2014 (4) TMI 621 - AT - Income Tax

Transfer pricing adjustment Purchase of raw materials from AE - Determination of ALP CUP method appropriate or not Held that - The TPO has wrongly rejected the quotations from Asian Metal - Asian Metal is one of the leading Marketing Researcher - Asian Metal is one such website which is used for obtaining metal prices - TPO considered the price of Molybdenum Oxide which is a final product to that of raw material purchased by the assessee - Fundamentally, the comparison itself is wrong - assessee also justified the prices paid on the basis of quotations and adjustments being made for the Ex-works quotation to the CIF quotations of the assessee - Thus, there is an internal CUP in the form of actual price paid to third parties by the Holding company with mark-up and it also justified by external CUP by way of Asian Metal Quotations with due adjustments - Relying upon Destination of the World (Subcontinent)(P.) Ltd. Vs. ACIT, Circle 10(1), New Delhi 2011 (7) TMI 576 - ITAT, DELHI - in the first instance, attempt should be made to determine arm s length price of controlled transactions by comparing same with internal uncontrolled transactions undertaken in same or similar economic scenario. No attempt has been made by TPO to make FAR analysis and give necessary adjustments required to make them comparable. Even the calculations made by the TPO are found to be wrong by the DRP - DRP s working in determining the ALP amount is also not correct - Once the amount of imported material is taken in its entirety for its comparison, why there is a requirement to add further amount for the amount utilised in the production is not explained thus, selection of CUP is the appropriate method and the assessee has both details for internal CUP as well as external CUP - CUP method should have been adopted as most appropriate method for comparing purchase price of the raw materials of Molybdenum acquired by the assessee from AE - Assessee justified the price paid by way of internal CUP in relation to actual price paid to third parties by M/s. KTC Korea and the mark-up invoice wise and also compared with reference to the external CUP in relation to Asian Metal Quotations thus, the matter is remitted back to the TPO to examine the assessee s contention and for fresh adjudication Decided in favour of Assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment of Rs. 5,45,18,174/- for international transactions.
2. Rejection of the Comparable Uncontrolled Price (CUP) method.
3. Selection of Transactional Net Margin Method (TNMM) and comparables.
4. Calculation of the Arm's Length Price (ALP).
5. Application of the (+) or (-) 5% variation in ALP determination.

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The core issue pertains to the transfer pricing adjustment of Rs. 5,45,18,174/- made by the Assessing Officer (A.O.) based on the calculations provided by the Disputes Resolution Panel (DRP) in respect of international transactions for the purchase of raw materials worth Rs. 17.24 crores from an Associated Enterprise (AE). The assessee's company, which is 100% owned by M/s. KTC Korea, engaged in manufacturing and trading, filed a return admitting a loss of Rs. 1,50,18,120/- for the assessment year 2007-2008.

2. Rejection of the Comparable Uncontrolled Price (CUP) Method:
The assessee relied on the CUP method, justifying the price paid using both internal CUP (third-party transactions from whom KTC Korea purchased) and external CUP (quotations from Asian Metal Market). The A.O. rejected the CUP method on several grounds:
(a) Lack of geographical details and contracting parties' information.
(b) Unverifiable terms of trade (CIF or FOB basis).
(c) Use of average prices instead of transaction-specific prices.
(d) Significant differences in molybdenum quality and content.

3. Selection of Transactional Net Margin Method (TNMM) and Comparables:
The Transfer Pricing Officer (TPO) selected TNMM as the method and chose 10 comparable companies under "Ferro Alloys," determining an average operating margin of 11.37% on sales and 14.67% on cost. Given the assessee's negative operating margin of (-)19.53%, an adjustment of Rs. 7.39 crores was proposed. The DRP upheld the TPO's objections to the CUP method and selected TNMM but reduced the adjustment to Rs. 5,45,18,174/- after further analysis.

4. Calculation of the Arm's Length Price (ALP):
The assessee objected to the rejection of the CUP method and the selection of comparables, arguing that the companies chosen were functionally different and did not process molybdenum. The assessee also contested the calculation of ALP, arguing that the TPO wrongly selected the price of Molybdenum Oxide instead of Molybdenum Concentrate Ore and used incorrect data points. The assessee provided invoices showing that the raw material was purchased from Chile and marked up by KTC Korea, arguing that the adjustment should be limited to Rs. 1,67,23,290/-.

5. Application of the (+) or (-) 5% Variation:
The assessee raised the issue of applying the (+) or (-) 5% variation once the ALP was determined. The A.O./TPO was directed to consider the provisions of Sec. 92 C(2) while determining the ALP.

Conclusion:
The tribunal concluded that the CUP method is the most appropriate method for this case, supported by both internal and external CUPs. The TPO's rejection of the CUP method and the selection of TNMM were found to be incorrect. The tribunal directed the TPO to re-examine the transactions using the CUP method, considering the internal CUP (price paid to third parties by KTC Korea) and external CUP (Asian Metal Quotations) with necessary adjustments. The issue was restored to the TPO for fresh analysis, and the appeal was allowed for statistical purposes. The tribunal also directed the A.O./TPO to consider the (+) or (-) 5% variation while determining the ALP.