Sabic Innovative Plastics India Pvt. Ltd., Vadodara V. The Deputy Commissioner of Income Tax, Circle-2(1)(1), Baroda

ITA 2730/AHD/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 4033 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 06-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MSA KHAN
• Assessee Lawyers: MIRAL SANGHARAJKA; MANOJ PARDASINI
• Keywords: Transfer pricing; International transaction; Commercial expediency
• Section: 143(3); 92D; 144C

Judgement Text

ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 1 OF 9 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR VP AND MADHUMITA ROY JM] ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 SABIC INNOVATIVE PLASTICS INDIA PVT LTD ... ..APPELLANT PLASTICS AVENUE, JAWHARNAGAR 391 320 VADODARA DISTRICT, GUJARAT [PAN: AABCE7565N] VS DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 2(1)(1), VADODARA ..........RESPON DENT APPEARANCES BY MANOJ PARDASINI AND MIRAL SANGHARAJKA FOR THE ASSESSEE MSA KHAN AND VINOD TANWANI FOR THE REVENUE DATE OF CONCLUDING THE HEARING : DECEMBER 12, 2018 DATE OF PRONOUNCEMENT : MARCH 08, 2019 O R D E R PER PRAMOD KUMAR, VP: 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS D IRECTED AGAINST THE ORDER DATED 13 TH JANUARY 2017, PASSED BY THE ASSESSING OFFICER IN TH E MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2013-14. AS THE IMPUGNED ORDER AFTER TAKING INTO ACCOUNT DIRECTIONS OF THE DISPUTE RESOLUTION PANEL, THIS APPEAL IS FILED DIRECTLY AGAINST THE ORDER OF THE A SSESSING OFFICER. 2. IN GROUND NOS. 1 TO 7, WHICH WE WILL TAKE UP TOG ETHER, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCES: ADJUSTMENT RELATING TO INTERNATIONAL TRANSACTION PE RTAINING TO MANUFACTURING OPERATION OF SABIC INNOVATIVE PLASTICS INDIA PRIVAT E LIMITED ('THE APPELLANT') 1. THE LEARNED ASSESSING OFFICER ('LD. AO') [ALONG WITH THE LEARNED TRANSFER PRICING OFFICER ('LD. TPO')] UNDER THE DIRECTIONS O F HON'BLE DRP ERRED ON FACTS AND IN LAW IN DETERMINING THE ARM'S LENGTH PRICE FOR PU RCHASE OF RAW MATERIAL PERTAINING TO MANUFACTURING ACTIVITY AT INR 3,874,663,557 INST EAD OF INR 4,081,684,747 UNDER ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 2 OF 9 THE PROVISIONS OF SECTION 92CA(4) OF THE INCOME TAX ACT, 1961 ('THE ACT') AND THEREBY MAKING AN UPWARD ADJUSTMENT OF INR 207,021,190 TO T HE TAXABLE INCOME OF THE APPELLANT. 2. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FACTS AND IN LAW IN PROPOSING TO MODIFY THE ECONOMIC ANALYSIS CARRIED OUT BY THE APPELLANT IN THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED UNDER SECTION 92D O F THE ACT READ WITH RULE 10D OF THE INCOME-TAX RULES, 1962 ('THE RULES'), WITHOUT P ROVIDING ANY COGENT REASONS. 3. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FAC TS AND IN LAW IN REJECTING VARIOUS COMPARABLE COMPANIES BASED ON CERTAIN PARAM ETERS AND IGNORING THE THAT THE SAME ARE FUNCTIONALLY COMPARABLE TO THE APPELLANT. 4. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FAC TS AND IN LAW IN REJECTING KEMROCK INDUSTRIES & EXPORTS LTD AS A COMPARABLE TO THE APPELLANT ON ACCOUNT OF HAVING A DIFFERENT ACCOUNTING YEAR. 5. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FAC TS AND IN LAW IN INAPPROPRIATELY CONSIDERING ONLY THE PVC SEGMENT OF FINOLEX INDUSTRIES LTD AS COMPARABLE TO THE APPELLANT INSTEAD OF BOTH THE 'PI PES AND FITTINGS & PVC SEGMENT'. 6. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FAC TS AND IN LAW IN PROPOSING TO APPLY ARBITRARILY, QUANTITATIVE FILTER IN RESPEC T OF IMPORT OF RAW MATERIAL AND THEREBY REJECTING VARIOUS COMPANIES WHICH ARE FUNCT IONALLY COMPARABLE TO THE APPELLANT. 7. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FACTS AND IN LAW IN NOT GRANTING PROPORTIONATE ADJUSTMENT FOR THE VALUE OF INTERNATIONAL TRANSACTIONS, THEREBY EXTENDING THE QUANTUM OF TRANSFER PRICING ADJUSTMEN T TO TRANSACTIONS WITH THE NON- ASSOCIATED ENTERPRISES ALSO. 3. SO FAR AS THESE GRIEVANCES OF THE ASSESSEE ARE C ONCERNED, ONLY A FEW MATERIAL FACTS NEED TO BE TAKEN NOTE OF. THE ASSESSEE BEFORE US I S A SUBSIDIARY OF SINGAPOREAN COMPANY BY THE NAME OF SABIC INNOVATIVE PLASTIC HOLDINGS PTE L TD, AND IS ENGAGED IN THE MANUFACTURING AND TRADING OF ADVANCED ENGINEERING THERMOPLASTICS AND IS ALSO ENGAGED IN TRADING OF POLYCARBONATE SHEETS. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAD A LARGE NUMBER OF TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES, INCLU DING IN RESPECT OF PURCHASE OF RAW MATERIAL RELATING TO MANUFACTURING ACTIVITY. THE ASSESSEE HA D EMPLOYED TRANSACTIONAL NET MARGIN METHOD FOR ASCERTAINING THE ARMS LENGTH PRICE IN R ESPECT OF THESE TRANSACTIONS. DURING THE PROCEEDINGS BEFORE THE TRANSFER PRICING OFFICER, IT WAS NOTED THAT THE ASSESSEE HAD AS MUCH AS 85% IMPORT CONTENT IN THE RAW MATERIAL BUT THEN NO IMPORTED RAW MATERIAL CONTENT FILTER WAS APPLIED ON THE COMPARABLE CASES SELECTED BY THE ASS ESSEE. THE TPO THUS PROCEEDED TO APPLY 75% IMPORT CONTENT FILTER AND THUS NARROWED DOWN TO ONLY FOUR COMPARABLE CASES- DCW LTD, ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 3 OF 9 FINOLEX LTD, KEMROCK INDUSTRIES LTD AND SUPREME PE TROCHEM LIMITED. IT WAS THEN NOTED THAT KEMROCK INDUSTRIES LTD HAD A DIFFERENT ACCOUNTING Y EAR I.E. FROM JULY 2012 TO SEPTEMBER 2013, AND, FOR THIS SHORT REASON, THIS COMPARABLE C ANNOT BE TAKEN INTO ACCOUNT. IT WAS FURTHER NOTED THAT SO FAR AS DCW LIMITED IS CONCERNED, ITS PRODUCT PROFILE IS TOTALLY DIFFERENT FROM PRODUCT PROFILE OF THE ASSESSEE COMPANY, AND DCW LT D IS ALSO IN THE MANUFACTURING OF CAUSTIC SODA, LIQUID CHLORINE, HCL, FEERIC CHLORIDE , I.E. CHEMICALS WHILE THE ASSESSEE IS INTO MANUFACTURING OF PLASTICS AND HENCE