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M/s.Trimex Industries (P)Ltd.,Trimex Towers,IV Floor No.1, C.P.Ramasamy Avenue, Alwarpet,Chennai 18. Vs. The Assistant Commissioner Of Income-tax, Central Circle-IV(3),Chennai.
June, 28th 2012
                   `C' BENCH, CHENNAI


                   I.T.A. No. 2117/Mds/2010
                  Assessment Year : 2006-07

M/s.Trimex Industries (P)
Ltd.,                                   The Assistant Commissioner
Trimex Towers,IV Floor        Vs.       Of Income-tax,
No.1, C.P.Ramasamy                      Central Circle-IV(3),
Avenue, Alwarpet,                       Chennai.
Chennai ­ 18.
PAN ­ AABCT 0212 F
   (Appellant)                             (Respondent)

          Appellant by : Shri B.S. Purushottam, CA
         Respondent by : Smt. Anupama Shukla, IRS, CIT

          Date of hearing             : 14th June, 2012
          Date of pronouncement       : 25th June, 2012



     This appeal is filed by the assessee.            The relevant

assessment year is 2006-07.         This is a transfer pricing case.

The appeal is directed against the assessment order passed
                               :- 2 -:                ITA 2117/10

under sec.143(3) read with sections 153A, 153C and 144C of the

Income-tax Act, 1961.

2.     The assessee is an exporter of minerals.     The minerals

exported are Barite Powder, Bentonite Lumps, Potash Feldspar

etc.     The assessee mainly exports these minerals to its

Associated       Enterprise(AE), namely, Trimex International at

Dubai. The assessee also makes occasional exports to non AEs,

as well.

3.     In determining the Arm's Length Price(ALP) in the transfer

pricing transactions, the matter was referred to the Transfer

Pricing Officer(TPO)-III at Chennai. The TPO passed her order

u/s.92CA on 30.10.2009 suggesting an addition of `3,90,47,364/-.

4.     The assessee has exported five varieties of minerals during

the previous year relevant to the assessment year under appeal.

Those varieties are :

       (i)     Barite Powder
       (ii)    Bentonite Lumps
       (iii)   Bentonite Powder
       (iv)    Potash Feldspar Lumps
       (v)     Soda Feldspar Lumps
                                :- 3 -:                       ITA 2117/10

5.      The assessee has followed TNMM method for the transfer

pricing analysis in respect of Bentonite Lumps, Bentonite Powder

and Potash Feldspar lumps.          But the TPO substituted CUP

method instead of TNMM method applied by the assessee. In the

case of remaining two items, Barite Powder and Soda Feldspar

Lumps, the assessee as well as the TPO adopted CUP method.

In short, the Assessing Officer adopted CUP method for analyzing

the price comparison of all transactions to arrive at the ALP.

6.      On analysis of the details and particulars, the TPO arrived

at the additional amounts to be added towards ALP adjustment, in

the following manner :


(i)     Barite Powder                1,07,85,472.50

(ii)    Bentonite Lumps              1,01,46,830.00

(iii)   Bentonite Powder                  57,71,100.00

(iv)    Potash Feldspar Lumps             79,87,256.70

(v)     Soda Feldspar Lumps             43,56,975.20
             Total addition          3,90,47,634.40
                                  :- 4 -:                 ITA 2117/10

7.    On the basis of the direction of the TPO, the Assessing

Officer made an upward revision of ALP, resulting in an addition

of ` 3,90,47,634/- and issued a draft assessment order.

8.    The draft assessment order was taken up before the

Dispute Resolution Panel(DRP) at Chennai protesting the

proposed addition of ` 3,90,47,634/-. The DRP confirmed the

proposal of adding of ` 3,90,47,634/- through their proceedings

dated 29.9.2010.     Thereafter the assessment was finalized as

proposed, resulting in ALP addition of ` 3,90,47,634/-.

9.    This ALP addition is the point of dispute raised in the

present appeal, before us.

