The Principal Commissioner Of Income Tax, Vadodara 1 v. Gulbrandsen Chemicals Pvt. Ltd

C/TAXAP/751/2019 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 751 of 2019With R/TAX APPEAL NO. 752 of 2019With R/TAX APPEAL NO. 753 of 2019 FOR APPROVAL AND SIGNATURE: HONOURABLE MR. JUSTICE J.B.PARDIWALA andHONOURABLE MR. JUSTICE BHARGAV D. KARIA ================================================================ 1 Whether Reporters of Local Papers may be allowed to NOsee the judgment ?2 To be referred to the Reporter or not ?NO3 Whether their Lordships wish to see the fair copy of the NOjudgment ?4 Whether this case involves a substantial question of law NOas to the interpretation of the Constitution of India or any order made thereunder ? 4 Whether this case involves a substantial question of law NOas to the interpretation of the Constitution of India or any order made thereunder ?================================================================ THE PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA 1 Versus GULBRANDSEN CHEMICALS PVT. LTD. ================================================================ Appearance: MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1MR S.N. SOPARKAR, SR. ADV WITH MR B S SOPARKAR(6851) for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALAandHONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 03/02/2020 ORAL JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1.These Tax Appeals under Section 260A of the Income Tax Act, 1961 (for short ‘the Act, 1961’) are at the instance of the Revenue and are directed against the orders passed by the Income Tax Appellate Tribunal, Ahmedabad ‘D’ Bench, Ahmedabad (for short ‘the Tribunal’).Income Tax Act, 1961 (for short ‘the Act, 1961’) are at the instance of the Revenue and are directed against the orders passed by the Income Tax Appellate Tribunal, Ahmedabad ‘D’ Bench, Ahmedabad (for short ‘the Tribunal’). 2.Tax Appeal No. 751 of 2019 is arising out of the order of the Tribunal dated 12.02.2019 in ITA No. 2276/AHD/2013 for A.Y. 2008-09. the order of the Tribunal dated 12.02.2019 in ITA No. 2276/AHD/2013 for A.Y. 2008-09. 3.Tax Appeal Nos. 752 of 2019 and 753 of 2019 are arising out of the common order of the Tribunal dated 12.02.2019 for A.Y. 2007-08 in ITA No. 760/AHD/2012 filed by the revenue and ITA No. 874/AHD/2012 filed by the assessee.are arising out of the common order of the Tribunal dated 12.02.2019 for A.Y. 2007-08 in ITA No. 760/AHD/2012 filed by the revenue and ITA No. 874/AHD/2012 filed by the assessee. 4.Since common issues are arising in these appeals, the same were heard analogously and are being disposed of by this common order. For the sake of convenience, Tax Appeal No. 753 of 2019 is treated as the lead matter.appeals, the same were heard analogously and are being disposed of by this common order. For the sake of convenience, Tax Appeal No. 753 of 2019 is treated as the lead matter. 5. The revenue has proposed the following three questions of law as substantial questions of law for the consideration of this Court so far as Tax Appeal Nos. 752 of 2019 and 753 of questions of law as substantial questions of law for the consideration of this Court so far as Tax Appeal Nos. 752 of 2019 and 753 of C/TAXAP/751/2019 JUDGMENT 2019 are concerned, which pertains to A.Y. 2007-08: 5. The revenue has proposed the following three questions of law as substantial questions of law for the consideration of this Court so far as Tax Appeal Nos. 752 of 2019 and 753 of questions of law as substantial questions of law for the consideration of this Court so far as Tax Appeal Nos. 752 of 2019 and 753 of C/TAXAP/751/2019 JUDGMENT 2019 are concerned, which pertains to A.Y. 2007-08: (a)Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in deleting the upward adjustment of Rs.2,78,02,502/- made by the AO/TPO and confirmed by CIT (A) on account of Transfer Pricing adjustments in respect of international transactions of sale of chemical products by the assessee to its Associated Enterprises (Aes)? (b)Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in rejecting the TPO’s approach of rejecting the Transactional Net Margin Method (TNMM) and adopting Comparable Uncontrolled Price (CUP) Method as Most Appropriate Method (MAM)? (c)Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in allowingfollowingappropriate adjustments claimed by the assessee for material differences in contractual term,underlyingcommercial circumstances, functions, risk and other economic factors between assessee’s transactionswithAEsvis-à-vis assessee’s transactions with non AEs whileapplyingtheComparable Uncontrolled Price (CUP) method: vi.Adjustment on account of business volumes difference.vii.Adjustment for advance payment received from AE. viii. Adjustment for marking and selling expenses not required to be incurred for AE sales vis-à-vis non AE sales. ix.Adjustment for credit risk not required to be borne by the assessee for AE sales vis-à-vis non AE sales. x. Adjustment for interest free ECB loan received from AE?received from AE? 6. Brief facts of the case are as under: 6.1. It appears from the material on record that the respondent – assessee filed his return of income for A.Y. 2007-08 on 05.11.2007 declaring the income at Rs.99,43,677/-. The case of the assessee was selected for scrutiny assessment and a notice under Section 143(2) and 142 (1) of the Act, 1961 were issued.of the Act, 1961 were issued. 6.2. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act, 1961. The TPO passed an order dated 19.10.2010 under Section 92CA (3) of the Act, 1961 determining the total transfer pricing adjustmentofRs.3,91,40,456/-by discarding the Transactional Net Margin Method (TNMM) and adopted Comparable Uncontrolled Price (CUP) method as Most C/TAXAP/751/2019 JUDGMENT Appropriate Method (MAM) by the assessee inrespectoftheinternational transactions. 6.3. On the basis of the order passed by the TPO, the Assessing Officer adopted the upward transfer pricing calculated by the TPO and passed the assessment order. 6.4. The Assessing Officer adopted the CUP method as Most Appropriate Method (MAM), due to following reasons as recorded by the Tribunal in the impugned order: Section 92CA (3) of the Act, 1961 determining the total transfer pricing adjustmentofRs.3,91,40,456/-by discarding the Transactional Net Margin Method (TNMM) and adopted Comparable Uncontrolled Price (CUP) method as Most C/TAXAP/751/2019 JUDGMENT Appropriate Method (MAM) by the assessee inrespectoftheinternational transactions. 6.3. On the basis of the order passed by the TPO, the Assessing Officer adopted the upward transfer pricing calculated by the TPO and passed the assessment order. 6.4. The Assessing Officer adopted the CUP method as Most Appropriate Method (MAM), due to following reasons as recorded by the Tribunal in the impugned order: “5. The material facts and circumstances of the case are like this. The assessee company is a wholly owned subsidiary of EW Limited, Mauritius- a group entity of Gulbrandsen Inc, USA and Gulbrandsen EU Limited UK inasmuch as the shareholders of EW Limited, i.e. Peter Gulbrandsen and Donald Gulbrandsen, are also majority shareholders of Gulbrandsen Inc, USA and Gulbrandsen EU Limited UK. The assessee is engaged in the manufacturing of chemicals for its divergent industrial customers, its productrangeincludesAluminium Chloride Anhydrous (ANH), Meno N Butyl Trichloride (MBTC), Stannic Chloride (TTC), Dibutyl Tin Oxide (DBTO)/ Dibutyl Tin Tin Dilaurate (DBTAA) and Tri Chloro Benzene and these products are supplied totheindustriesincluding petrochemical industry, pharmaceutical and chemical intermediate users. The assessee has also sold these products to C/TAXAP/751/2019 JUDGMENT its AEs, namely Gulbrandsen Chemicals Inc, USA, and Gulbrandsen EU Limited, UK. During the course of assessment proceedings, the matter regarding ascertainment of arm’s length price was referred to the Transfer Pricing Officer. The Transfer Pricing Officer noticed that the assessee had, deviating from the stand taken in the earlier years in which internal CUP method was adopted for benchmarking the sale to the AEs, computed the arm’s length price of these transactions on the basis of Transactional Net Margin Method (TNMM). In effect thus, the assessee moved, in the current year, from internal CUP to TNMM. This, however, did not find favour with the TPO. The TPO was of the view, for the detailed reasons set out in his order, that, given the facts of the case, the internal CUP was the most appropriate method and it has been used all along in the earlier years. The reasoning adopted by the TPO was like this. It was noted that the assessee had sold 40% of its products to the associated enterprises, and earned margin of PBIT/Cost at 2.07%, as against the sale of 70% of its products in the immediately preceding year and earning margin of PBIT/Cost at - 3.26%. The TPO computed the total cost per kg for each type of chemicals and compared it with average sale rate to AEs so as to compute the GP/Cost (%) and noted that “the assessee has charged very nominal margin to the AEs”. Coming to the Internal TNMM adopted by the assessee and the TPO’s view that the basis of allocating the overheads was not clear, it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these are C/TAXAP/751/2019 JUDGMENT C/TAXAP/751/2019 JUDGMENT directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee further submitted that “in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects”. While the TPO did not have any specific comment on this request, he simply rejected the explanation of assessee as “not accepted”. It was also explained to the TPO that the