IN THE INCOME TAX APPELLATE TRIBUNAL
`C' BENCH, CHENNAI
BEFORE Dr. O.K.NARAYANAN, VICE-PRESIDENT
AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER
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
ORDER
PER Dr. O.K.NARAYANAN, VICE PRESIDENT
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
lumps.
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
confirmed.
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
academic.
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
items.
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
price.
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
`3,90,47,634/-.
31. In result, this appeal filed by the assessee is allowed.
Order pronounced on Monday, the 25th of June, 2012 at
Chennai.
Sd/- Sd/-
(VIKAS AWASTHY) (Dr. O.K.NARAYANAN)
Judicial Member Vice-President
Chennai,
Dated the 25th June, 2012
mpo*
Copy to:
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
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