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2015 (8) TMI 1035 - ITAT DELHI

2015 (8) TMI 1035 - ITAT DELHI - TMI - Transfer pricing adjustment on account of international transactions - CIT(A) deleted the addition - Held that:- Both the assessee as well as the TPO/CIT(A) have adopted incorrect approach in determining the ALP under the CUP method.

Whether the price of ADC-L-5 charged by the assessee from its AE was different because of different formulations/specifications given by the Italy party? - Held that:- When the mandate of Rule 10B is vivid which pro .....

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ule, cannot be sustained. Under such circumstances, we overturn the impugned order on this issue and send the matter back to the file of AO/TPO for a fresh determination of ALP of this transaction under the CUP method in accordance with our above directions/observations. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.

Polymerization Catalysts named DBH - AR before us in justifying the reasons for the price charged at ₹ .....

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saction to justify the price charged from its AE nor the authorities below could justify their viewpoint in making or deleting the addition as per the parameters of Rule 10B. The position before us on this product is similar to ADC-L-5 discussed above. Following the view taken hereinabove, we set aside the impugned order on this score and send the matter to the file of AO/TPO for a fresh determination of the ALP of this transaction in accordance with our above guidelines.

Blowing Agen .....

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olled transaction. Under such circumstances, we set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of ALP of the sale of TSSC to its AE in accordance with our above observations. It goes without saying that the assessee will be allowed a reasonable opportunity of being heard in such fresh determination.

Chemical Blowing Agent OBSH - Held that:- AR tried to justify the price charged from its AE at ALP by contending that such product sold t .....

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ind that neither the assessee nor the authorities below have dealt with the matter as per law. Following the view taken in respect of the product Blowing Agent ADC-L-5 above, we set aside the impugned order and remit the matter to the file of AO/TPO for fresh determination of the ALP of the instant transaction in conformity with our directions given hereinabove. - ITA No.2120/Del/2010 - Dated:- 20-5-2015 - SHRI R.S. SYAL AND SHRI C.M. GARG, JJ. For The Assessee : Shri R.K. Mehra, CA and Shri Man .....

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oduction of various chemicals, such as, Blowing Agents, which include Polymer Additives, Speciality Chemicals and Industrial Chemicals. The assessee has a subsidiary in USA which acts as its marketing agent. The assessee reported an international transaction of sale of Blowing Agents & Antioxidants to its Associated enterprise (AE) with the transacted value of ₹ 5,36,16,103/. This international transaction reported by the assessee in Form No.3CEB consisted of sale of Blowing Agent wort .....

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er applicable. It was explained that the formulations done by the assessee are proprietary in nature and the final products vary as per requirements of various customers. To cater to the requirements of various customers, the assessee stated that sometimes, it needs to alter the chemical compositions and undertake research, so that the final product suits the customers processing parameters. The formations of the products were stated to be varying by application depending upon the processing tec .....

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the basis of the submissions advanced on behalf of the assessee and the material gathered during the course of proceedings, the TPO inferred that (i) the price charged from the AE in various transactions was lower than the priced charged from unrelated enterprises for similar items and, (ii) in case of material difference between the control and uncontrolled transactions, the assessee failed to establish or quantify any adjustment which could affect the determination of the ALP on this count. Th .....

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one, which formed the basis for the recommendation for a transfer pricing adjustment. The addition so proposed by the TPO was made by the AO. The ld. CIT(A) was pleased to delete the addition, against which the Revenue has come up in appeal before us. We shall deal with such additions/deletions individually to ascertain if the AO was right in making the additions or the ld. CIT(A) in deleting these additions. Blowing Agents ADC-L-5 4. The first product is Blowing Agents ADC-L-5, a modifier, call .....

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ade by the assessee to its AE on 14.10.2003, then on 6.12.2003. The assessee sold the same product to M/s Maricell SRI, Italy, on 17.12.2003. Noticing not much variation in the sale volume made to AE and Italy party, the TPO treated the price of ₹ 126 per kg. as the ALP of this transaction. That is how the differential amount between the ALP and the actual price charged amounting to ₹ 10,78,347/- was proposed as a transfer pricing adjustment. The AO made the addition which came to be .....

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rty for the same product. During the course of hearing, our attention was drawn towards the product ADC-L-5 having been sold by the assessee to various related and unrelated parties in the form of a Table given on page 49 of the paper book. From such tabulation, it can be seen that the assessee sold this product to its AE, firstly, on 14.10.2003, then on 6.12.2003 and, lastly, on 22.03.2004 @ ₹ 97/-, 98/- and ₹ 87/- per kg. respectively. Apart from that, the assessee also sold this p .....

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arying from ₹ 94/- to ₹ 97/- per kg. The ld. Counsel for the assessee, in an attempt to justify the price charged from AE at ALP, submitted that the sale price of this product largely depends on the formulations and specifications given by individual customers which entails varying costs and the resultant varying sales prices. He tried to justify the price charged from its AE at ALP by claiming it as comparable with the sales made to Bangladesh parties. However, no material was place .....

