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2015 (5) TMI 302 - ITAT PUNE

2015 (5) TMI 302 - ITAT PUNE - TMI - Transfer pricing adjustment - addition of ₹ 29,70,31,153/- made to the returned income on account of determination of the arm's length price of the international transactions entered into by the assessee with its associated enterprises - TPO reject the external CUP data based on the price quotes of MMSPL - In the present case, the international transactions in question relate to transaction of import of oils by the assessee from its associated enter .....

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T), which is an internationally recognized and accepted commodity exchange based in Chicago in USA facilitates trading in commodities, inter-alia, vegetable oils also. Therefore, the quotations appearing on such exchanges would reflect the prices at which the commodities are being traded in the market place. The price publication of Oil World, which was also pressed into service by the assessee, would be reflective of the prices prevailing in the market at a particular point of time. Undoubtedly .....

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Hon’ble High Court of Gujarat in Commissioner of Income Tax Versus Adani Wilmar Limited [2014 (4) TMI 563 - GUJARAT HIGH COURT ] held that the price publications are also relevant material for the purposes of carrying out the comparability analysis in the course of application of CUP method; so however, such price publications ought to be authentic and reliable. It is also noteworthy that the Hon’ble High Court of Gujarat was considering an objection of the Transfer Pricing Officer, which is si .....

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nue on this aspect, and in any case the said decision is not an authority for the proposition that price contained in the Broker Note, based on a commodity exchange, is not a valid CUP data. Thus the rejection by the TPO of the price publication of Oil World and the prices quoted by MMSPL, which are based on the rates quoted on CBOT, Chicago, is not justified.

No reason for the income tax authorities to have rejected the plea of the assessee that the stated values of the purchase of S .....

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M.P. Lohia For the Respondent : Shri Sandeep Gang, CIT ORDER Per G. S. Pannu, AM: The captioned appeal of the assessee for assessment year 2006-07 is directed against an order of the Deputy Commissioner of Income Tax, Circle- 4, Pune (in short the AO), passed u/s 143 (3) r.w.s. 144C(13) of the Incometax Act, 1961 (in short the Act ), dated 28.10.2010, which is in conformity with the directions given by the Dispute Resolution Panel (in short DRP) dated 13.09.2010. 2. In this appeal, the assessee .....

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ng to import of edible oil from the AE. 2. Rejection of Comparable Uncontrolled Price ('CUP') as the most appropriate method Erred in making an adjustment to the international transaction of the Appellant, rejecting CUP as the most appropriate method considered by the Appellant to determine the arm's length price. 3. Non consideration of additional external CUP, internal CUP and other data Erred by not considering the additional external CUP, internal CUP data and other data supporti .....

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the grounds above, erred in carrying out search process for identifying comparable companies using TNMM as the most appropriate method, mainly with regards to the following: 5.1 Considering only 'Prowess' database for search analysis though there is another widely recognized public database i.e. 'Capitaline Plus'; 5.2 Not sharing / providing of the detailed accept-reject analysis for the purpose of arriving at the comparable companies to the Appellant; 5.3 Considering non contem .....

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by selecting inappropriate companies as comparable to the Appellant. 7. Inappropriate adjustment using TNMM on the turnover of entire oil division of the Appellant Without prejudice to the grounds above, erred on the facts and in circumstances of the case and in law by proposing inappropriate adjustment using TNMM on the turnover of entire oil division of the Appellant. 8. Not considered adjusted margin of the Appellant Without prejudice to the grounds above, erred on the facts and in circumsta .....

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on for previous years Without prejudice to the grounds above, erred on facts and in circumstances of the case and in law by passing order under section 143(3) read with section 144C(13) of the Act without considering brought forward losses and unabsorbed depreciation for previous years amounting to ₹ 50,85,49,369, while determining the total income of the Appellant for AY 2006-07 at ₹ 20,00,42,071. 11. Applicability of +1-5% range Erred in law in not applying the Proviso to section 9 .....

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the Appellant and the Appellant has complied with the transfer pricing provisions. 13. Erroneous levy of penalty under section 271(1)(c) of the Act Without prejudice to the grounds above, if the transfer pricing adjustment is sustained then the learned AO has erred in proposing to levy penalty under section 271(1)(c) of the Act, without considering the fact that adjustment to transfer price is just on account of difference of opinion as to application of most appropriate method as determined by .....

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nt is made on account of difference of opinion regarding application of most appropriate method, etc and by no means the Appellant could have estimated such adjustments which has been proposed after the transfer pricing compliance dates, and consequential tax on such adjustment. 3. In this appeal, although the assessee has raised multiple Grounds of Appeal but the solitary issue in dispute is on account of an addition of ₹ 29,70,31,153/- made to the returned income on account of determinat .....

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es various categories of oil for manufacturing purposes from domestic as well as overseas market and such procurement is from associated enterprises as also from third parties. The oil so procured by it is further refined / processed for sale to ultimate customers predominantly in the domestic market to third party customers in bulk, tin and other consumer packagings. For the assessment year 2006-07, assessee filed a return of income declaring a total loss of Rs.(-)9,69,89,082/- which was subjec .....

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ion 92CA(1) of the Act in order to determine the arm's length price of such international transactions. Notably, the income arising from the international transactions was required to be computed having regard to their arm's length price in view of section 92(1) of the Act. The Transfer Pricing Officer, after allowing assessee an opportunity of being heard, has passed an order under section 92CA(3) of the Act dated 28.10.2009 determining the arm's length price of the international tr .....

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at an arm's length price. The only issue on which the TPO differed with the assessee was with regard to the international transactions of import / purchase of oil from its associated enterprises, and this is the subject matter of dispute before us. On receipt of the order of the TPO dated 28.10.2009, the Assessing Officer passed a draft order under section 144C(1) of the Act, dated 24.12.2009 proposing an addition of ₹ 29,70,30,153/- to the returned income / loss on account of the tran .....

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00,42,071/-, having regard to the arm's length price of the international transactions as determined by the TPO in his order u/s 92CA(3) of the Act. As a consequence, the returned loss of Rs.(-) 9,69,89,082/- has resulted in an assessed income of ₹ 20,00,42,071/-. Aggrieved by such an addition, assessee is in appeal before us. 5. In order to appreciate the manner in which the TPO has differed with the assessee on the aspect of determining the arm's length price of international tra .....

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essee to adopt the CUP method as the most appropriate method was not accepted by the TPO who instead, adopted the Transactional Net Margin Method (TNMM) method and applied it at the entity level sales in order to determine the arm's length price of the international transactions of import of Soyabean and sunflower oils from the associated enterprises. This aspect of the matter is the genesis of the dispute between assessee and the Revenue before us. 6. It was explained that Soyabean and sunf .....

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o the Broker Price Notes issued by a reputed broker Murji Meghan Services Pvt. Ltd., (MMSPL) which showed the prices prevailing in the market on the respective dates when assessee transacted the import of Soyabean and sunflower oils from its associated enterprises. Apart from the aforesaid, in the course of the proceedings before the TPO, assessee also obtained sample quotes from Sunvin group, the price publications of Oil World, an independent publication, and justified before the TPO that the .....

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assessee was only a Broker Price Note and that the same could not take the character and characteristics of a comparable uncontrolled transaction. In this context, the TPO referred to Rule 10B(1)(A)(i) of the Income Tax Rules, 1962 (in short Rules ) to point out that it is the price charged or paid for a comparable uncontrolled transaction which can be adopted as a benchmark while applying the CUP method. According to the TPO, any price quote or Broker Note does not qualify for consideration in .....

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the comparative analysis of internal uncontrolled transactions with third parties, the TPO rejected the same by pointing out that the nomenclature of the oils was not the same and therefore, the quality and specifications of the oil imported from associated enterprises was different than the oil procured from third parties. For all the aforesaid reasons, the TPO rejected the CUP method adopted by the assessee in order to benchmark assessee s international transactions of import of Soyabean and s .....

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oils from the associated enterprises. Explaining the nature of the Broker Notes, it is pointed out that MMSPL is a brokerage firm which is dealing in edible oils and other commodities. The said concern provides essential information and recommendations to its customers by providing upto date information on market movements, daily market reports and trend analysis. It is also pointed out that the price quotes of MMSPL are in turn, based on the prices prevalent in the commodity exchanges and other .....

