TaxTMI 
TaxTMI 
TaxTMI 
2018 (6) TMI 962
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....Year 2011- 12. The grievances raised by the Revenue are as follows: "1. "Whether on the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the upward adjustment, the addition of Rs. 48,94,738/- without appreciating the fact that the assessee had entered into international transaction with its associated enterprises in which Arm's Length Price is applicable. 2. "That the appellant craves for leave to add, delete, amend or modify any ground before or at the time of appellate proceedings." 4. The facts of the case which can be stated quite shortly are as follows: M/s Emami Limited is in FMCG Industry, manufactures branded products such as Boroplus, Navaratna, Fair & Handsome, Zandu Balm, KesriJivan etc. It also manufactures specific products saleable in foreign countries such as Ayucare, Emita etc. These products sold within India have a higher market awareness than that in other countries. Thus, exports are priced comparatively below at prices of similar products in those countries. Also some product range varies country to country, so it is difficult to compare prices amongst them. Also if similar products are sold to different countries, varianc....
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....ny information regarding probable interest chargeable to loan taken by Emami International FZE independently from, the foreign banks for the financial institutions. The benchmark adopted was the interest cost of the foreign currency loan taken by Emami Ltd, however the pricing of such loan was based purely on the basis of the financial parameters of Emami Ltd, and financial parameters of Emami Ltd cannot be equated with financial parameters of Emami International FZE. While making comparison, the assessee had failed to take into consideration the financials of the Emami FZE Ltd. and eligibility for loan. It would be proper if the assessee made an effort to compare the interest charged by Emami, with interest chargeable on a loan of similar duration advanced by any banking company to a company having financial parameter of Emami International FZE. However, no such exercise has been undertaken by the assessee. That the benchmarking of the assessee cannot be accepted as the same failed to consider the financials of the Exami FZE and also failed to provide any information regarding possible rate of interest to be charge on loan advanced to it by any banking company on the basis of the ....
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....th price of interest INR value @ (Rs.45/USD x 3,09,402 ) Rs.1,39,23,090/- Less: Interest offered Rs.90,28,352/- Upward adjustment Rs.48,94,738/- 8. Aggrieved by the order of the TPO/Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the transfer pricing adjustment of Rs. 48,94,738/-.The ld CIT(A) observed that the cost of 1 Year LIBOR during the period being below 1.2%, and the loan being advanced at much higher rate of 8%, it does not warrant any further adjustments. Further, there is no dispute that the cost of funds in the hands of appellant is 5% as pointed out by the Ld. TPO and also accepted by the appellant. Therefore, even if accepting the approach of Ld. TPO / AO and we apply suitable risk premium, the same cannot be 300bps. The ld. CIT(A) referring to the credit rating of the assessee company, which was BBB/BBB+, observed that even if the credit rating of the wholly owned subsidiary is considered two notches lower that the credit rating of the assessee company, in that scenario also the difference in US bond yield i.e. the risk premium works out to a figure which is much lower than 300 bps. Further, w....
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.... having regard to the facts of the present case, it shall be appreciated that the interest rate of 8% charged by the assessee far exceeded the LIBOR rate of 1.2%. 11. The ld Counsel pointed out that the AE had received an offer from an unrelated third parry, i.e, Citibank which was willing to advance similar loan facility to the AE at LIB0R + 600 bps, which worked out to 7.20%, therefore, the external quote received from a Banking Institution by the AE is a fair and reasonable parameter for determining the arm's length price. In the circumstances since the interest rate proposed to be charged by an unrelated third party is comparatively lower than the interest rate charged by the assessee from the AE, the transaction was at arm's length and no transfer pricing adjustment was warranted. 12.The ld Counsel further pointed out that in the transfer pricing assessments of the assessee company, framed u/s 92CA(3) for preceding assessment years i.e. A.Y. 2009-10, A.Y. 2010-11 & following assessment years i.e. A.Y. 2012-13 & A.Y. 2013-14, the CUP benchmarking analysis conducted by the assessee on identical fact situation and 8% interest rate charged by Emami from its AE has been a....