DCW LTD IS AL SO REJECTED FROM THE LIST OF FINAL COMPARABLES. THE FINAL COMPARABLES WERE THUS FINO LEX LTD AND SUPREME PETROCHEM LTD. THE AVERAGE MARGIN OP/OR OF THESE TWO COMPARABLES W ORKED OUT TO 7.97% AS AGAINST THE MARGIN OF THE MANUFACTURING SEGMENT COMPUTED AT 5.5 8%.. IT WAS ON THIS BASIS THAT AN ARMS LENGTH EXPENSES WERE COMPUTED AT RS 561,93,77,896 A S AGAINST THE ACTUAL RELATED EXPENSES OF RS 582,63,99,086, AND, ACCORDINGLY, AN ARMS LENGTH PRICE ADJUSTMENT OF RS 20,70,21,190 WAS RECOMMENDED BY THE TRANSFER PRICING OFFICER. WHEN T HE ASSESSING OFFICER PROPOSED TO MAKE THE RESULTANT ADDITION, ASSESSEE DID RAISE A GRIEVA NCE BEFORE THE DISPUTE RESOLUTION PANEL, BUT WITHOUT ANY SUCCESS. THE DRP CONFIRMED THE ACTION O F THE AUTHORITIES BELOW AND DECLINED TO INTERFERE IN THE MATTER. THE ASSESSEE IS NOT SATISF IED AND IS IN FURTHER APPEAL BEFORE US. FOR THE REASONS WE WILL SET OUT IN A SHORT WHILE, IT IS NOT REALLY NECESSARY TO TAKE NOTE OF ANY FURTHER FACTS AT THIS STAGE AND FOR OUR PURPOSES. 4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 5. TO BEGIN WITH THIS ADJUDICATION, ITIS SUFFICIENT TO DEAL WITH CORRECTNESS OF EXCLUDING DCW LTD FROM THE FINAL LIST OF COMPARABLES. WE HAVE NOTED THAT IN THE COURSE OF WRITTEN SUBMISSIONS FILED BY THE LEARNED DEPARTMENTAL REPRE SENTATIVE, A STAND IS TAKEN THAT THE COMPANY HAS MADE CONSISTENT LOSSES FOR THE PERIOD F INANCIAL YEAR 2011-12 TO FINANCIAL YEAR 2014-15 IN THE PVC SEGMENT AND THAT AS PER THE AN NUAL REPORTS OF THE ASSESSEE COMPANY FOR THESE FINANCIAL YEARS, DCW LTD WAS UNDERGOING AUTOM ATION AND DEBOTTLENECKING PROGRAM FOR ITS PVC SEGMENT DURING SUCH FINANCIAL YEARS. THE S TAND WAS THUS TAKEN THAT IN THESE CIRCUMSTANCES, WHEREIN THE COMPARABLE COMPANY HAS M ADE CONTINUOUSLY LOSSES FOR MORE THAN 3 YEARS, IT WILL NOT BE PROPER TO INCLUDE DCW LTD I N THE FINAL COMPARABLES. THE LEGAL POSITION IS FAIRLY WELL SETTLED. IT IS ONLY WHEN LO SSES ARE CONTINUOUSLY INCURRED FOR THREE OR MORE YEARS THAT A COMPARABLE CAN BE EXCLUDED, BUT T HE QUESTION REALLY IS AS TO WHICH THREE YEARS ARE TO BE TAKEN INTO ACCOUNT. THE QUESTION TH AT NEEDS OUR CONSIDERATION IS WHETHER THE PERIOD TO BE TAKEN INTO ACCOUNT IS ANY THREE YEARS IN THE PAST, OR THE CURRENT YEAR AND TWO IMMEDIATELY PRECEDING YEARS. WE FIND GUIDANCE FROM RULE 10B(4) WHICH PROVIDES THAT THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF A N UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATIN G TO THE FINANCIAL YEAR [(HEREAFTER IN THIS RULE AND IN RULE 10CA REFERRED TO AS THE 'CURRENT YEAR') ] IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO AND PROVISO TO THIS RULE FURTHER PROVIDES THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO [THE CURRENT YEA R] MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 4 OF 9 TO THE TRANSACTIONS BEING COMPARED. WHAT