CUP method is not really appropriate to the facts of this case as the assessee has long term business arrangements with the AEs, whereas there are no such long term arrangements with non AEs and that the contractual,economic,commercial, functional and risk profile differences, between the AE transactions vis-à-vis non AE transactions, make the comparison of prices irrelevant. The attention was invited to the fact that, as also stated in OECD Guidelines for Multinational Enterprises and Tax Administrators, application of CUP method “requires high degree of comparability not only in the products sold and services provided but also in the economic circumstances in which the respective AE and non AE transactions take place”. It was thus submittedthattheeconomic circumstances in which sales have taken place with the AEs are not at all C/TAXAP/751/2019 JUDGMENT comparablewiththeeconomic circumstances in which non AE sales have taken place. It was also explained that the AEs, to which the assessee has sold the products, are resellers whereas non AEs are end consumers, and that while these AEs are located in US and UK, the non AE customers are in Asia and Middle East. Emphasis thus was placed on the fact that the geographical location of markets was different and the comparison was thus inappropriate. It was also highlighted that the volume of sales to the AEs was substantially higher than sales to non AEs. The attention was also invited to the fact that while AEs make, on an average, 17 months advance payment for the purchases while non AEs are extended 60-90 days credit period. It was thus contended that there was no credit risk to AE sales. The assessee further pointed out that the AEs also reimburse the assessee the basic research and development costs with 110% mark up under long term business arrangement, over and above the sale price, and that the assessee has also benefited from interest free ECB loans from the AEs. None of these submissions impressed the TPO. The TPO noted the objections of the assessee for the application of Internal CUP but rejected the same mainly on the ground that “since 2003-04, the assessee company has been using internal CUP as the most appropriate method” and “the assessee company has shifted from internal CUP method to internal TNMM without giving any appropriate reasons. So the contention of the assessee is rejected”. As regards the justification of TNMM on the ground that the volume of sales to the AEs is several times higher than the C/TAXAP/751/2019 JUDGMENT C/TAXAP/751/2019 JUDGMENT sale to non AEs, the TPO observed that “it means that the assessee has sold huge volume to AEs at a lower rate and shifted the huge profits from India to other countries” and, therefore, “the contention of the assessee is not acceptable”. As regards the credit period and advance payments, the TPO observed, on a superficial note again, “contention of the assessee is considered but is not acceptable because in USA and UK market, the price of TTC, MBTC and DBTC are higher than non AE price rate”. As regards guaranteed purchase of 50% production, the TPO observed that “it is seen that the assessee has been earning profits only from the non AE transactions (and) at least 50% guaranteed selling to AEs mean that the assessee is making loss and shifting the profits from India to other countries”. On reimbursement of R&D costs also, the Assessing Officer did only observe, in rather general terms, that the plea is “not acceptable because the assessee has sold the products to its AEs at very lower rate and shifted the profits from India to outside India” The same was the comment in respect of interest free ECB loans from the AEs. As for the need of adjustment on account of various factors, the TPO simply observed that “the assessee has charged very nominal margin to its AEs (and) therefore, there is no any issue for any adjustment”. He then proceeded to make the adjustment by observing as follows: 10. Computation of Arm’s Length Price C/TAXAP/751/2019 JUDGMENT carried the matter in appeal before the CIT (A). 6.6.However, CIT (A) confirmed the order passed by the Assessing Officer observing that,‘regardlessofmeritsinto adjustments made by the appellant, the fact remains that adjustment to make control and uncontrolled transactions comparable were possible in appellant’s case. It was also observed that, “further, it is an accepted position that CUP is a superior method to other methods, if available.” The CIT (A) relying upon the decision of the Tribunal in case of Serdia Pharmaceuticals India Pvt. Ltd. v. ACIT by Mumbai ITAT reported in (2011) 44 SOT 391 (Mum.) and held that the adjustments were possible but same were rejected on the merits including in respect of volume discount, credit terms, marketing and selling function and consequent costs, C/TAXAP/751/2019 JUDGMENT credit risk, reimbursement of R & D costs, interest from ECB loan and all such factors. As the TPO observed that there is a huge difference between the sale price of Meno N Butyl Trichloride i.e. MBTC to its USA based AE and UK based AE, inasmuch as the same product was sold to USA based AE for Rs.412.95 and to UK based AE for Rs.370.13. According to the CIT (A) such difference indicated that sales to USA based AE was much above the ALP. The CIT (A) therefore, observed that, ‘the appellant has not explained the vast difference between the prices charged for the same chemical from two AEs in the same period.’ And therefore, ‘the adjustment claimed by the appellant and the calculation done by the appellant to arrive at ALP after adjustments is not acceptable’ and ‘determination by the TPO of ALP of transactions to be average sale price to non-AEs over the year, without carrying out adjustments is upheld’. The CIT (A) however, reduced the ALP adjustmenttoRs.2,78,02,502/-by observing as under: “3.3.2 Appellant’s contentions in para 3.2.2 of its submissions regarding C/TAXAP/751/2019 JUDGMENT “3.3.2 Appellant’s contentions in para 3.2.2 of its submissions regarding C/TAXAP/751/2019 JUDGMENT mistakes in quantification of transfer pricing addition under CUP method by Id. TPO are now taken up. It is pointed out by the appellant that for the products MBTC and DBTO, TPO compared consolidated average price for both the AEs with non-AE average price. Each sale transaction to the AEs constituted a separate international transaction, arm’s length price of which was required to be determined in accordance with Section 92 of the I.T. Act. The Comparable Uncontrolled Price (CUP) for each of the 4 chemicals was determined by the TPO to be the average sale price charged by appellant to non-AEs. Each transaction of sale of chemicals to the AEs needed to be benchmarked with reference to the CUP and if the CUP exceeded the sale price to AE for a particular transaction, only then transferpricingadjustmentwas warranted. TPO’s approach in working out adjustment on the basis of consolidated average sale price for both AEs for MBTC & DBTO was therefore erroneous; AE-wise aggregation of transactions for each chemical for the purpose of benchmarking and working out transfer pricing adjustment is however acceptable in this case, since it does not result into an outcome different from transaction-wise benchmarking. Thus, only AE-wise segregation of sale transactions for each chemical needs to be done. Appellant’s submissions in respect of DBTA sale also have merit and are accepted. Accordingly, transfer pricing adjustment of Rs.2,78,02,502/- worked out by the appellant is directed to be substituted in place of adjustment of Rs.3,91,40,456/- worked out by TPO subject to verification by C/TAXAP/751/2019 JUDGMENT the AO of arithmetical correctness of the working done by the appellant.” 6.7.Theassesseebeingaggrievedand dissatisfied by the order passed by the CIT (A) carried appeal before the Tribunal, whereas, the Revenue also filed a cross-appeal for the reduction of ALP adjustment made by the CIT (A). The Tribunal considered the question as to which is the most appropriate method for ascertainment of Arm’s Length Price in the facts of the case. The Tribunal considered the well established principle that as long as it is reasonably possible to apply direct method of ascertaining the Arm’s Length Price of a transaction, such a direct method will have an edge over application of an indirect method of ascertaining the Arm’s Length Price. The Tribunal relied upon the decision of the coordinate Bench of the Tribunal in case of ACIT v. MSS India Ltd. reported in (2009) 32 SOT 132 (Pune) and Serdia Pharmaceuticals India Pvt. Ltd. (supra) and has observed as under: “…Going by this principle, all other things being equal, a direct method like Comparable Uncontrolled Price (CUP) C/TAXAP/751/2019 JUDGMENT and has observed as under: “…Going by this principle, all other things being equal, a direct method like Comparable Uncontrolled Price (CUP) C/TAXAP/751/2019 JUDGMENT method will have an edge over an indirect method like Transactional Net Margin Method (TNMM). That does not, and cannot, however mean that whatever be the fact situation, CUP is always a preferred method because of one of the essential prerequisite for application of any method of ascertaining the ALP is the inputs necessary for that purpose. Whatever may be inherent edge of the direct methods of determining arm’s length price of an international transaction over indirect methods of determining the arm’s length price of international transactions, selection of the most appropriate method for determining arm’s length price under the transfer pricing provisions, in a particular fact situation, is not an academic exercise which can be decided de hors the peculiar