TMI Blog2010 (3) TMI 878X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the AO has not brought on record any evidence to substantiate its calculation of ALP. Further instead of industrial discount of 10 per cent he has allowed 5 per cent and quantitative discount of 20 per cent was not allowed totally. Since no evidences were brought on record for disallowances of 20 per cent of quantitative discount as claimed by the assessee and 5 per cent of industrial discount, the matter was set aside for earlier years whereas in this year all the facts are available and therefore the matter is to be decided by the Tribunal. We find that the following factors have been rightly considered by Ld. CIT(A). Turnover or quantity difference: The sale to Non-AE is of 1150 Kgs. Only, whereas there is a sale to the magnitude of 62,000 Kgs. to the AE which will have a bearing on the prices. Volume sold is a significant factor in fixing the price. Geographical difference : In the case of Ranbaxy Laboratories Ltd. v. Asstt. CIT[ 2008 (1) TMI 445 - ITAT DELHI-H] it has been held that it could have been appreciated if a particular entity in a particular country was sought to be compared with some similar entity in that very country as geographic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 16-12-2008 passed by the Ld. CIT(A)-XIX, Mumbai for the assessment year 2004-05. 2. The first ground raised by the Revenue reads as follows : "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 91,47,700 made by the Assessing Officer on account of transfer pricing as the goods sold to associate entities were valued at a discount of 5 per cent as compared to the goods sold to non-associate entities without appreciating the facts and circumstances of the case." 3. The facts are that the assessee filed its return of income for the assessment year 2004-05 disclosing total income of Rs. 91,67,716. The case was processed under section 143(1) after issuing statutory notice. 4. The assessee-company is engaged in the business of processing and export of chemicals. The assessee-company has transaction with the associate enterprises as well as non-associated enterprises. The associate enterprise is M/s. Chemical Link LLC, USA with whom the majority of the transaction of sale was entered into by the assessee-company. The assessee furnished auditor s report in Form No. 3CEB in respect of the transaction with assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern and to the other concern. 10. The Assessing Officer observed as follows : "It is seen that the sale price of the product is not dependent on the end use. When the same product is sold, then it must fetch the same price or nearly the same price. As regards qty. and discount, generally in the international transction there is not much difference. Moreover, the assessee has not furnished any evidence to the effect that there was an agreement between the assessee and its associate enterprises for the discount on qty. and bulk purchases. The assessee has also not furnished any evidence that the end use of the products was different. In the absence of any evidence the argument of the assessee are baseless. It can be seen that the assessee had not properly followed the Comparable Uncontrolled Price method (CUP) for computation of arm s length price. The assessee has also failed to furnish as to what are comparable prices for arriving at the arm s length price. Therefore the price charged by the assessee in the international transaction with the associate enterprise has not been determined in accordance with sub-sections (1) and (2) of section 92C. Therefore the Arm s Length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer has omitted even a mention of these discussions in her order leave alone the documents submitted. The Assessing Officer was shown the P L statement of Chemical Link, LLC USA, the AE, for the accounting year in question, where the AE has posted loss. The fact that AE has no other business interests other than with the appellant, was also presented to the Assessing Officer. It was pointed out to her that the basic concept of Transfer Pricing (TP) and Arm s Length Price (ALP) was to ensure that excessive profit was not posted to AE abroad, which otherwise denies the legitimate tax revenue to host country. In this case, the Associated Enterprise has actually suffered loss. Alarmed by this revelation the Assessing Officer asked us to bring the P L statements of earlier year from AE 3 days after this meeting the P L statements of earlier year from AE 3 days after this meeting the P L of earlier year was handed over to her. This P L of AE also shows losses. In fact the specter of Transfer Pricing hangs perilously over the AE if the US Govt. Income-tax authorities scrutinizes their accounts. Miniscule amounts of DDS purchased by Non-Associated enterprises is about 2.5 per cent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priorities of scrutiny areas and allocation of resources. As such a Risk matrix is usually drawn up before the Audit/Scrutiny is to be conducted. Applied to the facts of this case is observed that in the appellant s case the AE is in USA where the Marginal Tax rates are higher than that of India. Further, IRS of USA is known to follow a very strict Transfer Pricing Regime. Secondly, the Indian Enterprise (appellant) enjoys benefit of 30 per cent deduction this year under section 80HHC. Thirdly, the AE at USA has shown to have suffered a loss. Taking all the factors together there could not be any saving or avoidance of tax by the appellant by shifting the profits to USA. As such from the Risk Matrix Point of view it was a very low risk case. The ITAT s Bangalore Bench in a very recent judgment dated 26-9-2008 in Phillips Software v. Asstt. CIT in ITA No. 218/Bang./08 has held that while the motive of tax avoidance need not be shown at the time of initiating Transfer pricing provisions, the same is required to be shown at the stage of making the assessment/Audit. The Assessing Officer has to show that the assessee manipulated prices to shift profits outside India. In the spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atch. B. Geographical Difference - The appellant s 97 per cent of supplies is to Europe and USA while only 3 per cent is to Non-AE mostly South East Asia. Competition in the USA and Europe markets is bound to be higher as the bulk of the consumption is carried out there. The South East Asian Market is still small and hence does not attract big players and the consequent competition. C. Customer Profile - The appellant has dealt with AKZO Nobel or Isola which are considered to be eminent in this line of business and command great reputation. This is in sharp contrast to small sales of 500 Kgs. To small SE Asian business. D. The Survival of the appellant - This factor is linked to the turnover difference of International transactions. The appellant s 97.5 per cent of turnover is to AE in USA Europe and only 2.5 per cent to Non-AE and in order to capture and maximize its profits of the big and flourishing market of USA and Europe it has to depend on its AE only. The Assessing Officer has not taken into account these very material and significant differences while carrying out the ad hoc addition. While he was bold enough to enter the chopping seas of the CUP Method but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade the following submissions before us. The Necessity to Establish Associate Enterprises (AE) 18. DLPL was forced by circumstances and nature of business to establish a related company in USA. DLPL manufactures a single product known as 4.4 Diamino Diphenyl Sulphone or simply DDS, which is a Specialty Chemical Product information. This product is used by many Multinational Companies in Europe USA. The products manufactured by these companies with DDS as one important raw material are used in industries like forwarding charges on kilogram comparison are very high for small quantity. The fixed cost of execution of export order adds to the price of that small consignment. Quantity 19. The Ld. Counsel argued that the AU has used the price sold by DLPL to Merck Inde at USD 50/Kg calculate ALP which was incorrect. He substantiated that there are some companies world over who provide Pure or Reference chemical products in small quantities in glass vials. These are used by research laboratories for their work. These companies buy the chemical product from Market in Bulk , which is 50 Kg. or 100 Kg. at price (For DDS) of about USD 50/Kg. This is a viable price for su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g hangs perilously over the AE if the US Govt. Income-tax authorities scrutinizes their accounts. 22. Miniscule amounts of DDS purchased by Non-Associated enterprises is about 2.5 per cent of the sale in the whole year and the higher price paid by them has very little relevance to total business profile of the appellant. These are small time parties buying very small amount of the product just once a year or so. Sometimes these traders provide small quantities of this specialty chemical to Laboratories equipment dealers who in turn sell the product under their name to laboratories attached to chemical production units, for testing or R D purposes. The cost of these small quantities (50 or 100 grams) is at times 15 to 20 times higher than what the appellant charged. Such small quantities of chemicals are typically called Pure Substance . Not only the orders from such sources are small but they are very few and far between. This kind of business therefore does not represent the business profile of the appellant at all. Geographical region difference 23. In markets has to be taken into account as the South East Asian market is small whereas the Europe and USA market where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nover or quantity difference : The sale to Non-AE is of 1150 Kgs. Only, whereas there is a sale to the magnitude of 62,000 Kgs. to the AE which will have a bearing on the prices. Volume sold is a significant factor in fixing the price. (2) Geographical difference : In the case of Ranbaxy Laboratories Ltd. v. Asstt. CIT [2008] 110 ITD 428 (Delhi) it has been held that it could have been appreciated if a particular entity in a particular country was sought to be compared with some similar entity in that very country as geographical situations in several ways influence the transfer pricing. (3) Profile of Customer : The transactions with high profile clients such as AKZO Nobel or Isola is different when compared to small sales to small players in South East Asian business. (4) Survival of the appellant : In order to capture and maximize its profits of the big and flourishing market of USA and Europe it has to depend on its AE only. (5)Lastly on a simple average it is 8.21 from it to its AE whereas it is 8.87 from its AE to Customers. At the weighted average rate it is 8.20 from it to its AE while it is 8.75 from its AE to customers. If the overheads as identified in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany has received dividend of Rs. 2,800 from MKGSB Co.-op Bank Ltd. The company has taken an Overdraft facility from the said bank. As per Co.-op. Banking Rules and Regulations, the company is required to subscribe to its share capital. Accordingly, the company subscribed to 2000 shares of the bank. Thus the investment is out of a business necessity and not out of surplus funds and therefore the same needs to be considered as business income. The assessee therefore contended that the dividend income of Rs. 2,800 may be taken as business income. 34. The Ld. CIT(A) held as follows : "I have gone through the assessment order and the appellant s submission and I find that it is a 100 per cent exporter and has kept FD in the bank at the Banker s instance to avail OD facility. Thus there is a direct nexus between the interest received and export activity and it is therefore part of the operational income. Further the interest payable on OD facility and receivable on FD are inter-linked having direct nexus with each other." 35. We find no infirmity in the order of the Ld. CIT(A) and we direct the Assessing Officer to treat the interest income as business income. This ground r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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