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2017 (1) TMI 556 - AT - Income TaxTransfer pricing adjustment - ALP determination - import of natural gas - scope the term Person - associate enterprises - whether Present of India can be termed as associate person / companies - rejection of CUP (comparable uncontrolled price) as the most appropriate method - whether comparable uncontrolled price method vis- -vis resale price method, for the assessee s benchmarking imports of LNG from its AEs, was indeed more appropriate to the facts of this case? - Held that - What the TPO had suggested was the CUP method, but, for the detailed reasons set out earlier in this order, we have held that CUP method cannot be applied to the facts of this case. No method of determining ALP is perfect, but it is from these imperfect methods that we have to find out which is more appropriate a method. There is nothing on record or in the arguments of the learned Departmental Representative which can demonstrate to us as to why the RPM can be discarded and a more appropriate method of determining ALP can be adopted. Associate companies - scope of section 92A - Held that - the equity shareholding of the asseesse, even though in the name of the President of India, is held by the Union of India. The shares are held by the Union of India which is a sovereign. As for the President of India being treated as an artificial juridical person, as is contended by the learned Departmental Representative, we are unable to see any merits in this plea either. An artificial juridical person is a creature of law but the President of India is a creation of the constitution. If all the public sector undertakings are to be treated as associated enterprises , the inter se transactions between all the public sector undertakings will be subject to arm s length price determination- something which is seemingly quite incongruous and contrary to the scheme of the transfer pricing legislation. The assessee and Indian Oil, Bharat Petroleum, ONGC and GAIL, or, for that purpose, any other public sector undertaking, cannot be said to be associated enterprises. In the cases of public sector companies, even as all or majority of shareholdings may be by the Union or State Governments, these companies, for that reason alone, cannot be said to be associated enterprises for the purposes of Section 92A. In view of this finding, the issue regarding related party transactions ceases to hold good in law. Non suitability of comparable - Even under long term contracts, the prices of the LNG are not to remain static, as has been assumed by the learned Departmental Representative. This is also not in dispute that the PLL has purchased the LNG under long term arrangements as also by way of these spot deals. In any case, as is opined in the expert opinion filed by the assessee. It is, infact, a misnomer to refer to the short-term LNG trade as a spot market, and there is no spot market because no one is making a market, in the sense of providing liquidity and posting quotes in exchange for a buy-sell spread. As a matter of fact, as opined in the expert report, short-term trade is a collection of bilateral deals that may cover a single cargo to many cargoes, over period ranging from a single month to over a year. In this view of the matter, we agree that the mere fact that PLL also has long term arrangements for purchases of LNG, it does not cease to be a valid comparable for this reason alone. As regards GAIL as a comparable GAIL is selling natural gas on administered prices, this objection is found to be incorrect inasmuch asin response to the RTI application dated June 24, 2013, it has been clarified that Government that it does not regulate / fix / control the prices of imported LNG. In any event, even if GAIL is to be excluded from comparables, it does not make any difference to the conclusion that the margin earned by the assessee are well within the comparable margin earned by PLL. In view of the above discussions, as also bearing in mind entirety of the case, we hold that the comparables adopted by the assessee are appropriate. We may also add that there is a specific finding in the order of the Dispute Resolution Panel that in the light of this Tribunal s decision in the case of Liberty Agri Products (2011 (8) TMI 737 - ITAT, CHENNAI), even for the purposes of CUP, the prices prevailing on the day of transaction can only be compared with the comparable uncontrolled prices prevailing on that day only and not on some other dates, and that in none of the cases the TPO has used the prices prevailing on that particular day. This finding remains unchallenged and this principle has not been called into question by the appellant. Therefore, even if CUP method is to be applied, the impugned adjustment will have to be deleted anyway. Viewed thus, the grievances raised in this appeal may be viewed as somewhat academic and of no practical consequence. However, without any offence or prejudice to this line of reasoning, we have dealt with the issue on merits and given our categorical findings on the same. - Decided against the revenue.
