2015 (5) TMI 302 - AT - Income Tax

Tribunal rules in favor of assessee, rejects transfer pricing adjustment based on oil imports value.

Cargill Foods India Limited(Now merged in and known as‘Cargill India Private Limited’) Versus The Dy. Commissioner of Income

Cargill Foods India Limited(Now merged in and known as‘Cargill India Private Limited’) Versus The Dy. Commissioner of Income - TMI Issues Involved:1. Transfer pricing adjustment of Rs. 29,70,31,153.2. Rejection of Comparable Uncontrolled Price (CUP) method.3. Non-consideration of additional external CUP, internal CUP, and other data.4. Inappropriate consideration of Transactional Net Margin Method (TNMM) as the most appropriate method.5. Inappropriate search process while applying TNMM.6. Selection of inappropriate comparable companies.7. Inappropriate adjustment using TNMM on the turnover of the entire oil division.8. Not considering the adjusted margin of the appellant.9. Inappropriate calculation of the operating margins of selected comparable companies.10. Non-consideration of set-off of brought forward losses and unabsorbed depreciation.11. Applicability of +/-5% range.12. Erroneous levy of penalty under section 271AA.13. Erroneous levy of penalty under section 271(1)(c).14. Erroneous levy of interest under sections 234B and 234C.Detailed Analysis:1. Transfer Pricing Adjustment of Rs. 29,70,31,153:The primary issue in dispute is the addition of Rs. 29,70,31,153 made to the returned income due to the determination of the arm's length price (ALP) of international transactions between the assessee and its associated enterprises (AEs). The assessee argued that the adjustment was unjustified as it had used the Comparable Uncontrolled Price (CUP) method, which was rejected by the Transfer Pricing Officer (TPO) in favor of the Transactional Net Margin Method (TNMM).2. Rejection of Comparable Uncontrolled Price (CUP) Method:The TPO rejected the CUP method adopted by the assessee, stating that the broker price notes and other data provided by the assessee did not qualify as comparable uncontrolled transactions. The TPO emphasized that the CUP method requires actual transaction prices rather than quotations or broker notes.3. Non-Consideration of Additional External CUP, Internal CUP, and Other Data:The assessee provided additional external CUP data, including broker price notes from Murji Meghan Services Pvt. Ltd. (MMSPL), price publications from Oil World, and sample quotes from Sunvin group. The TPO rejected these data sources, arguing that they were not comparable uncontrolled transactions and had differences in terms and conditions.4. Inappropriate Consideration of TNMM as the Most Appropriate Method:The TPO adopted the TNMM method at the entity level sales to determine the ALP of the international transactions, which the assessee argued was inappropriate. The assessee contended that the CUP method was more direct and reliable for benchmarking the price paid for the import of oils.5. Inappropriate Search Process While Applying TNMM:The assessee raised concerns about the search process used by the TPO for identifying comparable companies under TNMM, including the exclusive use of the 'Prowess' database, non-sharing of detailed accept-reject analysis, use of non-contemporaneous data, inappropriate application of turnover filter, and the use of financial data for only the assessment year 2006-07.6. Selection of Inappropriate Comparable Companies:The assessee argued that the TPO selected inappropriate companies as comparables, which did not match the business profile and operations of the assessee.7. Inappropriate Adjustment Using TNMM on the Turnover of the Entire Oil Division:The TPO's adjustment using TNMM on the turnover of the entire oil division of the assessee was contested. The assessee argued that such an adjustment was inappropriate and did not reflect the true arm's length price of the international transactions.8. Not Considering the Adjusted Margin of the Appellant:The assessee's plea to consider its adjusted margin was rejected by the TPO, which the assessee argued was an error.9. Inappropriate Calculation of the Operating Margins of Selected Comparable Companies:The assessee contended that the TPO inappropriately computed the operating margins of the selected comparable companies, which affected the determination of the arm's length price.10. Non-Consideration of Set-Off of Brought Forward Losses and Unabsorbed Depreciation:The TPO did not consider the brought forward losses and unabsorbed depreciation amounting to Rs. 50,85,49,369 while determining the total income of the assessee for AY 2006-07, resulting in an assessed income of Rs. 20,00,42,071.11. Applicability of +/-5% Range:The assessee argued that the TPO erred in not applying the proviso to section 92C of the Act, which allows a benefit of lower variation of 5 percent in determining the arm's length price.12. Erroneous Levy of Penalty under Section 271AA:The initiation of penalty proceedings under section 271AA was contested by the assessee, stating that it had maintained and furnished all required documentation for assessing the value of international transactions.13. Erroneous Levy of Penalty under Section 271(1)(c):The assessee argued that if the transfer pricing adjustment was sustained, the proposed levy of penalty under section 271(1)(c) was erroneous, as the adjustment was due to a difference of opinion on the application of the most appropriate method.14. Erroneous Levy of Interest under Sections 234B and 234C:The assessee contended that the proposed levy of interest under sections 234B and 234C was erroneous, as the interest was based on the addition due to transfer pricing adjustment, which was a matter of difference of opinion.Conclusion:The Tribunal found merit in the assessee's arguments, particularly regarding the rejection of the CUP method and the reliability of the broker price notes and other data provided by the assessee. The Tribunal directed the Assessing Officer to accept the stated value of the international transactions of import of oils from associated enterprises as being at arm's length price, thereby deleting the addition of Rs. 29,70,31,153. Other grounds raised by the assessee were rendered academic in view of the main issue being resolved in favor of the assessee. The appeal was allowed.