Tecnimont ICB (P.) Ltd. v. Additional Commissioner of Income-tax, Range 9(3), Mumbai

Pramod Kumar, Accountant Member - These cross appeals and cross objection are directed against the order dated 26th March, 2010 passes by the Commissioner (Appeals), in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2005-06. As these appeals and cross objection deal with the same assessee, were heard together and involve some common issues, and as a matter of convenience, all these appeals and cross objection are being disposed of by way of this consolidated order.

2. We will first take up the appeal filed by the Assessing Officer.

3. Grievances raised by the Assessing Officer, as set out in the memorandum of appeal, are as follows:

Grounds of appeal by the revenue

1. On the facts and in the circumstances of the case and in law, learned CIT(A) erred in rejecting the comparability analysis made by the Transfer Pricing Officer, and adopted by the Assessing Officer, though it is evident from the TPO's order u/s 92CA(3) dated 21.04.2008, that the comparables relied on by the assessee differ in their risk and functional profile from that of the assessee and thus cannot be accepted as comparable.

2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting addition of Rs 8,42,54,187 by holding that the transactions of M/s ICBC, a wholly owned subsidiary of the assessee, are not comparable for benchmarking international transaction of the assessee.

3. On the facts and in the circumstances of the case and in law, the learned CIT [A) has erred in holding that the assessee's transactions with its associated enterprises, and the margins at 75.48%/44.21% are at arm's length.

4. The short issue that we are required to adjudicate in this appeal, as learned representatives agree, is whether or not the CIT(A)'s was justified in deleting the arm's length price adjustment of Rs 8,42,54,187 and, more specifically, in rejecting ICBC as a valid comparable for benchmarking assessee's international transactions. All the three grounds of appeal deal touch upon different facets of these issues, and we will, therefore, take up all these grounds of appeal together.

5. Briefly stated, the material facts are like this. The assessee company is stated to be an equal stakes joint venture between an Italian business house, referred to as Technimont Edison group, and its Indian collaborator, referred to as Kapadia group. The assessee is a multi discipline engineering company engaged in activities like turnkey contracts, feasibility studies, engineering design services and supervision services. The assessee also has a fully owned subsidiary by the name of ICB Contractors India Pvt. Ltd. This arrangement can be described as follows:

6. ICB Contractors India Pvt Ltd has, in turn, entered into transactions with another associate enterprises, namely JTS Contracting Co Mallta, which is a 45:55 joint venture between Technimont Group Italy and JTS Japan. These intra associate enterprise transactions by ICBI constitute as much as 59% of its total revenues. By way of a diagram, the above facts can be explained as follows:

6.1 On these undisputed facts, and while determining arm's length price in respect of technical services rendered by the assessee to its associate concerns, the Transfer Pricing Officer rejected the external comparables furnished by the assessee and adopted ICBC as an internal comparable. While doing so the Transfer Pricing Officer noted that the "the assessee had not carried out a detailed FAR/comparability analysis of the external comparables selected" and that "these companies cannot be accepted as comparable to the assessee since they differ in risk and functional profile from the assessee for which reasonable accurate adjustments cannot be made". Even as the Transfer Pricing Officer made these observations and as he reproduced the functional profiles of the selected comparables, the Transfer Pricing Officer made a brief reference to the functional profile of the assessee but did not identify the specific material variances in functional and FAR profile. The plea of the assessee that the ICBC had significant intra AE transactions was rejected, and it was observed that "an unrelated party M/s JTS Japan holds 55% of the shares in JTS Contracting Co" and "Since a majority stake in company JTS Contracting Co is held by an independent party, its transactions with ICBC can be considered as at arm's length". It was noted that the assessee's functional profile and that of the ICBC is materially similar and while the assessee has earned a margin of 44.21%, the ICBC has earned a margin of 66.77% on the net costs. The Transfer Pricing Officer thus concluded that "..... the ICBC is selected as an internal comparable under TNMM method, using the operating profit to total cost as the profit level indicator" and that" as it (ICBC) has earned a profit margin over total costs at 66.77%, while the assessee has earned a margin of 44.21%, the arm's length margin is held to be 66.77% and the amount of adjustment to the total income is calculated as .......Rs 8,42,54,187". This arm's length price adjustment was, accordingly, made by the Assessing Officer.

7. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A), upholding the grievance of the assessee and disapproving the selection of ICBC as a valid comparable, observed as follows:

I have considered the appellant's submissions/ arguments, as well as the TPO's/AOs finding as discussed in their orders. Transfer Pricing is a fact of intensive judgmental process which involves a very in depth analysis of facts and underlying economics of the international transaction, The TPO has included the ICBC without going into facts relating to that company. This comparable selected by the TPO is not only functional dissimilar but also is wholly owned subsidiary of the appellant. Its 59% of the total turnover has been achieved on account of receipts from ITS Contracting Co. which constitutes a huge related party transaction. Thus the TPO's case for its inclusion falls on not one, but three, fundamentals which are basic to any transfer pricing exercise involving comparability.

The TPO's judgment that an unrelated party M/s JGC Japan holds 55% of the shares in JTS Contracting Co. and, therefore, its transactions with ICBC can be considered to be at arm's length, is totally misplaced. In fact, if this argument is applied to justify taking of related party transaction as uncontrolled transaction for the purpose of bench marking, then perhaps there is no justification for taking the appellant's case for transfer pricing scrutiny itself because the appellant is also a 50:50 joint venture between Technimont Edision Group in Italy and independent third party- Kapadia Group based in India. Moreover, as mentioned earlier, ICBC is into project business executing various electrical and instrumentation projects while the appellant's international transactions are in relation to service segment. The TPO, by using ICBC as an internal comparable, has compared two different business lines, viz., project business and service business, which differ significantly in terms of nature of activity, risks involved etc. Coupled with the fact that there are external comparables available which are broadly similar to the functions performed by the appellant, the adoption of ICBC as an internal comparable is not appropriate. As such ICBC is excluded from the list of comparables. As a consequence, on the basis of remaining comparable companies, the appellant's transactions with its AE and its margins at 75.85% or even 44.21% on cost is held to at arm's length. In view of the above, the addition so made of Rs 8,32,54,187 is deleted.

