IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : FRIDAY I-2 : NEW DELHI
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
AND
SMT. BEENA A. PILLAI, JUDICIAL MEMBER
ITA No.4093/Del/2016
Assessment Year: 2010-11
Otsuka Chemical (India) Pvt. Ltd., Vs DCIT,
861-862, Joshi Road, Circle-13(1),
Karol Bagh, New Delhi.
New Delhi.
PAN: AAACO8042K
(Appellant) (Respondent)
Assessee by : Shri Hiren Mehta, CA
Revenue by : Shri A. Srinivas Rao, Sr. DR
Date of Hearing : 21.02.2019
Date of Pronouncement : 17.05.2019
ORDER
PER R.K. PANDA, AM:
This appeal filed by the assessee is directed against the order of the CIT(A)-44,
New Delhi, dated 29th February, 2016 relating to assessment year 2010-11.
2. Facts of the case, in brief, are that the assessee, Otsuka Chemicals India Pvt.
Ltd. (OCIPL), is a company wherein Otsuka Chemical Company Japan (OCCJ) owns
92.05% of shares and 7.53% shares are held by Dhanuka Laboratories Ltd. Rest of the
shareholding is held by individuals and outsiders. OCIPL is engaged in manufacture /
ITA No.4093/Del/2016
production of GCLE (Advance Cephalosporin Drug Intermediate) which is finally
used by customers for making advance stage of Anti-Biotic Bulk Drugs. The
Company is into only one business segment and is a single product company
manufacturing / producing GCLE. Certain By- Products also emerge / get produced in
the manufacturing process of GCLE. The assessee filed its return of income on 29th
September, 2010 declaring nil income. A reference u/s 92CA of the Act was made by
the Assessing Officer to the TPO for determining the ALP of the international
transactions entered into by the assessee. The TPO, during the course of TP
assessment proceedings, observed that the assessee has entered into the following
international transactions with its AE:-
No. Nature of transaction Method Amount
1 Sale of finished goods GCLE CUP 27,83,68,478
2 Purchase of raw material (Raw GCLE) CUP 2,66,97,330
3. The assessee has used CUP method to benchmark the transactions. It was seen
that it has sold finished goods (GCLE) to both AEs and non-AEs. Finished GCLE has
been sold at an average FOB rate of Rs.49.57/- per Kg to AEs and at an average FOB
rate of Rs.3050/- per Kg to Non-AEs and hence the transaction of sale of finished
goods to AEs was found to be at arm's length.
4. The TPO noted that the assessee during the year under consideration has
purchased raw GCLE from AE @ US $ 60 per Kg. and at the rates of 65, 65.50 and 70
from non-AEs as per the following details:-
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Date AE? Particulars Invoice no Qty in Kg. Rate-USD Amount-USD
Type
28-10-2009 Non-AE Lupin Ltd *09000951 2,010.00
CIF 65.00 1,30,650.00
13-11-2009 Non-AE Orchid Chemicals *09000952 2,520.00
CIF 70.00 1,76,400.00
26-12-2009 Non-AE Dhanuka Labs *09001227 5,010.00
CIF 65.50 3,28,155.00
16-07-2009 AE Otsuka India RAW GCLE CIF 9,090.00 60.00 266,97,330
5. He, however, noted that the date of transactions are not same and there are
fluctuations in price of GCLE over a period of time. Hence, the assessee was asked to
give comparable CUP data of Raw GCLE price at the same time when the same has
been purchased from the AE. However, the same could not be furnished. In absence of
the same, the prices of finished GCLE were examined on the relevant dates viz. the
dates of purchase of raw GCLE from AE and non-AEs. It was seen that there were few
transactions exactly on the relevant dates so the search was widened to find sale prices
of finished GCLE to non-AEs during the period from a date 10 days before the
relevant date to a date 10 days after the relevant date. The Assessing Officer, applying
the ratio of FG/RM i.e., finished goods by raw material, calculated the average rate of
55.67 per Kg. and took the same as arm's length price and, accordingly suggested an
adjustment of Rs.19,26,657/-. The assessee intimated that it does not intend to file
objections before the DRP and accordingly requested that final assessment order may
be passed in the case. The Assessing Officer, accordingly made adjustment of
Rs.19,26,657/- to the total income of the assessee on account of transfer pricing
adjustment.
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6. In appeal, the ld.CIT(A) upheld the action of the Assessing Officer by observing
as under:-
"3.3 Decision
I have carefully considered the assessment order, transfer pricing order, written
submission and oral arguments of the Ld AR.
