9911796707
TMI Blog2017 (1) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... in FAR (function, asset and risk) analysis between the assessee and the two alleged comparables. 4. The Hon'ble DRP has erred in law and on facts in directing the selection of RPM (resale price method) as the most appropriate method. 5. The Hon'ble DRP has erred in law and on facts in not carrying out suitable comparability adjustments in view of different intensities of the functions being carried out, use/non use off certain assets and assumptions/non assumptions of certain risks by the comparables vis-à-vis the assessee, even if RPM (resale price method) is to be considered as the most appropriate method. 6. The Hon'ble DRP has erred in law and on facts in accepting the PLI even if RPM (resale price method) is to be considered as most appropriate method and no comparability adjustment is to be carried out. 3. As would be evident from a plain reading of the above grounds of appeal, what really required to be decided is whether, on the facts and in the circumstances of the case, CUP method was indeed preferable over the RPM method, for benchmarking the arm's length price, and, if not, whether GAIL and PLL were rightly chosen as comparables, and, even if such a selectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate gross margin representing the amount from which the reseller would seek to cover its selling and other operating expenses and make reasonable profit. What is left after subtracting the gross margin can be regarded, after adjustment for other costs associated with the purchase of the product, as an arm's length price for the original transfer of property between the associated enterprises. Rule 10B(1)(b) of the Rules provides that the RPM is applicable in a resale situation where the property or services purchased from an associated enterprise are resold to an unrelated enterprise. The RPM is applicable to transactions involving a purchase and subsequent sale of the same property or services. Thus, in consideration of the criteria prescribed by the Rules, nature, class of the services rendered and the availability, coverage and reliability of data necessary, and guidelines issued by the OECD in this regard, inter alia, RPM is considered was being the "most appropriate method" to determine the arm's length value of the transaction pertaining to purchase of LNG." 6. The assessee adopted the gross profit margin per mmbtu was adopted as the profit level indicator. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Henry Hub prices at USA. The formula adopted by the assessee, at that point of time, was CUP price as equal to A x + B (where A= 0.85 of transaction; x= Henry hub price; and B= transportation cost). The TPO noted that by his own admission the assessee had purchased the LNG at prices lower than Henry Hub price. The TPO was of the view that the assessee did not have an good reasons to discard this approach. It was also noted by the TPO that the assessee has not taken into account profit element in the regasification process as entire difference between making the product saleable and the revenue realized is taken as trading profit. It was also noted that since the assessee is doing business in a competitive market and it cannot sell at a price higher than the prevailing market price, "shortfall appearing in the margins, logically would arise out of the purchase price paid for the LNG bought by it". In other words, according to the TPO, the profit margins of the assessee were too low to take into account profit element in regasification process and these profit margins were so low because the LNG prices of imports were high. He analysed the cost break to demonstrate that net mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TPO under section 133(6) of the Act. It was in this backdrop that the LNG imports were benchmarked on CUP basis, by taking Petronet purchase prices as valid CUP input, and, accordingly, an ALP adjustment of Rs. 19,05,74,124 was recommended. Aggrieved by the adjustment so proposed, assessee carried the matter in appeal before the Dispute Resolution Panel. Learned DRP was of the view that on the given facts, RPM is the most appropriate method for ascertaining the arm's length price, that the two comparables chosen by the assessee are appropriate comparables as there is not much of a difference in long term deals and spot deals, and that CUP is not an appropriate method for LNG imports in view of volatility surrounding spot LNG transactions. The operative portion of the DRP order reads as follows: "This Panel has taken into consideration all the facts which the Assessee and the TPO have brought on record. This Panel finds that RPM is the most suitable method in this case. Even the TPO has acknowledged this fact. The TPO writes on page 14 of TP order that there is no doubt that RPM is a most appropriate method in a case of distributor. However, the TPO rejected this method on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at