8. Learned CIT(A) also took up the issue regarding rejection of comparability analysis by the Transfer Pricing Officer, so far as the external comparables given by the assessee in its transfer pricing study are concerned. He noted that while TCE Consulting Engineers Ltd was rejected by the TPO on the ground that its functionally different inasmuch as it provides consultancy services and executes projects in diverse areas, whereas the assessee had included it on the ground that the comparable entity provides engineering consultancy services for power projects and other industrial projects. He also took note of assessee's contention that, as noted by the TPO himself at paragraph 6,2.6 of his order, TNMM is more tolerant to functional differences. He then referred to Geometric Software Solutions Co. Ltd., Pentasoft Technologies Ltd, Artefact Projects Limited and Infotech Enterprises Limited, and noted that while the assessee has adopted segmental data pertaining to segments like 'project', 'engineering division', 'project consultancy', 'consultancy and engineering' and 'engineering, manufacturing and industrial products', the TPO has rejected the same by entity level comparisons. He then referred to the PSU comparables, i.e. Rites Limited and water and Power Consultancy Services India Limited, and noted that while the assessee has taken the segmental data, the TPO has rejected the same on the ground that these are public sector undertakings and multi-disciplinary consultancy organizations. The CIT(A) also noted that Genesys International Corporation Ltd, Motherson Sumi Infotech and Designs Ltd and Kitco Limited were rejected by the TPO on the ground that these are persistent loss making companies but then it was only segmental data which was taken by the assessee which is fully comparable. A reference was also made to comparables as Tata Elxi Limited and Roltas India Limited and it was noted that while these comparables have been rejected on the ground of functional differences, what has apparently been missed out that only segmental data, relating to relevant segmental data, was taken. The CIT(A) then concluded as follows:

The TPO has committed factual errors by rejecting some companies as 'persistent loss making companies' and not considering the use of segmental data by the appellant. Bench marking is a term often used loosely to refer to looking for comparables. It may also be used to refer to the output from such a process. However, sometimes it Is interpreted as meaning or process to derive broad industry or company averages rather than specific data that are as closely comparable as possible. The appellant had enhanced the comparability standards by referring to the segmental data. For the purpose of determining the arm's length price properly, it is imperative that comparability analysis is more refined. Moreover, the companies rejected by the TPO as 'persistent loss makers' are not necessarily making losses on year-to-year basis. It is seen that the appellant has included Rites Limited and Water & Power Consultancy Services Limited as comparables which has shown high profits (30.22% and 25.21% respectively) despite the fact that these are Government of Indian enterprises. Since these two comparables operate in different economic sectors (primarily government or public sector) and markets (captive) and so can have different levels of profitability. The TPO, therefore, was justified in rejecting these two as comparables.

To sum up, the action of the TPO in rejecting the appellant's comparables (except Rites Ltd and Water & Power Consultancy Limited) is not proper. Accordingly, the companies selected by the appellant, except two, in transfer pricing analysis can be taken as comparables for the purposes of the transfer pricing analysis"

8.1 The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.

9. Learned Departmental Representative's basic plea, apart from relying upon the stand of the Transfer Pricing Officer and reiterating the same, is that even related parties can be used as comparables. He contends, relying upon an observation made in D P Mittal's book "Law on Transfer Pricing in India", that if the comparability and reliability level is of the high degree, there could perhaps be no objection taking transactions with related parties as truly comparable, that the focus of the transfer pricing is determination of the result and not the details or methodology employed, and a reference is made to the some foreign cases in support - namely Baush & Lomb Inc v. Commissioner (92 TC 525), Eily Lilly & Co v. United States (372 F2d 990 (1967) and DHL Corporation v. CIR (TC Memo 1998-461), Its broadly on this conceptual plane that the arguments are advanced. Learned Departmental Representative also referred to a coordinate bench's decision in the case of Asstt. CIT v. NGC Network (India) (P.) Ltd [2011] 10 taxmann.com 140 Mum] which, inter alia, observes that " merely because the transaction is with an associated enterprises, cannot be a ground to reject it as comparable when it is at an arm's length". He contends that when the assessee himself contends that the transactions of ICBC are at arm's length, it cannot be open to him to decline the ICBC as a valid comparable. As regards the comparables having been approved by the CIT(A), learned Departmental Representative does not make any specific submissions beyond stating that the reasons adopted by the CIT(A) are too vague and generalized to be accepted. Learned counsel for the assessee, on the other hand, has submitted that so far as profits earned from AEs is concerned, Rule 10B(e) specifically provides that TNMM can only take into account net profit margin realized by the enterprises, or by an unrelated enterprise, from a comparable uncontrolled transaction, or number of such transactions. It is, therefore, obvious that the profits earned on transactions with AEs can not be taken into account under the TNMM. A reference is then made to various judicial precedents by the coordinate benches in support of the proposition that wherever significant intra AE transactions are undertaken by a comparable, it ceases to be a valid comparable for the purposes of ascertainment of ALP by the TNMM. It is pointed out that in the transfer pricing order, no specific defects are pointed out in the comparables given by the assessee and these are rejected on the basis that functional profile is not the same, but then what the Transfer Pricing Officer clearly overlooked was that when segmental data is taken, entity level functional comparison is irrelevant. It as also pointed out that the Assessing Officer himself has accepted that the TNMM is more tolerant to functional differences, and, therefore, unless the Transfer Pricing Officer demonstrates that the functional differences are too basic, the comparability cannot be rejected. Reliance is then placed on the order of the CIT(A) and the contentions before him are reiterated. We are also taken through the submissions made before the authorities below from time to time and the transfer pricing study. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

