TaxTMI 
TaxTMI 
2014 (4) TMI 621
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.... the Companies Act, 1956 and is 100% owned by M/s. KTC Korea. The company is primarily engaged in the activity of manufacture of Roasted Molybdenum Concentrate Oxide and trade of high carbon ferro-chrome. Assessee filed return of income for the assessment year 2007-2008 admitting loss of Rs.1,50,18,120/-. Since assessee had international transactions with AE for purchase of raw material, the matter was referred to the Transfer Pricing Officer (in short "TPO") by the A.O. in the course of scrutiny proceedings. In the course of T P Study by assessee for examination of purchases from AE KTC Korea, the assessee relied on Comparable Uncontrolled Price (in short "CUP") Method as the most appropriate method and justified the price paid on the basis of Internal CUP i.e., third party transactions from whom KTC Korea purchased and supplied to assessee with mark-up. Details transactions undertaken by M/s. KTC Korea and also the transaction of purchase by M/s. KTC Korea were provided to the TPO for justifying the internal CUP. In addition, assessee also justified the price paid with reference to the quotations from Asian Metal Market, which is like London Metal Exchange, for this raw material ....
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.... other objections also as listed out in the DRP Order. The DRP rejected the selection of most appropriate method by upholding the TPO's objections and rejected the assessee's contentions. 6. With reference to the selection of comparables also, the DRP vide para 3.12 rejected the assessee's objections. With reference to the calculation of ALP on the given transactions, the DRP upheld the initial objection of the assessee that only Rs.3,43,81,690/- can be made as an adjustment as against Rs.7.39 crores arrived at by the TPO. However, they have further analysed the transactions and determined the addition to be made at Rs.5,45,18,174/-thereby, giving relief to the assessee partly with reference to the calculations. The A.O. consequent to the directions of the DRP made the addition of the above amount and hence, the assessee is aggrieved. 7. Assessee has raised 8 grounds, out of which, ground No.1 and 8 are general in nature and they need no adjudication. 8. Ground No.2 is with reference to the order being barred by limitation was not pressed, consequent to the clarification given by the D.R. about the service of the order. Accordingly, this ground is treated as wi....
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....nary course of business in the industry to negotiate prices of uncontrolled purchases or sales; and * The data derived from public exchanges or quotation media is used to set prices in the controlled transactions in the same way as how it is used by uncontrolled taxpayers in the industry * The amount charged in the controlled transaction is adjusted to reflect differences in product quality and quantity, contractual terms, transportation costs, market conditions, risk borne, and other factors that affect the price that would be agreed to by uncontrolled taxpayers. (4) It is very important to understand here that, metals across the world are traded over various trading exchanges. If one wants to buy metal like gold from MMTC or any retailer in India the price is negotiated with London Metal Exchange (LME) price as base. Similarly other metals bought from MMTC are benchmarked to LME. It is for this particular market characteristic of metals that there are standard exchanges for trading and also identifying the market price. The organization o....
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....es are on account of the failure in achieving desired quality of the end product. We were forced to sell at a much discounted price. It may also be noted that we have sold the product domestically and no sales were made to AE. A significant consequence of such process failure is that we have stopped the production and the factory is almost closed. The whole venture has become non-viable. Considering this we would request your goodselves to appreciate the fact that loss is on account of business failure and not on account of purchases from AE. In short even if we had purchased from non-AE we would have made similar losses. The idea of creating an import substitution has miserably failed." Despite the above submissions TPO rejected CUP method as MAM and adopted TNMM as MAM. 11.3 Coming to the Order of the TPO, learned Counsel submitted that TPO has wrongly selected the price of Molybdenum content of 5.7% which is a quote for Molybdenum Oxide, final product but not for the Molybdenum Concentrate Ore. Further, TPO has selected the data of 15.07.06 on which date the assessee does not have any purchase. The percentage of 46.77% relates to purchase made on 0....
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....ned Counsel further submitted that this amount of Rs.1,67,23,290/- is to be reduced by (i) the payment to be made by assessee AE to the Chile company is against LC whereas the assessee company has been given 60-90 days credit period for making the payment. Hence, adjustment has to be made for exchange risk and credit risk taken by assessee AE and towards administrative costs incurred for procurement by AE. For adjustment towards credit risk LIBOR plus 2% may be taken as the benchmark rate which works out to 5% + 2% = 7% and submitted that suitable adjustment for exchange risk undertaken by KTC Korea may also be made. 11.6 Continuing the arguments, learned Counsel submitted that TPO in the later years have accepted the assessee's internal CUP and external CUP on the basis of T.P. study in later years. He placed on record the orders of TPO for assessment years 2008-2009 wherein on import of Lam Coke of Rs.68.16 crores, the TPO has accepted the ALP under the CUP method by holding that prices at which KTC India purchased Coke from M/s. KTC Korea are, by and large, comparable and price at which Coke sold to third parties, although, there are minute variations, in the absence of a....
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....nt decisions on the topic, we have examined the facts for the assessment years 2006-07 and 2007-08. So far as the external comparables, turn over details of export and domestic segments and other relevant facts are concerned. we find similarity of the facts between both the years. The argument of the assessee is that the external comparable prices for the impugned assessment year 2006-07 supplied by the assessee, when accepted by the Assessing Officer for the assessment year 2007-08, must be accepted for that year in view of the absence of material facts and also in view of 'the rule of consistency. We have considered this argument and in our opinion, it is a settled law, that the principle of res judicata is inapplicable to Income-tax matters. However. the same is true as long as the facts of different in different assessment years. Otherwise, the rule of consistency is relevant to Income-tax matters and Assessing Officer, cannot be ignore the same. There ought to be uniformity in treatment and consistency when the facts and circumstances are identical as held by the Mumbai Tribunal in Gopal Purohit v. Jt. CIT [2009] 122 TTJ 87/29 SOT 117. Recent judgment of the Mumbai High Co....
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....ble. 13. The last objection of the learned Counsel is with reference to the calculation made by the DRP in page 5 of the order to arrive at an adjustment of Rs.5,45,18,174/- as against assessee's calculated figure of Rs.3,43,81,690/-. It was submitted that DRP calculated in a convoluted manner and the ALP which was determined is not correct on the facts of the case. 14. Learned DR, however, relied on the detailed Order of the TPO while rejecting the assessee's CUP method and also the Order of the DRP which modified the TPO order to the extent of reducing the ALP determined by the TPO. He also explained to the methodology followed, the principles involved and also supported the various comparables selected by the TPO. He vehemently submitted that the order of the DRP is correct both on factual aspects and in law. 15. We have considered the issue and examined the various contentions and documents placed on record. There is no dispute with reference to the fact that assessee's international transactions are only with reference to import of Molybdenum purchased through M/s. KTC Korea. M/s. KTC Korea is 100% holding company of the assessee and has in turn, purchased....
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.... and adjustments being made for the Ex-works quotation to the CIF quotations of the assessee. Thus, there is an internal CUP in the form of actual price paid to third parties by the Holding company with mark-up and it also justified by external CUP by way of Asian Metal Quotations with due adjustments. 18. The CUP method allows an assessee to apply internal CUP or external CUP. External CUP cannot be brushed aside. It may be appreciated that for every transaction a separate external CUP is established by the assessee company. It is pertinent to note that CBDT has issued Income Tax (sixth Amendment) Rules, 2012 - Insertion of Rule 10AB vide Notification No. 18/2012 to provide that even quotations and estimates can be considered as external CUPs. This endorses the spirit of law makers that external CUPs are acceptable in a comparability analysis. 19. OECD-TP guidelines also endorses the position that CUP method is most preferable over all methods, in case comparable uncontrolled transactions are available with the tax payer. It is also provided in the OECD guidelines that application of CUP method is justifiable even with some differences between international transactions and ....
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....ect comparison. Be that as it may, even the selection of the comparables is not correct. As assessee submitted in detail, these companies selected for comparison are in different functional areas of use of raw material as well as final products and they are not directly comparable. No attempt has been made by TPO to make FAR analysis and give necessary adjustments required to make them comparable. Even the calculations made by the TPO are found to be wrong by the DRP. Even DRP's working in determining the ALP amount is also not correct. Once the amount of imported material is taken in its entirety for its comparison, why there is a requirement to add further amount for the amount utilised in the production is not explained. We are of the opinion that selection of CUP is the appropriate method in this case and since assessee has both details for internal CUP as well as external CUP, CUP method should have been adopted as most appropriate method for comparing purchase price of the raw materials of Molybdenum acquired by the assessee from AE. As seen from the Orders of the TPO in later two years, we are of the opinion that CUP is the most appropriate method and accordingly, we are....