DAY OF FEBRUARY, 2019. SD/- SD/- MAHAVIR PRASAD PRAMOD KUMAR (JUDICIAL MEMBER) (VICE P RESIDENT) AHMEDABAD, DATED THE12 TH DAY OF FEBRUARY, 2019 COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD