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TMI Blog2016 (7) TMI 249X X X X Extracts X X X X X X X X Extracts X X X X ..... lication of CUP method is available in public domain has not been disputed by the Revenue. It is an undisputed position as well that crucial factor for determining the appropriateness of the method to be applied are the availability and reliability of the data. In view of these material facts, we come to the conclusion that CUP is the most appropriate method in order to benchmark the transaction pertaining to purchase of DAP Fertilizers and direct the learned TPO to apply the same for the benchmarking the transaction in question. In view of the above findings, the alternative plea of the Learned AR that the comparable chosen by the learned TPO are not at all the right comparable as these entities are engaged in manufacturing and sale of the product and not in the trading of the product as the assessee is, does not need consideration - ITA No. 5901/Del/2010 - - - Dated:- 11-5-2016 - SHRI I.C. SUDHIR AND SHRI PRASHANT MAHARISHI For The Assessee : Shri GC Srivastava, Adv. For The Department : Shri Amrendra Kumar, CIT(DR) ORDER PER I.C. SUDHIR: JUDICIAL MEMBER The assessee has questioned order of the authorities below on the following grounds: 1. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment control and regulations and hence any transfer pricing method targeting the net profitability would not be justified. (b)Selecting dissimilar companies as comparable, to the appellant and arbitrarily concluding that the all the companies had similar products and similar subsidy schemes as that of the appellant. 8. That on the facts and in the circumstances of the case and in law, the Ld. A.O./Ld. TPO/ Ld. DRP erred in denying the benefit of 5% margin allowed under the Proviso to Section 92C(2) of the Act by relying on an amendment applicable only from 1.04.2009 (and not applicable to the relevant assessment year 2006-07). 9. On the facts and circumstances of the case, the Ld. DRP has erred in not examining the validity of initiation of penalty proceedings under sec. 271(1)(c). 2. Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon. 3. The grounds raised involve mainly on three issues. Firstly, validity of addition of ₹ 30,99,75,553 by recomputing the arm s length price of the international transactions under sec. 92 of the Income-tax Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Profit Margin 3 Provision of Support Services 1,248,307 Cost Plus Method (CPM) Gross Profit Margin 4 Corporate IT Recharge 2,165,378 N.A. N.A. 5 Dispatch Earnings 11,378,684 N.A. N.A. 6 Distribution Support 69,866,037 N.A. N.A. 7 Ocean Freight Savings 77,790,257 N.A. N.A. 8 Reimbursement of Expenses 18,417,172 N.A. N.A. 9 Interest on Extended Credit Period 6,369,098 CUP N.A. Total value of International Transactions 6,372,754,007 The Appellant had undertaken a transactional analysis and benchmarked the above transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ussed above, the main international transaction undertaken by the Appellant, during the year, was import of fertilizers. The Appellant imported DAP fertilizer from its AEs and resold the same in India at the price fixed by the GOI. Based on the functional, asset and risk profile of theAppellant, Comparable Uncontrolled Price ( CUP ) was selected as the Most Appropriate Method for establishing the arm s length nature of its international transactions relating to import of DAP fertilizer. The above methodology of the application of CUP as the most appropriate method has been duly accepted by Hon ble ITAT in AY 2005-06 in the Appellant s own case. In the application of CUP method, the Appellant has used the prices of DAP fertilizers as published in Fertecon Price Service Report (hereinafter referred to as Fertecon report ) . Besides the price data, this report also provides freight rates for transport of goods between various locations including US Gulf India. (page 503 of the Paper Book) Fertecon report is a report published by Fertecon Limited which provides prices at which the DAP fertilizer is traded internationally. The data provided by Fertecon is widely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rive at the arm s length price of the purchase of DAP. On the other hand, the TPO had used India CFR price (as mentioned in the Fertecon report) i n order to arrive at the arm s length price of the purchase of DAP. i. US Gulf FOB prices indicate the Free On Board ( FOB ) prices for DAP fertilizers for the goods exported from US Gulf region ii. India CFR prices indicate an average of purchase price of DAP from different parts of the world plus and average of freight to purchase DAP e) The Appellant wishes to submit that during the current year even if the TPO s methodology of last year is applied i.e. the arm s length price of the above transaction is determined by using India CFR prices (as per Fertecon reports) even then the Appellant s transaction would be at arm s length. f) During the current year, TPO has changed his methodology of benchmarking the transaction of purchase of DAP by applying Transaction Net Margin Method (TNMM) as compared to CUP method in the previous year. g) For all subsequent years, i.e. from AY 2007-08 to AY 20102-13, the TPO has accepted CUP as the most appropriate method to benchmark the above transaction and no adverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s forced to sell at a price fixed by regulators which is lower than purchase price Urea production by Indian manufacturers is governed by group financing schemes which guarantees a return of 12% on net sales at 90% capacity utilization. This is in contrast to Phosphate and Potash fertilizers where retention pricing scheme was discontinued in 1992 Related Party transactions are 56% of total sales. 4 Turnover (In INR cr.) 641.23 2,758.43 41.28 11.44 In view of the above, the CUP method used by the appellant could not be rejected by the TPO. The following factors need be considered: (1) The TPO has himself accepted CUP as the most appropriate method in the preceding year as also in all the subsequent years . A chart was place before the Hon ble Bench to demonstrate the same. Thus, for AY 05-06 and from AY07-08 to 2011-12, the method stands accepted and ought not be disturbed in a singular year particularly when there is no change in either the profile of the assesse or in the nature of the transaction. The Rule of consistency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case is required to be maintained. In support, he placed reliance on the following decisions: i) Radhasoami Satsang vs. CIT- 193 ITR 321 (SC); ii) CIT vs. ARJ Security Printers 266 ITR 276 (Del.) SLP filed by Revenue has been dismissed 266 ITR 4. 7. In support of the alternative plea that comparables apply by the authorities below are not proper as they are functionally different, the Learned AR referred page Nos. 442 and 443 of the paper book volume-2. He submitted that Chambal Fertilizers Chemicals Ltd.- manufactures fertilizers segments which includes manufacture and marketing of urea which is a controlled commodity, the price and distribution of which is regulated by the Government of India. The company is engaged in manufacturing and trading of fertilizers in the proportion of 64% and 23% respectively while the assessee is 100% distributor of fertilizers and is not engaged in any manufacturing activity. They deal in several products whereas the assessee is mainly engaged in the distribution of DAP. Likewise Shiva Fertilizers Ltd. is engaged in the manufacturing and trading of single super phosphate (SSP) and NPK Fertilizers. The proportion of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-06 and from assessment years 2007-08 to 2011-12, the application of CUP as the most appropriate method in order to benchmark the transaction under dispute has been accepted by the learned TPO. In the assessment year 2005-06, the ITAT (supra) has set aside the matter to the file of the Assessing Officer on the issue of adopting CFR bulk price from the same report and not the FOB price. In compliance, the learned TPO has found it appropriate to apply CUP method. We thus fully concur with the contention of the assessee that Rule of Consistency needs to be respected in the approach of the Revenue in the application of CUP method as the most appropriate method particularly when there is no change in either the profile of the assessee or in the nature of the transaction. We also agree with the submission of the assessee that TNMM method is not an appropriate method since the sale price in the present case is regulated by the government and the margin of net profit is not under the control of the tax payers. It is not appropriate to apply TNMM method also for the reason that merely 40% to 45% of the receipts are by way of subsidy from the government and not from sale of the product. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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