Ld AR has explained that in present case, the AE of the appellant has been
taken as tested party and the AE of the appellant has sold similar goods from
Japan to India to the appellant as well as to third party. Ld AR has explained
that TPO has wrongly considered the sale by the parent company i.e. AE to
third party as the transactions of the AE. However, this fact will not change the
position that the price of raw GCLE has wide fluctuation with the date.
Therefore, it was relevant to consider nearby dates for the rate of raw GCLE
sold to non-AE.
As the TPO has observed the fluctuation, it was asked the appellant to provide
the prices of raw GCLE at which were sold to independent third party by AE
for nearby purchase dates of the appellant. In absence of instances exact date
of purchase by the appellant from its AE, the TPO has considered the data
during 10 days prior to invoice and 10 days after invoice. On the basis of
finished goods by raw material ratio it was concluded that the cost of raw
GCLE should be 54.58 US$ instead of 60 $ charged by the AE. The appellant
has objected that instead of +/-10 days the period should be taken +/-20 days
or +/-30 days and provided such data. The average of +/-20 days and +/-30
days came to 55.75 and 55.58 US$ and average of these two rates came 55.67
and the Ld TPO has applied this rate for computing arm's length price.
Main arguments of the Ld AR that under CUP the prices have to be compared
and not the ratios. I have considered this argument carefully, I agree with the
findings of the TPO that he has not compared with the ratio but trying to find
out the prices of raw GCLE at the near date of the transactions. While doing
so, he has applied the ratio of FG/RM (finished goods/raw material). Applying
this ratio also infact it is the only cost which has been at any profit while
taking this ratio. In absence of the data relating to purchase price of third party
in India for raw GCLE on similar date it is proper to apply ratio to obtain such
data in absence of wide fluctuation in cost of GCLE. Therefore, this argument
of the Ld AR is rejected.
Second argument of the Ld AR is that the Ld TPO has rejected the CUP as the
most appropriate method. I do not agree with this argument. The TPO has not
rejected CUP per say but only modified the price for independent party at near
date of actual transaction by applying the ratios. Therefore, the said ratio of
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FG/RM (finished goods/raw material) has been properly applied to arrive at
the market rate as per CUP. Accordingly, this argument is also rejected.
Considering the entire facts and circumstances of the case and the market rate
of raw GCLE near to purchase date has rightly been computed at US$ 55.67
per kg and the same should be taken as arm's length price. Accordingly,
adjustment made by the TPO in ALP is hereby confirmed. These grounds of
appeals are dismissed.
4. As a result, appeal is dismissed."
7. Aggrieved with such order of the CIT(A), the assessee is in appeal before the
Tribunal by raising the following grounds:-
"1. That on the facts and circumstances of the case and in law, the
Order passed by Hon'ble CIT (A) is contrary to the facts and bad in
law.
2. That on the facts and circumstances of the case and in law,
Hon'ble CIT (A) erred and was not justified in confirming the addition
of Rs. 19,26,657/- on account of transfer pricing adjustment on the basis
of order passed by Ld. TPO U/s 92CA(3) on the following grounds
a) rejecting the direct evidence in form of sales invoices showing
sales of Raw GCLE by AE to the assessee and to non-related parties.
b) arriving at the price of Raw GCLE by applying the ratio FG/RM
(Finished Goods / Raw Material) by alleging that there is difference in
dates of transactions between AE with assessee and AE with non-
related parties, thereby comparing the profits and not prices.
c) rejecting the CUP by upholding the order of TPO stating that,
TPO has not rejected CUP but only modified the price for independent
parties at near date of the actual transactions by applying the ratios
FG/RM (Finished Goods / Raw Material), whereas the Ld TPO had
rejected the CUP applied by the assessee.
3. That the Appellant craves leave to add, alter, amend, modify any
of the ground during the course of appeal. "
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8. The ld. counsel for the assessee strongly objected to the order of the CIT(A).
