BMW India (P) Ltd. v. Addl. CIT

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The Tax Publishers2013 TaxPub(DT) 2475 (Del-Trib) : (2014) 146 ITD 0165 : (2013) 157 TTJ 0036 : (2013) 092 DTR 0257 : (2013) 028 ITR (Trib) 0716 BMW India (P.) Ltd. v. Addl. CIT Income Tax Act, 1961 --Precedent--Binding natureScope of applicability--In order to decide applicability of any principle underlying the decision or judgment which would be a binding precedent in a case, appraisal of facts of case in which decision had been rendered is necessary, Moreso, in a case of transfer pricing as the transfer pricing litigation and adjudication thereof is fact based, only thereafter applicability of decision or judgment to facts of case to which its is sought to be applied, can be considered. *Held:* Settled legal precedents which have been judicially settled as binding for the courts and Tribunals. It is a settled legal position that a precedent is an authority for what it actually decides and not what may remotely or even logically follow from it; similarly a question which has not been argued cannot be treated as a covered issue by the precedent. It is also an accepted and recognized legal position that the language used in the judgement is to be interpreted plainly and unambiguously and artificial construction is to be avoided. Similarly it is equally well-settled that in case there is a doubt about the decision, then the entire judgement has to be considered and a stray sentence or a casual remark cannot be treated as a binding precedent in the decision as a case is a precedent for what it actually decides and nothing more. It is well-settled that for considering the applicability of rules of interpretation to the words used in the judgements and decisions vis-a-vis the Acts of Parliament, the words used by the Judges are not to be read as if they are words used in an Act of the Parliament. Statutes lay down rules 'in fixed verbal form' precedents do not. The particular words are not necessarily used by precedent. Courts after weighing the pros and cons of all conceivable situations that may arise, they constitute just the reasoning of the judges in the particular case, tailored to a given set of facts and circumstances, and only the proposition of law which constitutes ratio decidendi that is binding on the same set of facts. The Acts of Parliament on the other hand on account of the careful drafting presumably with reference to analogous statutes; the multiple readings to which it is subjected in the legislature and the discussions which go behind the making of a statute inject a degree of sanctity and definiteness to the meaning of the words used by the legislature. The same cannot necessarily be always said of a decision which deals with a certain given set of facts for answering the specific question posed to the Judges. The Judges while deciding the same may dwell on various possibilities without the benefit of the facts in those cases on which they may deliberate and at times without the benefit of specific arguments on those facts as such observations made in passing in these deliberations do not form the ratio decidendi As such it would be too much to ascribe and read precise meaning to words in a decision which the judges who wrote them may not have had in mind. [Para 6.3] A judgment or a decision considered to be a binding precedent necessarily has to be read as a whole and the ratio decidendi of the ruling expressly or impliedly given by a Court or Tribunal is sufficient to settle a point of law put in issue by the arguments of the parties in a case, being a point on which a ruling was necessary to justify the decision in that particular case in the light of the question which was before the court. A decision of the court and that equally applies to the Tribunal also takes its colour from the questions posed in the case in which it is rendered and while applying the decision to a later case, it is necessary for the Courts to ascertain the true principle laid down by the court. Similar would necessarily be the position considering the decision of a Co-ordinate Bench or the Special Bench in which case the Special Bench, being a Larger Bench, has greater precedent value in the context of the question posed to