2012 (9) TMI 615 - AT - Income Tax

Transfer Pricing u/s 92C Calculation of Arm Length Price Assessee is an exporter 5 types of minerals In 3 types of minerals TPO apply CUP (Comparable Uncontrolled Price) method instead of TNMM (Transaction Net Margin Method) method applied by assessee AO issue draft assessment order by making addition to income Same was also upheld by DRP Held that - TPO had not made suitable study of the case such as has not made any external comparison of the prices, adopted the special sale price attributable to non-Associates Enterprises on small quantity by instead of AE s for bulk and regular sales, ignored the factors like additional capital and risk involved, difference in FOB and CIF value, not considered quality variation in different consignments and the corresponding variations reflected in the pricing of exports. - ALP addition deleted - Therefore, appeal decides in favour of assessee

Issues Involved:
1. Determination of Arm's Length Price (ALP) in transfer pricing transactions.
2. Methodology adopted for transfer pricing analysis.
3. Comparisons made by the Transfer Pricing Officer (TPO).
4. Role and decision of the Dispute Resolution Panel (DRP).
5. Quality and quantity variations in exported minerals.
6. Differences between Free on Board (FOB) and Cost, Insurance, and Freight (CIF) terms.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) in Transfer Pricing Transactions:
The primary issue in this case revolves around the determination of the ALP for the assessee's international transactions with its Associated Enterprise (AE) in Dubai. The TPO suggested an addition of Rs. 3,90,47,364/- to the declared prices, which was contested by the assessee.

2. Methodology Adopted for Transfer Pricing Analysis:
The assessee used the Transactional Net Margin Method (TNMM) for certain minerals, while the TPO substituted this with the Comparable Uncontrolled Price (CUP) method for all transactions. The assessee argued that TNMM was more relevant for Bentonite Lumps and Bentonite Powder due to the nature of these transactions.

3. Comparisons Made by the Transfer Pricing Officer (TPO):
The TPO's comparison methodology was criticized for being flawed. The TPO compared the assessee's sales to its AE with small quantity sales to non-AEs, ignoring the volume and quality differences. For instance, the TPO compared a sale of 40 MT of Bentonite Lumps to a non-AE with a sale of 23,500 MT to the AE, which was deemed inappropriate due to the significant difference in quantities.

4. Role and Decision of the Dispute Resolution Panel (DRP):
The DRP confirmed the TPO's additions without adequately addressing the assessee's arguments. The DRP's order was criticized for not applying its mind to the merits of the case and for merely upholding the TPO's recommendations without proper justification.

5. Quality and Quantity Variations in Exported Minerals:
The assessee highlighted that the TPO failed to consider the variations in quality and quantity of the minerals exported. Different consignments had different chemical compositions, affecting their pricing. The TPO's analysis did not account for these variations, leading to erroneous conclusions.

6. Differences Between Free on Board (FOB) and Cost, Insurance, and Freight (CIF) Terms:
The TPO overlooked the differences between FOB and CIF terms while comparing prices. The assessee's sales to the AE were on FOB terms, while sales to non-AEs were on CIF terms. Adjustments for freight and insurance were not made, leading to an unfair comparison.

Conclusion:
The Tribunal found that the TPO's transfer pricing study was fundamentally flawed and far from reality. The TPO did not make any external comparisons, ignored the differences between FOB and CIF terms, and failed to consider quality variations. Consequently, the Tribunal deleted the ALP addition of Rs. 3,90,47,634/- and allowed the appeal filed by the assessee.

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