2015 (4) TMI 42 - AT - Income Tax

Transfer pricing adjustment - DRP excluding M/s. Ashapura Clay Tech Ltd. from the list of comparables for the purposes of Transfer Pricing Analysis resulted in the deletion of transfer pricing Adjustment of ₹ 2,55,49,852 worked out by the TPO - Held that - Although we agree with the contention of the Learned Departmental Representative that M/s.Ashapura Claytech Ltd. cannot be excluded from the list of comparables only on the ground of high/abnormal profits, we find on comparative analysis of the functional profile of the said company that the same is not functionally comparable with the assessee company. It is observed that the assessee company is purchasing Grey Bentonite Clay/Fullers Earth Lump extracted from the mines and selling the same almost in the same form, after removing impurities and moisture in specified lumps of different sizes. It is also involved in manual breaking of lumps using hammer in order to reduce the lumps into required sizes. All this minor processing work being done by the assessee does not change the basic nature and character of the product and what is ultimately sold by the assessee company remains to be the same commercial product, viz. Grey Bentonite Clay/Fullers Earth Lump. On the other hand, M/s Ashapura Claytech Ltd. is using Grey Bentonite Clay/Fuller s Earth Lump as raw material and after carrying out different operations, such as crushing, milling, sieving, etc., it is producing Bentonite/Bio-green Granules which is highly efficient and economic material for use in agricultural pesticides, catlitter and floor absorbents. All its operations to convert Grey Bentonite Clay/Fullers Earth Lump into Bentonite/Biogreen Granules are carried out with the help of different machinery at different stages and what is ultimately produced, namely Bentonite/Biogreen Granules is a new product which is commercially different from the Grey Bentonite Clay/Fullers Earth Lump used as raw material. The activities carried on by the assessee company as well as the M/s.Ashapura Claytech Ltd. thus clearly show that the assessee company is engaged only in trading of Grey Bentonite Clay/Fullers Earth Lump, whereas M/s Ashapura Claytech Ltd. is engaged in the manufacturing of Bentonite Biogreen Granules, where Grey Bentonite Clay/Fullers Earth Lump is used as raw material. Thus find ourselves in agreement with the Dispute Resolution Panel that the product/function of M/s. Ashapura Claytech Ltd. is not similar with that of the assessee company and the same therefore, cannot be taken as a comparable for the purpose of TP Analysis, in order to determine the ALP of the international transactions of the assessee company with its AE - Decided against revenue.

Summary

Issues Involved:
1. Exclusion of M/s. Ashapura Clay Tech Ltd. from the list of comparables for Transfer Pricing Analysis.

Issue-wise Detailed Analysis:

1. Exclusion of M/s. Ashapura Clay Tech Ltd. from the list of comparables for Transfer Pricing Analysis:

The solitary issue raised by the Revenue in this appeal is that the learned DRP has erred in excluding M/s. Ashapura Clay Tech Ltd. from the list of comparables for the purposes of Transfer Pricing Analysis, in order to determine the Arm's Length Price of the international transactions of the assessee with its AE which resulted in the deletion of transfer pricing Adjustment of Rs. 2,55,49,852 worked out by the TPO.

The assessee company, a subsidiary of Premier bleaching Earth Sdn Bhd. Malaysia, engaged in trading of Betonite/Fullers Earth Lumps, entered into international transactions with its Associated Enterprises (AE). The Transfer Pricing Officer (TPO), after reviewing the TP Study report, selected four comparables including M/s. Ashapura Claytech Ltd. The inclusion of M/s. Ashapura Claytech Ltd. was objected by the assessee on the grounds of functional differences and abnormal/super profits.

The TPO did not find merit in the objections raised by the assessee and included M/s. Ashapura Claytech Ltd. as comparable, stating that Bentonite was a natural product requiring only processing, and the activities of both companies were similar. The TPO also overruled the objection regarding abnormal profits, relying on the decision of the Mumbai Bench of ITAT in the case of Exxon Mobil Com. India Pvt. Ltd.

When the addition on account of TP adjustment was proposed, the assessee filed objections before the Dispute Resolution Panel (DRP), reiterating that M/s. Ashapura Claytech Ltd. was engaged in manufacturing activities, unlike the assessee which was involved in trading. The DRP found merit in the assessee's submissions and directed the exclusion of M/s. Ashapura Claytech Ltd. from the list of comparables, citing financial, product, and economic comparability issues.

Aggrieved by the DRP's direction, the Department appealed to the Tribunal. The Departmental Representative argued that abnormal profit should not be the basis for exclusion and that the product and activities of both companies were similar. The assessee's counsel countered by highlighting the functional differences, stating that the assessee was engaged in trading, whereas M/s. Ashapura Claytech Ltd. was involved in manufacturing with substantial plant and machinery.

The Tribunal, after considering the rival submissions, agreed with the DRP that M/s. Ashapura Claytech Ltd. was not functionally comparable with the assessee. The Tribunal noted that the assessee was engaged in minor processing and trading of Grey Bentonite Clay/Fullers Earth Lump, whereas M/s. Ashapura Claytech Ltd. was involved in manufacturing Bentonite/Biogreen Granules, a commercially different product. Consequently, the Tribunal dismissed the Revenue's appeal and upheld the exclusion of M/s. Ashapura Claytech Ltd. from the list of comparables.

Order pronounced in the court on 11th March, 2015