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TMI Blog2016 (7) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity of hearing. In view of this, we set aside ground of the appeal of the assessee holding that ld AO and TPO are directed to first benchmark the international transaction of the assessee by applying the CUP method. In the event the assessee is unable to support its international transactions by that method then the international transactions of the assessee may be benchmarked by adopting other methods including the sixth method after granting assessee adequate opportunity of hearing. - ITA No. 3155/Del/2013, ITA No. 3132/Del/2013, ITA No. 6470/Del/2012 - - - Dated:- 5-5-2016 - I. C. SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Sh. Aseem Chawla, Adv Ms. Priyanka Mongia, CA For The Revenue : Sh. H. K. Chaudhary, CIT DR ORDER PER PRASHANT MAHARISHI, A. M. ITA no 3132 3155 /Del /2013 A Y 2007-08 1. Captioned cross appeals are filed by the rival parties against the order for AY 2007-08 dated 18.03.2013 of the ld CIT (A)-XX, New Delhi. 2. The assessee has raised the following grounds of appeal for the Assessment Year 2007-08:- 1. That on the facts and circumstances of the case and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE with unrelated parties cannot be used as CUP data, considering that the same do not represent transaction value.] 2.4.1 That on the facts and circumstances of the case and in law, the Hon'ble CIT (A)/Ld. TPO have erred in holding that contracts entered into by the AE with unrelated parties do not represent transaction value and that sufficient opportunity was not made available to the Appellant to furnish documentary evidence to substantiate the same. 2.5. That on the facts of the case and in law, the Hon'ble CIT(A) has erred in holding that publications of repute, given credence in the business, available within the public domain are not sufficient to benchmark the international transactions entered into by the Appellant with its AE. 3. That on the facts and circumstances of the case, the Hon'ble CIT (A) has wrongly applied Transactional Net Margin Method ( TNMM ) as the MAM for determination of the Arm's Length Price ( ALP ) in respect of the international transactions entered into by the Appellant with its AE. 3.1. That on the facts and circumstances of the case, the Ld. TPO's finding that application of CUP by the assessee is a covert atte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) has erred in law and on facts in not appreciating the facts that the Transfer Pricing Officer (TPO) has specifically mentioned in his order that the company namely M/s. Kotak Ginning and Pressing Inds Ltd has shown that more than 90% turnover is from cotton trading and hence, predominately a trading company; 3. The ld CIT(A) has erred in law and on facts inn not appreciating the fact that it is segment level profitability which has been compared with the appropriate comparables and not the profitability from the international transactions alone. 4. The assessee is a private limited company formed by the name of Andagro Foods Pvt. Ltd. and was 100% subsidiary of M/s. Noble Resources and Trading India Pvt. Ltd. Later on this company merged with M/s. Noble Resources and Trading India Pvt. Ltd. w.e.f. 01.01.2006. It is primarily involved in the business of trading of bulk agro commodities involving exports of soyabean meal, seasame seed and export of iron ore and chemicals. During the year, it has also imported crude soyabean oil, coal, crude, palm oil and pulses. For A Y 2007-08, assessee company filed its return of income on 30.10.2007 declaring loss of ₹ 82975690/- an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM 9 Payment of expenses 29815250 CUP TNMM 6. The ld TPO of total international transactions of ₹ 735285145/- computed arm‟s length margin @ 3.71% thereof and determined ALP at ₹ 27279079/-. Against this the margin shown by the assessee was computed applying PLI at (-) ₹ 21470326/- and proposed an adjustment of ₹ 48749405/-. The ld Assessing Officer accordingly determined total loss of ₹ 22,30,09,240/- and passed an assessment order u/s 143(3) on 22.12.2010. Against this assessee preferred appeal before ld CIT (A), who in turn upheld the order of ld. Transfer Pricing Officer with regard to most appropriate method as well as comparables. However, ld CIT(A) adjudicating ground No. 7 of the appeal has held exclusion of Kotak Ginning and Pressing Industries ltd. from the list of comparables and restricting adjustment to the proportion of international transactions only. Against the order of the ld CIT (A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed or paid or would have been charged or paid for the same was similar transactions under similar circumstances shall be accepted for the sixth method u/s 92C(1)(f). He submitted that though it is effective from 01.04.2012 , applicable from AY 2012-13 it is retrospective in effect from the time when transfer pricing provisions introduced in India. For this proposition, he relied on the decision of coordinate bench in Toll Global Forwarding India Pvt. Ltd. Vs. DCIT 51 Taxmann.com 342 and Geodis Overseas Pvt. Ltd. Vs. DCIT 53 Taxmann.com 362. Regarding the acceptability of quotations and external CUP data submitted by the assessee he relied on the decision of Hon‟ble Gujarat High Court in CIT Vs. Adani Wilmar Ltd.[ Tax Appeal No.240 of 2014 dated 07.04.2014] wherein Hon‟ble High Court rejected the objection of the TPO where the transactions were benchmarked relying on quotations. Hon‟ble High Court considered the provisions of Rule 10D (3)(c) of the Income Tax Rules, 1962. Therefore, his argument was that CUP method should be applied for these transactions and for comparability analysis, the quotation and other evidences supplied by the assessee should be acceptable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable transactions. At the same time, it is relevant to observe that if complete data of such comparable uncontrolled transaction is not available, then the Revenue is at liberty to discard the CUP method and resort to any other suitable method . 