9911796707
TMI Blog2016 (4) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... d, and the DRP further erred in confirming the addition relating to payment of royalty under Section 92CA(3) of the Act by disregarding the documentation maintained under Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules') and not appreciating the factual details, submissions and various documentary evidences demonstrating benefits to the Appellant under the technical services agreement (against which the royalty is paid). 3.2 The Appellant submits that the TPO, the AO and the DRP failed to appreciate that: (i) Non-acceptance of the arm's length price of the aforesaid transaction creates an absurd situation where the Appellant is expected to receive the latest technological advancement and upgradation free of cost. Hence, considering the arm's length value of the transaction to be NIL is improper. (ii) Measuring payment of royalty based on the company's profitability would be inappropriate and has to be instead based on the technical expertise afforded to the Appellant from the AE and the benefit derived under such technical support. (iii) The aforesaid payment was essential since it was for the supply of know-how, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following, manner, namely:- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, 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; _________________________________________________________________________ It is thus clear that for application of the CUP Method, a comparable uncontrolled transaction or a number of comparable uncontrolled transactions need to be identified and the price charged in such comparable uncontrolled transaction/transactions is the Arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbined together and TNMM would have been applied on aggregated basis at entity level, there would have still been adjustments due to margins of the assessee being lower than the average margin of the comparable companies. Accordingly, the contention of the assessee that royally payment made by it to its AE is at arm's length basis is hereby rejected." 6. This is how the Assessing officer has made the impugned arm's length price adjustment, aggrieved by which assessee is in appeal before us. 7. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We find that the Transfer Pricing Officer did note, and was apparently swayed by the fact of, assessee's making losses. It was for this reason that the payment of royalty was held to be not at an arm's length price, as is implicit in the Transfer Pricing Officer's observation to the effect that "having considered the submission made by the assessee in respect of payment of royalty, the position of the assessee cannot be accepted due to the fact that the assessee has incurred an operating loss during the year under consideration". The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding/confirming the action of the TPO in rejecting the without prejudice contention of the Appellant to consider the correct margin of alleged comparable companies computed based on the annual report available in the public domain. 4.4 The Appellant prays that the Transfer Pricing adjustment made under Section 92CA(3) of the Act in relation to import of product PTOP is erroneous, unwarranted and be deleted." 10. So far as this ground of appeal is concerned, the relevant material facts are like this. During the relevant previous year, the assessee imported a relatively small quantity of 84 MT of Para Tertiary Octyl Phenol (PTOP) from it's associated enterprise based in South Korea, namely Schenectady Korea Limited. These purchases were made at average CIF value of US $ 1,425 per MT, which converted into FOB value, worked out to US $ 1,337.83 per MT. The total value of his import was Rs. 53,26,020/-. In the course of proceedings before the Transfer Pricing Officer, value of this transaction was ascertained at NIL, and the justification for this determination was as follows :- "(c) In respect of PTOP imported by the assessee during the year from its AE, the assessee has not pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing differences noticed :- i. Difference in the market (An Indian market cannot he compared with the Chinese Market) ii. Differences in the geographical area (In one case, the product was sold in India and in the other case, the product was sold in China) iii. Difference in the quantity sold (560 MT sold to Chinese party and 84 MT sold to Indian Party) iv. Difference in the period over which the sale was made by the AE. (Only 2 instances of sale during one year for the assessee, whereas, five instances of sale over the year for the Chinese party) Moreover, the terms and conditions of the sale are also not available for both these transactions." 12. The DRP, however, restricted the ALP adjustment to Rs. 8,28,196/- by adopting TNMM, and observed, inter alia, as follows :- "4.9.5 However, we accept the submission of the assessee that the adjustment made by the TPO on the entire amount paid by the assessee to its AE seems to be adhoc, arbitrary. However, it was also seen that the method of the assessee to adopt CUP as the most appropriate method and accordingly benchmarking the transactions also suffer from inherent problems. Accordingly, we therefore decide to bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which does not even account for one percent of total transactions. In the light of all these factors, and particularly bearing in mind smallness of the amount involved, in our considered view, it was not a fit case for rejection of CUP method, as employed by the assessee. We, therefore, deem it fit and proper to uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of Rs. 8,28,196/- 15. Ground no.4 is thus allowed. 16. In ground no.5, the assessee has raised the following grievance: "Ground No. 5 - Addition under Section 92CA(3) of the Act in respect of export of the product IBB to the associated enterprise, amounting to Rs. 41,19,424 5.1 On the facts and in the circumstances of the case and in law, the TPO and the AO erred, and the DRP further erred in confirming the addition relating to the export of the product PTOP amounting to Rs. 41,19,424 to its AE, under Section 92CA(3) of the Act by not appreciating/disregarding the benchmarking analysis, comparable transactions selected and the detailed submissions and the documentary evidence supplied by the Appellant. 5.2 The Appellant prays that the Transfer Pricing adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the order of the Transfer Pricing Officer has considered the issues in detail and I agree with the order of the TPO." 5.5 In this regard, the assessee's A.R. submitted that the AO has not provided any reasons for rejecting the additional submission made by the assessee before him in respect of export of IBB. According to the assessee, it had submitted details pertaining to all the exports of IBB made out of India during AY 2006-07 by way of its submissions dated 22 December 2009 to AO. Based on the CUP data, it is evident that the international transaction pertaining to import of IBB by the assessee from its AC is at arm's length from an Indian transfer pricing perspective. . 