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TMI Blog2014 (9) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions entered into by the Appellant pertaining to import of raw materials, export of finished goods and drop shipment commission rejecting the analysis undertaken by the Appellant in the Transfer Pricing Study Report to determine the arm's length price for its international transactions. 2. Non-consideration of the aggregation approach adopted by the appellant in the Transfer Pricing Study Report. 2.1 The learned DCIT erred in rejecting the "aggregation" approach followed by the appellant for three of its international transactions relating to import of raw materials, export of finished goods, and import of packing materials which were group under 'manufacturing activity'. 2.2 The learned DCIT erred on the facts and in circumstances of the case and in law in rejecting aggregation approach used for 'manufacturing activity' without giving any reasonable justification for rejection. 2.3 The learned DCIT erred on the facts and in circumstances of the case and in law in rejecting Transaction Net Margin Method (TNMM) as the most appropriate method without giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (CUP) method as the most appropriate Method. 5.2 The learned DCIT erred in comparing controlled transactions which is clearly not as per TP regulations as well as OECD guidelines. 5.3 The learned DCIT ought to have considered that reduction of royalty from drop shipment commission by one of the associated enterprises is tax neutral transaction. 6. Transfer pricing adjustment without giving benefit of +/- 5 per cent as available under proviso to section 92C(2) of the Act. The learned DCIT erred on the facts and in circumstances of the case and in law in making the transfer pricing adjustment from the arm's length price without giving the benefit of the option available to the Appellant under proviso to section 92C(2) of the Act of adopting as arm's length price, a price which varies by not more than 5 per cent from the arm's length price. 7. Initiation of penalty proceedings under section 271 (1) (c) of the Act on account of transfer pricing adjustment. The learned DCIT erred on the facts and in law in proposing to initiate penal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Transfer Pricing Study conducted by the assessee, it aggregated the aforesaid international transactions into two broad segments for the purposes of benchmarking it with the comparables. The international transactions comprising of import of raw materials & packing materials, and export of finished goods were aggregated under Manufacturing segment, and the residual international transactions on account of the import of finished goods for re-sale and receipts by way of drop shipment commission, were grouped together under Trading segment. The assessee chose to aggregate the transactions into the respective segments for the reason that the transactions of import of raw materials & packing materials, and export of finished goods were relating to the manufacturing functions whereas the import of finished goods for re-sale and receipts by way of drop shipment commission related to trading activities. For both the segments, assessee chose the Transactional Net Margin (TNM) method as the most appropriate method and the operating profit/costs was taken as the Profit Level Indicator (i.e. 'PLI'). After comparing the assessee's PLI in both the segments with those of the exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to benchmark its international transactions. According to the learned counsel, the TPO erred in rejecting the aggregation approach adopted by the assessee for three of its international transactions relating to import of raw materials, export of finished goods and import of packing raw materials and benchmarking it by applying the TNM method. Justifying the aggregation approach, it has been explained that the three activities of the assessee are closely linked to the manufacturing process. According to learned counsel, the TPO has not given any justifiable reasons for rejection of the aggregation approach and has merely stated that each of the transaction is different in its nature and scope. The learned counsel pointed out that the imported raw material and the packing material are used in the manufacturing process and the finished goods are exported or sold in the domestic market and therefore the international transactions comprising of import of raw material & packing material, and export of finished goods were aggregated for the purposes of carrying out the comparability analysis under the TNM method. The learned counsel referred to the provisions of rule 10C of the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT-DR, the instant was not one such case. 9. Firstly, we may consider the addition of Rs. 71,01,810/- with respect to the international transactions of export of finished goods to the associated enterprises which has been made by the TPO by invoking CUP method after rejecting the TNM method adopted by the assessee. In para 8 (A)(iii) of the order, the TPO noticed that assessee exported goods to its associated enterprises, namely, Henkel Korea, Henkel China, Henkel Thailand and Henkel Singapore amounting to Rs. 17,80,512/-. In respect of exports to Henkel Singapore, it was found that it was made at the same price which was charged from the third parties; and, therefore no adjustment was made by the TPO. Similarly, with regard to exports to Henkel Thailand, it was noticed that there was no third party sale of the same product and therefore no adjustment was made. Thus, the TPO took up for consideration the export of finished goods to Henkel Korea and Henkel China of Rs. 17,04,702/-. The goods exported to the said associated enterprises were sold to third parties in India also. In para 8(A)(vii) of his order, the TPO has tabulated the details of the products sold, their tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic third parties, while on export sales to the associated enterprises there is no such risk. The associated enterprises, who buy goods from the assessee, bear this risk as they in-turn sell to end-customers in their respective countries. Further, the difference in geographical location has also been highlighted inasmuch as sales to third parties are only in the domestic market whereas the associated enterprises are located in China, Singapore, Thailand and Korea. It is pointed out that such geographical differences have a material impact on the pricing of goods but no reliable data was available to make reasonably accurate adjustments in this regard; even there are differences in the level of market between the exports made to the associated enterprises on one hand and sales made to the domestic third parties. It is pointed out that the associated enterprises, who buy goods from assessee further sell to dealers or the end customers. It is pointed out that the price varies with the buyers place in the value chain. In nutshell, the plea of the assessee is that there are differences between the uncontrolled and controlled transactions which have a material impact on the price that wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of finished goods to the associated enterprises is sought to be justified. 