10. We find that so far as JTS Contracting Co is concerned, it is an associated enterprise of the 1CBC, within meaning of that expression under section 92A(2)(b), because Technimont holds not less than 26% shares in LTS Contracting Co as also the ICBC, which is 100% subsidiary of assessee company in which Technimont holds 50%. Whereas its holding in the assessee ICBC is, through the assessee company, is 50%, its direct holding in JTS Contracting Co is 45%. Let us, in the light of this factual position, take a look at the legal provisions providing for computation of arm's length price under the transactional net margin method. As Rule 10 A clearly states, the expression 'uncontrolled transaction', for the purpose of Rule 10 B to 10 E, means "a transaction between enterprises other than associated enterprises, whether resident or non-resident", it is thus free from doubt that so far as transactions between the associated enterprises are concerned, the same are outside the ambit of 'uncontrolled transactions'. The transactions between ICBC and JTSC are clearly such transactions, and these transactions constitute as much as 59% of total revenues. Rule 10B(1)(e), which sets out the mechanism to compute the arm's length price under the TNMM, provides that the profits earned by the enterprise taken as comparable, from comparable uncontrolled transactions, is to be taken into account. In other' words, profits from controlled transactions, which in turn refers to intra associated enterprise transactions, cannot be taken into account in computing arm's length price under the TNMM. However, when we take ICBC as a comparable in the present case, this is precisely what we end up doing -taking into account the profits earned by the ICBC from its associated enterprise i.e. ITS Contracting Co. In our humble understanding, this is not permissible under the scheme of the Indian transfer pricing legislation. When the profits derived by an enterprises arise out of, significantly or predominantly, intra AE transactions, the same cannot be taken into account for computation of arm's length price under the transactional net margin methods. As regards the observation made by the Transfer Pricing Officer to the effect that since more than 50% of JTS Contracting Co's equity is held by an unrelated party i.e. JTS Japan, it can be treated as an unrelated party, we can only point out that the test for an enterprise being associated enterprises has nothing to do with majority shares being held by an unrelated party, since section 92A(2) categorically provides that, inter alia, two enterprises will be deemed to be associated enterprises when as much as when these enterprises have 26% holding, directly or even indirectly, by the same person or enterprise. The criterion adopted by the Assessing Officer is thus devoid of legally sustainable basis. As regards reliance on coordinate bench's decision in the case of NGC Network India (P.) (supra), we have noted that there had no occasion to take note of, or deal with, the specific provisions of the statute, as discussed above, and learned Departmental Representative has also fairly accepted the same. In view of these discussions, the CIT(A) was quite justified in rejecting ICBC as a valid comparable. Coming to the comparables cited by the assessee, all but two of which have been accepted by the CIT(A), we have noted that the Transfer Pricing Officer has simply brushed them aside with rather generalized and sweeping observations. It is also not in dispute that the assessee had given segmental data, whereas the TPO has rejected on the ground of non-comparability at the entity level. Comparability at the entity level has not even been the case of the assessee, and, therefore, the rejection was certainly unjustified. When the Transfer Pricing Officer himself advocates greater tolerance level in the TNMM, though in the context of taking ICBC as a valid comparable when he stated that " The assessee had submitted that while it was engaged in mainly execution of engineering services through specialized software, ICBC was engaged in mainly execution of electrical and instrumentation projects, including onsite erection and allied activities which were labour intensive" but "the transactional net margin method is more tolerant to differences in functions", it cannot be open to him to contend that there are slight differences at functional level and, for that reason alone, the comparables should be rejected. In any case, the observations made by the Transfer Pricing Officer are too vague and generalized to meet any judicial approval. In the absence of any valid grounds, sustainable in law, of rejecting the comparables by the TPO, the CIT was quite justified in upholding the same. The CIT(A) has rejected two variables but the assessee is not in appeal against the same, and we need not deal with the same, nor are there any specific issues raised by the Assessing Officer. Ideally, the authorities below should have dealt with the comparable adopted by the assessee in a more comprehensive manner and we do feel that there is less than sufficient discussion about the appropriateness of the comparables, but then the Assessing Officer cannot be allowed to improve upon his case at this stage, and particularly when no specific issues are raised before us, we can do little about it. In view of these discussions, and bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter on appeal filed by the Assessing Officer.

11. In the result, the appeal filed by the Assessing Officer is dismissed.

12. We now take up the appeal filed by the assessee.

13. in the first and second grounds of appeal, which are somewhat interconnected, the assessee has raised the following grievances:

The learned CIT(A) has erred in confirming the addition of Rs 85,18,813 being transfer pricing adjustment on account of five per cent mark up on the amount of reimbursement of expenses received by the appellant from its associated enterprises.

The learned CIT(A) has erred in not deciding on the ground of appeal preferred by the appellant and thereby not confirming that the amount of reimbursements received by the appellant from its AEs do not form part of the appellant's cost base, while computing the operating margin of the appellant.

14. To adjudicate on these grievances, only a few material points need to be taken note of. The assessee had incurred certain expenses on the travel related costs of its employees which were deputed to its associated enterprises on different projects. As per the agreement, the assessee was entitled to recover these costs, plus a mark up-of 2 to 5%, but it recovered only the actual costs incurred. The TPO held that entire reimbursements should form part of the cost base and that an addition of 5%, towards mark-up, should be made. Aggrieved, assessee carried the matter in appeal. Learned CIT(A) upheld the addition on the ground that the assessee cannot waive the mark-up recoveries at will. The assessee is aggrieved and is in appeal before us.

15. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

16. We are in considered agreement with the conclusions arrived at by the CIT(A) to the extent that when the assessee decides not to recover agreed mark-up margins which he is entitled to, and which normally he would not have given up in the uncontrolled transactions, the Transfer Pricing Officer is perfectly justified in making ALP adjustment in respect of the same. However, whereas the TPO has observed that the arrangement with the AEs provided for mark-up costs of 2% and 5% and arm's length price of the mark up is not even in dispute, it cannot be open to him to make addition of 5% on a flat basis. In our considered view, the ALP adjustment should be confined to the agreed mark-up costs which have not been recovered by the assessee. To this extent, the assessee is entitled to get relief, if any relief is admissible on that count. As for the second issue, i.e. regarding not deciding whether' reimbursements should be included in the cost base or not, learned counsel agrees that this accept of the matter will be academic in the year before us now. We, therefore, decline to be deal with the same. With these directions, the matter stands restored to the file of the Assessing Officer for recomputation of ALP adjustment in respect of mark-up cost, and to give relief, if any relief is found admissible.

17. Ground No. 1 allowed for statistical purposes and ground No. 2 is dismissed.

18. In ground No. 3, the assessee has only pressed for the consequential relief, if any. Learned departmental representative does not oppose this prayer. We, therefore, direct the Assessing Officer to grant the consequential relief, if any.

19. The appeal filed by the assessee is thus partly allowed for statistical purposes in the terms indicated above.

20. As regards the cross-objection, in view of the pending retrospective amendment in Section 92C(2) in this year's budget, the issue is now practically academic. There is no point in adjudicating upon the same. The CO is thus dismissed as infructuous.

21. In the result, while the appeal by the Assessing Officer and cross-objection by the assessee are dismissed, the appeal filed by the assessee is partly allowed for statistical purposes in the terms indicated above.

ORDER

Vijay Pal Rao, Judicial Member - On perusal of the order of the learned brother and after giving my deep thought on the issue involved reasoning and conclusion of the Id AM, I do not agree with the view, reasons and the finding of the ld AM on the issue of internal comparable. The expression of international transaction as provided in the provisions of sec. 92B means the transaction between 2 or more Associated Enterprises (AE), either or both of whom are non-residents. Such transaction may be in the nature of purchase, sale or lease of tangible or intangible property or provision of services or lending or borrowing money or any other transactions having a bearing on the profits, income, losses or assets of such Enterprise.

2. Section 92F(ii) defines arm's length price (ALP), a price which is applied or proposed to be applied in regard to the transaction between the persons other than AEs, in uncontrolled conditions.

3. Rule 10B(1) of IT Rules prescribes method/manner in which ALP in relation to an international transaction has to be determined by applying most appropriate method as prescribed u/s 92C. The transactional net margin method (TNMM) is one of the various methods prescribed under the Rule 10B of the IT Rules. Rule 10B(1)(e) specifically mentions the method for determining the ALP by applying TNMM as under:

"9.3 Rules 10B(1) of the I T Rules prescribed the manner in which ALP in relation to international transaction has to be determined by applying most appropriate method as prescribed u/s 92C. Rules 10B(1)(e) specifically mentioned the method/manner for determining all the ALPs by applying net Transactional Net Margin Method (TNMM).

