2015 (5) TMI 302 - AT - Income Tax

Transfer pricing adjustment - addition of 29, 70, 31, 153/- made to the returned income on account of determination of the arm s length price of the international transactions entered into by the assessee with its associated enterprises - TPO reject the external CUP data based on the price quotes of MMSPL - In the present case the international transactions in question relate to transaction of import of oils by the assessee from its associated enterprises - plea of the assessee has been that the tested transaction of import of oil from associated enterprises has also been undertaken with third parties - Held that - Assessee has purchased Soyabean and sunflower oils from its associated enterprises as well as from third parties. Apart therefrom it is also a peculiar fact in the present case that the product being transacted is a commodity which is recognized for trading in Commodities Exchanges. For instance the Chicago Board of Trade (CBOT) which is an internationally recognized and accepted commodity exchange based in Chicago in USA facilitates trading in commodities inter-alia vegetable oils also. Therefore the quotations appearing on such exchanges would reflect the prices at which the commodities are being traded in the market place. The price publication of Oil World which was also pressed into service by the assessee would be reflective of the prices prevailing in the market at a particular point of time. Undoubtedly the rate quotations of CBOT and Oil World can be said to be a data published by independent organizations which reflect the prevailing market rates. These prices have been adopted by the assessee as comparable uncontrolled transaction prices and the tested transactions have been benchmarked vis- -vis such prices. The stand of the TPO in rejecting the aforesaid data as being mere quotations and not actual transactions in our view is not justified. It is evident that the Hon ble High Court of Gujarat in Commissioner of Income Tax Versus Adani Wilmar Limited 2014 (4) TMI 563 - GUJARAT HIGH COURT held that the price publications are also relevant material for the purposes of carrying out the comparability analysis in the course of application of CUP method; so however such price publications ought to be authentic and reliable. It is also noteworthy that the Hon ble High Court of Gujarat was considering an objection of the Transfer Pricing Officer which is similar to that being raised before us which is to the effect that the price publication of Oil World only reflect quotations and not actual transactions. The said argument did not find favour with the Hon ble High Court of Gujarat and it noted that the reliability and authenticity of the material stood established. Infact the decision of the Pune Bench of the Tribunal in the case of ACIT Vs. MSS India (P) Ltd. (2009 (5) TMI 600 - ITAT PUNE-A ) relied upon by the Ld.CIT-DR does not help the Revenue on this aspect and in any case the said decision is not an authority for the proposition that price contained in the Broker Note based on a commodity exchange is not a valid CUP data. Thus the rejection by the TPO of the price publication of Oil World and the prices quoted by MMSPL which are based on the rates quoted on CBOT Chicago is not justified. No reason for the income tax authorities to have rejected the plea of the assessee that the stated values of the purchase of Soyabean and sunflower oils from the associated enterprises are at their arm s length price. Thus we hereby direct the Assessing Officer to accept the stated value of the international transactions of import of oils from associated enterprises to be at an arm s length price. Thus the addition of 29, 70, 31, 153/- is directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment of Rs. 29,70,31,153.
2. Rejection of Comparable Uncontrolled Price (CUP) method.
3. Non-consideration of additional external CUP, internal CUP, and other data.
4. Inappropriate consideration of Transactional Net Margin Method (TNMM) as the most appropriate method.
5. Inappropriate search process while applying TNMM.
6. Selection of inappropriate comparable companies.
7. Inappropriate adjustment using TNMM on the turnover of the entire oil division.
8. Not considering the adjusted margin of the appellant.
9. Inappropriate calculation of the operating margins of selected comparable companies.
10. Non-consideration of set-off of brought forward losses and unabsorbed depreciation.
11. Applicability of +/-5% range.
12. Erroneous levy of penalty under section 271AA.
13. Erroneous levy of penalty under section 271(1)(c).
14. Erroneous levy of interest under sections 234B and 234C.