12. We have carefully considered the rival submissions. As regards the method to be adopted for comparability analysis, at the outset we may say that the approach of the TPO and the DRP in this regard cannot be faulted. In our considered opinion, having regard to the facts and circumstances of the case, including the fact that internal comparable uncontrolled transactions are available, the adoption of CUP method as the most appropriate method for the purposes of comparability analysis, is liable to be upheld. The learned counsel for the assessee as well as the learned CIT(DR) have referred to certain decisions of the Tribunal in this regard in support of their respective stands. We are not inclined to discuss each of them as the adoption of the most appropriate method for the purposes of comparability analysis is determined by the peculiar facts and circumstances of each case. So however, in this regard, we may make a brief reference to the decision of the Mumbai Bench of the Tribunal in the case of Serdia Pharmaceuticals (India) (P.) Ltd. v. ACIT, (2011) 136 TTJ 129 (Mumbai) wherein the Bench was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... differences, in order to facilitate a meaningful comparison between an uncontrolled transaction and the tested international transaction. There is nothing in the phraseology of Rule 10B(3) of the rules to suggest that the adjustment to an uncontrolled transaction is permissible only under the TNM method and not to the other methods enumerated in Rule 10B(1) of the rules. Therefore, the plea of the learned CIT(DR) that the implications of sub-rules (2) and (3) of rule 10B of the Rules are only in relation to the comparability analysis to be carried out in terms of TNM method and not in terms of CUP method, in our view, is not manifested by the legislative intent. Therefore, even in relation to the present situation whereby the comparability analysis has been carried out by adopting the CUP method, the adjustments to the uncontrolled comparable transaction which are permissible and justifiable in law and on facts of the case, in order to facilitate comparability of the international transaction with the uncontrolled comparable transactions deserve to be allowed. 14. No doubt, the onus shall be on the assessee to justify suitable adjustments to the comparable uncontrolled transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be scaled down to Rs. 36,91,536/- as against Rs. 71,01,810/- determined by the TPO. Accordingly, assessee succeeds partly. 17. Now, we may consider the international transactions of receipt of drop shipment commission by the assessee of Rs. 62,26,352/-. In this connection, the TPO noticed that assessee had received such commission on services given to its associated enterprises, viz. Henkel Malaysia, Henkel USA and Henkel Singapore as per details in para 9.2 of his order. The assessee benchmarked the said international transactions on the basis of TNM method whereas the TPO has selected the CUP method as the most appropriate method. The assessee earns drop-shipment commission as per the commission agreements. The TPO noticed that the Henkel Malaysia was deducting 7% of the commission amount as per understanding between assessee and Henkel Malaysia for certain additional functions, and no such deduction was made by other associated enterprises, namely, Henkel USA and Henkel Singapore from whom assessee was also earning drop-shipment commission. Therefore, by considering the agreement with Henkel USA, which had no clause for the 7% deduction, the TPO concluded that the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;" 21. The aforesaid three steps would reveal that the action of the TPO in the present case is contrary to the prescription contained in sub-clause (i) of clause (a) of sub-rule (1) of rule 10B of the Rules. Ostensibly, in terms of sub- clause (i), the price charged or paid in a "comparable uncontrolled transaction" is to be identified for the purpose of determining the arm's length price of the international transaction being tested. It is starkly evident that in the present case, the comparable transaction picked-up by the TPO, namely, agreement between assessee and Henkel USA is a transaction between two related/associated enterprises and therefore it is a controlled transaction and not a "uncontrolled transaction". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss reasons. In this connection, a tabulation pointing out the business reasons, the frequency of imports and the timing differences has been furnished which is an under :- Name of the Product Frequency of Import from AE Frequency of Import from Non-AE Business Reasons Azo Dyestuff/C.I. Part -I - solvent Once (27.12.2006) Thrice Air freight is a major component of cost in the price compared. Cabosil Ts - 720 (10 Lb Bag) Shortage in local market from Dec. 2006 to March 2007 hence imported from AE The business reason for import from AE is due to shortage and quality problems with the local source hence it was imported from AE. Cap/Noz 25/10/100 G New Design Only in Month of June 2006 later taken from 3rd party when local vendor identified Once local supplied was located it stopped the imports and purchased locally during the year under consideration. Isotridecanol Ethoxylated Marlipal (Gale - 12) Once (04.08.2006) 10 times The business reason for this import was business exigency and hence was purchased from China plant by air shipment. Silic a Microcrystalline (Novacite 1250) Once (19.05.2006) 8 times The business reason for the import was business exigency. &n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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