(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or ales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base.

(ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;

(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;

(iv) the net profit margin realized by the enterprise and referred to in sub clause (i) is established to be the same as the net profit margin referred to in sub clause (iii)

(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transactions.'

Thus, as per chapter X r.w r 10B any income arises from the international transaction shall be computed having regard to ALP. An international transaction is required to be tested at ALP irrespective of genuineness of the actual price of the transaction. In the case of international transaction, legislature has shifted the burden of proving from tax authority to the assessee to establish and show that the transaction with the AE was at ALP on the basis of documents maintained and file by the assessee. It is incumbent upon the assessee to satisfy the tax authorities that the transaction with the AE was at ALP and in support of its claim; the assessee has to produce all the relevant records including TP study having margin comparables to arrive at the ALP."

3.1 Thus, as per the provisions of Transfer Pricing, as envisaged in Chapter X of the I T Act r.w.r 10B of Income Tax Rules, net profit margin realised from the international transaction shall be computed having regard to ALP.

4. The provisions of transfer pricing mandate an international transaction to be tested or compared with the ALP. In contrast to general rule of taxation, in case of international transaction, the legislature has shifted the burden on the assessee to establish and show that the transaction with AE was at ALP on the basis of documents maintained and filed by the assessee.

4.1 It is incumbent upon the assessee to satisfy the tax authorities that the transaction with AE was at ALP and in support of its claim; the assessee has to produce all relevant record including the transfer price having margin comparables to arrive at ALP.

5. Under the Transaction Net Margin Method (TNMM), as required by the provisions of law, the comparison has to be made between the net margin realized by the assessee on international transactions and the net margin realized from the similar transaction between uncontrolled parties. Thus, in case the net margin realized from the international transaction is found less than the ALP arrived at by applying the most appropriate method, then ALP so determined will replace the net profit margin from international transaction.

6. To establish the transaction between the AEs at ALP, a comparison has to be made with uncontrolled similar transactions between unrelated parties having regard to the same base and other functional similarities. The expression uncontrolled transaction, as stipulated in Rules 10B to 10E refers to the comparable transactions between unrelated/uncontrolled parties. The condition, as stipulated under the statute and rule is that the comparable transaction should be non-AE. It means the comparable transactions to the purpose of computing the ALP of the international transactions should not be between the AE, which means the comparable transaction should be uncontrolled and between unrelated parties other than the assessee. In other words, the condition of uncontrolled transaction between unrelated parties is for external comparable for computation ALP. The conditions, as stipulated under the provisions of transfer pricing law is that the comparable transactions should not be between the AEs and therefore, there is no such embargo for a transaction between the assessee and its different AEs and margin of which is found at ALP and accepted by the revenue for considering the same as comparable for computing the ALP of international transaction between the assessee and another AE.

6.1 However, it is not permissible under the provisions of transfer pricing that a transaction between two AEs (say between A & B) may be at ALP can be taken as comparable for determining the ALP for a transaction between the other AE (say C & D). In other words, a transaction between the AE, if found and accepted at ALP, cannot be a comparable for different enterprise but the said transaction once found at ALP can be the best comparable being an internal comparable for computation of ALP of a transaction of the same Enterprise with another AE.

7. Once the net profit margin realized from a particular international transaction is found and accepted at ALP, then, the margin so realized would partake the character of margin realized by the assessee from an uncontrolled transaction. In other words, when the margin realized from an international transaction is found at ALP, then it is equal or at par with the margin realized from a comparable uncontrolled transaction(s). The object of transfer pricing legislation is to check tax avoidance by the assessee on the transaction between the associated parties and showing less receipt from such transactions. To address such situation, the legislature has mandate the comparison of transaction between the related parties with those between unrelated or uncontrolled parties. The best comparable would a transaction between the assessee and non associated /third party because in that case, ail other factors remain constant and the price charged by the assessee from a unrelated party would be the best price/margin that the assessee aught to have charged from its AE. However, the margin relied by the assessee from a transaction with its AE once accepted at ALP, then the difference between the transaction with AE and a comparable transaction between the unrelated and uncontrolled parties extinct. It can be said so because once the net margin realized from a transaction between the AE is found and accepted at ALP then, the said margin has become comparable with the margin realized from a transaction between the unrelated and uncontrolled parties. Though the assessee may not be allowed to claim the margin with a particular AE and ALP of the international transaction with another AE; however, if the Assessing Officer accepts the margin realized by the assessee from International transaction at ALP, then the same can be adopted as Arm's length price of the transaction between another AE and in that case, the assessee is not allowed to object such adoption of ALP.

8. In the case in hand, the assessee carried the transactions with its AEs. Similarly, the fully owned subsidiary of the assessee also had similar transaction with another AE. The net profit margin of transaction between the subsidiary of assessee and AE has been accepted by the Assessing Officer at ALP and the same was adopted as ALP of the transaction of assessee with another AE. It is not open to the assessee to say that the price charged from one AE should not be adopted as ALP of the international transaction with another AE when all other factors are the same. For instance, an enterprise has two similar or identical transactions with two associated enterprises. In such a situation where an assessee is having international transaction with two AEs and realizing the same net profit margin from both the transactions can it be possible either for the revenue or for the assessee to accept one of such transaction at ALP and deny the other one.

9. Similarly, when a transaction with AE is found and accepted at ALP, then net profit margin realized from the said transaction cannot be ignored while considering the comparable for the purpose of determining the ALP for the another international transactions with another AE. There cannot be two different ALP for two identical international transactions of one assessee. The ALP determined for one transaction out of two identical international would be adopted for the other one. Thus, the internal comparable is the most appropriate to be considered for determining the ALP of the transaction between the assessee and the other AE.

10. A similar view has been taken by the coordinate Bench of the Tribunal in the case of NGC Network India (P.) Ltd (supra) as relied upon by the Id AR in para 15 as under:

15. We have considered the various aspects. The Assessing Officer had accepted the license fees for the month of February and March 2003 to be at arm's length. However the steep increase given from the beginning of the year with retrospective effect has not been accepted. The reasons given by the Assessing Officer is that over the year there has been decline in rate of hiring transponders/satellite due to availability of higher capacity digital transponders and higher competition amongst various transporters There would have been no difficulty if retrospective increase was with respect to an unrelated party because these are commercial decisions which the assessee may take according to its business needs and cannot be questioned unless they are found not genuine. The position is however different in case of transactions with a related party as in the present case, which has to be compared to unrelated party transactions to find out the arm's length price. In this case arm's length price has been computed by the assessee with respect to certain comparables as mentioned in para 4 using TNMM. These comparables and the method of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e., 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also. However, it is noted that the assessee has worked out the arm's length price on the basis of transactions relating to the comparable for assessment year 2002-03 as at the relevant point of time complete details in respect of assessment year 2003-04 were not available. In our view when the facts and figures in relation to the relevant assessment year i.e., assessment year 2003-04 are now available then the transfer pricing adjustments have to be computed based on the said facts and figures. In case working is to be made on the basis of figures for assessment year 2002-03, then in our view the transactions in assessee's own case for the said year which have been found to be at arm's length in that year should be adopted as basis as the business being same, it will give better results. Merely because the transaction is with an associate enterprise cannot be the ground to reject it as a comparable when the transaction is at arm's length. However as we have held earlier, in our view it will be most appropriate to compare the transactions for the same year ie., assessment year 2003-04 for which the figures are available in respect of comparables which have already been accepted by the department. We therefore set aside the order of CIT(A) and restore the matter to the file of Assessing Officer for re-working of the transfer pricing adjustments using TNMM on the basis of facts and figures available for assessment year 2003 -04 In respect of the comparable selected by the assessee and pass fresh order after allowing opportunity of hearing to the assessee.