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....r year on the same issue, involving identical facts unless and until a cogent case is made out by the Assessing Officer on the basis of change in facts.For that we rely on the order of the Hon'ble Supreme Court in RadhasoamiSatsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows: "We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have b....
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....e ld. TPO/Assessing Officer has grossly erred in applying notional interest @11% (i.e. cost of procurement of funds by assessee @5% + 600 basis points) whereas the cost of procurement of similar funds from third part was LIBOR + 600 basis points, which comes at 7.20%. ( that is, prevailing USD LIBOR rate, which was 1.2% plus 600bps). Therefore, we are of the view that the interest rate of 8% charged by the assessee from its AE should be at arm's length. That being so, we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby confirmed and grounds of appeal raised by the Revenue is dismissed. 16. In the result, the ground raised by the Revenue in ITA No.1065, for A.Y. 2011-12, is dismissed. 17. Now, we shall take Revenue's Appeal in ITA No.1066/Kol/2017, for assessment year 2012-13,wherein the Revenue has raised the following grievances: "1.Whether on facts and in the circumstances of the case, the ld CIT(A) has erred in deleting the upward adjustment, the addition of Rs. 3,51,30,741/-, without appreciating the fact that the assessee had entered into international transaction with its associated enterprises in which Arm's Length Price is....
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....to AEs as well as non-AEs.In the course of TPO proceedings u/s 92CA(3), the assessee was asked to justify the benchmark for applying TNMM Method. It was noted by ld TPO that the CUP Method was rejected stating that data for similar products sold abroad to non-AEs was not available. However, from the details gathered during the course of transfer pricing assessment, it was noted that the company has sold exactly similar products in the export segment to various non-AEs abroad. The ld TPO also furnished the assessee, a statement of the comparative data of the prices at which the similar products were sold to AEs as well the non-AEs. 20. In response, the assessee submitted before the ld TPO that CUP method for benchmarking international transactions, does not applicable to the assessee. Therefore, the ld TPO, was grossly erred in applying CUP method without assigning any reasons for rejecting the TNMM as the most appropriate method (MAM). It has been further contended that the Ld. TPO was not fair in applying CUP method by benchmarking sales of AE with non-AE although the goods sold to AE and non-AE are not comparable. The assessee also submitted before the Ld. TPO that necessary adj....
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.... the assumptions required to be made in the application of a particular method, etc. 9. CUP has been defined as a price charged by an entity to another independent entity in an uncontrolled transaction, In this method, the price charged or paid in a comparable uncontrolled transaction is identified and adjusted to account for differences between the international transaction and the uncontrolled transaction. This adjusted price is taken to be the arm's length price in relation to the international transaction between the AEs. 10. The OECD Guidelines define CUP Methods as: "a transfer pricing method that compares the price for property or services transferred in controlled transaction to the price charged for property or services transferred in comparable uncontrolled transactions in comparable circumstances." 11. Rule 10B (1) (a) of the Rules describe CUP method as follows: "(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable un....
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....al CUP Method is most appropriate and suitable in the present case. The applicability of CUP method to the present case is elaborated below. 12.1 In order to apply CUP, it is first relevant to ascertain as to whether both AE & Non- AE belongs to the same class/category. In the present case, it is observed that the sales are made abroad both to AEs as well as non-AEs. Both AEs as well as non-AEs are distributors of the products manufactured and sold by the assessee. Neither the AEs nor the non-AEs are the ultimate consumers. The products purchased by the AEs & non-AEs are sold further to retailers and /or third party customers. In the circumstances the class of AEs as well as non-AEs are comparable, 12.2 Next one has to ascertain as to whether the Functions, Assets & Risks Performed with regard to transactions with AE are comparable with the transactions with non-AEs. In the present case, the assessee has sold its various to AEs as well as non-AEs. All the production & manufacturing functions are performed by the assessee. The sales and marketing functions are undertaken by the AEs as well as the non-AEs in their respective countries. 12.2.1 All the manufacturing and produc....
