TaxTMI 
TaxTMI 
2018 (6) TMI 169
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....sed by Transfer Pricing Officer, 2(1)(1), Mumbai dated 30-01-2015 u/s 92CA(3) of the 1961 proposing transfer pricing adjustment to Arm‟s length price on account of international transaction to the tune of Rs. 8, 59, 99, 908/-. 2. The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") read as under:- "1. The learned DRP erred in directing the AO in selecting the TNMM method and rejected the cost plus method adopted by the assessee, without appreciating the fact that the assessee company is a new company and it's the first year of business operation, therefore cost plus method was rightly applied by the assessee on the basis that comparative invoices available to establish the Arm's length price. Though the customers were spread at a different geographical distance, the assessee derived the rate for comparison at the Port of origin after excluding freight expenses and packing costs. (2) The learned DRP erred in directing the AO in selecting the companies for comparable analysis under TNMM METHOD which were branded and established old companies having....
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.... associated with carrying out the business because the basic raw material being base oil is manufactured by its AE which is used for manufacturing lubricating oil which bring down its cost of production. Secondly, the TPO observed that the AE got the assurance of selling lubricating oil in Indian market and around the world through its subsidiaries/associated companies, thus having assured access to huge market. Thus it was observed by TPO that AE of the assessee manufactures mass production of lubricating oil which has helped in reducing cost of production of oil. Thirdly, the AE is having full automatic plant of manufacturing lubricating oil which help in reducing cost of production of AE. The TPO observed that in TP study report, the AE was selected as a tested party to determine the Arm‟s Length Price(ALP) of the international transactions entered into by the assessee by adopting cost plus method which was considered by the assessee to be preferred method for determining/computing Arm‟s Length Price. The assessee purchases its raw material like finished lubricating oil from its AE which is also supplied by its AE to other customers in South East Asian Countries such....
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.... HHIC ENGOIL 15W/40 CF-4 (2) 20L PAIL 28. 40 28. 02 3, 700 1. 24 Jul. 2010 25000 3 ndia KiwGoldSGZOW/SO Flea-Tank, L 1. 17 1. 10 670, 000 1. 08 Jul. 2010 80000 Quantity bought by us a re larger and in bulk where as other country 3 Nepal KixxGoldSF/CF20W/50 4/4 L BOX 26. 69 26. 48 4, 000 1. 43 Jun. 2010 44560 4 India <3S Ultra 4T5L20W/40 Flen-Taok, L 1. 18 1. 11 670, 000 1. 09 Jul. 2010 80000 Quantity bought by us atelaigerand in bulk where as other country 4 Nepal GS ULTRA IT 15W/40 I2/1L3OX 19. 40 19. 25 ^ 5, 000 1. 23 Jun. 2010 22440 5 India GS Hydro 68 Flexi-Tank, L 0. 91 0. 87 670, 000 0. 84 Mar. 20 10 120000 Quantity bought by us a re larger and in bulk where as other countr....
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....fact following CUP (comparable uncontrolled price) method while the assessee is describing the same to be cost plus method in its TP study. The TPO observed that the CUP method is not the most appropriate method under the given circumstances . The TPO relied upon the decision of Mumbai-tribunal in the case of Gharda Chemicals Ltd. v. DCIT (2010) 35 SOT 406 (Mum), which led him to reject CUP method and adopt TNMM method considering the same to the most suitable method for computing Arm‟s Length Price under the given circumstances because the TNMM method tests the arm‟s length character of transfer prices in the controlled transactions by comparing the operative profit earned by the tested party in the controlled transactions under examination to operating profit earned by tested parties in its similar transaction with uncontrolled parties. Thus the TNMM measures the total returns derived from controlled tax payer‟s most narrowly defined business activity for which reliable date incorporating the controlled transaction under review is available. It was observed by the TPO that the strength of the TNMM is that net margins are less affected by the transactional differ....
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....O u/s. 143(3) r. w. s. 144C(1) of the Act, which led to the additions in the hands of the assessee by way of Arm‟s Length Price adjustment to the international transaction entered by the assessee with its AE to the tune of Rs. 8, 59, 99, 908/- . Sales(In Rs. ) 29, 04, 65, 103 Cost(In Rs. ) 35, 84, 69, 826 Loss(In Rs. ) (35, 84, 69, 826) OP/TC -18. 97% 1 Adjustment (6-1)(In Rs. ) 8, 59, 99, 908 5. The assessee aggrieved by the draft assessment order dated 06-02-2015 passed by the AO filed objections with the Dispute Resolution Panel-1, Mumbai objecting to the selection of TNM method for computing ALP and also objecting to the selection of the comparables which found mentioned in the grounds of objection filed by the assessee before DRP, which read as under:- 'The learned TPO has erred in selecting the TNMM method and rejected the cost plus method adopted by the assessee, without appreciating the fact that the assessee company is a new company and it's the first year of business operation, therefore cost plus method was rightly applied by the assessee on the basis that comparative invoices available to establish the Arm's length price. Though the custome....
