TaxTMI 
TaxTMI 
2010 (3) TMI 878
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....er section 143(1) after issuing statutory notice. 4. The assessee-company is engaged in the business of processing and export of chemicals. The assessee-company has transaction with the associate enterprises as well as non-associated enterprises. The associate enterprise is M/s. Chemical Link LLC, USA with whom the majority of the transaction of sale was entered into by the assessee-company. The assessee furnished auditor's report in Form No. 3CEB in respect of the transaction with associate enterprises amounting to Rs. 2,82,60,700. The method of computation of arm's length price has been stated to be comparable uncontrolled price method. 5. Vide questionnaire dated 1-12-2006, the assessee was asked about the transaction with its associate concern, viz., Chemical Link, LLC, USA. It was further asked to explain that the amount involved at Rs. 2,82,60,700 as per the comparable controlled price method employed by it. The assessee was further asked to furnish the sales register as well as the comparative rate which it had been supplying the products to other concerns in India as well as abroad. 6. In response, the assessee furnished the details called for. On examination of the sale....
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....ce. The assessee has also failed to furnish as to what are comparable prices for arriving at the arm's length price. Therefore the price charged by the assessee in the international transaction with the associate enterprise has not been determined in accordance with sub-sections (1) and (2) of section 92C. Therefore the Arm's Length Price as computed by the assessee is rejected and the same is recalculated. The assessee has stated that it has provided for 1 per cent industry discount and 20 per cent discount of qualitative and quantitative basis. The assessee's contention regarding 20 per cent discount has not been found tenable. This has also been rejected in the assessment year 2003-04 and the reasons for the same are relied upon which are not restated here for the sake of brevity. However, considering the general practice in the industry, 5 per cent industrial discount is allowed to the assessee. As such Rs. 587 per kg rate is taken for the purpose of computation of Arm's Length Price, in respect of the transaction with associate enterprises." 11. Therefore an addition of Rs. 91,47,700 was made to the total income by the Assessing Officer. Further he held that no deduction und....
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.... this meeting the P&L of earlier year was handed over to her. This P&L of AE also shows losses. In fact the specter of Transfer Pricing hangs perilously over the AE if the US Govt. Income-tax authorities scrutinizes their accounts. Miniscule amounts of DDS purchased by Non-Associated enterprises is about 2.5 per cent of the sale in the whole year and the higher price paid by them has very little relevance to total business profile of the appellant. These are small time parties buying very small amount of the product just once a year or so. Sometimes these traders provide small quantities of this specialty chemical to Laboratories equipment dealers who in turn sell the product under their name to laboratories attached to chemical production units, for testing or R&D purposes. The cost of these small quantities (50 or 100 grams) is at times 15 to 20 times higher than what the appellant charged. Such small quantities of chemicals are typically called 'Pure Substance'. Not only the orders from such sources are small but they are very few and far between. This kind of business therefore does not represent the business profile of the appellant at all." 13. The Ld. CIT(A) held as follow....
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.... held that while the motive of tax avoidance need not be shown at the time of initiating Transfer pricing provisions, the same is required to be shown at the stage of making the assessment/Audit. The Assessing Officer has to show that the assessee manipulated prices to shift profits outside India. In the specific facts of that case they held that the assessee enjoyed exemption under section 10A so the Transfer Pricing provisions ought not to have been applied. The decision of the ITAT finds an echo in this case as it enjoys deduction under section 80HHC. The ITAT in the above case went on to observe that the AP/TPO has to satisfy and communicate to the taxpayer which one of the four conditions prescribed in section 92C(3) are satisfied before applying the Transfer Pricing Provisions and the failure to demonstrate this to the assessee renders the transfer pricing void. The Assessing Officer while carrying out the Transfer Pricing adjustments has applied the CUP method. The Assessing Officer observed that the rate charged per kilogram with AE was Rs. 440 per Kg. whereas that charged with non-AE was Rs. 617. Thus after allowing 5 per cent traditional discount it determined the Arm's....