it. The transfer pricing litigation and adjudication being fact based necessarily requires consideration of the business model of the assessee and the contractual terms entered into with the AE along with a detailed FAR analysis so as to characterize the transactions and the business model and after characterizing the taxpayer on the basis of FAR analysis, a selection of comparable companies has to be made where functional similarity qua the transaction on the basis of the FAR analysis of the comparable companies is necessarily required to be done. In order to decide the applicability of any section, rule or principle underlying the decision or judgement which would be binding as a precedent in a case, an appraisal of facts of the case in which the decision has been rendered is necessary since 'the scope and authority of a precedent should never be expanded unnecessarily beyond the needs of a given situation' as held by the Supreme Court in P.A. Shah v. State of Gujarat AIR 1986 SC 468. More so, in the case of transfer pricing the detailed analysis cannot be overlooked as only thereafter the applicability of the decision to the facts of a case to which it is sought to be applied can be considered. [Para 6.6] The applicability of the decisions and orders in transfer pricing adjudication can only come after it has been established that relevant facts are identical. Transfer pricing issues, being fact driven the need and necessity to carefully examine the facts in order to cull out the relevant facts is thus imperative. Rule 10B framed under section 92C of the Income Tax Act, 1961 mandates that the comparability of an international transaction with an uncontrolled transaction in order to determine the arm's length price of the product or service, etc., shall then be judged with reference to the specific characteristics of the property transferred or services provided in either transactions; functions performed taking into account the assets employed or to be employed and the risks assumed by the respective parties to the transactions; the contractual terms whether or not such terms are formal or in writing of the transactions contemplated and in fact undertaken which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; and conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical locations and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. This entire enquiry is fact strewn and driven and the change or nuanced change in the facts of a case, for instance the terms of the contract may significantly vary or it may be borne out from the terms of the contract evidenced by the conduct of the parties despite similarity of contracts that the actual reality borne out from the conduct of the parties may lead to different conclusions qua the functions performed vis-a-vis the functions assumed. [Para 6.9] Income Tax Act, 1961 Section 92C Income Tax Act, 1961 --Transfer pricing--Computation of ALPAdvertisement marketing and sales promotion expenses vis-a-vis brand building of AE--As per agreement with it AE, assessee had inter alia to take responsibility of sales promotion and full potential for contracted goods, in unambiguous terms, rest with assessee. Assessee was also responsible for providing best possible customers services and also required to establish efficient distribution network by establishment and supervision and perform adequate advertising, marketing and sales promotion as well as establish public and media relation. In its transfer pricing study, assessee has characterized itself as 'normal distributor as opposed to distributor who is low end distributor. *Held:* Not acceptable. Assessee had performed greater intensity of service than a normal distributor and has incurred expenditure for advertising, marketing and sales promotion (AMP) expenses providing brand of its AE. Thus, it is evident that compensation for the higher services was embedded in pricing arrangement of contract goods itself. Therefore, no further compensation was required to be paid by the AE. As such, the occasion to consider applicability of mark-up does not arise. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 2475 (Del-Trib) : (2014) 146 ITD 0165 : (2013) 157 TTJ 0036 : (2013) 092 DTR 0257 : (2013) 028 ITR (Trib) 0716

