TaxTMI 
TaxTMI 
2019 (3) TMI 1028
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....on of the Arm's-Length Price (ALP) of the International Transactions [IA] was incorporated. 3. Assessee namely, Andagro services Private Limited, a company, was 100% subsidiary of M/s Noble Resources Trading (India) Private Limited which was merged with Noble Resources and Trading (India) Private Ltd w.e.f. 1/1/2006. Accordingly, return of Income of assessee for Assessment Year 2006-07 was revised to give effect to the scheme of amalgamation and therefore assessment order was passed in the name of Noble Resources and Trading India Private Limited. 4. Assessee filed its return of income on 30/09/2009 declaring loss of Rs. 224268822/-. Assessee was engaged in business of trading of bulk agro commodities, primarily involving export of agricultural products such as soybean meal, sesame seed and also export of iron ore etc. It was also importing crude soybean oil and pulses. Assessee entered into certain international transactions with respect to sale and purchase of traded goods, provision of services, transactions of reimbursement of expenses and charging of interest etc. Assessee stated that international transactions are made at Arm's-Length by adopting CUP as the most appropr....
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....irections, order u/s 143 (3) was passed wherein 'business support service' segment adjustment was determined at Rs. 10731404/- and 'export and import of chemical segment' adjustment was made of Rs. 67428360/-. Total transfer pricing adjustment was Rs. 78159764/-. Consequently, total income of assessee was assessed at loss of Rs. 13095662/- against the returned loss of Rs. 215212462/-. One corporate tax adjustment of Rs. 123957036/- was also made on account of disallowance of provision of doubtful debts written off. 7. Therefore, assessee aggrieved with the order of the learned Assessing Officer has preferred this appeal raising following grounds of appeal:- "1. That on the facts and circumstances of the case and in law, the Learned Assessing Officer ("Ld. AO")/Learned Transfer Pricing Officer ("Ld. TPO")/ Hon'ble Dispute Resolution Panel ("DRP") has erred in assessing business income amounting to Rs. 35,90,68,286/- (before adjustment of brought forward loss) as against a returned loss of Rs. 34,80,86,014/-, and thereby making an adjustment of Rs. 1,09,82,272/-. 1.1. That on the facts of the case and in law, the Ld. AO has erred in stating that "The Transfer Pricin....
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.... of setoff of brought forward losses & unabsorbed depreciation of earlier years. 5.1. That on facts of the case and in law, the Ld. AO instead of allowing setoff of Rs. 15,13,44,760/- being the aggregate amount of assessed brought forward losses and unabsorbed depreciation, allowed the same as Rs. 3,67,47,130/-. 6. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act." 8. Ground Nos. 1 and 2 of the appeal are general in nature and in fact, support Ground Nos. 3 to 6 of the grounds of appeal, therefore they do not deserve any adjudication specifically, and hence they are dismissed. 9. Ground No. 3 is with respect to the rejection of the CUP method adopted by assessee as the most appropriate method for determination of the Arm's- Length Price of international transactions relating to export and import of chemicals entered with the associated enterprise wherein the learned Transfer Pricing Officer has made an adjustment of Rs. 67428360/-. The only dispute with respect to the above adjustment is that the learned Transfer Pricing Officer rejected the 'CUP' method and applied th....
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....ore held that the issue squarely covered in favour of the assessee in assessee's own case for assessment year 2007-08 and 2008-09 where it has been sent back to the AO with directions. 12. The learned Departmental Representative vehemently supported the order of the learned Transfer Pricing Officer and the learned Dispute Resolution Panel and stated that in the CUP method, the actual transaction is required to be taken and not the price quotation or estimates. He further stated that such 'price quotations' or 'estimates' are not known with respect to the quantity and quality. Even otherwise, the authenticity of such price quotes is required to be established by the assessee. Merely because these are the quotations of some organization, they cannot be accepted. It was further stated that even the geographical location would also make a lot of difference in the prices. He further stated that quotations are for different price and not free on board price at which the assessee has entered into the international transactions; adjustments made for freight are also on estimates. 13. On other method, he submitted that it is not applicable for this year and when it is stated to be app....
