TaxTMI 
TaxTMI 
2013 (12) TMI 1575
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....fective ground in ITA No.-4831/Del/2010 is Ground No-2 and 2.1 which reads as under:- "2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in restricting the addition u/s 92CA of the Act to Rs. 71,45,622/- as against Rs. 2,11,23,382/- on account of TPO adjustment. 2.1. The Ld. CIT(A) ignored the fact recorded by the TPO and also the fact that the calculation has been correctly done by the TPO." 2. The grounds raised in ITA No-62/Del/2011 on the other hand reads as under :- "2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the remaining addition of Rs. 71,45,622/- made by the AO u/s 92CA of the Act on account of TPO adjustment. 2.2. The Ld. CIT(A) ignored the fact recorded by the TPO and also the fact that the calculation has been correctly done by the TPO." 2.1. The record shows that the assessee is incorporated as an Indian Company w.e.f 01.06.2004. As per its business profile it was engaged in the business of distribution and marketing of fertilizers in India. The assessee operates a 100% subsidiary of GNS II Corp USA which....
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....ost = US 0.81/mt Value of CUP = US$ 283.31 (wrongly mentioned in US$ 284.78 in Annexure 2A)" 2.5. The said methology was not accepted by the TPO as a result of which he rejected the FOB CUP selected by the assessee and selected CFR CUP on the basis of the Fertecon Price Service while doing so he took into considertion the fact that the effective credit period of first shipment was 90 days consequently effective credit PLP was taken as US$ 1.17 and for the second shipment the credit period being 60 days the credit cost was taken was US$ 0.81. The reasons prevailing with the TPO for rejecting the assessee's methodology are set out in para 6.3 of the TPO's order which is extracted hereunder :- 6.3 Comments of TPO: I have carefully examined the purchase invoices, sale invoices and Fertecon Price Service quoted price and have reached to following important facts: "(i) DAP fertilizer of 41,140.90 mt was purchased @ US $ 277.53 mt on CFR basis under contract dated 12.10.2004 vide invoice dated 13.10.2004 and the same consignment was sold under high sea to another AE of the assessee in Hongkong on 18.10.2004. It is further noted from sale i....
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.... assessee in Annexure 2A. (vii) 1 have already held in above para (iv) that a direct CUP with identical contractual term of transportation was available but the assessee had wrongly selected CUP having different contractual terms of transportation. Without prejudice to above conclusion, I also examined if freight adjustment of equal amount of FOB quoted value for both shipments was valid? It is pertinent to mention that first shipment of fertilizer was loaded from USA whereas second shipment was loaded from Australia and destination being the same i.e. India high sea, accordingly, equal amount of freight adjustment of US$ 47.50/mt to FOB value CUP by the assessee was incorrect and the same is not acceptable for the reason that both shipments from two different destinations would have two different freight rates. The Ferticon Price Service, does not have Australian freight accordingly, adjustment is not even possible to the FOB value CUP for consignment No.. 2." 2.6 Accordingly he computed the adjusted cups for both shipments as under:- (viii) In view of the above idsucssion I reject FOB CUP selected by the assesse and have selected CFR CUP on the basis of Ferticon Pr....
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....005 from the price list of Fertecon Price Service. He did not argue with the argument of the assessee that the transaction was at arm's length. The reason for not agreeing are set out in para 6.6 of his order. It took note of the fact that as per the invoice the port of loading the fertilizers was USA and the final destination was Jamnagar, India and being of the view that since price of fertilizers on CFR basis were available in India he questioned the logic of taking FOB value rate and then making subsequent adjustment of freight etc despite the fact that direct CUP for India bound shipment having identical Contractual Form of Transportation (hereinafter referred as "CFR') was available. He was of the view that CUP for India specific price should be considered for making comparability analysis of import price of DAP fertilizers from AE instead of CUP with different terms of delivery were found to be wrongly chosen by the assessee. 2.9 The reasoning is extracted from his order for ready reference:- 6.6 Comments of TPO: I have carefully examined the purchase invoices, sale invoices and Fertecon Price Service quoted price and have reached to following important facts. (i....