LNG spot rates fluctuate on a daily basis. Such high level of volatility negates the possibility of comparing procurements concluded on different dates. The assessee has also demonstrated by referring to documentary evidence that PLL has sourced the cargo of September 17, 2008 from GDF Suez which has a common director with PLL. Since the transaction chosen by TPO as uncontrolled transaction is related party transaction this Panel cannot approve the comparison under CUP as it is against the basic tenants of TP. The assessee has argued that this can be stated to be a critical reason for PLL to get a lower price for said cargo. The TPO has not given any counter argument to demolish assessee's arguments. This Panel also refers to the PLL letter dated February 01, 2012 that mentions each spot cargo transaction is distinct and are not comparable. This Panel finds force in the contention of the assessee that unless sources, discharge dates, ships and supply and discharge locations and other cargo parameters are identical, LNG cargo prices cannot be compared. Therefore it cannot be denied that the assessee's decision to purchase one cargo at a slight premium over PLL's price was a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and hence stand dispose of in favour of assessee. The TPO is directed to decide the ALP of international transactions taking only relevant year data into consideration in RPM method treating PLL and GAIL as uncontrolled comparable companies." 9. The Assessing Officer is aggrieved of the relief so granted by the DRP and is in appeal before us. 10. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 11. As to the question whether comparable uncontrolled price method vis-à-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, learned Departmental Representative's arguments are two fold - first, that CUP is inherently more suitable to the facts of this case since the transactions of purchase are plain vanilla commodity purchase transactions of buying the LNG; and, second, that, in any event, neither RPM is suitable for application in this case since the purchase of LNG is followed by a complex process of regasification, for which no separate charges are levied, nor suitable comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price of the LNG purchased by the assessee cannot be identified by referring to the prices of crude oil or natural gas. The reference to these prices is thus of no relevance under the scheme of the transfer pricing legislation. In any event, Henry Hub prices are relevant to the US market and undoubtedly geographic differences play a very vital role as is implicit in the stand of the TPO himself. As a matter of fact, in the immediately preceding assessment year, when the LNG prices in Japanese trades of LNG were furnished by the assessee for comparison, the TPO himself rejected the same by observing that "The information is of little relevance as Japanese trade commands highest prices and hence are not comparable just as Henry Hub prices lower than that of Indian rates and hence not compared on spot basis" As for the use of Henry Hub prices in the first year of operations, the assessee's explanation for the use of Henry Hub prices in the first year is as follows: (In this year)..... LNG cargoes were primarily purchased for commissioning of Hazira terminal and not for trading. 'Commissioning' was an ascertained activity with defined volumes, time period etc. Hence, it was possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5/2008 Y Idku Port, Egypt Gaz De France Gasleys 11/10/2008 3,286,422.00 18,5000 17/09/2008 Y Arzew, Algeria Sonatrach Galea 20/10/08 3,190,940,23 16,0000 4/10/2008 Y Withnell Bay, Australia North West Shelf, Australis AI Thakhira 26/10/2008 3,362,960.00 17,5000 10/10/2008 Y Qalhat, Oman Qalhat Ibara LNG 7/11/2008 3,346,090.00 13,2500 4/11/2008 Y Ras Laffan, Qatar RasGas MRL 22/11/08 3,092,090.00 12,3000 5/11/2008 Y Point Fortin T&T BG Blue Sky 17/12/08 3,087,330.00 11,9000 25/11/2008 Y Bonny, Nigeria BG LNG Akwa Ibom 3/1/2009 2,724,260.00 11,9000 25/11/2008 Y Bintulu, Malaysia BP Seri Angkasa 11/3/2009 3,274,231.00 6,2500 3/3/2009 Y Point Fortin T&T BP Brit Innovator 29/03/09 2,779,225.03 5,8000 12/3/2009 Y *Date on which purchase of spot cargo is confirmed. 