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....terprises in comparable transactions. At the same time, it is relevant to observe that if complete data of such comparable uncontrolled transaction is not available, then the Revenue is at liberty to discard the CUP method and resort to any other suitable method. 5. Adverting to the facts of the instant case, it is seen that the details of its export transactions of Soyabean meal to its AEs is available on pages 64 & 65 of the paper book. Major transactions are of export to AE in Singapore and few transactions are of export to its AE in Indonesia. Page 135 of the paper book is a copy of Invoice dated 21.3.2006 pursuant to contract dated 2.3.2006 in which price of Rs. 193 per MT has been charged. The assessee also supplied similar products to its non-AE in Singapore, a copy of which is available on page 287 of the paper book. Similarly, the details regarding export of Sesame seed made to its AEs is available on page 66 of the paper book, for which the ld. AR contended that though no actual comparable uncontrolled transactions was available but the assessee could show the price actually charged by comparables. As regards the export of Iron ore of its AEs, the detail of which is av....
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....to say the assessee will be allowed a reasonable opportunity of being heard in such de-novo proceedings and will also have full right to place any fresh material in its support." [underlined by us] 13. The ld DR could not controvert the above decision as far as applicability of CUP method in the impugned transactions during the year as well as in AY 2006-07, in fact he agreed that CUP method is the most appropriate method in the trading transactions. Therefore respectfully following the decision of the coordinate bench, we hold that the CUP method shall be the most appropriate method for benchmarking the trading transactions with its AE in this year too. 14. Now the issue comes that whether the 'quotations' in the form of external CUP and custom data of third party shipping bills, brokers rates, SOPA Rates etc whether these can be considered as the reliable comparable data or not and whether they satisfy the requirement of Rule 10D (3)(c) of the Income Tax Rules, 1962. The coordinate bench in the assessee's own case has rejected that quotations etc. or the prices as per some publications for benchmarking the assessee's international transactions under the C....
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....t have any statutory authority. The second objection was that Oil World was an independent organisation registered in Germany and had nothing to do with the oil prices prevailing in Malaysia. He relied on Rule 10D)(3)(a) of the Income tax Rules (hereinafter referred to as 'the Rules'), to place heavy reliance on the price list of the MPOB. 4. The assessee carried the matter in appeal. The Commissioner of Income tax (CIT) (Appeals) discarded both the objections of the TPO. Referring to section 92C of the Income tax Act, 1961 (hereinafter referred to as 'the Act') and Rule 10(D)(3) of the Rules, he found that the quotations of the Oil World could not have been discarded. He observed as under : "4.4 I have also gone through the few publications of Oil World which is independent organization established in 1958 in Germany. This provides the independent forecasting services for oil seeds, oils and beans and providing primary information and professional analysis. The oil world compiles information of various countries in the oil sector. This publishes daily, monthly and yearly journals in oil sector. This compiles information of various countries and, t....
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.... Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely : (a) xxx xxx xxx (b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them; (c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted; 7. In terms of clause (c) of subsection (3) of Rule 10D of the Rules, these price publications as long as the same were authentic and reliable, would be relevant materials. In this background, mere base of the organisation would be of no consequence. Further, though the price quotations of the MPOB would be entitled to its due and full weightage and respect, would not necessarily mean that the other quotations would lose their significance, unless, of course, it is pointed out that such quotat....
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....ised and transparent price reporting or statistical agencies, or from governmental price-setting agencies, where such indexes are used as a reference by unrelated parties to determine prices in transactions between them. 2.16B Under the CUP method, the arm's length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price. Quoted commodity prices generally reflect the agreement between independent buyers and sellers in the market on the price for a specific type and amount of commodity, traded under specific conditions at a certain point in time. A relevant factor in determining the appropriateness of using the quoted price for a specific commodity is the extent to which the quoted price is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled transactions comparable to the controlled transaction. Accordingly, depending on the facts and circumstances of each case, quoted prices can be considered as a reference for pricing commodity transactions between associated enterprises. Taxpaye....
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....d information prepared for non-tax purposes. 2.16E A particularly relevant factor for commodity transactions determined by reference to the quoted price is the pricing date, which refers to the specific time, date or time period (e.g. a specified range of dates over which an average price is determined) selected by the parties to determine the price for commodity transactions. Where the taxpayer can provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled commodity transaction at the time the transaction was entered into (e.g. proposals and acceptances, contracts or registered contracts, or other documents setting out the terms of the arrangements may constitute reliable evidence) and this is consistent with the actual conduct of the parties or with other facts of the case, in accordance with the guidance in Section D of Chapter I on accurately delineating the actual transaction, tax administrations should determine the price for the commodity transaction by reference to the pricing date agreed by the associated enterprises. If the pricing date specified in any written agreement between the associated enterprises is inconsistent with t....
