A “controlled transaction” can never be regarded as “comparable” even if at ALP
In determining the comparable parties for purposes of TNMM, the TPO selected a wholly owned subsidiary of the assessee called ICB Contractors India Pvt Ltd (“ICB”) even though there were related party transactions between ICB and another AE called JTS Contracting Co. Malta. The TPO justified the selection on the ground that the transactions between ICB and the AE were at arms’ length and so the distinction between controlled and uncontrolled transactions stood obliterated. In appeal before the Tribunal, the AM held that as there were controlled transactions between ICB and the AE, ICB could not be taken as a comparable party. However, the JM took the view as the transactions entered into by ICB was found to be at arms’ length, it was an internal comparable which could not be ignored. The Third Member had to consider whether “the net margin realized from a transaction with an AE found and accepted at ALP could be taken as a comparable being an internal comparable for computation of ALP an international transaction with another AE?” HELD by the Third Member:
The entire scheme in the Act & Rules for determining the ALP of an international transaction is based on making comparison with certain comparable uncontrolled transactions. The various methods prescribed for determining ALP clearly divulge that the comparison is always sought to be made of the assessee’s international transactions with comparable ‘uncontrolled transactions’. An ‘uncontrolled transaction‘ is defined under Rule 10A(a) to mean ‘a transaction between enterprises other than associated enterprises whether resident or non-resident‘. A transaction between two associated enterprises goes out of the ambit of ‘uncontrolled transaction’ under Rule l0A. There is no statutory sanction for roping in a comparable controlled transaction for the purposes of benchmarking. If the view that a controlled transaction should not be shunted out for the purposes of benchmarking, is accepted, then all the relevant provisions contained in Chapter X in this regard, will become otiose. The argument that once controlled transactions are verified by the TPO and found at ALP, then the difference between controlled and controlled transactions is obliterated cannot be accepted because it is possible that higher/lower prices for India may have been charged to reduce the overall incidence of tax. The TPO may accept that the transaction does not require adjustment if it benefits India even though the transaction may not be at ALP and cannot be used as a benchmark for purposes of making comparison in other cases. That is why the legislature has ignored controlled transactions, even though at ALP, and restricted the ambit only to uncontrolled transactions for computing ALP in respect of international transactions between two AEs.