The Arvind Mills Ltd.,, Ahmedabad v. The ACIT, Ahmedabad Circle-1,, Ahmedabad

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'A' BEFORE SHRI T K SHARMA JM & SHRI A N PAHUJA AM ITA NO.1304/AHD/2006 (ASSESSMENT YEAR:-2002-03) ARVIND MILLS LIMITED NARODA ROAD AHMEDABAD [PAN:AABCA2398D] V/S ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-1 AHMEDABAD [APPELLANT] [RESPONDENT] ITA NO.1427/AHD/2006 (ASSESSMENT YEAR:-2002-03) & ITA NO.2917/AHD/2007 (ASSESSMENT YEAR:-2003-04) ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-1 AHMEDABAD V/S ARVIND MILLS LIMITED NARODA ROAD AHMEDABAD [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI S N SOPARKAR AR REVENUE BY:- SMT. CHHAVI ANUPAM DR O R D E R A N PAHUJA: THESE CROSS APPEALS AGAINST AN ORDER DATED 23-03- 2006 OF THE LD. CIT(APPEALS)-VI AHMEDABAD FOR T HE ASSESSMENT YEAR 2002-03 AND AN APPEAL BY THE REVENUE AGAINST A N ORDER DATED 24-04-2007 OF THE LD. CIT(APPEALS)-VI AHMEDABAD FO R THE ASSESSMENT YEAR 2003-04 RAISE THE FOLLOWING GROUND S:- ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 2 ITA NO.1304/A/06-AY 02-03[ASSESSEE] : I . ON THE FACTS CIRCUMSTANCES OF THE APPELLANT'S CASE THE ORDER DETERMINING ARM'S LENGTH RATE OF COMMISSION PAYABLE TO ARVIND W ORLDWIDE INC. (USA) AN ASSOCIATED ENTERPRISE AT 4.2% IN PLACE OF 6.2% A ND THEREBY COMPUTING ARM'S LENGTH PRICE AT RS.13 13 532/- AS AGAINST RS. 20 60 842/- BY THE COMMISSIONER OF INCOME TAX (APPEALS) IS BAD IN LAW ON FOLLOWING COUNTS: (A) IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE ARM'S LENGTH PRINCIPLE IS BASED ON A COMPARISON OF THE CO NDITIONS IN A CONTROLLED TRANSACTION WITH THE CONDITIONS IN TRANS ACTION BETWEEN TWO INDEPENDENT ENTERPRISES I.E. UNCONTROLLED TRANSACTI ON. (B) THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THE CUP METHOD PROVIDE FOR COMPARISON OF CONTROLLED T RANSACTION WITH UNCONTROLLED TRANSACTION SUBJECT TO ADJUSTMENTS TO THE PRICE OF UNCONTROLLED TRANSACTION TO CARVE OUT DIFFERENCES B ETWEEN THIS TWO TYPE OF TRANSACTION. (C) ON THE FACTS & CIRCUMSTANCES OF THE APPELLANT'S CASE THE COMMISSIONER OF INCOME TAX (APPEALS) FURTHER ERRED IN DETERMINING ARM'S LENGTH PRICE PAYABLE TO ARVIND WORLDWIDE INC. BY COMPARING IT WITH CONTROLLED TRANSACTIONS ENTERED INTO WITH ANOT HER ASSOCIATED ENTERPRISES NAMELY ARVIND WORLDWIDE (MAURITIUS) INC . INSTEAD OF COMPARING INTERNATIONAL/CONTROLLED TRANSACTION WITH UNCONTROLLED TRANSACTION. II ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND ON MERITS OF THE CASE THE ORDER PASSED BY THE COMMISSIONER OF INCOM E TAX (APPEALS) IS BAD EVEN ON MERITS ON FOLLOWING COUNTS: (A) THE COMMISSIONER OF INCOME TAX (APPEALS) HAVING CONCLUDED THAT THE ARVIND WORLDWIDE INC. AN ASSOCIATED ENTERPRISE RENDERED MORE COMPREHENSIVE SERVICES AS COMPARE TO NON RELATED PA RTIES TO WHOM COMMISSION WAS PAID @ 5% GROSSLY ERRED IN DET ERMINING ARM'S LENGTH RATE OF COMMISSION PAYABLE TO ARVIND W ORLDWIDE INC. @ 4.2%. (B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT IDENTIFICATION OF COMPARABLES IN CONTROLLED AND UNCONTROLLED TRANS ACTIONS INVOLVE IDENTIFICATION OF DIFFERENCES AND TERMS QUANTIFICA TION OF DIFFERENCES IMPACT ON PRICING AND IF COMPARISON BETWEEN CONTROL LED AND UNCONTROLLED TRANSACTION IS NOT POSSIBLE EVEN AFTER CONSIDERING ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 3 ABOVE FACTOR THAN ONLY DEALING BETWEEN TWO CONTROLL ED TRANSACTION REQUIRES TO BE CONSIDER. (C) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE SIMILARITY IN THE CONTRACTUAL TERMS ALONE IS NOT THE FACTOR TH AT HAVE RELEVANCE IN DETERMINING ARM'S LENGTH PRICE UNDER CUP METHOD SO COMPARISON BETWEEN TWO ASSOCIATED ENTERPRISE SHOULD HAVE TO BE JUDGE IN LIGHT OF ORGANISATIONAL STRUCTURE MARKET IN WHICH IT IS OPERATING CORPORATE GOAL ECONOMIC CIRCUMSTANCES BUSINESS STRATEGIES PRICING STRATEGY MARKET ETC. (D) THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT BESIDES SAME FUNCTIONS ARVIND WOR LDWIDE INC. (MAURITIUS) OPERATED ON LARGER SCALE WITH BRANCHES IN MANY PARTS INCLUDING IN THE IMPORTANT EUROPEAN MARKET WHEREAS THE SCALE OF OPERATION WAS LOWER IN CASE OF ARVIND WORLDWIDE INC . WHICH MOSTLY OPERATED IN THE US MARKET AND THEREFORE DETERMINING ARM'S LENGTH PRICE FOR COMPARISON BETWEEN BOTH ASSOCIATED ENTERP RISES WITHOUT MAKING ANY ADJUSTMENT TO ELIMINATE SAID MATERIAL DI FFERENCE WILL NEVER GIVE CORRECT PICTURE. (E) THE COMMISSIONER OF INCOME TAX (APPEALS) DETERM INED THE ARM'S LENGTH PRICE BY FOLLOWING INTERNAL CUP METHOD BUT W HILE DOING SO FAILED TO APPRECIATE THAT EVEN UNDER INTERNAL CUP THE CONTROLLED TRANSACTION NEED TO BE COMPARED WITH UNCONTROLLED TRANSACTION. III. (A) IN THE FACTS AND CIRCUMSTANCES OF T HE CASE THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN REJECTING THE CLAIM O F WRITE OFF OF RS.102.25 CRORES MADE BY THE APPELLANT COMPANY DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS. (B) THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT IN VIEW OF CIRCULAR NO 14(XL-35) D ATED 11-4-1955 THE ASSESSING OFFICER WAS SUPPOSED TO GRANT DEDUCTI ON LEGALLY AVAILABLE TO THE APPELLANT EVEN THOUGH THE SAME IS NOT CLAIMED IN THE RETURN OF INCOME. THE APPELLANT CRAVES LEAVE TO ADD AMEND ALTER VAR Y AND/OR WITHDRAW ANY OR ALL THE ABOVE GROUND OR GROUNDS OF APPEAL EITHER BEFORE OR DURING THE COURSE OF HEARING OF THE APPEAL. ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 4 ITA NO.1427/A/06-AY 02-03[REVENUE] 1 THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN D IRECTING TO RESTRICT THE ADDITION ON ACCOUNT OF ARMS LENGTH PRICE AT RS. 7 47 310/- AS AGAINST RS.2 90 64 166/- MADE BY THE T.P.O. 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF AO. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. THE APPEL LANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA NO.2917/A/07-AY 03-04[REVENUE] 1 THE CIT(A) ERRED IN LAW AND ON FACTS IN DIRECTING TO DELETE THE DISALLOWANCE OF RS.43 07 259/- ON ACCOUNT OF ARMS L ENGTH PRICE. 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) O N THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED. THE APPEL LANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 2. ADVERTING TO GROUND NOS. I & II IN THE APPEAL O F THE ASSESSEE AND GROUND NO.1 IN THE APPEAL OF THE REVENUE FOR TH E AY 2002- 03 FACTS IN BRIEF AS PER RELEVANT ORDERS ARE THA T RETURN DECLARING NIL INCOME FILED BY THE ASSESSEE ENGAGED IN THE BUSINE SS OF TEXTILE GARMENTS TELECOMMUNICATION AFTER BEING PROCESSED ON 28-02-2003 U/S 143(1) OF THE INCOME-TAX ACT 1961 [HEREINAFTER REFERRED TO THE AS THE ACT] WAS SELECTED FOR SCRUTINY WITH THE SERV ICE OF A NOTICE ISSUED U/S 143(2) OF THE ACT ON 23-10-2003.DURING T HE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSA CTIONS WITH THEIR ASSOCIATED ENTERPRISES [AE] BY WAY OF PURCHASE / SALE OF VARIOUS COMMODITIES AND ALSO PAID COMMISSION TO ARVIND WORL DWIDE INC. MAURITIUS AND ARVIND WORLDWIDE INC. USA. SINCE THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTIONS DETAILED IN THE AUDIT REPORT IN FORM NO. 3CEB A REFERENCE U/S 92CA(3) OF THE ACT W AS MADE TO THE TRANSFER PRICING OFFICER [TPO]. INTER ALIA THE ASS ESSEE PAID ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 5 COMMISSION OF RS.8 38 02 080/- @ 4.2% TO ITS ASSOCI ATED ENTERPRISE ARVIND WORLDWIDE INC. MAURITIUS AND RS .20 60 842/- @.6.2% TO ARVIND WORLDWIDE INC. USA WHILE THE TPO NOTICED THAT THE ASSESSEE PAID COMMISSION @ 2.8% TO NON-RELATED PARTIES. TO A QUERY BY THE TPO THE ASSESSEE VIDE LETTER DATED 0 3-01-2005 EXPLAINED THE NATURE OF SERVICES RENDERED BY THE AS SOCIATED ENTERPRISES AND OTHER NON-RELATED PARTIES AND CONT ENDED THAT THEY PAID COMMISSION TO THE AE @ 2.8% ONLY FOR PROCURING ORDERS WHILE ADDITIONAL AMOUNT OF COMMISSION @ 1% WAS PAID TO AE S FOR IDENTIFYING PRODUCT MARKET SEGMENT & REQUIREMENTS O F MAJOR CUSTOMERS AND INFORMATION BESIDES 0.5% FOR COLLECTI NG MARKET RELATED DATA AND INFORMING KEY BUYING FACTORS MARK ET STRATEGY TO BE FOLLOWED 1% FOR CANVASSING OF TEXTILE PRODUCTS MANU FACTURED BY PARENT COMPANY AND DEL-CREDERE COMMISSION @ 1%. IT WAS AL SO POINTED OUT THAT THE COMMISSION TO AE WAS PAID AT THE HIGHER RA TES (WHICH IS LOWER THAN THE ARMS LENGTH RATE) ARVIND WORLDWIDE I NC. USA IN VIEW OF SMALL AMOUNT OF BUSINESS AND TO INCUR FIXED OV ERHEADS TO MAINTAIN THE OFFICE. IN NUT-SHELL THE ASSESSEE CON TENDED THAT I. COMPREHENSIVE SERVICES WERE PERFORMED BY AE AS A GAINST ONLY PROCURING ORDERS BY NRP(NON-RELATED PARTY); II. AES WERE RESPONSIBLE FOR THE AMOUNT TO BE REALI ZED AFTER THE ORDER IS EXECUTED. NO SUCH RESPONSIBILITY ON THE NR P; III. AES WERE NOT ENTITLED TO RECEIVE COMMISSION IF THE SALES AMOUNT OF THE ORDER PROCURED BY IT WAS NOT REALIZED WHILE NRP WAS PAID COMMISSION IRRESPECTIVE OF THE FACT THAT T HE SALES AMOUNT WAS REALIZED OR NOT; AND IV. THE MAJOR COMMISSION OF RS.8.38 CRORES WAS PAID TO ARVIND WORLDWIDE (MAURITIUS) INC. AND THE AVERAGE OF WHICH WORKS OUT 4.2% WHICH IS BELOW THE COMPARATIVE AVERAGE. THE CO MMISSION PAID TO ARVIND WORLDWIDE INC. USA THOUGH PAID @ 6.2 % WAS ONLY RS.0.21 CRORES. 