2010 (7) TMI 520 - AT - Income Tax

Arm s Length Price - Scrutiny - CUP or TNMM method - The assessee itself admits that there are no transactions after July 2003 and that the assessee continues to incur freight & clearing charges - As per News Article dated January 23 2003 in The Financial Express and Press Articles on crop failure during the years 2002 and 2003 again available in the public domain the monsoon failure in 2002 coupled with 33% deficiency in post-monsoon rains over the country led to crop failure - the operating gross profit margin earned from the Global Trading Division was better than last year and price charged for Niger Seeds was also better - It is also evident that prices charged to 3M US were higher than market price or ALP - Therefore it cannot be held that price charged was not at arm s length. - Decided in the favour of the assessee

Issues Involved:
1. Deletion of Transfer Pricing Adjustments.
2. Gross margin comparison and undercharging of exports.
3. Verification of details submitted by the assessee.
4. Increase in administrative and other costs.

Issue-wise Detailed Analysis:

1. Deletion of Transfer Pricing Adjustments:
The CIT(A) deleted the additions of Rs. 52,78,324 made by the Assessing Officer (AO) on account of Transfer Pricing Adjustments. The AO had adopted the Arm's Length Price (ALP) determined by the Transfer Pricing Officer (TPO), who rejected the comparables selected by the assessee and considered new comparables under the Transactional Net Margin Method (TNMM). The CIT(A) found merit in the assessee's argument that the TPO and AO erred in not considering the economic analysis and rejecting the comparables identified by the assessee.

2. Gross Margin Comparison and Undercharging of Exports:
The revenue contended that the lower gross margin of the assessee compared to the comparables indicated undercharging of exports to the Associated Enterprise (AE). The CIT(A) observed that the turnover reduction was due to crop failure and increased freight costs. The CIT(A) applied the Comparable Uncontrolled Price (CUP) method based on the average price of Niger Seeds reported by the Commission for Agricultural Costs and Prices, concluding that the operating margin of the taxpayer was higher than the average operating margin of the comparables.

3. Verification of Details Submitted by the Assessee:
The revenue argued that the CIT(A) accepted the assessee's arguments without allowing the Department to verify the details. The assessee countered that the information provided, such as the Report of the Commission for Agricultural Costs and Prices and news articles on crop failure, was publicly available and had been submitted to the Department in January 2010. The CIT(A) found that the Department had adequate time to review these documents and did not challenge the information provided.

4. Increase in Administrative and Other Costs:
The revenue claimed that the assessee did not explain the increase in administrative and other costs. The CIT(A) noted that the costs were due to the winding down and closure of the Global Trading Division, which resulted in non-operating expenses like terminating supply contracts and bad debts. The CIT(A) found that the prices charged to the AE were higher than the market price or ALP, indicating that the transactions were at arm's length.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the operating gross profit margin from the Global Trading Division was better than the previous year, and the prices charged for Niger Seeds were higher than the market price. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal.

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