facts of that situation, and, therefore, there cannot be any straight-jacket formulas holding application of a particular method in case of a particular type of product or service. While rule 10B(1) of the Income Tax Rules 1962, provides that arm’s length price in relation to an international transaction shall be determined by any of the methods, “being the most appropriate method”, set out therein, Rule 10 C(1) provides the mechanism for selecting the most appropriate method “which is best suited to the facts and circumstances of each particular transaction” and “which provides the most reliable measure of arm’s length price of the international transaction”. Rule 10C(2) further provides that in selecting the most appropriate method as specified in rule 10C(1), certain factors are to be taken C/TAXAP/751/2019 JUDGMENT 10.What is clear from the above analysis is that a method of determining arm’s length price, to be held as a ‘most appropriate method’ (MAM), should be, as provided in rule 10C(1), a method “which is best suited to the facts and circumstancesofeachparticular transaction” and a method and “which provides the most reliable measure of arm’s length price of the international transaction”. Under rule 10C(2)(c), “the availability, coverage and reliability of data necessary for application of the method” is one of the crucial factors determining suitability of a method of determination of arm’s length price in a particular fact situation. Similarly, it is also important to determine whether accurate adjustments can be made for the differences between the international transactionsandthecomparable uncontrolled transactions, and unless such adjustments can be made the related method cannot be said to be most appropriate method. We have already seen as to how, in the CIT(A)’s analysis, suitable adjustments could not be made even though in his opening observations in the operative portion of the order, he stated that suitable adjustments can indeed be made. The inability to make suitable adjustments, therefore, does take the method outside the ambit of most appropriate method. Quite clearly, therefore, unless suitable reliable data inputs necessary for application of a particular method, as CUP in this case, are available, CUP method cannot be said to be most appropriate methods on the facts of this case. Let us, therefore, first examine whether sufficient inputs were indeed available. 11. At the outset, it is important to note that what has been relied upon by the TPO is Internal CUP data but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intra-AE transactionsandindependent transactions. This approach, though in the case of application of Cost Plus Method, has been rejected by a coordinate bench of this Tribunal in the C/TAXAP/751/2019 JUDGMENT case of ACIT Vs Tara Ultimo Pvt Ltd [(2012) 143 TTJ 91 (Mum)], though the same reasoning will be equally applicable in respect of the CUP as well as the computation mechanism, in that respect, is materially similar. In this case, speaking through one of us (i.e. the Vice President), the coordinate bench had observed as follows: The way this rule works, the benchmarkgross profit is to be applied on eachtransaction with the AEs , while, forcomputing the benchmark, one could takeinto account a series of same or similartransactions. In other words, whilesetting the benchmark, one can take intoaccount several transactions withunrelated enterprise on what can betermed as 'global basis', essentially inrespect of same or similar property orservices though, the benchmark soarrived at cannot be applied on theglobal basis i.e. the average of grossprofit earned from same or similartransactions with AEs.The application of CPM has to be on transaction basis rather than on global basis, and this fundamental scheme of cost plus method is also evident from the plain wordings of Rule 10 B as well.Any other view ofthe matter will result in incongruities.For example, if our average mark up to unrelated enterprises is 20 per cent. and we charge a mark-up of 2 per cent in one transaction with AE and 38 per cent in another transaction with the AE, both these transactions, by applying the mark up on global basis, will meet the test of ALP whereas in the first case, the mark up charged is certainly not a mark-up resulting in an ALP. In this particular case, for example, the normal C/TAXAP/751/2019 JUDGMENT mark up in transactions with has been computed at 16.31 per cent. and the average of mark up on sales to AEs having been taken at 17.08 per cent. entire sales to AEs has been taken at ALP, but, the mark up in the many cases is clearly less than benchmark. To give one example, at page 221 of the paper-book, margin of 14.15 per cent (4 invoices), 13.95 per cent. 13.81 per cent. 14 per cent (4 invoices), 14.14 per cent (2 invoices), and 14.16 per