TaxTMI 
TaxTMI 
2018 (6) TMI 169
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....), 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 existence in Indian market over a period 28 years and....
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.... 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 as Bangladesh, China, Japan etc. . The TPO observed that the assessee while claiming to use cost plus m....
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....y 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 country volumes are very low. Also the supplies to China is done by Korean Local Distributors after keepi ng their own margins 5 China DICC HYDRAULIC 01L46(1) Field-Tank, L 1. 08 1. 07 670, 000 1. 04 Jul. 2010 60000 S China HHICHYOOIL46(2) 200L DRUM 2S1. 50 248. 10 30, 000 1. 11 Jul. 2010 38000 6 India New Golden Pparl 3 180kg DRUM 31600 300. SO 30, ....
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....sts 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 difference. The TPO adopted TNMM method to be used as the most appropriate method. The assessee was confronted by TPO and the assessee justify cost plus method as adopted in its TP study report. The TPO selected three comparables based on search of capitaline data bases which led him to shortlist three comparables namely as under:- i. Castrol India Ltd. ii. Gulf Oil Corporation Limited iii. Sah Petroleum Ltd. The comparable Castrol India Ltd. itself was dropped by TPO after considering the reply/objections of the assessee and finally two comparables were short....
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....tion 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 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. The learned TPO erred in selecting the companies for comparable analysis under TNMM METHOD which were branded and established old companies having existence in Indian market over a period 28 years and 50 years dealing in variety of product ranges, therefore the comparables selected by the TPO are to be rejected and the transfer pricing adjustment made of Rs. 8, 59, 99, 908/- be deleted. The learned TPO has erred in calculating the Average OP/TC of the selected company as a whole instead of calculating the OP/TC of only Lubricant Segment wi....
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....ion 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 customers. Hence, percentage of marketing expenses to sales is very low compared to GSIPL. All these factors are playing very vital role in GSIPL because of a new company in comparison to old established above named companies. 2. 10 Comparing the above two companies with GSIPL is unjustifiable due to the years of existence, plant capacity of production, volume of sales, product range, Brand name of the company in the market, Spends on Media and Marketing etc are factors which hit the company's Operating Margin. 2. 11 In view of the above the transfer pricing adjustment made by the TPO is unjustified. " Thus, in nut-shell the assessee contended before DRP that TP adjustments made by the TPO are unjustified and not sustainable in the eyes o....
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....pecially 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 segmental data of the comparable companies for calculation of average operating margin of lubricant division. The assessee has, however, informed that on going through the balance sheet of the companies, it is noticed that no segmental reporting was available in the case of Sah Petroleum Ltd whereas in the case of Gulf Oil Corporation Ltd, the segmental reporting does not reveal a true picture of the segment since the data reflected is inclusive of all income and expenses. From the submissions of the assessee, it is clear that it has not been able to show the extent of the business of the comparables in segments other than lubricant oil. The assessee has, therefore, not been able to show that the comparable companies were engaged in any other segment on a substantial basis. The objection....
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....he 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 assessee and TNMM was adopted . Our attention was drawn to page no. 223 to 225 of the paper book to reflect that for the assessment year 2012-13 in the case of assessee, no adjustments were made by TPO to compute ALP of international transactions entered into by the assessee with its AE. The said order is placed at page no. 223 to 225 of the paper book. The Ld. DR on the other hand drew our attention to page no. 50 of the paper book wherein FAR analyses of the assessee is placed. It was submitted that the assessee is deemed manufacturer and it is only doing repacking of lubricating oil from bulk lubricating oil imported from parent company. Our attention was also drawn by learned DR to page no. 54 of the paper book. It was submitted that the assessee adopted cost plus method which was in fact C....
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....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 910 ml. to 210 ltrs . The assessee‟s international transactions with its AE‟s was referred by AO to Transfer Pricing Officer(TPO) u/s. 92CA(1) of the Act. The TPO observed that assessee is repacking in small packets of lubricating oils of 910 ml. to 210 ltrs. manufactured from the lubricating oil imported from its AE in bulk packs/flexi packs of 20, 000 ltrs. which are then sold to customer in Indian market in small packs. The international transactions reported by the assessee in its TP study is as under:- Sr. no Nature of international transaction Quantity Total CIF Value (In. Rs. ) 1. Lubricants in Flexi Bags -Purchases -Royalty -Interest 3880298 Ltrs 18, 92, 59, 403/2, 10, 848/- 3, 38, 439/- Total 18, 98, 09, 690/- The dispute between riv....
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....t 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 unreliable. Thus, so far as TNMM adopted by authorities below is concerned, we concur with the views of the authorities below as TNMM will compare the operating margins of the assessee‟s business with that of operating margins of companies operating in similar businesses. This is the first year of operations of the assessee company and the assessee has stated to have claimed certain expenses which were incurred for initial set-up of businesses which are not routine expenses such as setting up of the company / infrastructure/offices/depots and hiring costs of new employees etc. which the assessee claimed that it has pulled down OP/TC to a negative figure of ( -)18. 97% because substantial expenses were incurred towards these initial costs . The assessee requires to be given adjustments for these extra-ordinary costs incurr....