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erred to the price publication of Oil World and sample quotes from Sunvin group, which are independent parties and not related to MMSPL. The learned representative explained that aforesaid material was obtained by the assessee in the course of the transfer pricing proceedings and such data also supported assessee s claim that the price Notes of MMSPL was a valid CUP data. Secondly, the learned representative pointed out that TPO has erred in observing that there was difference in the terms of tr .....

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the terms of trade are similar. In this context, a reference has been made to the Federation of Oils, Seeds and Fats Association (FOSFA) which provides standard form of contracts covering various products including Soyabean and sunflower oils. By referring to page 423 of Paper Book which contains the FOSFA s standard agreement, it is pointed out that Form 54 depicts the CIF terms for vegetable edible oil and the same has been referred in the terms of trade of MMSPL as also assessee s terms of t .....

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. It is pointed out that the said comparative analysis also shows that the price paid by the assessee for import of oils from the associated enterprises was at an arm's length price. In this context, our reference has been invited to page 395 of the Paper Book wherein, a comparative chart of the purchase of Soyabean and sunflower oils from associated enterprises and from third parties has been placed. As per the said analysis, it is sought to be pointed out that the per unit price paid for p .....

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equent assessment year of 2007-08, the TPO has accepted that assessee s transaction of import of oils from the associated enterprises are at an arm's length price, having regard to similar comparative analysis of internal CUP as well as external CUP data done in this year. Therefore, on the principle of consistency also it is sought to be pointed out that the action of the TPO in rejecting the CUP method in order to benchmark the transaction of import of oils from the associated enterprises, .....

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nchmark adopted by the assessee was only a quotation and does not represent any actual transaction. Furthermore, the relevant details such as, the price on FOB basis, the relevant terms and conditions of assessee s contract for import of oil vis-à-vis broker notes are not verifiable, therefore, the benchmarking so done by the assessee following the CUP method, was not acceptable. It has also been submitted that the Broker Notes are meant for private circulation and cannot be said to be an .....

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ntrolled transaction of purchase of Soyabean and Sunflower oil from third parties vis-à-vis the import from associated enterprises asserted by the assessee is also not reliable as the similarity in the products procured is not clear. 12. We have carefully considered the rival submissions. Section 92(1) of the Act provides that any income arising from international transactions, as defined in section 92B of the Act, shall be computed having regard to its arm's length price. Furthermore .....

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dopted and chosen the most appropriate method referred to in sub-section(1) of section 92C of the Act, then, the same is to be applied for determining the arm's length price of the international transactions. The methods prescribed in subsection (1) of section 92C of the Act, are:- (a) Comparable Uncontrolled Price method (CUP); (b) Resale Price Method (RPM); (c) Cost Plus Method (CPM); (d) Profit Building Method (PBM); (e) Transactional Net Margin Method (TNMM); and (f) Such other method as .....

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that the comparability of international transactions with uncontrolled transactions shall be judged with reference to the factors prescribed therein. Similarly, sub-rule (3) prescribes that uncontrolled transactions shall be comparable to international transactions if none of the differences if any, between the transaction being compared or between the enterprises entering into such transactions, are likely to materially affect the price or the cost charged or if reasonably accurate adjustments .....

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ce of the international transactions shall be the method which is best suited to the facts and circumstances of each particular transaction and which provides the most reliable measure of an arm's length price in relation to the international transactions. Sub-rule (2) of Rule 10C of the Rules lays down certain factors in selecting the most appropriate method as specified in subrule (1) thereof. 14. The aforesaid discussion shows that the entire objective of carrying out comparability analys .....

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ost reliable measure of the arm's length price in relation to the tested international transaction. Though section 92C(1) of the Act prescribes five different methods, but the selected method should provide the most reliable measure of an arm's length price in relation to the international transactions. 15. In the present case, the international transactions in question relate to transaction of import of oils by the assessee from its associated enterprises. Notably, assessee procures oil .....

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f an arm's length price in relation to the tested international transaction. Consequently, in such a situation, the CUP method would be a preferable method. We are saying so for the reason that in the present case, plea of the assessee has been that the tested transaction of import of oil from associated enterprises has also been undertaken with third parties. In other words, assessee has purchased Soyabean and sunflower oils from its associated enterprises as well as from third parties. Apa .....

