GE Healthcare Bio-Sciences Limited - India Branch Office, CHENNAI V. DCIT, CHENNAI

ITA 677/CHNY/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7630 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2010-2011
• Appeal Filed On: 06-04-2015
• Court: TRIBUNAL
• Department Lawyers: DR B NISCHAL
• Assessee Lawyers: S P CHIDAMBARAM S
• Keywords: Transfer pricing; International transaction
• Section: 6; 12; 2; 15

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' # , $ %& ' [ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD , JUDICIAL MEMBER ] S.P.NO.73/MDS/2016 & ./ I.T.A.NO.677/MDS/2015 / ASSESSMENT YEAR : 2010-11 M/S GE HEALTHCARE BIO - SCIENCES LTD INDIA BRANCH OFFICE 4 TH FLOOR, KAMAK TOWER PLOT NO.12-A(SP) THIRUVIKA INDUSTRIAL ESTATE CHENNAI 600 032 VS. THE DY. DIRECTOR OF INCOME - TAX INTERNATIONAL TAXATION - I CHENNAI [PAN AACCA 6917 F ] ( () / APPELLANT) ( #*() /RESPONDENT) / APPELLANT BY : S HRI N. VENKATRAMAN, SR.COUNSEL FOR MS. V. UBHAYA BHARATHI, ADVOCATE SHRI K.R. SEKAR & SHRI S.P.CHIDAMBARAM, ADVOCATES /RESPONDENT BY : DR. B. NISCHAL, JCIT / DATE OF HEARING : 23 - 03 - 2016 / DATE OF PRONOUNCEMENT : 30 - 0 3 - 2016 + / O R D E R PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER THIS APPEAL IS FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE DISPUTE RESOLUTION PANEL, CHENNAI, DATED 27.11 .2014, FOR THE ASSESSMENT YEAR 2010-11. ITA NO.677/15 SP NO.73/16 :- 2 -: 2. THE ASSESSEE HAS ALSO FILED ADDITIONAL GROUNDS OF APPEAL CONTENDING THAT THE FOREIGN EXCHANGE GAIN PERTAININ G TO MARKETING COMMISSION SEGMENT SHOULD BE CONSIDERED AS ITS OPER ATING INCOME. THE ASSESSEE IN ITS ADDITIONAL GROUNDS CONTENDS TH AT FOREIGN EXCHANGE GAIN WAS DERIVED FROM MARKETING COMMISSION TRANSACT ION AND AS SUCH, IT IS DIRECTLY AND INEXTRICABLY LINKED WITH MARKETI NG COMMISSION SEGMENT. THE ASSESSEE CONTENDS THAT THE TPO WHILE COMPUTING THE MARGIN OF THE ASSESSEE CONSIDERED THE FOREIGN EXCH ANGE GAIN PERTAINING TO MARKETING COMMISSION SEGMENT AS NON-O PERATING INCOME. IT IS THE SUBMISSION OF THE ASSESSEE THAT IT HAS INADVERTENTLY OMITTED TO RAISE SPECIFIC ALTERNATIVE GROUND IN RELATION TO FOREIGN EXCHANGE GAIN TO BE CONSIDERED AS OPERATING INCOME WHILE COMPUTIN G THE SEGMENTAL MARGIN OF THE ASSESSEE I.E THE TPO WHILE DETERMINI NG ARMS LENGTH PRICE HAS ERRONEOUSLY CONSIDERED THE FOREIGN EXCHAN GE GAIN AS NON- OPERATING ITEM IN NATURE. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ABOVE GROUNDS DO NOT REQUIRE INVESTIGATION OF ADDITIONAL FACTS, THEY ARE LEGAL GROUNDS AND THEREFORE, HE PRAYED THA T THESE ADDITIONAL LEGAL GROUNDS MAY BE ADMITTED AND DECIDED ON MERITS . 3. THE LD. DR OPPOSED FOR ADMISSION OF ADDITIONAL GROU NDS RAISED BY THE ASSESSEE. ITA NO.677/15 SP NO.73/16 :- 3 -: 4. ON HEARING BOTH THE PARTIES, WE ARE OF THE VIEW THA T THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE DO NOT R EQUIRE INVESTIGATION OF ADDITIONAL FACTS AND THE GROUNDS RAISED ARE PURE LY LEGAL GROUNDS. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD , 229 IT R 383, WE ADMIT THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE. 5. THE LD. SR. COUNSEL FOR THE ASSESSEE, BY PLACING R ELIANCE ON THE DECISION OF HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF M/S CAPITAL IQ INFORMATION VS DCIT IN I.T.A.NO.1961/HYD /2011 DATED 23.11.2012, SUBMITS THAT THE FOREIGN EXCHANGE GAIN EARNED BY THE ASSESSEE FROM MARKETING COMMISSION SEGMENT SHOULD B E CONSIDERED AS OPERATING INCOME. REFERRING TO PARA 27 OF THE TRIB UNALS ORDER (SUPRA), HE SUBMITS THAT THE ISSUE HAS BEEN CONSIDERED BY TH E BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA P. LT D AND THIS DECISION WAS FOLLOWED BY THE HYDERABAD BENCH HOLDING THAT FO REIGN EXCHANGE GAIN/LOSS HAS TO BE TAKEN AS PART OF THE OPERATING MARGIN. 6. THE LD. DR PLACED RELIANCE ON THE ORDER OF THE TPO IN CONSIDERING THE FOREIGN EXCHANGE GAIN AS NON-OPERAT ING INCOME. 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE OR DERS OF THE LOWER AUTHORITIES AS WELL AS THE DECISION RELIE D ON BY THE ASSESSEE IN THE CASE OF M/S CAPITAL IQ INFORMATION (SUPRA). WE FIND THAT THE ITA NO.677/15 SP NO.73/16 :- 4 -: ISSUE HAS BEEN CONSIDERED BY THE BANGALORE BENCH AN D THE HYDERABAD BENCH OF THE TRIBUNAL. THE HYDERABAD BENCH IN THE CASE OF M/S CAPITAL IQ INFORMATION (SUPRA) HAS HELD IN PARA 27 OF ITS ORDER AS UNDER: 27. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PART IES IN THIS REGARD. THE BANGALORE BENCH OF THE TRIBUNAL IN T HE CASE OF SAP LABS INDIA P. LTD. (SUPRA), WHILE CONSIDERIN G A DISPUTE OF SIMILAR NATURE, OBSERVED AS FOLLOWS- THE FOREIGN EXCHANGE FLUCTUATION GAINS IS NOTHING BUT AN INTEGRAL PART OF THE SALES PROCEEDS OF AN ASSESSEE CARRYING ON EXPORT BUSINESS. THE COURTS AND TRIBUNA LS HAVE HELD THAT FOREIGN EXCHANGE FLUCTUATION GAINS F ORM PART OF THE SALE PROCEEDS OF EXPORTER-ASSESSEE. THE FOREIGN EXCHANGE FLUCTUATIONS INCOME CANNOT BE EXCL UDED FROM THE COMPUTATION OF THE OPERATING MARGIN OF THE ASSESSEE COMPANY. FOLLOWING THE AFORESAID DECISION OF THE BANGALORE BEN CH OF THE TRIBUNAL, THE HYDERABAD BENCH OF THE TRIBUNAL HELD I N THE CASE OF FOUR SOFT LTD. (SUPRA) IN THE FOLLOWING MAN NER- 16. WITH REGARD TO THE EXCLUSION OF GAIN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION WHILE COMPUTING THE NE T MARGIN, AS CLAIMED BY THE ASSESSEE, WE FIND THAT TH E EXCHANGE FLUCTUATION GAINS ARISE OUT OF SEVERAL FAC TORS, FOR INSTANCE, REALISATION OF EXPORT PROCEEDS AT HIG HER RATE, IMPORT DUES PAYABLE AT LOWER RATE. SINCE THE GAIN OR LOSS ON ACCOUNT OF EXCHANGE RATE FLUCTUATION ARISES IN THE NORMAL COURSE OF BUSINESS TRANSACTION, THE SAME SHO ULD BE CONSIDERED WHILE COMPUTING THE NET MARGIN FOR THE INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTE RPRISES OF THE ASSESSEE. OUR VIEW IN THIS BEHALF IS FORTIFI ED BY THE DECISIONS OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA LTD. SUPRA AND BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF DEUTSCHE BANK A.G. V/S. D. CIT REPORTED IN 86 ITD 431 ITA NO.677/15 SP NO.73/16 :- 5 -: RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS OF T HE TRIBUNAL, AND CONSIDERING THE CONTENTION OF THE ASSESSEE THAT FOR THE ASSESSMENT YEAR 2008-09 FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS HAS BEEN CONSIDERED AS OPERATING MARGIN W HILE COMPUTING THE MARGIN OF COMPARABLE COMPANIES, WE HO LD THAT EVEN FOR THE YEAR UNDER APPEAL ALSO THE SAME PRINCI PLE SHOULD BE APPLIED, AND WHILE COMPUTING THE MARGIN FOR DETE RMINING THE ALP FOR THE ASSESSMENT YEAR UNDER APPEAL, THE FOREI GN EXCHANGE GAIN/LOSS HAS TO BE TAKEN AS PART OF THE OP ERATING MARGIN. CONSEQUENTLY, WE ALLOW THE GROUND OF THE AS SESSEE ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO TREA T THE FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS PART OF TH E OPERATING MARGIN OF THE COMPARABLE COMPANY. 