BMW India (P.) Ltd. v. Addl. CIT

Income Tax Act, 1961

--Precedent--Binding natureScope of applicability--In order to decide applicability of any principle underlying the decision or judgment which would be a binding precedent in a case, appraisal of facts of case in which decision had been rendered is necessary, Moreso, in a case of transfer pricing as the transfer pricing litigation and adjudication thereof is fact based, only thereafter applicability of decision or judgment to facts of case to which its is sought to be applied, can be considered. Held: Settled legal precedents which have been judicially settled as binding for the courts and Tribunals. It is a settled legal position that a precedent is an authority for what it actually decides and not what may remotely or even logically follow from it; similarly a question which has not been argued cannot be treated as a covered issue by the precedent. It is also an accepted and recognized legal position that the language used in the judgement is to be interpreted plainly and unambiguously and artificial construction is to be avoided. Similarly it is equally well-settled that in case there is a doubt about the decision, then the entire judgement has to be considered and a stray sentence or a casual remark cannot be treated as a binding precedent in the decision as a case is a precedent for what it actually decides and nothing more. It is well-settled that for considering the applicability of rules of interpretation to the words used in the judgements and decisions vis-a-vis the Acts of Parliament, the words used by the Judges are not to be read as if they are words used in an Act of the Parliament. Statutes lay down rules 'in fixed verbal form' precedents do not. The particular words are not necessarily used by precedent. Courts after weighing the pros and cons of all conceivable situations that may arise, they constitute just the reasoning of the judges in the particular case, tailored to a given set of facts and circumstances, and only the proposition of law which constitutes ratio decidendi that is binding on the same set of facts. The Acts of Parliament on the other hand on account of the careful drafting presumably with reference to analogous statutes; the multiple readings to which it is subjected in the legislature and the discussions which go behind the making of a statute inject a degree of sanctity and definiteness to the meaning of the words used by the legislature. The same cannot necessarily be always said of a decision which deals with a certain given set of facts for answering the specific question posed to the Judges. The Judges while deciding the same may dwell on various possibilities without the benefit of the facts in those cases on which they may deliberate and at times without the benefit of specific arguments on those facts as such observations made in passing in these deliberations do not form the ratio decidendi As such it would be too much to ascribe and read precise meaning to words in a decision which the judges who wrote them may not have had in mind. [Para 6.3] A judgment or a decision considered to be a binding precedent necessarily has to be read as a whole and the ratio decidendi of the ruling expressly or impliedly given by a Court or Tribunal is sufficient to settle a point of law put in issue by the arguments of the parties in a case, being a point on which a ruling was necessary to justify the decision in that particular case in the light of the question which was before the court. A decision of the court and that equally applies to the Tribunal also takes its colour from the questions posed in the case in which it is rendered and while applying the decision to a later case, it is necessary for the Courts to ascertain the true principle laid down by the court. Similar would necessarily be the position considering the decision of a Co-ordinate Bench or the Special Bench in which case the Special Bench, being a Larger Bench, has greater precedent value in the context of the question posed to it. The transfer pricing litigation and adjudication being fact based necessarily requires consideration of the business model of the assessee and the contractual terms entered into with the AE along with a detailed FAR analysis so as to characterize the transactions and the business model and after characterizing the taxpayer on the basis of FAR analysis, a selection of comparable companies has to be made where functional similarity qua the transaction on the basis of the FAR analysis of the comparable companies is necessarily required to be done. In order to decide the applicability of any section, rule or principle underlying the decision or judgement which would be binding as a precedent in a case, an appraisal of facts of the case in which the decision has been rendered is necessary since 'the scope and authority of a precedent should never be expanded unnecessarily beyond the needs of a given situation' as held by the Supreme Court in P.A. Shah v. State of Gujarat AIR 1986 SC 468. More so, in the case of transfer pricing the detailed analysis cannot be overlooked as only thereafter the applicability of the decision to the facts of a case to which it is sought to be applied can be considered. [Para 6.6] The applicability of the decisions and orders in transfer pricing adjudication can only come after it has been established that relevant facts are identical. Transfer pricing issues, being fact driven the need and necessity to carefully examine the facts in order to cull out the relevant facts is thus imperative. Rule 10B framed under section 92C of the Income Tax Act, 1961 mandates that the comparability of an international transaction with an uncontrolled transaction in order to determine the arm's length price of the product or service, etc., shall then be judged with reference to the specific characteristics of the property transferred or services provided in either transactions; functions performed taking into account the assets employed or to be employed and the risks assumed by the respective parties to the transactions; the contractual terms whether or not such terms are formal or in writing of the transactions contemplated and in fact undertaken which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; and conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical locations and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. This entire enquiry is fact strewn and driven and the change or nuanced change in the facts of a case, for instance the terms of the contract may significantly vary or it may be borne out from the terms of the contract evidenced by the conduct of the parties despite similarity of contracts that the actual reality borne out from the conduct of the parties may lead to different conclusions qua the functions performed vis-a-vis the functions assumed. [Para 6.9]

Income Tax Act, 1961 Section 92C

Income Tax Act, 1961

--Transfer pricing--Computation of ALPAdvertisement marketing and sales promotion expenses vis-a-vis brand building of AE--As per agreement with it AE, assessee had inter alia to take responsibility of sales promotion and full potential for contracted goods, in unambiguous terms, rest with assessee. Assessee was also responsible for providing best possible customers services and also required to establish efficient distribution network by establishment and supervision and perform adequate advertising, marketing and sales promotion as well as establish public and media relation. In its transfer pricing study, assessee has characterized itself as 'normal distributor as opposed to distributor who is low end distributor. Held: Not acceptable. Assessee had performed greater intensity of service than a normal distributor and has incurred expenditure for advertising, marketing and sales promotion (AMP) expenses providing brand of its AE. Thus, it is evident that compensation for the higher services was embedded in pricing arrangement of contract goods itself. Therefore, no further compensation was required to be paid by the AE. As such, the occasion to consider applicability of mark-up does not arise.