TMI Blog2017 (1) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... 92A - Held that:- the equity shareholding of the asseesse, even though in the name of the President of India, is held by the Union of India. The shares are held by the Union of India which is a sovereign. As for the President of India being treated as an artificial juridical person, as is contended by the learned Departmental Representative, we are unable to see any merits in this plea either. An artificial juridical person is a creature of law but the President of India is a creation of the constitution. If all the public sector undertakings are to be treated as ‘associated enterprises’, the inter se transactions between all the public sector undertakings will be subject to arm’s length price determination- something which is seemingly quite incongruous and contrary to the scheme of the transfer pricing legislation. The assessee and Indian Oil, Bharat Petroleum, ONGC and GAIL, or, for that purpose, any other public sector undertaking, cannot be said to be associated enterprises. In the cases of public sector companies, even as all or majority of shareholdings may be by the Union or State Governments, these companies, for that reason alone, cannot be said to be associated e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion by the appellant. Therefore, even if CUP method is to be applied, the impugned adjustment will have to be deleted anyway. Viewed thus, the grievances raised in this appeal may be viewed as somewhat academic and of no practical consequence. However, without any offence or prejudice to this line of reasoning, we have dealt with the issue on merits and given our categorical findings on the same. - Decided against the revenue. - I.T.A. Nos. 1056/Ahd/ 2014 - - - Dated:- 27-12-2016 - Pramod Kumar AM and S S Godara JM For The Appellant : Mahesh Shah For The Respondent : Saurabh Soparkar, along with Mukesh Butani, Vishal Kalra and Sumisha Murgai ORDER Per Pramod Kumar, AM: 1. This appeal is filed by the Assessing Officer and is directed against the order 14th February 2014 passed by the Deputy Commissioner of Income Tax, Circle 4, Ahmedabad, in the matter of assessment under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the assessment year 2009-10. 2. Grievances raised by the appellant are as follows: 1. The Hon ble DRP has erred in law and on facts in directing the rejection of CUP (comparable uncontrolled price) as the most appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es), and sells regasified LNG (R-LNG) to its customers in India. 5. During the relevant previous year, the assessee had entered several transactions with its associated enterprises, inter alia , for the purchase of liquefied natural gas. These transactions included purchases of LNG for 2,523.73 crores from Shell Eastern Trading Pte Ltd and of ₹ 2,226.98 crores from Total Gaz and Power Ltd, and for ₹ 611.22 crores Shell International Trading Middle East Limited, its associated enterprises. The total transactions of imports of LNG from the AEs, as noted by the TPO, amounted to ₹ 4,794.85 crores consisting of 32 spot cargos. A spot transaction, we may add, is a transaction which is negotiated for each transaction separately within a particular delivery window, rather than for a series of such individual transaction spread over a period of time. The assessee imported LNG, essentially on the basis of expected demand and other market conditions in India, on CIF basis and the price for such imports, as is the convention in this line of business, was decided on the basis of per million british thermal units (mmbtu). In its transfer pricing report, the assessee used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M ) per mmbtu, which is the ratio of gross profit to total quantity of R-LNG sold, measured in terms of mmbtu. Gross profits are total income minus cost of goods sold. Total income is the aggregate of total operating income excluding interest income, dividend income and non-recurring income. Cost of goods sold is the sum of opening stock and purchases less closing stock. R-LNG is not generally sold per unit of volume, but rather per unit of energy that can be produced by burning the gas. The heat energy that the gas generates during combustion measures the real worth of the gas. The heat energy of a particular gas stream is measured by units of calorific value, which is defined by the number of heat units released when a unit volume of the gas burns. This can be measured in terms of mmbtu. Hence the PLI used in establishing the arm s length profitability is based on per mmbtu of LNG sold. 7. The assessee narrowed down to two comparables, namely Petronet LNG Limited (PLL, in short) and Gas Authority of India Ltd (GAIL, in short), which showed weighted average of gross profit margin per mmtbu at 31.97% and 26.08% respectively. The arithmetic mean of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the increase in passage of time, other factors, such as market and exchange risks will have to be taken into account for comparison. It was also noted that the services being rendered by the assessee and the comparables are not the same inasmuch as Petronet has carried out transactions either with long term contracts or with Government administered resale prices or it as merely provided regasification facilities to its clients who have utilized its LNG terminal which was having some spare capacity and GAIL is not having LNG terminal of its own and as such was not able to perform those activities as were carried out by the assessee The TPO also noted that GAIL is a Government owned undertaking having large number of related party transactions and most of its sources of LNG are very long term contracts which cannot be compared with spot purchases . As for Petronet, the TPO observed that out of sales of ₹ 8,428 crores, related party sales amounts