2.1 IT WAS FURTHER SUBMITTED THAT THE COMMISSION WAS PAID TO THE AES AFTER REALIZATION OF PROCEEDS OF THE ORDERS PROCURE D BY THE AES AND ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 6 THEY HAD FOLLOWED THE CUP METHOD WHILE DETERMINING THE ALP. IT WAS MENTIONED THAT THE SUBSIDIARIES HAD INCURRED HUGE L OSSES BECAUSE OF THEIR LARGE ADMINISTRATIVE SET UP AND DEALINGS ON A CCOUNT OF THE PARENT COMPANY. THEREFORE THERE WAS NO QUESTION OF EXCESS PAYMENT OF COMMISSION ON THIS SCORE. SINCE THE ASSE SSEE DID NOT FURNISH ANY DOCUMENTARY EVIDENCE IN SUPPORT OF EXTR A ORDINARY FUNCTIONS PERFORMED BY ITS ASSOCIATED ENTERPRISES V IS--VIS UNRELATED PARTIES THE TPO VIDE LETTER DATED 14.1.2005 ASKED THE ASSESSEE TO FURNISH NECESSARY EVIDENCE. IN RESPONSE WHILE POI NTING OUT THAT THE EXPENSES INCURRED BY THE AES WERE FOR THE PURPOSE O F DEVELOPMENT AND PROMOTION OF BUSINESS OF THE ASSESSEE COMPANY IT WAS SUBMITTED THAT THE ASSESSEE HAD ALSO PAID COMMISSIO N IN EARLIER YEARS AND IT WAS NOT FOUND TO BE EXCESSIVE IN TERMS OF PROVISIONS OF SECTION 40A(2)(B) OF THE ACT IN ANY OF THE PRECEDIN G ASSESSMENT YEARS. IT WAS FURTHER SUBMITTED THAT THEY HAD ALREA DY FILED AUDITED ACCOUNTS OF AES AS ALSO COPY OF AGREEMENT WITH AE A ND SINCE COMMISSION HAD BEEN PAID IN ACCORDANCE WITH AGREEME NT ENTERED INTO BETWEEN THE ASSESSEE AND THE AES MUCH PRIOR T O THE ENACTMENT OF TRANSFER PRICING LEGISLATION AND IT WAS NOT FOUN D EXCESSIVE BY THE RBI WHILE THE SERVICES RENDERED BY NON-RELATED PART IES WERE LIMITED TO PROCUREMENT OF ORDERS ONLY AND THE AES RENDERED MUCH MORE SERVICES WHILE PROCURING ORDERS NO ADJUSTMENT WAS REQUIRED. HOWEVER THE TPO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND DETERMINED THE ALP OF THE COMMISSION @ 2.8% IN THE FOLLOWING TERMS:- 6. I HAVE GONE THROUGH THE CONTENTION OF THE ASSE SSEE AND THE MAIN CONTENTIONS OF THE ASSESSEE ARE AS FOLLOWS: A. THE SERVICES RENDERED BY THE NON-RELATED PARTY A RE LIMITED TO THE PROCUREMENT OF ORDERS AND FORWARDING IT TO THE ASSE SSEE FOR EXECUTION. B. THE AE HAS DONE COMPREHENSIVE SERVICES WHICH INC LUDE EXPLORING THE NEW MATERIALS MAKE EFFORTS TO ENHANCE MARKET S HARE PROCURE ORDERS NEGOTIATING TERMS OF ORDERS COLLECTION OF PAYMENTS INFORM ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 7 BEST PRACTICES FOLLOWED BY COMPETITORS INFORM ABOU T MARKET SHARING CARRY OUT MARKET RESEARCH/SURVEY AND CANVA SSING THE TEXTILE PRODUCTS THROUGH VARIOUS TECHNIQUES. C. AE DO NOT RECEIVE COMMISSION IF THE SALES AMOUNT OF THE ORDER PROCURED BY IT ARE NOT REALIZED. NON RELATED PARTY PAID COMMISSION IRRESPECTIVE OF THE FACT THAT THE SALES AMOUNT IS R EALIZED OR NOT. D. COMMISSION PAYMENTS ARE GOVERNED BY THE FEMA AND ALSO MONITORED BY RBI SO IF THE RATE OF COMMISSION IS E XCESS THE RBI COULD NOT HAVE ALLOWED THE ASSESSEE TO REMIT THE SA ME. E. MAJOR COMMUNICATION WITH THE AE WERE THROUGH EMA IL OR TELEPHONIC CONVERSATION AND NO CORPORATE KEEPS THE HARD COPY O F E MAILS. HOWEVER THE ASSESSEE HAS PRODUCED SOME SAMPLE CORRESPONDENCES OUT OF THE MAILS RETRIEVED. 7. VARIOUS CONTENTION OF THE ASSESSEE ARE CONSIDERE D AS FOLLOWS: A. THE CONTENTION OF THE ASSESSEE THAT THE NON RELA TED PARTY IS CONFINED TO ONLY PROCUREMENT OF ORDERS AND FORWARD IT TO THE ASSESSEE FOR EXECUTION IS NOT CORRECT. NO CORPORAT E BODY PAYS 2.8% COMMISSION JUST FOR PROCUREMENT OF ORDERS. IN ORDER TO EARN THE COMMISSION THE AGENT HAS TO DO MANY MORE FUNCT IONS AND IN FACT THE NON RELATED PARTY MIGHT BE DOING THE SIMIL AR FUNCTIONS WHICH HAVE BEEN CLAIMED TO HAVE BEEN DONE BY THE AE BECAU SE OF THE SIMPLE REASON THAT THESE FUNCTIONS ARE INTERLINKED AND CAN NOT BE DONE IN ISOLATION. FURTHER THE ASSESSEE HAS NOT PR ODUCED ANY AGREEMENT WITH THE NON RELATED PARTY TO SHOW THAT T HE NON RELATED PARTY WAS CONFINED TO ONLY PROCUREMENT OF ORDERS. T HE ASSESSEE HAS RELIED ON THE AGREEMENT WITH THE AE IN SUPPORT OF ITS CLAIM THAT THE AE IS RENDERING MANY MORE SERVICES THAN THE NON RELATED PARTY. IN THE ABSENCE OF ANY WRITTEN AGREEMENT WITH THE NO N RELATED PARTY IT IS DIFFICULT TO BELIEVE THAT THE AE WAS RENDERIN G MANY MORE SERVICES THAN THE NON RELATED PARTY. B. THE SAMPLE CORRESPONDENCES IN THE FORM OF E MAIL S WHICH HAVE BEEN FILED ON 17.2.2005 ARE IN THE NATURE OF ROUTI NE CORRESPONDENCES DONE IN THE COURSE OF CONDUCTING BU SINESS. THE ASSESSEE WOULD BE HAVING THE SIMILAR CORRESPONDENCE WITH THE NON RELATED PARTIES ALSO WHEN THEY ARE PROCURING AND EX ECUTING THE ORDERS ON BEHALF OF THE ASSESSEE. HENCE IT CAN BE CONCLUDED THAT THE AE HAS RENDERED ONLY ROUTINE SERVICES LIKE THE NON RELATED PARTIES AND THEREFORE ENTITLED FOR THE SAME PERCEN TAGE OF- COMMISSION. ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 8 C. AS REGARDS THE ASSESSEE'S CONTENTION THAT THE PA YMENT OF COMMISSION ARE WITHIN THE LIMITS LAID DOWN BY THE F OREIGN EXCHANGE REGULATIONS APPLICABLE FROM TIME TO TIME IT CAN ON LY BE STATED THAT THE PROVISIONS UNDER THE TRANSFER PRICING REGULATIO NS ARE INDEPENDENT OF THE LIMITS LAID FOR REMITTANCE OF MO NEY OUTSIDE INDIA. THE LIMITS FIXED BY RBI ONLY LAYS DOWN THE UPPER LI MIT FOR REMITTANCE AND IT DOES NOT IN ANY WAY EXAMINE THE CORRECTNESS OF THE AMOUNT IN THE CONTEXT OF THE TRANSFER PRICING PROVISIONS. D. AS REGARDS THE CONTENTION OF THE ASSESSEE RELATI NG TO CORRESPONDENCE/DOCUMENTS FURNISHED IN SUPPORT OF EX TRA ORDINARY SERVICES RENDERED BY THE AE THE PROVISIONS RELATIN G TO RULE 10D ARE TO BE CONSIDERED. THE RULE 10D OF THE IT RULES 1962 PRESCRIBES THE INFORMATION & DOCUMENTS TO BE MAINTAINED BY EVERY P ERSON WHO ENTERS INTO INTERNATIONAL TRANSACTION. THE RELEVANT SUB-RULES IS REPRODUCED BELOW: 10D(1)(E) -A DESCRIPTION OF THE FUNCTIONS PERFORMED RISKS ASSUMED AND ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ASSESS EE AND BY THE ASSOCIATED ENTERPRISES INVOLVED IN THE INTERNAT IONAL TRANSACTION; 10D(1)(F) - A RECORD OF ECONOMIC AND MARKET ANALYSE S FORECASTS BUDGETS OR ANY OTHER FINANCIAL ESTIMATES PREPARED B Y THE ASSESSEE FOR THE BUSINESS AS A WHOLE AND FOR EACH DIVISION O R PRODUCT SEPARATELY WHICH MAY HAVE A BEARING ON THE INTERNA TIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. 10D(1)(M) -ANY OTHER INFORMATION DATA OR D OCUMENT INCLUDING INFORMATION OR DATA RELATING TO THE ASSOC IATED ENTERPRISE WHICH MAY BE RELEVANT .FOR .DETERMINATION OF ARM'S LENGTH PRICE. THE RULE 10D(3) STATES THAT THE INFORMATION IN SUB- RULE (1) SHALL BE SUPPORTED BY AUTHENTIC DOCUMENTS WHICH INCLUDE (F) LETTERS & OTHER CORRESPONDENCE DOCUMENTING ANY TERMS NEGOTIATED BET WEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISE AND (G) DOCU MENTS NORMALLY ISSUED IN CONNECTION WITH VARIOUS TRANSACT ION UNDER THE ACCOUNTING PRACTICES FOLLOWED. IN THE LIGHT OF THE AFORESAID PROVISIONS OF RULE 10 D(1) AND (3) THE ASSESSEE'S EXPLANATION IS EXAMINED. BY LETTER DATED 14.1.2005 THE ASSESSEE WAS ASKED TO FURNISH DOCUMENTARY EVIDENCE IN SUPPORT OF EXTRA ORDINARY FUNCTIONS PERFORMED BY THE ASSOCIATE D ENTERPRISE VIS- A-VIS NON RELATED PARTIES. VIDE ITS LETTER DTD. 17. 2.2005 THE ASSESSEE HAS SUBMITTED THE EXPLANATION REGARDING HIGHER COMM ISSION PAYMENT TO THE ASSOCIATED ENTERPRISE. RELATING TO T HE DOCUMENTARY ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 9 EVIDENCE THE ASSESSEE HAS STATED THAT THE MAJOR CO MMUNICATIONS WITH ITS AE WERE THROUGH E MAIL OR TELEPHONIC CONVE RSATION. AND FURTHER STATED THAT NO CORPORATE KEEPS THE HARD COP Y OF E MAILS AND THE OLDER E MAILS ARE DELETED FROM THE DATA BASE. H OWEVER THE ASSESSEE HAS STATED THAT SOME E MAILS WERE RETRIEVE D FROM THE ARCHIVED DATABASE AND FURNISHED THE COPIES OF E MAI LS. I HAVE GONE THROUGH THE COPIES OF THESE E MAILS. THEY ARE IN TH E NATURE OF ROUTINE CORRESPONDENCE BETWEEN THE ASSOCIATED ENTER PRISE AND THE ASSESSEE RELATING TO THE BUSINESS TRANSACTIONS. BY NO STRETCH OF IMAGINATION THEY COULD BE TAKEN AS THE SUPPORTING DOCUMENTS TO PROVE THE EXTRA ORDINARY FUNCTIONS PERFORMED BY THE ASSOCIATED ENTERPRISE TO GET HIGHER RATE OF COMMISSION. IN VIE W OF THE ABOVE IT IS CONCLUDED THAT THE ASSESSEE COULD NOT FURNISH DO CUMENTARY SUPPORT TO JUSTIFY HIGHER RATE OF COMMISSION TO THE ASSOCIATED ENTERPRISES. ACCORDINGLY THE ALP FOR THE COMMISSION PAYMENTS WA S DETERMINED @2.8% AMOUNTING TO RS.5 67 98 756/- IN LINE WITH CO MMISSION PAID TO NON-RELATED PARTIES. 