TMI Blog2018 (6) TMI 169X X X X Extracts X X X X X X X X Extracts X X X X ..... Member This appeal, filed by the assessee, being ITA No. 228/Mum/2016, is directed against the assessment order dated 23. 12. 2015 passed by learned Assessing Officer u/s 143(3) r. w. s. 144C(13) of the Income-tax Act, 1961 (hereinafter called the Act ) for assessment year 2011-12 which is passed in pursuance to Directions dated 27. 10. 2015 issued by Disputes Resolution Panel-1, Mumbai (hereinafter called the DRP ) u/s 144C(5) of the 1961 Act, the proceedings had arisen before DRP from draft assessment order dated 06-02-2015 passed by learned Assessing Officer (hereinafter called the AO ) u/s 143(3) r. w. s. 144C(1) of the 1961 Act for AY 2011-12 which was issued in pursuance to order passed by Transfer Pricing Officer, 2(1)(1), Mumbai dated 30-01-2015 u/s 92CA(3) of the 1961 proposing transfer pricing adjustment to Arm‟s length price on account of international transaction to the tune of ₹ 8, 59, 99, 908/-. 2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) read as under:- 1. The learned DRP erred in directing the AO in selecting the TNMM met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckets of lubricating oils of 910 ml. to 210 ltrs. manufactured from the lubricating oil imported from its AE in bulk packs/flexi packs of 20, 000 ltrs. which are then sold to customer in Indian market in small packs. The international transactions reported by the assessee in its TP study is as under:- Sr. no Nature of international transaction Quantity Total CIF Value (In. Rs. ) 1. Lubricants in Flexi Bags -Purchases -Royalty -Interest 3880298 Ltrs 18,92,59,403/- 2,10,848/- 3,38,439/- Total 18, 98, 09, 690/- The TPO observed from the TP study report that the AE is manufacturer of base oil which assumes less than market risks associated with carrying out the business because the basic raw material being base oil is manufactured by its AE which is used for manufacturing lubricating oil which bring down its cost of production. Secondly, the TPO observed that the AE got the assurance of selling lubricating oil in Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So far Remarks 35 to why prices to India are reasonable and at arm's length i India Ki xx Dynamic CH-4 15W/40 Flan-Tank, L 1. 17 1. 11 670, 000 1. 08 Jul. 2010 440000 Quantity bought by us ate larger and in bulk where as other country volumes are very low. Also we have to keep m mind that other than packing cost, margins are higher in smaller packs for all the products in the market. l Nepal Ki xDYNAMlCCG-4 15W/40 3/6 L BOX 28. 17 2S. 76 4, 000 1. 23 Jan. 2010 3450 i Ghana Kiw DYNAMIC CH-4 15W/40 2001. DRUM 280. 76 257. 20 30, 000 1. 15 Mar. 2010 5000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ^ 5, 000 1. 23 Jun. 2010 22440 5 India GS Hydro 68 Flexi-Tank, L 0. 91 0. 87 670, 000 0. 84 Mar. 20 10 120000 Quantity bought by us a re larger and in bulk where as other country volumes are very low. Also the supplies to China is done by Korean Local Distributors after keepi ng their own margins 5 China DICC HYDRAULIC 01L46(1) Field-Tank, L 1. 08 1. 07 670, 000 1. 04 Jul. 2010 60000 S China HHICHYOOIL46(2) 200L DRUM 2S1. 50 248. 10 30, 000 1. 11 Jul. 2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO observed that the assessee is infact following CUP (comparable uncontrolled price) method while the assessee is describing the same to be cost plus method in its TP study. The TPO observed that the CUP method is not the most appropriate method under the given circumstances . The TPO relied upon the decision of Mumbai-tribunal in the case of Gharda Chemicals Ltd. v. DCIT (2010) 35 SOT 406 (Mum), which led him to reject CUP method and adopt TNMM method considering the same to the most suitable method for computing Arm‟s Length Price under the given circumstances because the TNMM method tests the arm‟s length character of transfer prices in the controlled transactions by comparing the operative profit earned by the tested party in the controlled transactions under examination to operating profit earned by tested parties in its similar transaction with uncontrolled parties. Thus the TNMM measures the total returns derived from controlled tax payer‟s most narrowly defined business activity for which reliable date incorporating the controlled transaction under review is available. It was observed by the TPO that the strength of the TNMM is that net margins are less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. 723) 4 OP/TC (3/1) -18. 97% 5 Average markup of comparables 5. 02% 6 Arm's Length Value (2X5)(In Rs. ) 1, 79, 95, 185 7 Adjustment (6-1)(In Rs. ) 8, 59, 99, 908 (In Rs. ) The average OP /TC was 5. 02% of these two comparable entities, while OP/ TC of the assessee was (-) 18. 97% which led to the additions of ₹ 8, 59, 99, 908/- towards TP adjustments on account of international transaction and adjustments was proposed by TPO to ALP vide orders dated 30. 01. 2015 passed u/s. 92CA(3) of the Act. The said TPO order dated 30. 01. 2015 led to the framing of draft assessment order dated 06. 02. 2015 passed by the AO u/s. 143(3) r. w. s. 144C(1) of the Act, which led to the additions in the hands of the assessee by way of Arm‟s Length Price adjustment to the international transaction entered by the assessee with its AE to the tune of ₹ 8, 59, 99, 908/- . Sales(In Rs. ) 29, 04, 65, 103 Cost(In Rs. ) 35, 84, 69, 826 Loss(In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proceedings before the DRP, the assessee has submitted that assessee's comparison with Sah Petroleum Ltd and Gulf Oil Corporation is also to be ruled out even though they are in the business of lubricating oil. The reason given by the assessee for this is that Sah Petroleum Ltd is 28 years old and Gulf Oil Corporation is 50 years old company with a Capital Investment in Fixed Assets of ₹ 46 crs and ₹ 518 crs. respectively. Both the companies are having its own blending plant and having mass production of Lubricating Oil and greases. Their total Sales volume of Lubricating oil is 63236 KL and 52767 KL per annum respectively. Its products are being sold on the Brand name of IPOL and Gulf, hence easily saleable product in the market. It has market share of at least 2% of the Lubricating oil market in India. Their spending on media and marketing is very high due to which their products known to the public and can be sell easily in the market. Sah petroleum is basically into trading of white oil business and caters to the Pharmaceutical industry; their volume is also huge compared to GSlPL. 