5. Adverting to the facts of the instant case, it is seen that the details of its export transactions of Soyabean meal to its AEs is available on pages 64 65 of the paper book. Major transactions are of export to AE in Singapore and few transactions are of export to its AE in Indonesia. Page 135 of the paper book is a copy of Invoice dated 21.3.2006 pursuant to contract dated 2.3.2006 in which price of ₹ 193 per MT has been charged. The assessee also supplied similar products to its non-AE in Singapore, a copy of which is available on page 287 of the paper book. Similarly, the details regarding export of Sesame seed made to its AEs is available on page 66 of the paper book, for which the ld. AR contended that though no actual comparable uncontrolled transactions was available but the assessee could show the price actually charged by comparables. As regards the export of Iron ore of its AEs, the detail of which is available o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less to say the assessee will be allowed a reasonable opportunity of being heard in such de-novo proceedings and will also have full right to place any fresh material in its support. [underlined by us] 13. The ld DR could not controvert the above decision as far as applicability of CUP method in the impugned transactions during the year as well as in AY 2006-07, in fact he agreed that CUP method is the most appropriate method in the trading transactions. Therefore respectfully following the decision of the coordinate bench, we hold that the CUP method shall be the most appropriate method for benchmarking the trading transactions with its AE in this year too. 14. Now the issue comes that whether the quotations‟ in the form of external CUP and custom data of third party shipping bills, brokers rates, SOPA Rates etc whether these can be considered as the reliable comparable data or not and whether they satisfy the requirement of Rule 10D (3)(c) of the Income Tax Rules, 1962. The coordinate bench in the assessee‟s own case has rejected that quotations etc. or the prices as per some publications for benchmarking the assessee‟s international transactions unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id not have any statutory authority. The second objection was that Oil World was an independent organisation registered in Germany and had nothing to do with the oil prices prevailing in Malaysia. He relied on Rule 10D)(3)(a) of the Income tax Rules (hereinafter referred to as 'the Rules'), to place heavy reliance on the price list of the MPOB. 4. The assessee carried the matter in appeal. The Commissioner of Income tax (CIT) (Appeals) discarded both the objections of the TPO. Referring to section 92C of the Income tax Act, 1961 (hereinafter referred to as 'the Act') and Rule 10(D)(3) of the Rules, he found that the quotations of the Oil World could not have been discarded. He observed as under : 4.4 I have also gone through the few publications of Oil World which is independent organization established in 1958 in Germany. This provides the independent forecasting services for oil seeds, oils and beans and providing primary information and professional analysis. The oil world compiles information of various countries in the oil sector. This publishes daily, monthly and yearly journals in oil sector. This compiles information of various countries and, therefore, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction shall keep and maintain the following information and documents, namely : (a) xxx xxx xxx (b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them; (c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted; 7. In terms of clause (c) of subsection (3) of Rule 10D of the Rules, these price publications as long as the same were authentic and reliable, would be relevant materials. In this background, mere base of the organisation would be of no consequence. Further, though the price quotations of the MPOB would be entitled to its due and full weightage and respect, would not necessarily mean that the other quotations would lose their significance, unless, of course, it is pointed out that such quotations lack basis. In this context , we may recall that the only objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from governmental price-setting agencies, where such indexes are used as a reference by unrelated parties to determine prices in transactions between them . 2.16B Under the CUP method, the arm‟s length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price. Quoted commodity prices generally reflect the agreement between independent buyers and sellers in the market on the price for a specific type and amount of commodity, traded under specific conditions at a certain point in time . A relevant factor in determining the appropriateness of using the quoted price for a specific commodity is the extent to which the quoted price is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled transactions comparable to the controlled transaction. Accordingly, depending on the facts and circumstances of each case, quoted prices can be considered as a reference for pricing commodity transactions between associated enterprises . Taxpayers and tax administrations should be consistent in their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.16E A particularly relevant factor for commodity transactions determined by reference to the quoted price is the pricing date, which refers to the specific time, date or time period (e.g. a specified range of dates over which an average price is determined) selected by the parties to determine the price for commodity transactions. Where the taxpayer can provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled commodity transaction at the time the transaction was entered into (e.g. proposals and acceptances, contracts or registered contracts, or other documents setting out the terms of the arrangements may constitute reliable evidence) and this is consistent with the actual conduct of the parties or with other facts of the case, in accordance with the guidance in Section D of Chapter I on accurately delineating the actual transaction, tax administrations should determine the price for the commodity transaction by reference to the pricing date agreed by the associated enterprises. If the pricing date specified in any written agreement between the associated enterprises is inconsistent with the actual conduct of the parties or with other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so as to achieve its laudable objectives without any collateral damage. 23. The lawmakers have also not been oblivious of this compelling need of a certain degree of flexibility in the methods of determining arm‟s length price. Central Board of Direct Taxes, vide notification dated 23rd May 2012, has introduced, in addition to Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM) and Transactional Net Margin Method (TNMM), the following additional method: any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between nonassociated (i.e. independent) enterprises, under similar circumstances considering all the relevant facts . 24. Very significantly, the above method, which is only method prescribed under any other method‟ under section 92C(1)(f) read with rule 10B(1)(f) , is not a residual method in the sense that it is not a condition precedent for the application of this method that all other methods, i.e. methods set out in section 92C (1)(a)to 92C(1)(e) and as elabora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction, the price so paid can be said to be arm‟s length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression price which .would have been charged on paid is used in rule 10BA, dealing with this method, in this method the place of price charged or paid , as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm‟s length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle, meets the test of arm‟s length price determination under rule 10BA as well. 26. No doubt, rule 10B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a constitutional bench of Hon‟ble Supreme Court, is that the operation of rule 10BA, which confers the benefit of an additional method of ascertaining arm‟s length price and, inter alia, relaxes the rigour of CUP method, can only be retrospective in effect. In our considered view, therefore, rule 10BA is to be held as effective from 1st April 2002, i.e. the time when transfer pricing provisions were introduced in India. 18. In view of above, we hold that ; i. The CUP is the most appropriate method to be applied for the international transactions of import and export of traded goods of the assessee. ii. The assessee is required to support the international transaction by authentic documents which may also include quoted prices. iii. the assessee may support its international transactions benchmarking analysis by the other method u/s 92C(1)(f) of the act which is held to be retrospective by the decision of the coordinate bench. iv. In the event assessee fails to adduce and support its transactions under CUP method or under the sixth method then ld TPO and AO are entitled to resort to other method of benchmarking and comparability analysis after granting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Import of coal 503027489 Commission received on sale of coal 594811 Commission received on sale of cotton 17375651 Other transactions CPM 77033955 25. Ld TPO vide its order dated 05.10.2011 rejected the TP study of the assessee and applying the TNMM method as the most appropriate method and adopting OP/TC as the profit level indicator, taking 9 comparables computed the arm‟s length price of the transaction and proposed an adjustment u/s 92CA of the act of ₹ 2887388546/- . Based on this ld Assessing Officer passed draft assessment order on 08.11.2011 computing the total income of ₹ 289493953/-. Against which the assessee filed objection before Dispute Resolution Panel on 14.12.2011 which were disposed by ld Dispute Resolution Panel vide its direction dated 03.08.2012 u/s 144C(5) of the Income Tax Act. The Ld DRP has held that CUP method is not appropriate method in the assessee‟s own case and TNMM would capture the business realities much better as it would take into account the broader bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the case the Ld.AO/Ld. TPO/Hon'ble DRP has erred in not taking in consideration adjustments on account of Inco-terms made by Appellant. 3.4. That on the facts of the case the Ld. AO/Ld. TPO/DRP has erred in providing a restricted meaning to the items enumerated in Rule 10D(3) of the Rules, to hold that only actual fructified transactions be adopted as a comparable uncontrolled transaction for the purposes of determining the ALP. 4. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/DRP has grossly erred in applying the Transactional Net Margin Method ( TNMM ) as the MAM for the purpose of determining the ALP of international transactions. 5. That on the facts of the case the search process and methodology adopted by the Ld. TPO, in applying TNMM is flawed and contrary to law. 5.1 That on the facts of the case and in law, the Ld. TPO has applied different formula for calculating Profit Level Indicator ( PLI ) in case of comparable companies as compared to formula used in case of the Appellant. 5.2 That on the facts of the case the methodology followed by the Ld. TPO in compiling the set of comparables for the purposes of applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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