2.2 IN THE LIGHT OF AFORESAID FINDINGS OF THE TPO THE AO ADDED AN AMOUNT OF RS.2 90 64 166/-[RS. 2 79 34 027/- ATT RIBUTED TO ARVIND WORLDWIDE INC. MAURITIUS AND RS.11 30 139/- TO ARV IND WORLDWIDE INC. USA] IN THE AY 2002-03. 2.3 LIKEWISE IN THE AY 2003-04 THE ASSESSEE HA D ENTERED INTO INTERNATIONAL TRANSACTION AND PAID COMMISSION AS UN DER:- NAME OF AE AMOUNT (RS.) RATE OF COMMISSION --------------------------- ------------- - -------------- 1 ARVIND WORLDWIDE INC. 29332703 5.78 % MAURITIUS 2 ARVIND WORLDWIDE INC. 17868239 4.93 % USA ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 10 ON A REFERENCE MADE BY THE AO TO THE TPO THE LATTE R DETERMINED THE ARMS LENGTH PRICE OF TRANSACTIONS RELATING TO COMMISSION@4.93% IN THE FOLLOWING TERMS: THE CONTENTIONS OF THE ASSESSEE HAVE BEEN CONSIDER ED. THE COPY OF AGREEMENTS WITH EACH CATEGORY OF SUCH A GENTS WERE CALLED FOR TO VERIFY WHAT FUNCTIONS THEY WERE REQUIRED TO PERF ORM AS PER THE AGREEMENT AND WHETHER TRANSACTIONS WITH THEM ARE CO MPARABLE WITH THE TRANSACTIONS UNDERTAKEN WITH ASSOCIATED ENTERPRISES . THE AUTHORIZED REPRESENTATIVE OF THE ARVIND MILLS L IMITED SUBMITTED SAMPLE COPIES OF AGREEMENTS WITH BOTH ASSOCIATED ENTERPRI SES AND NON-RELATED PARTIES CONSIDERED FOR COMPARISON AND THE COPY OF E-MAILS EXCHANGED WITH ASSOCIATED ENTERPRISES. IN RESPECT OF THE EMAILS THE ASSESSEE STATED : '... IN RESPECT OF DOCUMENTARY EVIDENCE IN SUPPORT OF SERVICES PERFORMED BY THE AES WE WISH TO INFORM YOU THAT THE MAJOR CO MMUNICATIONS WITH THE ASSOCIATED ENTERPRISES WERE THROUGH E-MAIL OR TELEP HONIC CONVERSATION. ...... WE ARE FORTUNATE THAT WE WERE ABLE TO RETR IEVE SOME E-MAIL'S FROM THE ARCHIVE DATABASE AND THEREFORE ABLE TO PRODUCE SOME SAMPLE E-MAILS OUT OF THE MAILS RETRIEVED FOR YOUR KIND PERUSAL. Y OUR HONOUR WILL PLEASE NOTE THAT THESE SAMPLE MAILS PRODUCED COVERS MAJORI TY ACTIVITY DEFINED IN THE AGREEMENT VIZ. ORDER / NEW ORDER BOOKING MARKE T TREND FASHION TREND TECHNICAL SUPPORT PAYMENT FOLLOW-UP NEW CUSTOMER INTERACTION WITH FOREIGN GOVERNMENT AUTHORITIES FOLLOW-UP OF INSURA NCE CLAIM ETC. IN THE PRECEDING YEAR THE TPO HAD MADE SPECIFIC OBS ERVATIONS AS FOLLOWS > THAT THE ASSESSEE HAD NOT FURNISHED ANY WRITTEN A GREEMENT WITH THE UNRELATED PARTIES SO THE TPO HAD STATED THAT 'IN THE ABSENCE OF ANY WRITTEN AGREEMENT WITH THE NON RELATED PARTY I T IS DIFFICULT TO BELIEVE THAT THE AE WAS RENDERING MANY MORE SERVICE S THAN THE NON RELATED PARTY. > THE TPO HAD THUS CONCLUDED THAT THE ASSESSEE CO ULD NOT FURNISH DOCUMENTARY SUPPORT TO JUSTIFY HIGHER RATE OF COMMI SSION TO THE ASSOCIATED ENTERPRISES. IN THE PRESENT YEAR THE ASSESSEE HAS > FURNISHED SAMPLE COPIES OF AGREEMENT WITH THE NON -AES TO WHOM IT IS PAYING COMMISSION @ 3%. ('CATEGORY 1' PARTIES) ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 11 > FURNISHED SAMPLE COPIES OF AGREEMENTS WITH THE NO N-AES TO WHOM IT IS PAYING COMMISSION @5%. ('CATEGORY 2' PARTIES ) HOWEVER IT IS SEEN THAT DESPITE PERFORMING IDENTICA L FUNCTIONS BOTH THE AES HAVE BEEN COMPENSATED DIFFERENTLY . THE COPIES OF AGREEMENTS WITH THE AES WERE ALSO FUR NISHED. IT IS SEEN THAT THE TERMS OF BOTH THE AGREEMENTS ARE THE SAME. THE FOLLOWING TABLE SHOWS THE DETAILS OF THE .COMMI SSION PAYMENT TO THE ASSOCIATED ENTERPRISES: SR. NO. NAME OF THE AE AMOUNT (RS.) RATE OF COMMISSION 1 ARVIND WORLDWIDE INC MAURITIUS 29332703 5.78% 2 ARVIND WORLDWIDE INC USA 17868239 4.93% HOWEVER AS CAN BE SEEN FROM THE TABLE ABOVE THE AS SESSEE HAS PAID COMMISSION AT A HIGHER RATE TO M/S ARVIND WORLDWIDE INC MAURITIUS (5.78%) COMPARED TO THE RATE OF 4.93% PAID TO ARVIN D WORLDWIDE INC USA THE OTHER ASSOCIATE ENTERPRISE. IT IS NOT EXPLAINED AS TO WHY THE RATES TO BOTH THE AES ARE DIFFERENT. > BOTH ARE PERFORMING IDENTICAL FUNCTIONS AND > THE AGREEMENTS OF BOTH THE AES ARE ALSO THE SAME THUS COMMISSION PAID AT A HIGHER RATE TO ARVIND WOR LDWIDE INC MAURITIUS IS NOT JUSTIFIED LOOKING AT THE FACT THAT THE ASSES SEE HAS DETERMINED ITS RATES OF COMMISSION TO AES AND NON-AES ON THE BASIS OF FUNCTIONS THEY PERFORM . THE ASSESSEE ITSELF HAS EXPLAINED THAT HIGHER RATES OF COMMISSION ARE PAID TO PARTIES PERFORMING MORE FUNCTIONS. BUT IN THIS C ASE THE ASSESSEE HAS NOT PROVED HOW M/S ARVIND WORLDWIDE INC MAURITIUS IS PERFORMING MORE ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 12 FUNCTIONS THAN ITS USA COUNTERPART SO AS TO WARRAN T A HIGHER RATE OF COMMISSION. NO OTHER UNCONTROLLED TRANSACTION EXISTS IN THIS CA TEGORY AS THE ASSESSEE HAS NOT ENTERED INTO SIMILAR AGREEMENTS (THE KIND I T HAS ENTERED INTO WITH ITS AE) WITH ANY UNCONTROLLED PARTIES. ALL THE OTHER TRANSACTIONS THAT THE ASSESSEE HAS CO MPARED WITH ARE THOSE WHERE THE PARTIES TO WHOM COMMISSION IS BEING PAID ARE PERFORMING LESSER FUNCTIONS THAN THOSE PERFORMED BY ITS AES. SO THE T RANSACTION OF THE AES AS FAR AS THE INTRA AE RATES ARE CONCERNED CANNOT BE COMPARED WITH TRANSACTIONS OF ANY OTHER PARTIES AS THERE IS NO S IMILARITY IN FUNCTIONS OF THE AE AND THE FUNCTIONS OF OTHER PARTIES. THUS IT IS NOT EXPLAINED WHY THE ASSESSEE HAS COMPE NSATED BOTH THE AES DIFFERENTLY FOR PERFORMING THE SAME FUNCTIONS . AS THERE IS NO UNCONTROLLED TRANSACTION TO COMPARE WITH FOR THIS TRANSACTION THE COMPARABLE TRANSACTION EXISTS IN THE FORM PAYMENT OF LOWER RATES OF COMMISSION TO A CONTROLLED ENTITY OF THE GROUP ON THE ISSUE OF USE OF CONTROLLED TRANSACTION PARA GRAPH 1.70 OF THE 1995 OECD REPORT INDICATES THAT EVIDENCE FROM ENTERPRISES ENGAGED IN CONTROLLED TRANSACTIONS WITH ASSOCIATED ENTERPRISES MAY BE USEFUL IN UNDERSTANDING THE TRANSACTION UNDER REVIEW OR AS A POINTER TO FURTHER INVESTIGATION. THE DEALINGS BETWEEN ASSOCIATED ENTE RPRISES FOR COMPARISON CAN ALSO BE USED IN THE CASES OF LAST R ESORT WHERE: (1) THERE IS SUFFICIENT DATA AVAILABLE TO DEMONSTRA TE THEIR RELIABILITY AND (2) RELATED PARTY COMPARABLE DATA PROVIDES THE MOST RELIABLE AVAILABLE DATA UPON WHICH TO DETERMINE OR ESTIMATE AN ARM'S L ENGTH OUTCOME. THUS IN THE PRESENT CASE RELIABLE DATA REGARDING C OMPARABLE TRANSACTION IS AVAILABLE THEREFORE COMPARABLE PRICE METHOD (BY USING PRIC ES / RATES OF A CONTROLLED TRANSACTION) IS THE MOST DIRECT AND RELI ABLE METHOD. IN THIS CASE RELATED PARTY COMPARABLE DATA PROVIDES THE MOST RELIABLE AVAILABLE DATA UPON WHICH TO DETERMINE OR ESTIMATE AN ARM'S LENGTH OUTCOME BECAUSE THEREON ARE NO UNCONTROLLED TRANSA CTIONS IN THE SAME CATEGORY. AS THE ASSESSEE HAS PAID COMMISSION AT A LOWER RATE (4.93%) TO AN AE (ARVIND WORLDWIDE INC USA) FOR PERFORMING THE SAME FUNCTIONS IT IS HELD THAT THE COMMISSION OF 4.93% PAID TO THE AE M/S ARV IND WORLDWIDE INC ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 13 USA IS THE ARMS LENGTH RATE APPLICABLE IN RESPECT OF COMMISSION PAYMENT TO THE OTHER AE M/S ARVIND WORLDWIDE INC MAURITIUS BECAUSE: > BOTH THE AES ARE PERFORMING IDENTICAL FUNCTIONS > AND THE ASSESSEE HAS FURNISHED NO REASON TO DEMON STRATE WHY ONE AE SHOULD RECEIVE A HIGHER RATE FOR PERFORMING THE SAME FUNCTION. THE FOLLOWING TABLE SHOWS THE DETAILS OF THE COMMIS SION PAYMENT TO THE ASSOCIATED ENTERPRISES: SR. NO. NAME OF THE AE AMOUNT (RS.) RATE OF COMMISSION 1 . ARVIND WORLDWIDE INC MAURITIUS 29332703 5.78% 2 ARVIND WORLDWIDE INC USA 17868239 4.93% AS SHOWN ABOVE THE ASSESSEE HAS PAID COMMISSION TO ITS ASSOCIATED ENTERPRISES @5.78% AND 4.93 % AS AGAINST THIS. IN V IEW OF THE DISCUSSION MADE IN THE AFORESAID PARAS THE COMMISSION PAYMENT TO THE ASSOCIATED ENTERPRISES M/S ARVIND WORLDWIDE INC MAURITIUS IS RESTRICTED TO 4.93 % ON PAR WITH THE COMMISSION PAID TO THE OTHER AE M/S ARVIND WORLDWIDE INC USA. ACCORDINGLY THE ARMS LENGTH PRICE OF TRANSACTION R ELATING TO COMMISSION PAYMENT TO THE ASSOCIATED ENTERPRISES GETS ADJUSTED AS UNDER: SR. NO. NAME OF THE AE FOB VALUE OF SALES COMMISSI ON PAID ALP ADOPTING 4.93% AS THE RATE OF COMMISSION EXCESS AMOU; DISALLOWE D ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 14 1 ARVIND WORLDWIDE INC MAURITIUS 5076155 08 2 93 32 7 03 2 50 25 444 43 07 259 HENCE THE ARMS LENGTH PRICE FOR THE COMMISSION PA YMENTS TO THE ASSOCIATED ENTERPRISES M/S ARVIND WORLDWIDE INC. MA URITIUS IS DETERMINED AT RS.2 50 25 444/- AS AGAINST RS.2 93 32 703/- CLA IMED BY THE ASSESSEE RESULTING IN AN ADJUSTMENT OF RS.43 07 259/-. THIS WILL RESULT IN INCREASING THE INCOME OF THE ASSESSEE BY RS.43 07 259/-. THE AO WILL BE REQUIRED TO MAKE AN ADDITION OF RS. 43 07 259/- TO THE INCOME OF THE ASSESSEE ON THE BASIS OF DISCUSSION I N THE PRECEDING PARAS. IN RESPECT OF REMAINING TRANSACTIONS NO ADJUSTMENT IS MADE TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE. THIS ORDER IS IN RESPONSE TO SPECIFIC REFERENCE U/S 92CA(1) RECEIVED AND WILL APPLY TO THE CASE OF THE ASSESSEE FOR AY 2003-04 ONLY. 2.4 IN TERMS OF THE AFORESAID ORDER OF THE TPO THE AO ADDED AN AMOUNT OF RS.43 07 259/- IN THE AY 2003-04. 