2017 (3) TMI 1178 - AT - Income Tax

Computation of T.P adjustments - Held that - According to ld.A.R, Lubrizol is procuring raw materials at lower cost as Lubrizol is a JV promoted by M/s.Indian Oil Corporation ( IOCL)., and M/s.Chevron Oronite Company LLC USA. IOCL has given better discount in Lube Oil price/MT to Lubrizol, which is not available to the assessee. In our opinion, if it is reflected in the financial statement of Lubrizol, it is appropriate to give credit to the same and computation of T.P adjustments thereafter while determining the ALP. Accordingly we remit the issue to the file of AO for reconsideration and give proper adjustments on account of raw materials cost of Lubrizol and mineral oil. This issue is remitted to the file of AO for fresh consideration. Regarding Tolling fee for ZINC, it was submitted that Lubrizol toll had their own Zinc and on other hand, the assessee entered into sub contract agreement with UPL Ltd. in Gujarat for making Zinc. Therefore the cost of Zinc in the case of assessee is higher compared to the cost incurred by the Lubrizol towards the Zinc. In our opinion, if the details of cost of procurement of Zinc by tolling, the same by Lubrizol is available and if the AO finds that the cost price of the Zinc incurred by the Lubrizol is lesser as compared to the assessee s case, then the suitable adjustments to be made while determining the ALP. Accordingly, this issue is also remitted to the file of AO for fresh consideration. It is needless to say that opportunity of hearing to be given to assessee by AO/TPO before deciding the above issues. Regarding transportation cost, it is submitted that the assessee incurred additional cost for transportation from Gujarat to Chennai whereas the cost of transportation in case of Lubrizol is less. However, we find that the assessee has not able to establish that the cost of transportation in case of Lubrizol is lesser than the assessee and Lubrizol is selling its goods only in local and thus arguments of assessee cannot be upheld. This ground is rejected.

Summary

Issues:
Downward adjustment to Transfer Pricing in two assessment years.

Analysis:
The appeals were filed by the Assessee against the orders of the Commissioner of Income Tax for the assessment years 2009-10 and 2010-11. The common ground in both appeals was the downward adjustment to Transfer Pricing. The Assessee, a joint venture engaged in the manufacture and sale of lube additives, contested the adjustments made by the Transfer Pricing Officer (TPO) based on the TNMM Method and benchmarking against a comparable company, M/s. Lubrizol India Pvt. Ltd. The Assessee raised concerns regarding three adjustments: Lube Oil/Base oil/Mineral oil price, ZINC Tolling Fee, and Transportation cost.

The Assessee argued that the comparison with Lubrizol was not appropriate due to significant differences in capital base, product mix, and market presence. The Assessee highlighted disparities in net worth, product range, export sales, and margins between the two companies. The Assessee contended that adjustments should be made for the cost of procurement of raw materials, tolling fee for Zinc, and transportation costs to reflect a fair comparison with Lubrizol.

The Department, however, maintained that Lubrizol was a comparable company and objected to the selective nature of the Assessee's requested adjustments. The Department questioned the Assessee's assumptions and lack of detailed cross-comparison with Lubrizol, especially concerning depreciation and transportation costs. The Department argued that without credible data analysis, the Assessee's contentions were not acceptable.

Upon hearing both parties, the Tribunal remitted the issues of raw material costs and tolling fee for Zinc back to the Assessing Officer for reconsideration. The Tribunal directed the AO to make appropriate adjustments based on the raw material costs and Zinc procurement details of Lubrizol. However, the Tribunal rejected the Assessee's argument regarding transportation costs, finding insufficient evidence to support the claim that Lubrizol's transportation costs were lower. The appeals were partly allowed for statistical purposes.

In conclusion, the Tribunal's decision highlighted the importance of accurate comparability analysis in Transfer Pricing matters. The case underscores the need for detailed scrutiny and proper adjustments to ensure a fair determination of Arm's Length Price (ALP) in international transactions.