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tion (1) of section 92C enlists five specific and one general method for determining the ALP of an international transaction. This sub-section provides that the ALP of an international transaction shall be determined by any of the given methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed or such persons or such other relevant factors, as the Board may prescribe. Rule 10B of the Income .....

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ion, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction 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 t .....

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price in the open market. The price so adjusted is taken as ALP in respect of the property transferred under the third step. Thus, it is patent that the international and uncontrolled transactions are compared with each other to find out the differences in them, if any, and thereafter adjustments are made in the price of the uncontrolled transaction due to such differences. Sub-rule (2) of Rule 10B provides that for the purposes of sub-rule (1) , the comparability of an international transaction .....

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e responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. Sub-rule (3) of Rule 10B stipulates tha .....

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les (1), (2) and (3) of Rule 10B, it is manifest that the international transaction and the uncontrolled transaction with which comparison is sought to be made for determining the ALP, in the first instance, must have overall similar products. It is obvious that if the products are different, then, there can be no question of making an effective comparison between the prices charged. Once the products under both the transactions are broadly similar but there is a difference in them because of ce .....

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o reasonable accurate adjustment can be made due to such differences, then, such uncontrolled transaction should not be considered as a comparable transaction. If, after eliminating such transaction(s), there remains no other comparable uncontrolled transaction, then, the CUP method cannot be considered as the most appropriate method which should be discarded and substituted with another more suitable method. 9. Adverting to the facts of the instant case, we find that both the assessee as well a .....

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e charged, the ld. AR could not give any convincing reply. A generalized statement was made that the price charged from the AEs conformed to the price charged from non-AEs, if the specifications of the two transactions had been similar. No material worth the name was placed on record to show, firstly, the difference in the specifications of the two sets of transactions and, secondly, the extent of adjustment in the price from uncontrolled transactions to be made on account of such differences. C .....

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ired to be considered as benchmark or the extent of adjustment to be made in respect of price charged by the assessee from Italy/Bangladesh parties due to difference in the formulations/specifications of products. When the mandate of Rule 10B is vivid which provides for, firstly, bringing the product sold to a non-AE at par with the product sold to AE by making adjustment due to the differences in the characteristics of the products sold and then to make adjustments on account of contractual ter .....

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r above directions/observations. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. Polymerization Catalysts named DBH. 10. The assessee sold 13500 kgs. of this product to its AE at a total price of ₹ 18,15,205/-, giving the average unit sale price of ₹ 134/-per kg. The assessee also sold this product to Belgium and Japanese parties. Total seven transactions of this product were undertaken by the assessee which have been tabul .....

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t material on record, it is observed from the impugned order that the ld. CIT(A) has recorded a categorical finding that this product exported to non-AE is different in formulations and costs from product exported to AE. Similar contention was put forth by the ld. AR before us in justifying the reasons for the price charged at ₹ 134/- per kg. from its AE, being the lowest price charged in comparison with all the uncontrolled transactions. Here again, the ld. AR put forward the same submiss .....

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Rule 10B. The position before us on this product is similar to ADC-L-5 discussed above. Following the view taken hereinabove, we set aside the impugned order on this score and send the matter to the file of AO/TPO for a fresh determination of the ALP of this transaction in accordance with our above guidelines. Blowing Agent named TSSC. 12. The assessee sold this product to its US AE on different dates during the year at the price charged varying from ₹ 233/- per kg. to ₹ 266 per kg. .....

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per kg. That is how, he proposed transfer pricing adjustment of ₹ 48,46,928/- on this score. Such addition made by the AO was deleted in the first appeal by giving the same reasoning as given for the earlier products. 13. We have heard the rival submissions and perused the relevant material on record. It is noticed from page 54 of the paper book that the assessee sold 73710 kgs. of this product to its AE and only 1 kg. of sale to a Japanese party at ₹ 125/- per kg. It is obvious that .....

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by making a comparison of the controlled transaction with similar uncontrolled transaction(s). Such comparable uncontrolled transactions can be internal as well as external. Usually, preference is given to internally comparable transactions. If, however, internal comparables are not available and the assessee seeks to apply CUP as the most appropriate method, then, the onus is upon him to put forward certain externally comparable uncontrolled transactions for enabling the TPO to make a logical c .....

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o comparable uncontrolled transaction is available, then, the CUP cannot be applied as the most appropriate method. 15. Coming to the facts of the instant case, we find that the assessee has not placed on record any effective comparable uncontrolled transaction to demonstrate that its international transactions with AE of the same product were at ALP. The TPO chose an altogether different product for making comparison under the CUP method, which is not legally sustainable because of the inherent .....

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hemical Blowing Agent OBSH 16. The assessee sold 75600 kgs. of this product to its AE at a total value of ₹ 1,45,85,074/-, giving the average unit sale price of ₹ 192/-per kg. The TPO observed that the assessee sold similar product to an Italian company on two occasions @ ₹ 290 and ₹ 289/- per kg. respectively. Considering the rate of ₹ 289/- per kg. as its ALP, the TPO proposed a transfer pricing adjustment of ₹ 72,63,326/-, which was made by the AO but delet .....

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