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....ntractual term of transportation was available but the assesee had wrongly selected CUP having different contractual terms of transportation. It is pertinent to mention here that for consignment 4, the assessee had computed CUP of US$ 277.97 as against purchase price of US$ 272.14. However, a careful scrutiny of computation of CUP has reveled that actual cost of CUP as per assessee's computation is as US$ 270.50 which was wrongly computed at US$ 277.97 in Annexure 1. These facts have proved tht even as compared with CUP selected by the assessee for consignment 4 the purchase of DAP @ US$ 272.14 was not at arm's length price. (viii) In view of above discussion I reject FOB CUP selected by the assessee and have selected CFR CUP on the basis of Ferticon Price Service, a document relied upon by the assessee. Since both the purchases, consignment 3 & 4 were on credit of 90 and 365 days respectively, CFR CUP shall be adjusted for effective credit PLL of US$ 1.11 for consignment 3 and US$ 4.50 for 4th consignment. The adjusted CUPs for both the shipment are computed as under: Consignment No.3 Contract dated 20/8/2004 for 46,768mt of DAP fertilizer Step 1 Purchase Price paid....
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....ment was quoted in the relied upon rate list for relevant date. However, the assessee had selected FOB purchase rate and had made adjustments for freight and credit in order to compute uncontrolled comparable CUP on CFR terms of payment for reasons best known to it. It is further noted that for some country of shipment the freight charges were not mentioned on the price list and the adjustment of the freight was made without basis. I have further noted various calculation mistakes in determining adjusted CUP by the assessee as noted in para 6.2, 6.5 and 6.6 (vii) of this order. In view of above findings, I have rejected the adjusted CUP applied by the assessee to benchmark international transaction. (iv) Since purchase price of DAP fertilizer on CFR terms of delivery was noted on the relied upon document, I have selected purchase price on CFR terms (which was identical to terms of purchase by the assessee) as uncontrolled comparable CUP after making adjustment for credit purchases. (v) The assessee was given number of opportunities of being heard vide order sheet entry and issue of notices. (vi) The transfer pricing studies have proved that purchase prices of consignment 1....
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....rate Adjust- ment for credit pur- chases Adjusted CUP (US$/MT) Excess Price paid by to AE (US$/ MT) Total Excess Price paid (US$) Total Excess Price paid (INR) A B C D E F G=E+F H=C-G I=G *B J=I*exc- hange rate 1. 41,140 .90 277.53 271-277 274 3.21 277.21 0.32 1319 8.9 605.236 2. 41,066 277.27 271-277 274 2.21 276.21 1.059 4349 8.50 1,994,62 2 3. 46,768 266.50 260-263 261.50 2.90 264.40 2.0984 9813 9.10 4,545,80 4 4. 12,700 272.14 260-263 261.50 11.77 273.27 None None Since purchase price paid is lower than the comparable uncontrolled price hence, no adjustment is required to be made for this consignment Total 7,145,622 Thus, the above table clearly depicts that even the methodology adopted by the TPO the amount of adjustment should have been restricted to INR 7,145,622 instead of INR 2,11,23,382. Accordingly, the Appellant humbly submits that the addition made by the TPO be suitably rectified and the....
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....hat in the circumstances the importer does not have any control over the sale price. It was submitted that sale price fixed by the regulators may be lower than the purchase price and the Government of India has a system of compensating the fertilizer Company through a subsidy mechanism. It is seen that it was also submitted that the assessee also resells the DAP fertilizers in India at the price fixed by the Indian Government and in the year under consideration had purchased from a single Associated Enterprise. It was further submitted that all the purchases are from the US Gulf Region which denotes an area in USA in West of Florida in US. It was submitted that the assessee has demonstrated the arm's length nature of its purchase of DAP transactions by application of Comparable Uncontrolled Price method as the most appropriate method which has been accepted by the TPO also. It was submitted that the assessee has relied on the publicly available information on External CUP from a weekly report called Fertecon Phosphate Report of Fertecon Report which has a trade journal published weekly by Fertecon Limited. It was stated that the said report provides prices at which the DAP fert....
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....rved that in view of her order against the Rectification moved by the assessee u/s 154 before the TPO which resulted in reducing the overall amount of adjustment proposed by the TPO from Rs. 2,11,23,382/- to Rs. 71,45,622/- as such she was of the view that she was not required to further decide whether the application of CUP by the assesssee was reliable and correct or not. The relevant conclusion is reproduced from the said order:- With respect to the above Ground NO. 4.2 has already been adjudicated vide my order dated 31st August 2010 with respect to the appeal against the order u/s 154 issued by the TPO reducing the overall amount of adjustment to Rs. 71,45,622/- from Rs. 21,123,382. Thus the same is not perused in this order. From the remaining grounds of appeal following issues arise which require adjudication. "(i) Whether the application of CUP by the appellant was in a reliable and correct manner; (ii) Whether the TPO erred in determining the CUP for consignment dated October 25, 2004. (iii) Whether the TPO erred in allowing the benefit of +\5% range." 4.6 In the circumstances the CIT(A) came to the following conclusion :- "24. I have carefully considered....