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....the big and flourishing market of USA and Europe it has to depend on its AE only. The Assessing Officer has not taken into account these very material and significant differences while carrying out the ad hoc addition. While he was bold enough to enter the chopping seas of the CUP Method but unable to navigate on account of ignoring the core tenets of adjustments in this regard thus leading to an erroneous Arm's Length Price. In doing so, she ignored the key guidelines laid down by ITAT Special Bench decision in Aztec Software 294 ITR 32 (Bang.) Ranbaxy Laboratories 110 ITD 478 (Delhi), Mentor Graphics Ltd. 109 ITD 101 (Delhi). The appellant has also furnished the details of rate charged by its AE to the customers and it is observed that on a simple average it is 8.21 from it to its AE whereas it is 8.87 from its AE to Customers. At the weighted average rate it is 8.20 from it to its AE while it is 8.75 from its AE to customers. If the overheads as identified in the submissions to run the AE is reduced then there would be hardly any profit. The fact that the AE has infact shown losses finally clinches the case in favour of the appellant. It is also relevant to mention here that th....
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....products in small quantities in glass vials. These are used by research laboratories for their work. These companies buy the chemical product from Market in 'Bulk', which is 50 Kg. or 100 Kg. at price (For DDS) of about USD 50/Kg. This is a viable price for such companies because they sell the product in 10 Gram Vials for USD 12. This price for DDS is mentioned in catalogue of Merck Index. Thus the qty. does have an effect on the price of the International transaction hence Associated enterprise for the appellant come into existence merely because European customers felt very comfortable dealing with an American based firm rather than an Indian. This is due to sensitive and important application of the product and implications in case any matter of dispute went to court. There was no other objective in appointing this associated enterprise. 20. He further submitted that the Assessing Officer was shown the copies of original orders from and invoices made to Multinational end-users, by AE. These reputed multinational companies operating in Europe, command the price of their raw materials. The appellant or AE has no scope to get the price of their choice more than 97.5 per cent of th....
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....d of business therefore does not represent the business profile of the appellant at all. Geographical region difference 23. In markets has to be taken into account as the South East Asian market is small whereas the Europe and USA market where the assessee supplies 97 per cent of its products is higher and is very competitive, hence the countries demographical location has bearing in determining the Arm's Length Price. Survival of the appellant 24. The assessee's 97.5 per cent of the turnover is to AE in USA and Europe and only 2.5 per cent to Non-AE. The survival of the assessee-company depends on the business with AE. The miniscule 2.5 per cent of the sale has very little relevance to the total business of the assessee. The reasons mentioned above amply demonstrate that price charged to AE cannot be equated with that charged to Non-AE. Comparison of the rates charged by AE to its customers 25. AE merely purchases material from assessee and sell it to different European customers. AE does not have any other business transactions, whatsoever, other than with assessee. The rates charged by AE to its customer are comparable to rate charged by assessee to AE. The following chart....
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....e it is 8.20 from it to its AE while it is 8.75 from its AE to customers. If the overheads as identified in the submissions to run the AE is reduced then there would be hardly any profit. 29. In our opinion the transaction with the AE was at Arm's Length and there is no case of making adjustments. We confirm the order of the Ld. CIT(A) deleting the addition of Rs. 91,47,700 made on such adjustments. The Revenue's appeal is dismissed on this issue. 30. The second ground raised by the revenue reads as follows :- "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the addition made by the Assessing Officer on account of interest on fixed deposit of Rs. 9,74,002 and dividend of Rs. 2,800 as the same were disallowed for deduction under section 80HHC without appreciating the facts and circumstances of the case." 31. The Ld. CIT(A) had treated the dividend interest income as business income and not income from other sources. During the proceedings before us the assessee contended that the fixed deposits are kept with the bank to obtain Overdraft facility. There have been no Overdraft facility and there would have been no fixed deposits place....