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2018 (1) TMI 1723 - AT - Income TaxTP Adjustment - comparable selection - assessee had adopted TNMM as the most appropriate method to determine the arm s length nature of its IT's - DRP observed that Resale Price Method (RPM) would be appropriate to determine as to whether the AE transactions were at ALP, that the mean of GP realised in the non-AE transactions would be appropriate benchmark to examine arm s length price of each of the AE transactions, that GP realised on non-AE exports would be an appropriate internal cup for the AE exports - HELD THAT - The method adopted by the TPO was faulty from the very beginning. The TIPS data contained price of iron ore exported from Vishakhpatanm port for two categories- i. e. having iron content 62% and having iron content 62% or less. The assessee had exported iron ores to its AE's having FE contents of 63. 01%, 63. 38%, 60. 16% and 50. 60%. Export details clearly show that in three consignments FE content was less than 62% and only in on consignment FE was more than 62%. Even in three consignments having FE content less than 62% in one case iron ore content is 50. 60%. There is no need to quote any authority to hold that market value of the ore having 50. 60% FE would be less than the ore having 62% FE. Besides, price of iron ore, like any other exported commodity, is highly sensitive and has wide fluctuation depending upon demand and supply. Considering these peculiar facts, we are of the opinion that the DRP had rightly held that TIPS data was not a reliable tool to determine the ALP of the IT's of the assessee. TP provisions try to bring parity between the controlled and uncontrolled IT. s of similar nature. For that matter some methods have been incorporated in the IT Rules, 1962. The method is procedural part of the TP exercise, but the substantive law is Chapter X of the Act. What has to be seen in such proceedings that IT. s are valued in a reason ably fair manner. TP provisions are not based on some arithmetic or scientific formulas that would always give similar results in similar conditions. They find place in statute to take care of various and different situations and circumstance of dynamic business world. The method adopted by the DRP, in our opinion, was quite appropriate considering the peculiarities of the facts of the case. It did not result in deleting the entire adjustment proposed by the TPO/AO-it resulted in lower adjustment. AO had used the TIPS data but it had so many lacunas. The DRP, therefore, after obtaining details of all the seven AE and non-AE transactions, directed the AO to follow a particular method. Thus, there is no basic difference in the approach of the TPO and DRP. Certain modifacations, were made by it and we hold that same were required to decide the ALP. We would also like to mention that the cases relied upon by the DR are not relevant to decide the issue before us. Considering the above, we confirm the directions of the DRP and hold that same are not suffering from any legal or factual infirmity. Effective ground of appeal, filed by the AO, is decided against him.
Issues Involved:
1. Adoption of the most appropriate method to benchmark International Transactions (ITs). 2. Reliability of the TIPS data for determining the Arm's Length Price (ALP). 3. Application of the Resale Price Method (RPM) by the Dispute Resolution Panel (DRP). Detailed Analysis: 1. Adoption of the Most Appropriate Method to Benchmark ITs: The core issue in the appeal was the selection of the most appropriate method to benchmark the International Transactions (ITs) between the assessee and its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) initially found that the assessee had adopted the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) of its ITs, identifying 14 comparables with an arithmetic mean margin of 1.56% and claimed an operating margin on cost at 3.47%. However, the TPO rejected the TNMM and directed the assessee to apply the Comparable Uncontrolled Price (CUP) method, collecting data from TIPS software. The DRP, upon review, held that the TNMM was not the correct method due to the lack of strict functional similarity and the inappropriate data used by the assessee. The DRP concluded that the Resale Price Method (RPM) would be more appropriate to determine whether the AE transactions were at ALP. 2. Reliability of the TIPS Data for Determining the ALP: The TPO used the TIPS data to benchmark the ITs, but the DRP found several deficiencies in this data. The DRP noted that the TIPS database classified iron ore into three categories without specifying the exact iron content, making it unreliable for comparison. It highlighted that the quality of iron ore significantly affects its price, and the absence of details regarding the actual iron content made it unfair to compare the prices. The DRP also pointed out that the TIPS data did not capture all export transactions and was incomplete and unreliable. Consequently, the DRP held that the TIPS data was not a reliable tool to determine the ALP of the ITs of the assessee. 3. Application of the Resale Price Method (RPM) by the DRP: The DRP directed the use of RPM to benchmark the AE transactions, suggesting that the Gross Profit (GP) realized in non-AE transactions would be an appropriate benchmark. It instructed the assessee to furnish details of all AE and non-AE transactions, including purchase and sale prices, to compute the GP earned in such transactions. The DRP computed the transaction-wise GP and found that the GP in non-AE transactions varied from 64.07% to 13.24%, with a mean of 31.40%, while the GP in AE transactions ranged between 35.20% to 19.51%. The DRP directed the TPO/AO to verify the purchase and sale prices and rates of each consignment of iron ore to compute the GP rate in each transaction. The methodology adopted by the DRP was deemed appropriate as it aimed to ensure that the transactions with AEs were at par with those of non-AEs, thereby ensuring fair valuation of ITs. Conclusion: The Tribunal upheld the DRP's directions, confirming that the RPM was the most appropriate method to benchmark the AE transactions, given the peculiarities of the case. It emphasized that the TP provisions aim to ensure that transactions with AEs are valued fairly, comparing them with similar uncontrolled transactions to prevent profit shifting and tax evasion. The Tribunal found no legal or factual infirmity in the DRP's directions and dismissed the appeal filed by the Assessing Officer. Order Pronounced: The appeal filed by the Assessing Officer stands dismissed. Order pronounced in the open court on 19th January 2018.
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