cent is given by assessee's own computation, and, on the same page, on one invoice, the assessee has shown a margin as high as 27 per cent. The cost plus method, therefore, has not been correctly applied. In any case, one of the most important input, i.e. diamond, has been imported at a price for which no ALP documentation is available and the price of imports have been taken into account in computation of costs as well. The costs of inputs have not been verified either. No efforts are made to show that the terms of sale to the AEs and all other relevant factors are materiallysimilarvis-a-visthe transactionswithindependent enterprises. The CPM is applied by comparing gross profit on sales, whereas the method requires comparison of mark up on costs on transactions with AEs vis-a-vis mark up on costs on transactions with non AEs [Emphasis, by underlining, supplied by us now] 12.It is also important to note that the TPO has justified application of internal CUP on the basis of deviations in prices at which products are sold to different AEs and, by implication, using one intra AE price to bench the other 12.It is also important to note that the TPO has justified application of internal CUP on the basis of deviations in prices at which products are sold to different AEs and, by implication, using one intra AE price to bench the other C/TAXAP/751/2019 JUDGMENT intra AE price. That is wholly incorrect. It is well settled in law that it is only an uncontrolled price which can be compared with controlled price and used for any benchmarking. This position has been well summarized in a coordinate bench decision in the case of Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 138/35 taxmann.com 177 (Ahd.), and we are in considered agreement with the same. 13. When comparing the prices of products sold in intra AE transactions vis-à-vis independent transactions, it is not sufficient to compare the prices de hors the economic circumstances in which the respective AE and non AE transactions take place. This principle is beyond any doubt or controversy. In the OECD Guidelines for Multinational Enterprises and Tax Administrators, it is clearly stated that application of CUP method “requires high degree of comparability not only in the products sold and services provided but also in the economic circumstances in which the respective AE and non AE transactions take place”. In the UN Transfer Pricing Manual, it is observed that “degree of comparability between controlled and uncontrolled transactions is typically determined on the basis of a number of attributes of the transactions or parties that could materially affect prices or profits and the adjustment that can be made to account for differences” and then it is observed that “these attributes, which are usually referred to as the five comparability factors, include: (i) Characteristics of the property or C/TAXAP/751/2019 JUDGMENT service transferred; (ii) Functions performed by the parties taking into account assets employed and risks assumed, in short referred to as the “functional analysis” (iii) Contractual terms; (iv) Economic circumstances; and (v) Business strategies pursued”. Clearly, therefore, the significant variations in economic circumstances and contractual terms can take seemingly comparable transactions outside the ambit of comparability.” 6.8. Afterconsideringtheaforesaid principles, the Tribunal applied the same to the facts of the case, as under: “14. We have noted huge and crucial variations in payment terms of the transactions with the AEs vis-a-vi transactions with non AEs. The CIT(A) has rejected the adjustments in this respect on account of irrelevant factors such as assessee claiming only 8% adjustment in the financial year 2005-06, as against 20% adjustment sought in this year, even though the transactions were under the same agreement. That is immaterial. What is material is that there is huge difference in the payment terms. The CIT(A) has also noted the deviations in the advance payment terms of 120 days under the agreement and the actual advance payment of 17 months on average. He has also noted that in three invoices on non-AEs the credit period was 60 days but then he declines to treat these evidence as support for the claim that in all cases similar credits were given. However, what is clear that there is clearly significant variation C/TAXAP/751/2019 JUDGMENT C/TAXAP/751/2019 JUDGMENT in payment terms. As a matter of fact, at page 29, learned CIT(A) himself notes that “as per the agreement, advance payment was to facilitate appellant’s purchases, working capital etc which, in turn, ensured uninterrupted supply to the AE”. He does accept that he was given analysis sheet showing 17 months advance payment but rejects it as agreement refers to only 120 days advance payment. That does not belittle the fact that whatever may have been payment terms under the intra AE agreement, the payment was actually received substantially in advance. The question we must ask ourselves is that whethersuchsubstantialadvance payments, which ensure availability of working capital to the assessee, can be comparedwithnormalbusiness transactions allowing, on the contrary, credit period to the customers. The answer is clearly in negative as the economic circumstances in which these two sets of transactions operate are substantially different. The very character of these transactions is different. 