Issues Involved:
1. Rejection of Comparable Uncontrolled Price (CUP) method. 2. Selection of Petronet LNG Limited (PLL) and Gas Authority of India Ltd (GAIL) as comparables for Resale Price Method (RPM). 3. Differences in Function, Asset, and Risk (FAR) analysis between the assessee and the comparables. 4. Selection of RPM as the most appropriate method. 5. Lack of comparability adjustments for differences in functions, asset usage, and risk assumptions. 6. Acceptance of Profit Level Indicator (PLI) without comparability adjustments. Detailed Analysis: 1. Rejection of Comparable Uncontrolled Price (CUP) method: The main issue was whether the CUP method was preferable over the RPM method for benchmarking the arm’s length price. The Tribunal noted that LNG is not sold in an open commodity market, making it difficult to identify comparable uncontrolled transactions. The TPO had used prices at which PLL imported LNG as CUP inputs, despite variations in dates and origins. The Tribunal found that the TPO's approach was flawed as it did not account for the volatility and daily fluctuations in LNG prices. The Tribunal upheld the DRP's view that CUP was not appropriate due to the high volatility in LNG spot market prices and the lack of comparable transactions on the same dates. 2. Selection of Petronet LNG Limited (PLL) and Gas Authority of India Ltd (GAIL) as comparables for RPM: The Tribunal agreed with the DRP that PLL and GAIL were appropriate comparables for RPM. Both companies were engaged in similar activities, including the purchase of LNG from overseas sellers, regasification, and resale in India. The Tribunal noted that the differences in long-term and spot trade did not significantly affect the comparability, as even PLL did not bifurcate profits from long-term and spot trades. The Tribunal also dismissed the TPO's objections regarding the functional differences between the assessee and the comparables. 3. Differences in Function, Asset, and Risk (FAR) analysis between the assessee and the comparables: The Tribunal found that the FAR analysis for the assessee and PLL were not significantly different. Both companies engaged in the purchase, regasification, and resale of LNG. The Tribunal noted that the process of regasification was an integral part of the business model and did not change the character of the transactions. The Tribunal also dismissed the TPO's argument that the assessee's low profit margins were due to high LNG import prices, noting that the assessee's business model and market conditions justified the margins. 4. Selection of RPM as the most appropriate method: The Tribunal upheld the DRP's decision that RPM was the most suitable method for benchmarking the arm’s length price. The Tribunal noted that RPM focuses on functional comparability and that the gross profit margin remunerates a sales company for performing marketing and selling functions. The Tribunal found that the assessee's use of RPM was justified, given the nature of its business and the availability of reliable data for comparables. 5. Lack of comparability adjustments for differences in functions, asset usage, and risk assumptions: The Tribunal found that the TPO had not made any comparability adjustments for differences in functions, asset usage, and risk assumptions between the assessee and the comparables. The Tribunal noted that such adjustments, if required, should have been performed on the gross profit margins of the uncontrolled transactions. The Tribunal upheld the DRP's decision that no comparability adjustments were necessary, as the business models and functions performed by the assessee and the comparables were sufficiently similar. 6. Acceptance of Profit Level Indicator (PLI) without comparability adjustments: The Tribunal upheld the DRP's acceptance of the PLI used by the assessee. The Tribunal noted that the assessee had justified the use of gross profit margin per mmbtu as the appropriate PLI, given its role as a distributor and the nature of its transactions. The Tribunal found that the TPO had not provided any valid reasons to reject the PLI used by the assessee or to suggest an alternative PLI. Conclusion: The Tribunal dismissed the appeal, upholding the DRP's decision to reject the CUP method and accept the RPM method with PLL and GAIL as comparables. The Tribunal found that the TPO's objections were not substantiated and that the assessee's approach to benchmarking the arm’s length price was appropriate. The Tribunal also noted that the use of secret comparables by the TPO was not permissible and that the comparability adjustments suggested by the TPO were not justified.
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