2. 9 On the other hand, GSIPL is a new company with a one year of its ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y chosen the TNMM for benchmarking the international transaction of the assessee. The TPO has also given detailed reasons for rejecting the method employed by the assessee for benchmarking the international transaction with which we agree. It may also be mentioned that the prices charged to other customers by AE and used as CUP cannot be so regarded since the other customers are not independent customers but they are also other AEs of the assessee and the group. 2. 13 As regards the objection of the assessee that the TPO has selected companies which were branded, old and established companies dealing in variety of products and, hence, the comparables selected by the TPO should be rejected, we are of the opinion that even if the assessee company is a new company, the CALTEX brand is a known and established brand in the field of lubricants in India and has been in existence for a number of years. Hence, the product in which the assessee company is dealing is an established product in the Indian market having a brand value and visibility. CALTEX brand is also known worldwide. Therefore, the fact that the assessee is a new company as compared to the comparables will have no mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the issue in this appeal is with respect to the two comparables selected by TPO namely Gulf Oil Corporation Limited and Sah Petroleum Ltd. It was submitted that this is first year of business of assessee company and the assessee is 100% subsidiary of G. S Caltex Corporation, South Korean . The assessee imports lubricating oils from parent company in barrel of 20, 000 ltrs which were converted in small pouches of 910 ml. To 210 ltrs. and it was submitted that originally there were three comparables selected by the TPO namely, Castrol India Ltd. , Gulf Oil Corporation Limited, Sah Petroleum Ltd. . It was submitted that the assessee did not offered any comparables and assessee applied cost plus method to compute ALP . it was submitted that Castrol India was not finally taken as comparables by TPO. It was submitted that it is first year of operation of the assessee and Sah Petroleum Limited is 28 years old company while Gulf Oil Corporation Limited is more than 50 years old company . Our attention was drawn to page no. 57 to 123/ paper book filed by the assessee with the tribunal wherein the audited Balance Sheet of Sah Petroleum Ltd. is placed and it was submitted that Sah Petrole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Welspun Zucchi Textiles Ltd. v. ACIT in ITA no. 6539/Mum/2009, vide order dated 11. 01. 2013, it was submitted that assessee AE is parent company which supplied to different geographical market and hence the CUP method was rejected and TNMM was applied by TPO/AO which was upheld by DRP. The Ld. DR submitted that the matter can be restored to the file of TPO for fresh search and adjudication . It was submitted that it is not clear from the order of AY 2012-13 whether CUP method was adopted by the assessee and which comparables were adopted from the order produced by the assessee. The Ld. Counsel for the assessee on the other hand in rejoinder drew our attention to page no. 53/paper book filed with the tribunal and it was submitted that that assessee import lubricating material from parent company in bulk packing and bring the same to job workers place at Taluja, Navi Mumbai and get it refilled in small packs ranging from 910 ML to 210 ltrs which is sold to various customers in India. Our attention was also drawn to page no. 184 of the paper book which contains the segmental results of Gulf Oil Corporation Limited and it is submitted that said segments results are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er geographical areas/countries such as Nepal, China, Ghana, etc. and the assessee came into conclusion that the price charged by its AE from the assessee for import of lubricating oil is within Arm‟s Length Price of international transaction entered into by the assessee for import of lubricating oil from its AE and no TP adjustments/ additions are warranted u/s. 92C . As per AO, while assessee has stated that it adopted cost plus method but in-fact the assessee adopted comparable uncontrolled prices (CUP) method, wherein it adopted internal CUP method to benchmark its international transaction with its AE for import of lubricating oil . The assessee‟s AE is manufacturing base oil and converting into lubricants oil and supplying the same to its subsidiaries/ associated companies worldwide. As per AO, the AE doesn‟t assume much risk as it manufactures and supply to its subsidiaries/associated companies across globe. The brand Caltex‟ in which the assessee and its AE dealt is a 100 years old brand . The AO adopted Transactional Net Margin method (TNMM) as in the opinion of the AO internal CUP method adopted by the assessee is not reliable keeping in view geog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Both the companies selected as comparable by authorities below are engaged in the business of lubricating oil . Both these comparable companies are old and well established companies dealing in established brands. The assessee is also dealing in established Brand ‟Caltex‟ which is more than 100 years old. We have observed that Sah Petroleum Limited is engaged majorly and primarily in business of lubricating oil. The assessee has contended that segment results of Sah Petroleum Limited are not available in the audited financial statements which are placed in paper book. We reject this contention of the assessee because Sah Petroleum Limited is majorly and primarily in Lubricating oils business, thus, there is no need to have separate segment results of the said company to be considered for computing ALP and for TP adjustments. So far as Gulf Oil Corporation Limited is concerned, it is in business of lubricating oils and explosives. The explosive business of said Gulf Oil Corporation Limited was divested into separate company w. e. f. 01-10-2010 . Segments results are available for Gulf Oil Corporation Limited from the audited financial statements as are available on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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