to ₹ 8,372 crores and to this extent, gross margin of sale of this company cannot be taken as comparable . It was in the backdrop of this analysis by the TPO that both the comparables adopted by the assessee were rejected a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom overseas sellers of LNG, re-gasification of imported LNG to convert into R-LNG and thereon resale of RLNG in India. Further the assets employed and resources utilized by both HLPL and PLI are similar. These include use of LNG terminal, re-gasification plant, amongst others. Even PLL does not disclose a bifurcation of profits earned from long term and spot trade. Therefore even PLL considers long term and spot trade as same. This fact further validates the fact that the LNG industry also considers trading in long term and spot cargoes as one business segment. The assessee is a trader which purchases and sales the LNG Regasification is not value addition. Rather it is the part of process considered necessary to transport LNG overseas. In long distance overseas transportation by pipelines is not considered viable. Therefore re-gasification cannot be viewed separately. In the case of Gharda Chemicals Limited vs. DCIT: (2010) 130 TTJ (Mum) 556, use of RPM has been advocated in situations where in property is purchased and resold. Since the operating model of PLL and HLPL is comparable, this Panel directs the TPO that RPM should be accepted as most appropriate method in the case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business in a competitive market as they sale their product at a government controlled price. Therefore this Panel directs the TPO not to use CUP for determination of ALP of purchase transactions from its AEs in spot trade in this case. During the financial year 2008-09, HLPL purchases 26 spot LNG cargoes from its associated enterprises, namely Shell Eastern LNG (Pte) Limited, Singapore ( SELNG ) and Total Gas Power Limited, London [ TGPL ) for resale in India. But the TPO however disregarded the methodology adopted by the assessee for benchmarking its international transactions and made an upward adjustment of INR 190,574,124 to the total income of the assessee under CUP holding that the assessee has purchased LNG from its AE at a higher price as compared to price PLL paid in spot trade. Accordingly the TPO has proposed adjustment to one cargo (mandate date September 21, 2008). This Panel has already referred to the arguments of the assessee. In this connection it is also relevant to note that out of 26 international transactions of spot LNG cargoes the TPO has found only one transaction as at higher price compared to PLL. The assessee has argues that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case is to adopt the prices at which PLL has imported LNG as CUP input, despite the variation in dates and variations in the origin of the LNG. Therefore, taking up the crude oil prices, as base material, or referring to Henry Hub prices at this stage will be giving a new twist to this case and attempting to thereby improve the case of the revenue- which is not permissible. Learned Departmental Representative has laid a lot of emphasis on the observation made in the TP report to the effect that The price of natural gas mirrored international crude oil prices in terms of volatility but then their rate of variation may not be the same even as it may be in the same direction. That is clear from the graph showing movement of these prices, as filed by the assessee, clearly shows. It is not even the case of the Departmental Representative that there is a direct formula with the help of which prices of LNG can be derived nor is it clear to us as to how can the prices of LNG be derived from the prices of crude oil, which are in public domain. Learned Departmental Representative has pointed out that the Japanese LNG import is bench marked on the basis of JCC prices which is based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct international transaction 13. In the year in which the Henry Hub prices were used, primarily the commissioning of the project was to take place, and, therefore, the operations of assessee s business were of different nature. The fact that the assessee had used Henry Hub prices in the first year of operations, therefore, cannot be used as estoppel against the assessee. In any case, these prices are of a significantly different geographical market and a different product inasmuch neither US, as a market, can be compared with Indian energy market, nor LNG prices CIF Hazira can be compared with the domestic prices of natural gas in US. This is, of course, besides the fact that the TPO has not even relied upon Henry Hub, or, for that purpose, any other prices in public domain. 14. What has been done by the TPO is to adopt the prices, at which PLL has imported LNG in spot transactions, as external comparables. There is no dispute that this information was never in public domain, and that it was in response to the requisition under section 133(6) of the Act that the PLL furnished, vide letter dated 1st February 2012, to the Transfer Pricing Officer. In this letter, PLL has, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25/11/2008 Y Bintulu, Malaysia BP Seri Angkasa 11/3/2009 3,274,231.00 6,2500 3/3/2009 Y Point Fortin T T BP Brit Innovator 29/03/09 2,779,225.03 5,8000 12/3/2009 Y *Date on which purchase of spot cargo is confirmed. 