IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `I' NEW DELHI
BEFORE SHRI S.V.MEHROTRA, ACCOUNTANT MEMBER
AND
SMT DIVA SINGH, JUDICIAL MEMBER
I.T.A .No.-4831/Del/2010 & 62/Del/2011
(ASSESSMENT YEAR-2005-06)
ACIT, M/s Mosaic India Pvt. Ltd.,
Circle-5(1), R.No.-409A, 111, Rectangle One, Plot No.-D-4,
C.R. Building, I.P.Estate, vs Saket Distt. Centre,
New Delhi. Saket, Delhi.
PAN-AACCC4033C
(APPELLANT) (RESPONDENT)
Appellant by Sh. Peeyush Jain, CIT DR (TP)
Respondent by Sh. H.Srinivasulu, Retd. IRS &
Smt. Somya Seth, CA
ORDER
PER DIVA SINGH, JM
Both these appeals have been filed by the Revenue against the separate
orders dated 31.08.2010 and 29.10.2010 of CIT(A)-XX, New Delhi pertaining to
2005-06 assessment years wherein in the first appeal the Revenue is aggreieved by
the order of the CIT(A) which has been passed against the TPO's order dated
17.10.2008 against which the assessee filed a petition u/s 154. As a result of this
order the addition made on account of arm's length price amounting to
Rs.2,11,23,382/- was reduced to Rs.71,45,622/-. The second appeal has been filed
by the Revenue against the order of the CIT(A) wherein he has deleted the addition
made by the TPO. Aggrieved by both these actions, the Revenue is in appeal the
effective ground in ITA No.-4831/Del/2010 is Ground No-2 and 2.1 which reads
as under:-
2 ITA No. 4831/Del/10& 62
"2. On the facts and in the circumstances of the case and in law, the learned
CIT(Appeals) has erred in restricting the addition u/s 92CA of the Act to
Rs.71,45,622/- as against Rs.2,11,23,382/- on account of TPO adjustment.
2.1. The Ld. CIT(A) ignored the fact recorded by the TPO and also the fact
that the calculation has been correctly done by the TPO."
2. The grounds raised in ITA No-62/Del/2011 on the other hand reads as under
:-
"2. On the facts and in the circumstances of the case and in law, the learned
CIT(Appeals) has erred in deleting the remaining addition of rs.71,45,622/- made
by the AO u/s 92CA of the Act on account of TPO adjustment.
2.2. The Ld. CIT(A) ignored the fact recorded by the TPO and also the fact
that the calculation has been correctly done by the TPO."
2.1. The record shows that the assessee is incorporated as an Indian Company
w.e.f 01.06.2004. As per its business profile it was engaged in the business of
distribution and marketing of fertilizers in India. The assessee operates a 100%
subsidiary of GNS II Corp USA which in turn is owned by the Mosaic Company,
USA. In the year under consideration, the assessee was specifically dealing in the
Di-Ammonium Phosphate (`DAP') fertilizer. As per record the Appellant is also
engaged in providing certain support services to its Associated Enterprises. The
main international transaction for the assessee as per its claim was Purchase of
fertilizers for further resale, without any value addition, in the Indian market.
2.2 A perusal of the Transfer Pricing Officers TPO's order hereinafter referred
to as the TPO shows that the assessee as per para 6.2 chose a Comparable
Uncontrolled Price (hereinafter referred as `CUP") of DAP fertilizers as on
12.10.2004 and 25.10.2004 from price list of Fertecon Price Service. The record
shows that as per assessee's claim the Fertecon Report is a trade journal published
weekly by Fertecon Limited and is widely used in the fertilizers industry. The
said Report was also relied upon by the TPO.
3 ITA No. 4831/Del/10& 62
2.3 The TPO considered the methodology applied by the assesssee in order to
consider the Arm's Length the price (hereinafter referred to as the ALP of the
following transactions:-
"Date Commodity Quantity Rate Terms of
(USD/MT) supply
12.10.2004 DAP fertilizer 41,140.90 277.53 CFR
25.10.2004 DAP fertilizer 41,066.00 277.27 CFR
2.4. He observed that the methodology by the assessee was in the following
manner:-
" Adjustment to FOB CUP of DAP fertilizer
· The assessee had taken DAP rate of US gulf FOB bulk @ US$
235/mt as on 14.10.2004 and 21.10.2004 as the CUP(FOB).
· It added freight for US-Gulf-India at US$ 45-50 (cargo size more
than 35,000 tons) to CUP FOB of US$ 235/mt
· It made adjustment for credit purchase by PLI of US$ 1.17 and US$
0.81 on 12.10.2004 and 25.10.2004 respectively.
After making above adjustment value of comparable CUP was computed as
under :-
CUP for consignment No.1 for 41,140.90 MT for invoice dated 13.10.2004 on
contract dated 12.10.2004
FOB value of CUP = US$ 235/mt
Add freight = US$ 47.50/mt
Add credit cost = 1.17/mt
Value of CUP US$ 283.67
(Wrongly mentioned as US$
285.81 in Annexure 2A)
CUP for consignment No.2 for 41,066 mt
FOB value as on 14.10.2004 = US$ 235.0/mt
Add: Freight = US$ 47.50/mt
Add: Credit cost = US 0.81/mt
Value of CUP = US$ 283.31
(wrongly mentioned in
US$ 284.78 in Annexure 2A)"
2.5. The said methology was not accepted by the TPO as a result of which he
rejected the FOB CUP selected by the assessee and selected CFR CUP on the basis
of the Fertecon Price Service while doing so he took into considertion the fact that
the effective credit period of first shipment was 90 days consequently effective
4 ITA No. 4831/Del/10& 62
credit PLP was taken as US$ 1.17 and for the second shipment the credit period
being 60 days the credit cost was taken was US$ 0.81. The reasons prevailing with
the TPO for rejecting the assessee's methodology are set out in para 6.3 of the
TPO's order which is extracted hereunder :-
6.3 Comments of TPO:
I have carefully examined the purchase invoices, sale invoices and Fertecon Price
Service quoted price and have reached to following important facts:
"(i) DAP fertilizer of 41,140.90 mt was purchased @ US $ 277.53 mt
on CFR basis under contract dated 12.10.2004 vide invoice
dated 13.10.2004 and the same consignment was sold under
high sea to another AE of the assessee in Hongkong on
18.10.2004. It is further noted from sale invoice that loading
was undertaken at TAMPA, Florida USA and final destination of the
consignment was Karachi port Pakistan.
(ii) Similarly another consignment of DAP fertilizer of 41,066 mt
was purchased @ US$ 277.27/mt on CFR basis vide invoice
dated 13.10.2004 but surprisingly their invoice dated 13.10.2004
make reference of contract dated 25.10.2004 which is not
possible. In my view this invoice had quoted wrong contract
date. The contract dated 12.10.2004 was revised on 25.10.2004;
accordingly the correct contract date is 12.10.2004. This
consignment was sold under high sea to the AE in Hongkong
vide invoice dated 20.10.2004. It is noted from invoice that port
of loading of the fertilizer was Townsvilli, Australia and final
destination was Karachi port, Pakistan.
(iii) It is evident from above fact that both the purchases were made
vide invoice dated 13.10.2004 on CFR basis as per agreement
dated 12.10.2004.