10.1 When the findings of the coordinate Bench of the Tribunal is on the issue of appropriate comparable transaction, then it is implied that while deciding such issue 'all relevant provisions were kept in mind by the coordinate Bench.

11. In the absence of any tangible reasons brought on record by the assessee, it is not permissible to the assessee to take such technical objection against considering the internal! comparable being transaction between the related parties. As per the scheme and provisions of Transfer Pricing Legislation, no doubt the external comparable must be of uncontrolled transaction between unrelated parties. But there is no such bar in case of internal comparable, which is most appropriate because having the same basis and other functional similarities between the parties.

12. In view of the above discussion, the internal comparable, being the most appropriate comparable cannot be ruled out for computing the ALP. Accordingly, the impugned order of the Id Commissioner of Income Tax (Appeals) is not sustainable and the appeal of the revenue is deserved to be allowed.

13. As far as the other issues are concerned, I do agree and concur with the view and finding of the Id Accountant Member.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

In ITA No.5085/Mum/2010 (AY 2005-06) & CO No.78/Mum/2011 and appeal in ITA No.4608/Mum/2010 (Assessment Year 2005-06) In the case of Technimount ICB India Pvt. Ltd., Technimont ICB Chnicholi Bunder 504 Link Road, Mumbai 20.

1. While adjudicating the above appeals, we have not been able to agree on one of the issues which has come up in appeal before us. This point of difference is as follows:-

Whether in the facts and circumstances of the case, the net margin realized from a transaction with an Associated Enterprise (AE) found and accepted at Arm's Length Price (ALP) can be taken as a comparable being an internal comparable for computation of arm ALP of an international transaction with another AE?.

2. In view of the fact that one of us has relied upon a Division Bench order (i.e. NGC Network (India) (P.) Ltd. (supra), in support of the respective stand and as there are decisions supporting the contrary view by other division benches (viz. Skoda Auto India Pvt. Ltd. v. Asstt. CIT [2009] 30 SOT 319)(Pune), it will be appropriate that the point of difference is referred to a bench of three members, under section 255(4) of the Act. The Registry is directed to place this reference, along with case records, for appropriate orders before Hon'ble President.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

In ITA No.5085/Mum/2010 (AY 2005-06 ) & CO No. 78/Mum/2011 and appeal in ITA No.4608Mum/2010 (Assessment Year 2005-06 In the case of Technimount ICB India Pvt Ltd. Technlmont ICB House Chnicholi Bunder 504 Link Road, Mumbai 20

While adjudicating these appeals, both the members have expressed their independent views. We, therefore, make a reference to the Hon'ble President of the Income tax Appellate Tribunal under section 255(4) of the I T Act, 1961, for an appointment of a Third Member or to pass necessary order to adjudicate the following question of law on a point of difference:

Whether in the facts and circumstances of the case, the net margin realised from a transaction with an Associated Enterprise (AE) is found and accepted at Arm Length Prtce(ALP) can be taken as a comparable being an internal comparable for computation of arm ALP of an international transaction with another AE ?.

The Registry is accordingly directed to place this reference before the Hon'ble President for his kind perusal and necessary orders.

THIRD MEMBER ORDER

R.S. Syal, Accountant Member (As a Third Member) - The following point of difference has been referred to me by the Hon'ble President u/s 255(4) of the Income-tax Act, 1961 :-

"Whether in the facts and circumstances of the case, the net margin realized from a transaction with an Associated Enterprise (AE) found and accepted at Arm's Length Price (ALP) can be taken as a comparable being an internal comparable for computation of (sic -arm) ALP of an international transaction with another AE?"

2. The factual matrix of the case has been elaborately given by my learned brothers in their respective opinions. Still, I will briefly recapitulate the facts which are material for decision on the question referred to me. The assessee-company is engaged in activities like EPC lump sum turnkey contracts, engineering design services, supervision services, translation services and feasibility studies. During the year in question, it rendered services to Tecnimont group concerns through its personnel either from India or by deputation at the Tecnimont office or at the field construction site. The assessee has a fully owned subsidiary called ICB Contractors India Private Limited (hereinafter called 'ICB'). This company, in turn, received revenues from JTS Contracting Co. Mallta (hereinafter called 'JTS') to the tune of 'Rs. 26.26 crore, which constituted 59% of its total revenues. Both the ld. Members have agreed that JTS is an Associated Enterprise (hereinafter called 'AE') of ICB. The assessee computed Arm's Length Price (hereinafter called 'ALP') by using Transactional Net Margin Method (hereinafter also called 'TNMM') using Profit Level Indicator (hereinafter called 'PLI') as Operating profit to Cost. In its transfer pricing study, the assessee chose twelve cases as comparable giving average margin of operating profit to cost at 15.37%. The assessee declared that its margin from international transactions with AEs at 75.48% on cost was better than the average profit margin on similar base of twelve comparable cases shown by it. The AO made a reference to the Transfer Pricing Officer (hereinafter called 'TPO') u/s 92CA(1). During the course of proceedings before the TPO, the assessee argued that its margin of Operating profit to cost was much higher than the comparable uncontrolled cases and hence its international transaction be accepted at ALP. The TPO, after analyzing the facts and circumstances of the case and also considering the submissions advanced on behalf of the assessee, recorded the following conclusions, which are relevant for answering the question referred to me:-

(i) Twelve cases considered by the assessee as comparable are functionally different on end level and hence should be excluded for benchmarking.

(ii) ICB is an internally comparable case which has earned 66.77% profit margin over total cost. It is only this cost which should be considered for determining ALP in assessee's case.

(iii) The assessee's contention that ICB had related party transactions of Rs. 29.53 crore including Rs. 26.26 crore as receipts from JTS and hence the same be excluded as controlled transactions, was not acceptable.