ESSENTIAL LY FOLLOWS IS THAT THE CURRENT YEAR IS TO BE TAKEN INTO ACCOUNT, AND, SINCE THE TEST IS FOR THRE E CONSECUTIVE YEARS, TWO YEARS PRECEDING THE CURRENT YEAR ARE ALSO TO BE TAKEN INTO ACCOUNT. VIE WED THUS, IT WOULD APPEAR THAT IN ORDER TO DISQUALIFY FROM BEING TAKEN INTO ACCOUNT, A COMPARA BLE UNIT MUST BE A LOSS MAKING UNIT IN THE PRESENT YEAR AS ALSO TWO IMMEDIATELY PRECEDING YEAR . VIEWED IN THIS PERSPECTIVE, WHEN WE EXAMINE THE FACTS OF THIS CASE, WE FIND THAT THE W HILE THERE IS PVC SEGMENT LOSS IN THE FINANCIAL YEAR 2012-13 (I.E. CURRENT YEAR) @ 4.53%, AND IN THE IMMEDIATELY PRECEDING YEAR 2011-12 (5.87%), THERE IS IN FACT PROFIT IN THE FIN ANCIAL YEAR 2010-11 AT 2.88% NET PROFIT MARGIN. THE FACT ABOUT PROFIT IN THE FINANCIAL YEA R 2010-11, AS ALSO IN THE FINANCIAL YEAR 2015-16 ONWARDS, IS NOT EVEN DISPUTED BY THE REVEN UE AUTHORITIES BELOW. IN VIEW OF THESE DISCUSSIONS, THE EXCLUSION OF DCW LTD FROM THE LIST OF FINAL COMPARABLES IS NOT JUSTIFIED ON THE GROUND THAT IT IS A PERSISTENT LOSS MAKING COMP ANY. AS REGARDS THE AUTOMATION AND DEBOTTLENECKING PROGRAM IN THE DCW LTD IN THE RELEV ANT FINANCIAL YEARS, THAT IS AN ONGOING PROCESS AND CANNOT RESULT IN COMPARABILITY. IN VIEW OF THESE DISCUSSIONS, IN OUR CONSIDERED VIEW, THE EXCLUSION OF DCW LTD WAS NOT JUSTIFIED. W E, THEREFORE, DIRECT THE ASSESSING OFFICER TO RECOMPUTE THE ARMS LENGTH MARGIN AFTER TAKING I NTO ACCOUNT DCW LTD AS VALID COMPARABLE. 6. LEARNED REPRESENTATIVES AGREE THAT IN THE EVENT OF DCW LTD BEING ACCEPTED AS A VALID COMPARABLE, THERE WILL BE NO NEED TO DEAL WITH OTHE R ISSUES RAISED WITH RESPECT TO THIS ARMS LENGTH PRICE DETERMINATION, AS, IN THAT EVENT, THE PROFITABILITY OF THE TESTED PARTY WILL BE WELL WITHIN ACCEPTABLE RANGE. THAT ASPECT, HOWEVER, IS T O BE EXAMINED BY THE ASSESSING OFFICER. WE UPHOLD THE PLEA OF THE ASSESEEE IN PRINCIPLE, RE MIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION ON THE ALP IN THE LI GHT OF OBSERVATIONS ABOVE, AND DECLINE TO DEAL WITH OTHER GRIEVANCES RAISED BY THE ASSESSEE W HICH ARE, GIVEN THESE CONCLUSIONS, ACADEMIC AT THIS STAGE. 7. GROUND NOS. 1 TO 7 ARE ALLOWED FOR STATISTICAL P URPOSES IN THE TERMS INDICATED ABOVE. 8. IN GROUND NOS. 8 TO 12, WHICH WE WILL TAKE UP TO GETHER, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCES: ADJUSTMENT RELATING TO INTERNATIONAL TRANSA CTIONS PERTAINING TO AVAILING OF MANAGEMENT SERVICES 8. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FAC TS AND IN LAW IN DETERMINING THE ARM'S LENGTH PRICE FOR PAYMENT OF M ANAGEMENT SERVICES FEES UNDER THE PROVISIONS OF SECTION 92CA(4) OF THE ACT AND THEREB Y MAKING AN ADJUSTMENT OF INR 31,458,460 TO THE TAXABLE INCOME OF THE APPELLANT I N RESPECT OF FOLLOWING SERVICES:. ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 5 OF 9 A. LEGAL SERVICES B. HUMAN RESOURCE SERVICES C. FINANCIAL SERVICES D. MANUFACTURING SERVICES E. MARKETING SERVICES F. INFORMATION TECHNOLOGY SERVICES 9. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED IN LAW IN DETERMINING THE ARM'S LENGTH PRICE AT 'NIL' FOR VARIOUS SERVICES MENTIONE D ABOVE WHICH IS AGAINST THE PRINCIPLES LAID DOWN BY VARIOUS JUDICIAL PRECEDENTS . 10. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FACTS AND IN LAW IN DISREGARDING THE BENCHMARKING APPROACH OF THE APPEL LANT OF APPLYING TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S LENGTH PRICE OF MANAGEMENT SERVICES FEES. 11. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED IN LA W, IN APPLYING THE 'COMPARABLE UNCONTROLLED PRICE' METHOD AS PRESCRIBE D UNDER RULE 10B(L)(A) FOR DETERMINING THE ARM'S LENGTH PRICE FOR MANAGEMENT S ERVICES, IN THE ABSENCE OF ANY FINDING OF 'THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION.' 12. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FA CTS AND IN LAW IN IGNORING THE FACT THAT THE ASSOCIATED ENTERPRISES FILED THEI R 'RETURN OF INCOME' IN INDIA AND OFFERED TO TAX THEIR TAXABLE INCOME IN INDIA. 9. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CONC ERNED, THE RELEVANT MATERIAL FACTS ARE AS FOLLOWS. IN THE COURSE OF PROCEEDINGS BEFORE THE TR ANSFER PRICING OFFICER, IT WAS NOTICED THAT THE ASSESSEE HAS MADE PAYMENTS OF (I) RS 1,27,70,47 9 TO SABIC INNOVATIVE PLASTICS US LLC USA; (II) RS 7,20,92,912 TO SABIC INNOVATIVE PLASTI C MANAGEMENT (SHANGHAI) CO LTD CHINA; AND (III) RS 13,02,53,476 TO SABIC INNOVATIVE PLAST ICS (SEA) PTE LTD, SINGAPORE. WHEN THE TPO PROBED THE ARMS LENGTH PRICE DETERMINATION OF THESE TRANSACTIONS, HE FOUND THAT THE ASSESSEE HAS CLUBBED THE PAYMENT OF MANAGEMENT SERV ICE CHARGES WITH MANUFACTURING/ TRADING AND BENCHMARKED SUCH AGGREGATED TRANSACTION S TOGETHER USING TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD, USING THE ASSESSEE AS THE TESTED PARTY. THE TPO WAS OF THE VIEW THAT THIS BENCHMARKING WAS INCO RRECT AND OBSERVED THAT THE PAYMENTS WERE FOR SPECIFIC SERVICES RENDERED BY DIFFERENT AE S, THE ASSESSEE SHOULD HAVE CONDUCTED BENCHMARKING SEPARATELY FOR EACH TYPE OF PAYMENT. I T WAS NOTED THAT NO SUCH STUDY WAS CARRIED OUT. IT WAS ALSO NOTED THAT BENEFIT TEST AN D RECEIPT OF ACTUAL SERVICES SHOULD HAVE EXAMINED FOR SUCH PAYMENTS. THE TPO THUS HELD THAT PROPER BENCHMARKING WAS NOT DONE. HE PROPOSED AN ALP ADJUSTMENT OF US $ 9,38,910, WHICH WAS CONVERTED INTO INR 5,09,82,812. ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 6 OF 9 WHEN THE ASSESSING OFFICER PROPOSED TO MAKE THIS AL P ADJUSTMENT, ASSESSEE CARRIED THE MATTER BEFORE THE DISPUTE RESOLUTION PANEL BUT WITH OUT ANY SUCCESS. THAT IS HOW THE IMPUGNED ADJUSTMENT WAS MADE. THE ASSESSEE IS AGGRI EVED AND IS IN APPEAL BEFORE US. 10. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF APPLIC ABLE LEGAL POSITION. 