8. RESPECTFULLY FOLLOWING THE SAID DECISION, WE HOLD T HAT THE FOREIGN EXCHANGE GAIN PERTAINING TO MARKETING COMMI SSION SEGMENT SHOULD BE CONSIDERED AS OPERATING INCOME. WE DIREC T ACCORDINGLY. 9. COMING TO THE REGULAR GROUNDS OF APPEAL, THE ASSES SEE RAISED GROUNDS CHALLENGING THE ORDER OF THE DRP (I) IN REJECTING COMPARABLE UNCONTROLLED PRICE METHOD(CUP) FOR BENCH MARKING MARKETING SUPPORT SERVICES, (II) ERROR IN DETERMINI NG ALP BY USING NET MARGINS OF SPINCO, (III) APPLICATION OF TNMM USING EXTERNAL COMPARABLES, AND (VI) DRP/ASSESSING OFFICER ERRED I N NOT APPRECIATING THE FACT THAT THE EFFECTIVE RATE OF COMMISSION OF 1 4.80% EARNED BY THE ASSESSEE DURING THE YEAR IS HIGHER THAN THE EFFECTI VE COMMISSION RATE OF 12% CONSIDERED TO BE APPROPRIATE BY THE ITAT IN EARLIER YEARS. ITA NO.677/15 SP NO.73/16 :- 6 -: 10. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITS THAT GROUND NO.2.2 AND 2.5 RELEVANT TO REJECTION OF COMPARABLE UNCONTROLLED PRICE METHOD FOR BENCH MARKING MARKETING SUPPORT SERVICES AND ON THE EFFECTIVE RATE OF COMMISSION EARNED BY THE ASSESSE E DURING THE YEAR IS HIGHER THAN THE EFFECTIVE COMMISSION RATE OF 12% CO NSIDERED TO BE APPROPRIATE BY THE ITAT, ARE NOT PRESSED. THE LD.S R. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ONLY ISSUE REMAINS FOR AD JUDICATION IS WHETHER THE SINGLE COMPARABLE ADOPTED BY THE DRP BA SED ON WHICH WHETHER TRANSFER PRICING ADJUSTMENT CAN BE MADE OR NOT IS THE QUESTION TO BE DECIDED. 11. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITS THA T DURING THE ASSESSMENT YEAR AMONG OTHER INTERNATIONAL TRANS ACTIONS, THE ASSESSEE HAS ALSO ENTERED INTO INTERNATIONAL TRANSA CTIONS OF MARKETING SERVICES WITH ITS ASSOCIATED ENTERPRISE I.E PARENT COMPANY/HEAD OFFICE. IT IS SUBMITTED THAT HEAD OFFICE HAD ALSO APPOINTED M/S SPINCO BIOTECH PVT. LTD, A THIRD PARTY AS ANOTHER MARKETING SERVIC E COMPANY IN INDIA. IT IS THE SUBMISSION OF THE LD. SR. COUNSEL FOR THE ASSESSEE THAT IN THE TRANSFER PRICING DOCUMENTATION FOR MARKETING SERVIC ES RELATED TO INTERNATIONAL TRANSACTION, THE ASSESSEE ADOPTED CU P METHOD AS THE MOST APPROPRIATE METHOD BY RELYING ON THE WEIGHTED AVERAGE RATE OF COMMISSION RECEIVED BY M/S SPINCO. THE RATE OF COM MISSION RECEIVED BY M/S SPINCO WAS 15.7% WHEREAS THE ASSESSEE HAS E ARNED ITA NO.677/15 SP NO.73/16 :- 7 -: COMMISSION @ 14.8%. THEREFORE, IT IS CONTENDED THA T THE MARKETING SERVICES RELATED INTERNATIONAL TRANSACTION WAS AT A LP. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITS THAT IN THE TRANS FER PRICING ASSESSMENT, THE TPO HELD THAT M/S SPINCO IS NOT FUN CTIONALLY COMPARABLE FOR THE REASON THAT (A) GREATER ROLE OF ASSISTANCE AND GREATER FUNCTIONS ASSUMED BY THE ASSESSEE-COMPANY T HAN M/S SPINCO, (B) WARRANTY RISK/POST SALES SERVICES, AND (C) REST RICTIONS IMPOSED ON M/S SPINCO. IT IS SUBMITTED THAT BASED ON THE DIFF ERENCE IN THE FUNCTIONAL PROFILE BETWEEN THE ASSESSEE AND M/S SP INCO, THE TPO HELD THAT CUP METHOD CANNOT BE APPLIED, THEREFORE, THE T PO REJECTED THE CUP METHOD AND PROCEEDED TO ADOPT EXTERNAL TNMM AS THE MOST APPROPRIATE METHOD. THE LD. SR. COUNSEL SUBMITS TH AT BASED ON THE DIFFERENCE IN THE FUNCTIONAL PROFILE BETWEEN ASSES SEE AND M/S SPINCO, THE TPO HELD THAT CUP METHOD CANNOT BE APPLIED FOR THE FOLLOWING REASONS: (A) ASSESSEE UNDERTAKES CONTRACT SERVICE SEGMENT WHICH CANNOT BE COMPARED WITH ENTREPRENEURIAL SERVICE SEGMENT OF SPINCO (REFER PG 11 CONTINUATION OF PAR A 9.1). (B) VARIABLE RISK PROFILE BETWEEN ASSESSEE AND SPINCO CANNOT BE COMPARED UNDER CUP METHOD (REFER PG 14 CONTINUATION OF PARA 9.4) (C) SPINCO IS RESTRICED FROM SUPPLYING TO INTERMEDIARIE S WHEREAS ASSESSEE IS NOT SO RESTRICTED (REFER PG 1 4 PARA 9.8 OF TP ORDER) (D) COUPLE OF DECISIONS WHEREIN IT IS HELD THAT TO APPL Y CUP METHOD, PRODUCT/SERVICES SHOULD HAVE CLOSE SIMILARI TY (REFER PG 14 PARA 9.6 & 9.7 OF TP ORDER). ITA NO.677/15 SP NO.73/16 :- 8 -: THE LD. SR. COUNSEL FOR THE ASSESSEE FURTHER SUBMI TS THAT INITIALLY THE TPO SELECTED 10 COMPARABLES BUT BASED ON THE REPLY TO THE SHOW CAUSE NOTICE, THE TPO SELECTIVELY ACCEPTED ASSESSE ES REPLY IN RESPECT OF THREE EXTERNAL COMPARABLE COMPANIES AND REMOVED THEM. HE SUBMITS THAT FINALLY THE TPO SELECTED SEVEN COMPAR ABLE COMPANIES FROM COMPARABLES. HE SUBMITS THAT THE TPO COMPARED THE TNMM OF SEVEN COMPARABLE CASES AT 15.82% WITH THAT OF ASSE SSEES OVERALL MARGIN OF (-) 1.40% BY CONSIDERING MARKETING COMMIS SION SEGMENT ALONGWITH THE TRADE AND AFTER SALES SEGMENT NET MA RGINS AND PROPOSED ADJUSTMENT OF ` 2.33 CRORES. 12. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE DRP SUSTAINED THE TNMM ADOPTED BY THE TPO AND REJECTED THE CUP METHOD. IT IS SUBMITTED THAT THE DRP CONSIDERED AN D HELD THAT INTERNAL TNMM IS MUCH BETTER THAN EXTERNAL TNMM. ACCORDINGL Y, DRP ENHANCED THE ASSESSMENT HOLDING THAT SINGLE COMPANY M/S SPINCO COULD BE CONSIDERED AS A COMPARABLE COMPANY UNDER T NMM METHOD. HE FURTHER SUBMITS THAT THE DRP DIRECTED THE TPO T O APPLY INTERNAL TNMM USING OPERATING PROFIT TO OPERATING COST AS PL I. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITS THAT DRP ELIMINAT ED SIX COMPARABLES OUT OF SEVEN TAKEN BY THE TPO EXCEPT M/S SPINCO. H E FURTHER SUBMITS THAT TRANSFER PRICING ADJUSTMENT CANNOT BE BASED ON SINGLE COMPARABLE, THEREFORE, THE MATTER SHOULD GO BACK FO R FRESH ITA NO.677/15 SP NO.73/16 :- 9 -: ADJUDICATION. THE LD. SR. COUNSEL STRONGLY PLACED RELIANCE ON THE DECISION OF AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF FORTUNE INFOTECH LTD VS ACIT IN I.T.A.NO. 274/AHD/13 DATED 3.2.2016. HE SUBMITS THAT IT IS A FINDING OF FACT BY THE AUTHORI TIES BELOW THAT FUNCTIONS PERFORMED BY THE ASSESSEE AND THE FUNCTI ONS PERFORMED BY M/S SPINCO ARE NOT SAME. HE FURTHER SUBMITS THAT A S PER THE PROVISIONS OF SEC. 10B(2), WHEN FUNCTIONS ARE DIFFE RENT, THE COMPARABLE CEASES TO BE A COMPARABLE. THE LD. SR. COUNSEL FUR THER SUBMITS THAT DRP ACCEPTS THAT SEGMENTAL FINANCIALS HAVE TO BE CO NSIDERED AND THERE IS NO DISPUTE ON THIS. HE SUBMITS THAT THE