3. ON APPEAL THE LEARNED CIT(A) REDUCED THE ADDIT ION TO RS. 7 47 310/- IN THE AY 2002-03 IN THE FOLLOWING TERM S:- 2.3 I HAVE CONSIDERED THE SUBMISSION FOR THE APPEL LANT FACTS OF THE CASE AND ORDER U/S. 92CA(3) OF THE ACT PASSED BY ADDL. C IT (TRANSFER PRICING-3) MUMBAI. THE ADDL. CIT(TPO) HAS APPLIED CUP METHOD F OR CONSIDERING ARMS LENGTH PRICE OF COMMISSION PAID TO ARVIND WORL DWIDE INC. MAURITIUS AND ARVIND WORLDWIDE INC. USA. THE TOTAL COMMISSION PAID TO ARVIND WORLDWIDE INC. MAURITIUS COMES TO 4.2% WHILE TO ARV IND WORLDWIDE INC. USA IT COMES TO 6.2%. THE TPO HAS TAKEN TOTAL AVERA GE COMMISSION OF LARGE NUMBER OF NON-RELATED ENTERPRISES AND HAS MAD E ADJUSTMENT BY RESTRICTING THIS COMMISSION TO 2.8%. THE COMPARISON OF THE TPO OF THE AVERAGE COMMISSION OF ALL NON-RELATED PARTIES TAKEN TOGETHER IS NEITHER FULLY JUSTIFIED NOR IN ACCORDANCE WITH THE PRINCIPL E OF CUP METHOD; BECAUSE UNDER THE CUP METHOD THE COMPARISON WILL HAVE TO B E MADE WITH EACH TRANSACTION OF SIMILARLY PLACED NON-RELATED PARTY. THERE IS NO FIXED COMMISSION GIVEN TO NON-RELATED ENTERPRISES. THESE NON-RELATED ENTERPRISES HAVE GIVEN COMMISSION RANGING FROM 1% T O 10% DEPENDING UPON THE VOLUME OF BUSINESS SERVICES RENDERED LOC ATION OF PARTY COUNTRY AND VARIOUS ECONOMIC CONSIDERATION. THEREFORE UNDE R THE CUP METHOD ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 15 THE AO WAS REQUIRED TO EXAMINE THE TRANSACTION WITH EACH OF NON-RELATED PARTY AND IF THE SERVICES RENDERED AND THE ECONOMIC CONSIDERATION WERE SAME ONLY THEN THAT COULD HAVE BEEN TAKEN AS COMPA RABLE UNCONTROLLED TRANSACTION. AS MENTIONED IN PARA 1.6 OF THE APPELL ANT'S REPLY THE APPELLANT HAS GIVEN COMMISSION @ 5% TO 17 NON-RELATED PARTIES THE APPELLANT HAS GIVEN COMMISSION @ 5% DEPENDING UPON THE SERVICES R ENDERED WHICH IS EVEN MORE THAN THE COMMISSION GIVEN TO AE. TO SOME OF THE NON-RELATED ENTERPRISES THE COMMISSION IS EVEN 6% AND 10% AND W HERE NO SERVICES WERE GIVEN EXCEPT PROCURING THE ORDER THE RATE OF COMMISSION WAS 1% TO 4%. THE MAIN POINT OF THE APPELLANT HAS BEEN THAT T HE AES HAVE RENDERED MUCH WIDER SERVICES THAN WHAT HAVE BEEN PROVIDED BY THE NON-RELATED PARTIES. THEREFORE THE SAME CANNOT BE COMPARED WIT H NON-RELATED ENTERPRISES AS COMPARABLE UNCONTROLLED TRANSACTION. I HAVE ALSO GONE THROUGH THE AGREEMENT WITH THE AES WHICH ARE DATED 1.1.1998 AND 1.4.98 MUCH BEFORE THE TRANSFER PRICING REGULATIONS CAME I NTO EXISTENCE. AS PER THIS AGREEMENT THESE AES WERE REQUIRED TO GIVE THE FOLLOWING SERVICES TO THE APPELLANT: SERVICES RENDERED BY ASSOCIATED ENTERPRISE SERVICES RENDERED BY NON RELATED PARTY TO EXPLORE NEW MARKETS FOR TEXTILE PRODUCTS MANUFACTURED BY THE COMPANY AS WELL AS TO MAKE EFFORTS TO ENHANCE MARKET SHARE OF THOSE PRODUCTS IN INTERNATIONAL MARKETS ACROSS THE GLOBE. THE SERVICES ARE LIMITED TO THE SALE OF THE PRODUCTS I.E. JUST PROCURING THE ORDERS AND FORWARD IT TO THE AML FOR EXECUTION. TO PROCURE ORDERS FOR TEXTILE PRODUCTS MANUFACTURED BY THE AML FROM INTERNATIONAL MARKETS IN CASE OF ORDERS DIRECTLY PROCURED BY AML THEN AE WOULD HAVE TO HELP THE AML IN NEGOTIATING AND CONCLUDING TERMS OF SUCH ORDER. AFTER EXECUTION BY AML OF ORDER PROCURED BY AE IT IS THE SOLE RESPONSIBILITY OF AE TO COLLECT PAYMENTS OF SAID ORDERS AND FAILING WHICH IT WOULD NOT BE ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 16 ENTITLED TO ANY COMMISSION AE WOULD ALSO HAVE TO HELP THE COMPANY TO REALIZE THE PROCEED OF THE ORDER WHICH THE COMPANY HAS PROCURED ITSELF OR THROUGH OTHER AGENTS. AE WOULD IDENTITY PRODUCT MARKET SEGMENT QUALITY REQUIREMENTS OF THE MAJOR CUSTOMERS IN THE INTERNATIONAL MARKET. IT WOULD INFORM THE AML ABOUT THE BEST PRACTICES FOLLOWED BY SIMILAR TEXTILE MANUFACTURERS IN THE INTERNATIONAL MARKET IT WOULD ALSO INFORM THE AML ABOUT THE MARKETING STRATEGY ADOPTED BY OTHER SUPPLIERS OF SIMILAR PRODUCT COLLECT MARKET RELATED DATA INFORMATION ON KEY BUYING FACTORS. THE AE WOULD ALSO CARRY OUT MARKET RESEARCH / SURVEY FROM TIME TO TIME THE AE WOULD CANVASS FOR THE TEXTILE PRODUCTS OF THE PARENT COMPANY THROUGH VARIOUS PROMOTION TECHNIQUES AND BEAR THE EXPENDITURE FOR SUCH PROMOTION AND MARKETING. AND FOR WHICH THE PARENT COMPANY SHALL HAVE TO PROVIDE SPECIFICATIONS AND MARKETING MATERIAL LIKE DESIGN BROCHURES SAMPLES ETC. FREE OF CHARGE TO THE AE. 2.3.1 THESE AES WERE NOT AGENT SIMPLICITOR AND NOT SIMPLY OBTAINING THE ORDERS AND FORWARDING TO THE H.O. THESE AES WERE PROVIDING COMPREHENSIVE AND WIDER ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 17 SERVICES AS PER AGREEMENTS. I HAVE ALSO SEEN THE VA RIOUS E-MAILS AND CORRESPONDENCE WHICH SUBSTANTIATE THAT THE AES WERE RENDERING VARIOUS SERVICES WHICH ARE MENTIONED IN THE AGREEMENTS. WHILE NON RE LATED PARTIES ARE SIMPLY WORKING AS AGENT FOR PROCURING THE ORDERS TO THE AP PELLANT COMPANY ON SOLITARY ORDER BASIS. WHEREVER THE NON-RELATED ENTERPRISES H AVE RENDERED MORE SERVICES THEY WERE ALSO PAID COMMISSION @ 5%. THE APPELLANT HAS MADE THE PAYMENTS TO AES FOR THE SERVICES RENDERED AS PER THE AGREEMENT AND SUCH PAYMENTS WERE MADE SINCE LAST MANY YEARS AND THE COMMISSION WAS N EVER CONSIDERED AS EXCESSIVE UNDER THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. IT IS ALSO NOTICED THAT THE AES HAVE INCURRED EXPENDITURE ON EXHIBITIO N TRAVELING SALES PROMOTION SALES COMMISSION AND ADMINISTRATIVE AND OTHER MATTE RS FOR THE SERVICES WHICH HAVE BEEN RENDERED BY THEM TO THE APPELLANT IN ACCO RDANCE WITH THE AGREEMENT. THE TPO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO S UBSTANTIATE THAT ALL NON RELATED PARTIES HAVE ALSO RENDERED THE SAME SERVICE S WHICH THE AES HAVE RENDERED. HE HAS SIMPLY MENTIONED THAT NON RELATED PARTIES MIGHT BE DOING THE SIMILAR FUNCTIONS WHICH HAVE BEEN CLAIMED TO HAVE B EEN DONE BY THE AE BECAUSE OF SIMPLE REASON THAT THESE FUNCTIONS ARE INTER LIN KED AND CANNOT BE DONE IN ISOLATION. THE A.O'S ANOTHER OBSERVATION THAT IT IS DIFFICULT TO BELIEVE THAT THE AES WERE RENDERING MANY MORE SERVICES THAN THE NON-RELA TED PARTY IS ALSO NOT JUSTIFIABLE BECAUSE THE SERVICES WHICH HAVE BEEN RE NDERED BY THE AE ARE CLEARLY MENTIONED IN THE AGREEMENTS WHICH ARE SUPPORTED BY VARIOUS EMAILS WHICH HAVE BEEN EXCHANGED BETWEEN AE AND THE APPELLANT. IN ORD ER TO ESTABLISH THE DEGREE OF ACTUAL COMPARABILITY AND THEN TO MAKE APPROPRIAT E ADJUSTMENTS TO ESTABLISH ARMS LENGTH CONDITIONS IT IS NECESSARY TO COMPARE ATTRIBUTES OF THE TRANSACTIONS OF ENTERPRISES THAT WOULD AFFECT CONDITIONS IN ARM LENGTH DEALINGS. ATTRIBUTES THAT MAY BE IMPORTANT INCLUDE THE CHARACTERISTIC OF THE PROPERTY OR SERVICES TRANSFERRED THE FUNCTIONS PERFORMED BY THE PARTIES (TAKING INTO ACCOUNT ASSETS USED AND RISKS ASSUMED) THE CONTRACTUAL TERMS THE ECONOMIC CIRCUMSTANCES OF THE PARTIES AND THE BUSINESS STRATEGIES PURSUED BY THE PARTIES. BESIDES THIS FROM THE REPLY OF THE APPELLANT IT IS ALSO CLEAR THAT TH E APPELLANT AS WELL AS BOTH THE AES ARE INCURRING HUGE LOSSES AND THEREFORE THERE WAS N O; INTENTION OF THE APPELLANT TO TRANSFER PART OF PROFIT TO THE AES. 2.3.2 FROM THE ABOVE FACTS AND CONSIDERING THE REP LY OF THE APPELLANT I FIND THAT THE SERVICES RENDERED BY THE AES ARE DEFI NITELY MUCH WIDER AND COMPREHENSIVE THAN WHAT HAVE BEEN PROVIDED BY THE N ON-RELATED PARTIES AND EVEN NON RELATED PARTIES HAVE BEEN PAID COMMISSION @ 5% AND MORE IN MANY CASES. CONSIDERING THESE FACTS AND LEGAL POSITION TPO WAS NOT JUSTIFIED IN RESTRICTING THE COMMISSION PAYMENT TO 2.8% WHICH WA S THE AVERAGE OF COMMISSION PAID TO ALL NON RELATED PARTIES TAKEN TO GETHER. HOWEVER I FIND THAT THE SERVICES RENDERED BY BOTH AES ARE SIMILAR AND AGREE MENTS ARE ALSO SIMILAR. THEREFORE THERE WAS NO JUSTIFICATION FOR GIVING HI GHER COMMISSION @ 6.2% TO ARVIND WORLDWIDE INC. USA THAN TO ARVIND WORLDWIDE INC. MAURITIUS WHICH WAS ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 18 GIVEN @ 4.2%. THEREFORE FOLLOWING THE INTERNAL CUP METHOD IT WILL BE JUSTIFIABLE TO MAKE ADJUSTMENT IN RESPECT OF COMMISSION PAID TO ARVIND WORLDWIDE INC. USA AND THE COMMISSION PAID IN EXCESS OF 4.2% WILL BE D ISALLOWED. SUCH DISALLOWANCE WILL COME TO RS.7 47 310/-. THEREFORE THE UPWARD A DJUSTMENT COST OF THE COMMISSION PAID WILL BE RESTRICTED TO RS.7 47 310/- ONLY AND THE REST OF THE AMOUNT WILL BE DELETED. THEREFORE THIS GROUND IS P ARTLY ALLOWED. 