11. AS LEARNED REPRESENTATIVES FAIRLY AGREE, EVEN A S THE LEARNED DEPARTMENTAL REPRESENTATIVE DUTIFULLY RELIES UPON THE STAND OF T HE AUTHORITIES BELOW AND URGES US TO TAKE AN INDEPENDENT VIEW ON THE SUBJECT, THIS ISSUE IN APPE AL IS SQUARELY COVERED, IN FAVOUR OF THE ASSESSEE, BY DECISIONS OF THE COORDINATE BENCHES IN ASSESSEES OWN CASES FOR THE THREE IMMEDIATELY PRECEDING ASSESSMENT YEARS. WHILE DEALI NG WITH THE APPEALS OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2009-10 AND 2011-12, A COORDIN ATE BENCH OF THIS TRIBUNAL, IN A JUDGMENT REPORTED AS 186 TTJ 214 AND THROUGH ONE OF US (I.E. THE VICE PRESIDENT), HAS OBSERVED AS FOLLOWS: 8. WE MAY AT THE OUTSET NOTE THAT THE DRP'S OBSERVA TIONS JUSTIFYING THE IMPUGNED ALP ADJUSTMENT ON THE GROUND OF BENEFIT NO T REACHING THE ASSESSEE FROM RENDITION OF SERVICES, ARE SOMEWHAT IRRELEVANT , BECAUSE WHETHER A PARTICULAR EXPENSE ON SERVICES RECEIVED ACTUALLY BE NEFITS AN ASSESSEE IN MONETARY TERMS OR NOT EVEN A CONSIDERATION FOR ITS BEING ALL OWED AS A DEDUCTION IN COMPUTATION OF INCOME, AND, BY NO STRETCH OF LOGIC, IT CAN HAVE ANY ROLE IN DETERMINING ALP OF THAT SERVICE. WHEN EVALUATING TH E ALP OF A SERVICE THE REAL QUESTION WHICH IS TO BE DETERMINED IN SUCH CASES IS WHETHER THE PRICE OF THIS SERVICE IS WHAT AN INDEPENDENT ENTERPRISE WOULD HAV E PAID FOR THE SAME. THIS PROCESS OF DETERMINATION OF ARM'S LENGTH PRICE HAS TO BE DONE ON THE BASIS OF A RECOGNIZED METHOD OF DETERMINING ARM'S LENGTH PRICE , RATHER THAN ON THE BASIS OF SUBJECTIVE PERCEPTIONS, DIVORCED FROM GROUND REALIT IES OF BUSINESS, OF THE TPO. WHILE ON THIS ISSUE, WE MAY ALSO REFER TO THE FOLLO WING OBSERVATIONS MADE BY A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF AW B INDIA (P.) LTD. V. DY. CIT [2014] 50 TAXMANN.COM 323/[2015] 152 ITD 770 (DELHI - TRIB.) AND WHICH ARE EQUALLY APPLICABLE IN THE PRESENT CONTEXT: 15. ONE OF THE VERY BASIC PRE CONDITION FOR USE OF CUP METHOD IS AVAILABILITY OF THE PRICE OF THE SAME PRODUCT AND SERVICE IN UNCONT ROLLED CONDITIONS. IT IS ON THIS BASIS THAT ALP OF THE PRODUCT OR SERVICE CAN BE ASC ERTAINED. IT CANNOT BE A HYPOTHETICAL OR IMAGINARY VALUE BUT A REAL VALUE ON WHICH SIMILAR TRANSACTIONS HAVE TAKEN PLACE. COMING TO THE FACTS OF THIS CASE, THE APPLICATION OF CUP IS DEPENDENT ON THE MARKET VALUE OF THE ARRANGEMENTS U NDER WHICH THE PRESENT ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 7 OF 9 PAYMENTS HAVE BEEN MADE. UNLESS THE TPO CAN IDENTIF Y A COMPARABLE UNCONTROLLED CASE IN WHICH SUCH SERVICES, HOWSOEVER TOKEN OR IRRELEVANT SERVICES AS HE MAY CONSIDER THESE SERVICES TO BE, ARE RENDER ED AND FIND OUT CONSIDERATION FOR THE SAME, THE CUP METHOD CANNOT HAVE ANY APPLIC ATION. HIS PERCEPTION THAT THESE SERVICES ARE WORTHLESS IS OF NO RELEVANCE. IT IS NOT HIS JOB TO DECIDE WHETHER A BUSINESS ENTERPRISE SHOULD HAVE INCURRED A PARTIC ULAR EXPENSE OR NOT. A BUSINESS ENTERPRISE INCURS THE EXPENDITURE ON THE B ASIS OF WHAT IS COMMERCIALLY EXPEDIENT AND WHAT IS NOT COMMERCIALLY EXPEDIENT. A S HELD BY HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. EKL APPLIANCES LIMITED (345 ITR 241), 'EVEN RULE 10B(1)(A) DOES NOT AUTHORISE D ISALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME'. 