Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT

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The Tax PublishersITA No. 142/Ahd/2013 2013 TaxPub(DT) 1892 (Ahd-Trib) : (2014) 056 (II) ITCL 0233 : (2013) 155 TTJ 0537 : (2013) 059 SOT 0138 : (2013) 090 DTR 0203 Income Tax Act, 1961 --Transfer pricing--Computation of ALPCUP method vis-a-vis profit margin --Assessee-company came into existence as a result of demerger of plastic division of GEII. It was a case of vertical demerger, i.e., an entire tier of business activity claim was given up altogether by GEII. TPO made impugned addition by applying internal CUP method as the most appropriate method adopting net margin at the rate of 8.95 per cent on the basis of result shown by GEII's plastic division. Same upheld by Commissioner (Appeals). Held: Not justified. Internal CUP method deals with a situation in which prices at which similar transaction is entered into with an independent enterprise while external CUP method refers to situation in which two unconnected independent enterprises deal with each other therefore, impugned addition was to be deleted. A plain reading of the orders of the authorities below shows that the method upheld by the Commissioner (Appeals), for the purposes of ascertaining ALP, is internal CUP, but then the application of this method is clearly incorrect, in as much as any application of any CUP method involves dealing with prices of a product not the profit margin earned thereon. Rule 10B(1)(a) of the Income Tax Rules, 1962 lays down that the ALP in relation to an international transaction shall be determined by any of the prescribed methods, being the most appropriate method. [Para 6] As for the connotations of the expressions 'internal CUP' and 'external CUP', while the former deals with a situation in which prices at which similar transaction is entered into with an independent enterprise, latter refers to the situation in which two unconnected independent enterprises deal with each other. In other words, even in the case of 'internal CUP', the ALP to be adopted is the price, subject to admissible adjustments, at which the similar transactions are carried out between the assessee and an independent enterprise. Internal CUP has nothing to do with the margins earned by the same enterprises from other transactions, as is the present case, the authorities below have proceeded on the basis that in the case of GEII's plastic division there were substantial intra-AE transactions as evident from Commissioner (Appeals)'s observations to the effect that, 'the appellant has also stated that for the purposes of internal CUP also, the uncontrolled transactions can only be considered. Since the transactions of the predecessor company, i.e., GE India (P) Ltd., were not uncontrolled transactions, but were transactions made with AEs under controlled conditions. [Para 7] The authorities below have proceeded on the basis that in the case of GEII's plastic division there were substantial intra-AE transactions as evident from Commissioner (Appeals)'s observations to the effect that, 'the appellant has also stated that for the purposes of internal CUP also, the uncontrolled transactions can only be considered. Since, the transactions of the predecessor company, i.e., GE India (P) Ltd., were not uncontrolled transactions, but were transactions made with AEs under controlled conditions'. [Para 7] The course of action adopted by the authorities below, in adopting the net margin @ 8.95 per cent, on the basis of results shown by the GEII's plastic division, is unsustainable in law, and vacate the same. However, the Commissioner (Appeals) has declined to deal with all other issues on the short ground that the decision to apply, what he erroneously terms as, 'internal CUP' method for ascertaining ALP is correct and does not call for any interference. This stand, in the light of the discussions above, is clearly incorrect and unsustainable in law. In this view of the matter, as also bearing in mind entirety of the case, it is fit and proper to remit the matter to the file of the Commissioner (Appeals) for fresh adjudication on merits in the light of above observations, in accordance with the law and by way of a speaking order. [Para 10] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA No. 142/Ahd/2013
2013 TaxPub(DT) 1892 (Ahd-Trib) : (2014) 056 (II) ITCL 0233 : (2013) 155 TTJ 0537 : (2013) 059 SOT 0138 : (2013) 090 DTR 0203

Income Tax Act, 1961

--Transfer pricing--Computation of ALPCUP method vis-a-vis profit margin --Assessee-company came into existence as a result of demerger of plastic division of GEII. It was a case of vertical demerger, i.e., an entire tier of business activity claim was given up altogether by GEII. TPO made impugned addition by applying internal CUP method as the most appropriate method adopting net margin at the rate of 8.95 per cent on the basis of result shown by GEII's plastic division. Same upheld by Commissioner (Appeals). Held: Not justified. Internal CUP method deals with a situation in which prices at which similar transaction is entered into with an independent enterprise while external CUP method refers to situation in which two unconnected independent enterprises deal with each other therefore, impugned addition was to be deleted.

A plain reading of the orders of the authorities below shows that the method upheld by the Commissioner (Appeals), for the purposes of ascertaining ALP, is internal CUP, but then the application of this method is clearly incorrect, in as much as any application of any CUP method involves dealing with prices of a product not the profit margin earned thereon. Rule 10B(1)(a) of the Income Tax Rules, 1962 lays down that the ALP in relation to an international transaction shall be determined by any of the prescribed methods, being the most appropriate method. [Para 6] As for the connotations of the expressions 'internal CUP' and 'external CUP', while the former deals with a situation in which prices at which similar transaction is entered into with an independent enterprise, latter refers to the situation in which two unconnected independent enterprises deal with each other. In other words, even in the case of 'internal CUP', the ALP to be adopted is the price, subject to admissible adjustments, at which the similar transactions are carried out between the assessee and an independent enterprise. Internal CUP has nothing to do with the margins earned by the same enterprises from other transactions, as is the present case, the authorities below have proceeded on the basis that in the case of GEII's plastic division there were substantial intra-AE transactions as evident from Commissioner (Appeals)'s observations to the effect that, 'the appellant has also stated that for the purposes of internal CUP also, the uncontrolled transactions can only be considered. Since the transactions of the predecessor company, i.e., GE India (P) Ltd., were not uncontrolled transactions, but were transactions made with AEs under controlled conditions. [Para 7] The authorities below have proceeded on the basis that in the case of GEII's plastic division there were substantial intra-AE transactions as evident from Commissioner (Appeals)'s observations to the effect that, 'the appellant has also stated that for the purposes of internal CUP also, the uncontrolled transactions can only be considered. Since, the transactions of the predecessor company, i.e., GE India (P) Ltd., were not uncontrolled transactions, but were transactions made with AEs under controlled conditions'. [Para 7] The course of action adopted by the authorities below, in adopting the net margin @ 8.95 per cent, on the basis of results shown by the GEII's plastic division, is unsustainable in law, and vacate the same. However, the Commissioner (Appeals) has declined to deal with all other issues on the short ground that the decision to apply, what he erroneously terms as, 'internal CUP' method for ascertaining ALP is correct and does not call for any interference. This stand, in the light of the discussions above, is clearly incorrect and unsustainable in law. In this view of the matter, as also bearing in mind entirety of the case, it is fit and proper to remit the matter to the file of the Commissioner (Appeals) for fresh adjudication on merits in the light of above observations, in accordance with the law and by way of a speaking order. [Para 10]