15.It is also important to bear in mind the undisputed fact that the AE had an obligation to buy at least 50% of its products and the assessee was reseller rather than an end user. These contractual terms and the difference in functions also seriously affect the comparability. The reasons given by the CIT(A) for rejecting these variations are wholly superficial and devoid of any legallysustainablemerits.The variations in quantities between the AEs and the non AEs cannot be ignored either. There is no dispute that there C/TAXAP/751/2019 JUDGMENT is huge variations in quantities sold to the AEs vis-à-vis the quantities sold to the non-AEs but the CIT(A) has rejected the plea on the basis that “there is no consistent pattern or correlation between the volume and sale prices” and that “there is no reference to any volume discount in the agreement”. That is again a superficial approach. Whether there is a mention of the volume discount or not or whether there is always a direct relation between the prices and volumes, the fact remains that the transactions with such huge variations, as in this case, cannot be considered to be comparable transactions and that is the consistent approach in benchmarking analysis. The scale of transactions is an important economic factor affecting the comparability. We have also noted that the AEs have reimbursed R&D costs, with mark up, to the assessee. The AEs have also given interest free ECB loans. These are also equally important factors. When we take the transactions with the AEs in the light of these surrounding economic and contractual realities, in our considered view, the transactions with non AEs, on the facts of this case and as a whole, are not comparable at all. We cannot consider the price of the product in isolation with all these factors, and that is the reason why the comparability under CUP ceases to be relevant as these factors are clearly missing in non AE transactions. We have also noted that Rule10 B(1)(a)(ii) itself provides that “such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into C/TAXAP/751/2019 JUDGMENT C/TAXAP/751/2019 JUDGMENT suchtransactions,whichcould materially affect the price in the open market” but then while CIT(A) uphold the application of CUP method on the ground that adjustments can indeed be made, he rejects the adjustments on merits. That is clearly incongruous. When he admits that no adjustments can be made on merits, the very foundation of his decision to uphold application of CUP method ceases to hold good. In any case, having perused the material on record, we are of the considered view that accurate adjustments cannot be made to nullify the impact of absolutely fundamental variations in the terms of the intra AE and non AE transactions, and since accurate adjustments cannot be made, for this reason alone, CUP method ceases to be workable on the facts of this case. The contradiction in the approach is also evident from the fact that the CIT(A) has upheld application of CUP method on the sole basis that accurate adjustments can be made to take care of variations in the intra AE and independent transactions but then one of the points made before us, in the written submissions, is that “if total adjustment of 36% claimed in those years was allowed, prices would come down to such unrealistic levels that one of the international transaction, including sales to non AEs, were made anywhere neat them”. Clearly, there is no meeting ground between these diametrically opposed stands by the authorities. As regards the decision of coordinate bench in the case of Serdia Pharmaceuticals (supra), that was a case in which no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment 6.9. C/TAXAP/751/2019 JUDGMENT was allowed. This precedent, therefore, does not offer any help to the case of the revenue. 