TaxTMI 
TaxTMI 
2016 (12) TMI 1813
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....etween the assessee and the two alleged comparables. 4) The Hon'ble DRP' has erred in law and on facts in directing the selection of RPM as the most appropriate method. 5) The Hon'ble DRP has erred in law and on facts in not carrying out suitable comparability adjustments in view of the different intensities of the functions being carried out, use/non use of certain assets and assumption/non-assumption of certain risks by the comparables vis a vis the assessee, even if RPM is to be considered as the most appropriate method. 6) The Hon'ble DRP has erred in law and on facts in accepting the PLI even if RPM is to be considered as the most appropriate method and no comparability adjustment is to be carried out. 7) It is, therefore, prayed that the directions of the Hon'ble DRP may be set aside and that of the TPO may be restored to the above extent." 3. This appeal was heard alongwith, amongst other appeal, ITA No.1056/Ahd/2014 i.e. appeal filed by the same appellant in the matter of the same assessee for the assessment year 2009-10. Learned representatives have submitted that whatever we decide in this appeal will apply mutati....
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....ses and make reasonable profit. What is left after subtracting the gross margin can be regarded, after adjustment for other costs associated with the purchase of the product, as an arm's length price for the original transfer of property between the associated enterprises. Rule 10B(1)(b) of the Rules provides that the RPM is applicable in a resale situation where the property or services purchased from an associated enterprise are resold to an unrelated enterprise. The RPM is applicable to transactions involving a purchase and subsequent sale of the same property or services. Thus, in consideration of the criteria prescribed by the Rules, nature, class of the services rendered and the availability, coverage and reliability of data necessary, and guidelines issued by the OECD in this regard, inter alia, RPM is considered was being the "most appropriate method" to determine the arm's length value of the transaction pertaining to purchase of LNG." 6. The assessee adopted the gross profit margin per mmbtu was adopted as the profit level indicator. The assessee gave the following justification for adopting GP margin per mmbtu as appropriate profit level indica....
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....assessee, at that point of time, was CUP price as equal to A x + B (where A= 0.85 of transaction; x= Henry hub price; and B= transportation cost). The TPO noted that by his own admission the assessee had purchased the LNG at prices lower than Henry Hub price. The TPO was of the view that the assessee did not have an good reasons to discard this approach. It was also noted by the TPO that the assessee has not taken into account profit element in the regasification process as entire difference between making the product saleable and the revenue realized is taken as trading profit. It was also noted that since the assessee is doing business in a competitive market and it cannot sell at a price higher than the prevailing market price, "shortfall appearing in the margins, logically would arise out of the purchase price paid for the LNG bought by it". In other words, according to the TPO, the profit margins of the assessee were too low to take into account profit element in regasification process and these profit margins were so low because the LNG prices of imports were high. He analysed the cost break to demonstrate that net margin per mmbtu was as low as Rs. 4.54 per mmbtu whereas "th....
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....backdrop that the LNG imports were benchmarked on CUP basis, by taking Petronet purchase prices as valid CUP input, and, accordingly, an ALP adjustment of Rs. 19,05,74,124 was recommended. Aggrieved by the adjustment so proposed, assessee carried the matter in appeal before the Dispute Resolution Panel. Learned DRP was of the view that on the given facts, RPM is the most appropriate method for ascertaining the arm's length price, that the two comparables chosen by the assessee are appropriate comparables as there is not much of a difference in long term deals and spot deals, and that CUP is not an appropriate method for LNG imports in view of volatility surrounding spot LNG transactions. The operative portion of the DRP order reads as follows: "This Panel has taken into consideration all the facts which the Assessee and the TPO have brought on record. This Panel finds that RPM is the most suitable method in this case. Even the TPO has acknowledged this fact. The TPO writes on page 14 of TP order that there is no doubt that RPM is a most appropriate method in a case of distributor. However, the TPO rejected this method on the ground that there appear two deficiencies in the....
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....sis. Such high level of volatility negates the possibility of comparing procurements concluded on different dates. The assessee has also demonstrated by referring to documentary evidence that PLL has sourced the cargo of September 17, 2008 from GDF Suez which has a common director with PLL. Since the transaction chosen by TPO as uncontrolled transaction is related party transaction this Panel cannot approve the comparison under CUP as it is against the basic tenants of TP. The assessee has argued that this can be stated to be a critical reason for PLL to get a lower price for said cargo. The TPO has not given any counter argument to demolish assessee's arguments. This Panel also refers to the PLL letter dated February 01, 2012 that mentions each spot cargo transaction is distinct and are not comparable. This Panel finds force in the contention of the assessee that unless sources, discharge dates, ships and supply and discharge locations and other cargo parameters are identical, LNG cargo prices cannot be compared. Therefore it cannot be denied that the assessee's decision to purchase one cargo at a slight premium over PLL's price was a pure coincidence and does not reflect asse....
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.... dispose of in favour of assessee. The TPO is directed to decide the ALP of international transactions taking only relevant year data into consideration in RPM method treating PLL and GAIL as uncontrolled comparable companies." 9. The Assessing Officer is aggrieved of the relief so granted by the DRP and is in appeal before us. 10. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 11. As to the question whether comparable uncontrolled price method vis-à-vis resale price method, for the assessee's benchmarking imports of LNG from its AEs, was indeed more appropriate to the facts of this case, learned Departmental Representative's arguments are two fold - first, that CUP is inherently more suitable to the facts of this case since the transactions of purchase are plain vanilla commodity purchase transactions of buying the LNG; and, second, that, in any event, neither RPM is suitable for application in this case since the purchase of LNG is followed by a complex process of regasification, for which no separate charges are levied, nor suitable comparab....
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....n the price of the LNG purchased by the assessee cannot be identified by referring to the prices of crude oil or natural gas. The reference to these prices is thus of no relevance under the scheme of the transfer pricing legislation. In any event, Henry Hub prices are relevant to the US market and undoubtedly geographic differences play a very vital role as is implicit in the stand of the TPO himself. As a matter of fact, in the immediately preceding assessment year, when the LNG prices in Japanese trades of LNG were furnished by the assessee for comparison, the TPO himself rejected the same by observing that "The information is of little relevance as Japanese trade commands highest prices and hence are not comparable just as Henry Hub prices lower than that of Indian rates and hence not compared on spot basis" As for the use of Henry Hub prices in the first year of operations, the assessee's explanation for the use of Henry Hub prices in the first year is as follows: (In this year)..... LNG cargoes were primarily purchased for commissioning of Hazira terminal and not for trading. 'Commissioning' was an ascertained activity with defined volumes, time period etc. Hence, it ....
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....13,9500 28/5/2008 Y Idku Port, Egypt Gaz De France Gasleys 11/10/2008 3,286,422.00 18,5000 17/09/2008 Y Arzew, Algeria Sonatrach Galea 20/10/08 3,190,940,23 16,0000 4/10/2008 Y Withnell Bay, Australia North West Shelf, Australis AI Thakhira 26/10/2008 3,362,960.00 17,5000 10/10/2008 Y Qalhat, Oman Qalhat Ibara LNG 7/11/2008 3,346,090.00 13,2500 4/11/2008 Y Ras Laffan, Qatar RasGas MRL 22/11/08 3,092,090.00 12,3000 5/11/2008 Y Point Fortin T&T BG Blue Sky 17/12/08 3,087,330.00 11,9000 25/11/2008 Y Bonny, Nigeria BG LNG Akwa Ibom 3/1/2009 2,724,260.00 11,9000 25/11/2008 Y Bintulu, Malaysia BP Seri Angkasa 11/3/2009 3,274,231.00 6,2500 3/3/2009 Y Point Fortin T&T BP Brit Innovator 29/03/09 2,779,225.03 5,8000 12/3/2009 Y *Date on which purchase of spot cargo is confirmed. 15. The above comparables have been used to examine the following actual import transactions entered into by the assessee: Annexure - Details of purchases made by HLPL dur....
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.... 21 Gallina Nigeria 20-Oct-08 29-Oct-08 17.20 2,781,230 47,837,156 2,407,644,061 22 Granosa Western Australia 31-Dec-08 09-Jan-09 9 .06 3,319,130 30,071,318 1,449,437,518 23 Sohar LNG Oman 26-Feb-09 3-Mar-09 7.15 3,162,030 22,608,515 1,137,208,279 24 British Ruby Trinidad, W.I. 6-Mar-09 31-Mar-09 5.65 3,153,020 17,814,563 869,072,519 25 Al Marrouna Qatar 10-Mar-09 15-Mar-09 6.00 3,487,040 20,922,240 1,052,388,672 26 Al Hamla Qatar 23-Mar-09 28-Mar-09 4.50 2,152,450 9,686,025 487,207,058 16. Out of 26 spot transactions that the assessee had with its AE, only one has been found to be not at an arm's length. Even in this case, there is significant variations in dates of transaction. The assessee entered into transaction on 21st September 2008, whereas the transaction used as External CUP input was entered into on 17th September 2008. It is by now a settled legal position that the prices entered into by the parties on the date of contract must be compared with the prices of similar transactions on that day. In the case ....
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.... Egypt 17-09-08 18.50 AY 2010-11 Source Booking date Price (USD) Source Booking date Price (USD) Russian Federation 06-04-09 5 Egypt 13-04-09 4.8 Withnell Bay, WA 25-05-09 3.87 Australia 22-05-09 3.50 Russian Federation 02-06-09 3.87 Australia 22-05-09 3.50 Guinea 02-06-09 4.20 Australia 22-05-09 3.50 Russian Federation 25-08-09 5.15 Qatar 20-08-09 4.65 Qatar 03-09-09 5.15 Qatar 01-09-09 4.70 Trinidad, W.I 02-09-09 5.15 Qatar 01-09-09 4.70 17. In any case, the information available for External CUP inputs (i.e PLL data) is clearly inadequate that it is only in respect of some of the transactions entered by the assessee that such an information can be used. There are transactions entered by the assessee in respect of which there are no PLL transactions available in the same week or even same month. When variations in prices are evident on day to day basis, even in the data used by the TPO himself, it is absurd to suggest that data of transactions a week or a month away from the date of External CUP input can be....
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....espect of the transactions on the same day on which the assessee entered into similar transactions, in some cases- not even the same week or the same month, and yet based on the availability of this data, the method of determining ALP is being changed. The DRP was quite justified in rejecting the use of CUP method on these facts, and we approve the stand of the DRP. 19. Learned Departmental Representative has then contended that resale price method is not an appropriate method in this case as there is substantial value addition by way of complex regasification process in the LNG terminal operated by the assessee, for which the assessee has not levied any charges, and it is not a limited risk distributor's case for which RPM is actually best suited. 20. Let's take a pause here, and try to understand as to how does the LNG terminal, which is what the assessee owns, operates and maintains, works. LNG terminal is a reception facility for unloading of cargo from LNG tankers. Such a terminal is specially used for import of LNG, and it contains a variety of facilities for unloading, regasification, tanking, metering etc. of LNG. It is important to bear in mind the fact t....
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....ification and regasification is the compulsion of international transportation and an integral part of this business model. What is imported, however, is natural gas and what is sold is also natural gas. As we deal with this aspect of the matter, we may refer to Hon'ble Supreme Court in the case of Association of Natural Gas & Ors Vs Union of India & Ors [(2004) 4 SCC 489 (SC)] wherein it is held that liquefied natural gas (LNG) is also a natural gas and belongs to the same category. Recognizing the role of liquification of natural gas for transportation purposes, Their Lordships have observed as follows: "24. To obtain a marketable product, the raw natural gas flowing from gas or oil wells must be processed to remove water vapor, inert or poisonous constituents, and condensable hydrocarbons. The processed gas is principally methane, with small amounts of ethane, propane butane, pentane, carbon dioxide and nitrogen. This gas can easily be transported from the producing areas to the market in underground pipelines under pressure or liquefied at low temperatures and transported in specially designed ocean-going tankers. ............. 28. The technological a....