15. The above comparables have been used to examine the following actual import transactions entered into by the assessee: Annexure Details of purchases made by HLPL during FY 2008-09 S.No. Name of Ship Source Date of Confirmation notice Date of Arrival Price USD Net Qty. Unloaded Value in books (USD) Value in books (INR) 1 Al Thakira Qatar 2-Apr-08 11-Apr-08 13.98 3,264,240 45,634,075 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18-Sep-08 20.45 3,422,600 69,992,170 3,062,157,438 13 Arctic Lady Norway 21-July-08 13-Aug-08 19.55 3,272,270 63,972,879 2,722,045,980 14 Seri Alam Guinea 23-July-08 24-Sep-08 19.55 3,058,230 59,788,397 2,615,742,347 15 Seri Alam Nigeria 28-July-08 8-Aug-08 18.70 3,166,660 59,216,542 2,519,663,862 16 Berge Arzew Algeria 13-Aug-08 22-Aug-08 20.37 3,118,180 63,517,327 2,702,662,247 17 Seri Bijasksana Guinea 18-Aug-08 12-Oct-08 20.50 3,158,740 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as entered into on 17th September 2008. It is by now a settled legal position that the prices entered into by the parties on the date of contract must be compared with the prices of similar transactions on that day. In the case of Liberty Agri Products Pvt Ltd Vs ITO [(2012) 49 SOT 79 (Chennai)], a coordinate bench of this Tribunal has held that even when a comparison with respect to customs data is to be made, it should be for the data in respect of the day on which contract was entered into and not a different date. The data obtained by the TPO from PLL would also show that there are variations in the prices of LNG imported within a gap of even 1 day. On 4.11.2008, PLL entered into spot deal @ US $ 13.2500 per mmbtu but on the very next day, i.e. on 5.11.2008, the next spot deal was @ US $ 12.3000 per mmbtu. Similarly, on 4.10.2008, PLL entered into spot deal of LNG imports @ US $ 16 per mmbtu, but in less than a week, on 10.10.2008, PLL entered into another spot deal of LNG import @ USS $ 17.5 per mmbtu. The business situations can never be so static, particularly in the case of a product like LNG spot deals which are purely based on one to one negotiations, that the market pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Booking date Price (USD) Russian Federation 06-04-09 5 Egypt 13-04-09 4.8 Withnell Bay, WA 25-05-09 3.87 Australia 22-05-09 3.50 Russian Federation 02-06-09 3.87 Australia 22-05-09 3.50 Guinea 02-06-09 4.20 Australia 22-05-09 3.50 Russian Federation 25-08-09 5.15 Qatar 20-08-09 4.65 Qatar 03-09-09 5.15 Qatar 01-09-09 4.70 Trinidad, W.I 02-09-09 5.15 Qatar 01-09-09 4.70 17. In any case, the information available for External CUP inputs (i.e PLL data) is clearly inadequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r humble understanding, cannot be done. As we say so we are alive to the fact that in certain decisions by the coordinate benches, even when secret comparables are used by the TPO, the same has been broadly upheld with the rider that the assessee should be confronted with the secret comparables used by the TPO but then the present case is materially different. Here is a case in which secret comparables, which have been obtained by the TPO under section 133(6), are not in respect of the transactions on the same day on which the assessee entered into similar transactions, in some cases- not even the same week or the same month, and yet based on the availability of this data, the method of determining ALP is being changed. The DRP was quite justified in rejecting the use of CUP method on these facts, and we approve the stand of the DRP. 19. Learned Departmental Representative has then contended that resale price method is not an appropriate method in this case as there is substantial value addition by way of complex regasification process in the LNG terminal operated by the assessee, for which the assessee has not levied any charges, and it is not a limited risk distributor s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation methods, such as pipelines, to the end users. The work typically done at the LNG terminal, by way of a diagram, can be shown as follows: (source: http://www.marineinsight.com/wp-content/uploads/2013/05/lng-diagram.jpg) 21. We have noted that what is imported by the assessee is natural gas, which is liquefied because it can be transported internationally only after being liquefied, and what is sold is also natural gas. The process of liquification and regasification is the compulsion of international transportation and an integral part of this business model. What is imported, however, is natural gas and what is sold is also natural gas. As we deal with this aspect of the matter, we may refer to Hon ble Supreme Court in the case of Association of Natural Gas Ors Vs Union of India Ors [(2004) 4 SCC 489 (SC)] wherein it is held that liquefied natural gas (LNG) is also a natural gas and belongs to the same category. Recognizing the role of liquification of natural gas for transportation purposes, Their Lordships have observed as follows: 24. To obtain a marketable product, the raw natural gas flowing from gas or oil wells must be processed to remove wat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , where required, and the higher margin: 6.2.9.5. As the gross profit margin remunerates a sales company for performing marketing and selling functions, the Resale Price Method especially depends on comparability regarding functions performed, risks assumed and assets used. The Resale Price Method thus focuses on functional comparability. A similar level of compensation is expected for performing similar functions across different activities. If there are material differences that affect the gross margins earned in the controlled and the uncontrolled transactions, adjustments should be made to account for such differences. In general comparability adjustments should be performed on the gross profit margins of the uncontrolled transactions. The operating expenses in connection with the functions performed and risks incurred should be taken into account in this respect, as differences in functions performed are frequently reflected in different operating expenses. [UN Transfer Pricing Manual] 2.31 It should be expected that the amount of the resale price margin will be influenced by the level of activities performed by the reseller. This level of activities can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method cannot be applied to the facts of this case. No method of determining ALP is perfect, but it is from these imperfect methods that we have to find out which is more appropriate a method. There is nothing on record or in the arguments of the learned Departmental Representative which can demonstrate to us as to why the RPM can be discarded and a more appropriate method of determining ALP can be adopted. We are, therefore, not persuaded by this plea either. 