4. SIMILARLY IN AY 2003-04 THE LEARNED CIT(A) DEL ETED THE ADDITION IN THE FOLLOWING TERMS:- 5.4 I HAVE CAREFULLY CONSIDERED THIS ASPECT. I FIN D THAT THE TRANSFER PRICING OFFICER HAS MADE THIS ADJUSTMENT ON THE BAS IS OF RATES OF COMMISSION PAID TO THE ASSOCIATE ENTERPRISES AT US BY HOLDING THAT NATURE OF SERVICES PROVIDED BY BOTH THE ASSOCIATE ENTERPRI SES WAS SAME AND THE RATE OF COMMISSION SHOULD HAVE BEEN SAME. HOWEVER HE HAS NOT REALIZED THAT MERE NOMENCLATURE OF TYPE OF SERVICE WOULD NOT DEFINE THE ACTUAL TYPE AND EXTENT OF SERVICES RENDERED. BASIC DIFFERENCE I S THAT BASICALLY ASSOCIATE ENTERPRISES AT US WAS MAINLY DEALING WITH NORTH CENTRAL AND SOUTH AMERICA BUT ASSOCIATE ENTERPRISE AT MAURITIUS HAD ALREADY ITS BRANCHES AT DIFFERENT PARTS OF THE WORLD AND WAS CA RRYING ON SALES OF TEXTILE PRODUCTS TO MOST PARTS OF THE WORLD AND HAD BRANCH OFFICES AT HONG KONG AND UK. ASSOCIATE ENTERPRISES OF MAURITIUS ALSO REN DERED MARKETING RELATED OTHER SERVICES INCLUDING CONSULTANCY TO ITS PARENT COMPANY AND ITS SIZE SET-UP AND ITS GEOGRAPHICAL AREA COVERED WAS MUCH LARGER THAN THE US ENTERPRISE. IT IS ALSO SEEN THAT THE ASSESSES IT SELF WAS PAYING A HIGHER RATE OF COMMISSION TO NON-RELATED ENTERPRISES LIKE AEG J.F. GANGNOT STUDIO FABBRI ETC. WHEN PAYMENT OF COMMISSION TO NO N-RELATED PARTIES WAS EVEN HIGHER THAN THE PAYMENT MADE TO ASSOCIATE AT US THEN IT WAS IMPORTANT TO LOOK INTO THE TYPE OF SERVICES AND EXT ENT OF SERVICES RENDERED BY THE MAURITIUS ASSOCIATES ENTERPRISE. IT IS ALSO NOTICED THAT SALES BY MAURITIUS ASSOCIATE ENTERPRISE WAS OF RS.50.76 CROR ES AS AGAINST RS.36.24 CRORES BY THE US ENTERPRISE AND MAURITIUS ENTERPRIS E HAD DONE MARKET SURVEY FOR THE ASSESSEE AND AS IT WAS LOOKING AFTER SALES IN OTHER COUNTRIES LIKE UK ETC. ITS TRAVELING EXPENSES WERE ALSO MORE WHICH ENTITLED IT TO A HIGHER RATE OF COMMISSION. AS DISCUSSED EARLIER EV EN HIGHER RATE OF COMMISSION HAS BEEN:*PAID TO UNRELATED PARTIES AND IN THESE CIRCUMSTANCES COMPARISON WITH US ENTERPRISE ITSELF WAS NOT PROPER FOR THE SIMPLE REASON THAT THE EXTENT OF SERVICES PROVIDED BY THE US ENTERPRISE AND THE TERRITORY COVERED BY IT WAS MUCH SMALLER AS COMPARED TO ASSOCIATE ENTERPRISE AT MAURITIUS WHICH WAS LOOKING AFTER SAL ES IN UK HONG KONG AS WELL. IN VIEW OF THIS I DO NOT FIND ANY JUSTIFICAT ION IN THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER AND THE SAME IS DEL ETED. ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 19 5. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LEARNED CIT(A) IN REDUCING THE ADDI TION TO RS.7 47 310/- IN THE AY 2002-03 AND DELETING THE A DDITION IN AY 2003-04 WHILE THE ASSESSEE IS IN APPEAL AGAINST UPH OLDING OF THE ADDITION TO THE EXTENT OF RS.7 47 310/- IN THE AY 2 002-03.THE LEARNED DR WHILE CARRYING US THROUGH THE ORDERS OF THE TPO AND THE AO SUPPORTED THEIR FINDINGS. ON THE OTHER HAND THE LEARNED AR ON BEHALF OF THE ASSESSEE CONTENDED THAT EVEN THOUGH T HE LEARNED CIT(A) IN AY 2002-03 DETERMINED THE PAYMENT OF COMM ISSION @ 4.2% TO ARVIND WORLDWIDE INC. USA AS ALP ON THE G ROUND THAT THE COMMISSION AT THE RATE OF 4.2% WAS PAID TO ARVIND W ORLDWIDE INC. MAURITIUS THE TPO AND AO THEMSELVES FOUND THAT THE PAYMENT OF COMMISSION @ 4.93% TO ARVIND WORLDWIDE INC. USA T O BE AT ALP IN THE AY 2003-04. SINCE NATURE OF SERVICES RENDERE D BY AES WAS SAME IN THE TWO ASSESSMENT YEARS THE LEARNED CIT( A) WAS NOT JUSTIFIED IN UPHOLDING THE ADDITION TO THE EXTENT O F RS.7 47 310/- IN THE AY 2002-03. THE LEARNED AR POINTED OUT THAT THE RATE OF COMMISSION WAS FIXED FOR EACH OF THE YEAR SEPARATEL Y IN TERMS OF AGREEMENT DATED 01-04-98 PLACED AT PAGE 23 OF THE P APER BOOK AND EVEN NON-RELATED PARTIES WERE PAID COMMISSION AT TH E RATE OF 5% TO 10%. WHILE CARRYING US THROUGH PAGES 43 TO 61 OF TH E PAPER BOOK FOR AY 2002-03 THE LD. AR ADDED THAT DETERMINATION OF ALP BY ADOPTING AVERAGES WAS NOT PERMISSIBLE. THE PAYMENTS OF COMMISSION TO ARVIND WORLDWIDE INC. MAURITIUS AND ARVIND WORLDWIDE INC. USA WERE ALSO NOT COMPARABLE THE LD. AR ARGUED. INTER ALIA THE LD. AR RELIED ON THE DECISIONS IN AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. VS. ACIT (2007) 107 ITD 14 1 (BANG) (SB) MENTOR GRAPHICS (NOIDA) (P) LTD. VS. DCIT (200 7) 109 ITD 101 (DELHI) SONY INDIA (P) LTD. VS. DCIT (2008) 114 ITD 448 (DELHI) AND PHILIPS SOFTWARE CENTRE (P) LTD. VS. ACIT 26 SOT 22 6(BANG.).IN HER REJOINDER THE LEARNED DR SUBMITTED THAT AES WERE M ERELY PROCURING ORDERS AND THERE IS NOTHING TO SUGGEST THAT ANY AD DITIONAL SERVICES WERE RENDERED BEYOND PROCUREMENT OF ORDERS. ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 20 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. INDISPUTABLY AND AS MENTIONED IN THEIR GROUNDS OF A PPEAL BY THE ASSESSEE AND AS CONTENDED BY THE LD. AR ON THEIR BEHALF THE ARM'S LENGTH PRINCIPLE IS BASED ON A COMPARISON OF THE CONDITIONS IN A CONTROLLED TRANSA CTION WITH THE CONDITIONS IN TRANSACTION BETWEEN TWO INDEPENDENT ENTERPRISES I.E . UNCONTROLLED TRANSACTION SUBJECT TO ADJUSTMENTS TO THE PRICE OF UNCONTROLLED TRANSACTION TO CARVE OUT DIFFERENCES BETWEEN THIS TWO TYPE OF TRANSACTIONS. A PERUSAL OF SEC. 92C OF THE ACT REVEALS THAT THESE PROVISIONS CAN BE INVOKED BY THE ASSESSING OFFICER AND HE CAN PROCEED TO DETERMINE ARM'S LENGTH PRICE WHERE H E EITHER FINDS THE EXISTENCE OF THE CIRCUMSTANCES MENTIONED IN CLAUSES (A) TO (D ) OF SUB-SECTION (3) OR WHERE HE CONSIDERS IT NECESSARY AND EXPEDIENT TO REFER TH E DETERMINATION OF ALP TO THE TPO. THERE IS NO OTHER REQUIREMENT FOR INVOKING THE SE PROVISIONS BY THE ASSESSING OFFICER. BESIDES AS PER MANDATE OF SECTI ON 92(1) OF THE ACT INCOME FROM INTERNATIONAL TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISES HAS TO BE COMPUTED HAVING REGARD TO ARM'S LENGTH PRICE. COMPU TATION OF ARM'S LENGTH PRICE IS ESSENTIALLY A FACTUAL EXERCISE. EACH CASE DEPEND S ON ITS OWN PECULIAR FACTS AND CIRCUMSTANCES. IN CERTAIN CASES WHERE IDENTICAL OR ALMOST SIMILAR UNCONTROLLED TRANSACTION IS AVAILABLE FOR COMPARISON; DETERMINAT ION OF ARM'S LENGTH PRICE IS AN EASY TASK. HOWEVER IT IS NOT SO IN MOST OF TRANSAC TIONS AND RARELY ONE IS ABLE TO LOCATE AN IDENTICAL TRANSACTION. IN SUCH CASES ARM 'S LENGTH PRICE IS DETERMINED BY TAKING RESULTS OF A COMPARABLE TRANSACTION IN CO MPARABLE CIRCUMSTANCES AND MAKE SUITABLE ADJUSTMENTS FOR THE DIFFERENCES. THE LEGISLATURE IN INDIA IN ORDER TO DETERMINE TRUE INCOME OF THE ASSESSEE HAVE PRESCRI BED CERTAIN UNIVERSALLY ACCEPTED METHODOLOGIES TO COMPUTE ARM'S LENGTH PRIC E UNDER THE ACT AND THE RULES MADE THEREUNDER. THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-SECTION (1) OF SEC. 92C OF THE ACT IS APPLIED FOR DETERMIN ATION OF ARM'S LENGTH PRICE IN THE MANNER PRESCRIBED. IN TERMS OF PROVISIONS OF SEC.9 2F (II) OF THE ACT 'ARM'S LENGTH PRICE' MEANS A PRICE WHICH IS APPLIED OR PROPOSED T O BE APPLIED IN A TRANSACTION BETWEEN PERSONS OTHER THAN ASSOCIATED ENTERPRISES I N UNCONTROLLED CONDITIONS. THERE IS NO DISPUTE THAT IN THE INSTANT CASE CUP METHOD ONE OF THE PRESCRIBED METHOD WAS CONSIDERED TO BE THE MOST APPROPRIATE M ETHOD BY THE ASSESSEE AND THE TPO IN DETERMINING THE ALP IN RESPECT OF INTERN ATIONAL TRANSACTIONS RELATING TO ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 21 PAYMENT OF COMMISSION TO THE AFORESAID TWO AES. CUP METHOD AS DESCRIBED IN RULE 10B(A) OF THE IT RULES 1962 READS AS FOLLOWS: (A) COMPARABLE UNCONTROLLED PRICE METHOD BY WHICH - (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFER RED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES IF ANY BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (II) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION. 6.1 CUP IS APPLIED WHEN A PRICE IS CHARGED FOR A PRODUCT OR SERVICE. THIS IS ESSENTIALLY COMPARISON OF PRICES CHARGED FOR THE PR OPERTY OR SERVICES TRANSFERRED IN A CONTROLLED TRANSACTION TO A PRICE CHARGED FOR PROPERTY OR SERVICES TRANSFERRED IN A COMPARABLE UNCONTROLLED TRANSACTION. THE BEDRO CK OF THIS METHOD IS THE IDENTIFICATION OF A SIMILAR TRANSACTION IN A SITUA TION WHERE A PRICE IS CHARGED FOR PRODUCTS OR SERVICES BETWEEN UNRELATED PARTIES. WHI LE APPLYING CUP THE COMPARABILITY BETWEEN CONTROLLED AND UNCONTROLLED T RANSACTIONS SHOULD NOT BE ONLY JUDGED FROM THE POINT OF PRODUCT COMPARABILITY BUT SHOULD ALSO TAKE INTO CONSIDERATION THE EFFECT ON PRICE OF OTHER BROADER BUSINESS FUNCTIONS. EVEN MINOR DIFFERENCES IN CONTRACTUAL TERMS OR ECONOMIC CONDIT IONS GEOGRAPHICAL AREAS RISKS ASSUMED FUNCTIONS ASSUMED ETC. COULD AFFECT THE AM OUNT CHARGED IN AN UNCONTROLLED TRANSACTION. COMPARABILITY UNDER THIS METHOD DEPENDS ON CLOSE SIMILARITIES WITH RESPECT TO VARIOUS FACTORS. THE C UP CAN BE INTERNAL OR EXTERNAL. THE INTERNAL CUP IS THE PRICE THAT THE ASSESSEE HAS PAID/CHARGED IN A COMPARABLE UNCONTROLLED TRANSACTION WITH AN INDEPEN DENT PARTY WHEN COMPARED TO THE PRICE PAID/CHARGED IN A CONTROLLED TRANSACTI ON. EXTERNAL CUP IS A PRICE CHARGED IN COMPARABLE UNCONTROLLED TRANSACTIONS BET WEEN THIRD PARTIES WHEN COMPARED TO THE PRICE OF A CONTROLLED TRANSACTION. HOWEVER WHERE CUP METHOD IS TO BE APPLIED ON THE BASIS OF PUBLIC DATA IT HA S TO BE ENSURED THAT THE DATA IS WIDELY AND ROUTINELY USED IN ORDINARY COURSE OF BUS INESS IN THE INDUSTRY TO ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 22 NEGOTIATE PRICES FOR UNCONTROLLED SALES/SERVICES AN D IS USED TO SET PRICES IN THE CONTROLLED TRANSACTION IN THE SAME WAY THAT IT IS U SED BY UNCONTROLLED TAXPAYERS IN THE INDUSTRY; AND THE AMOUNT CHARGED IN THE CONTROL LED TRANSACTION IS ADJUSTED TO REFLECT PRODUCT AND SERVICE VARIATIONS. 