TMI Blog2013 (12) TMI 1575X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant : Sh. Peeyush Jain, CIT DR (TP) For the Respondent : Sh. H.Srinivasulu, Retd. IRS Smt. Somya Seth, CA ORDER PER DIVA SINGH, JM Both these appeals have been filed by the Revenue against the separate orders dated 31.08.2010 and 29.10.2010 of CIT(A)-XX, New Delhi pertaining to 2005-06 assessment years wherein in the first appeal the Revenue is aggreieved by the order of the CIT(A) which has been passed against the TPO s order dated 17.10.2008 against which the assessee filed a petition u/s 154. As a result of this order the addition made on account of arm s length price amounting to ₹ 2,11,23,382/- was reduced to ₹ 71,45,622/-. The second appeal has been filed by the Revenue against the order of the CIT(A) wherein he has deleted the addition made by the TPO. Aggrieved by both these actions, the Revenue is in appeal the effective ground in ITA No.-4831/Del/2010 is Ground No-2 and 2.1 which reads as under:- 2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in restricting the addition u/s 92CA of the Act to ₹ 71,45,622/- as against ₹ 2,11,23,382/- on account of TPO adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CFR 2.4. He observed that the methodology by the assessee was in the following manner:- Adjustment to FOB CUP of DAP fertilizer The assessee had taken DAP rate of US gulf FOB bulk @ US$ 235/mt as on 14.10.2004 and 21.10.2004 as the CUP(FOB). It added freight for US-Gulf-India at US$ 45-50 (cargo size more than 35,000 tons) to CUP FOB of US$ 235/mt It made adjustment for credit purchase by PLI of US$ 1.17 and US$ 0.81 on 12.10.2004 and 25.10.2004 respectively. After making above adjustment value of comparable CUP was computed as under :- CUP for consignment No.1 for 41,140.90 MT for invoice dated 13.10.2004 on contract dated 12.10.2004 FOB value of CUP = US$ 235/mt Add freight = US$ 47.50/mt Add credit cost = 1.17/mt Value of CUP US$ 283.67 (Wrongly mentioned as US$ 285.81 in Annexure 2A) CUP for consignment No.2 for 41,066 mt FOB value as on 14.10.2004 = US$ 235.0/mt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontain CFR prices bulk prices of DAP fertilizer at Indian high sea which were @ US$ 271-277/mt as on 7th October and 14th October. Since India bound CFR rate of DAP fertilizer was available, I could not find any logic for the assessee of taking FOB value rate and then making subsequent adjustments of freight etc. The only incentive in making such round out calculation could be some how to show CUP having more value as compared to purchase price. Since direct CUP for India bound shipment having identical contractual form of transportation (CFR.) was available, it is held that this direct CUP having identical terms of delivery of DAP fertilizer shall be used for making comparability analysis of import price of DAP fertilizer by the assessee instead of CIJP with different terms of delivery as wrongly chosen by the assessee. (v) It is evident from above finding that direct CUP of US$ 271- 277/mt at CFR basis (which included freight and cost) is available for relevant date 12.10.2004 the same has been taken and no adjustment on account of freight shall be mode to the CFR CUP price. (vi) I have further noted that the price quoted on Ferticon Price Service are net of credit accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... = US$97,092.52 (US$2.36X41140.90) Step 5. Conversion in Indian Rupee =Rs.44,52,178/- Daily average of US$ as on 12/10/2005 @ ₹ 45.855 for 1 US$, (45.855X97092.52)(source-oanda.com) Consignment2 For the second shipment invoice dated 13/10/2004 (contract dated 12/10/2004 which was amended on 25/10/2004) for 41066mt Step1 . Purchase price paid to AE =US$277.27/mt Step.2 Indian CFR bulk DAP Fertilizer rate on 7th October 2004 Average of High/low rate =US$274/mt Step3. Adjustment for credit purchase (for 62 days) add effective PLR As claimed by the assessee =US$0.81/mt Adjusted CUP US$274.81/mt Step4. Excess purchase price paid To the AE as compared to CUP (US$277.27-US$274.81 =US$ 2.46/mt Step5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. It is further noted from sale invoice that loading was undertaken at USA and final destination of the consignment was Jamnagar, India. (ii) Similarly consignment 4 of DAP fertilizer of 12,7000 mt was purchased @ US$ 272.14mt on CFR basis vide agreement dated 20/8/2004 on credit of 365 days. This consignment was sold in India. It is noted from invocie that port of loading of the fertilizer was USA and final destination was Jamnagar, India. (iii) It is evident from above facts that both the purchases were made on CFR basis as per agreement dated 20/8/2004. (iv) I have carefully examined the price list of Ferticon Price Serevice and have noted that congains CFR prices bulk prices of DAP fertilizer at India port which were @ US$260-263/mt as on 19/8/2008, a day prior to contract date (assessee had taken FOB CUP of the same date i.e, 19/8/2008). Since DAP fertilizer on CFR basis in India was available, I could not find any logic for the assessee of taking FOB, value rate and then making subsequent adjustments of freight etc. The only incentive in making such round out calculation could be some how to show a CUP having more value as compared to purchase price. Since dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... =US$ 260-263/mt =US$261.4/mt Step 3. Adjustment for credit purchase (90 days) add effective PLR = US$1.11/mt Adjusted CUP =US$ 3.89/mt Step 4. Excess