(iv) I have carefully examined the price list of Ferticon Price Service
and have noted that contain CFR prices bulk prices of DAP
fertilizer at Indian high sea which were @ US$ 271-277/mt as
on 7th October and 14th October. Since India bound CFR rate of
DAP fertilizer was available, I could not find any logic for the
assessee of taking FOB value rate and then making subsequent
adjustments of freight etc. The only incentive in making such
round out calculation could be some how to show CUP having
more value as compared to purchase price. Since direct CUP for
India bound shipment having identical contractual form of
transportation (CFR.) was available, it is held that this direct CUP having
identical terms of delivery of DAP fertilizer shall be
used for making comparability analysis of import price of DAP
fertilizer by the assessee instead of CIJP with different terms of
delivery as wrongly chosen by the assessee.
5 ITA No. 4831/Del/10& 62
(v) It is evident from above finding that direct CUP of US$ 271-
277/mt at CFR basis (which included freight and cost) is
available for relevant date 12.10.2004 the same has been taken
and no adjustment on account of freight shall be mode to the
CFR CUP price.
(vi) I have further noted that the price quoted on Ferticon Price
Service are net of credit accordingly the above referred to direct
CUP (CFR form) would be adjusted by effective credit PLI for
both the consignments as disclosed by the assessee in Annexure
2A.
(vii) 1 have already held in above para (iv) that a direct CUP with
identical contractual term of transportation was available but
the assessee had wrongly selected CUP having different
contractual terms of transportation. Without prejudice to above
conclusion, I also examined if freight adjustment of equal
amount of FOB quoted value for both shipments was valid? It is
pertinent to mention that first shipment of fertilizer was loaded
from USA whereas second shipment was loaded from Australia
and destination being the same i.e. India high sea, accordingly,
equal amount of freight adjustment of US$ 47.50/mt to FOB
value CUP by the assessee was incorrect and the same is not
acceptable for the reason that both shipments from two different
destinations would have two different freight rates. The Ferticon
Price Service, does not have Australian freight accordingly,
adjustment is not even possible to the FOB value CUP for
consignment No.. 2."
2.6 Accordingly he computed the adjusted cups for both shipments as under:-
(viii) In view of the above idsucssion I reject FOB CUP selected by the assesse
and have selected CFR CUP on the basis of Ferticon Price Service, a document
relied upn by the assesssee. Since both the purchases were on credit of 90 and 60
days CFR CUP shall be adjusted for effective credit PLL of US$ 1.17 for first
shipment and US$ 0.81 for second shipment.
"Consignment No.1
For the first shipment invoice dated 13/10/2004 (contact dated 12/10/2004) for
41140.90 mt
Step 1. Purchase price paid to AE = US$ 277.53/mt
Step 2 Indian CFR Bulk DAP fertilizer = US$271-277/mt
th th
Rate on 7 Otober and 14
October 2004 Average of High/low
Rate = US$274/mt
Step 3 Adjustment for credit = US$1.17/mt
Purchase (90 days) add
6 ITA No. 4831/Del/10& 62
Effective PLR as claimed
By the asssessee
Adjusted CUP US$275.17/mt
Step 4 Excess purchase price paid
To the AE as compared to
CUP(US$277.53-US$275.17)
Total excess price paid = US$97,092.52
(US$2.36X41140.90)
Step 5. Conversion in Indian Rupee =Rs.44,52,178/-
Daily average of US$ as on 12/10/2005 @ Rs.45.855 for
1 US$, (45.855X97092.52)(source-oanda.com)
Consignment2
For the second shipment invoice dated 13/10/2004 (contract dated 12/10/2004
which was amended on 25/10/2004) for 41066mt
Step1 . Purchase price paid to AE =US$277.27/mt
Step.2 Indian CFR bulk DAP
Fertilizer rate on 7th
October 2004 Average of
High/low rate =US$274/mt
Step3. Adjustment for credit purchase =US$0.81/mt
(for 62 days) add effective PLR
As claimed by the assessee
Adjusted CUP US$274.81/mt
Step4. Excess purchase price paid =US$ 2.46/mt
To the AE as compared to
CUP (US$277.27-US$274.81)
Total excess price paid =US$1,01,022.36
(US$2.46X41066))
Step5. Conversion in Indian Rupee =Rs.46,32,380.36/-
Daily average of US$ as on 12/10/2005
@ Rs.45.855 for 1US$, (45.855X101022.36)
(source-oanda.com)
7 ITA No. 4831/Del/10& 62
2.7. The TPO thereafter also considered the fact that the assessee had made
purchases of the following two consignments from its AE:-
"No. of Date Commodity Quantity Rate Terms of
Consignment (MT) (USD/MT) supply
No.3 20.08.2004 DAP fertilizer 46,768 266.50 CFR
No.4 20.08.2004 DAP fertilizer 12,700 272.14 CFR"
2.8. Referring to the facts he observed that therein the assesssee had chosen CUP
of DAP fertilizer as on 19/8/2005 being the nearest date from the a date of
contract which was dated 20.08.2005 from the price list of Fertecon Price Service.
He did not argue with the argument of the assessee that the transaction was at
arm's length. The reason for not agreeing are set out in para 6.6 of his order. It
took note of the fact that as per the invoice the port of loading the fertilizers was
USA and the final destination was Jamnagar, India and being of the view that since
price of fertilizers on CFR basis were available in India he questioned the logic of
taking FOB value rate and then making subsequent adjustment of freight etc
despite the fact that direct CUP for India bound shipment having identical
Contractual Form of Transportation (hereinafter referred as "CFR') was available.
He was of the view that CUP for India specific price should be considered for
making comparability analysis of import price of DAP fertilizers from AE instead
of CUP with different terms of delivery were found to be wrongly chosen by the
assessee.
2.9 The reasoning is extracted from his order for ready reference:-
6.6 Comments of TPO:
I have carefully examined the purchase invoices, sale invoices and
Fertecon Price Service quoted price and have reached to following important
facts.
(i)Consignment 3 of DAP fertilizer of 46,768 mt was purchased from the
AE@ US$ 266.50/mt on CFR basis vide agreement dated 20/8/2004 on
credit for 90 days and the same consignment was sold in India. It is
further noted from sale invoice that loading was undertaken at USA and
final destination of the consignment was Jamnagar, India.
8 ITA No. 4831/Del/10& 62
(ii) Similarly consignment 4 of DAP fertilizer of 12,7000 mt was
purchased @ US$ 272.14mt on CFR basis vide agreement dated
20/8/2004 on credit of 365 days. This consignment was sold in India. It is
noted from invocie that port of loading of the fertilizer was USA and final
destination was Jamnagar, India.
(iii) It is evident from above facts that both the purchases were made
on CFR basis as per agreement dated 20/8/2004.
(iv) I have carefully examined the price list of Ferticon Price Serevice
and have noted that congains CFR prices bulk prices of DAP
fertilizer at India port which were @ US$260-263/mt as on
19/8/2008, a day prior to contract date (assessee had taken FOB
CUP of the same date i.e, 19/8/2008). Since DAP fertilizer on
CFR basis in India was available, I could not find any logic for the
assessee of taking FOB, value rate and then making subsequent
adjustments of freight etc. The only incentive in making such
round out calculation could be some how to show a CUP having
more value as compared to purchase price. Since direct CUP for
India bound shipment having identical contractual form of
transportation (CFR) was available, it is held that this direct CUP
having identical terms of delivery of DAP fertilizer shall be used
for making comparability analysis of import price of DAP fertilizer
by the assessee from the AE instead of CUP with different terms of
delivery as wrongly chosen by the assessee.