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....l of market (wholesale or retail etc), geographical market, date of transactions, intangible property associated with sale, foreign currency receipt and alternatives realistically available option with buyer or seller. Unquote: Date Adjusted CUP in USD (US FOB Gulf prices) Import price paid by the Appellant 20-Aug-04 268.95 266.50 20-Aug-04 277.97 272.14 12-Oct-04 285.81 277.53 25-Oct-04 236.39 227.27 *Working provided in para 14 above. a. The above table makes it very clear that that import prices paid by the Appellant are lower than the prices paid for the same product in uncontrolled transactions. Based on the same I hold the transactions undertaken by the Appellant with respect to purchase of DAP to be at arm's length and allow the appeal of the appellant. (ii) Whether the TPO erred in allowing the benefit of +\5% range. In view of the finding as above, this ground does not need any adjudication. In view of the above the appeal of the appellant is allowed and the proposed addition by the TPO amounting to Rs. 71,45,622 (Rs. 21,123,382) is deleted." 5. Aggrieved by these findings by way of these the t....
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....or need of the assessee cannot be taken into consideration for the issue at hand that was the transaction at arm's length price or not. It was argued that the Revenue has no role and is not concerned with the internal arrangements. The Revenue is only concerned that is the price of the assessee for the international transaction at arm's length or not. Keeping the fact in mind that the port of destination being India then for benchmarking purposes India specific prices be considered. The internal agreements, needs or constraints of the assessee or the regulatory controls to which its AE is subjected it was argued is not relevant to decide as to what an uncontrolled concern would have transacted for the said products in India. Reliance was placed upon the order of the CO-ordinate Bench in the case of Clear Plus India (P.) Ltd. v. Dy. CIT in ITA No.-3944/Del/2010. 6.2 On the other hand Ld. AR has all along argued that whatever method is followed no adjustments would be warranted. Addressing the facts on record it was argued that the CIT(A) on the peculiar facts and circumstances of the case has come to a correct finding as admittedly the Associated Enterprise of the assesse....
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....rom the said submissions. The Ld. CIT DR summed up the argument on behalf of the Revenue as under :- "2. The peculiar fact in this case is that the assessee purchased fertilizer from its A.E. In the market the world over, India specific rates for fertilizer are available. However, to accommodate its AE, the assessee, purchased goods from its AE, at USA price, even when India specific prices were available. Any third party buying/purchasing goods in India will buy good at India purchase price. Since the Indian entity is purchasing goods for use in India, the applicable price should be prices for purchase of fertilizer for use in India. However, to accommodate its AE, the assessee has purchased good at U.S.A price. The tested party logically is/and should be the Indian entity. 3. The Assessee is taking U.S.A prices and then making adjustments thereon, to somehow justify that its prices are at Arm's Length. Whereas, the prices to be taken should be India prices and adjustment (if any) should be made thereupon. 4. The geographical market is India since the tested party is the Indian Entity which has purchased/bought goods for consumption in India. The ass....
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....the markets, in respect of which the Fertecon publishes the prices. The Fertecon Report itself reveals the prices of DAP across these markets/countries and the price varies from market to market. b. The port of origin is an important aspect and it reveals the quality of product, quality of raw material, technology involved, cost of labour, cost of production, government regulations, etc. The different markets have different FOB prices and the price of DAP depends on the market from where the DAP is purchased. The technology in manufacture of DAP plays a vital role and such technology varies from market to market in the Globe. c. In 'US Gulf FOB, price, the port or origin of DAP is known. The Respondent's, AE is located in USA and the geographical location of the international transaction gets identified. The import of DAP was made from USA by the Respondent and the price paid to the AE has been compared with the price prevailing in the same geography, namely, USA by adopting the 'US Gulf FOB' price. d. In 'India CFR Cash' price, the destination is India, but which part of India is not known. The destination could be Vishakhapatnam,....