15. The above comparables have been used to examine the following actual import transactions entered into by the assessee: Annexure - Details of purchases made by HLPL during FY 2008-09 S.No. Name of Ship Source Date of Confirmation notice Date of Arrival Price USD Net Qty. Unloaded Value in books (USD) Value in books (INR) 1 Al Thak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spot transactions that the assessee had with its AE, only one has been found to be not at an arm's length. Even in this case, there is significant variations in dates of transaction. The assessee entered into transaction on 21st September 2008, whereas the transaction used as External CUP input was entered into on 17th September 2008. It is by now a settled legal position that the prices entered into by the parties on the date of contract must be compared with the prices of similar transactions on that day. In the case of Liberty Agri Products Pvt Ltd Vs ITO [(2012) 49 SOT 79 (Chennai)], a coordinate bench of this Tribunal has held that even when a comparison with respect to customs data is to be made, it should be for the data in respect of the day on which contract was entered into and not a different date. The data obtained by the TPO from PLL would also show that there are variations in the prices of LNG imported within a gap of even 1 day. On 4.11.2008, PLL entered into spot deal @ US $ 13.2500 per mmbtu but on the very next day, i.e. on 5.11.2008, the next spot deal was @ US $ 12.3000 per mmbtu. Similarly, on 4.10.2008, PLL entered into spot deal of LNG imports @ US $ 16 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are no PLL transactions available in the same week or even same month. When variations in prices are evident on day to day basis, even in the data used by the TPO himself, it is absurd to suggest that data of transactions a week or a month away from the date of External CUP input can be benchmarked on that basis. These transactions cannot, therefore, be benchmarked anyway. Clearly, CUP cannot, for this short reason alone, cannot be the most appropriate method in this case. As we hold so, we may also refer to rule 10C(2C) which states that, in selecting the most appropriate method for ascertaining the arm's length price, "the availability, coverage and reliability of data necessary for application of the method" is essentially to be taken into account. The appropriateness of a method of ascertaining the arm's length price cannot be decided in a vacuum and de hors the availability of relevant data. No matter how desirable is the use of CUP method in a particular type of transaction, or in every plain vanilla commodity purchase transaction- as learned Departmental Representative puts it, it essentially depends on availability, coverage and reliability of data necessary for appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erminal is a reception facility for unloading of cargo from LNG tankers. Such a terminal is specially used for import of LNG, and it contains a variety of facilities for unloading, regasification, tanking, metering etc. of LNG. It is important to bear in mind the fact that natural gas is transported in liquefied state, using specialized LNG gas tankers, and at the LNG terminals receiving this liquefied gas, the liquefied natural gas is turned back into gaseous state (regasified) after unloading from ships, and then distributed across the network. While on the subject, it may be useful to also take note of the fact that Liquefied Natural Gas (LNG) was developed in 1964 as a solution to the problem of transporting the gas, which was, until that point of time and because of the inherent limitations of transporting the gas, seen as a product for domestic use only. With LNG, gas is liquefied and transported internationally via tankers and then regasified into its original state for distribution and sale. Additionally, the hydrocarbon takes up significantly less space as a liquid than a gas; LNG is approximately 1/600th the volume of the same amount of natural gas. LNG has transformed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asily be transported from the producing areas to the market in underground pipelines under pressure or liquefied at low temperatures and transported in specially designed ocean-going tankers. ............. 28. The technological advancement in the use of liquefied natural gas (LNG) provided, the gas industry with new methods to solve the problems of storage and transportation. Natural gas can be reduced to 1/600 of the volume occupied in the gaseous state by cryogenic processing, safely stored or transported in double-walled insulated metal containers at near atmospheric pressure and when required, can be re-gasified. 22. It cannot, therefore, be said that the product being imported and the product being sold in the market are different from each other. Once Hon'ble Supreme Court holds so, it cannot be open to us to take any other view of the matter. 