(v) It is evident from above finding tht direct CUP of US$ 260-263/mt
at CFR basis (which included freight and cost) is available for
relevant date d20/8/2004 and the same has been taken,
accordingly, no adjustment on account of freight shall be made to
the CFR CUP price.
(vi) I have further noted that the price quoted on Ferticon Price
Service are net of credit accordingly the above referred to direct
CUP (CFR form) would be adjusted by effective credit PLI for the
consignments 3 & 4 as disclosed by the assessee in Anneuxre-1
(vii) I have already held in above para (iv) that a direct CUP with
identical contractual term of transportation was available but the
assesee had wrongly selected CUP having different contractual
terms of transportation. It is pertinent to mention here that for
consignment 4, the assessee had computed CUP of US$ 277.97 as
against purchase price of US$ 272.14. However, a careful
scrutiny of computation of CUP has reveled that actual cost of
CUP as per assessee's computation is as US$ 270.50 which was
wrongly computed at US$ 277.97 in Annexure 1. These facts have
proved tht even as compared with CUP selected by the assessee for
consignment 4 the purchase of DAP @ US$ 272.14 was not at
arm's length price.
(viii) In view of above discussion I reject FOB CUP selected by the
assessee and have selected CFR CUP on the basis of Ferticon
9 ITA No. 4831/Del/10& 62
Price Service, a document relied upon by the assessee. Since both
the purchases, consignment 3 & 4 were on credit of 90 and 365
days respectively, CFR CUP shall be adjusted for effective credit
PLL of US$ 1.11 for consignment 3 and US$ 4.50 for 4th
consignment. The adjusted CUPs for both the shipment are
computed as under:
Consignment No.3
Contract dated 20/8/2004 for 46,768mt of DAP fertilizer
Step1 Purchase Price paid to AE =US$266.50/mt
Step2. Indian CFR bulk DAP fertilizer =US$ 260-263/mt
Rate on 19/8/2004 Average
Of High/low rate =US$261.4/mt
Step.3 Adjustment for credit purchase = US$1.11/mt
(90 days) add effective PLR
Adjusted CUP =US$ 3.89/mt
Step4. Excess Purchase price paid to = US$181927.52
The AE as compared to CUP
(US$3.89X46,768)
Consignemtn 4
Contract dated 20/8/2004 for 12,700mt of DAP fertilizer
Step1 Purchase Price paid to AE =US$ 272.14/mt
Step 2. India CFR bulk DAP fertilizer =US$260-263/mt
Rate on 19/8/2004 Average
of high/low rate =US$ 261.5/mt
Step3. Adjustment for credit purchase =US$4.50/mt
(for 365 days) add effective PLR
As claimed by the asssessee
Adjusted CUP =US$ 266/mt
Step4. Excess purchase price paid to the =US$6.14/mt
AE as compared to CUP
(US$272.14-US$ 266)
Total excess price paid =US$77,978
(ix) Total excess payment to theAE
On consignment 3&4 US$
(181,927.52+77,978)
10 ITA No. 4831/Del/10& 62
Excess payment in Indian rupee =Rs.120,38,823.96
@ 46.32 Rs. Per dollar as on
20.08.2008; rate taken from
Oanda.com (Rs.46.32X259,905.52)
7. It is evident from findings contend in Para 6.3 and 6.4 of this order that assessee has
paid excess purchase price to its AE as per following details:
Consignment Excess Payment
Consignmetn1. 44,52,178
Consignment2 46,32,380
Consignmetn 3&4. 1,20,38,824
2,11,23,382
2.10. The TPO summarized his findings as under :-
"8. The main findings as recorded in this order may be summarized as under:-
(i) I have determined the arm's length price of international transactions on
the basis of CUP method which was selected as most appropriate method
by the assessee.
(ii) The assessee had selected CUP of purchase price of DAP fertilizer on the
basis of Ferticon Price Service rate list. I have also selected CUP from
same price list i.e, I have selected CUP from the documents submitted by
the assessee.
(iii) The assessee had purchase DAP fertilizer on CFR terms of delivery (i.e.
cost+ freight) on the credit varying from 62 days to 365 days. The rate of
DAP fertilizer on CFR terms for India shipment was quoted in the relied
upon rate list for relevant date. However, the assessee had selected FOB
purchase rate and had made adjustments for freight and credit in order to
compute uncontrolled comparable CUP on CFR terms of payment for
reasons best known to it. It is further noted that for some country of
shipment the freight charges were not mentioned on the price list and the
adjustment of the freight was made without basis. I have further noted
various calculation mistakes in determining adjusted CUP by the assessee
as noted in para 6.2, 6.5 and 6.6 (vii) of this order. In view of above
findings, I have rejected the adjusted CUP applied by the assessee to
benchmark international transaction.
(iv) Since purchase price of DAP fertilizer on CFR terms of delivery was noted
on the relied upon document, I have selected purchase price on CFR terms
(which was identical to terms of purchase by the assessee) as uncontrolled
comparable CUP after making adjustment for credit purchases.
(v) The assessee was given number of opportunities of being heard vide order
sheet entry and issue of notices.
(vi) The transfer pricing studies have proved that purchase prices of
consignment 1 to 4 were not at arm's length price and this resulted in
adjustment of Rs.2,11,23,382."
3. Aggrieved by this, the assessee filed a petition u/s 154 before the TPO
assailing the basis of the calculation of CUP regarding purchase of fertilizers from
11 ITA No. 4831/Del/10& 62
its AE stating that as per Annexure 1, Annexure 2A and Annexure 2B, the value
of effective PLR had been mentioned in absolute terms and not in percentage terms
which was not accepted by the TPO as a mistake apparent on the face of the
record. Similarly the request that the + 5% adjustment benefit under the proviso to
section 92C(2) be made available to the assessee was also not accepted by the
TPO.
3.1 Aggrieved by this the assessee moved an appeal before the CIT(A) assailing
the rejection of the 154 petition filed by the assessee and also assailing the original
TPO's order also.
4. The CIT(A) accepted the assessee's petition holding that there were
mistakes apparent on the face of the record which were rectifiable u/s 154.
Referring to the petition which is extracted at page 12 of the order dated
31.08.2010 she accepted the submission of the assessee that following the
methodology adopted by the TPO, the amount of the adjustment should have been
limited to Rs.71,45,622/-.
4.1 The same is extracted hereunder:-
"Table : Computation of corrected credit period cost
Consignment PLR (in %) Credit Effective Average of Credit Credit
No. period in PLR (in %) high India period cost period cost
Days CFR (in as used by
Prices US$/MT) the Ld.
