2016 (12) TMI 1813 - AT - Income Tax

TP Adjustment - rejection of CUP as the most appropriate method - Comparable selection - selection of Petronet LNG Limited and Gas Authority of India Ltd. as comparables for RPM - HELD THAT - In consideration of the criteria prescribed by the Rules nature class of the services rendered and the availability coverage and reliability of data necessary and guidelines issued by the OECD in this regard inter alia RPM is considered was being the most appropriate method to determine the arm s length value of the transaction pertaining to purchase of LNG. The assessee and Indian Oil Bharat Petroleum ONGC and GAIL or for that purpose any other public sector undertaking cannot be said to be associated enterprises. In the cases of public sector companies even as all or majority of shareholdings may be by the Union or State Governments these companies for that reason alone cannot be said to be associated enterprises for the purposes of Section 92A. In view of this finding the issue regarding related party transactions ceases to hold good in law. Nothing on record to substantiate the claim of the learned Departmental Representative that the PLL was charging separate fees for regasification. In our considered view regasification is an integral part of assessee s trading activity as unpacking of a consignment to put the same in a saleable state and fit for transportation by the available mode. The process of regasification cannot be seen in isolation with the main activity carried on by the assessee. What has been sold by the assessee is regasified LNG (R-LNG) as is evident from the financial statements of the assessee. The business models of HLPL and PLL are similar in the sense that the entire cost whether it is a long term or a short term contract is passed on to the customer in India as no trader will keep the cost to itself including the foreign exchange fluctuation. To that extent leaned Departmental Representative indeed seems to have erred in observing that in the case of PLL the entire fuel cost including the exchange rate fluctuation is passed on to the customers whereas the same is not the case of HLPL as it is a full risk distributor. In any case as a plain look at the financial statements of PLL would show the PLL has booked in its profit and loss account foreign loss exchange loss separately to the tune of 33 crores approximately and thus it cannot be said that the PLL had passed on entire foreign exchange fluctuation risk to its customers. It has also been noted that sale to customers in India by both PLL as also the assesse is foreign currency (USD) denominated and therefore the foreign currency risk is a pass through costs for both HLPL and PLL to that extent. We agree that the mere fact that PLL also has long term arrangements for purchases of LNG it does not cease to be a valid comparable for this reason alone. As regards GAIL as a comparable As for the point that the GAIL is selling natural gas on administered prices this objection is found to be incorrect inasmuch asin response to the RTI application dated June 24 2013 it has been clarified that Government that it does not regulate / fix / control the prices of imported LNG. In any event even if GAIL is to be excluded from comparables it does not make any difference to the conclusion that the margin earned by the assessee are well within the comparable margin earned by PLL. As for the point that the GAIL is selling natural gas on administered prices this objection is found to be incorrect inasmuch asin response to the RTI application dated June 24 2013 it has been clarified that Government that it does not regulate / fix / control the prices of imported LNG. In any event even if GAIL is to be excluded from comparables it does not make any difference to the conclusion that the margin earned by the assessee are well within the comparable margin earned by PLL. We hold that the comparables adopted by the assessee are appropriate. There is a specific finding in the order of the Dispute Resolution Panel that in the light of this Tribunal s decision in the case of Liberty Agri Products 2011 (8) TMI 737 - ITAT CHENNAI even for the purposes of CUP the prices prevailing on the day of transaction can only be compared with the comparable uncontrolled prices prevailing on that day only and not on some other dates and that in none of the cases the TPO has used the prices prevailing on that particular day. This finding remains unchallenged and this principle has not been called into question by the appellant. Therefore even if CUP method is to be applied the impugned adjustment will have to be deleted anyway. Viewed thus the grievances raised in this appeal may be viewed as somewhat academic and of no practical consequence. However without any offence or prejudice to this line of reasoning we have dealt with the issue on merits and given our categorical findings on the same.