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....ndent have relied on the external CUP. The Respondent fulfils all the conditions stipulated by the Hon'ble ITAT in the case of UCB India Pvt. Ltd. (Supra). In Para 79(d) the parameters laid down in an independent uncontrolled transactions are: a. Similar goods; b. Similar quantity; c. Similar terms; & d. Similar market. Out of the above conditions, the Respondent fulfils the conditions at 'a, b & d (Refer to para 31.1). The Respondent purchased the goods on credit and an appropriate adjustment was made for the credit period by adopting the interest rate prevailing in USA. Thus, the Respondents, method of computing the ALP in respect of purchase of DAP is in accordance with the ratio laid down by the Hon'ble ITAT in UCB India Pvt. Ltd (Supra). 43. The Ld. CIT(DR) relied on the decision of the Hon'ble ITAT, Delhi Bench 'B' in the case of Clear Plus India Pvt. Ltd, ITA No. 3944/Del/2010. He drew the attention of the Hon'ble Bench to para 7 of the order and submitted that buyer of DAP is India and the market is in India, therefore, 'India CFR Cash' price, is the specific price which should be applied and not ....
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....e prices of DAP in uncontrolled transactions of USA, which were reported by the Fertecon Report. Thus, the prices of DAP which were compared were from the same geography or market. D. The Hon'ble ITAT in Clear Plus Pvt Ltd (supra) has applied the ratio laid down in SNF (Australia) Pty Ltd (supra). Brief Facts in SNF (Australia) Pty Ltd. In this case, the taxpayer carried on the business of manufacture of chemicals known as flocculants and coagulants in Australia and for the purpose of manufacture it had imported products/raw material from its AEs located in France, USA and China. The AE in France had also supplied the same products/ raw material to independent distributors in other countries and also to the taxpayer in Australia. The price paid by the taxpayer in Australia was the same price which was paid by the Independent distributors to its AE in France. On these facts, the Australian Federal Court at para 146 observed that "This evidence relied upon the taxpayer establishes the true comparable nature of the transactions relied upon. As I have already indicated the focus is on the market in which the products are acquired by the taxpayer and unique features of the ....
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.... are selling at India Specific prices is inferior. In Paragraph 29(b) the Assessee speaks of different quality of product, of raw material, technology, cost of labour, cost of production, government regulation etc. It is pointed out that all these difference have been indicated by the assessee (though not proved), merely to accommodate the foreign AE. The quality of AE and the 3rd party has not been differentiated at all. A buyer is concerned with the prices he is getting, and not the cost of labour, cost of production, government regulation of a particular seller. Counter to Para 30 The letter of Govt. of India is dated July 20, 1989, whereas the financial year involved is FY 2004-05. The assessee is merely fabricating retrospectively in this communication that the letter has future applicably is clear from the wording - "5) monthly concession for imported DAP will be based on ....... " The use of word "will" shows that it has future applicability and is not relevant. Counter to Paras 30 & 31 The India specific prices are for similar goods, the market is India, the Indian Govt. regulations have been duly factored in, and the TPO has made the due adjustments st....
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....reful consideration of the same, we are of the view that the departmental stand to the extent that the bench-marking should have been taking into consideration by considering the India specific prices deserves to be upheld. No doubt the assessee in terms of the contract entered into with its AE being a 100% subsidiary of GNS II Corp US made purchases from its AE, the need and necessity of adhering to the Contracts and Arguments with the AE stands unrebutted. However we hold on a consideration of the facts and circumstances of the case that the decisive criteria should be the market in which the goods are destined. In order to consider the arm's length price it is necessary to see at what price the product would be purchased in India by an uncontrolled party who is to procure the product in India. It is that price which should have been taken by the assessee for benchmarking. 12.1 We may at this point also address the arguments made in passing on behalf of the assessee, which me may refer, were made de hors any evidence that the assessee's product sourced in USA necessarily may have been of a superior quality as opposed to the product readily available in India may be fro....
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.... the department which admittedly is not a fact in the present proceedings. 12.4 Similarly the argument that no adjustment would be warranted whatever method is followed as such the departmental appeal be dismissed is also not an argument which can be the reason for dismissing the appeal. The issue under challenge as per the focus of the arguments advanced by the parties is whether for benchmarking purposes the product purchased by the assessee from its AE to be sold in India should be benchmarked by taking India specific prices or prices in the market of the source country. We are of the view as observed that the need and compulsion of the assessee to purchase the product from its AE in US as per the terms of Agreement with the AE cannot be an argument to take the prices which are dictated by unique market conditions of the AE since the product purchased from the AE has to be considered for the purposes of transfer pricing to adjudicate whether the transaction is at arm's length for which to our minds the tested party should be in India and thus for bench marking purposes the India specific prices are to be considered and this duty and responsibility to lay down the principl....