TPO
A B C=[(A)/365] D E=C*D
X (B)
1. 4.75 90 1.17 274 3.21 1.17
2. 4.75 62 0.81 274 2.21 0.81
3. 4.5 90 1.11 261.50 2.90 1.11
4. 4.5 365 4.50 261.50 11.77 4.50
As can be seen from the above table, the adjustment factor has changed. We now
provide below the working of the adjustment amount following the methodology
adopted by the TPO after incorporating correct amounts for credit period
adjustment:
12 ITA No. 4831/Del/10& 62
Table: Computation of adjustment amount after incorporating corrected credit
period cost
Consi Quant Purchase India CFR Aver Adjustmen Adjuste Excess Total Total
gnme ity (In price paid Bulk DAP age t for credit d CUP Price Exces Excess
nt MT) to Associate fertilizer of purchases (US$/ paid by s Price
No. Enterprise rate high MT) to AE Price paid
(US$/MT) (US$/MT) low (US$/ paid (INR)
rate MT) (US$)
A B C D E F G=E+ H=C-G I=G J=I*exc
F *B hange
rate
1. 41,140 277.53 271-277 274 3.21 277.21 0.32 1319 605.236
.90 8.9
2. 41,066 277.27 271-277 274 2.21 276.21 1.059 4349 1,994,62
8.50 2
3. 46,768 266.50 260-263 261. 2.90 264.40 2.0984 9813 4,545,80
50 9.10 4
4. 12,700 272.14 260-263 261. 11.77 273.27 None None Since
50 purchase
price
paid is
lower
than the
compara
ble
uncontrol
led price
hence, no
adjustme
nt is
required
to be
made for
this
consignm
ent
Total 7,145,62
2
Thus, the above table clearly depicts that even the methodology adopted
by the TPO the amount of adjustment should have been restricted to INR
7,145,622 instead of INR 2,11,23,382. Accordingly, the Appellant humbly
submits that the addition made by the TPO be suitably rectified and the order of
the TPO, denying the above rectification, be quashed."
13 ITA No. 4831/Del/10& 62
4.2. The said issue was decided by the CIT(A) in the following manner:-
"I have carefully examined this issue and also considered the submissions
made by the appellant and all other relevant material placed on record. In this
regard, I have the following comments:
On perusal of the transfer pricing order and the submission made by the
appellant there is no doubt that the TPO made an apparent order while
calculating the amount of transfer pricing addition. The TPO erroneously
considered the PLR to be an absolute number instead of percentage. Herein, it is
important to note that the appellant in its submission dated 14th July 2008 very
clearly mentioned the terms such as PLR and interest rates to denote the rates
used by the appellant to compute the adjusted CUP. The terms use by the
appellant are, in common parlance, considered to be in percentage rather than
absolute numbers. Further, a careful consideration of the calculations made by
the appellant in the said submission would also have revealed the fact that those
numbers were meant to be in percentage.
Thus, I am of the view that on a careful consideration of the submission
made by the appellant, the errors made by the TPO could have been avoided on a
careful consideration of the facts available with the TPO. Further, I am also in
agreement with the above calculations made by the appellant. Thus, without
prejudice to anything contained later in this order, I limit the amount of addition
made by the TPO to INR 7,145,622.
With regard to the other grounds raised by the Appellant viz. application
of +/-5% range and import of one consignment on FOB vs. CFR price I am of the
opinion that these were not apparent from records submitted before the TPO and
hence are outside the scope of section 154 of the income tax act, 1961. Thus the
same have not been dealt with in this order."
4.3. In the main appeal the CIT(A) took note of the submissions on behalf of the
assessee that the sale price for fertilizers are controlled/regulated by the
Government by way of Regulatory restrictions wherein the maximum retail price
is filed, subsidies, distribution restrictions are imposed imports and even choice of
technology, feedstock etc for the DAP fertilizers are controlled and monitored by
the Government. The record shows that It was argued that in the circumstances the
importer does not have any control over the sale price. It was submitted that sale
price fixed by the regulators may be lower than the purchase price and the
Government of India has a system of compensating the fertilizer Company through
a subsidy mechanism. It is seen that it was also submitted that the assessee also
14 ITA No. 4831/Del/10& 62
resells the DAP fertilizers in India at the price fixed by the Indian Government and
in the year under consideration had purchased from a single Associated Enterprise.
It was further submitted that all the purchases are from the US Gulf Region which
denotes an area in USA in West of Florida in US. It was submitted that the
assessee has demonstrated the arm's length nature of its purchase of DAP
transactions by application of Comparable Uncontrolled Price method as the most
appropriate method which has been accepted by the TPO also. It was submitted
that the assessee has relied on the publicly available information on External CUP
from a weekly report called Fertecon Phosphate Report of Fertecon Report which
has a trade journal published weekly by Fertecon Limited. It was stated that the
said report provides prices at which the DAP fertilizers are traded internationally
and the data provided is widely acknowledged within the fertilizers industry to be
the most accurate, comprehensive, and authoritative and it also provides a timely
and detailed foresight into the development of the global fertilizer industry and the
data published by the Fertecon Report is used by all the leading corporations, trade
bodies and government agencies belonging to the fertilizers industry throughout
the world. It was further submitted that it is also relevant that these prices are also
adopted by the Government of India while determining the subsidy. The
application of CFR prices was assailed on the ground that it is reported for port of
destination without disclosing the port of origin or port of dispatch and in order to
benchmark its imports of DAP, the assessee identified "US Gulf FOB prices"
published in theFertecon report as the appropriate data for application of CUP for
the following reason namely that the assessee had purchased DAP from US Gulf
region and not from any other region i.e Morocco, Tunisia and the data relating to
prices of imports in India on CFR terms was not considered on account of the
following two factors namely; that neither the port of original; and nor the port of
dispatch were sure which was not the position for the data pertaining to CFR price
15 ITA No. 4831/Del/10& 62
where the port of dispatch was fixed. It was argued that the assessee has made
appropriate adjustments to the cost for variations for different credit terms/period
and freight charges.
4.4. Accordingly the assessee after making adjustments for freight and credit
terms justified its import transaction at arm's length by providing the comparable
analysis of assessee's purchases which was stated to be less the adjusted CUP. The
following table in support of the submissions advanced was relied upon before the
CIT(A) The same is extracted from the order:-
"Comparison of Adjusted CUP with the Appellant's Import price
Date Adjusted CUP in USD Import price paid
by the Appellant
20-Aug-04 268.95 266.50
20-Aug-04 277.97 272.14
7-Sep-04 277.97 272.43
18-oct-04 287.3 268.50
25-Jan-05 293.15 272.50
12-Oct-04 285.81 277.53
25-oct-04 236.39 227.27
4.5. It is seen that the CIT(A) in para 15 of the impugned order referring to her
order dated 31.08.2010 observed that in view of her order against the Rectification
moved by the assessee u/s 154 before the TPO which resulted in reducing the
overall amount of adjustment proposed by the TPO from Rs.2,11,23,382/- to
Rs.71,45,622/- as such she was of the view that she was not required to further
decide whether the application of CUP by the assesssee was reliable and correct or
not. The relevant conclusion is reproduced from the said order:-
With respect to the above Ground NO. 4.2 has already been adjudciated vide my
order dated 31st August 2010 with resepct to the appeal against the order
u/s 154 issued by the TPO reducing the overall amount of adjustment to
Rs. 71,45,622/- from Rs.21,123,382. Thus the same is not perused in this
order. From the remaining grounds of appeal following issues arise
which require adjudication.
"i) Whether the application of CUP by the appellant was in a reliable and
correct manner;
16 ITA No. 4831/Del/10& 62
(ii) Whether the TPO erred in determining the CUP for consignment dated
October 25, 2004.
(iii) Whether the TPO erred in allowing the benefit of +\5% range."
