TMI Blog2016 (12) TMI 1813X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to substantiate the claim of the learned Departmental Representative that the PLL was charging separate fees for regasification. In our considered view, regasification is an integral part of assessee s trading activity as unpacking of a consignment to put the same in a saleable state and fit for transportation by the available mode. The process of regasification cannot be seen in isolation with the main activity carried on by the assessee. What has been sold by the assessee is regasified LNG (R-LNG) as is evident from the financial statements of the assessee. The business models of HLPL and PLL are similar in the sense that the entire cost, whether it is a long term or a short term contract, is passed on to the customer in India as no trader will keep the cost to itself including the foreign exchange fluctuation. To that extent, leaned Departmental Representative indeed seems to have erred in observing that in the case of PLL, the entire fuel cost including the exchange rate fluctuation is passed on to the customers, whereas the same is not the case of HLPL as it is a full risk distributor. In any case, as a plain look at the financial statements of PLL would show the PLL has bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. - ITA No.313/Ahd/2015 - - - Dated:- 27-12-2016 - Pramod Kumar AM and S S Godara JJ. For the appellant: Mahesh Shah For the respondent: Saurabh Soparkar, alongwith 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 19th December 2014 passed by the Deputy Commissioner of Income Tax, Circle 2(1)(1), Ahmedabad, in the matter of assessment under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the assessment year 2010-11. 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 as the most appropriate method. 2) The Hon ble DRP has erred in law and on facts in directing the selection of Petronet LNG Limited and Gas Authority of India Ltd. as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 resale price method (RPM) as most appropriate method for ascertaining the arm s length price, and justified this method as follows: RPM RPM begins with the price at which a product purchased from an associated enterprise is resold to an independent enterprise. This resale price is then reduced by an appropriate gross margin rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 29.02% was thus arrived at, and was comparable with assessee gross profit margin per mmtbu at 60.86%. On this basis, the LNG import transactions with the AEs were claimed to be at an arm s length. 8. The approach so adopted by the assessee did not have the approval of the Transfer Pricing Officer. He noted that in the first year of assessee carrying on this business, the assessee had purchased 3 spot cargos from its AE and benchmarked the same, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and, in any way, the benchmarking done by the assessee, on the basis of gross profit margin per mmbtu was held to be unsustainable in law. The TPO then proceeded to adopt CUP method and justified the same, inter alia, on the ground that, as noted by the OECD Transfer Pricing Manual, CUP is the most appropriate method in the case of commodity trading. He then used the prices at which Petronet had purchased the LPG in spot deals as valid inputs- an inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates 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 Re-gasification 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 assessee. This Panel also finds that the CUP is not the right method to be applied in this case. The price of LNG in spot market as highly volatile. The Hon ble Chennai Tribunal has rightly held in the case of Liberty Agri Products Private Limited: [2012] 49 SOT 79 (Chennai), that, to undertake a price comparison in case of commodities, price entered into between the parties on the date of contract must be compared to similar transactions entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever 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 implies that assessee has engaged in Transfer Pricing devices to transfer the price to its AE in excess by ₹ 19 Crore on total transactions with AE for ₹ 6100 Crores. In percentage terms it works out to 0.3 Percent only. In these circumstances the approach of the TPO is rejected. On all major grounds of objections this Panel has already given direction to the TPO. The directions given to the TPO by this Panel are in favour of the Assessee. Other grounds of objections are ancillary t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 on Japan s Customs Crude Oil Clearance, and that in the North America, the prices of LNG are determined by Henry Hub prices, and contented that there are prices available for different regions in the world can be applied with reasonable adjustments but then he does not explain the mechanism of this adjustment process. In any event, what application of CUP method requires, as a first step, is that the price charged or paid for property transferred or services provided in a comparable uncontrolled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et, 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, inter alia, stated that each spot cargo transaction is distinct and are not comparable and that PLL is presently operating in one segment i.e. R-LNG . The information so furnished by the PLL is as follows: Spot Cargoes Purchased by Petronent lNG Ltd During FY 2008-09 Loading Port Supplier Ship Unloading Date MMBTU Price USD/ MMBTU Booking Date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1,845,898,342 2 Galea Algeria 14-Apr-08 23-Apr-08 13.98 3,138,060 43,87 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15-July-08 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,152,450 9,686,025 487,207,058 16. Out of 26 spot transactions that the assessee had with its AE, only one has been found to be not at an arm s length. Even in this case, there is significant variations in dates of transaction. The assessee entered into transaction on 21st September 2008, whereas the transaction used as External CUP input was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Qatar 29-01-08 15 AY 2009-10 Source Booking date Price (USD) Source Booking date Price (USD) Oman 21-09-08 19.95 Egypt 17-09-08 18.50 AY 2010-11 Source Booking date Price (USD) Source 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thrust upon the assessee. The information obtained by the TPO under section 133(6), on the basis of which the use of CUP method is justified, was not in the public domain, nor did the assessee have any information about the same unless the assessee was confronted with the same by the TPO. To suggest that in view of the information so made available to the assessee now, the assessee should have used CUP method is to expect an impossibility being performed by the assessee. What is important to note in the present case is that the method of ascertaining the ALP is being sought to be changed on the basis of alleged availability of necessary CUP data in the nature of secret comparables. That, in our 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 transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mperature of the hydrocarbon to approximately -260 degrees Fahrenheit (-160 degrees Celsius). This temperature drop liquefies the methane present in the natural gas, making transportation at atmospheric pressure in the form of LNG possible LNG is then introduced into specially insulated tankers and transported around the world. Once it has reached its destination, the LNG is offloaded from the tanker and either stored or regasified. The LNG is dehydrated into a gaseous state again through a process that involves passing the LNG through a series of vaporizers that reheat the fuel above the - 260 degree Fahrenheit (-160 degrees Celsius) temperature mark. The fuel is then sent via established transportation 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 regasificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transportation do not alter the character of transactions carried on by the assessee. The FAR analysis for the assessee and at least PLL are not any different. There is a process of custom clearance, unloading, storage, regasification and delivery to the agreed point involved in the work of the assessee as also the PLL. 24. A lot of emphasis is then placed by the learned Departmental Representative on the proposition that since there is special process involved in storage and sale of product, the RPM should not apply. However, as will be evident from the following guidance in the UN Transfer Pricing Manual and the OECD Transfer Pricing Guidelines, such a fact only calls for, at best, economic adjustments, 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 differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an the approach of the assessee. Secondly, the comparable, particularly PLL, is assuming the same risks. Thirdly, at best some economic adjustments, as may be appropriate in a case, may be done in such a situation but then no such adjustments are made by the TPO nor even suggested by the learned Departmental Representative. Finally, it is for the tax administration to show as to how another approach to the benchmarking, in a particular fact situation, will be more appropriate and unless that is done, the assessee s approach to benchmarking the transactions cannot be discarded. What the TPO had suggested was the CUP method, but, for the detailed reasons set out earlier in this order, we have held that CUP 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d enterprise , in relation to another enterprise, means an enterprise- (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,- (b) any person or enterprise holds, directly or indirectly, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e laws is so fundamental that the Constitution is not regarded as a law or a legislative act . Clearly, therefore, President of India cannot be treated as a creation of law, which, as has been noted above, qualitatively different from creation of the Constitution. While on this issue, it is also useful to take note of the Circular No.9/76 [13/127/6-CL-VI and 1/1/76-CLV] dated 19.5.1976 issued under the Companies law by the Ministry of Corporate Affairs for the purpose of section 370(1B)(3) of the erstwhile Companies Act, 1956. In the said circular the issue was whether the Government Companies will be deemed to be falling under the same management for the purposes of above stated section as the President of India or the Governor of a State, as the case may be, holds 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The business models of HLPL and PLL are similar in the sense that the entire cost, whether it is a long term or a short term contract, is passed on to the customer in India as no trader will keep the cost to itself including the foreign exchange fluctuation. To that extent, leaned Departmental Representative indeed seems to have erred in observing that in the case of PLL, the entire fuel cost including the exchange rate fluctuation is passed on to the customers, whereas the same is not the case of HLPL as it is a full risk distributor. In any case, as a plain look at the financial statements of PLL would show the PLL has booked, in its profit and loss account, foreign loss exchange loss separately to the tune of ₹ 33 crores approximately, and thus it cannot 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mental Representative does accept that GAIL is also involved in trading in natural gas though with a difference that it does not have its own terminal and regasification facilities but then he has not pointed as to what comparability adjustment is required on that account. As for the point that the GAIL is selling natural gas on administered prices, this objection is found to be incorrect inasmuch asin response to the RTI application dated June 24, 2013, it has been clarified that Government that it does not regulate / fix / control the prices of imported LNG. In any event, even if GAIL is to be excluded from comparables, it does not make any difference to the conclusion that the margin earned by the assessee are well within the comparable margin earned by PLL. 38. In 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 transa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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