ONLY IS SUE FOR CONSIDERATION IS WHETHER ONE COMPARABLE OR SEVEN COMPARABLES TO BE CONSIDERED. PLACING RELIANCE ON PARA 11 OF THE DECISION OF AHME DABAD TRIBUNAL IN THE CASE OF FORTUNE INFOTECH LTD (SUPRA), THE LD. S R. COUNSEL SUBMITS THAT M/S SPINCO COULD NOT BE CONSIDERED AS COMPARAB LE FOR THE REASON THAT THE TPO HAS GIVEN A CATEGORICAL FINDING THAT T HE FUNCTIONS PERFORMED BY THE ASSESSEE ARE MUCH MORE THAN THE F UNCTIONS PERFORMED BY M/S SPINCO. FURTHER, THE TPO HAS ALSO HELD THAT THE RISK ASSUMED BY THE ASSESSEE AND M/S SPINCO ARE NOT THE SIMILAR. DRP ALSO HAVING HELD THAT M/S SPINCO IS NOT FUNCTIONALL Y COMPARABLE OUGHT NOT TO HAVE PROCEEDED TO CONSIDER M/S SPINCO AS A C OMPARABLE COMPANY BY ADOPTING A DIFFERENT METHOD. THEREFORE, IT IS SUBMITTED THAT M/S SPINCO CANNOT BE CONSIDERED AS A COMPARABL E COMPANY. THE ITA NO.677/15 SP NO.73/16 :- 10 -: LD. SR. COUNSEL FURTHER SUBMITS THAT A SINGLE COMPA RABLE COMPANY WILL NOT INDICATE THE INDUSTRY/SEGMENT MARKET TREND. THE REFORE, FOR THE PURPOSE OF COMPARABILITY MULTIPLE COMPANIES SHOULD BE CONSIDERED. FURTHER, AS PER TNMM THE AVERAGE NET MARGIN OF COMP ARABLE COMPANIES IS COMPARED WITH NET MARGIN OF THE TESTED PARTY. THIS IMPLIEDLY MEANS THAT AT LEAST TWO COMPANIES SHOULD BE CONSIDERED AS COMPARABLES FOR THE PURPOSE OF BENCHMARKING ANALYSI S UNDER TNMM METHOD. 13. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPP ORTS THE ORDERS OF THE AUTHORITIES BELOW. 14. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. IN THIS CASE, THE TPO RE JECTED THE CUP METHOD ADOPTED BY THE ASSESSEE AS THE MOST APPROPR IATE METHOD HOLDING THAT THERE WERE WIDE DIFFERENCE BETWEEN THE ASSESSEE AND M/S SPINCO WITH REFERENCE TO THE FUNCTIONS AND RISK ASSUMED. IN PARA 9.4 OF THE TPOS ORDER, IT WAS SPECIFICALLY BROUGHT ON RECORD BY THE TPO THAT M/S SPINCO IS FUNCTIONALLY DIFFERENT THAN THE ASSESSEE- COMPANY AND THEREFORE, WHY IT SHOULD NOT BE COMPARE D UNDER CUP METHOD. HAVING HELD THAT M/S SPINCO CANNOT BE CONS IDERED AS A COMPARABLE FOR CUP METHOD, THE TPO HOLDS THAT TNMM IS THE MOST APPROPRIATE METHOD IN THE PRESENT CASE. THE TPO S ELECTED TEN ITA NO.677/15 SP NO.73/16 :- 11 -: COMPARABLES HOWEVER, RESTRICTS FINALLY TO SEVEN COM PARABLES TO COMPARE THE MARGINS AT PROFIT LEVEL AND NOT AT THE SEGMENTAL PROFITS. THE DRP ACCEPTS THE REJECTION OF CUP METHOD AND AD OPTION OF TNMM BY THE TPO. FURTHER, THE DRP CONSIDERED M/S SPINCO AS THE ONLY COMPARABLE AND ELIMINATES THE OTHER COMPARABLES. T HE DRP HOLDS THAT SEGMENTAL PROFITS SHOULD BE CONSIDERED. THE Q UESTION NOW BEFORE US IS AS TO WHETHER THE SINGLE COMPARABLE AND THAT TOO A COMPARABLE WHICH WAS FUNCTIONALLY DISSIMILAR AS HELD BY THE TP O CAN BE CONSIDERED FOR DETERMINING TRANSFER PRICING ADJUSTMENT? IN TH E CASE OF M/S FORTUNE INFOTECH LTD (SUPRA) IT WAS HELD THAT IN AN INDIRECT METHOD LIKE TNMM, A REASONABLE NUMBER OF COMPARABLES IS AN IMPO RTANT FACTOR TO ENSURE THAT THE RESULTS ARE TRULY REPRESENTATIVE OF THE SEGMENT TO WHICH THE TESTED PARTY BELONGS. IT WAS ALSO HELD T HAT WHEN ONLY ONE COMPARABLE IS AVAILABLE FOR APPLICATION OF A PARTIC ULAR METHOD, THIS SERIOUS LIMITATION ON THE AVAILABILITY OF DATA, CER TAINLY RELEGATES ITS APPROPRIATENESS VIS-Z-VIS OTHER ALTERNATE METHODS A VAILABLE SUCH AS EXTERNAL TNMM IN RESPECT OF WHICH SUFFICIENT AND ES SENTIALLY RELIABLE DATA IS AVAILABLE. IT WAS HELD THAT FOR THIS REASO N ALONE, INTERNAL TNMM IS CERTAINLY NOT THE MOST APPROPRIATE METHOD ON THE FACTS OF THE CASE. WHILE HOLDING SO, THE TRIBUNAL OBSERVED AS UNDER: 10. WE HAVE NOTED THAT DURING THE COURSE OF THE HEAR ING BEFORE US, LEARNED COUNSEL VEHEMENTLY CONTENDED THA T, ON THE FACTS OF THIS CASE, THE INTERNAL TRANSACTIONAL NET MARGIN ITA NO.677/15 SP NO.73/16 :- 12 -: METHOD WAS WRONGLY REJECTED BY THE AUTHORITIES BELO W. HIS CONTENTION WAS THAT UNDOUBTEDLY FIDELITY US WAS AN ASSOCIATED ENTERPRISE IN AN EARLIER ACCOUNTING PERIOD BUT THAT ASPECT OF THE MATTER WAS WHOLLY IRRELEVANT SINCE THE PRICES F OR WORK DONE FOR FIDELITY US WERE NEGOTIATED AFRESH AFTER T HIS CONCERN CEASED TO AN AE. LEARNED COUNSEL TOOK PAINS TO TAKE US THROUGH THE DOCUMENTS IN SUPPORT OF THE FACTS EMBED DED IN HIS ARGUMENTS, BUT, FOR THE REASONS WE WILL SET OUT IN A SHORT WHILE AND IN OUR CONSIDERED VIEW, IT IS NOT REALLY NECESSARY TO GO INTO THAT ASPECT OF THE MATTER. WHEN WE PUT IT T O THE LEARNED COUNSEL THAT WHEN ONLY ONE COMPARABLE IS AV AILABLE SO FAR AS INTERNAL TNMM IS CONCERNED, AND THE RELIABI LITY OF THIS COMPARABLE IS ALSO NOT FREE FROM DOUBT, WOULD IT R EALLY BE APPROPRIATE TO SELECT THIS METHOD AS MOST APPROPRI ATE METHOD FOR DETERMINING ARMS LENGTH PRICE ON THE F ACTS OF THIS CASE, HE QUICKLY RESPONDED THAT THERE IS NO S TATUTORY BAR ON APPLICATION OF A PARTICULAR METHOD ONLY BECAUSE ONE COMPARABLE IS AVAILABLE FOR BENCHMARKING. HE REFERR ED TO JUDICIAL PRECEDENTS IN SUPPORT OF THE PROPOSITION S O ADVANCED BY HIM. THAT IS NOT, HOWEVER, THE ISSUE; IT IS NOT A QUESTION OF STATUTORY BAR. THE QUESTION IS AS TO WHAT IS THE M OST APPROPRIATE METHOD ON THE FACTS OF THAT CASE, AND T HIS QUESTION CANNOT BE DECIDED IN VACUUM OR IN AN ABSTR ACT OR THEORETICAL TERMS. IT HAS BE CONSIDERED IN THE LIG HT OF THE FACTS OF THAT CASE, IN THE LIGHT OF AVAILABILITY O F NECESSARY INPUTS FOR VARIOUS ALTERNATIVE OPTIONS AND IN THE L IGHT OF OTHER RELEVANT FACTORS. IF IN ONE CASE THE TRIBUNAL HAS H ELD THAT EVEN ONE COMPARABLE IS GOOD ENOUGH FOR DETERMINING THE ARMS LENGTH PRICE ON THE BASIS OF ONE OF THE PRESCRIBED METHODS, AND THAT METHOD IS MOST APPROPRIATE METHOD IN A GIV EN SITUATION, IT CANNOT BE INFERRED THAT IRRESPECTIVE OF THE METHOD EMPLOYED AND DE-HORS THE PECULIARITIES OF A FACT SITUATION, A SINGLE COMPARABLE IS GOOD ENOUGH FOR ALL THE METHODS OF DETERMINING ARMS PRICE, SO AS TO BE TRE ATED AS MOST APPROPRIATE METHOD FOR THAT PURPOSE. IN AN IN DIRECT METHOD LIKE TNMM, A REASONABLE NUMBER OF COMPARABLE S IS AN IMPORTANT FACTOR TO ENSURE THAT THE RESULTS ARE TR ULY REPRESENTATIVE OF THE SEGMENT TO WHICH THE TESTED P ARTY BELONGS. THE SITUATION WITH REGARD TO DIRECT METHOD S LIKE CUP, AS LONG AS TRANSACTIONS ARE ESTABLISHED TO BE BONA FIDE, COULD BE SLIGHTLY DIFFERENT. THERE ARE NO YARDSTICKS OF UNIVERSAL ITA NO.677/15 SP NO.73/16 :- 13 -: APPLICATION. HOWEVER, THE MANDATE OF SECTION 92C(1), READ WITH RULE 10C, IS UNAMBIGUOUS. A METHOD SELECTED FO R BENCHMARKING MUST BE A PERMISSIBLE METHOD TO BE IN CLUDED IN THE CONSIDERATION ZONE, BUT