16. THE VERY FOUNDATION OF THE ACTION OF THE TPO IS THUS DEVOID OF LEGALLY SUSTAINABLE MERITS. THERE IS NO DISPUTE THAT THE IM PUGNED PAYMENTS ARE MADE UNDER AN ARRANGEMENT WITH THE AE TO PROVIDE CERTAIN SERVICES. IT IS NOT EVEN THE TPO'S CASE THAT THE PAYMENTS FOR THESE SERVICES WER E NOT MADE FOR SPECIFIC SERVICES UNDER THE CONTRACT BUT HE IS OF THE VIEW T HAT EITHER THE SERVICES WERE USELESS OR THERE WAS NO EVIDENCE OF ACTUAL SERVICES HAVING BEEN RENDERED. AS FOR THE SERVICES BEING USELESS, AS WE HAVE NOTED ABOVE, IT IS A CALL TAKEN BY THE ASSESSEE WHETHER THE SERVICES ARE COMMERCIALLY EXPE DIENT OR NOT AND ALL THAT THE TPO CAN SEE IS AT WHAT PRICE SIMILAR SERVICES, WHAT EVER BE THE WORTH OF SUCH SERVICES, ARE ACTUALLY RENDERED IN THE UNCONTROLLED CONDITIONS. 17. AS FOR THE EVIDENCE FOR EACH OF THE SERVICE STA TED IN THE AGREEMENT, IT IS NOT EVEN NECESSARY THAT EACH OF THE SERVICE, WHICH IS S PECIFICALLY STATED IN THE AGREEMENT, IS RENDERED IN EVERY FINANCIAL PERIOD. T HE ACTUAL USE OF SERVICES DEPENDS ON WHETHER OR NOT USE OF SUCH SERVICES WAS WARRANTED BY THE BUSINESS SITUATIONS WHEREAS PAYMENTS UNDER CONTRACTS ARE MAD E FOR ALL SUCH SERVICES AS THE USER MAY REQUIRE DURING THE PERIOD COVERED. AS LONG AS AGREEMENT IS NOT FOUND TO BE A SHAM AGREEMENT, THE VALUE OF THE SERV ICES COVERED UNDER THE AGREEMENT CANNOT BE TAKEN AS 'NIL' JUST BECAUSE THE SE SERVICES WERE NOT ACTUALLY REQUIRED BY THE ASSESSEE. IN ANY CASE, HAVING PERUS ED THE MATERIAL ON RECORD, WE ARE SATISFIED THAT THE SERVICES WERE ACTUALLY RENDE RED UNDER THE AGREEMENT AND THESE SERVICES DID JUSTIFY THE IMPUGNED PAYMENTS. 18. WE ARE ALSO OF THE CONSIDERED VIEW THAT IN THE ABSENCE OF PREREQUISITES FOR APPLICATION OF CUP METHODS BEING ABSENT IN THE PRES ENT CASE, IT WAS NOT OPEN TO THE TPO TO DISREGARD THE TNMM EMPLOYED BY THE ASSES SEE. NO DEFECTS HAVE BEEN POINTED OUT IN APPLICATION OR RELEVANCE OF TNMM IN THIS CASE. UNDER THESE CIRCUMSTANCES, THE TPO'S IMPUGNED ACTION CANNOT MEE T OUR JUDICIAL APPROVAL. ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 8 OF 9 19. FOR THE DETAILED REASONS SET OUT ABOVE, WE UPHO LD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE AO TO DELETE THE IMPUGNED A LP ADJUSTMENT OF RS. 31,23,325. THE ASSESSEE GETS THE RELIEF ACCORDINGLY . 