4.6. In the circumstances the CIT(A) came to the following conclusion :-
24. "I have carefully considered the submissions made by the appellant. In
the current case there is no dispute regarding selection of most
appropriate method. Instead the major point of dispute is with respect to
application of US FOB gulf vis-a-vis India CFR prices.
25. After a consideration of the submission and Power Point
Presentation and perusing the TPO's AO order made by the
Appellant I am of the view that the Appellant has used the prices
published in the Fertecon Report to establish the CUP. Fertecon
Report is widely known amongst industry and is also used by the
Government of India to compute the subsidy offered to the
Fertilizer companies. Further, there is no dispute on the use of
Fertecon report to establish the CUP. Further, it was observed that
the Fertecon Report alongwith US FOB Gulf Prices also contains
India CFR prices. The major difference between the two prices are
with respect to geographical location of the transactions. While US
FOB Gulf prices denotes the prices for fertilizers imported from US
Gulf region to India, India CFR prices depicts prices for fertilizers
imported into India from any other geographical locations and
hence, the port of origin in this case is unknown. In case of the
Appellant, since all the imports made by the Appellant were from US
Gulf region, US FOB Gulf prices were used by the Appellant. Further,
suitable adjustments with respect to difference in freight and credit
terms were made with respect to which again, there is no dispute
between the TPO and the Appellant.
26. In this regard reliance is placed on the ruling provided by Hon'ble
Tribunal in case UCB India Private Limited. In the said case the Hon'ble
IT AT has held as follows.
Quote (Emphasis Supplied)
The Hon'ble ITAT in the case of UCB India (P) ltd Vs ACIT [2009} 30 SOT 95
(MUM) has summarized following principles relevany to CUP method and
has laid down requirement for comparability analysis under CUP method:
· Even a minor change in the properties of the products circumstances
of the trade (billing period, amount of credit there in etc.) may have
significant effect on the price and would greatly affect comparability
under CUP method.
· The CUP method require a high degree of comparability on quantity
of product or services, contractual terms, (warranties, sales or
purchase volumes, credit terms and transportation terms etc.) level
of market (wholesale or retail etc), geographical market, date of
17 ITA No. 4831/Del/10& 62
transactions, intangible property associated with sale, foreign
currency receipt and alternatives realistically available option with
buyer or seller.
Unquote:
Date Adjusted CUP in USD (US Import price paid by
FOB Gulf prices) the Appellant
20-Aug-04 268.95 266.50
20-Aug-04 277.97 272.14
12-Oct-04 285.81 277.53
25-oct-04 236.39 227.27
*Working provided in para 14 above.
a. The above table makes it very clear that that import prices paid by
the Appellant are lower than the prices paid for the same product in
uncontrolled transactions. Based on the same I hold the transactions
undertaken by the Appellant with respect to purchase of DAP to be at
arm's length and allow the appeal of the appellant.
(ii) Whether the TPO erred in allowing the benefit of +\5% range.
In view of the finding as above, this ground does not need any
adjudication.
In view of the above the appeal of the appellant is allowed and the
proposed addition by the TPO amounting to Rs.71,45,622 (Rs.
21,123,382) is deleted."
5. Aggrieved by these findings by way of these the two appeals the Revenue is
in appeal before the Tribunal.
6. The hearing in the present appeals continued on various dates wherein the
Ld. CIT DR heavily relying upon the TPO's order assailed the impugned order on
the ground that the CIT(A) has erred in deciding that the international transaction
with respect to purchase of fertilizers should be bench-marked by the use of US
FOB Gulf prices instead of India CFR prices. It was his submission that the
assessee has failed to prove that the transaction was at arm's length and the
arguments that the prices are favourbale when compared to the adjusted CUP
based on US FOB prices is irrelevant as the market is India and it is India specific
prices which should have been quoted. It was his vehement stand that only to
oblige it's AE, the assessee has necessarily made purchases from the US and when
the product is available in India, at a much lesser price the occasion to refer to US
18 ITA No. 4831/Del/10& 62
FOB Gulf Price for benchmarking the transaction has no logic. It was his
submission referring to the various charts available on record that the issue is very
simple and the correctness of the prices quoted in the Fetecon Report is not an
issue. It was also candidly stated that the calculation mistakes corrected in the
impugned order is also not the grievances of the Revenue. The grievance is posed
on the legal principles as to which price is the correct price for benchmarking the
transaction so as to decide whether the transaction was at arm's length or not. The
issue at hand and the grievance of the Revenue calling for setting the legal position
is that when the "Market" in the facts of the case is India then why justification for
the transaction being at arm's length is being looked at from the point of port of
origin as the port of origin is immaterial and what is material for considering the
arm's length price is the destination point which is India. In this background it was
submitted it has to be considered that has the assesssee shown its transaction at
arm's length price. For determining the same it was submitted it is the price at
which the specific product is available in India which is the relevant price as the
market is India and even if assessee's argument is considered that it is necessarily
required to purchase the product from its AE it was his vehement stand that this
internal arrangement or need of the assessee cannot be taken into consideration for
the issue at hand that was the transaction at arm's length price or not. It was argued
that the Revenue has no role and is not concerned with the internal arrangements.
The Revenue is only concerned that is the price of the assessee for the international
transaction at arm's length or not. Keeping the fact in mind that the port of
destination being India then for benchmarking purposes India specific prices be
considered. The internal agreements, needs or constraints of the assessee or the
regulatory controls to which its AE is subjected it was argued is not relevant to
decide as to what an uncontrolled concern would have transacted for the said
products in India. Reliance was placed upon the order of the CO-ordinate Bench in
19 ITA No. 4831/Del/10& 62
the case of Clear Plus India Pvt. Ltd. vs DCIT, Circle-3(1) in ITA No.-
3944/Del/2010.
6.2. On the other hand Ld. AR has all along argued that whatever method is
followed no adjustments would be warranted. Addressing the facts on record it
was argued that the CIT(A) on the peculiar facts and circumstances of the case has
come to a correct finding as admittedly the Associated Enterprise of the assessee is
located in Florida, USA. Accordingly the US Mexico and Gulf FOB prices close to
the date of transaction have been taken. Referring to the arguments before the
TPO and the CIT(A) at length it was argued that it had been demonstrated that
after making necessary adjustments for freight rate which again is quoted from the
Fertecon Manual and the credit rate the assessee has made adjustments. It was also
stated that it had been argued that Fertecon rates from various markets in the
world are available and no doubt India CFR rates are also available but when in the
facts of the present case the goods are sourced from Florida, USA than the most
appropriate rate was the US Gulf FOB rate. In support of the impugned order it
was argued that India CFR rates did not address the port of origin of the goods and
the goods may have been sourced from China or various other countries which
may be more economical for the buyer however the facts remains that the quality
of goods which the assessee was supplying met with the stringent Regulatory
conditions prevalent in the US market and which may or may not be prevalent in
the other source market but would contribute to the cost as the goods were of a
better quality. Even otherwise without prejudice to the above it was argued that
even if the version of the Revenue is accepted even then no adjustment can be
made as the benefit of + 5 % available to the assessee under the Statute would
decide the issue in favour of the assessee warranting no adjustment. The reliance
placed upon the order of the Co-ordinate Bench in the Clear Plus India Pvt. Ltd.