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....ry high due to which their products known to the public and can be sell easily in the market. Sah petroleum is basically into trading of white oil business and caters to the Pharmaceutical industry; their volume is also huge compared to GSlPL. 2. 9 On the other hand, GSIPL is a new company with a one year of its existence. It doesn't not have own manufacturing plant and pays the processing fees of fixed amount to the job worker up to 600 KL of production. Hence the cost of production goes up because of less production during 1st year of operation. Sales volume is just 2378 KL p. a. i. e. average 200 KL month, hence fixed processing charges have eaten away and impacted the Gross Margin which indirectly affected OP/OC before depreciation on cost. It's Establishment, Administrative and selling costs are also high because of new admissions of employees, Business promotion expenses etc. which directly impact the bottom line of the company. Sah Petroleum and Gulf Oil having other business activities of white oil trading apart from Lubricating oil which has nothing to do with the business promotion or marketing spend as these products are directly sold to the industrial custo....
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....ndia and has been in existence for a number of years. Hence, the product in which the assessee company is dealing is an established product in the Indian market having a brand value and visibility. CALTEX brand is also known worldwide. Therefore, the fact that the assessee is a new company as compared to the comparables will have no material impact as far as the comparability is concerned since the customers would be buying a brand rather than being swayed by the company which is selling the brand. This objection of the assessee is, therefore, not tenable. Hence, the same is dismissed. 2. 14 As regards the objection of the assessee that the TPO has erred in calculating the average OP/TC of the selected company as a whole instead of doing so of only the lubricant segment, especially when the comparables are into other diversified business thus rendering the data available as not comparable, we are of the opinion that the major and substantial segment in which the assessee and the comparables are engaged is lubricant oil. In TNMM, it is the broad comparability which is required to be seen. In any case, in the course of the hearing, the assessee was requested to get the segme....
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....n of the assessee and Sah Petroleum Limited is 28 years old company while Gulf Oil Corporation Limited is more than 50 years old company . Our attention was drawn to page no. 57 to 123/ paper book filed by the assessee with the tribunal wherein the audited Balance Sheet of Sah Petroleum Ltd. is placed and it was submitted that Sah Petroleum Limited is a leading manufacturer of lubricating oil . It was also submitted that the audited Balance Sheet of Gulf Oil Corporation Limited is placed in paper book at page no. 125 to 212. It was submitted that these companies have various segments and lubricating oils is one of the segments It was submitted that TPO erred in taking the overall profits of these companies for making comparison . It was submitted that this is the first year of operation of the assessee company and there were certain extra ordinary expenses which were incurred such as infrastructure cost, costs incurred for hiring new employees etc. . Our attention was drawn to the decision of Hon‟ble Bombay High Court in the case of CIT v. Pentair Water India P. Ltd. (2016) 281 ITR 216 (Bom. ). It was submitted that the TPO/DRP rejected the cost plus method adopted by the ass....
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.... to job workers place at Taluja, Navi Mumbai and get it refilled in small packs ranging from 910 ML to 210 ltrs which is sold to various customers in India. Our attention was also drawn to page no. 184 of the paper book which contains the segmental results of Gulf Oil Corporation Limited and it is submitted that said segments results are part of audited balance sheet . Our attention was also drawn to page no. 220 wherein both Gulf Oil Corporation Limited and Sah Petroleum Ltd. were referred in the letter filed by the assessee before DRP-1, Mumbai and it was submitted that no segmental results in the case of Sah Petroleum Limited are available, while in the case of Gulf Oil Corporation Limited it was contended that the same does not reveal the true picture of the said segmental results. 7. We have considered rival contentions and have perused the material available on record including cited case laws. We have observed that the assessee is engaged in business of procuring/importing lubricants in bulk from its parent company G. S. Caltex Corporation, South Korea which holds 100% shares of the assessee company and selling in India to its customers after repacking in small packs of 9....
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....pted Transactional Net Margin method (TNMM) as in the opinion of the AO internal CUP method adopted by the assessee is not reliable keeping in view geographical differences prevailing in different countries wherein the subsidiaries/associated companies were situated to whom supplies were also made by its AE, different qualities of lubricating oil supplied by its AE in different geographies/countries as also the difference in quantity dealt in these different geographical markets rendering CUP method as unreliable . We are of the view that the authorities below have rightly adopted TNMM method due to these differences noted by the authorities below as CUP method requires high degree of comparison in the product/services, geographies and other attributes such as scale of operations, type of market etc. . The comparative chart submitted by the assessee reflecting supplies made by its AE in other geographies(countries) clearly reveals that there are product quality differential and other differences such as scale of operations as the assessee is admittedly buying in larger quantities from its AE etc, than quantities sold by its AE in other geographical(countries) areas making CUP unrel....