9. THE ONLY JUSTIFICATION FOR TAKING ALP OF SERVICE S AT NIL IS UNDER CUP BUT THEN THERE HAS TO BE SOMETHING ON RECORD TO SHOW THAT IN AN ARM'S LENGTH SITUATION THESE SERVICES ARE RENDERED WITHOUT CONSIDERATION. THE WORTH OF SERVICES CANNOT BE DECIDED BY THE TPO, NOR IS IT OPEN TO HIM TO QUE STION, AS SUCH AN APPROACH IMPLICITLY DOES, THE COMMERCIAL EXPEDIENCY OF THESE SERVICES. IT IS ONLY ELEMENTARY THAT HOW AN ASSESSEE CONDUCTS HIS BUSINESS IS ENTIR ELY HIS PREROGATIVE AND IT IS NOT FOR THEM TO DECIDE WHAT IS NECESSARY FOR AN ASSESSE E AND WHAT IS NOT. IT IS NOT FOR THE TPO TO QUESTION ASSESSEE'S WISDOM IN MAKING PAY MENT FOR THE SERVICES, WHICH, IN THE OPINION OF THE TPO, ARE NOT OF 'MUCH' USE. THE TPO HAS TRAVELLED MUCH BEYOND HIS POWERS IN QUESTIONING COMMERCIAL WI SDOM OF ASSESSEE'S DECISION TO TAKE BENEFIT OF EXPERTISE OF ITS AES. T HE DRP IS ALSO IN ERROR, IN THE LIGHT OF THESE DISCUSSIONS, EVALUATING THE WORTH OF SERVICES ON THE BASIS OF BENEFIT OF THESE SERVICES. THE VERY FOUNDATION OF THE IMPUG NED ALP ADJUSTMENT WAS THUS DEVOID OF ANY LEGALLY SUSTAINABLE BASIS. 10. IN ANY CASE, WE HAVE CAREFULLY PERUSED THE EVID ENCE OF SERVICES RENDERED AND THE NATURE OF SERVICES IN QUESTION, ON RANDOM SAMPL E BASIS. IN OUR CONSIDERED VIEW, THERE IS REASONABLE EVIDENCE OF THE RENDITION OF SERVICE AND IT CANNOT BE OPEN TO TPO TO PROCEED ON THE BASIS THAT THE SERVIC ES WERE NOT RENDERED. THE METHOD OF ASCERTAINING THE ARM'S LENGTH PRICE, ON THE BASIS O F TPO'S SUBJECTIVE PERCEPTION ABOUT WORTH OF SERVICES, IS NOT SUSTAINABLE IN LAW EITHER. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF TH E CASE, WE DEEM IT FIT AND PROPER TO DELETE THE IMPUGNED ALP ADJUSTMENTS. 12. THESE VIEWS WERE ALSO FOLLOWED BY ANOTHER COORD INATE BENCH, IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2010-11, AS WELL. 13. WE SEE NO REASONS TO, NOR IS IT OPEN TO US TO, TAKE ANY OTHER VIEW THAN THE VIEW SO TAKEN BY THE COORDINATE BENCHES. NO DISTINGUISHING FEATURES ON FACTS HAVE BEEN POINTED OUT TO US TO MAKE ANY SUCH DEVIATION. 14. ADMITTEDLY, THERE IS NO DIFFERENCE ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE SERVICES IN QUESTION ARE UNDER THE SAME AGREEMENTS. IN THIS VIEW OF THE MATTER, AND RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISIO NS IN ASSESSEES OWN CASE FOR THE EARLIER ITA NO.: 2730/AHD/ 2017 ASSESSMENT YEAR: 2013-14 PAGE 9 OF 9 ASSESSMENT YEARS, WE UPHOLD THE PLEA OF THE ASSESSE E AND DELETE THIS ALP ADJUSTMENT OF RS 3,14,58,460. THE ASSESSEE GETS THE RELIEF ACCORDING LY. 15. GROUND NOS. 8 TO 12 ARE THUS ALLOWED IN THE TER MS INDICATED ABOVE. 16. THE OTHER GROUNDS OF APPEAL WERE NOT PRESSED BE FORE US. 17. IN THE RESULT, THE APPEAL IS ALLOWED IN THE TER MS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THE 8 TH DAY OF MARCH, 2019. SD/- SD/- MADHUMITA ROY PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMB ER) AHMEDABAD, DATED THE 8 TH DAY OF MARCH, 2019. COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD