Tilda Rice Delhi I bench Final - · PDF filebasmati rice, evolved basmati rice, raw milled basmati rice, sella milled basmati rice, raw brown basmati rice, sona maoori

I.T.A. No.: 6279/Del/2012

Assessment year: 2008-09

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IN THE INCOME TAX APPELLATE TRIBUNAL,

DELHI I BENCH, NEW DELHI

[Coram : Pramod Kumar AM and Rajpal Yadav JM]

I.T.A. No. : 6279/Del/2012


Tilda Riceland Pvt Ltd ………………….Appellant

Eros Corporate Towers, Level 15

Nehru Place, New Delhi 110 019

[PAN : AAACU0649N]

Vs.

Assistant Commissioner of Income Tax

Circle 16(1), New Delhi …………….…Respondent

Appearances by:

Deepak Chopra, for the appellant

Peeyush Jain and YK Verma, for the respondent

Date of concluding the hearing : December 24, 2013

Date of pronouncing the order : February 21, 2014

O R D E R

Per Pramod Kumar:

1. This is an appeal fi led by the taxpayer against the assessment order

dated 15 t h November 2012 passed by the Assessing Officer under section

143(3) r.w.s. 144 C of the Income Tax Act, 1961 ( hereinafter referred to

as ‘the Act’) , for the assessment year 2008 -09.

2. The core issue that we are required to adjudicate in this appeal is

whether or not the Assessing Officer was justif ied in making an arm’s

length price (ALP) adjustment of Rs. 26,07,70,513 under section 92 C of

http://transfer-pricing.in

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the Act. To decide this core issue, we also have to deal with the question

as to which method, on the facts and in the circumstances of this case, is

the most appropriate method of determining the ALP, and certain applied

aspects relating to ALP determination mechanism under such a method.

For the records, however, we deem it appropriate to reproduce the

grievances raised by the appellant, as set out in the me morandum of

appeal, as follows:

1. The learned Assistant Commissioner of Income Tax Circle -

16(1), New Delhi (“the Assessing Officer” or the “AO”) / Hon’ble

Dispute Resolution Panel (“DRP”) have erred in confirming the order

passed u/s 92CA(3) of the Income Tax Act, 1961 (“Act”) making an

addition of Rs.26,07,70,513 to the total income of the appellant on

account of adjustment in the arm’s length price determined by the

learned Transfer Pricing Officer (“TPO”) and the arm’s length price

determined by the Appellant for the international transaction

entered into by the appellant with its associated enterprises.

2. The DRP has erred in concurring with findings of the AO/TPO

and disregarding the economic analysis undertaken by the appellant

for establishing the arm’s length price of the international

transactions without appropriate justification and mechanically

relying on the order under section 92CA(3) of the Act passed by the

TPO.

3. The TPO/AO/DRP have erred in law and on facts of the case in

rejecting Comparable Uncontrolled Price (CUP) Method as the Most

Appropriate method (MOM) and subsequently applying Transactional

Net Margin Method (TNMM) as the MOM over the CUP Method as

adopted by the appellant for the purpose of benchmarking its

international transactions with its associated enterprises.


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4. (a) The TPO/AO have further erred in law on facts of the case

in applying, and DRP has erred in confirming, an export turnover

filter of 25% while applying TNMM as the MOM, as against 50%

proposed by the Assessee, without providing any cogent reasons for

the same.

(b) Further the TPO/AO/DRP has erred in rejecting the one

company (‘RT Exports Ltd. ’) identified by the TPO in the show cause

notice, without providing cogent reasons.

5. The DRP has erred in law on the facts of the case in excluding

entire ‘Other Income’ amounting to Rs.85,030,000 while computing

the operating margin of the Assessee without appreciating that a

significant portion of the ‘Other Income’ is intrinsically linked to the

business operation of the Assessee and hence should be considered as

part of the operating income.


not allowing appropriate adjustments for difference in working

capital employed by the Appellant vis -à-vis the comparable

companies.


not allowing appropriate adjustments for granting the adjustment

for difference in the capacity utilization and excess depreciation of

the Assessee vis-à-vis the comparable companies.

8. The TPO/AO/DRP have erred in not computing the adjustment

proportionate to the value of international transactions.


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9. The DRP/TPO/AO have erred in not providing the benefit of the

arm’s length range as provided under provis o to Section 92C for

purpose of computing the arms length price under Section 92F of the

Act.

10. That on facts and in laws, the AO erred in holding that the

Appellant has furnished inaccurate particulars of income in respect

of each item of disallowance /additions and in initiating penalty

proceedings under section 274 read with section 271 of the Act.”

3. The relevant material facts are as follows. The assessee before us

is an exporter of brown basmati rice and milled basmati rice to its

associated enterprises. The assessee procures paddy, stores, processes/

mills, packs and exports various kinds of rice. During the relevant

previous year, the assessee’s exports of basmati rice and non -basmati

rice to the AEs was Rs 367,50,02,759 and Rs 7,48,79,4 75 respectively. It

is not in dispute that the orders placed by the AEs were priced on the

basis of market trends, and that, during the relevant previous year, there

were no fixed price contracts. In the course of the assessment

proceedings, the determination of arm’s length price of these

transactions with the AEs was referred to the Transfer Pricing Officer.

The TPO noted, as set out in his order dated 25 t h October 2011, that the

transfer pricing approach adopted by the assessee was as follows:

The assessee exports different varieties of rice, viz traditional

basmati rice, evolved basmati rice, raw milled basmati rice,

sella milled basmati rice , raw brown basmati rice, sona maoori

rice and permal rice to countries in European Union, United

States and Middle Eastern countries. The assessee has accepted

CUP as the most appropriate method. The comparison has been


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done between the prices charged by the assessee and rates

prevailing in the international market as reported in “Daily

Export Port Data- April 2007 to March 2008” compiled by TIPS

Software Services Pvt Ltd, Mumbai. On the basis of comparison,

it has been established that both the prices are similar and,

therefore, the transactions are at an arm’s length.

4. As for the nature of comparables r elied upon in the transfer pricing

study, it was stated by the assessee that “ for industry data, we looked

for the information from publicly available data on the similar

transactions entered into by the unrelated parties in India ” , that “

(w)e obtained and relied on the ‘Daily Export Port Data – April 2007-

March 2008’ (hereinafter referred to as ‘database’) compiled by Tips

Software Services Pvt Ltd Mumbai with respect to export of Basmati

Rice from India to EU, ME, and North America/ US and export of ot her

varieties of rice, viz. Sona Masoori and Permal Rice to North

America/ US, ME” and that “the database provides quantum, price,

date, quantity and the type of rice exported by parties in India to

parties in EU, ME and North America ”. The exports were categorised on

the basis of different products and different markets and in the light of

manner and format in which data was available. While applying the CUP

method, transactions with regard to the organic rice were eliminated as

pricing of organic rice commands a premium vis -à-vis non organic rice.

The transact ions in units other than MTs and quantities less than 10 MTs

were also eliminated. The average price was adopted on quarterly basis

since monthly average could result in distortions due to fewer

comparables and extraneous factors.

5. This approach, however, did not find favour with the Transfer

Pricing Officer. He observed that the working of arm’s length price,


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which was done by adopting the quarterly average prices and adjusting

the same for tolerance band of + 5%, is based on certain filters, and that

“while applying CUP, it is essential that the comparability between

controlled and uncontrolled transactions should not be only judged

from the point of view of product comparability, but should also take

into consideration the effect on price of other broader business

functions”. It was also noted that “ where differences exist between

controlled and uncontrolled transactions or between the enterprises

undertaking these transactions, it may be dif ficult to determine

reasonable accurate adjustments to eliminate the effect on price ”.

The Transfer Pricing Officer was further of the view that the assessee has

relied upon the data furnished by Tips Software Services Pvt Ltd but the

said company “ is a private company and the quotes (given by Tips

Software) are not covered within the provisions of Rule 10D(3)”. The

TPO was further of the view that “ the criteria adopted for arriving at

the CUP price by the assessee, in its TP report, shows that the filter s

have been applied to arrive at CUP ”, that “as per the provision in the

income tax statute and several decisions of higher appellate bodies,

it is inferred that under CUP method, stringent comparability is

required” and that “transactions cannot be compar ed if there are

geographical differences, differences in quality of products ”. The TPO

also noted that there are various adjustments made to the CUP data on

account of factors like adopting quarterly analysis, eliminating

transactions with extra ordinary h igh prices etc. It was in this backdrop

that the TPO required the assessee to show cause as to why the CUP data

not being reliable, the TPO should not reject the CUP as most appropriate

method on the facts of this case. The TPO then proceeded to refer to

TNMM for being applied to this case and the comparable date for that

purpose.


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6. It was contended by the assessee that the CUP, being a direct and

traditional method, is preferable over an indirect method like the TNMM .

Reliance was placed, in support o f this proposition, on judicial precedents

in the cases of ACIT Vs MSS India Pvt Ltd (123 TTJ 657), Serdia

Pharmaceuticals Pvt Ltd Vs ACIT (136 TTJ 129) , Clear Plus India Pvt

Ltd Vs DCIT (ITA No. 3944/Del/2010), and Coastal Energy Pvt Ltd Vs

ACIT (12 ITR Trib 347).

7. The TPO was, however, of the view that in terms of the OECD

Guidelines, an uncontrolled transaction is comparable to a controlled

transaction, for the purpose of CUP met hod and where products are not

exactly the same, only if either none o f the differences between the

transactions being compared or between the enterprise undertaking

those transactions could materially affect the price, or, if where

differences do affect the price , reasonably accurate adjustments could be

made to eliminate the effect of such differences. He also referred to rule

10C(2)(e) of the Income Tax Rules 1962, in selecting the most

appropriate method, the extent to which reliable and accurate

adjustments can be made for differences is an important factor in

selecting the most appropriate method. While the TPO did note that “ the

product data compiled in the TIPS database is taken from custom

data relating to rice, but also specifies the variety and brand of

basmati/ non basmati rice” , the TPO was of the view that ‘ brand’ of rice

was an important factor which cannot be quantified for adjustment. He

observed that. “the adjustments carried out by the assessee to the

price of the uncontrolled transaction cannot quantify the price

which ‘Tilda’ brand would command in th e markets in EU countries,

USA, Middle East compared to any other brand in TIPS data ”. The TPO

was of the view that , “ the characteristics of the property being such that

even economic adjustment, like the value of the brand, cannot bring on

parity the controlled and uncontrolled transaction, then such


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uncontrolled transactions would not be comparable by application of CUP

method”. While rejecting the application of CUP method on the facts of

this case, the TPO concluded as follows:

As the characteristics of these goods vary specially because of

the brand name associated with each of various varieties of

rice, in such a situation, economic adjustments cannot bring on

parity between the controlled and uncontrolled transactions,

such uncontrolled transact ion applied by the assessee is not

comparable by using the CUP method, and, hence, rejected .

8. The TPO then proceeded to determine the arm’s length price on the

basis of the Transactional Net Margin Method (TNMM) on the entity level,

but, for the reasons we will set out in a short while, it is not really

relevant to take note of the facts so far as this aspect of the matter is

concerned. Suffice to note that based on TPO’s ALP determination under

the TNMM and on the basis of comparables of some entitie s engaged in

similar activity, an adjustment of Rs. 26,07,70,513 was finally made by

the Assessing Officer. The assessee did take up, inter alia, grievance

against rejection of CUP method before the Dispute Resolution Panel, but

without any success. The DRP rejected this grievance, and, while doing so,

observed as follows:

We have considered the contentions of the assessee. As

mentioned above, the data relied by the assessee has been

obtained from database maintained by a private company. The

assessee has not been able to rebut the argument of the TPO

that Rule 10D(3) does not allow the use of private databases.

Further, in a commodity like Basmati rice, it is very difficult to


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find the exact comparables which can meet the stringent

standards required for application of CUP method. The price of

rice varies depending on the area where it is grown, the

variety, the aroma and size of the rice grains. The same variety

grown in Dehradun would fetch a different price as compared to

that grown in Punjab or Haryana. The price also fluctuates from

time to time almost on weekly basis. Therefore, this Panel is in

agreement with the opinion of the AO that CUP is not the most

appropriate method to be used in this kind of business.

Accordingly, these grounds of objection s are rejected.

9. The assessee is aggrieved, inter alia , of rejection of the CUP method

on the facts of this case, and is in appeal before us.

10. We have heard the rival contentions, perused the material on

record and duly considered factual matrix o f the case in the light of the

applicable legal position.

11. We have noted that the information inputs given by the Tips

Software, on the facts of this case, are inputs with regard to the

information publicly available with the customs department at the

different ports. These inputs are not the independent ‘quotes’, as referred

to by the TPO, but only compilation of the data available in public

domain. In our considered view, the Transfer Pricing Officer was clearly

in error in rejecting these inputs on the ground that such information is

not covered by Rule 10D (3) for the simple reason that Rule 10 D(3) is

only illustrative in nature and it merely describes the information,

required to be maintained by the assessee under section 92 D, “ shall be

supported by authentic documents, which may include the following (


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i .e . documents specified therein) ”. The logic employed by the Transfer

Pricing Officer is that since databases compiled by private entities is not

included in rule 10 D(3), such databases cannot be relied upon by the

assessee. This logic is clearly fallacious inasmuch as an item not being

included in i llustrative list of required documents does not take outside

the ambit of ‘acceptable document’ for the required purposes. In any

event, all that Tips Software does is to collect the data, compile the same

in easy to refer format and make it available to the end -user of such data

online (www.tipsexim.com) or on electronic media , but this data,

nonetheless, is public data maintained by the customs department at

various ports. It was also open to the Transfer Pricing Officer to, if he

had any doubts, call for further information from this database supplier

and examine authenticity of the data so furnished. Yet, in stead of doing

so, he summarily rejected the data as unreliable on a technical ground –

which, as we have seen above, is not tenable in law.

12. We have also seen that the information so furnished by the

database used by the assessee is fairly comprehensive information,

including description and prices as per invoices presented to customs – a

fact noted by the TPO himself, which can be cross checked and verified, in

case of doubts. The TPO has, at page 11 of the transfer pricing order,

himself stated that “the product data compiled in the TIPS database is

taken from custom data relating to rice, but also specifies the variety

and brand of basmati/ non basmati rice ”. In these circumstances, the

vague doubts expressed by the TPO on the relevance of this database are

clearly unfounded. His action is incorrect in law as indeed inappropriate

to the facts of this case. Therefore, in our considered view, the Transfer

Pricing Officer was clearly in error in rejecting the information inputs

received from the Tips Software and the database made available by the

said entity. The DRP laid so much of emphasis on the observation that

the assessee has “ not been able to rebut the argument of the TPO that


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Rule 10D(3) does not allow the use of private databases” but did not

note of the glaringly i llustrative, rather than exhaustive, character of the

documents listed in the said rule . As a quasi -judicial authority, and while

pursing the goal of justice, one cannot remain at the mercy of the wisdom

of representatives of the parties appearing before such an authority; it is

bounden duty of every quasi -judicial authority to appreciate the scope of

the legal provisions and apply them in letter and in spirit. We uphold

the grievance of the assessee to the extent the authoriti es below have

indeed erred in summarily rejecting assessee’s reliance on the database,

with respect to information publicly available with customs department

at various ports, compiled by a private entity.

13. As regards learned DRP’s additional observa tion 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 shoul d 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, d onot 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


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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 class ification, 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 filed 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 geo graphical 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 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 donot

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 en sure that day


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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 stil l 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 argume nts 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 implied, can be exercised

by us either.

61. This issue is no longer res integr a. 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 alia, observed that "While t here 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


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(i.e. , TNMM and profit split method) are treat ed 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 transaction 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 transaction

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 position that transa ctional 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 all". 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 transaction, 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 selection of most appropriate method rather than the


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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 Guid elines, 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 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 esta blishing 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 di rectly

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


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account the criteria established in para 2.2, a traditional

transaction method and a tradition profit method can be

applied in a equally reliable manner, the traditional

transaction 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 all things being

equal, CUP and traditional transacti on 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 witho ut 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 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 transaction 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


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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 reje cted 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 c ase, 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 h as 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 transaction. The expression ‘ the

international transaction’ referred to in rule 10 B(1)((a)(ii i) is used in


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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 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 transactions

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 arr ived 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 transaction with AE and 3 8 per cent in

another transaction 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


I.T.A. No.: 6279/Del/2012


Page 19 of 21

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 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

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. 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 exceptionally high prices. In our considered view, the CUP

method does not allow 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


I.T.A. No.: 6279/Del/2012


Page 20 of 21

quartile ranges, is normally not pe rmissible under the scheme of

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 o ur hearing,

this proposition was put to the learned representatives, and learned

representatives fairly agreed to accept these directions. In effect, thus,

the CUP method is upheld in principle but the determination of ALP,

under the CUP method, is restore d 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 t he comparables selected for the said

purpose. All those issues are academic in the present context.

21. In the result, the appeal is allowed for statistical purposes in the

terms indicated above. Pronounced in the open court today on 21s t day

of February, 2014.

Sd/xx S d/xx

Rajpal Yadav Pramod Kumar

(Judicial Member) (Accountant Member)

New Delhi, the 21s t day of February, 2014


I.T.A. No.: 6279/Del/2012


Page 21 of 21

Copies to : (1) The appellant

(2) The respondent

(3) D R P

(4) CIT(A)

(5) Departmental Representative

(6) Guard File

By order etc

Deputy/ Assistant Registrar

Income Tax Appellate Tribunal

Delhi benches, New Delhi


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