23. As for the process involved in regasification, it is the same process which is involved in the comparable PLL, and the same is the position with regard to the foreign exchange risk. The process involved makes it all the more comparable. As we have noted earlier, it is the business model of the assessee to import the natural g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertising, marketing, distributing and guaranteeing the goods, financing stocks, and other connected services. If the reseller in the controlled transaction does not carry on a substantial commercial activity but only transfers the goods to a third party, the resale price margin could, in light of the functions performed, be a small one. The resale price margin could be higher where it can be demonstrated that the reseller has some special expertise in the marketing of such goods, in effect bears special risks, or contributes substantially to the creation or maintenance of intangible property associated with the product. However, the level of activity performed by the reseller, whether minimal or substantial, would need to be well supported by relevant evidence. This would include justification for marketing expenditures that might be considered unreasonably high; for example, when part or most of the promotional expenditure was clearly incurred as a service performed in favour of the legal owner of the trademark. In such a case the cost plus method may well supplement the resale price method. [OECD Transfer Pricing Guidelines] 25. As for the point regarding the assessee being a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29. The equity capital of PLL is held by Indian Oil, Bharat Petroleum, ONG and GAIL at 12.5% each, and, in turn, 74.14%, 78.92%, 84.93% and 57.36% respectively of the equity capital of these companies is held by the President of India. In effect, thus, the indirect shareholding of the President of India in these companies can be computed as follows: Sr. No. % of holding of Government of India % holding in PLL Holding 1 74.14 12.5% 9.2675 2 78.92 12.5% 9.865 3. 84.93 12.5% 10.61625 4. 57.36% 12.5% 7.17 Total 36.91875 30. The question that we are now called upon to adjudicate is whether these four companies can be said to be associated enterprises of the assessee before us. 31. Section 92 A, as relevant to the issue requiring our adjudication, provides as follows: Meaning of associated enterprise. 92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, "associated enterprise", in relation to another enterprise, means an enterprise- (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough officers subordinate to him in accordance with this Constitution". It is also important to note that the voting rights are not exercised or controlled by the President of India, but by the Union of India. Essentially, therefore, 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. In the case of IC Gokal Nath & Ors Vs State of Punjab & Anr (AIR 1967 SC 1643), as pointed out by the learned counsel for the assessee, Hon'ble Supreme Court has observed that, "The distinction between the Constitution and the laws is so fundamental that the Constitution is not regarded as a law or a legislative act". Clearly, therefore, President of India cannot be treated as a creation of law, which, as has been noted above, qualitatively different from creation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges. It is also contended that entire cost of PLL is passed through including foreign exchange risk which makes its business model a low risk business model not comparable with the assessee. It is then pointed out that PLL has entered into certain long term contracts for purchase of LNG whereas the assessee has solely purchased LNG in spot deals. 36. We find nothing on record to substantiate the claim of the learned Departmental Representative that the PLL was charging separate fees for regasification. In our considered view, regasification is an integral part of assessee's trading activity as unpacking of a consignment to put the same in a saleable state and fit for transportation by the available mode. The process of regasification cannot be seen in isolation with the main activity carried on by the assessee. What has been sold by the assessee is regasified LNG (R-LNG) as is evident from the financial statements of the assessee. The business models of HLPL and PLL are similar in the sense that the entire cost, whether it is a long term or a short term contract, is passed on to the customer in India as no trader will keep the cost to itself including the foreign exchange fluct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 37. As regards GAIL as a comparable, the first objection of the learned Departmental Representative is with respect to the related party transactions but then, in view of the discussions earlier in this order, the inter se transactions between the public sector undertakings cannot be treated as transactions between the associated enterprises, and, for this reason alone, this objection is to be deleted. The second point is regarding the GAIL not owning any regasification facilities and it is dealing in only natural gas. That objection does not hold good either as even GAIL is trading in natural gas and has made considerable investments in its distribution network of gas pipes. Learned Departmental Representative does accept that GAIL is also involved in trading in natural gas though with a difference that it does not have its own terminal and regasification facilities but then he has not pointed as to what comparability adjustment is required on that accou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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