TRL RICELAND PVT. LTD.,(FORMERLY KNOWN AS M/S TILDA RICELAND P.LTD.),NEW DELHI V. ADDL.CIT, SPECIAL RANGE- 9, NEW DELHI

MA 69/DEL/2022

AI Insights

The case involves TRL Riceland Pvt. Ltd, which is engaged in the business of paddy purchase, rice milling, and export of rice. The company had entered into international transactions with its Associated Enterprises (AEs) and used the CUP method for benchmarking these transactions. However, the Transfer Pricing Officer (TPO) rejected this method and proposed the Transactional Net Margin Method (TNMM), leading to an adjustment in the ALP. The Tribunal initially accepted the CUP method in a previous assessment year but later found an error in the application of this method in the current assessment year, leading to the filing of a miscellaneous application by the assessee to rectify the order.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 470158 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 6 month(s) 16 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 28-10-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Assessment Year: 2014-2015
• Appeal Filed On: 11-04-2022
• Other Referred Cases: Serdia Pharmaceuticals Pvt Ltd Vs ACIT, Asstt. CIT vs. MSS India (P) Ltd., ACIT vs Tara Ultimo Pvt Ltd
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KANV BALI
• Assessee Lawyers: NAGESWAR ROA
• Keywords: Transfer pricing; International transaction
• Section: 13; 10B; 20

Judgement Text

"Page | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I”: NEW DELHI BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI M. BALAGANESH, ACCOUNTANT MEMBER MA No. 69/Del/2022 (In ITA No. 7366/Del/2018) (Assessment Year: 2014-15) TRL Riceland Pvt. Ltd, (formerly known as M/s. Tilda Riceland Pvt. Ltd), Eros Corporate Towers, Level-15, Nehru Place, New Delhi Vs. Addl. CIT, Special Range-9, New Delhi (Appellant) (Respondent) PAN:AAACU0649N Assessee by : Shri Nageswar Roa, Adv Ms. Anshika Aggarwal, Adv Revenue by: Shri Kanv Bali, Sr. DR Date of Hearing 23/08/2024 Date of pronouncement 28/10/2024 O R D E R PER M. BALAGANESH, A. M.: 1. By virtue of this miscellaneous application the assessee seeks to rectify the order passed by this Tribunal in ITA No. 7366/Del/2018 dated 17.11.2021 for AY 2014-15. 2. We have heard the rival submissions and perused the material available on record. The assessee is engaged in the business of paddy purchase, rice milling and export of rice. Basmati Rice products manufactured by the assessee include traditional and evolved brown basmati rice, raw and sella milled basmati rice. These varieties of basmati rice are primarily exported to European Union and Middle East countries, USA etc. The assessee entered with the various international transactions with its Associated Enterprises (AEs). The assessee had MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 2 chosen Comparable Uncontrolled Price (CUP) method for benchmarking its international transaction with regard to export of rice using TIPS database as procured from Customs Department and compiled by TIPS Software Services Pvt. Ltd. This data base provided quantum, price, date, quality, quantity and types of rice exported by various parties in India to European Union, Middle Eastern countries, USA etc. The Transfer Pricing Officer (TPO) vide order u/s 92CA(3) of the Act dated 26.09.2017 rejected CUP method and proposed Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and made an adjustment of Rs. 84,45,235/- while determining the Arm‘s Length Price (ALP) of international transaction of export of rice. The assessee in its miscellaneous application had stated that the ld TPO had also brought on record the favourable order passed by Delhi Tribunal in assessee‘s own case for AY 2008-09 in ITA NO. 6279/Del/2012 dated 21.02.2014. Pursuant to the directions of the ld DRP, the margins of comparable companies stood recomputed and ALP adjustment of Rs. 97,57,951/- was made on account of export of rice. 3. We find that this tribunal in its order dated 17.11.2021 vide para 12 sought to rely on the Tribunal order passed in assessee‘s own case for AY 2008-09 accepting the CUP method for export of rice. However, while reproducing the relevant operative portion of the order, this tribunal committed an error by reproducing the operative operation of some other order which is not at all germane to the issue in dispute. This mistake has been rightly pointed out by the assessee in its miscellaneous application, which, in our considered opinion, requires to be corrected and modified. Hence, para 12 of the Tribunal order dated 17.11.2021 shall read as under:- 12. The Tribunal in Assessment Year 2008-09 in the case of the assessee has analyzed the CUP method employed by the assessee MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 3 but averaging of control transactions with its AEs and comparison of the same with average uncontrolled transaction has not been approved by the Tribunal. The Tribunal also did not approve exclusion of high-priced sale instances. The relevant finding of the Tribunal analyzing the CUP method applied by the assessee is reproduced as under:- 13. As regards learned DRP‘s additional observation that, “Further, in a commodity like Basmati rice, it is very difficult to find the exact comparables which can meet the stringent standards required for application of CUP method”, we are unable to see any merits in this approach either. Undoubtedly, product comparability should be closely examined in applying the CUP Method as a price may be materially influenced by differences between the goods in the controlled and uncontrolled transactions, but product comparability does not require the comparables to be exactly the same. The product categorization has been done on the basis of reasonable generic description, and the product being generic in nature, such categorization in reasonable and sufficient. Generic goods, even under different brand names, do not cease to be comparable with each other- unless the impact of brand or other intangibles is so substantial that it distorts the comparison altogether. In any event, even if there are minor variations in prices of generic goods, such factors are adequately taken care of by average in the case of large size of comparables, as is the situation before us. As noted in the UN Transfer Pricing Manual for Developing Countries, with which we are in considered agreement, ―the CUP Method is appropriate especially in cases where an independent enterprise buys or sells products that are identical or very similar to those sold in the controlled transaction ….‖. It would, therefore, indeed seem that for the purpose of applying CUP method would be, a reasonable classification, which could justifiably define the prices, would suffice. We have also noted that the assessee has done categorization of basmati rice, as evident from pages 352 and 253 of the transfer pricing study fi led before us, in three broad geographical categories and seven sub categories, and of non-basmati rice in four broad geographical categories and six sub categories. Let us also not forget that the classification is done on the basis of geographical markets and normally the products sold in a geographical market, due to sheer competitive forces, are broadly similar. It is also useful to refer to certain observations made in UN Transfer Pricing Manual , with which we are in considered agreement, to the effect that “External comparables may be difficult to find in practice unless the transactions involve a fairly MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 4 common and homogeneous product or service. However, the advantages of the CUP Method are great enough to warrant a significant effort to apply the method as not to be influenced by minor variations in the fine points about product quality‖. Viewed thus, even if there be some minor variations in the quality even under the elaborate categorization of rice varieties, such variations, which do not materially affect the prices of uncontrolled trans actions due to large size of comparables and the same geographical consumption market being covered by the comparables, can be ignored. 14. As for rejection of CUP method on the ground that prices of uncontrolled transactions often fluctuate on weekly and even daily basis. The TPO himself has noted in his order, the assessee did not have any contractual arrangement and these were market driven prices on which the exports to AEs took place. It is also important to bear in mind the fact that the assessee has taken average of a quarter so as to ensure that day to day variations in prices do not distort the comparability. Neither there is any specific objection to this averaging, nor has the TPO suggested any better alternative to this approach. In our humble understanding, this method does provide for a reasonable, even if not perfect, solution to the distortion which may creep in case comparison of prices is done on day to day basis, and due to limited comparables being available for the same. Transfer Pricing is not a perfect science but we still have to choose a less imperfect alternative from the various alternatives available. 15. Coming to the inherent edge that direct methods have over indirect methods of determining the arm‘s length principle, which justifies selection of CUP method as the most appropriate method, we may refer to the following observations made by a coordinate bench in the case of Serdia Pharmaceuticals Pvt Ltd Vs ACIT (136 TTJ 139) : 60. The thrust of learned counsel ‘s arguments is that since transfer pricing legislation does not provide for any order of preference in selection of the most appropriate method, no such order of preference—direct or impl ied, can be exercised by us either. 61. This issue is no longer res integra. In the case of Asstt. CIT vs. MSS India (P) Ltd. (2009) 123 TTJ (Pune) 657 : (2009) 25 DTR (Pune)(Trib) 1 : (2009) 32 SOT 132 (Pune), a Co-ordinate Bench of this Tribunal , speaking through one of us (i .e. the AM), had, inter al ia, observed that MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 5 \"While there is no particular order or priority of methods which the assessee must follow, and no method can invariably be considered to be more reliable than others, on a conceptual note, transactional profit methods (i.e. , TNMM and profit split method) are treated as methods of last resort which are pressed into service only when the standard methods, which are also termed as ‗traditional methods‘ (i.e. , CUP method, resale price method and cost plus method) cannot be reasonably applied\". It was noted by the Co - ordinate Bench that the OECD Guidelines also recognize this approach, and the Bench expressed its considered agreement with this approach. We are in considered agreement with the views so expressed by the Co-ordinate Bench. In our considered view, the traditional transact ion methods have an inherent edge over the traditional profit methods in most of the situations, and, therefore, wherever both the methods can be applied in an equally reliable manner, traditional transact ion methods are to be preferred over traditional profit methods. 62. We are alive to the fact that in the 2010 version of OECD Guidelines, OECD has done away with hierarchical approach in selecting the method for determination of ALP. The OECD has abandoned its earlier posit ion that transactional profit methods may be used \"to approximate arm‘s length conditions when traditional transactional methods cannot be reliably applied alone, or exceptionally cannot be applied at al l\". In sharp contrast to the said observation, 2010 OECD Guidelines, in para 2.4, recognize that \"there are situations when transactional profit methods are found to be more suitable (vis -a-vis traditional transactional methods)\" such as, in a situation, \"where each of the party makes a unique contribution in relation to controlled transact ion, or where the parties engage in highly integrated activities\". This change in OECD approach is quite in line with Indian transfer pricing legislation which requires select ion of most appropriate method rather than the method being picked up in the order of priority. To this extent , the approach of OECD and Indian transfer pricing legislation is now quite in harmony with each other. 63. It will , however, be stretching the things too far to suggest that in the 2010 version of OECD Guidelines, all the methods of determining the ALP have been placed at par with each other. The change in the OECD Guidelines, as we see it , is in respect of the order in which suitability MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 6 of the methods is to be considered and in recognition of the fact that there can be situations in which transactional profit methods can have an edge over traditional transactional methods. However, wherever transactional profit methods as also traditional transactional methods can be applied in equally reliable manner, the OECD Guidelines still consider the traditional transactional methods to be preferable, as is evident from following observations in para 2.3 of the OECD Guidelines 2010 : \"2.3 Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between AEs are at arm‘s length. This is because any difference in the price of a controlled transaction from the price of a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the AEs, and the arm‘s length conditions can be established by directly substituting the price in comparable uncontrolled transaction for the price of the controlled transaction. As a result, where, taking into account the criteria established in para 2.2, a traditional transact ion method and a tradition profit method can be applied in a equally reliable manner, the traditional transact ion method is to be preferred over traditional profit method. Moreover, where, taking into account the criteria established in para 2.2, the CUP method and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred….. .. . .\" 64. In other words, therefore, even as there may not be any order of preference in which methods of determining the ALP must be considered, the traditional transaction methods, and particularly CUP, have an edge in the sense that al l things being equal , CUP and traditional transact ion methods are preferred over the transaction profit method. We are broadly in agreement with these views. Whether we proceed on the basis that there is an order of preference in which transfer pricing methods are to be applied, or whether we proceed without any such priority order, the fact remains that as long as CUP method can be reasonably applied in determining the ALP of an international transaction in a particular fact situation, and unless another method is proven to be more reliable a MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 7 method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. The reason is simple. When AEs enter into a transaction at such conditions in commercial and financial terms, which are different from commercial and financial terms imposed in comparable transact ion between independent enterprises, the differences in these two sets of conditions in financial and commercial terms are attributed to inter-relationship between the AEs, and it is this impact of inter-relationship between the AEs that is sought to be neutralized by the transfer pricing regulations. As long as CUP method can be reliably applied on the facts of a case, it does offer most direct method of neutralizing the impact of inter - relationship between AEs on the price at which the transactions have been entered into by such AEs. 16. In view of the above discussions , and bearing in mind entirety of the case, we are of the considered view that the ALP determination under CUP Method on the basis of ‗Daily Export Port Data – April 2007- March 2008‘ , by adopting quarterly averages, was wrongly rejected by the TPO and the DRP. 17. However, having held that the CUP method is indeed the most appropriate method on the facts of this case, and that the compilation of daily exports port data does constitute a reasonable source of inputs, we have to point out some apparent errors, which came to the light during the course of hearing before us, in the application of this method. 18. The first thing we have noticed is that the assessee has determined arm‘s length price of its transactions with the AEs by comparing average export price by the assessee to its AEs with the average uncontrolled export price. This approach is patently incorrect inasmuch as while under rule 10 B (1)(a)(i), it is indeed open to compute ALP on the basis of price charged in a comparable controlled transaction or ‗a number of such transactions‘ , but the arm‘s length price so computed is, under rule 10B(1)(a)(iii), taken as arm‘s length price in respect of property transferred in the international transact ion. The expression ‗ the international transaction‘ referred to in rule 10 B(1)((a)(iii) is used in singular and does not permit taking into account, unlike rule 10B(1)(a)(i), ‗a number of such transactions ‘ . While averaging is thus permissible for the uncontrolled transactions, each international transaction is to be taken on standalone basis. In our humble understanding, it is not open to the assessee to compare the average price in his transactions with AEs with average price in uncontrolled transactions. Dealing MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 8 with a somewhat similar issue, though in the context of cost plus method of ascertaining the arm‘s length price, a coordinate bench of this Tribunal, in the case of ACIT vs Tara Ultimo Pvt Ltd (143 TTJ 91), has explained this principle as follows: ………. .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 could take into account a series of same or similar transact ions. In other words, while setting the benchmark, one can take into account several transact ions with unrelated enterprise on what 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 application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of CPM is also evident from the plain wordings of r. 10B as well . Any other view of the matter will result in incongruities. For example, if our average mark-upto unrelated enterprises is 20 per cent , and we charge a mark-up of 2 per cent in one transact ion with AE and 38 per cent in another transact ion with the AE, both these transactions, by 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 result ing in an ALP. In this particular case, for example, the normal mark-up in transact ions with has been computed at 16.31 per cent, 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 p. 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 invoices), and 14.16 per cent is given by assessee‘s own computation, and, on the same page, on one invoice, the assessee has shown a margin as high as 27 per cent. The CPM, therefore, 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 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 al l other relevant factors are material ly similar vis -a-vis the transact ions with independent enterprises. The CPM is MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 9 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 transact ions with non AEs. In view of these discussions, the CIT(A) was in error in upholding assessee‘s computation of ALP by CPM 19. The second thing that we has been noticed is that the assessee has excluded exceptional ly high prices. In our considered view, the CUP method does not al low exclusion of high priced sale instances, unless such high prices could be explained by differences of product or commercial terms. In any event, exclusion of extreme cases, such as in determination of ALP under the CUP method. However, we donot wish to give any findings, as assessee has not been given effective opportunity of hearing on this issue, in this respect beyond stating that we are remitting the matter to the file of the Assessing Officer for fresh determination of arm‘s length price under the CUP method, and while so determining the ALP, the observations made above, as also in preceding paragraphs, shall be duly considered. During the course of our hearing, this proposition was put to the learned representatives, and learned representatives fairly agreed to accept these direct ions. In effect, thus, the CUP method is upheld in principle but the determination of ALP, under the CUP method, is restored to the file of the Assessing Officer in the light of our observations above. 20. As we have approved the application of CUP method in principle, on the facts of this case, we see no need to deal with the issues relating application of TNMM method and the comparables selected for the said purpose. Al l those issues are academic in the present context.‖ 4. Either way, ultimately we find that the Tribunal in para 13 of its order had only restored this issue to the file of ld AO/ TPO for determination of ALP in terms of the directions of the Tribunal for AY 2008-09. Hence, the conclusion reached by this Tribunal in its para 13 does not require to be modified. MA No. 69/Del/2022 TRL Riceland Pvt. Ltd Page | 10 5. In the result, the miscellaneous application of the assessee is allowed and order dated 17.11.2021 stands modified in the above mentioned terms. Order pronounced in the open court on 28/10/2024. -Sd/- -Sd/- (KUL BHARAT) (M BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28/10/2024 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi "