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Mosaic India Pvt. Ltd. Versus ACIT, Circle 5 (1) , New Delhi

Addition by recomputing the arm’s length price of the international transactions under sec. 92 - selection of MAM - CUP or TNMM - Comparable Companies selected by the TPO in the application of TNMM to determine the arm’s length price - international transaction pertaining to “purchase of DAP” - Held that:- We fully concur with the contention of the assessee that Rule of Consistency needs to be respected in the approach of the Revenue in the application of CUP method as the most appropriate metho .....

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nd not from sale of the product. The submission of the assessee that the relevant data for the application of CUP method is available in public domain has not been disputed by the Revenue. It is an undisputed position as well that crucial factor for determining the appropriateness of the method to be applied are the availability and reliability of the data. In view of these material facts, we come to the conclusion that CUP is the most appropriate method in order to benchmark the transaction per .....

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I.C. SUDHIR AND SHRI PRASHANT MAHARISHI For The Assessee : Shri GC Srivastava, Adv. For The Department : Shri Amrendra Kumar, CIT(DR) ORDER PER I.C. SUDHIR: JUDICIAL MEMBER The assessee has questioned order of the authorities below on the following grounds: 1. That on the facts and in the circumstances of the case and in law, the order passed by the learned Assessing Officer ( A.O. ) is bad in law and void ab-initio. 2. That on the facts and in the circumstances of the case and in law, the refer .....

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ing an addition of ₹ 30,99,75,553 to the returned income of the Appellant by re-computing the arm s length price of the international transactions under section 92 of the Act. 4. That on the facts and in the circumstances of the case and in law, the Ld. Assessing Officer/Ld.TPO/Ld.Dispute Resolution Panel ( DRP ) erred in rejecting Comparable Uncontrolled Price (CUP) method selected by the Appellant as the most appropriate method, under sec. 92C(1), wherein the appellant had relied on the .....

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s and in the circumstances of the case and in law, the Ld. A.O./Ld.TPO/ Ld. DRP erred in rejecting the CUP as the most appropriate method, despite accepting the same during prior assessment year, without any change in facts and circumstances. 7. That on the facts and in the circumstances of the case and in law, the Ld. A.O./ Ld.TPO/ Ld. DRP erred in selecting and applying Transaction Net Margin Method ( TNMM ) as the most appropriate method in a manner that is contrary to the provisions of the A .....

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cumstances of the case and in law, the Ld. A.O./Ld. TPO/ Ld. DRP erred in denying the benefit of 5% margin allowed under the Proviso to Section 92C(2) of the Act by relying on an amendment applicable only from 1.04.2009 (and not applicable to the relevant assessment year 2006-07). 9. On the facts and circumstances of the case, the Ld. DRP has erred in not examining the validity of initiation of penalty proceedings under sec. 271(1)(c). 2. Heard and considered the arguments advanced by the partie .....

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5% margin by the authorities below. 4. The facts in brief are that the assessee incorporated on 01.06.2004 is engaged in the business of distribution of marketing of fertilizers in India. It is 100% subsidiary of GNS-II Corp. USA which is owned by the Mosaic Company, USA. During the year, the assessee has undertaken international transaction worth ₹ 6,37,27,54,007 with its associated enterprises (AEs). Out of the total nine international transactions, the transactions pertaining to the pu .....

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of distribution and marketing of fertilizers in India. The Appellant operates as a 100% subsidiary of GNS II Corp USA which, in turn, is owned by The Mosaic Company, USA. (page 141 of the paper book) The appeal is directed primarily against the addition made to the arm s length price charged/paid by the Appellant, with respect to international transactions undertaken by it, during the year under consideration i.e. FY 2005-06. During FY 2005-06,the Appellant had undertaken the following internat .....

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Provision of Support Services 1,248,307 Cost Plus Method (CPM) Gross Profit Margin 4 Corporate IT Recharge 2,165,378 N.A. N.A. 5 Dispatch Earnings 11,378,684 N.A. N.A. 6 Distribution Support 69,866,037 N.A. N.A. 7 Ocean Freight Savings 77,790,257 N.A. N.A. 8 Reimbursement of Expenses 18,417,172 N.A. N.A. 9 Interest on Extended Credit Period 6,369,098 CUP N.A. Total value of International Transactions 6,372,754,007 The Appellant had undertaken a transactional analysis and benchmarked the above tr .....

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is under dispute, rest all the transactions have been accepted by the Ld. TPO to be at arm s length. The Appellant would like to highlight the factthat the above transactionis coveredin the Appellant s own case in AY 2005-06 (order of the Hon ble Tribunal placed before the Hon ble bench) Summary of the Functional profile of the Appellant and a brief background of the product which is under dispute During FY 2005-06, the Appellant was mainly engaged in trading of fertilizers. The Appellant impor .....

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d by the government. Because of the regulations, the importer does not have any control over the sale price and is forced to sell at a price fixed by the regulators, which may be lower than the purchase price. The Government of India (GOI) has a system of compensating the fertilizer companies through a subsidy mechanism. Herein, it may not be out of place to mention that the GOI also uses data published in Fertecon Report to compute the amount of subsidy to be granted to companies engaged in man .....

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from its AEs and resold the same in India at the price fixed by the GOI. Based on the functional, asset and risk profile of theAppellant, Comparable Uncontrolled Price ( CUP ) was selected as the Most Appropriate Method for establishing the arm s length nature of its international transactions relating to import of DAP fertilizer. The above methodology of the application of CUP as the most appropriate method has been duly accepted by Hon ble ITAT in AY 2005-06 in the Appellant s own case. In the .....

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ertecon is widely acknowledged within the fertilizer industry to be most accurate, comprehensive, and authoritative, providing timely and detailed foresight into the developments of the global fertilizer industry. Data published by Fertecon is used by all the leading corporations, trade bodies, and government agencies belonging to the fertilizer industry, throughout the world. Herein, it may be worth mentioning that these Fertecon prices are also adopted by the Government of India while determin .....

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justments to account for the differences in the credit period which has been duly accepted by the TPO as well. The detailed working of the calculation of comparable uncontrolled price and its comparison with the import price paid by the Appellant was duly documented in the transfer pricing report as well as also provided to the Ld. TPO during the course of the hearings. Findings of Hon ble ITAT order in the Appellant s own case for AY 2005-06 and its implication on the current years a) During th .....

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05-06 the Appellant had applied CUP as the most appropriate method in order to benchmark the transaction under the dispute which has been accepted by the TPO. d) The Differential factor in the application of CUP by the Appellant and TPO in AY 2005-06 was that the Appellant had used US FOB price (plus US to India freight, as mentioned in the Fertecon report) in order to arrive at the arm s length price of the purchase of DAP. On the other hand, the TPO had used India CFR price (as mentioned in th .....

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ice of the above transaction is determined by using India CFR prices (as per Fertecon reports) even then the Appellant s transaction would be at arm s length. f) During the current year, TPO has changed his methodology of benchmarking the transaction of purchase of DAP by applying Transaction Net Margin Method (TNMM) as compared to CUP method in the previous year. g) For all subsequent years, i.e. from AY 2007-08 to AY 20102-13, the TPO has accepted CUP as the most appropriate method to benchmar .....

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Particulars/Name of the Company Appellant Chambal Fertilizers and Chemicals Ltd. Shiva Fertilizers Ltd. Deepak Agro Solutions 1 Functions The Appellant is engaged in trading of fertilizers (100% trading). The company is engaged in manufacturing (63%) as well as trading activities(23%). However no segmental breakup for the same is available. However the TPO has considered entity level margins. The company is engaged in manufacturing (56%) as well as trading activities(44%). However no segmental b .....

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getables and fruits and also engaged in shipping business. Mainly engaged in production and trading of Urea. (Urea is a single nutrient fertilizer whereas DAP is a multi-nutrient fertilizer) Single super Phosphate and Mix fertilizer Segments Deals in cereals, micro nutrients, primary and secondary nutrients whereas DAP is a multi-nutrient fertilizer 3 Others DAP fertilizer is a commodity of which MRP, subsidies, restrictions, import and even choice of technology, feedstock etc are all control by .....

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641.23 2,758.43 41.28 11.44 In view of the above, the CUP method used by the appellant could not be rejected by the TPO. The following factors need be considered: (1) The TPO has himself accepted CUP as the most appropriate method in the preceding year as also in all the subsequent years. A chart was place before the Hon ble Bench to demonstrate the same. Thus, for AY 05-06 and from AY07-08 to 2011-12, the method stands accepted and ought not be disturbed in a singular year particularly when the .....

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nt and the margin of net profit is not under the control of the taxpayer. (4) The TNMM would also not be the appropriate method for the reason that nearly 40-45% of receipts are by way of subsidy from the Govt. and not from sale of the product. (5) The relevant data for the application of CUP method is available in public domain and the availability of the data and its reliability is not in dispute. It needs to be appreciated that the crucial factors for determining the appropriateness of the me .....

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s is all the more reason that in the absence of right comparables, TNMM could not be applied. Hence the appeal deserves to be allowed. 6. The learned AR pointed out that the issue of applicability of appropriate method to benchmark the international transaction of purchase of DAP was also raised before the ITAT in the case of the assessee itself for the assessment year 2005-06 in ITA No. 4831/Del/2010 and Ors. under the similar set of facts and circumstances as in the present assessment year and .....

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s of the case is required to be maintained. In support, he placed reliance on the following decisions: i) Radhasoami Satsang vs. CIT- 193 ITR 321 (SC); ii) CIT vs. ARJ Security Printers - 266 ITR 276 (Del.) - SLP filed by Revenue has been dismissed - 266 ITR 4. 7. In support of the alternative plea that comparables apply by the authorities below are not proper as they are functionally different, the Learned AR referred page Nos. 442 and 443 of the paper book - volume-2. He submitted that Chambal .....

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ainly engaged in the distribution of DAP. Likewise Shiva Fertilizers Ltd. is engaged in the manufacturing and trading of single super phosphate (SSP) and NPK Fertilizers. The proportion of their manufacturing and sales activities comes out to 56% and 44% respectively whereas the assessee is 100% distributor of fertilizers. Again, Deepak Agro Solution is engaged in the manufacturing and trading of micro-nutrients in the ratios of 29% and 69% respectively. 8. On the other hand, the Learned CIT(DR) .....

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controlled by the government. He submitted that profit element has already been considered by the government while controlling the price keeping in view the subsidiary. He submitted that A.E. is manufacturer and the assessee is distributor thereof. Thus, both the activities cannot be seen in isolation. The three comparables selected by the learned TPO are just and proper. He submitted further that DAP contents other nutrients fertilizers as well hence it does not make difference whether it is DA .....

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al transaction pertaining to purchase of DAP mentioned at Sr. No.1 in the above table. Remaining transactions have been accepted by the learned TPO to be at arm s length. In this regard, contention of the assessee also remains that the issue is covered by the decision of the ITAT in the case of assessee itself for the assessment year 2005-06 as in compliance of setting aside orders of the ITAT, the learned TPO has accepted the application of CUP method as an appropriate method in order to benchm .....

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has found it appropriate to apply CUP method. We thus fully concur with the contention of the assessee that Rule of Consistency needs to be respected in the approach of the Revenue in the application of CUP method as the most appropriate method particularly when there is no change in either the profile of the assessee or in the nature of the transaction. We also agree with the submission of the assessee that TNMM method is not an appropriate method since the sale price in the present case is reg .....

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