(cited supra) it was submitted does not detract from the merits of the case and
20 ITA No. 4831/Del/10& 62
addressing page 10 of the impugned order wherein the assessee provided tabular
presentation depicting the comparison of the transaction on various parameters it
was argued that it would be seen that the assessee has made accurate adjustment
and the transfer price methodology adopted by the assessee should be accepted.
7. Both the parties were required to give written submissions addressing the
arguments advanced by them. Ld. CIT DR filed his submissions dated 01.10.2013
and it was stated that copy of the same had been provided to the Ld. AR well in
advance who too has filed written submissions dated Nil received by the Registry
on 20.09.2013.
8. It may be relevant to extract the specific arguments from the said
submissions. The Ld. CIT DR summed up the argument on behalf of the Revenue
as under :-
"2. The peculiar fact in this case is that the assessee purchased fertilizer from
it's A.E. In the market the world over, India specific rates for fertilizer are
available. However, to accommodate its AE, the assessee, purchased goods from
its AE, at USA price, even when India specific prices were available. Any third
party buying/purchasing goods in India will buy good at India purchase price.
Since the Indian entity is purchasing goods for use in India, the applicable price
should be prices for purchase of fertilizer for use in India. However, to
accommodate its AE, the assessee has purchased good at U.S.A price. The tested
party logically is/and should be the Indian entity.
3 The Assessee is taking U.S.A prices and then making adjustments thereon, to
somehow justify that its prices are at Arms Length. Whereas, the prices to be
taken should be India prices and adjustment (if any) should be made thereupon.
4 The geographical market is India since the tested party is the Indian Entity which
has purchased/bought goods for consumption in India. The assessee in its bid to
accommodate its AE, has changed the market to USA. Since goods are purchased
for India and there are prices available for goods to be sold in India, the market
is India and the prices are India prices (These India prices are available in USA
and everywhere) Moreover, the Port of Origin is not important, as the prices are
average prices, and the TPO has duly considered them.
5 The assessee has not been able to counter the case of Clear Plus India (P.)
Ltd., ITA No.3944/D/2010. In the case of Clear Plus India (P) Ltd.; the market
was taken to be the place, where the buyer was situated, and the prices were
taken to be the prices available to the buyer (including 3rd party buyers). Similar
facts are obtaining here also. The assessee, here, is accommodating, its AE ,and
therefore going in for seller's price (and the seller is the American AE)."
21 ITA No. 4831/Del/10& 62
9. A perusal of the written submissions advanced on behalf of the assessee
shows that at pages 1 to 2 of the written submissions filed, paras 1to 6 address the
departmental stand. The facts are found addressed in para 7 to 14.1 at pages 3 to 5
of the 20 paged written submissions which are more or less repetition of the facts
available on record which have already been alluded to at considerable length in
the earlier part of this order. Para 15 to 18.2 of pages 5 to 7 address the
methodology manner of application of CUP by the assessee and paras 19 to 23 at
pages 7 to 8 address the methodology adopted by the TPO. The proceedings
before the CIT(A) are found addressed at pages 8 to 10 vide paras 24 to 28 wherein
the reliance is placed on the order of the CO-ordinate Bench in UCB India Pvt.
Ltd. vs ACIT (30 SOT 95 (Delhi. In this background in support of the impugned
order, the following arguments were advanced on behalf of the assessee :-
Arguments of the Respondent before the Hon'ble bench
29. The Ld. CIT(A)-XX, New Delhi has appreciated the difference between the `US
Gulf FOB' price and the `India CFR Cash' price and accepted the Respondent's
submissions. The following are the major differences between the `India CFR Cash'
price and the `US Gulf FOB'price:
a. In `India CFR Cash' price, the port of origin of DAP is not known. `India CFR
Cash' price is an average price of DAP prevailing in all the markets, in respect of which
the Fertecon publishes the prices. The Fertecon Report itself reveals the prices of DAP
across these markets/countries and the price varies from market to market.
b. The port of origin is an important aspect and it reveals the quality of product,
quality of raw material, technology involved, cost of labour, cost of production,
government regulations, etc. The different markets have different FOB prices and the
price of DAP depends on the market from where the DAP is purchased. The technology
in manufacture of DAP plays a vital role and such technology varies from market to
market in the Globe.
c. In `US Gulf FOB, price, the port or origin of DAP is known. The Respondent's,
AE is located in USA and the geographical location of the international transaction gets
identified. The import of DAP was made from USA by the Respondent and the price paid
to the AE has been compared with the price prevailing in the same geography, namely,
USA by adopting the `US Gulf FOB' price.
d. In `India CFR Cash' price, the destination is India, but which part of India is not
known. The destination could be Vishakpapatnam, on the east coast and Mundra on the
west coast of India. During the previous year, the Respondent had operated on the west
coast.
22 ITA No. 4831/Del/10& 62
e. The `India CFR Cash' price is a spot price and the payment has to be made
immediately. The Ld. TPO adopted the `India CFR Cash' p[rice but for the purpose of
adjustment in respect of credit period has adopted the US interest rates. It is humbly
submitted that the approach of the Ld. TPO is inconsistent. If `India CFR Cash' price is
taken, then, the adjustment for credit period should be the India interest rate prevailing
at that time and not at the US interest rate. This aspect also supports the decision of the
Ld. CIT(A) XX, New Delhi."
9.1 Since the written submissions were exchanged by the parties before the
Bench, it is seen that the department had countered the assessee's stand, these
arguments were rebutted by the Ld. AR in the following manner:-
"40. The Ld. CIT (DR) submitted that the Respondent adopted the US FOB price to
accommodate its AE despite having India specific rate in the Fertecon report. The
Respondent denies tht the US FOB price was adopted for accommodating the AE. For
the purpose of granting the subsidy, Department of Fertilizer, Government of India, has
adopted the same method of calculation of price which has been adopted by the
Respondent. It is also humbly submitted that there was no need for the Respondent to
shift the profit from India to USA as the Respondent paid the tax under the MAT
provisions of the aCt. As submitted earlier, `India CFR Cash' price does not indicate the
port of origin of the DAP, which plays a vital role in taking the business decisions. In
subsequent years, the revenue has accepted the same method of computation of ALP
under the CUP method (AY 2007-08 to AY 2009-10).
41. The Ld. CIT(DR) submitted that port or origin is not important as the goods were
delivered in India. It is humbly submitted that the port of origin is important for taking
vital business decisions and the DAP was imported from USA in pursuance of a
contractual obligation with its AE and the price paid was within +/-5%.
42. The Ld. CIT (DR) submitted tht India specific price was available in the Fertecon
Report and relied on the ratio laid down in UCB India Pvt. Ltd (para 79). It is humbly
submitted that both the Ld. TPO and the Respondent have relied on the external CUP.
The Respondent fulfills all the considtions stipulated by the Hon'ble ITAT in the case of
UCB India Pvt. Ltd (Supra). In Para 79(d0< the parameters laid down in an
independent uncontrolled transactions are:
a. Similar goods;
b. Similar quantity;
c. Similar terms; &
d. Similar market.
Out of the above conditions, the Respondent fulfills the conditions at `a, b & d (Refer to
para 31.1). The Respondent purchased the goods on credit and an appropriate
adjustment was made for the credit period by adopting the interest rate prevailing in
USA. Thus, the Respondents, method of computing the ALP in respect of purchase of
DAP is in accordance with the ratio laid down by the Hon'ble ITAT in UCB India Pvt.
Ltd (Supra).