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.... of these countries. It is a settled position that for application of the CUP method, highest degree of comparability is required. The CUP cannot be applied without adjustments on account of differences in market and economic conditions of countries in which products have been sold to independent third parties. In case of Internet India Private Limited (2010) 39 SOT 93, the Hon'ble Mumbai Tribunal has observed that standard of comparable data while applying CUP method is more stringent and need to be of similar economic relevant transactions is of paramount importance. (ii) While applying CUP method by the Ld.TPO, it was seen that in few instances [12 products out of 56, as picked up for comparison by the Ld.s TPO] have been sold at a price which is higher than those sold to Non-AE. These products were later eliminated by the Ld. TPO. Further, as per the pricing of the Ld. TPO of applying proportionate pricing, ALP of some products exceeds even the value at which they were finally sold by AE's to independent distributors. For instance, Himani Fast Relief F & I 1000 ml ALP computed by TPO is USD 38 whereas the price at which it was sold to independent third party is USD 29....
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.... the compared products were of dissimilar sizes and hence not comparable, However, FOB rate was compared to compute ALP even in those cases where the sizes were different and ALP was calculated proportionately to compare prices at which products were sold to AE and Non AE. The same is not acceptable in FMCG industry as prices are never done proportionately in FMCG sector. This way, the ld Counsel for the assessee, defended the order passed by the ld CIT(A). 26. We have heard learned arguments on both sides, perused the material available on record, and before we proceed to record our view and opinion on the issue under consideration, it is worthwhile to quota here the relevant provisions of Rule 10B of Income Tax Rules. Clause (a) of sub-rule (1) of Rule 10B defines the comparable uncontrolled price method ( CUP-Method) as follows: "Rule 10B. Determination of arm's length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a) comparable uncontrolled price met....
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....of the Coordinate Bench Mumbai in case of Internet India Private Limited (2010) 39 SOT 93, wherein it was held as follows: "We heard both parties. From the submissions made by the assessee the economic and market conditions of Thailand and Vietnam are totally different. The ld. CIT (A) has held that both the countries are located in Far East Asia and have similar demographical constitution.......... We find that the TPO and the CIT(A) have assumed similarity of markets and economic conditions and have made adjustments only for the volume discount, credit offered and a small adjustment of credit risk. They have completely ignored the disparate economic and market conditions of Thailand and Vietnam and have made no adjustment for the same ..." In the assessee's case under consideration, the ld TPO/AO has ignored the disparate economic and market conditions of Kenya, Congo, Angola, Uganda, Sri Lanka, USA, and have made no adjustment for the same. The Prices of small packaged products per unit are usually higher than per unit price of large size products in order to promote higher sales and achieve economies of scale and ld AO/TPO has not made adjustment on that account. These f....
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....egree of comparability and where the product mix, material, composition etc. are not identical, application of CUP fails.In most of the instances, where compared products were of dissimilar sizes, Ld. TPO calculated FOB Rate of goods sold to AE and Non-AE of different sizes based on proportionate price per unit. This methodology is devoid of any merit, as in FMCG sector the pricing of product, as per unit/quantity is never done proportionately. The rationale is that in FMCG sector packaging cost, transportation cost, handling cost, marketing cost can never be proportionate to the unit size of the product. Prices of small packaged products per unit are usually higher than per unit price of large size products in order to promote higher sales and achieve economies of scale. It should be noted that in some instances the Ld. TPO has made an ad hoc 3% revision on account of larger size difference. The arbitrary rate of 3% adopted by the Ld. TPO has no empirical basis or logic whatsoever but is a pure estimation based on Ld. TPO's conjectures & surmise. 28. We note that no cogent reasons given by the ld. TPO for rejecting the TP Study Memorandum and the selection of TNMM Method as t....
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....able accurate adjustment can be made to eliminate the material effects of any such differences. Rule 10B(2) of Income Tax Rules, provides the comparability of the transaction with uncontrolled transaction which has to be judged with reference to specific characteristics of the property transferred or services provided; FAR analysis; contractual terms; conditions prevailing in the markets, that is, economic conditions in which respective parties transact or operate including geographical locations, size etc. Thus, comparison of attributes of the transaction is carried which would affect conditions in Arm's length dealing. Rule 10B (3) specifically provides as under:- "An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences". This, Rule sp....