5.6 The A.R. also submitted that the AO was wrong in observing that the order of the TPO has considered the issues in detail. The additional CUP information submitted by the assessee in its submission dated 22 December 7009 to the AO could obviously not have been considered by the TPO as the same was not submitted to the TPO during the course of transfer pricing assessment. Hence, the AO ought to have considered the submission of the assessee and should have passed the order based on the merits of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been brought on record by the assessee in this case. Moreover, it is also observed that the assessee has incurred a substantial loss in this transaction of export of IBB which evidences the fact the assessee has not even tried to cover up the costs of production incurred by it. In view of the facts mentioned above, the contention of the assessee is hereby rejected." 18. The assessee is aggrieved and is in further appeal before us. 19. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 20. We find that IBB (i.e. Isobutyl Benzene) is a generic chemical product and so far as prices of generic products are concerned, CUP, on the basis of database built on inputs like customs data, is reasonably acceptable. While on this aspect of the matter, we may refer to the following observations made by a co-ordinate bench in the case of Tilda Riceland Pvt. Ltd. vs. ACIT [(2014) 64 SOT 61 (Delhi)] :- "11. We have noted that the information inputs given by the Tips Software, on the facts of this case, are inputs with regard to the information publicly available with the customs departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, in our considered view, the Transfer Pricing Officer was clearly in error in rejecting the information inputs received from the Tips Software and the database made available by the said entity. The DRP laid so much of emphasis on the observation that the assessee has " not been able to rebut the argument of the TPO that Rule 10D(3) does not allow the use of private databases" but did not note of the glaringly illustrative, rather than exhaustive, character of the documents listed in the said rule. As a quasi-judicial authority, and while pursing the goal of justice, one cannot remain at the mercy of the wisdom of representatives of the parties appearing before such an authority; it is bounden duty of every quasijudicial authority to appreciate the scope of the legal provisions and apply them in letter and in spirit. We uphold the grievance of the assessee to the extent the authorities below have indeed erred in summarily rejecting assessee's reliance on the database, with respect to information publicly available with customs department at various ports, compiled by a private entity. 13. As regards learned DRP's additional observation that, " Further, in a commod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CUP Method are great enough to warrant a significant effort to apply the method as not to be influenced by minor variations in the fine points about product quality". Viewed thus, even if there be some minor variations in the quality even under the elaborate categorization of rice varieties, such variations, which do not materially affect the prices of uncontrolled transactions due to large size of comparables and the same geographical consumption market being covered by the comparables, can be ignored. 14. As for rejection of CUP method on the ground that prices of uncontrolled transactions often fluctuate on weekly and even daily basis. The TPO himself has noted in his order, the assessee did not have any contractual arrangement and these were market driven prices on which the exports to AEs took place. It is also important to bear in mind the fact that the assessee has taken average of a quarter so as to ensure that day to day variations in prices do not distort the comparability. Neither there is any specific objection to this averaging, nor has the TPO suggested any better alternative to this approach. In our humble understanding, this method does provide for a reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical approach in selecting the method for determination of ALP. The OECD has abandoned its earlier position that transactional profit methods may be used "to approximate arm's length conditions when traditional transactional methods cannot be reliably applied alone, or exceptionally cannot be applied at all". In sharp contrast to the said observation, 2010 OECD Guidelines, in para 2.4, recognize that "there are situations when transactional profit methods are found to be more suitable (vis- a-vis traditional transactional methods)" such as, in a situation, "where each of the party makes a unique contribution in relation to controlled transaction, or where the parties engage in highly integrated activities". This change in OECD approach is quite in line with Indian transfer pricing legislation which requires selection of most appropriate method rather than the method being picked up in the order of priority. To this extent, the approach of OECD and Indian transfer pricing legislation is now quite in harmony with each other. 63. It will, however, be stretching the things too far to suggest that in the 2010 version of OECD Guidelines, all the methods of determining the ALP have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in a particular fact situation, and unless another method is proven to be more reliable a method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. The reason is simple. When AEs enter into a transaction at such conditions in commercial and financial terms, which are different from commercial and financial terms imposed in comparable transaction between independent enterprises, the differences in these two sets of conditions in financial and commercial terms are attributed to interrelationship between the AEs, and it is this impact of inter-relationship between the AEs that is sought to be neutralized by the transfer pricing regulations. As long as CUP method can be reliably applied on the facts of a case, it does offer most direct method of neutralizing the impact of interrelationship between AEs on the price at which the transactions have been entered into by such AEs. 16. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the ALP determination under CUP Method on the basis of 'Daily Export Port Data - April 2007- March 2008', by adopting quarterly averages, was wrongly ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