10.   The assessee has contended that the DRP has erred in

abdicating its statutory responsibility of resolution of dispute in fair

manner and merely confirmed the order of the TPO without any

rhyme, reason or justification.      The assessee further contended

that the DRP ought to have appreciated on the facts and

circumstances of the case that there is no need for upward

revision in sales amounting to ` 3,9,047,634/- in respect of
                              :- 5 -:                 ITA 2117/10

international transactions on the ground that the transfer price is

not at ALP.

11.   We heard Shri B.S.Purushottam, the learned Chartered

Accountant appearing for the assessee and Smt. Anupama

Shukla, the learned Commissioner appearing for the Revenue.

12.   The learned counsel explained that the TPO has made

upward revision of sales price in respect of 5 products

independently, of which the total comes to ` 3,90,47,634/-.

13.   Regarding the adjustment of ` 1,07,85,472/- made by the

TPO towards Barite Powder sales, the contention of the learned

counsel is that the comparison made by the assessee with sale

price by its competitor was fair enough, as there was no material

difference between the assessee and its competitor.     In respect

of comparison of prices of other players in the field, the TPO has

compared the sale prices of the assessee, relating to the sales

made to AE and relating to the sales made to non AE.           The

learned counsel submitted that the sale of Barite Powder to non

AE was a small quantity of 324 MT compared to the sale of 8250
                               :- 6 -:                 ITA 2117/10

MT to its AE. He explained that the qualities were also differed.

The regular business of the assessee is export of minerals to its

AE at Dubai and that export provides chunk of the business of the

assessee.   Therefore, the price offered to AE at Dubai would be

moderated by the volume of sales, whereas the sale of 324 MT

made to non AE was only an occasional transaction, where no

such moderation is given by the assessee. In addition to that, the

learned counsel pointed out that the sales were made on FOB

basis whereas the sales made to non AE were on CIF terms. If

the factors of freight and insurance are deducted from the CIF

rate, it is well comparable to the FOB rate quoted by the assessee

to AE except for a nominal difference.       The learned counsel

further explained that while comparing the sale prices made to AE

and non AE, the TPO has not at all considered the various

qualities and quantities in different consignments of exports. It is

evident from the invoices themselves that the sale price is

depending upon the quality of the minerals. In support of which

the assessee has filed chemical analysis report before the TPO to

show that there are substantial differences in quality of different

consignments and value is determined on the basis of quality.
                               :- 7 -:                  ITA 2117/10

The learned counsel further pointed out that even a mistake

occurred in the invoice was not considered by the TPO, where

there is a significant cost difference in sale of powder and the sale

of lumps. The sale of powder always brings more price than the


14.   The same pattern of arguments have been advanced by the

learned counsel in respect of other four items of additions made

by the TPO.     In the case of Bentonite Lumps and Bentonite

Powder, the learned counsel contended that TNMM method used

by the assessee was more relevant than CUP method adopted by

the TPO. In the case of these two items also, the learned counsel

pointed out that the price of small quantity sales has been

compelled, the TPO to adopt the price of large quantity sales. In

respect of other items, he contended that the TPO has not

considered various factors like quantity, quality, etc. and blindly

accepted the price reflected in a low volume sale.

15.   The learned counsel relied on the decision of the Hon'ble

Supreme Court in the case of DIT (International Taxation) v.

Morgan Stanley and Co. Inc. (292 ITR 416) wherein the Supreme
                               :- 8 -:                 ITA 2117/10

Court has upheld the proposition that all the relevant factors, such

as sale, quality, quantity, risk etc. had to be compared while

making study of transfer pricing. The learned counsel contended

that in the present case, no such study was made by the TPO.

16.   The learned Commissioner appearing for the Revenue, on

the other hand, submitted that the TPO has considered the

matters in a very detailed manner and the TPO has adopted the

price disclosed by the assessee itself while adopting CUP method

for   analyzing   the   international    taxation.   The    learned

Commissioner explained that the assessee has provided the case

of one outsider for comparison. The assessee itself has details of

different sales made to different parties. Therefore, she submitted

that in the nature of business carried on by the assessee, the

transfer pricing study made by the TPO is comprehensive and the

ALP adjustment suggested by the TPO is just and reasonable.

She, therefore, submitted that the assessment orders may be


17.   We have heard both sides in detail.
                                :- 9 -:                   ITA 2117/10

18.    First of all, we have to say that the DRP at Chennai has not

applied their mind to the merits of the case, as explained by the

assessee, before us. This position is clear from paragraph 5 of

the proceedings of the DRP which is reproduced below :

      "5.    We have carefully considered the facts of the

      case, examined the records and considered the oral

      and written submissions made on behalf of the

      assessee.      The   assessee       has   entered    into

      international transactions with its AEs.         In this

      connection, the facts recorded by the T.P.O. in the

      T.P.O's order are not disputed. What the assessee

      has disputed is the interpretation of such data and

      facts. The learned ARs has made arguments largely

      on the legal issues. The T.P. audit is basically a fact

      based exercise. The law on transfer pricing in India is

      not yet fully evolved and contentious issues are not yet

      settled. Therefore, the assessee's reliance placed on

      various court decisions in support of its contention that

      the T.P.O. has erred in recommending the adjustment

      has to be understood in this background.             The
                                  :- 10 -:                   ITA 2117/10

      contentious issues pertaining to the T.P. audit are not

      yet settled or resolved. We therefore uphold the action

      of the T.P.O. in making adjustment in respect of

      assessee's international transactions both its AEs.

      Consequently,    the    addition       of   `   3,90,47,634/-

      proposed by the A.O. is confirmed and these grounds

      of dispute are rejected."

19.    Therefore, we straightaway go to the order passed by the

TPO to examine whether the addition is called for or not.

20.    It is worthwhile to mention here that an appeal filed by the

Revenue for the earlier assessment year 2005-06 in assessee's

own case, has been heard and disposed of by this Tribunal

through our order of even date in ITA No.527/Mds/12.                  The

findings arrived at by the Tribunal in the said order are equally

applicable to the present case, as the pattern of transfer pricing

analysis made by the TPO in both cases is exactly similar. The

facts are identical. Therefore, the said order also may be read

along with this impugned order.
                              :- 11 -:                 ITA 2117/10

21.   The TPO has considered the sale value of five items, Barite

Powder, Bentonite Lumps, Bentonite Powder, Potash         Feldspar

Lumps and Soda Feldspar Lumps.            In respect of Bentonite

Lumps, Bentonite Powder, Potash Feldspar lumps, the assessee

has adopted TNMM method. In respect of other two items, CUP

method has been used.      But the TPO has made the studies by

adopting CUP method for all these five items. As far as this case

is concerned, the CUP method is also equally acceptable and,

therefore, we are not inclined to discuss on the proper method of

comparison to be adopted in this case. That study would be only


22.   In fact, the assessee has compared its sale price to the AE

with that of the export rate of the competitor, M/s. IBC Ltd. In the

case of Barite Powder, the export price by M/s. IBC Ltd. was US$

51.65 per MT, whereas the price realized by the assessee for the

shipment made in April 2005 was US$ 48.50 per MT and US$

54.50 per MT for the shipment made in September, 2005. The

average price realized by the assessee on export of minerals to

its AE is very much comparable to the price reflected in the
                             :- 12 -:                ITA 2117/10

transactions made by its competitor, M/s. IBC Ltd. As already

stated, for the earlier assessment year 2005-06, the assessee is

operating in a very limited sphere.      The assessee and its

competitor, few in number, have obtained licences from State

Government undertaking of Andhra Pradesh on the basis of

public auction. The dealers in this field are few in numbers. This

is mainly because the exporters of bulk minerals are very few in

India. Therefore, as pointed out by the assessee, there cannot be

a large number of cases available for comparison.

23.   The most important point is that in the case of assessment

of M/s. IBC Ltd., the authorities have made a comparison with

sale price recorded by the assessee and that comparison was

found reasonable and no addition was made in the case of M/s.

IBC Ltd. This is a sure case of double standard. The TPO has

made a fundamental omission in not comparing the rate declared

by M/s. IBC Ltd. while proposing the additions in the hands of the

assessee company.

24.   Then what is the method of comparison adopted by the

TPO? This is apparent in the case of Bentonite Lumps. The TPO
                              :- 13 -:                 ITA 2117/10

has adjusted the price reflected in the sale of 40 MT Bentonite

Lumps made to non AE. The TPO summarily rejected the sale

price reflected in the case of a sale of 23500 MT made to its AE.