Summary

Issues Involved:
1. Rejection of Comparable Uncontrolled Price (CUP) method.
2. Selection of Petronet LNG Limited (PLL) and Gas Authority of India Ltd. (GAIL) as comparables for Resale Price Method (RPM).
3. Differences in Functions, Assets, and Risks (FAR) analysis between the assessee and the comparables.
4. Selection of RPM as the most appropriate method.
5. Comparability adjustments for different intensities of functions, use/non-use of certain assets, and assumption/non-assumption of certain risks.
6. Acceptance of Profit Level Indicator (PLI) for RPM without comparability adjustments.
7. Request to set aside the directions of the Dispute Resolution Panel (DRP) and restore the Transfer Pricing Officer (TPO)'s order.

Detailed Analysis:

1. Rejection of Comparable Uncontrolled Price (CUP) Method:
The DRP rejected the CUP method for benchmarking the LNG imports due to the high volatility of spot LNG prices. The Tribunal agreed, noting that the prices of LNG and crude oil, while moving in the same direction, do not have a direct formula for comparison. The Tribunal emphasized that the TPO's reliance on PLL's spot purchase prices, which were not in the public domain and obtained under section 133(6), was inappropriate. The Tribunal stated that the prices of LNG cannot be derived from crude oil prices, and the geographic differences between markets further complicate the use of CUP. Additionally, the Tribunal highlighted that the TPO's use of data from different dates invalidated the CUP method application.

2. Selection of Petronet LNG Limited (PLL) and Gas Authority of India Ltd. (GAIL) as Comparables for RPM:
The DRP directed the selection of PLL and GAIL as comparables, finding them functionally similar to the assessee. The Tribunal upheld this view, noting that both PLL and the assessee are engaged in similar activities, including the purchase of LNG, regasification, and resale of R-LNG. The Tribunal rejected the TPO's argument that PLL and GAIL were not suitable comparables due to their long-term contracts and government-administered prices, respectively.

3. Differences in Functions, Assets, and Risks (FAR) Analysis:
The TPO argued that the assessee's functions, assets, and risks differed significantly from those of PLL and GAIL. However, the DRP and the Tribunal found that the FAR analysis did not reveal substantial differences. The Tribunal noted that regasification is an integral part of the business model for both the assessee and PLL, and the foreign exchange risks were similarly managed. The Tribunal also rejected the TPO's claim that PLL's business model was low-risk due to pass-through costs, finding that PLL also bore foreign exchange risks.

4. Selection of RPM as the Most Appropriate Method:
The DRP and the Tribunal found RPM to be the most appropriate method for determining the arm's length price of the assessee's LNG imports. The Tribunal noted that RPM is suitable for transactions involving the purchase and resale of the same property or services. The Tribunal emphasized that RPM focuses on functional comparability and that the gross profit margin can be adjusted for differences in functions performed, risks assumed, and assets used.

5. Comparability Adjustments:
The TPO argued that suitable comparability adjustments were not made for differences in functions, assets, and risks. The Tribunal found that the TPO did not provide specific adjustments or demonstrate how these differences impacted the comparability. The Tribunal noted that economic adjustments could be made to account for such differences, but the TPO failed to suggest or implement any.

6. Acceptance of PLI for RPM:
The DRP accepted the PLI based on the gross profit margin per mmbtu for RPM, finding it appropriate for the assessee's business model. The Tribunal upheld this decision, noting that the PLI was justified based on the functions performed by the assessee as a distributor of LNG.

7. Request to Set Aside DRP Directions:
The Assessing Officer requested to set aside the DRP's directions and restore the TPO's order. The Tribunal dismissed this appeal, finding no merit in the grievances raised. The Tribunal emphasized that the DRP's directions were based on a thorough analysis of the facts and applicable legal principles.

Conclusion:
The Tribunal upheld the DRP's decision to reject the CUP method, select PLL and GAIL as comparables for RPM, and accept the PLI for RPM. The Tribunal found that the differences in functions, assets, and risks did not warrant the rejection of RPM or the comparables. The appeal by the Assessing Officer was dismissed, and the DRP's directions were affirmed.