2013 (12) TMI 1575 - AT - Income Tax

Transfer pricing adjustment - Held that - By our detailed reasoning we have held that the departments stand is correct as unique geographical market conditions of the source country in the present facts of the case have no relevance for bench-marking purposes. We have held the focus has to be on India prices as the market for the product of the assessee is India and any third uncontrolled entity for selling similar product would pay the price for the said product going by India specific prices as such they should form the basis for benchmarking. Accordingly we set aside the impugned order and restore the issue back fact to the TPO to readjudicate the issue afresh by way of a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. The TPO shall also consider the benefit of /- 5%, it available to the assessee on facts of the case. The impugned orders as such are set aside.

Summary

Issues Involved:
1. Reduction of Transfer Pricing Officer (TPO) adjustment by the Commissioner of Income Tax (Appeals) [CIT(A)].
2. Deletion of remaining TPO adjustment by CIT(A).
3. Methodology for determining Arm's Length Price (ALP) for international transactions.
4. Application of Comparable Uncontrolled Price (CUP) method.
5. Consideration of India-specific prices versus US Gulf FOB prices for benchmarking.
6. Application of +/- 5% range for determining ALP.

Detailed Analysis:

1. Reduction of TPO Adjustment by CIT(A)
The Revenue was aggrieved by the CIT(A)'s order which restricted the addition under Section 92CA of the Income Tax Act to Rs. 71,45,622/- from Rs. 2,11,23,382/-. The CIT(A) found that the TPO made an apparent error by considering the Prime Lending Rate (PLR) as an absolute number instead of a percentage, which led to an incorrect calculation of the adjustment amount. After correcting this, the CIT(A) limited the adjustment to Rs. 71,45,622/-.

2. Deletion of Remaining TPO Adjustment by CIT(A)
The Revenue also contested the CIT(A)'s decision to delete the remaining addition of Rs. 71,45,622/- made by the Assessing Officer (AO) under Section 92CA. The CIT(A) held that the application of US Gulf FOB prices by the assessee was appropriate for benchmarking the transactions, as the goods were sourced from the US Gulf region. The CIT(A) rejected the TPO's use of India CFR prices, stating that the port of origin and the quality of goods were crucial factors that justified the use of US Gulf FOB prices.

3. Methodology for Determining ALP for International Transactions
The TPO had rejected the methodology applied by the assessee, which involved adjustments to the FOB CUP of DAP fertilizer by adding freight and credit costs. The TPO instead selected CFR CUP based on the Fertecon Price Service, arguing that direct CUP for India-bound shipments with identical contractual terms was available and should be used for comparability analysis. The TPO's method resulted in an adjustment of Rs. 2,11,23,382/-.

4. Application of CUP Method
The CIT(A) accepted the assessee's application of the CUP method using US Gulf FOB prices, arguing that the Fertecon Report, which provided these prices, was widely recognized in the industry and used by the Government of India for determining subsidies. The CIT(A) found that the TPO's rejection of the FOB CUP and selection of CFR CUP was not justified, especially given the adjustments made by the assessee for freight and credit terms.

5. Consideration of India-specific Prices versus US Gulf FOB Prices for Benchmarking
The Tribunal held that the decisive criterion should be the market in which the goods are destined, i.e., India. For determining whether the transaction was at arm's length, it is necessary to see the price at which the product would be purchased in India by an uncontrolled party. The Tribunal found that the CIT(A) erred in accepting the US Gulf FOB prices for benchmarking and held that India-specific prices should have been considered.

6. Application of +/- 5% Range for Determining ALP
The Tribunal acknowledged that the benefit of +/- 5% range under the proviso to Section 92C(2) should be considered if applicable. However, the Tribunal emphasized that the primary issue was the correct benchmarking methodology, which should be based on India-specific prices.

Conclusion:
The Tribunal set aside the CIT(A)'s order and restored the issue back to the TPO for re-adjudication. The TPO was directed to re-examine the issue afresh by considering India-specific prices for benchmarking and to provide the benefit of +/- 5% range if applicable. The appeals filed by the Revenue were allowed for statistical purposes.