16. A lot of emphasis has been placed on the fact that the assessee on its own was using the Internal CUP method in past, and, there was, thus, no good reason to deviate from the same. It is for this main reason that the application of TNMM has been declined by the authorities below. Nothing, however, turns on this plea. What is before us is the question as to which method is most appropriate method for ascertaining the arm’s length in the present year. We do not see how this question is to be adjudicated simply on the basis of what has been accepted by the assessee, on his own, as the most appropriate method in the earlier years. Such a choice of method in the earlier years, in our humble understanding, cannot act as an estoppel against the assessee. In our considered view, the decision as to what is the most appropriate method on the facts of this case is to be taken in the light of the facts and material on record before us in the present year. The past conduct of the assessee, with regard to the selection of the most appropriate method for ascertaining arm’s length price for the present assessment year, is not really decisive. We, therefore, reject this plea of the revenue authorities as well.” The Tribunal thereafter referred to the decision of the Coordinate Bench relied on behalf of the assessee in the case of DCIT v. Dishman Pharmaceuticals & Chemicals C/TAXAP/751/2019 JUDGMENT Ltd. reported in 45 SOT 37 (2011), wherein, the Tribunal considering the factors relating to the determination of Most Appropriate Method for computing ALP adjustments and came to the conclusion that CUP method cannot be applied in each and every case. The Tribunal, therefore, in the facts of the case, held as under: The Tribunal thereafter referred to the decision of the Coordinate Bench relied on behalf of the assessee in the case of DCIT v. Dishman Pharmaceuticals & Chemicals C/TAXAP/751/2019 JUDGMENT Ltd. reported in 45 SOT 37 (2011), wherein, the Tribunal considering the factors relating to the determination of Most Appropriate Method for computing ALP adjustments and came to the conclusion that CUP method cannot be applied in each and every case. The Tribunal, therefore, in the facts of the case, held as under: “19. In view of the above discussions and following the consistent view being taken by the coordinate benches, inourconsideredview,the application of CUP method was indeed not justified on the facts of the presentcase.TheintraAE transactions, on the facts of this case, were so fundamentally different in character in economic circumstances and contractual terms, that these cannotbecomparedwiththe independent transactions entered into by the assessee. We, therefore, reject the stand of the authorities below on this issue. 20. We have noted that the assessee has applied TNMM by comparing the profits on transactions with AEs and the non AEs and no specific defects have been pointed out in the allocation of costs in the segmental accounts which are duly reconciled withentitylevelconsolidated accounts. We have also noted that dealing with the Internal TNMM adopted by the assessee the TPO had expressed the view that the basis of allocating the overheads was not clear, in response to which it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these are directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity,salesrevenue,total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee had further submitted that “in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects”. We have noted that the TPO did not have any specific comment on this request and he simply rejected the explanation of assessee as “not accepted”. In appeal also, no specific adjustments were suggested to the allocations made in the segmental accounts and the discussions were confined to generalities. In these circumstances, we see no reasons to disturb the internal TNMM adopted by the assessee. We, therefore, delete the impugned ALP adjustment of Rs 2,78,02,502.” 6.1.Learned Standing Counsel appearing for the revenue Mr. Varun K. Patel submitted that the Tribunal has committed an error in law and on facts in rejecting the approach of the TPO of adopting Comparable Uncontrolled Price (CUP) method as Most Appropriate Method (MAM) and further erred in allowing various adjustments claimed by the assessee for material differences in contractual term, underlying commercial circumstances, functions, risk and othereconomicfactorsbetweenthe transactions of assessee with AEs vis-à-vis the transactions of the assessee with non-AEs while applying the CUP method as under: i.Adjustment on account of business volumes difference.volumes difference. ii. Adjustment for advance payment received from AE. iii. Adjustment for making and selling expenses not required to be incurred for AE sales vis-à-vis non AE sales. iv. Adjustment for credit risk not required to be borne by the assessee for AE sales vis-à-vis non AE sales. v. Adjustment for interest free ECB loan received from AE. further erred in allowing various adjustments claimed by the assessee for material differences in contractual term, underlying commercial circumstances, functions, risk and othereconomicfactorsbetweenthe transactions of assessee with AEs vis-à-vis the transactions of the assessee with non-AEs while apply