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.... implemented in a reasonable and pragmatic manner so as to achieve its laudable objectives without any collateral damage. 23. The lawmakers have also not been oblivious of this compelling need of a certain degree of flexibility in the methods of determining arm's length price. Central Board of Direct Taxes, vide notification dated 23rd May 2012, has introduced, in addition to Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM) and Transactional Net Margin Method (TNMM), the following additional method: "..................any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated (i.e. independent) enterprises, under similar circumstances considering all the relevant facts". 24. Very significantly, the above method, which is only method prescribed under 'any other method' under section 92C(1)(f) read with rule 10B(1)(f) , is not a residual method in the sense that it is not a condition precedent for the application of this method that all othe....
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....would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm's length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression 'price which....would have been charged on paid" is used in rule 10BA, dealing with this method, in this method the place of "price charged or paid", as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm's length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle,....
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.... liability or a burden, the effect of such a legislative provision can only be prospective. What logically follows from the law so settled by a constitutional bench of Hon'ble Supreme Court, is that the operation of rule 10BA, which confers the benefit of an additional method of ascertaining arm's length price and, inter alia, relaxes the rigour of CUP method, can only be retrospective in effect. In our considered view, therefore, rule 10BA is to be held as effective from 1st April 2002, i.e. the time when transfer pricing provisions were introduced in India." 18. In view of above, we hold that ; i. The CUP is the most appropriate method to be applied for the international transactions of import and export of traded goods of the assessee. ii. The assessee is required to support the international transaction by authentic documents which may also include quoted prices. iii. the assessee may support its international transactions benchmarking analysis by the other method u/s 92C(1)(f) of the act which is held to be retrospective by the decision of the coordinate bench. iv. In the event assessee fails to adduce and support its transactions under CUP method or und....
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....e multiple year data and it is also noted that assessee has mentioned method as 'Cost Plus Method' but basically used Transactional Net Margin Method, as assessee has taken entire cost of providing the services in the case of comparable companies as cost base. The ld TPO applied certain filters carried out fresh search and selected some of the comparables, Rejected all the comparables of the assessee. Assessee objected to the various filters proposed by the learned Transfer Pricing Officer as well as the selection of new comparables. The learned Transfer Pricing Officer rejected all the 5 comparable selected by the assessee and after recording the objection of the assessee, ultimately selected 9 comparables whose profit level indicator was 22.41% and therefore proposed an adjustment of Rs. 19530369/-. After the direction of the learned dispute resolution panel, above adjustment was reduced to Rs. 10731404/-. The assessee is aggrieved with the above adjustment and challenged the same vide ground number 5 of the appeal. 18. The learned authorised representative submitted that assessee is objecting to the inclusion of following comparables:- i. Aptico Limited ii. Cameo corpor....
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....re neither before ITAT, DRP or TPO, comparable selected by the TPO cannot be excluded. Hence, these judicial precedents are not applicable for the reason that:- i. Comparability analysis is only on the functions of the assessee with comparables selected ii. are not on the functions of the assessee iii. Functions of comparable are to be compared with functions of assessee, which is not dealt with in those precedents iv. Comparability is a fact based analysis so rules on different facts cannot be applied in this case 21. We have carefully considered the rival contentions and perused the orders of the learned Transfer Pricing Officer as well as the Learned Dispute Resolution Panel. We have also perused the Transfer Pricing Study Report prepared by the assessee for the above segment. On careful reading of the transfer pricing study report prepared by the assessee, functions performed for the above segment, asset employed and risk assumed are stated in para number 5.5 as under. "5.5 Other transactions a) Provision of services Functions Performed a. Identification of Potential Customers; b. Market Research; c. Communication of the ....
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....per book dated 9th May 2012 and second of the submissions in the month of June 29 and 11/10/2012, which are also placed at paper book number IV submitted before us. On careful reading of these submissions, we are of the opinion that the transfer pricing study report prepared by the assessee is sketchy and does not give the complete analysis of the functions performed by the assessee. It also does not show what kind of assets and personnel the assessee has employed. Further, none of the submissions made by the assessee before the learned Transfer Pricing Officer discussed the FAR analysis of this segment. No agreements, nature of services provided were shown before lower authorities or before us. In view of this, our opinion is that the assessee in the transfer pricing study report has not at all captured the functions performed by the assessee. Further, on reading the order of the learned Transfer Pricing Officer, We do not find that the functions performed for this segment has been captured and considered by the learned Transfer Pricing Officer also. On reading the order of the learned Dispute Resolution Panel, the arguments of the assessee have been dealt with in one-liners and c....
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....ned dispute resolution panel. On receipt of the direction of the learned Dispute Resolution Panel, or otherwise the learned Assessing Officer shall pass the final order. 23. In view of this ground number 5 of the appeal of the assessee is allowed with above directions. 24. The ground number 6 of the appeal of the assessee is with respect to the disallowance made by the learned assessing officer of INR 123957036/- on account of provision for doubtful debts. The brief fact shows that the learned assessing officer has noted that assessee has debited in the profit and loss account Rs. 123957036 under the head provision for bad and doubtful debts as on 31/3/2009. The learned AO was of the view that the above provision is not an ascertained liability and therefore the same was added to the total income of the assessee as disallowance. He further rejected the explanation given by the assessee stating that assessee is not able to establish that it has created any provision in the previous year for the said bad and doubtful debts, which has been written off in the impugned assessment year. 25. The assessee filed objection before the learned Dispute Resolution Panel, which is covere....
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....arned Assessing Officer and stated that when assessee was directed by the learned Dispute Resolution Panel to submit the details before the learned Assessing Officer, which did the assessee and therefore the learned Assessing Officer not do has repeated the above addition. He further stated that assessee can produce the above details before the assessing officer, then AO may verify the same and delete the disallowance made, if found in accordance with law. 29. We have carefully considered the rival contention and perused the orders of the lower authorities. In para number, 11 of the order of the learned Dispute Resolution Panel the complete facts are narrated which shows that assessee has only debited Rs. 9359406/- in the profit and loss account as bad debts written off. The complete details of such bad debts are provided at page No. 93 of the paper book wherein the details concerning 130 parties were mentioned. There are many credits which have been written back and there are many debits which have been written off , net sum of the above transaction is debited to the profit and loss account as bad debts of INR 9359406/-. Naturally, the above debit has been made to the profit an....
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....ost. The assessee's profit level indicator is 9.68% whereas after selection of the comparable whose is PLI was found to be 2.91%, assessee submitted that it is international transaction of business support services is at arm's-length. 33. The transfer-pricing officer examined the transfer pricing documents of the assessee and found that assessee has mentioned the most appropriate method as the cost plus method. However, assessee has used transactional net margin method as entire cost of providing the services have been taken for tested party as well as in the case of comparable company. He rejected the comparables selected by the assessee and after carrying out the fresh search, applying various filters, finally selected 9 comparable companies. The profit level indicator of comparables was worked out at 23.25 percentages. Therefore the learned TPO determined the operating cost of the assessee and applied the above margin of the comparables and found that the arm's-length price of international transaction of Rs. 8,87,65,617 is INR 9,97,47,889 and therefore proposed an adjustment of INR 1,09,82,272/-. Accordingly he passed the order under section 92CA (3) of the act on 20/1/2....
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.... grounds in appeal of the assessee for assessment year 2009 - 10. 38. We have carefully considered the rival contentions, the orders of the lower authorities, the various submissions made by the assessee before the lower authorities, and chart submitted before us contesting various comparables. As the facts and in the present case are identical to the facts in the case of the assessee as per ground number 5 of the appeal for assessment year 2009 - 10, wherein we have set aside it to the file of the learned transfer pricing officer with certain direction to both the parties, for similar reasons and with similar direction to parties, We set aside ground number 2 of the appeal back to the file of the learned transfer pricing officer. Accordingly, ground number 2 of the appeal of the assessee is allowed with above directions. 39. The ground number 3 and ground number 4 of the appeal are with respect to the several issues raised by the assessee. However, before us no arguments were advanced and therefore, both these grounds are dismissed. 40. Ground number 5 of the appeal of the assessee says that the assessing officer has incorrectly computed the amount of set off of brought f....