Is it fair to say that the export price of 23500 MT would be exactly

that of a sale of 40 MT?      In every trade, the volume of the

consignment is a very important factor.      It is to be seen that

almost the entire sales of the assessee are made to AE at Dubai.

Therefore, the price offered to its Dubai AE will be influenced by

volume, frequency and other vital aspects of the trade. The sale

of 40 MT made to non AE was an occasional sale, where the

assessee was not constrained by such considerations as

applicable in the case of its AE. Therefore, it is evident that the

TPO has erred in comparing the mountain with a mole hill.

25.   This is the same case with Bentonite Powder, where the

assessee has made a sale of 6000 MT to AE whereas the sale to

non AE was just 110 MT. This is the fate of other remaining


26.   The   most    glaring feature of the transfer pricing study

placed before us, is that the TPO has overlooked the simple
                              :- 14 -:                ITA 2117/10

arithmetic of the case discussed in our order passed for the

earlier assessment year 2005-06. We have made this point very

clear that the assessee is making sales to AE on FOB basis. The

assessee is making sales to non AE on CIF terms. There is a

difference between CIF and FOB value. When the freight and

insurance factors are excluded from the CIF value reflected in the

invoice issued against the sales made to non AE, it is very clear

that the said amount is very much comparable to FOB value

reflected in the invoice issued against the sales made to AE. It is

evident from the records that the price variation between the sale

made to AE and non AE is predominantly, because of the

different methods of invoicing as FOB and CIF.

27.   In addition to the above, it is to be seen that the TPO has

not considered the quality variation in the minerals exported by

the assessee. The assessee has in fact filed chemical analysis

report before the TPO to show that different consignments have

different qualities depending upon the contents of potash,

nitrogen etc. The chemical analysis report submitted by the

assessee showed that different consignments have different
                                 :- 15 -:                ITA 2117/10

chemical compositions and therefore, they vary in quality. The

price is of course, fixed on the quality of the minerals exported by

the assessee.

28.      The assessee has also pointed out an example to the TPO

that mistakes occur sometimes in the invoices/shipping bills

where Lumps are shown as Powder. Powder is sold for a better


29.      In the light of the detailed discussion above, we come to the

following findings:

         (1) The TPO has not made any external comparison of the

         prices, even though the assessee has furnished the price

         details of M/s. IBC Ltd.      The TPO has accepted the

         particulars furnished by M/s. IBC Ltd. in the assessment of

         that company whereas there is no material difference in the

         price quoted by the assessee and that company.

         (2)   The TPO has adopted the special sale price

         attributable to non AEs on small quantity by ignoring the
                                :- 16 -:              ITA 2117/10

      price quoted by the assessee to its AE for bulk and regular

      sales.   The variables adopted by the TPO for making

      comparison are fundamentally different and, therefore, the

      comparison is erroneous.

      (3)   The TPO has overlooked the basic difference

      between FOB and CIF value while comparing the sale price

      attributable to AE as well as to non AEs. While accepting

      the comparing sale value in the case of non AE, the TPO

      has ignored the factors like deployment of additional capital

      and risk involved.

      (4)   The TPO has not considered quality variation in

      different consignments and the corresponding variations

      reflected in the pricing of exports.

30.   Therefore, in the facts and circumstances of the case, we

find that transfer pricing study made by the TPO is far away from

reality. If the erroneous presumptions of the TPO are excluded,

we find that the price disclosed by the assessee is comparable

and compatible to ALP and no adjustment is called for in the
                                :- 17 -:                 ITA 2117/10

present case.      We accordingly delete the ALP addition of


31.    In result, this appeal filed by the assessee is allowed.

       Order pronounced on Monday, the 25th of June, 2012 at


           Sd/-                                         Sd/-
     (VIKAS AWASTHY)                          (Dr. O.K.NARAYANAN)
      Judicial Member                              Vice-President

Dated the 25th June, 2012


Copy to:

1.    Appellant
2.    Respondent
3.    CIT(A)
4.    CIT
5.    DR
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