EVEN ITS PRESENCE IN THE CONSIDERATION ZONE IS NOT GOOD ENOUGH TO JUSTIFY IT S APPLICATION FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS ON THE FACTS OF A PARTICULAR CASE BECAUSE SUCH A METHOD HAS TO BE NOT ONLY A PERMISSIBLE METHOD BUT ALSO MOST APPROPRIATE MET HOD HAVING REGARD TO ALL THE MATERIAL FACTORS, INCLUDIN G AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPL ICATION OF SUCH A METHOD. THE METHOD SELECTED FOR BENCHMARKIN G MUST NOT ONLY BE A PERMISSIBLE METHOD BUT IT ALSO BE TH E MOST APPROPRIATE METHOD ON THE FACTS AND CIRCUMSTANCES OF THAT CASE AND VIS--VIS THE OTHER METHODS WHICH CAN BE A PPLIED ON THE FACTS OF THAT CASE. THE SELECTION OF MOST APPRO PRIATE METHOD IS NOT SIMPLY DECIDING A QUESTION AS TO WHA T IS PERMISSIBLE AND WHAT IS NOT PERMISSIBLE, BECAUSE, A S IS ELEMENTARY, EVERYTHING PERMISSIBLE IN LAW, AS INDEE D IN ALL WALKS OF LIFE, IS NOT NECESSARILY THE MOST APPROPRIATE TH ING AS WELL. IT IS IMPORTANT TO BEAR IN MIND THE FACT THAT UNDER SE CTION 92C(1), THE ARMS LENGTH PRICE IN RELATION TO AN INT ERNATIONAL TRANSACTION SHALL BE DETERMINED BY ONE OF THE ...( PRESCRIBED)... METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION O R CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH P ERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCR IBE. RULE 10C, WHICH PRESCRIBES THE RELEVANT FACTORS FOR DETER MINING THE MOST APPROPRIATE METHOD, AS IT STOOD AT THE REL EVANT POINT OF TIME, STATES AS FOLLOWS: RULE 10 C- MOST APPROPRIATE METHOD. (1) FOR THE PURPOSES OF SUB-SECTION (1) OF SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BES T SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR INTE RNATIONAL TRANSACTION AND WHICH PROVIDES THE MOST RELIABLE ME ASURE OF AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPE CIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANS ACTION; ITA NO.677/15 SP NO.73/16 :- 14 -: (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING 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 TRAN SACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIO NS REQUIRED TO BE MADE IN APPLICATION OF A METHOD [EMPHASIS, BY UNDERLINING, SUPPLIED BY US] 11. THE SCHEME OF THE TRANSFER PRICING LEGISLATION IN INDIA IS THUS UNAMBIGUOUS. THERE IS NO DISPUTE THAT THE SELE CTION OF MOST APPROPRIATE METHOD IS NOT IN THE UNFETTERED DISCRETION OF THE ASSESSEE AND IT IS SOMETHING WHICH CAN ALWAY S BE SUBJECT MATTER OF ADJUDICATION AT THE ASSESSMENT AS WELL AS APPELLATE STAGE. THE TPO HAS A RIGHT, AS INDEED DUT Y, TO EXAMINE WHETHER A PARTICULAR METHOD ADOPTED BY THE A SSESSEE IS INDEED MOST APPROPRIATE METHOD OF DETERMINING AR MS LENGTH PRICE ON THE FACTS OF A PARTICULAR CASE. ONE OF THE IMPORTANT FACTORS GOVERNING THE DECISION ON AS TO WHAT WILL C ONSTITUTE THE MOST APPROPRIATE METHOD, AS SET OUT IN RULE 10C( 1)(C) ABOVE, IS THE AVAILABILITY, COVERAGE AND RELIABILI TY OF DATA NECESSARY FOR APPLICATION OF THE METHOD. THE AVAIL ABILITY OF DATA, WITH RESPECT TO A PARTICULAR METHOD VIS-A-VIS OTHER METHODS OF DETERMINING THE ALP, IS THUS ONE OF THE CRUCIAL FACTORS IN DECIDING WHETHER THAT PARTICULAR METHOD OF DETERMINING THE ALP IS MOST APPROPRIATE METHOD OF DETERMINING ALP ON THE FACTS OF THAT CASE, OR NOT. WHEN ONLY ITA NO.677/15 SP NO.73/16 :- 15 -: ONE COMPARABLE IS AVAILABLE FOR APPLICATION OF A PA RTICULAR METHOD, THIS SERIOUS LIMITATION ON THE AVAILABILITY OF DATA, IN OUR CONSIDERED VIEW, CERTAINLY RELEGATES ITS APPROP RIATENESS VIS-A-VIS OTHER ALTERNATE METHODS AVAILABLE, SUCH A S EXTERNAL TNMM, IN RESPECT OF WHICH SUFFICIENT, AND ESSENTIAL LY RELIABLE, DATA IS AVAILABLE. FOR THIS SHORT REASON ALONE, THE INTERNAL TNMM IS CERTAINLY NOT THE MOST APPROPRIATE METHOD O N THE FACTS OF THIS CASE. THAT IS ONE ASPECT OF THE MATTE R. THE OTHER ASPECT OF THE MATTER IS ITS RELIABILITY. THE FACT THAT THE INDEPENDENT ENTERPRISE WAS AN ASSOCIATED ENTERPRISE IN NOT SO DISTANT A PAST, THE FACT THAT DESPITE ITS BECOMING, IN LEGAL TERMS AND AS AN OFFSHOOT OF GROUP RESTRUCTURING, AN INDEPENDENT ENTERPRISE, THE ASSESSEE CONTINUES TO W ORK FOR THIS ENTERPRISE EVEN AFTER MAKING HUGE LOSSES, AS H IGH AS 21.75% ON COST, AND THE FACT THAT IT IS A SINGLE COMPA RABLE, DOES RAISE SERIOUS APPREHENSIONS ABOUT ITS RELIABIL ITY. THIS FACT SITUATION, COUPLED WITH THE ADMITTED POSITION THAT SUFFICIENT NUMBER OF EXTERNAL COMPARABLES FOR TNMM ARE AVAILABL E, DOES LEAVE THE INTERNAL TNMM MUCH LOWER IN THE HIERARCHY OF METHODS, PARTICULARLY VIS--VIS EXTERNAL TNMM, APPRO PRIATE FOR DETERMINING THE ALP ON THE FACTS OF THIS CASE. WE ARE OF THE CONSIDERED VIEW THAT THE INTERNAL TNMM, ON THE BASIS OF WHICH THE ASSESSEE HAD DONE ITS BENCHMARKING, WAS I NDEED NOT THE MOST APPROPRIATE METHOD ON THE FACTS OF THIS CA SE. FOR THIS SHORT REASON ALONE, AND WITHOUT ADDRESSING OUR SELVES TO THE MERITS OF THE LINE OF REASONING ADOPTED BY THE AUTHORITIES BELOW, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE TPO AND THE DRP AND DECLINE TO INTERFERE IN THE MATTER. A L OT OF ARGUMENTS HAVE BEEN ADDRESSED ON WHETHER THE SERVIC ES RENDERED TO THE NON AE CAN BE COMPARED WITH THE SER VICES RENDERED TO THE AE, BUT, GIVEN OUR ABOVE CONCLUSION S, THAT ASPECT OF THE MATTER IS WHOLLY ACADEMIC. 15. IN THE PRESENT CASE, THE AUTHORITIES BELOW HAVING H ELD THAT M/S SPINCOS OPERATIONS ARE FUNCTIONALLY DIFFERENT THAN THE ASSESSEE, IN OUR CONSIDERED VIEW, M/S SPINCO CANNOT BE TAKEN AS A COMPARABLE. WHEN M/S SPINCO CEASES TO BE A COMPARABLE, THE TPO SHOULD LOOK FOR ITA NO.677/15 SP NO.73/16 :- 16 -: EXTERNAL COMPARABLES WHICH HE HAS RIGHTLY ADOPTED S OME OF THE EXTERNAL COMPARABLES. THEREFORE, FOLLOWING THE DEC ISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF FORT UNE INFOTECH LTD.(SUPRA), WE RESTORE THE MATTER TO THE FILE OF T HE TPO WHO SHALL CONSIDER THE EXTERNAL COMPARABLES AND DETERMINE THE ALP BY TAKING THE SEGMENTAL FINANCIALS AFTER PROVIDING ADEQUATE O PPORTUNITY OF BEING HEARD TO THE ASSESSEE. 16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES AND THE STAY PETITION IS DISMI SSED AS INFRUCTUOUS. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH MARCH, 2016, AT CHENNAI. SD/- SD/- ( !'# $ % ) (CHANDRA POOJARI) &' / ACCOUNTANT MEMBER # ( !) *+' & ) ( CHALLA NAGENDRA PRASAD) + &' / JUDICIAL MEMBER !+ / CHENNAI ,& / DATED: 30 TH MARCH, 2016 RD &-## ./#0/ / COPY TO: # 1 . / APPELLANT 4. # 1 / CIT 2. / RESPONDENT 5. /2*# 3 / DR 3. # 1#(4 / CIT(A) 6. *5#6 / GF