23 ITA No. 4831/Del/10& 62
43. The Ld. CIT(DR) relied on the decision of the Hon'ble ITAT, Delhi Bench `B' in
the case of Clear Plus India Pvt. Ltd, ITA No. 3944/Del/2010. He drew the attention of
the Hon'be Bench to para 7 of the order and submitted that buyer of DAP is India and
the market is in India, therefore, `India CFR Cash' price, is the specific price which
should be applied and not the `US Gulf FOB' price. It is humbly submitted that the ratio
laid down in Clear Plus India Pvt. Ltd (supra) doesn't support the contention of the Ld.
CIT(DR)."
9.2 The order of the Co-ordinate Bench in the case of Clear Plus India Pvt. Ltd.
(cited supra) which has followed the ratio laid down in SNF (Australia Pvt. Ltd.) it
was argued has been wrongly applied to the present case on the following
grounds:-
Brief facts in Clear Plus India Pvt. Ltd
A. The Assessee is engaged in the manufacture of all seasons wipers and snow
wipes, which were sold to its AE in USA. The AE also purchased the similar goods form
the Chinese manufacturers and the Assessee maintained the details of invoices of Chinese
goods purchased by its AE in USA. The Assessee adopted the CUP method as the most
appropriate method by comparing its selling price with the purchase price by its AE from
the Chinese manufacturers as the goods were similar and the price paid for the India
products was more than the price paid for the Chineses products.
B. On the basis of the above facts, the Hon'ble ITAT observed that goods were sold
by the Chinese manufacturers in the USA market and the assessee also sold the goods in
the USA market. Therefore, the market conditions of sale are the same. At para 6.11 of
the order, the Hon'ble ITAT relied on the ratio laid down by the Federal Court of
Australia in the case of SNF (Australia) Pty Ltd Vs. Commissioner of Taxation, [2010]
FCA 635 (25 June 2010) . At para 6.12, the Hon'ble ITAT observed that " the focus is on
the market on which the products are acquired by the Assessee; and any unique feature
of the market in which the sale is made is of no importance in relative terms; the
comparable transactions that occurred in Australia were not great". Further, at para
7.1 of the order, the Hon'ble ITAT observed that " in the case of SNF (Australia) Pty Ltd
(Supra), it has been held that the focus is on the market in which products are acquired.
The ratio of this case is applicable mutatis-mutandis to the facts of the case as the focus
is on the market in which products are sold."
C. The above ratio laid down by the Hon'ble ITAT in the case of Clear Plus India
Pvt. Ltd is squarely applicable to the facts of the Respondent. The Respondent purchased
the DAP from its AE in USA and compared the controlled transactions with the prices of
DAP in uncontrolled transactions of USA, which were reported by the Fertecon Report.
Thus, the prices of DAP which were compared were from the same geography or market.
D. The Hon'ble ITAT in Clear Plus Pvt Ltd (supra) has applied the ration laid dowsn
in SNF (Australia) Pty Ltd (supra).
Brief Facts in SNF (Australia)Pty Ltd.
In this case, the taxpayer carried on the business of manufacture of chemicals known as
flocculants and coagulants in Australia and for the purpose of manufacture it had
imported products/raw material from its AEs located in France, USA and China. The AE
24 ITA No. 4831/Del/10& 62
in France had also supplied the same products/ raw material to independent distributors
in other countries and also to the taxpayer in Australia. The price paid by the taxpayer
in Australia was the same price which was paid by the Independent distributors to its AE
in France. On these facts, the Australian Federal Court at para 146 observed that "This
evidence relied upon the taxpayer establishes the true comparable nature of the
transactions relied upon. As I have already indicated the focus is on the market in which
the products are acquired by the taxpayer and unique features of the market in which the
taxpayer sells is of no importance". Thus, the ratio laid down by the Australian Federal
Court applies to the facts of the Respondent (the kind attention of the Hon'ble bench is
drawn to the paras 3,4,68,74,75,78,82,140,144& 146 of the decision). Thus, the ratio
laid down in Clear Plus India Pvt. Ltd & SNF (Australia) Ptly Ltd support the
Respondent's case.
44. The Ld. CIT(DR) has submitted that the tested party is the Respondent, therefore, the
India specific price should be adopted. He further submitted that the method of
computation of ALP by the Respondent is against the ratio laid down in Clear Plus India
Pvt. Ltd. it is humbly submitted that there are various differences between the `India
CFR Cash' price and the `US Gulf FOB' price (as submitted at Para 29). The concept
of Tested Party doesn't come in the way of adoption of US Gulf FOB price as the
imported DAP price is compared with the prevailing uncontrolled price in USA (as
reported in the Fertecon Report).
9.3 Addressing the interest charged by the assessee in order to compute the
correct adjustment, the assessee's stand was summarized as under :-
"45. The Ld. CIT(DR) submitted that there is a variation in computation of Interest
rate and drew the attention of the Hon'ble Bench to page 289 of the paper book.
It is humbly submitted that Ld. TPO has nowhere in his order disputed the said
interest rate. The Respondent for the purpose of adjustment applied the US prime
lending rate which was approximately US 4.5% during the previous year and the
Ld. TPO accepted the same interest rate while computing the amount of Transfer
pricing adjustment. Thus, there is no dispute on the interest rate which should be
used for the purpose of computing the adjustment."
10. It would also be necessary for the sake of completeness to bring out the
department's response to Para 29, 30, 31, 32, 33, to 38 and 39 of the 20 pages
submissions of the assessee. The same is extracted from the written departmental
submissions hereunder:-
Counter to Para 29
"India specific prices are available. The port of origin of DAP has been duly factored in
India CFR prices. The TPO has made due adjustment for freight and for credit terms.
The assessee has not brought in anything to prove that the quality of its AE is superior
and tht of other sellers who are selling at India Specific prices is inferior.
25 ITA No. 4831/Del/10& 62
In Paragraph 29(b) the Assessee speaks of different quality of product, of raw material,
technology, cost of labour, cost of production, government regulation etc.
It is pointed out that all these difference have been indicated by the assessee (though not
proved), merely to accommodate the foreign AE. The quality of AE and the 3rd party has
not been differentiated at all. A buyer is concerned with the prices he is getting, and not
the cost of labour, cost of production, government regulation of a particular seller.
Counter to Para 30
The letter of Govt. of India is dated July 20089, whereas the financial year involved is FY
2004-05. The assessee is merely fabricating retrospectively in this communication that
the leter has future applicably is clear from the wording "5) monthly concession for
imported DAP will be based on.........."
The use of word "will" shows that it has future applicability and is not relevant.
Counter to Paras 30 & 31
The India specific prices are for similar goods, the market is India, the Indian Govt.
regulations have been duly factored in, and the TPO has made the due adjustments
starting from India specific prices.
Even the order in the case of UCB, India, as referred to by the assessee, in para 31.1 of
its submissions speaks of "(d) an independent terms from other independent enterprises
in a similar market (an external comparable)
The facts are squarely applicable in case of the assessee also.
Since the Indian assessee is buying/purchasing goods, the prices are the ones that are
India specific. Any third party buying goods in India, will buy at the best prices which
clearly are Indian specific pries.
Counter to Para 32
The assessee, chose the prices to suit its foreign AE. The assessee did not buy at the
best price which was the India Specific Price, which was lower than the US price. This
has been detailed by the TPO.
