TMI Blog2016 (4) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... mport of product PTOP from the associated enterprise - Held that:- The quantities and sale instances in the case of the tested party are fewer but that does not lead to the inference that a comparison cannot be made at all. It is only when comparable instances are of relative smaller quantity and based on fewer sale instances that the bonafides of comparable are in the dock. When the quantity and the instances of comparables is much higher vis-a-vis the transaction with AE, issues cannot be raised about the bonafides. So far as CUP comparability is concerned, differences in the size, geographical location etc. cannot be reason enough to discard the comparables, unless it is shown that such factors influence conditions in the market in which respective parties to the transactions operate. There is, in the orders of the authorities below, not even a whisper about the impact, if any, of these factors on the market conditions. It is also important to bear in mind the fact that the imports are of very small quantities which does not even account for one percent of total transactions. In the light of all these factors, and particularly bearing in mind smallness of the amount involved, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant submits that the TPO, the AO and the DRP failed to appreciate that: (i) Non-acceptance of the arm's length price of the aforesaid transaction creates an absurd situation where the Appellant is expected to receive the latest technological advancement and upgradation free of cost. Hence, considering the arm's length value of the transaction to be NIL is improper. (ii) Measuring payment of royalty based on the company's profitability would be inappropriate and has to be instead based on the technical expertise afforded to the Appellant from the AE and the benefit derived under such technical support. (iii) The aforesaid payment was essential since it was for the supply of know-how, provision of technical assistance, etc. which were necessary for the production of goods by the Appellant, sustain the market competition and have a perennial source of supply for technological advancement and up-gradation. 3.3 The appellant prays that the Transfer Pricing adjustment made under Section 92CA(3) of the Act in relation to payment of royalty is erroneous, unwarranted and be deleted. 4. During the course of the assessment proceedings, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transaction; _________________________________________________________________________ It is thus clear that for application of the CUP Method, a comparable uncontrolled transaction or a number of comparable uncontrolled transactions need to be identified and the price charged in such comparable uncontrolled transaction/transactions is the Arm's Length Price subject to any adjustment warranted, if any. Now, in the instant case, the assessee has not identified any such comparable uncontrolled transaction which could be used for benchmarking its international transaction pertaining to royalty payment. 2.4.2 The assessee has also contended that the royalty rates are approved by Reserve Bank of India, therefore, the rates are at Arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer has made the impugned arm s length price adjustment, aggrieved by which assessee is in appeal before us. 7. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We find that the Transfer Pricing Officer did note, and was apparently swayed by the fact of, assessee s making losses. It was for this reason that the payment of royalty was held to be not at an arm s length price, as is implicit in the Transfer Pricing Officer s observation to the effect that having considered the submission made by the assessee in respect of payment of royalty, the position of the assessee cannot be accepted due to the fact that the assessee has incurred an operating loss during the year under consideration . The Transfer Pricing Officer has thereafter proceeded to treat the arm s length price of the royalty as NIL , thus virtually disallowing entire royalty payment. It is not, however, clear as to under which method of ascertaining the arm s length price, the value of royalty has been determined as NIL . There cannot be an adhoc adjustment in the course of ascertaining the arm s length price. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort of product PTOP is erroneous, unwarranted and be deleted. 10. So far as this ground of appeal is concerned, the relevant material facts are like this. During the relevant previous year, the assessee imported a relatively small quantity of 84 MT of Para Tertiary Octyl Phenol (PTOP) from it s associated enterprise based in South Korea, namely Schenectady Korea Limited. These purchases were made at average CIF value of US $ 1,425 per MT, which converted into FOB value, worked out to US $ 1,337.83 per MT. The total value of his import was ₹ 53,26,020/-. In the course of proceedings before the Transfer Pricing Officer, value of this transaction was ascertained at NIL, and the justification for this determination was as follows :- (c) In respect of PTOP imported by the assessee during the year from its AE, the assessee has not provided any details or documentation regarding the benchmarking of the said transaction. The assessee was provided a further opportunity in the personal hearing held on 26 October 2009 to justify the arm s length nature of the import of PTOP. In this regard, the assessee submitted some customs related documents in its submission dated 27 Octob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old to Chinese party and 84 MT sold to Indian Party) iv. Difference in the period over which the sale was made by the AE. (Only 2 instances of sale during one year for the assessee, whereas, five instances of sale over the year for the Chinese party) Moreover, the terms and conditions of the sale are also not available for both these transactions. 12. The DRP, however, restricted the ALP adjustment to ₹ 8,28,196/- by adopting TNMM, and observed, inter alia, as follows :- 4.9.5 However, we accept the submission of the assessee that the adjustment made by the TPO on the entire amount paid by the assessee to its AE seems to be adhoc, arbitrary. However, it was also seen that the method of the assessee to adopt CUP as the most appropriate method and accordingly benchmarking the transactions also suffer from inherent problems. Accordingly, we therefore decide to benchmark the said international transactions by adopting the Transactional Net Margin Method by adopting the comparables chosen by the TPO. As no separate net margins are available for the import of PTOP, the adjustment has been limited only on the amount of international transaction undertaken by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. We, therefore, deem it fit and proper to uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 8,28,196/- 15. Ground no.4 is thus allowed. 16. In ground no.5, the assessee has raised the following grievance: Ground No. 5 - Addition under Section 92CA(3) of the Act in respect of export of the product IBB to the associated enterprise, amounting to ₹ 41,19,424 5.1 On the facts and in the circumstances of the case and in law, the TPO and the AO erred, and the DRP further erred in confirming the addition relating to the export of the product PTOP amounting to ₹ 41,19,424 to its AE, under Section 92CA(3) of the Act by not appreciating/disregarding the benchmarking analysis, comparable transactions selected and the detailed submissions and the documentary evidence supplied by the Appellant. 5.2 The Appellant prays that the Transfer Pricing adjustment made under Section 92CA(3) of the Act in relation to export of the product IBB is erroneous, unwarranted and be deleted. 17. During the relevant previous year, the assessee exported IBB for ₹ 64,26,5789/- to is associated ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO has not provided any reasons for rejecting the additional submission made by the assessee before him in respect of export of IBB. According to the assessee, it had submitted details pertaining to all the exports of IBB made out of India during AY 2006-07 by way of its submissions dated 22 December 2009 to AO. Based on the CUP data, it is evident that the international transaction pertaining to import of IBB by the assessee from its AC is at arm s length from an Indian transfer pricing perspective. . 5.6 The A.R. also submitted that the AO was wrong in observing that the order of the TPO has considered the issues in detail. The additional CUP information submitted by the assessee in its submission dated 22 December 7009 to the AO could obviously not have been considered by the TPO as the same was not submitted to the TPO during the course of transfer pricing assessment. Hence, the AO ought to have considered the submission of the assessee and should have passed the order based on the merits of the case after considering the CUP information in respect of IBB submitted by the assessee vide submission dated 22 December 2009. Therefore, having regard to the additional detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport of IBB which evidences the fact the assessee has not even tried to cover up the costs of production incurred by it. In view of the facts mentioned above, the contention of the assessee is hereby rejected. 18. The assessee is aggrieved and is in further appeal before us. 19. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 20. We find that IBB (i.e. Isobutyl Benzene) is a generic chemical product and so far as prices of generic products are concerned, CUP, on the basis of database built on inputs like customs data, is reasonably acceptable. While on this aspect of the matter, we may refer to the following observations made by a co-ordinate bench in the case of Tilda Riceland Pvt. Ltd. vs. ACIT [(2014) 64 SOT 61 (Delhi)] :- 11. We have noted that the information inputs given by the Tips Software, on the facts of this case, are inputs with regard to the information publicly available with the customs department at the different ports. These inputs are not the independent 'quotes', as referred to by the TPO, but only compilation of the data availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware and the database made available by the said entity. The DRP laid so much of emphasis on the observation that the assessee has not been able to rebut the argument of the TPO that Rule 10D(3) does not allow the use of private databases but did not note of the glaringly illustrative, rather than exhaustive, character of the documents listed in the said rule. As a quasi-judicial authority, and while pursing the goal of justice, one cannot remain at the mercy of the wisdom of representatives of the parties appearing before such an authority; it is bounden duty of every quasijudicial authority to appreciate the scope of the legal provisions and apply them in letter and in spirit. We uphold the grievance of the assessee to the extent the authorities below have indeed erred in summarily rejecting assessee's reliance on the database, with respect to information publicly available with customs department at various ports, compiled by a private entity. 13. As regards learned DRP's additional observation that, Further, in a commodity like Basmati rice, it is very difficult to find the exact comparables which can meet the stringent standards required for application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne points about product quality . Viewed thus, even if there be some minor variations in the quality even under the elaborate categorization of rice varieties, such variations, which do not materially affect the prices of uncontrolled transactions due to large size of comparables and the same geographical consumption market being covered by the comparables, can be ignored. 14. As for rejection of CUP method on the ground that prices of uncontrolled transactions often fluctuate on weekly and even daily basis. The TPO himself has noted in his order, the assessee did not have any contractual arrangement and these were market driven prices on which the exports to AEs took place. It is also important to bear in mind the fact that the assessee has taken average of a quarter so as to ensure that day to day variations in prices do not distort the comparability. Neither there is any specific objection to this averaging, nor has the TPO suggested any better alternative to this approach. In our humble understanding, this method does provide for a reasonable, even if not perfect, solution to the distortion which may creep in case comparison of prices is done on day to day basis, and due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal profit methods may be used to approximate arm's length conditions when traditional transactional methods cannot be reliably applied alone, or exceptionally cannot be applied at all . In sharp contrast to the said observation, 2010 OECD Guidelines, in para 2.4, recognize that there are situations when transactional profit methods are found to be more suitable (vis- a-vis traditional transactional methods) such as, in a situation, where each of the party makes a unique contribution in relation to controlled transaction, or where the parties engage in highly integrated activities . This change in OECD approach is quite in line with Indian transfer pricing legislation which requires selection of most appropriate method rather than the method being picked up in the order of priority. To this extent, the approach of OECD and Indian transfer pricing legislation is now quite in harmony with each other. 63. It will, however, be stretching the things too far to suggest that in the 2010 version of OECD Guidelines, all the methods of determining the ALP have been placed at par with each other. The change in the OECD Guidelines, as we see it, is in respect of the order in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact situation of that particular case, the CUP method is to be preferred. The reason is simple. When AEs enter into a transaction at such conditions in commercial and financial terms, which are different from commercial and financial terms imposed in comparable transaction between independent enterprises, the differences in these two sets of conditions in financial and commercial terms are attributed to interrelationship between the AEs, and it is this impact of inter-relationship between the AEs that is sought to be neutralized by the transfer pricing regulations. As long as CUP method can be reliably applied on the facts of a case, it does offer most direct method of neutralizing the impact of interrelationship between AEs on the price at which the transactions have been entered into by such AEs. 16. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that the ALP determination under CUP Method on the basis of 'Daily Export Port Data - April 2007- March 2008', by adopting quarterly averages, was wrongly rejected by the TPO and the DRP. 21. In this view of the matter, and particularly looking to the smalln ..... X X X X Extracts X X X X X X X X Extracts X X X X
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