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d in the market place. The price publication of Oil World, which was also pressed into service by the assessee, would be reflective of the prices prevailing in the market at a particular point of time. Undoubtedly, the rate quotations of CBOT and Oil World can be said to be a data published by independent organizations, which reflect the prevailing market rates. These prices have been adopted by the assessee as comparable uncontrolled transaction prices and the tested transactions have been benc .....

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or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transactions and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international tra .....

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an assessee entering into an international transaction in support of the Transfer Pricing study carried out. In particular, we may refer to sub-rule (3) of Rule 10D of the Rules, the relevant portion of which reads as under:- (3) The information specified in sub-rule (1) shall be supported by authentic documents, which may include the following: (a) official publications, reports, studies and data bases from the Government of the country of residence of the associated enterprise, or of any other .....

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l transactions; (f) letters and other correspondence documenting any terms negotiated between the assessee and the associated enterprise; (g) documents normally issued in connection with various transactions under the accounting practices followed. 18. Ostensibly, the rules pertaining to the transfer pricing assessment refer to information, being price publications including stock exchange and commodity market quotations. It is a common knowledge that for the products which are listed on the sto .....

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.04.2014 which was relied upon by the assessee before us. In the case before the Hon ble High Court of Gujarat, the TPO adopted CUP method to benchmark an international transaction. The assessee presented two sets of prices claiming them to be comparable to his transactions with the associated enterprises. One set of prices relied upon by the assessee was supplied by the Malaysian Palm Oil Board and the second set of prices was the quotations published by Oil World, an independent organization. .....

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r of the Hon ble High Court of Gujarat is relevant in this regard:- 7. In terms of clause (c) of sub-section (3) of Rule 10D of the Rules, these price publications as long as the same were authentic and reliable, would be relevant materials. In this background, mere base of the organisation would be of no consequence. Further, though the price quotations of the MPOB would be entitled to its due and full weightage and respect, would not necessarily mean that the other quotations would lose their .....

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of rate-list, such objection of the TPO must be overruled. Learned advocate Mr.Bhatt for the Revenue, however, strenuously attempted to persuade us that the Oil World is a forecasting agency and further that such rates were not based on actual transactions. Quite apart from the observations of the CIT (Appeals) and Tribunal being to the contrary, these were not the objections of the TPO. We would, therefore, focus on the grounds on which the TPO "desired to reject such price quotations. 19 .....

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publication of Oil World only reflect quotations and not actual transactions. The said argument did not find favour with the Hon ble High Court of Gujarat and it noted that the reliability and authenticity of the material stood established. Infact, the decision of the Pune Bench of the Tribunal in the case of ACIT Vs. MSS India (P) Ltd. (supra) relied upon by the Ld.CIT-DR does not help the Revenue on this aspect, and in any case the said decision is not an authority for the proposition that pr .....

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ble vegetable oils. It was pointed out that MMSPL has a team of expert professional brokers with experience of more than 50 years in the oil industry and its clients include Fortune 500 companies, banks as well as local and internationally listed companies. It was also asserted that the prices provided by MMSPL are used as benchmark to determine commodity prices by major suppliers in the industry. One of the fundamental points raised by the assessee was that the price Notes issued by MMSPL were .....

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L has confirmed that the prices quoted were derived / based on CBOT and Bursa Malaysia Derivative Exchange (BMD). All the aforesaid assertions of the assessee have not been controverted by the TPO or the DRP in any manner. Therefore, there is no material to doubt the authenticity and reliability of the data sought to be relied upon by the assessee in order to benchmark its transaction of import of oils from associated enterprises. Apart therefrom, in the course of the transfer pricing proceeding .....

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ation on market prices. Pertinently, the same publication was a subject matter of challenge before the Hon ble High Court of Gujarat in the case of Adani Wilmar Limited (supra). The reliability and authenticity of the price publication of Oil World was upheld and found to be a relevant material while testing the international transactions of the assessee in the course of application of CUP method. In the face of the aforesaid, we are unable to acquiesce ourselves to the objections of the TPO in .....

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assessment year i.e. 2007-08. Though, we are conscious that the principles of res judicata are not applicable to the Income Tax proceedings so however, if qualitatively same situation permeates through more than one assessment year, then the rule of consistency cannot be ignored. In other words, uniformity in treatment and consistency over a period of time is required if the facts and circumstances are similar. On this aspect also, we are unable to acquiesce to the objection raised by the TPO i .....

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