Counter to Para 33 to 38
This relates to claim of safe harbour benefit, and involves a set of calculations, which
was not before the TPO.
Counter to Para 39
The TPO, as per law, is allowed to choose the Most Appropriate Method. The assessee
might have, in the subsequent years, imported/purchased goods at ALP, as per the TPO
and the TPO would have thought it proper not to make any adjustments on the basis of
26 ITA No. 4831/Del/10& 62
facts before him. The TPO has been very judicious on facts as he would have obtained.
This argument therefore is not relevant.
11. On the last date of hearing, both the parties reiterated their respective stands
based on the written submissions filed. Addressing the assessee's stand, the Ld.
CIT DR stated that the arguments that there is no motive in shifting the profit from
India is not a relevant argument. Similarly the arguments on behalf of the assessee
that ultimately whichever method is followed and no adjustment would be called
forth if the benefit of + 5% as mandated in proviso to section 92C(2) is given it
was his submission is also not the criteria on the basis of which decision on the
grievance of the Revenue is not given as whether ultimately there is an adjustment
or not would be a matter of fact and whatever relief the assessee is ultimately
entitled to by the Statute is not and cannot be opposed by the Revenue, however
what is relevant is that it was argued, the legal principle be decided.
12. We have heard the rival submissions and perused the material available on
record and considered the submissions advanced on behalf of the parties before the
Bench. On a careful consideration of the same, we are of the view that the
departmental stand to the extent that the bench-marking should have been taking
into consideration by considering the India specific prices deserves to be upheld.
No doubt the assessee in terms of the contract entered into with its AE being a
100% subsidiary of GNS II Corp US made purchases from its AE, the need and
necessity of adhering to the Contracts and Arguments with the AE stands
unrebutted. However we hold on a consideration of the facts and circumstances of
the case that the decisive criteria should be the market in which the goods are
destined. In order to consider the arm's length price it is necessary to see at what
price the product would be purchased in India by an uncontrolled party who is to
procure the product in India. It is that price which should have been taken by the
assessee for benchmarking.
27 ITA No. 4831/Del/10& 62
12.1 We may at this point also address the arguments made in passing on
behalf of the assessee ,which me may refer, were made de hors any evidence that
the assessee's product sourced in USA necessarily may have been of a superior
quality as opposed to the product readily available in India may be from Asian
countries. It is a matter of record that there is no discussion in any material on
record in regard to grading or quality of the product. Moreover even before us
there is no plea to consider fresh evidence qua the difference either in grading or
quality of the product sourced from USA or Asia. Thus in the absence of any
material or evidence in regard to the same the argument forwarded for the first
time now that too in passing in regard to justification of arm's length price on the
reasoning of possibility of superior quality of goods has no merit or relevance and
has to be dismissed as based on no evidence.
12.2 Similarly the arguments based on unique market conditions prevalent in
USA by way of stringent Regulatory condition adding to costs of the product for
the assessee is not relevant as the tested party should be in India and the quality of
products has never been argued before any of the two forums and even before us
as observed no attempt to plead for placing such evidence let alone placing
necessary evidence on record has been done. Considering the legal precedent as
laid down in Clear Plus we hold that for the purposes of considering the arm's
length price of the transaction it is necessary to benchmark the transaction with the
price of the said commodity which any third party purchasing the goods in India
would pay in India. It is this price which should have been taken as a bench-mark
to consider whether the price paid by the assessee to its AE is at arm's length or
not. Admittedly this was not the approach of the assessee and admittedly this also
was not the approach of the CIT(A). We have taken into consideration the order
of the Co-ordinate Bench in the case of UCB India Pvt. Ltd. vs ACIT 317 ITR 292
(AT) which it is seen has wrongly been applied by the CIT(A) to the facts of the
28 ITA No. 4831/Del/10& 62
present case. On the other hand the view taken is found to be supported by the
decision of the Co-ordinate Bench in the case of Clear Plus India Pvt. Ltd. (Cited
Supra).
12.3. We also do not find any merit in the arguments advanced on behalf of the
assessee canvassed for upholding the impugned order on the reasoning that there is
no motive for the assessee to shift the profit from India as lack of motive, on the
part of the assessee cannot be a reasoning on the basis of which the departmental
appeal on the legal issue can be dismissed unless the issue is given up by the
department which admittedly is not a fact in the present proceedings.
12.4 Similarly the argument that no adjustment would be warranted whatever
method is followed as such the departmental appeal be dismissed is also not an
argument which can be the reason for dismissing the appeal. The issue under
challenge as per the focus of the arguments advanced by the parties is whether for
benchmarking purposes the product purchased by the assessee from its AE to be
sold in India should be benchmarked by taking India specific prices or prices in
the market of the source country. We are of the view as observed that the need and
compulsion of the assessee to purchase the product from its AE in US as per the
terms of Agreement with the AE cannot be an argument to take the prices which
are dictated by unique market conditions of the AE since the product purchased
from the AE has to be considered for the purposes of transfer pricing to adjudicate
whether the transaction is at arm's length for which to our minds the tested party
should be in India and thus for bench marking purposes the India specific prices
are to be considered and this duty and responsibility to lay down the principle
cannot be shied away from or abdicated on the alter of convenience or there being
no impact on the adjustment ultimately unless the aggrieved party pleads that on
account of this reasoning they choose to give up the argument which as observed is
not a fact in the present case as the Revenue has insisted upon a finding.
29 ITA No. 4831/Del/10& 62
12.5 We may also deal with the argument advanced on behalf of the assessee that
in subsequent year the TPO has accepted the assessee's stand. Considering the
same we hold that this argument also cannot form the basis of a finding in the
present case warranting a dismissal of department's appeal as not only it is a
settled legal position that res-judicata does not strictly apply to income tax
proceeding as each assessment year is an independent year. Apart from that we are
of the considered view thatlack of action on the part of the AO in a subsequent
year on facts which did not warrant interference or warranted interference despite
which the methodology was accepted cannot be the edifice on which it can be held
that the department's appeal be dismissed. Once an issue is agitated before us for
laying down the legal position as to whether in the facts of the present case bench
marking should have been done keeping India specific prices as benchmark or as
per the unique market conditions of the source country then we are bound to
address the correct legal principles which we have done. The duty placed upon us
to address the grievance has to be discharged unless the aggrieved party choose to
give up the point. By our detailed reasoning we have held that the departments
stand is correct as unique geographical market conditions of the source country in
the present facts of the case have no relevance for bench-marking purposes. We
have held the focus has to be on India prices as the market for the product of the
assessee is India and any third uncontrolled entity for selling similar product would
pay the price for the said product going by India specific prices as such they should
form the basis for benchmarking. Accordingly we set aside the impugned order and
restore the issue back fact to the TPO to readjudicate the issue afresh by way of a
speaking order in accordance with law after giving the assessee a reasonable
opportunity of being heard. The TPO shall also consider the benefit of + 5%, it
available to the assessee on facts of the case . The impugned orders as such are set
aside.
30 ITA No. 4831/Del/10& 62
13. In the result ITA 62/Del/2011 and 4831/Del/2010 of the Revenue are
allowed for statistical purposes.
The order is pronounced in the open court on 18th of December 2013.
Sd/- Sd/-
(S.V.MEHROTRA) (DIVA SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 18 /12/2013
*Amit Kumar/R. Naheed*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT, NEW DELHI
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