He submitted that in order to benchmark the transactions, the assessee had used direct
evidence i.e., transactions entered into by the AE with unrelated parties for identical
goods. Transactions of sale of identical goods by the AE with unrelated parties were
available during the F.Y. 2009-10 and, therefore, the assessee used CUP (Internal
CUP) for benchmarking the transaction pertaining to sale of raw GCLE between
OCCJ and OCIPL. He submitted that during the impugned assessment year OCCJ
sold raw GCLE at an average CIF rate of US $ 60 per Kg., to assessee enterprise and
the comparable average CIF rate for sale of identical goods to unrelated parties was
66.58 per Kg. The ld. counsel for the assessee filed the following chart:-
"Table: Sale of Raw GCLE by OCCJ to OCIPL (Assessee Enterprise) and to
other enterprises during the Financial Year 2009-10 are tabulated below for
comparison:-
Particulars Quantity of Raw Value of Raw Average Rate per
GCLE sold GCLE sold during Kg. at which
during F.Y. 2009- F.Y. 2009-10 (in goods were sold
10 (in Kg.) USD) (in USD)
Assessee Enterprise (OCIPL) 9,090 5,45,000/- 60.00
Other Enterprises 9,540 6,35,205 66.58
8.1 However, average rate of USD 66.58 for sale of identical goods by AE to non-
related enterprises is calculated in table below.
Date of Rate in
Invoice Particulars Invoice no Type Qty in Kg. USD Amount-USD
Sales by AE to Others
28-10-2009 Lupin Ltd *09000951 CIF 2,010 65.00 1,30,650.00
13-11-2009 Orchid Chemicals *09000952 CIF 2,520 70.00 1,76,400.00
26-12-2009 Dhanuka Labs *09001227 CIF 5,010 65.50 3,28,155.00
Average rate of Sales by AE to
Others 66.58
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9. He submitted that a copy of confirmation from OCCJ stating that goods sold by
OCCJ to OCIPL and other third parties in India are identical in nature was submitted
before the TPO. The fact that goods being benchmarked and the comparables are
identical in nature was accepted by the TPO at the time of transfer pricing proceedings
and no doubts were raised by the TPO in this regard. He submitted that the TPO has
taken Sales Prices / Average Sales Prices of Finished GCLE near the date of purchase
of Raw GCLE which indirectly results in comparison of margins whereas CUP
Method is all about comparing prices of identical goods. Referring to para 2.10 of the
order of the TPO he submitted that he has made assumption that variation in price of
Raw GCLE will be almost in same proportion as the variation in price of finished
GCLE. He has incorrectly assumed that the prices of finished GCLE and raw GCLE
will move in same proportion. The ld. AR submitted that the price of GCLE will be
governed not only because of movement in price of raw material but it will also
depend on cost of other direct inputs like labour, power etc., and assuming it to be
linked only to movement of price of raw material was incorrect. He submitted that the
assessee company was incurring huge losses since it started production 2 years back
and that the Financial Year under consideration was the first profitable year of the
assessee. The assessee was able to earn profit during the year under consideration only
because of the fact that the AE purchased GCLE from Assessee at much higher prices
when compared to sale of identical goods to non-related parties. He submitted that the
assessee had to import raw GCLE from AE because of fire occurred at the plant of the
company at Kotputali, Rajsthan on 29th June 2009 and to fulfill the pending orders and
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to retain the existing customers, the company had to import raw GCLE from its parent
company in Japan. To support Indian subsidiary at the time of accident, the parent
company supplied Raw GCLE at low / reasonable prices. He submitted that that this is
the only purchase made by the assessee from AE till date which strengthens the point
that the parent company OCCJ supplied goods to the assessee company at
low/reasonable prices when it was in great need to retain its existing customers and
avoid the contractual repercussions which otherwise would have been faced by OCIPL
had it not complied with the delivery schedule committed to its customers.
10. Referring to the decision of the Mumbai Bench of the Tribunal in the case of
DCIT Vs. Isagro (Asia) Agrochemicals (P) Ltd. [2013] 31 taxmann.com 388 (Mum.)
he submitted that the Tribunal in the said decision held that that the CUP cannot be
rejected simply because of difference in dates of transactions with AE's & Non AE's.
Referring to the decision of the Ahmedabad Bench of the Tribunal in the case of Sabic
Innovative Plastic India (P) Ltd. Vs. DCIT [2013] 35 taxmann.com 177 (Ahmedabad -
Trib.), he submitted that the Tribunal in the said decision has held that:
a) Where CIT(A)'s order upheld internal CUP but deals with margins instead of
prices, it is an incorrect application of internal CUP and matter restored to
CIT(A)'s file for fresh adjudication.
b) Any application of any CUP (Comparable Uncontrolled Price) method
involves dealing with prices of a product not the profit margin earned
thereon.