3. That is how the TPO adopted net profit margin over cost at 66.77% for determining ALP in respect of the payments received by the assessee from its AEs and resultantly proposed adjustment of Rs. 7.13 crore (after rectification). The assessee contested the addition before the learned first appellate authority, who deleted the addition by holding, insofar as it is relevant for answering the question referred to me, as under :-

(a) The TPO was wrong in rejecting all the twelve comparable cases cited by the assessee on entity level. Ten cases out of such twelve are functionally comparable on segment level.

(b) ICB is functionally different inasmuch as it entered into the project business executing various electrical and instrumentation projects while the assessee's international transactions are in relation to service segment.

(c) Transactions of ICB with JTS constituted related party transactions and hence the case of ICB should be excluded from the comparable cases.

(d) On the basis of remaining ten comparable cases, the assessee's transactions with its AEs and its margin on cost at 75.48% or even 44.21%, was at arm's length and hence no addition was warranted.

4. The learned AM in his opinion held that JTS is AE of ICB and hence the transactions between them constitute controlled transactions. In that view of the matter, he ruled out the case ICB for determining the ALP in respect of the assessee's international transactions. It was further held that the learned CIT(A) was justified in accepting ten out of twelve cases considered by the assessee in its transfer pricing study as comparable because the assessee had given segmental data whereas the TPO rejected these cases due to non-comparability at the entity level. He, therefore, declined to interfere with the view of the ld. CIT(A) in this regard, thereby dismissing the appeal of the Revenue. On the other hand, the learned JM did not agree with the reasons as well as finding of the learned AM on the issue of internal comparable. The sum and substance of his finding is that when a transaction with AE is found and accepted at ALP, then such comparable transaction can also be considered for determining ALP in respect of other cases - having transactions with its AEs. By applying this logic to the present situation, he opined that since the transactions between ICB and JTS were found to be at ALP, there was no reason to ignore such internally comparable transaction for determining ALP in respect of the assessee's international transactions. He held that the contrary view of the ld. CIT(A) on this issue, as upheld by the ld. AM, was not sustainable. On all other issues, he agreed with the opinion of the ld. AM. In the final analysis, he allowed the appeal of the Revenue. That is how this matter has come up before me as third member.

5. I have heard the rival submissions and perused the relevant material on record in the light of precedents relied on. From the question referred to me, it is apparent that I have been called upon to answer as to whether the net margin realized from a transaction with an AE, found and accepted at ALP, can be taken as a comparable being an internal comparable for computation of ALP of an international transaction with another AE. To be more specific and in the present context, the precise question is whether the case of ICB can be considered for determining ALP in the case of the assessee's international transactions when the transactions of ICB with JTS are controlled transactions and the arm's length margin in that case has been accepted at 66.77%.

6. The ld. AR, at the very outset, submitted that it was not essential for the Division Bench to delve into the question as to whether or not a comparable controlled transaction of ICB could be considered for benchmarking. He stated that the ld. CIT(A) gave one of the reasons for deleting the addition that the case of ICB was not comparable to the assessee and the Members of the Division Bench accepted this plea reiterated on behalf of the assessee during the course of proceedings u/s 254(1). It was thus stated that the reference made to the third member for consideration and decision itself was infructuous. On a specific query to draw my attention towards the finding recorded by the ld. Members in their respective opinions that the case of ICB is incomparable, the ld. AR referred to certain portions of the opinion of the ld. AM, which in his view constituted an inference as to the finding given in favour of the assessee. I have thoroughly perused the opinion given by the ld. AM. There is no verdict of the ld. AM on the comparability or otherwise of the case of ICB with the assessee. The ld. JM also did not express his view on this aspect of the matter. He simply dissented with the opinion of the ld. AM on the question of considering a controlled transactions of ICB for determining ALP of the assessee's international transactions. It is observed that the ld. CIT(A) ordered to delete the addition by adducing three reasons. One of such reasons was that the case of ICB was not comparable with that of the assessee. The ld. AM, affirmed the conclusion of the ld. CIT(A), by mainly holding that ICB and JTS were associated enterprises and as such the profit margin realised by ICB from such controlled transactions could not be used for determining the ALP of the assessee's international transactions. It is imperative to bear in mind that if in a given case, CIT(A) sustains or deletes an addition by examining the issue from more than one angle, all of which are mutually exclusive and the Tribunal upholds such sustenance or deletion by considering and deciding the issue from one of such angles, it cannot be impliedly inferred that the reasoning of the CIT(A) on other angles also got automatically decided in line with the decision on angle so decided. There can be no question of any implied consideration of other angles as well. In order to ascertain as to whether the Tribunal subscribed to or negated various angles adopted by the CIT(A) to sustain or delete an addition, it is necessary to find out view of the Tribunal in on all such angles distinctly. If the conclusion drawn by the CIT(A) is upheld by considering the issue from one of the angles only, it is the approval of view of the first appellate authority by the Tribunal from that angle alone. The other angles cannot be claimed as impliedly considered and decided by the Tribunal unless there, is sufficient hint in the four corners of order itself or other proceedings of the bench directly related to the case duly signed by the Members, to indicate a decision on such other angle(s). Adverting to the facts of the instant case, it is seen that the ld. AM, who rendered the leading opinion, did not specifically hold anything about the comparability or otherwise of the case of ICB with the assessee. He observed that the TPO has rightly held that TNMM is tolerant to functional differences between two concerns to some extent. In that view of the matter, if some decision of the Tribunal on this aspect is to be inferred, it is that he approved the view of the TPO that the case of ICB was not incomparable with that of the assessee because of the adoption of the TNMM for determining ALP, which method takes care of minor functional differences. Further, the ld. JM also proceeded with the inference that the ld. AM has held the case of ICB to be comparable. He expressed the dissenting opinion only on the question of whether the controlled transactions of ICB can be considered for benchmarking, which pre-supposes the acceptance as to the comparability of this case. If either of the ld. Members had accepted the case of ICB as incomparable, then the matter would have ended there alone and such case would have gone out of reckoning for determining the ALP. No point would have been left then to consider the question of controlled, or uncontrolled transactions of such incomparable case. The fact that both the ld. Members have considered the case of ICB for the purposes of comparison automatically implies that they held it to be comparable. They differed only on the question of consideration of the controlled transactions of this comparable case of ICB. It is further relevant to note that both the ld. Members have unanimously framed the question referred to u/s 255(4), which is about the inclusion or exclusion of the controlled transactions of ICB. It demonstrates that there was unison between both the ld. Members that the case of ICB is comparable. In the otherwise possibility, there would have been one more preliminary question for reference to the third member as to whether the case of ICB is comparable or not. As both the ld. Members have referred to only one question reproduced above, there can be no foundation for contending at this stage that the case of ICB is not comparable. All the relevant facts discussed above are clear pointer to the fact that both the ld. Members impliedly held the case of ICB to be comparable. This contention raised on behalf of the assessee is, thus, jettisoned.

7. The ld. AR next argued that the transactions between ICB and JTS were wrongly considered as internal comparable of the assessee. He stated that even though ICB is a hundred per cent subsidiary of the assessee company, still the transactions of ICB could not be described as the transactions of the assessee as both are separate entities. In view of the fact that ICB is different from the assessee, the ld. AR stated that the transactions of the ICB were not capable of being characterized as the internal transactions of the assessee-company. He put forth that once the ICB is held to be separate from the assessee, its controlled or uncontrolled transactions cease to be internal comparable of the assessee. On a pertinent query, the ld. AR failed to draw my attention towards any categorical finding given by the ld. Members on this aspect of the matter. I have meticulously perused the opinion of the ld. AM but failed to find out any decision given by him in this regard. The ld. JM has impliedly rejected this contention of the assessee, which is evident from the fact that he has strongly accentuated on comparing the case of ICB for benchmarking on the premise that it is an internal comparable. Further, the ld. AM also did not disagree with the ld. JM on this aspect of the matter as is perceptible from the question proposed by both the ld. Members, which does not dispute this finding recorded by the ld. JM.

8. At this juncture I will like to clarify that the scope of proceedings before the third member is confined to the question referred to by both the members of the Division Bench. It is neither permissible nor desirable on the part of the third member to examine the issues on which there is no divergence of opinion between the members of the division bench. His jurisdiction extends to the question referred to him. On all other matters, the proceedings are final qua the third member. What is not open for consideration by the third member is equally not open for arguments by the rival parties. The parties before the Tribunal are debarred from tossing up any issue before the third member other than that which has been referred to him. No matter or aspect of the matter already decided or left undecided by the division bench, except the one on which the members of the division bench have recorded dissent and framed question, can be assailed before the third member. His scope is restricted to rendering decision on such point or points on which the members have differed, nothing more nothing less. This position is amply manifest from the language of section 255(4) which provides that : 'If the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Appellate Tribunal for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and such point or points shall be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it.' A bare perusal of this provision indicates that 'if the members of a bench differ in opinion on any point', then 'such point' shall be referred to the third member and 'such point' shall be decided in consonance with the view expressed by the third member. The jurisdiction of the third member starts from the 'point' which is referred to him and ends at rendering decision on 'such point'. In the light of the clear mandate given by the Legislature, it is crystal clear that the third member's authority extends only to the point on which the members have differed and such difference has been so referred to him. It is impermissible to him to take up any point for consideration and decision, either suo motu or at the instance of the parties, other than that which has been referred to him. In view of the foregoing discussion it is clear that the above point raised by the ld. AR also does not require any consideration or decision at my end.

9. Accordingly I will now proceed to answer the question referred to me. Chapter X with a marginal note 'Special provisions relating to avoidance of tax', inter alia, contains sections 92 to 92F dealing with computation of income from international transactions having regard to ALP. In this regard, section 92(1) provides that any income arising from an international transaction shall be computed having regard to the ALP. 'International transaction' has been defined in section 92B(1) to mean 'transactions between two or more associated enterprises, either or both of whom are non-residents.......'. Coming back to the determination of income arising from an international transaction on ALP, we require to visit section 92C which deals with the computation of arm's length price. Sub-section (1) provides that ALP in relation to an international transaction shall be determined by any of the methods prescribed, being the most appropriate method having regard to the nature of transaction and or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe. This section makes a mention of five methods in specific and one in general for determining the ALP. The specific methods are - (a) comparable uncontrolled price method, (b) resale price method, (c) cost plus method, (d) profit split method, and (e) transactional net margin method; and the general method has been set out as "(f ) such other method as may be prescribed by the Board". The modalities for working out the ALP in relation to these five specified methods have been given distinctly in Rule 10B. The assessee in the instant case adopted transactional net margin method for benchmarking its international transactions, The applicability of such method has not been disputed by the TPO. Thus it becomes relevant to consider the mandate of Rule 10B(e), which provides for the determination of ALP under TNMM in the following manner :-

"10B. Determination of arm's length price under section 92C.-(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :-

(e) transactional net margin method, by which,-

(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ;

(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;

(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ;

(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i ) is established to be the same as the net profit margin referred to in sub-clause (iii ) ;

(v) the net profit margin thus established is then taken into account to arrive, at an arm's length price in relation to the international transaction."

10. Clause (i) of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to 'the net profit margin realised by the enterprise .... from a comparable uncontrolled transaction' and the other part talks of 'the net profit margin realised ....by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-a-vis externally comparable uncontrolled transactions. It is because the delegated Legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart i.e. external comparable.

11. Reverting to the question of making comparison of net profit margin of internally or externally comparable case from uncontrolled transaction, it can be seen that clause (ii ) of Rule 10B(e) unequivocally mandates for making a comparison with "uncontrolled transaction" or a number of such transactions. The word 'comparable' used in the provision to describe internal or external comparable, is succeeded by the words 'uncontrolled transaction'. When clause (iii ) of Rule 10B(e) is examined, it becomes lucid that there is reference to the net profit margin arising, again in 'comparable uncontrolled transaction'. It provides that the net profit margin arising in comparable uncontrolled transaction is adjusted to account for difference, if any, between the international transaction and the comparable uncontrolled transaction. When the net profit margin from a comparable uncontrolled transaction is adjusted in the light of clause (iii ) of Rule 10B(e), the resulting figure constitutes benchmark, which is then taken into account to arrive at an ALP in relation to the international transaction entered into by the assessee with its AEs. Thus it is evident that Rule 10B(e) vividly refers to making a comparison of net profit margin with some comparable 'uncontrolled transaction'. There is no reference to making a comparison of an assessee's international transactions with a comparable controlled transaction. Comparable may be internal or external, but in any case such comparable must be that of uncontrolled transaction or number of such uncontrolled transactions.

12. In fact, the entire scheme of determining ALP of an international transaction is based on making comparison with certain comparable uncontrolled transactions. It is more glaring from the command of Rule 10B given in all the methods which have been prescribed u/s 92C(1) for determining ALP. The first method is 'comparable uncontrolled price method'. Procedure for determining ALP under this method is given in Rule 10B(a). As the very name of the method itself suggests that the price charged or paid for the property 'in a comparable uncontrolled transaction' is identified. Such price in a comparable uncontrolled transaction is adjusted on account of differences, if any. The consequential price is taken as benchmark for considering the assessee's international transactions with its AEs. The second method is 'resale price method'. The procedure for determining price under this method is given in Rule 10B(b). Under this method, the price at which property purchased or services obtained by the enterprise from an AE is resold or are provided to 'an unrelated enterprise' is identified. This method also compares the gross profit margin in a controlled transaction with the gross profit margin in an uncontrolled transaction based on specific functions performed. Next is 'cost plus method'. The modus operandi for determining of ALP under this method is provided in section 10B(c) which again refers to making comparison with 'uncontrolled transaction'.