Detailed Analysis:

1. Transfer Pricing Adjustment of Rs. 29,70,31,153:
The primary issue in dispute is the addition of Rs. 29,70,31,153 made to the returned income due to the determination of the arm's length price (ALP) of international transactions between the assessee and its associated enterprises (AEs). The assessee argued that the adjustment was unjustified as it had used the Comparable Uncontrolled Price (CUP) method, which was rejected by the Transfer Pricing Officer (TPO) in favor of the Transactional Net Margin Method (TNMM).

2. Rejection of Comparable Uncontrolled Price (CUP) Method:
The TPO rejected the CUP method adopted by the assessee, stating that the broker price notes and other data provided by the assessee did not qualify as comparable uncontrolled transactions. The TPO emphasized that the CUP method requires actual transaction prices rather than quotations or broker notes.

3. Non-Consideration of Additional External CUP, Internal CUP, and Other Data:
The assessee provided additional external CUP data, including broker price notes from Murji Meghan Services Pvt. Ltd. (MMSPL), price publications from Oil World, and sample quotes from Sunvin group. The TPO rejected these data sources, arguing that they were not comparable uncontrolled transactions and had differences in terms and conditions.

4. Inappropriate Consideration of TNMM as the Most Appropriate Method:
The TPO adopted the TNMM method at the entity level sales to determine the ALP of the international transactions, which the assessee argued was inappropriate. The assessee contended that the CUP method was more direct and reliable for benchmarking the price paid for the import of oils.

5. Inappropriate Search Process While Applying TNMM:
The assessee raised concerns about the search process used by the TPO for identifying comparable companies under TNMM, including the exclusive use of the 'Prowess' database, non-sharing of detailed accept-reject analysis, use of non-contemporaneous data, inappropriate application of turnover filter, and the use of financial data for only the assessment year 2006-07.

6. Selection of Inappropriate Comparable Companies:
The assessee argued that the TPO selected inappropriate companies as comparables, which did not match the business profile and operations of the assessee.

7. Inappropriate Adjustment Using TNMM on the Turnover of the Entire Oil Division:
The TPO's adjustment using TNMM on the turnover of the entire oil division of the assessee was contested. The assessee argued that such an adjustment was inappropriate and did not reflect the true arm's length price of the international transactions.

8. Not Considering the Adjusted Margin of the Appellant:
The assessee's plea to consider its adjusted margin was rejected by the TPO, which the assessee argued was an error.

9. Inappropriate Calculation of the Operating Margins of Selected Comparable Companies:
The assessee contended that the TPO inappropriately computed the operating margins of the selected comparable companies, which affected the determination of the arm's length price.

10. Non-Consideration of Set-Off of Brought Forward Losses and Unabsorbed Depreciation:
The TPO did not consider the brought forward losses and unabsorbed depreciation amounting to Rs. 50,85,49,369 while determining the total income of the assessee for AY 2006-07, resulting in an assessed income of Rs. 20,00,42,071.

11. Applicability of +/-5% Range:
The assessee argued that the TPO erred in not applying the proviso to section 92C of the Act, which allows a benefit of lower variation of 5 percent in determining the arm's length price.

12. Erroneous Levy of Penalty under Section 271AA:
The initiation of penalty proceedings under section 271AA was contested by the assessee, stating that it had maintained and furnished all required documentation for assessing the value of international transactions.

13. Erroneous Levy of Penalty under Section 271(1)(c):
The assessee argued that if the transfer pricing adjustment was sustained, the proposed levy of penalty under section 271(1)(c) was erroneous, as the adjustment was due to a difference of opinion on the application of the most appropriate method.

14. Erroneous Levy of Interest under Sections 234B and 234C:
The assessee contended that the proposed levy of interest under sections 234B and 234C was erroneous, as the interest was based on the addition due to transfer pricing adjustment, which was a matter of difference of opinion.

Conclusion:
The Tribunal found merit in the assessee's arguments, particularly regarding the rejection of the CUP method and the reliability of the broker price notes and other data provided by the assessee. The Tribunal directed the Assessing Officer to accept the stated value of the international transactions of import of oils from associated enterprises as being at arm's length price, thereby deleting the addition of Rs. 29,70,31,153. Other grounds raised by the assessee were rendered academic in view of the main issue being resolved in favor of the assessee. The appeal was allowed.