26. Let us now move on to the third and last limb of revenue s grievance and that is against non comparability of the comparables, namely PLL and GAIL. 27. The first issue against the comparability is of high related party (i.e. intra AE) transactions. 28. So far as PLL is compared, as pointed out by the learned Departmental Representative, total sales of this comparable is 8,428.70 crores, out of which the sales to the related parties, namely (1) Indian Oil Corp Ltd, (2) Bharat Petroleum Limited, (3) Oil and Natural Gas Co Ltd and (4) GAIL India Ltd, is 8,372.95 crores. It is pointed out that the sales with related parties being almost 99%, the comparable with such high related party transactions cannot be taken as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or . .. .. 32. It is thus clear that where a person or an enterprise holds, directly or indirectly, shares carrying not less than 26% of voting powers in each such enterprises, the requirements of Section 92A(2)(b) will be fulfilled, and that where a person, directly or indirectly, or through one or more intermediaries, participates in the management, control or capital of these companies, the requirements of Section 92A(1)(b) will be fulfilled. The law is also settled that conditions of both the limbs of Section 92A are to be fulfilled, and only then the enterprises can be said to be associated enterprises. It is only when both of these conditions are fulfilled that these four companies and the assessee can be said to be associated enterprises. 33. The expression person , under section 2(31), has been defined to include (i)an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the major shares and exercise and control the voting rights , and In the Ministry of Corporate Affairs clarified that for the purpose of section 370, the Companies will not be deemed to be under the same management as the President or the Governor does not hold shares and exercises or controls voting rights as an individual in the Government Companies. Of course, the scope of section 370 (1B), in the Companies Act in force at that point of time, was with respect to the expression individual as against person in the present case, but then the same position, for the detailed reasons set out above, holds good in the present context, i.e. in the context of person , as well. If all the public sector undertakings are to be treated as associated enterprises , the inter se transactions between all the public sector undertakings will be subject to arm s length price determination- something which is seemingly quite incongruous and contrary to the scheme of the transfer pricing legislation. 34. In view of the above discussions, in our considered view the assessee and Indian Oil, Bharat Petroleum, ONGC and GAIL, or, for that purpose, any other public sector undertaking, cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that the PLL had passed on entire foreign exchange fluctuation risk to its customers. It has also been noted that sale to customers in India by both PLL as also the assesse is foreign currency (USD) denominated and, therefore, the foreign currency risk is a pass through costs for both HLPL and PLL to that extent. We have also noted, as pointed out by the learned counsel, that LNG Prices are floating in long term trade as well since they are generally linked to certain Oil exchange prices. As an example, it has been noted that PLL sourced LNG from Rasgas, Qatar under a 25 year SPA for which prices were linked to Japan Custom Cleared ( JCC ) crude oil of US$ 20/bbl in the period from April 2004 to December 2008, and in the period from January 2009 to December 2013, LNG prices would gradually float in line with the specified formula, with prices fully indexed to the previous 12 month JCC from Jan 2014, subject to cap and floor price. It would thus follow that just because PLL has entered into long term contracts, it does not essentially follow that the prices will not be subjected to variations. In other words, even under long term contracts, the prices of the LNG are not to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the above discussions, as also bearing in mind entirety of the case, we hold that the comparables adopted by the assessee are appropriate. 39. We may also add that there is a specific finding in the order of the Dispute Resolution Panel that in the light of this Tribunal s decision in the case of Liberty Agri Products (supra), even for the purposes of CUP, the prices prevailing on the day of transaction can only be compared with the comparable uncontrolled prices prevailing on that day only and not on some other dates, and that in none of the cases the TPO has used the prices prevailing on that particular day. This finding remains unchallenged and this principle has not been called into question by the appellant. Therefore, even if CUP method is to be applied, the impugned adjustment will have to be deleted anyway. Viewed thus, the grievances raised in this appeal may be viewed as somewhat academic and of no practical consequence. However, without any offence or prejudice to this line of reasoning, we have dealt with the issue on merits and given our categorical findings on the same. 40. In the light of these discussions above, and for the detailed reasons set out ab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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