6.2 IT IS WELL SETTLED THAT THE BURDEN IS ON THE ASS ESSEE TO SELECT THE MOST APPROPRIATE METHOD AND HAS TO BE SUBSTANTIATED BY T HE ASSESSEE BY AN APPROPRIATE DOCUMENTATION AS ALSO AS TO WHY THE SELECTED METH OD IS CONSIDERED BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF THE INTERNATIONAL TRANSA CTION AND AS TO HOW IT PROVIDES THE MOST RELIABLE RESULT OF THE ALP. RULE 10C(2) OF THE I.T. RULES 1962 LAYS DOWN THE FACTORS TO BE CONSIDERED IN SELECTION OF MOST APPROPRIATE M ETHOD. AFTER SELECTION OF MOST APPROPRIATE METHOD THE NEXT STEP IS TO COLLECT THE INPUTS FOR COMPUTING ARM'S LENGTH PRICE UNDER THAT METHOD. THE QUESTION ARISES AS TO WHO HA S THE ONUS OF COLLECTING AND FURNISHING THE REQUISITE INPUTS FOR DETERMINING THE ALP. IN TERMS OF PROVISIONS OF SECTION 92D OF THE ACT THE ASSESSEE ENTERING INTO INTERNA TIONAL TRANSACTION IS REQUIRED TO KEEP AND MAINTAIN INFORMATION AND DOCUMENTS AS ARE PRESC RIBED IN THE RULE 10D OF THE INCOME-TAX RULES 1962 WHICH READS AS UNDER: '10D (1) EVERY PERSON WHO HAS ENTERED INTO AN INTER NATIONAL TRANSACTION SHALL KEEP AND MAINTAIN THE FOLLOWING INFORMATION AND DOCUMENTS N AMELY:- (A) A DESCRIPTION OF THE OWNERSHIP STRUCTURE OF THE ASSESSEE ENTERPRISE WITH DETAILS OF SHARES OR OTHER OWNERSHIP INTEREST HELD THEREIN BY OTHER ENTERPRISES; (B) A PROFILE OF THE MULTINATIONAL GROUP OF WHICH T HE ASSESSEE ENTERPRISE IS A PART ALONG WITH THE NAME ADDRESS LEGAL STATUS AND CONTRARY T O TAX RESIDENCE OF EACH OF THE ENTERPRISES COMPRISED IN THE GROUP WITH WHOM INTERN ATIONAL TRANSACTIONS HAVE BEEN ENTERED INTO BY THE ASSESSEE AND OWNERSHIP LINKAGE S AMONG THEM; (C) A BROAD DESCRIPTION OF THE BUSINESS OF THE ASSE SSEE AND THE INDUSTRY IN WHICH THE ASSESSEE OPERATES AND OF THE BUSINESS OF THE ASSOC IATED ENTERPRISES WITH WHOM THE ASSESSEE HAS TRANSACTED; (D) THE NATURE AND TERMS (INCLUDING PRICES) OF INTE RNATIONAL TRANSACTIONS ENTERED INTO WITH EACH ASSOCIATED ENTERPRISE DETAILS OF PROPERTY TRA NSFERRED OR SERVICES PROVIDED AND THE QUANTUM AND THE VALUE OF EACH SUCH TRANSACTION OR C LASS OF SUCH TRANSACTION; (E) A DESCRIPTION OF THE FUNCTIONS PERFORMED RISKS ASSUMED AND ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ASSESSEE AND BY THE ASSOCIATED ENTE RPRISES INVOLVED IN THE INTERNATIONAL TRANSACTION; ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 23 (F) A RECORD OF THE ECONOMIC AND MARKET ANALYSES F ORECASTS BUDGETS OR ANY OTHER FINANCIAL ESTIMATES PREPARED BY THE ASSESSEE FOR TH E BUSINESS AS A WHOLE AND FOR EACH DIVISION OR PRODUCT SEPARATELY WHICH MAY HAVE A BE ARING ON THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE; (G) A RECORD OF UNCONTROLLED TRANSACTIONS TAKEN INT O ACCOUNT FOR ANALYZING THEIR COMPARABILITY WITH THE INTERNATIONAL TRANSACTIONS E NTERED INTO INCLUDING A RECORD OF THE NATURE TERMS AND CONDITIONS RELATING TO ANY UNCONT ROLLED TRANSACTION WITH THIRD PARTIES WHICH MAY BE OF RELEVANCE TO THE PRICING OF THE INT ERNATIONAL TRANSACTIONS; (H) A RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY OF UNCONTROLLED TRANSACTIONS WITH THE RELEVANT INTERNATIONAL TRANSA CTION; (I) A DESCRIPTION OF THE METHODS CONSIDERED FOR DET ERMINING THE ARM'S LENGTH PRICE IN RELATION TO EACH INTERNATIONAL TRANSACTION OR CLASS OF TRANSACTION THE METHOD SELECTED AS THE MOST APPROPRIATE METHOD ALONG WITH EXPLANATIONS AS TO WHY SUCH METHOD WAS SO SELECTED AND HOW SUCH METHOD WAS APPLIED IN EACH C ASE; (J) A RECORD OF THE ACTUAL WORKING CARRIED OUT FOR DETERMINING THE ARM'S LENGTH PRICE INCLUDING DETAILS OF THE COMPARABLE DATA AND FINANC IAL INFORMATION USED IN APPLYING THE MOST APPROPRIATE METHOD AND ADJUSTMENTS IF ANY W HICH WERE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION A ND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS; (K) THE ASSUMPTIONS POLICIES AND PRICE NEGOTIATION S IF ANY WHICH HAVE CRITICALLY AFFECTED THE DETERMINATION OF THE ARM'S LENGTH PRICE; (L) DETAILS OF THE ADJUSTMENTS IF ANY MADE TO TRA NSFER PRICES TO ALIGN THEM WITH ARM'S LENGTH PRICES DETERMINED UNDER THESE RULES AND CONS EQUENT ADJUSTMENT MADE TO THE TOTAL INCOME FOR TAX PURPOSES; (M) ANY OTHER INFORMATION DATA OR DOCUMENT INCLUD ING INFORMATION OR DATA RELATING TO THE ASSOCIATED ENTERPRISE WHICH MAY BE RELEVANT FOR DE TERMINATION OF THE ARM'S LENGTH PRICE.' 6.3. HAVING REGARD TO THE AFORESAID STATUTORY P ROVISIONS INCLUDING PROVISIONS OF SEC. 271AA & 271G OF THE ACT IT IS APPARENT THAT BURDE N TO ESTABLISH THAT INTERNATIONAL TRANSACTION WAS ENTERED IN TO AT ALP IS ON THE ASS ESSEE. THE ASSESSEE IS DUTY BOUND TO FURNISH COMPARABLE TRANSACTIONS APPLY APPROPRIATE METHOD FOR DETERMINATION OF ALP AND JUSTIFY THE SAME BY PRODUCING RELEVANT MATERIAL AND DOCUMENTS BEFORE THE REVENUE AUTHORITIES.IN THE INSTANT CASE THE TPO SPECIFICA LLY POINTED OUT THAT ASSESSEE DID NOT FURNISH THE RELEVANT FAR ANALYSIS PRESCRIBED IN TH E AFORESAID CLAUSES (E) (F) & (M) OF THE RULE 10D(1). EVEN NO SUCH MATERIAL OR FAR ANALYSIS FINDS MENTION IN THE IMPUGNED ORDERS NOR HAS BEEN PLACED BEFORE US .IT IS ONLY IF THE REVENUE AUTHORITIES ARE NOT SATISFIED WITH THE ALP OR THE SUPPORTING DOCUMENTS/INFORMATIO N FURNISHED BY THE ASSESSEE THIS ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 24 RESPONSIBILITY OF DETERMINATION OF ALP IS SHIFTED T O THE REVENUE AUTHORITIES WHO ARE TO DETERMINE THE SAME IN ACCORDANCE WITH STATUTORY REG ULATIONS. KNOWLEDGE OF ECONOMIC CONDITIONS PREVAILING AT THE PLACE WHERE TRANSACTIO NS ARE CARRIED IS ALSO ESSENTIAL. THE VERY NATURE OF THIS JOB OF COLLECTION OF DATA IS SU CH THAT THE ASSESSEE IS IN THE BEST POSITION TO GATHER THE REQUISITE INFORMATION. SINCE THE ASSESSEE IS A PARTY TO THE TRANSACTION AND HAS FULL KNOWLEDGE OF THE TRANSACTI ON CARRIED AND PROFIT EARNED BY HIM THE ASSESSEE IS REASONABLY EXPECTED TO BE NOT ONLY AWARE ABOUT NUANCES OF THAT BUSINESS BUT ALSO ABOUT ECONOMIC CONDITIONS AND PE CULIAR CIRCUMSTANCES IF ANY OF THAT BUSINESS. HE IS LIKELY TO KNOW EVEN ABOUT COMPARABL E UNCONTROLLED TRANSACTIONS. OTHERWISE TOO AS PER THE SETTLED LAW EVERY ATTEMPT TO COLLECT BEST EVIDENCE HAS TO BE MADE. EVIDENCE OF SITUATION HAS TO BE CALLED FROM A PERSON POSSESSING SPECIAL MEANS TO KNOW THAT SITUATION. IN NUTSHELL THE BURDEN TO ES TABLISH THAT INTERNATIONAL TRANSACTION IS ENTERED IN TO AT ALP IS ON THE ASSESSEE WHO IS TO DISCLOSE ALL THE RELEVANT INFORMATION AND DOCUMENTS RELATING TO PRICES CHARGED AND PROFIT EARNED WITH RELATED AND UNRELATED CUSTOMER. THIS VIEW OF OURS IS SUPPORTED BY FOLLOW ING PORTIONS OF CIRCULAR NO. 14 OF 2001 ISSUED BY THE CBDT: 'UNDER THE NEW PROVISIONS THE PRIMARY ONUS IS ON TH E TAXPAYER TO DETERMINE AN ARMS LENGTH PRICE IN ACCORDANCE WITH THE RULES AND TO S UBSTANTIATE THE SAME WITH THE PRESCRIBED DOCUMENTATION. WHERE SUCH ONUS IS DISCHA RGED BY THE ASSESSEE AND THE DATA USED FOR DETERMINING THE ARMS LENGTH PRICE IS RELIA BLE AND CORRECT THERE CAN BE NO INTERVENTION BY THE ASSESSING OFFICER. THIS MADE CL EAR BY SUB-SECTION (3) OF SECTION 92C OF THE INCOME-TAX ACT WHICH PROVIDES THAT THE ASSES SING OFFICER MAY INTERVENE ONLY IF HE IS ON THE BASIS OF MATERIAL OR INFORMATION OR DOCU MENT IN HIS POSSESSION OF THE OPINION THAT THE PRICE CHARGED IN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2) OR INFORMA TION AND DOCUMENTS RELATING TO THE INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MA INTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB-SEC TION (1) OF SECTION 92D OF THE INCOME-TAX ACT AND THE RULES MADE THERE UNDER; OR T HE INFORMATION OR DATA USED IN COMPUTATION OF THE ARMS LENGTH PRICE IS NOT RELIABL E CORRECT; OR THE ASSESSEE HAS FAILED TO FURNISH WITHIN THE SPECIFIED TIME ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D. IF ANYONE OF SUCH CIRCUMSTANCES EXISTS THE ASSESSING OFFICER MAY REJ ECT THE PRICE ADOPTED BY THE ASSESSEE AND DETERMINE THE ARMS LENGTH PRICE IN ACC ORDANCE WITH THE SAME RULES.' 6.4 IN CASE REVENUE AUTHORITIES ARE NOT SATISFIED WITH THE ALP AND THE SUPPORTING DOCUMENTS/INFORMATION FURNISHED BY THE A SSESSEE THE AUTHORITIES HAVE AMPLE POWER TO DETERMINE THE SAME AND MAKE SUI TABLE ADJUSTMENTS. IN THE PROCESS OF DETERMINING ARM'S LENGTH PRICE THE FIRS T IMPORTANT FACTOR TO CONSIDER IS THE SPECIFIC CHARACTERISTICS OF SERVICES RENDERED BOTH IN THE INTERNATIONAL ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 25 TRANSACTION AS ALSO IN THE UNCONTROLLED TRANSACTION . NEXT IMPORTANT ASPECT REQUIRED TO BE CONSIDERED IS AMOUNT OF ASSETS EMPLO YED RISK INVOLVED BOTH IN CONTROLLED AND UNCONTROLLED TRANSACTIONS. IF THERE ARE SUCH DIFFERENCES BETWEEN TRANSACTIONS TAKEN FOR COMPARISON WHICH ARE LIKELY TO AFFECT THE PRICE OR COST CHARGE ETC. IN THE OPEN MARKET THEN A REASONABLE AN D ACCURATE EVALUATION IS TO BE DONE AND ADJUSTMENT MADE. RELIABILITY OF THE UNC ONTROLLED TRANSACTION WOULD DEPEND UPON THE DEGREE OF COMPARABILITY. THE UNCONT ROLLED TRANSACTION MAY NOT BE TAKEN 'AS COMPARABLE' IF THERE ARE SUCH MATERIAL DIFFERENCES AS CANNOT BE ADJUSTED . AS ALREADY MENTIONED IT IS FOR THE ASSESSEE TO SHO W THAT RESULTS OF THE INTERNATIONAL TRANSACTIONS ARE NOT INCONSISTENT WIT H RESULTS OF SIMILAR UNCONTROLLED TRANSACTIONS CARRIED IN SIMILAR CIRCUMSTANCES . IN THE INSTANT CASE HOWEVER THE RELEVANT FAR ANALYSIS AND ECONOMIC ANALYSIS DOES NOT FIND EVEN A MENTION IN THE IMPUGNED ORDERS NOR HAVE BEEN PLACED BEFORE US AND NOR EVEN THE LD. CIT(A) RECORDED ANY FINDINGS IN THE IMPUGNED ORDERS ON S IMILAR UNCONTROLLED TRANSACTIONS POINTED OUT BY THE ASSESSEE IN THEIR F AR ANALYSIS OR TRANSFER PRICING STUDY IF ANY. AS ALREADY STATED THOUGH THE TPO WH ILE REFERRING TO RULES 10D(1)(E) (F) & (M) AS ALSO RULE 10D(3) OF THE IT RULES 1962 IN HIS ORDER FOR THE AY 2002-03 OBSERVED THAT THE ASSESSEE DID NOT FURNI SH THE RELEVANT DOCUMENTATION THERE IS NO MATERIAL BEFORE US TO ASCERTAIN AS TO WHETHER OR NOT SUCH DOCUMENTATION PRESCRIBED IN RULE 10D WAS MAINT AINED OR SUBMITTED BY THE ASSESSEE BEFORE THE REVENUE AUTHORITIES . IN THE AB SENCE OF RELEVANT DOCUMENTATION JUSTIFYING HIGHER RATE OF COMMISSION TO AES THE TPO DETERMINED THE RATE OF 2.8% PAID TO NON-RELATED PARTY AS THE A LP BY APPLYING THE CUP METHOD IN THE AY2002-03. ACCORDING TO THE LD. CIT(A ) THE TPO TOOK TOTAL AVERAGE COMMISSION OF LARGE NUMBER OF NON-RELATED E NTERPRISES AND HAS MADE ADJUSTMENT BY RESTRICTING THIS COMMISSION TO 2.8%. IN THESE CIRCUMSTANCES THE LD. CIT(A) CONCLUDED THAT THE COMPARISON MADE BY THE TP O OF THE AVERAGE COMMISSION OF ALL NON-RELATED PARTIES TAKEN TOGETHE R WAS NEITHER FULLY JUSTIFIED NOR IN ACCORDANCE WITH THE PRINCIPLE OF CUP METHOD; BEC AUSE UNDER THE CUP METHOD THE COMPARISON WILL HAVE TO BE MADE WITH EA CH TRANSACTION OF SIMILARLY PLACED NON-RELATED PARTY. ACCORDING TO THE LD. CIT(A) THE NON-RELATED ENTERPR ISES WERE GIVEN COMMISSION RANGING FROM 1% TO 10% DEPEND ING UPON THE VOLUME OF BUSINESS SERVICES RENDERED LOCATION OF PARTY COU NTRY AND VARIOUS ECONOMIC ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 26 CONSIDERATION AND UNDER THE CUP METHOD THE AO WAS REQUIRED TO EXAMINE THE TRANSACTION WITH EACH OF NON-RELATED PARTY AND IF T HE SERVICES RENDERED AND THE ECONOMIC CONSIDERATION WERE SAME ONLY THEN THAT CO ULD HAVE BEEN TAKEN AS COMPARABLE UNCONTROLLED TRANSACTION. BUT AS ALREADY POINTED OUT BY US ONUS IS ON THE ASSESSEE TO ESTABLISH ALP OF THE TRANSACTION A ND NOT ON THE AO. THE LD. CIT(A) CONCLUDED THAT THE AES HAVE RENDERED MUCH WI DER SERVICES THAN WHAT HAVE BEEN PROVIDED BY THE NON-RELATED PARTIES TO TH E ASSESSEE AND WERE PAID COMMISSION @ 5% AND THE TPO HAS NOT BROUGHT ANY MAT ERIAL ON RECORD TO SUBSTANTIATE THAT ALL NON RELATED PARTIES HAVE ALSO RENDERED THE SAME SERVICES WHICH THE AES HAVE RENDERED. THOUGH THE LD. CIT(A) OBSERVED THAT IN ORDER TO ESTABLISH THE DEGREE OF ACTUAL COMPARABILITY AND TH EN TO MAKE APPROPRIATE ADJUSTMENTS TO ESTABLISH ARMS LENGTH CONDITIONS I T IS NECESSARY TO COMPARE ATTRIBUTES OF THE TRANSACTIONS OF ENTERPRISES THAT WOULD AFFECT CONDITIONS IN ARM LENGTH DEALINGS AND ATTRIBUTES THAT MAY BE IMPORTAN T INCLUDE THE CHARACTERISTIC OF THE PROPERTY OR SERVICES TRANSFERRED THE FUNCTIONS PERFORMED BY THE PARTIES (TAKING INTO ACCOUNT ASSETS USED AND RISKS ASSUMED) THE CONTRACTUAL TERMS THE ECONOMIC CIRCUMSTANCES OF THE PARTIES AND THE BUSIN ESS STRATEGIES PURSUED BY THE PARTIES THE LD. CIT(A) ULTIMATELY DETERMINED T HE ALP IN RESPECT OF COMMISSION PAID TO ARVIND WORLDWIDE INC. USA ON TH E BASIS OF COMMISSION PAID TO ANOTHER AE VIZ. TO ARVIND WORLDWIDE INC. MA URITIUS @ 4.2% IN THE AY 2002-03. THIS CONCLUSION OF THE LD. CIT(A) ACCORDING TO THE ASSESSEE IS NOT IN ACCORDANCE WITH STATUTORY PROVISIONS. 6.5 IN THE AY 2003-04 THE TPO ADOPTING THE AP PROACH FOLLOWED BY THE LD. CIT(A) IN THE AY 2002-03 DETERMINED THE ALP IN RESPECT OF COMMISSION PAID TO ARVIND WORLDWIDE INC. MAURITIUS ON THE BASIS OF COMMISSION PAID TO ANOTHER AE VIZ. TO ARVIND WORLDWIDE INC. US A @ 4.93%. HOWEVER THE LD. CIT(A) DELETED THE ADJUSTMENT ON THE GROUND THAT T HE ASSESSEE ITSELF WAS PAYING A HIGHER RATE OF COMMISSION TO NON-RELATED ENTERPRI SES LIKE AEG J.F. GANGNOT STUDIO FABBRI ETC. AND COMPARISON WITH US ENTERPRIS E ITSELF WAS NOT PROPER FOR THE SIMPLE REASON THAT THE EXTENT OF SERVICES PROVIDED BY THE US ENTERPRISE AND THE TERRITORY COVERED BY IT WAS MUCH SMALLER AS COMPARE D TO ASSOCIATE ENTERPRISE AT MAURITIUS WHICH WAS LOOKING AFTER SALES IN UK HONG KONG AS WELL. ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 27 6.6 IIN THE CASE BEFORE US FOR THESE TWO YEARS BOTH THE ASSESSEE AS WELL AS THE TPO CONSIDERED CUP METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP OF THE AFORESAID INTERNATIONAL TRANSACTIONS .TH E APPROACH OF THE LD. CIT(A) IN THE AY 2002-03 AND THE TPO IN THE AY 2003-04 IN COMPARING A CONTROLLED TRANSACTION WITH ANOTHER CONTROLLED TRANSACTION IS NOWHERE PRESCRIBED THE ACT OR IN RULE 10B(A) OF THE IT RULES 1962 AND IS AGAINST THE SPIRIT OF CUP METHOD. IN THE INSTANT CASE AS ALREADY MENTIONED THERE IS NOT HING TO SUGGEST THAT THE ASSESSEE DISCHARGED THEIR BURDEN OF ESTABLISHING AL P BEFORE THE AO OR THE LD. CIT(A) NOR EVEN PLACED ANY ECONOMIC ANALYSIS OR FAR ANALYSIS BEFORE THE REVENUE AUTHORITIES OR EVEN BEFORE US WHICH WOULD ENABLE US TO CONCLUDE THAT THE PRICE PAID BY THE ASSESSEE TO THE AES FOR SERVI CES RENDERED IS AT ALP. IT WAS FOR THE ASSESSEE TO SHOW THAT RESULTS OF THESE INTE RNATIONAL TRANSACTIONS WERE NOT INCONSISTENT WITH RESULTS OF SIMILAR UNCONTROLLED T RANSACTIONS CARRIED IN SIMILAR CIRCUMSTANCES. IN THE ABSENCE OF RELEVANT FAR ANALY SIS AND ECONOMIC ANALYSIS IN THE LIGHT OF RELEVANT DATA OF COMPARABLE CONTROL LED OR UNCONTROLLED TRANSACTIONS CARRIED IN SAME OR SIMILAR CIRCUMSTANCES WE ARE OF THE OPINION THAT THE ALP FURNISHED BY THE ASSESSEE DID NOT MEET THE STATUTOR Y REQUIREMENTS. THE LD. C.I.T. (APPEALS) ALSO FAILED TO CONSIDER THAT BURDEN OF P ROOF TO SHOW THAT THE INTERNATIONAL TRANSACTIONS WERE ARM'S LENGTH TRANSA CTIONS WAS ON THE ASSESSEE AND NO SUCH FINDINGS EMERGE AS TO WHETHER THE SAME WAS DISCHARGED. THE LD. CIT(A) IN FACT DID NOT EXAMINE ON THE TOUCHSTONE OF PARAMETERS SET OUT IN RULE 10C(2) AND 10B(1) OF THE IT RULES 1962 AS TO WHICH METHOD SHOULD FOR DETERMINING THE ARMS LENGTH PRICE WILL BE MOST APPR OPRIATE METHOD ON THE FACTS OF THIS CASE. THE NATURE AND CLASS OF INTERNATIONAL TR ANSACTIONS AND OTHER RELEVANT FACTORS WERE REQUIRED TO BE LOOKED INTO. NONE OF T HESE IMPORTANT ASPECTS OF THE MATTER HAVE BEEN DEALT WITH BY THE LD. CIT(A) AT ALL. THAT CERTAINLY IS NOT JUDICIOUS APPROACH IN DEALING WITH THE ISSUE AS TO WHAT SHOULD BE THE CORRECT ARMS LENGTH PRICE ON THE FACTS OF THIS CASE. ONCE A PARTICULAR METHOD IS FOUND TO BE SUITABLE THE NEXT THING THAT THE CIT(A) WAS REQ UIRED TO EXAMINE WAS WHETHER INPUT VARIABLES REQUIRED FOR ALP DETERMINATION HAVE BEEN PROPERLY GATHERED; IF NOT THEN THE ONUS OF GATHERING THOSE INPUTS ARISES . AS HELD BY THE SPECIAL BENCH OF THE ITAT IN AZTEC SOFTWARE & TECHNOLOGY SERVICE LTD. VS. ACIT 294 ITR(AT)32(BANGLORE) AND RANBAXY LABORATORIES LTD. V S. ADDL.CIT 110 ITD ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 28 428(DELHI) THE PRIMARY BURDEN FOR COLLECTING INPU TS FOR COMPUTING ALP UNDER THE RELEVANT PROVISIONS OF THE ACT; BE IT SELECTION OF MOST APPROPRIATE METHOD OR FINDING COMPARABLES IS ON THE ASSESSEE. SIMILAR VI EW WAS TAKEN BY A CO-ORDINATE BENCH IN THEIR DECISION DATED 24-07-2009 IN THE CAS E OF ATUL LTD. IN THE AYS 2003-04 IN ITA NO.157/AHD/2007 FOLLOWED IN THE DECISION DATED 24.9.2010 FOR THE AY 2004-05 IN ITA NO.1547/ AHD/2007.THERE IS NOTHING TO SUGGEST IN THE IMPUGNED ORDERS THAT T HE ASSESSEE DISCHARGED THIS BURDEN IN THE INSTANT CASE NOR ANY ECONOMIC ANALYSI S OR EVEN FAR ANALYSIS HAS BEEN PLACED BEFORE REVENUE AUTHORITIES AND EVEN BE FORE US. IT COULD NOT BE SAID THAT ONUS OF GATHERING ALL THE INPUTS IS ONLY ON TH E ASSESSING OFFICER AND