Purchase price paid to The AE as compared to CUP (US$3.89 46,768) = US$181927.52 Consignment 4 Contract dated 20/8/2004 for 12,700mt of DAP fertilizer Step 1 Purchase Price paid to AE =US$ 272.14/mt Step 2. India CFR bulk DAP fertilizer Rate on 19/8/2004 Average of high/low rate =US$260-263/mt =US$ 261.5/mt Step 3. Adjustment for credit purchase (for 365 days) add effective PLR As claimed by the assessee =US$4.50/mt Adjusted CUP =US$ 266/mt Step 4. Excess purchase price paid to the AE as compared to CU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjusted CUP applied by the assessee to benchmark international transaction. (iv) Since purchase price of DAP fertilizer on CFR terms of delivery was noted on the relied upon document, I have selected purchase price on CFR terms (which was identical to terms of purchase by the assessee) as uncontrolled comparable CUP after making adjustment for credit purchases. (v) The assessee was given number of opportunities of being heard vide order sheet entry and issue of notices. (vi) The transfer pricing studies have proved that purchase prices of consignment 1 to 4 were not at arm's length price and this resulted in adjustment of ₹ 2,11,23,382. 3. Aggrieved by this, the assessee filed a petition u/s 154 before the TPO assailing the basis of the calculation of CUP regarding purchase of fertilizers from its AE stating that as per Annexure 1, Annexure 2A and Annexure 2B, the value of effective PLR had been mentioned in absolute terms and not in percentage terms which was not accepted by the TPO as a mistake apparent on the face of the record. Similarly the request that the 5% adjustment benefit under the proviso to section 92C(2) be made available to the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... high low rate Adjust- ment for credit pur- chases Adjusted CUP (US$/MT) Excess Price paid by to AE (US$/ MT) Total Excess Price paid (US$) Total Excess Price paid (INR) A B C D E F G=E+F H=C-G I=G *B J=I*exc- hange rate 1. 41,140 .90 277.53 271-277 274 3.21 277.21 0.32 1319 8.9 605.236 2. 41,066 277.27 271-277 274 2.21 276.21 1.059 4349 8.50 1,994,62 2 3. 46,768 266.50 260-263 261.50 2.90 264.40 2.0984 9813 9.10 4,545,80 4 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-5% range and import of one consignment on FOB vs. CFR price I am of the opinion that these were not apparent from records submitted before the TPO and hence are outside the scope of section 154 of the Income tax Act, 1961. Thus the same have not been dealt with in this order. 4.3 In the main appeal the CIT(A) took note of the submissions on behalf of the assessee that the sale price for fertilizers are controlled/regulated by the Government by way of Regulatory restrictions wherein the maximum retail price is filed, subsidies, distribution restrictions are imposed imports and even choice of technology, feedstock etc for the DAP fertilizers are controlled and monitored by the Government. The record shows that it was argued that in the circumstances the importer does not have any control over the sale price. It was submitted that sale price fixed by the regulators may be lower than the purchase price and the Government of India has a system of compensating the fertilizer Company through a subsidy mechanism. It is seen that it was also submitted that the assessee also resells the DAP fertilizers in India at the price fixed by the Indian Government and in the year under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length by providing the comparable analysis of assessee's purchases which was stated to be less the adjusted CUP. The following table in support of the submissions advanced was relied upon before the CIT(A) The same is extracted from the order:- Comparison of Adjusted CUP with the Appellant's Import price Date Adjusted CUP in USD Import price paid by the Appellant 20-Aug-04 268.95 266.50 20-Aug-04 277.97 272.14 7-Sep-04 277.97 272.43 18-Oct-04 287.3 268.50 25-Jan-05 293.15 272.50 12-Oct-04 285.81 277.53 25-Oct-04 236.39 227.27 4.5 It is seen that the CIT(A) in para 15 of the impugned order referring to her order dated 31.08.2010 observed that in view of her order against the Rectification moved by the assessee u/s 154 before the TPO w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, US FOB Gulf prices were used by the Appellant. Further, suitable adjustments with respect to difference in freight and credit terms were made with respect to which again, there is no dispute between the TPO and the Appellant. 26. In this regard reliance is placed on the ruling provided by Hon'ble Tribunal in case UCB India Private Limited. In the said case the Hon'ble IT AT has held as follows. Quote (Emphasis Supplied) The Hon'ble ITAT in the case of UCB India (P.) Ltd. v. ACIT [2009] 30 SOT 95 (MUM) has summarized following principles relevany to CUP method and has laid down requirement for comparability analysis under CUP method: Even a minor change in the properties of the products circumstances of the trade (billing period, amount of credit there in etc.) may have significant effect on the price and would greatly affect comparability under CUP method. The CUP method require a high degree of comparability on quantity of product or services, contractual terms, (warranties, sales or purchase volumes, credit terms and transportation terms etc.) level of market (wholesale or retail etc), geographical market, date of transactions, intangible proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts available on record that the issue is very simple and the correctness of the prices quoted in the Fetecon Report is not an issue. It was also candidly stated that the calculation mistakes corrected in the impugned order is also not the grievances of the Revenue. The grievance is posed on the legal principles as to which price is the correct price for benchmarking the transaction so as to decide whether the transaction was at arm's length or not. The issue at hand and the grievance of the Revenue calling for setting the legal position is that when the Market in the facts of the case is India then why justification for the transaction being at arm's length is being looked at from the point of port of origin as the port of origin is immaterial and what is material for considering the arm's length price is the destination point which is India. In this background it was submitted it has to be considered that has the assesssee shown its transaction at arm's length price. For determining the same it was submitted it is the price at which the specific product is available in India which is the relevant price as the market is India and even if assessee's argument is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in the US market and which may or may not be prevalent in the other source market but would contribute to the cost as the goods were of a better quality. Even otherwise without prejudice to the above it was argued that even if the version of the Revenue is accepted even then no adjustment can be made as the benefit of + 5 % available to the assessee under the Statute would decide the issue in favour of the assessee warranting no adjustment. The reliance placed upon the order of the Co-ordinate Bench in the Clear Plus India (P.) Ltd. (cited supra) it was submitted does not detract from the merits of the case and addressing page 10 of the impugned order wherein the assessee provided tabular presentation depicting the comparison of the transaction on various parameters it was argued that it would be seen that the assessee has made accurate adjustment and the transfer price methodology adopted by the assessee should be accepted. 7. Both the parties were required to give written submissions addressing the arguments advanced by them. Ld. CIT DR filed his submissions dated 01.10.2013 and it was stated that copy of the same had been provided to the Ld. AR well in advance who too has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addressed in para 7 to 14.1 at pages 3 to 5 of the 20 paged written submissions which are more or less repetition of the facts available on record which have already been alluded to at considerable length in the earlier part of this order. Para 15 to 18.2 of pages 5 to 7 address the methodology manner of application of CUP by the assessee and paras 19 to 23 at pages 7 to 8 address the methodology adopted by the TPO. The proceedings before the CIT(A) are found addressed at pages 8 to 10 vide paras 24 to 28 wherein the reliance is placed on the order of the CO-ordinate Bench in UCB India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 95 (Delhi). In this background in support of the impugned order, the following arguments were advanced on behalf of the assessee :- Arguments of the Respondent before the Hon'ble bench 29. The Ld. CIT(A)-XX, New Delhi has appreciated the difference between the 'US Gulf FOB' price and the 'India CFR Cash' price and accepted the Respondent's submissions. The following are the major differences between the 'India CFR Cash' price and the 'US Gulf FOB' price: a. In 'India CFR Cash' price, the port of origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the US FOB price was adopted for accommodating the AE. For the purpose of granting the subsidy, Department of Fertilizer, Government of India, has adopted the same method of calculation of price which has been adopted by the Respondent. It is also humbly submitted that there was no need for the Respondent to shift the profit from India to USA as the Respondent paid the tax under the MAT provisions of the Act. As submitted earlier, 'India CFR Cash' price does not indicate the port of origin of the DAP, which plays a vital role in taking the business decisions. In subsequent years, the revenue has accepted the same method of computation of ALP under the CUP method (AY 2007-08 to AY 2009-10). 41. The Ld. CIT(DR) submitted that port or origin is not important as the goods were delivered in India. It is humbly submitted that the port of origin is important for taking vital business decisions and the DAP was imported from USA in pursuance of a contractual obligation with its AE and the price paid was within +/-5%. 42. The Ld. CIT (DR) submitted that India specific price was available in the Fertecon Report and relied on the ratio laid down in UCB India Pvt. Ltd (para 79). I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the USA market and the assessee also sold the goods in the USA market. Therefore, the market conditions of sale are the same. At para 6.11 of the order, the Hon'ble ITAT relied on the ratio laid down by the Federal Court of Australia in the case of SNF (Australia) Pty Ltd. v. Commissioner of Taxation, [2010] FCA 635 (25 June 2010) . At para 6.12, the Hon'ble ITAT observed that the focus is on the market on which the products are acquired by the Assessee; and any unique feature of the market in which the sale is made is of no importance in relative terms; the comparable transactions that occurred in Australia were not great . Further, at para 7.1 of