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....oss different activities. If there are material differences that affect the gross margins earned in the controlled and the uncontrolled transactions, adjustments should be made to account for such differences. In general comparability adjustments should be performed on the gross profit margins of the uncontrolled transactions. The operating expenses in connection with the functions performed and risks incurred should be taken into account in this respect, as differences in functions performed are frequently reflected in different operating expenses. [UN Transfer Pricing Manual] 2.31 It should be expected that the amount of the resale price margin will be influenced by the level of activities performed by the reseller. This level of activities can range widely from the case where the reseller performs only minimal services as a forwarding agent to the case where the reseller takes on the full risk of ownership together with the full responsibility for and the risks involved in advertising, marketing, distributing and guaranteeing the goods, financing stocks, and other connected services. If the reseller in the controlled transaction does not carry on a substantial commer....
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....rsuaded by this plea either. 26. Let us now move on to the third and last limb of revenue's grievance and that is against non comparability of the comparables, namely PLL and GAIL. 27. The first issue against the comparability is of high related party (i.e. intra AE) transactions. 28. So far as PLL is compared, as pointed out by the learned Departmental Representative, total sales of this comparable is 8,428.70 crores, out of which the sales to the related parties, namely (1) Indian Oil Corp Ltd, (2) Bharat Petroleum Limited, (3) Oil and Natural Gas Co Ltd and (4) GAIL India Ltd, is 8,372.95 crores. It is pointed out that the sales with related parties being almost 99%, the comparable with such high related party transactions cannot be taken as a valid comparable. Learned Departmental Representative relies upon the provisions of Section 92A(2)(b) to hold these companies as associated companies as more than 26% of the shares of assessee are held, directly or indirectly, by the Government of India. 29. The equity capital of PLL is held by Indian Oil, Bharat Petroleum, ONG and GAIL at 12.5% each, and, in turn, 74.14%, 78.92%, 84.93% and 57.36% respe....
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....es can be said to be associated enterprises. It is only when both of these conditions are fulfilled that these four companies and the assessee can be said to be associated enterprises. 33. The expression 'person', under section 2(31), has been defined to include (i)an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. However, as it is an inclusive definition, and in any case valid only unless the context otherwise requires, a school of thought may indeed exist to justify inclusion of the President of India in this definition of 'person' as well. However, it appears to us that such an approach would be fallacious. The President of India is a constitutional head and, under the constitutional provisions, the Union carries on business in his name. Article 53(1) of the Constitution of India states that "The executive power of the Union shall be vested in the President and shall be exercised by him either directly or through officers subordinate to him ....
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....ector undertakings are to be treated as 'associated enterprises', the inter se transactions between all the public sector undertakings will be subject to arm's length price determination- something which is seemingly quite incongruous and contrary to the scheme of the transfer pricing legislation. 34. In view of the above discussions, in our considered view the assessee and Indian Oil, Bharat Petroleum, ONGC and GAIL, or, for that purpose, any other public sector undertaking, cannot be said to be associated enterprises. In the cases of public sector companies, even as all or majority of shareholdings may be by the Union or State Governments, these companies, for that reason alone, cannot be said to be associated enterprises for the purposes of Section 92A. In view of this finding, the issue regarding related party transactions ceases to hold good in law. 35. The next point made by the learned Departmental Representative is regarding the non suitability of PLL as a comparable for the variations in functional parameters. It is pointed out that separate regasification charges are being levied by the PLL whereas the assessee does not levy any such charges. It is also ....
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....d from April 2004 to December 2008, and in the period from January 2009 to December 2013, LNG prices would gradually float in line with the specified formula, with prices fully indexed to the previous 12 month JCC from Jan 2014, subject to cap and floor price. It would thus follow that just because PLL has entered into long term contracts, it does not essentially follow that the prices will not be subjected to variations. In other words, even under long term contracts, the prices of the LNG are not to remain static, as has been assumed by the learned Departmental Representative. This is also not in dispute that the PLL has purchased the LNG under long term arrangements as also by way of these spot deals. In any case, as is opined in the expert opinion filed by the assessee. ""It is, infact, a misnomer to refer to the short-term LNG trade as a 'spot market," and "there is no spot market because no one is making a market, in the sense of providing liquidity and posting quotes in exchange for a buy-sell spread. As a matter of fact, as opined in the expert report, "short-term trade is a collection of bilateral deals that may cover a single cargo to many cargoes, over period ranging fro....