13. A brief overview of various methods prescribed for determining ALP clearly divulges that the comparison is always sought to be made of the assessee's international transactions with comparable 'uncontrolled transactions'. One common factor permeating through various methods for determining ALP is comparison of the assessee's international transactions with those of third parties similarly situated. The essence is that the comparison is sought with 'uncontrolled transaction'. The transactional net margin method is no exception in this regard. It also contemplates comparison of net profit realized by an enterprise with the net profit realized from a comparable uncontrolled transaction.

14. What is an 'uncontrolled transaction' has been clearly defined under Rule 10A(a) to mean 'a transaction between enterprises other than associated enterprises whether resident or non-resident'. A plain reading of the meaning given to the expression 'uncontrolled transaction' leaves no room for any doubt that it is a transaction between two non-associated enterprises. If the transaction is between two associated enterprises, it goes out of the ambit of 'uncontrolled transaction' under Rule 10A. When section 92C is read along with Rules 10B(e), and 10A, it becomes abundantly clear that in computing ALP under the transactional net margin method, a comparison of the assessee's net profit margin from international transactions with its AEs has necessarily to be made with that of the net profit margin realized by the same enterprise or an unrelated enterprise from a comparable but definitely uncontrolled transaction i.e., a transaction between non-associated enterprises. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. When it has been clearly mandated in all the relevant methods for determining ALP that the comparison has to be made by the enterprise's international transaction with comparable uncontrolled transaction, by no sheer logic a comparable controlled transaction can be employed for the purposes of making comparison. There is no warrant for diluting the prescription given by the statute or rules when such prescription itself serves the ends of justice properly and is infallible. If the view of the Revenue that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. If such a contention of making comparison with a comparable controlled transaction is taken to its logical conclusion, then there will never arise any need to take up any case for transfer pricing scrutiny. The reason is obvious. ALP is determined for application in respect of transactions between two AEs so that the profit likely to arise from such transactions is not under-reported vis-a-vis from similar transactions with third parties. If the comparison is made again with net profit margin realized from transactions between two AEs, instead of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction.

15. There is one more dimension of this case. The transactions between ICB and JTS are not only controlled, but the profit margin of ICB also passed through the examination by the TPO, who declared it at arm's length. The ld. DR contended that once controlled transactions are verified by the TPO and found at ALP, then the difference between controlled and controlled transactions is obliterated. Canvassing this point further, he accentuated that even though the transactions between ICB and JTS were controlled, still they constituted a good basis for comparison as the TPO found them at arm's length.

16. This contention of the Id. DR albeit sounds attractive at the first blush, but on closer examination, fails to endure. The basic purpose behind the transfer pricing provisions is to ensure that the multinational companies do not arrange their intra group cross border transactions in such a way as to reduce the incidence of tax in India. A multinational company, having concerns across the world, may resort to pricing the intra group transactions in such a manner that lower income gets offered in countries with high tax rates and higher income gets reflected in countries with lower tax rates, so that its overall tax liability is shrinked. If the tax rates in India are relatively higher vis-a-vis the other country, say A, and the international transaction is between the concerns in India and country A, there may be an attempt on the part of multinational company to value the transaction in such a way that the income to be offered in India gets sliced away and corresponding income is increased in the hands of the company situated in country A. There may a converse situation as well. It may also happen that the tax rates in India are lower than the other country, say B, and the international transaction is between the concerns in India and country B. In such a situation, the multinational company may attempt to value the transaction in such a manner that the income to be offered in India is swelled, thereby reducing the corresponding income in the hands of the company situated in country B. It is palpable that in both such situations, the value of transaction between the associated enterprises is tailor-made to suit the overall interest of the multinational company. It does not represent the transaction at its true value. In the first situation, the receipt from the transaction recorded in India will be lower and its ALP will be higher. In the second situation, the receipt from the transaction recorded in India will be higher but the benchmark price will be lower. Whereas the first situation will necessitate the making of an addition on account of transfer pricing adjustment in the hands of Indian company, the second situation will not permit any deduction in the declared income of the such Indian concern to that extent. It is so because if the ALP is higher than the value of the transaction recorded in the books of account, it requires making addition on account of transfer pricing adjustment. However, in the opposite situation, there is no mandate for reducing the income. In such a second situation, the receipt from the transaction recorded shall be considered at ALP, notwithstanding the fact that it is at exaggerated figure when compared with a comparable uncontrolled transaction. This is what has been laid down in sub-section (3) of section 92. Whereas sub-section (1) of section 92 provides that any income arising from an international transaction shall be computed having regard to the arm's length price, sub-section (3) provides that : 'The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.' From the above discussion it is vivid that whereas in the first situation, the ALP represents the true value of transaction or, profitability as will be there in the ordinary course without having any regard to the relationship between the concerns, it is not so in the second situation. In the later case, even though the value of transaction or profitability will be at more than higher level, still it will be described as the ALP. In such later case, the ALP of the transaction or the arm's length profit cannot be considered as benchmark for the purposes of making comparison in other cases. That appears to be the probable reason for which the legislature has ignored the controlled transactions, even though at ALP, and restricted the ambit only to uncontrolled transactions for computing ALP in respect of international transactions between two AEs.

17. I, therefore, answer the question referred to me u/s 255(4) in negative by holding that the net profit margin realized from a transaction with an AE cannot be taken as a comparable being internal comparable for computation of ALP of an international transaction with another AE even though the net margin from a transaction with AE is found and accepted at ALP.

18. Before parting with this matter, I consider it my duty to record that the ld. AR relied on certain decisions including UCB India (P.) Ltd. v.. Asstt. CIT [2009] 121 ITD 131 / 30 SOT 95 (Mum), Bayer. Material Science (P.) Ltd. v. Addl. CIT [2012] 134 ITD 582 /18 taxman.com 60 (Mum.) and Dy. CIT v. BP India Services (P.) Ltd. [2011] 133 ITD 255 / 48 SOT 253 / 15 taxmann.com 125 (Mum) in which it has been held that controlled transactions cannot be considered for determining ALP in other transactions. Per contra, the ld. DR has relied on a solitary decision rendered by the Mumbai bench of the tribunal in NGC Network (India) (P.) Ltd. (supra) to buttress his contention that a controlled transaction can also be considered for benchmarking. I do not propose to embark upon these cases separately for discussion, I clarify that my decision in the foregoing paras is founded on the interpretation of the relevant bare provisions of the Act and Rules, without taking any assistance from decisions cited by the rival parties on the point, which differ in their conclusion as stated by the ld. Representatives before me.

19. For the foregoing reasons I agree with the view expressed by the learned AM. The Registry of the Tribunal is directed to place this matter before the division bench for passing an order in accordance with majority view.