the order, the Hon'ble ITAT observed that in the case of SNF (Australia) Pty Ltd (Supra), it has been held that the focus is on the market in which products are acquired. The ratio of this case is applicable mutatis-mutandis to the facts of the case as the focus is on the market in which products are sold. C. The above ratio laid down by the Hon'ble ITAT in the case of Clear Plus India Pvt. Ltd is squarely applicable to the facts of the Respondent. The Respondent purchased the DAP from its AE in USA and compared th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as summarized as under :- 45. The Ld. CIT(DR) submitted that there is a variation in computation of Interest rate and drew the attention of the Hon'ble Bench to page 289 of the paper book. It is humbly submitted that Ld. TPO has nowhere in his order disputed the said interest rate. The Respondent for the purpose of adjustment applied the US prime lending rate which was approximately US 4.5% during the previous year and the Ld. TPO accepted the same interest rate while computing the amount of Transfer pricing adjustment. Thus, there is no dispute on the interest rate which should be used for the purpose of computing the adjustment. 10. It would also be necessary for the sake of completeness to bring out the department's response to Para 29, 30, 31, 32, 33, to 38 and 39 of the 20 pages submissions of the assessee. The same is extracted from the written departmental submissions hereunder:- Counter to Para 29 India specific prices are available. The port of origin of DAP has been duly factored in India CFR prices. The TPO has made due adjustment for freight and for credit terms. The assessee has not brought in anything to prove that the quality of its AE is super ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments on the basis of facts before him. The TPO has been very judicious on facts as he would have obtained. This argument therefore is not relevant. 11. On the last date of hearing, both the parties reiterated their respective stands based on the written submissions filed. Addressing the assessee's stand, the Ld. CIT DR stated that the arguments that there is no motive in shifting the profit from India is not a relevant argument. Similarly the arguments on behalf of the assessee that ultimately whichever method is followed and no adjustment would be called forth if the benefit of +/- 5% as mandated in proviso to section 92C(2) is given it was his submission is also not the criteria on the basis of which decision on the grievance of the Revenue is not given as whether ultimately there is an adjustment or not would be a matter of fact and whatever relief the assessee is ultimately entitled to by the Statute is not and cannot be opposed by the Revenue, however what is relevant is that it was argued, the legal principle be decided. 12. We have heard the rival submissions and perused the material available on record and considered the submissions advanced on behalf of the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering the arm's length price of the transaction it is necessary to benchmark the transaction with the price of the said commodity which any third party purchasing the goods in India would pay in India. It is this price which should have been taken as a bench-mark to consider whether the price paid by the assessee to its AE is at arm's length or not. Admittedly this was not the approach of the assessee and admittedly this also was not the approach of the CIT(A). We have taken into consideration the order of the Co-ordinate Bench in the case of UCB India (P.) Ltd. (supra) which it is seen has wrongly been applied by the CIT(A) to the facts of the present case. On the other hand the view taken is found to be supported by the decision of the Co-ordinate Bench in the case of Clear Plus India (P.) Ltd. (supra). 12.3 We also do not find any merit in the arguments advanced on behalf of the assessee canvassed for upholding the impugned order on the reasoning that there is no motive for the assessee to shift the profit from India as lack of motive, on the part of the assessee cannot be a reasoning on the basis of which the departmental appeal on the legal issue can be dismissed un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as to whether in the facts of the present case bench marking should have been done keeping India specific prices as benchmark or as per the unique market conditions of the source country then we are bound to address the correct legal principles which we have done. The duty placed upon us to address the grievance has to be discharged unless the aggrieved party choose to give up the point. By our detailed reasoning we have held that the departments stand is correct as unique geographical market conditions of the source country in the present facts of the case have no relevance for bench-marking purposes. We have held the focus has to be on India prices as the market for the product of the assessee is India and any third uncontrolled entity for selling similar product would pay the price for the said product going by India specific prices as such they should form the basis for benchmarking. Accordingly we set aside the impugned order and restore the issue back fact to the TPO to readjudicate the issue afresh by way of a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. The TPO shall also consider the benefit of +/- 5%, it avail ..... X X X X Extracts X X X X X X X X Extracts X X X X
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