2013 (11) TMI 572 - AT - Income Tax

Court upholds DRP decision adding Rs. 1,61,33,111 to income for gas imports. Penalty proceedings initiated.

SHV Energy (P) Ltd. Versus Dy. CIT, Cir-3(1), Hyderabad

SHV Energy (P) Ltd. Versus Dy. CIT, Cir-3(1), Hyderabad - TMI Issues Involved:1. Addition of Rs. 1,61,33,111/- to ALP for gas imported from AE.2. Methodology for determining arm's length price (ALP) and freight charges.3. Adjustment to ALP for shipments to Visakhapatnam and Porbandar Ports.4. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Addition of Rs. 1,61,33,111/- to ALP for Gas Imported from AE:The assessee, a wholly-owned subsidiary of SHV Energy India Pvt. Limited, imported LPG from its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) determined that the price paid by the assessee was not at arm's length, leading to an adjustment of Rs. 9,85,59,861/-. The Dispute Resolution Panel (DRP) later directed a reduced adjustment of Rs. 1,61,33,111/-.2. Methodology for Determining ALP and Freight Charges:The assessee adopted the Comparable Uncontrolled Price (CUP) method, using prices published by Argus Media. The TPO noted discrepancies in freight charges and adjusted the cost price accordingly. The DRP found the TPO's method of using the lowest freight rate inappropriate and agreed to a methodology based on the distance between ports. The DRP used a shipment arranged by the AE for M/s Chevron, USA, as a benchmark, calculating freight charges proportionately based on distance.3. Adjustment to ALP for Shipments to Visakhapatnam and Porbandar Ports:The DRP analyzed shipments to Visakhapatnam and Porbandar Ports. For Visakhapatnam, the DRP found that the excess freight charges for two shipments were within the tolerance level of +/-5%, so no adjustment was required. For Porbandar, the DRP found excess payments for two shipments in May and October 2007, leading to an adjustment of Rs. 1,61,33,111/-. The assessee argued that various factors like distance, fuel costs, and vessel age should be considered, but the DRP maintained its methodology based on distance alone.4. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee challenged the initiation of penalty proceedings. The court found no reason to interfere with the DRP's findings, stating that the assessee could argue for dropping the penalty during actual proceedings.Conclusion:The court upheld the DRP's findings and dismissed the assessee's appeal. It sustained the addition of Rs. 1,61,33,111/- to the income of the assessee and found no reason to interfere with the initiation of penalty proceedings under section 271(1)(c). The judgment emphasized the reasonableness and appropriateness of the DRP's methodology in determining the ALP and freight charges based on distance.