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c) Even in the case of 'internal CUP', the arm's length price to be adopted is the
price, subject to admissible adjustments, at which the similar transactions are
carried out between the assessee and an independent enterprise.
11. He submitted that internal CUP has nothing to do with the margins earned by
the same enterprises from other transactions, as is the case before the Tribunal. He
submitted that the ld. CIT(A)'s reliance on the decision of a coordinate bench of this
Tribunal, in the case of Bayer Material Science Pvt. Ltd v. Addl. Commissioner of
Income Tax(134 ITD 582), is also no longer sustainable in law. He accordingly
submitted that the order of the CIT(A) be set aside and the addition made by the A.O.
12. The ld. DR, on the other hand, heavily relied on the order of the CIT(A).
13. We have considered the rival arguments made by both the sides and perused the
material available on record. We find the Assessing Officer in the instant case has
made addition of Rs.19,26,657/- by adjusting the price of purchase of raw GCLE from
60 US$ to 55.67 US $. We find the ld. CIT(A) upheld the action of the Assessing
Officer the reasons for which have already been reproduced in the preceding
paragraphs. It is the submission of the ld. counsel that the assessee has used direct
evidence i.e., the transactions entered into by the AE with unrelated parties for
identical goods according to which OCCJ sold raw GCLE at an average CIF rate of US
$ 60 per Kg., to assessee enterprise whereas similar goods were sold to unrelated
parties at US $ 66.58 per Kg. and, therefore, the internal Comparable Uncontrolled
Price (CUP) method used by the assessee for benchmarking the transactions
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pertaining to sale of raw GCLE is correct. It is also his submission that the TPO has
taken Sales Prices / Average Sales Prices of Finished GCLE near the date of purchase
of Raw GCLE which indirectly results in comparison of margins whereas CUP
Method is all about comparing prices of identical goods. We find force in the above
argument of the ld. counsel for the assessee. We find, the assessee, during the course
of TP assessment proceedings had filed the copy of the confirmation from Otsuka
Chemical Company, Japan, which has been taken as the tested party stating that goods
sold by OCCJ to OCIPL and other third parties in India are identical in nature. The ld.
counsel for the assessee submitted that this was accepted by the TPO at the time of
transfer pricing proceedings and no doubts were raised by the TPO in this regard. The
ld. DR could not controvert the above submission of the ld. counsel for the assessee.
We also find merit in the submission of the ld. counsel that the TPO has taken Sales
Prices / Average Sales Prices of Finished GCLE near the date of purchase of raw
GCLE which indirectly results in comparison of margins whereas CUP Method is all
about comparing prices of identical goods. We also find merit in the argument of the
ld. counsel that the TPO has incorrectly assumed that the price of finished GCLE and
raw GCLE will move in same proportion. In our opinion, the price of GCLE will be
governed not only because of movement in price of raw material but it will also
depend on cost of other direct inputs like labour, power etc., and assuming it to be
linked only to movement of price of raw material was incorrect. We further find merit
in the argument of the ld. counsel of the assessee that it was able to earn profit during
the year under consideration only because of the fact that the AE purchased GCLE
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from the assessee at much higher prices when compared to sale of identical goods to
non-related parties. The submission of the ld. counsel for the assessee that because of
fire occurred at the plant of the company at Kotputali, Rajsthan on 29th June 2009 and
to fulfill the pending orders and to retain the existing customers, the company had to
import raw GCLE from its parent company in Japan who, in turn, supplied Raw GCLE
at low / reasonable prices also finds merit especially when this is the only purchase
that has been made by the assessee from AE till date. Therefore, we find merit in the
argument of the ld. counsel for the assessee that it is beyond doubt that the assessee
has never tried to pass on profits to its parent AE and, on the contrary, it had benefitted
by making sales of Rs.27.84 crores to parent company at higher rates. Further, in our
opinion, the internal CUP has nothing to do with the margin earned by the same
enterprises from other transactions. The various decisions relied on by the ld. counsel
for the assessee also supports its case. In this view of the matter, we set aside the order
of the CIT(A) and direct the Assessing Officer to delete the addition. The grounds
raised by the assessee are accordingly allowed.
14. In the result, the appeal filed by the assessee is allowed.
The decision was pronounced in the open court on 17.05.2019.
Sd/- Sd/-
(BEENA A. PILLAI) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMFBER
Dated:17th May, 2019
dk
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Copy forwarded to
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asstt. Registrar, ITAT, New Delhi
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