THAT THE ASSESSEE HAS NO RESPONSIBILITY TO FURNISH THE RELEV ANT DETAILS IN THIS REGARD. IN ANY CASE NOT ONLY THAT THE ASSESSEE DID NOT DISCHA RGE THE BURDEN THAT LAY UPON IT EVEN THE LD. CIT(A) DID NOT EXAMINE THESE ASPEC TS. THE LD. CIT(A) NOWHERE CONCLUDED THAT THE ASSESSEE DISCHARGED THE ONUS LA ID DOWN UPON IT TO ESTABLISH THAT PRICE PAID BY IT TO AES IS AT ALP NOR REFERRE D TO ANY ECONOMIC AND FAR ANALYSIS. EVEN WHEN THE LD. CIT(A) DETERMINED THE ALP IN THE LIGHT OF TRANSACTION WITH ANOTHER AE NO SUCH ECONOMIC AND FAR ANALYSIS HAS BEEN REFERRED TO NOR THE LD. CIT(A) CONSIDERED FACTORS LIKE ECONOMIC CON DITIONS GEOGRAPHICAL AREAS RISKS ASSUMED FUNCTIONS ASSUMED ETC. IN RELATION TO TRANSACTIONS WITH THE TWO AES VIS-A-VIS UNCONTROLLED TRANSACTIONS. AT THE C OST OF REPETITION EVEN BEFORE US THE LD. AR DID NOT PLACE US ANY ECONOMIC AND FAR A NALYSIS SUGGESTING THAT PRICE PAID BY THE ASSESSEE TO ITS AE FOR SERVICES RENDERED WAS AT ALP. HAVING REGARD TO THE STATUTORY PROVISIONS PARTICULARLY TH E MANDATE OF SECTIONS 92(1) AND 92D READ WITH RELEVANT RULES WE ARE OF THE OPINION THAT THE ADJUSTMENTS MADE ON ACCOUNT OF ALP BY TAX AUTHORITIES CAN BE DELETED IN APPEAL ONLY IF THE APPELLATE AUTHORITIES ARE SATISFIED AND RECORD A FINDING THAT ALP SUBMITTED BY THE ASSESSEE IS FAIR AND REASONABLE. MERELY BY FINDING FAULTS WI TH THE TRANSFER PRICE DETERMINED BY THE REVENUE AUTHORITIES ADDITION ON ACCOUNT OF 'ADJUSTMENTS' CANNOT BE DELETED. THIS IS BECAUSE THE MANDATE OF SECTION 92( 1) IS THAT IN EVERY CASE OF INTERNATIONAL TRANSACTION INCOME HAS TO BE DETERMI NED HAVING REGARD TO ALP. THEREFORE UNLESS ALP FURNISHED BY THE ASSESSEE IS SPECIFICALLY ACCEPTED THE APPELLATE AUTHORITIES ON THE BASIS OF MATERIAL AVAI LABLE ON RECORD HAVE TO DETERMINE ALP ITSELF. SUBJECT TO STATUTORY PROVISIO NS APPELLATE AUTHORITIES CAN ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 29 DIRECT LOWER REVENUE AUTHORITIES TO CARRY THIS EXER CISE IN ACCORDANCE WITH LAW. THE MATTER CANNOT BE LEFT HANGING IN BETWEEN AND ALP OF INTERNATIONAL TRANSACTION HAS TO BE DETERMINED IN EVERY CASE. EVALUATION OF TRAN SACTIONS IS THE MOST IMPORTANT PART OF TRANSFER PRICING AND THE AO IN THIS CASE FA ILED TO CARRY THE SAME IN ACCORDANCE WITH LAW. IT HAS VITIATED DETERMINATION OF A.L.P. THE CIT(A) ALSO ADOPTED SIMILAR APPROACH AND DID NOT EXAMINE MERITS OF THE CASE FROM THE RIGHT PERSPECTIVE AS DISCUSSED ABOVE. NEEDLESS TO REITER ATE THAT THE ARM'S LENGTH PRINCIPLE IS USUALLY APPLIED BY COMPARING THE 'COND ITIONS (E.G. PRICE OR MARGIN) OF A CONTROLLED TRANSACTION WITH THOSE OF INDEPENDENT TR ANSACTIONS. THE FACTORS THAT SHOULD BE CONSIDERED WHEN ASSESSING THE COMPARABILI TY OF A TRANSACTION INCLUDE- THE SPECIFIC CHARACTERISTICS OF THE PROPERTY OR SER VICES; THE FUNCTIONS THAT EACH ENTERPRISE PERFORMS INCLUDING THE ASSETS USED AND MOST IMPORTANTLY THE RISKS UNDERTAKEN; THE CONTRACTUAL TERMS; THE ECONOMIC CIR CUMSTANCES OF DIFFERENT MARKETS FOR EXAMPLE DIFFERENT COUNTRIES WHOLESAL E VERSUS RETAIL; AND - BUSINESS STRATEGIES FOR EXAMPLE MARKET PENETRATION SCHEMES WHEN A PRICE IS TEMPORARILY LOWERED ETC. 6.7 IN VIEW OF THE FOREGOING ESPECIALLY WHEN THE LD. CIT(A) DID NOT CARE TO ASCERTAIN THE CORRECT FACTS NOR PASSED A SPEAKING ORDER NOR EVEN RECORDED HIS FINDINGS AS TO WHETHER OR NOT THE ONUS LAID DOWN UPON THE ASSESSEE IN ESTABLISHING ALP WAS DISC HARGED IN THE INSTANT CASE WE ARE OF THE OPINION THAT MATTER NE EDS TO BE RECONSIDERED . THE APPLICATION OF MIND TO THE MATERIAL FACTS AND THE A RGUMENTS SHOULD MANIFEST ITSELF IN THE ORDER. SECTION 250(6) OF THE INCOME TAX ACT MANDATES THAT THE ORDER OF THE CIT(A) WHILE DISPOSING OF THE APPEAL SHALL BE IN WR ITING AND SHALL STATE THE POINTS FOR DETERMINATION THE DECISION THEREON AND THE REA SON FOR THE DECISION. IN THE LIGHT OF AFORESAID DISCUSSION ESPECIALLY WHEN THE ASSESSEE HAS NOT FULFILLED ITS STATUTORY OBLIGATIONS CONTEMPLATED UNDER THE AFORE SAID PROVISIONS RELATING TO TRANSFER PRICING UNDER CHAPTER- X OF THE ACT WE CO NSIDER IT FAIR AND APPROPRIATE TO SET ASIDE THE IMPUGNED ORDERS OF THE COMMISSIONER O F INCOME-TAX (APPEALS) IN THESE TWO YEARS AND RESTORE THE MATTER TO HIS FILE FOR FRESH ADJUDICATION IN ACCORDANCE WITH LAW IN THE LIGHT OF OUR AFORESAID O BSERVATIONS AND OF COURSE AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE ASSESSEE BR INGING OUT CLEARLY AS TO HOW THE ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 30 ASSESSEE THROUGH THEIR ECONOMIC AND FAR ANALYSIS E STABLISHED ALP OF THE INTERNATIONAL TRANSACTIONS ENTERED IN TO WITH THE A FORESAID AES .IN THE EVENT THE ASSESSEE FAILS TO SUBMIT THE RELEVANT ECONOMIC AND FAR ANALYSIS OR OTHER RELEVANT PRESCRIBED DOCUMENTS ALP SHOULD BE DETE RMINED AFTER HAVING A ROBUST TRANSFER PRICING ANALYSIS AS ALSO AFTER EXAM INING THE DOCUMENTS WHICH THE ASSESSEE IS OBLIGED TO MAINTAIN UNDER RULE 10D OF T HE INCOME TAX RULES 1962. WE MAY CLARIFY THAT THE ASSESSEE IS FREE TO SUBMIT FRESH INFORMATION AND DOCUMENTATION AND IS FREE TO CHOSE ANY OF THE PRES CRIBED METHODS AS MOST APPROPRIATE METHOD . IN NUTSHELL THE LD. CIT(A) SH OULD BY WAY OF A SPEAKING ORDER BRING OUT CLEARLY AS TO HOW THE PRICE DETERMI NED BY HIM IS ALP IN RESPECT OF THE TRANSACTIONS ENTERED IN TO BY THE ASSESSEE W ITH ITS AE. BE THAT AS IT MAY A FAIR AND REASONABLE ARM'S LENGTH PRICE SHOULD BE DE TERMINED. CONSEQUENTLY GROUND NOS. I & II IN THE APPEAL OF THE ASSESSEE FO R THE AY 2002-03 & GROUND NO.1 IN THE APPEALS OF THE REVENUE FOR THE AYS 2002 -03 & 2003-04 ARE DISPOSED OF. 7. AS REGARDS GROUND NO. III IN THE APPEAL OF THE ASSESSEE FOR THE AY 2002-03 RELATING TO WRITE OFF OF RS.102.25 CRORE S THERE IS NO DISCUSSION IN THE ASSESSMENT ORDER. ON APPEAL THE LD. CIT(A) FOUND THAT NEITHER THE CLAIM WAS MADE IN THE COMPUTATION OF INCOME NOR ANY REVISED RETURN WAS FILED. SINCE THE ISSUE DID N OT EMANATE FROM THE ASSESSMENT ORDER THE LD. CIT(A) DID NOT ENTERT AIN THE GROUND. 7.1. THOUGH THE ASSESSEE HAS RAISED A GROUND IN T HE APPEAL BEFORE US THE LD. AR DID NOT EVEN WHISPER BEFORE US ABOUT THIS GROUND. SINCE THE LD. AR DID NOT MAKE ANY SUBMISSIONS ON TH IS GROUND NOR RELEVANT FACTS ARE AVAILABLE ON RECORDS APPARENTLY THIS GROUND WAS NOT PRESSED BEFORE US. IN THESE CIRCUMSTANCES ESPE CIALLY WHEN NEITHER FACTS ARE AVAILABLE ON RECORD NOR THE ISSUE RAISED IN THE GROUND RAISED BEFORE EMERGES FROM THE IMPUGNED ORDER OF THE LD. CIT(A) WE HAVE NO ALTERNATIVE BUT TO DISMISS THE GROUND.. IF THERE IS NO DECISION OF THE FIRST APPELLATE AUTHORITY IT CAN NOT BE SAID THAT THE ASSESSEE IS STILL AGGRIEVED BY THE DECISION OF THE FIRST APPELLATE AUTHORITY IN NOT GRANTING SUCH RELIEF TO HIM. HONBLE JURISDICTIONAL HIGH COURT IN THEIR DECISION IN CIT VS. KARAMCHAND PREM CHAND PRIVATE LTD. 74 ITR ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 31 254(GUJ) HELD THAT THE TRIBUNAL IS NOT ENTITLED T O ALLOW THE ASSESSEE TO AGITATE AN ISSUE WHICH WAS NOT RAISED BEFORE THE FIRST APPE LLATE AUTHORITY AND THERE IS NO DECISION OF SUCH AUTHORITY ON THE ISSUE EVEN IF THE ASSESSEE HAS RAISED THE ISSUE IN THE MEMORANDUM OF APPEAL AND SEEKS TO AGIT ATE IT. SIMILARLY IN SMT. ARUDHANTI BALKRISHNA VS. ITO 103 ITR 763(GUJ) THE HONBLE JURISDICTIONAL HIGH COURT HELD THAT THE ASSESSEE IS NOT ENTITLED TO QUE STION THE DECISION OF THE OFFICER ON A POINT IN AN APPEAL TO THE TRIBUNAL WHICH WAS NOT RAISED OR DECIDED BY THE APPELLATE ASSISTANT COMMISSIONER. SIMILAR VIEW WAS TAKEN IN HUKAMCHAND & MANNALAL & CO. 126 ITR 251(MP) UGAR SUGAR WORKS LT D. VS. CIT 141 ITR 326(BOM.). CIT VS. ANAND PRASAD [1981] 128 ITR 388 (DELHI) AND CIT VS. CELLULOSE PRODUCTS OF INDIA LTD. [1985] 151 ITR 499 (GUJ) [FB] . IN THE LIGHT OF VIEW TAKEN IN THESE DECISIONS GROUND NO. III IN THE APP EAL OF THE ASSESSEE IS DISMISSED. 8. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN TERMS OF RESIDUARY GROUND IN THESE THREE APPEALS WHILE GROUN D NO.2 IN THE APPEALS OF THE REVENUE BEING GENERAL IN NATURE NOR ANY SUBMISSIONS HAVING BEEN MADE DOES NOT REQUIRE ANY SEPARATE ADJ UDICATION ACCORDINGLY ALL THESE GROUNDS ARE DISMISSED. 9. IN THE RESULT BOTH THE APPEALS OF THE REVENUE ARE ALLOWED WHILE THAT OF THE ASSESSEE IS PARTLY ALLOWED BUT ALL FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 22-02-2011 SD/- SD/- (T K SHARMA) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 22 -02-2011 ITA N O.1304&1427/A/06 & ITA NO.2917/A/07 32 COPY OF THE ORDER FORWARDED TO: 1. ARVIND MILLS LIMITED NARODA ROAD AHMEDABAD 2. ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-1 AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-V AHMEDABAD 5. DR ITAT AHMEDABAD BENCH-A AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR/ASSISTANT REGISTRAR ITAT AHMEDABAD