TaxTMI 
TaxTMI 
2019 (12) TMI 1626
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce paid by NTDCL and directing to re-determine the ALP of sale of ANH. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in not upholding and granting a relief to the assessee from Splitting the time period between April 2008 to January 2009 and February 2009 to March 2009 for the purpose of price comparison in case of ANH product. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in deleting the disallowance of depreciation to the tune of Rs. 15,46,130/-, without appreciating the fact that the as per the provisions of 43A the assessee company should have reduced the amount of reimbursement from the cost of asset and since the expenditure is made by Gulbransen chemicals Inc., USA(GCI), same cannot be capitalized in the books of assessee company. 4. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary." Assessee's appeal : 2009-10 1. In respect of the Appellant's international transaction of sale of chemical products viz. ANH, MBTC and TTC to its Associated Enterprises ('AEs') Gulbrandsen Chemicals....
X X X X Extracts X X X X
X X X X Extracts X X X X
....E-Gulbrandsen Chemicals Inc. USA, Ld.CIT(A) grossly erred in upholding the action of Ld.AO/TPO of determining the NIL arm's length price and in making consequent upward transfer pricing adjustment of Rs. 2,24,01,998 u/s 92 of the Act in this regard. 3. In the facts and circumstances of the case and in law, the ld.CIT(A) grossly erred in not quashing the ld.AO's action of initiating the penalty proceedings u/s.274 r.w.s. 271(1)(c) of the Act." Assessee's appeal : A.Y.2010-11 "1. In respect of the Appellant's international transaction of sale of chemical products viz. ANH, TTC, DBTO and TEAL to its Associated Enterprises ('AEs') Gulbrandsen Chemicals Inc, USA and Gulbrandsen EC Limited, UK, the learned Commissioner of Income Tax (Appeals) ('CIT(A)') grossly erred - i. In upholding the Ld. TPO/AO's action of rejecting the Transactional Net Margin Method (TNNM') as the most appropriate method. ii. In upholding the Ld. TPO/AO's action of adopting the Comparable Uncontrolled Price ('CUP') method as the most appropriate method. iii. In upholding the action of Ld.AO/TPO of not allowing followi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... enterprise ("AE"). They read as under: Nature Amount Sale of finished goods (chemical and hoods) 70,00,88,244/- Purchase of raw material 19,23,545/- Reimbursement of expenses 80,33,761/- Availing of selling, distribution and Marketing services 2,24,01,998/- 6. Before the ld.TPO, the assessee has filed transfer price study report, and other documents which were required. On an analysis of the TP study report, the ld.TPO has issued a detailed show cause notice. He pointed out that with regard to international transaction of sale of finished goods, the assessee has benchmarked these transactions using Transactional Net Margin Method (TNMM), stating to be the most appropriate method on the facts and circumstances of the case. According to the TPO, these transactions were aggregated with all other internal transactions by the assessee by submitting that all the transactions are closely linked and arose from long term business contract with the AEs. He further found that similar sales to non-AEs were also made in the year under consideration, and internal TNMM was selected for benchmarking these transactions. The return on total cost i.e. ratio of operat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unt of large volume being sold to associate enterprise. However in this case, it is seen that the quantity of chemical sold to non associate enterprise is more than the quantity sold to the associate enterprise. Vide letter dated 18.10.2012, the assessee has submitted that volume discount of-20.98% is embedded in the price charged to this entity i.e. National Titanium Dioxide Company Ltd viz-a-viz other entity on account of large purchase order. Taking these facts into consideration it is clear that instead of volume discount being granted to associate enterprise, it has been granted to the non associate enterprise i.e.- National -Titanium- Dioxide Company Ltd. Considering the large volume bought by this enterprise vis a vis the AE, the assessee must have granted atleast 10% volume discount to this entity. Therefore^ it is proposed to proposed to modify the per unit price received from non associate enterprise to account for the 10% volume-discount. 1.4 Adjustment for advance payment The assessee has submitted that the AE, Gulbrandsen Chemical Inc has provided an average 5 months advance payment to the assessee and corresponding reduction in price should be allowe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s calculated at Rs. 7.54 per kg for each product. In order to examine the adjustment the details of ECB and its agreement were called. From the perusal of the agreement, it seen that the ECB loan was granted to be utilised for arrangement of new project, working capital requirement and repayment of_existing loan. Further it-is seen that the agreement did not contain any clause related to reduction of price of the product to be purchased by the AE from the assessee. On the contrary it is seen that the interest is waived off by the AE since the assessee, allowed the AE to purchase its products in large quantity thereby allowing the AE to have assured source of purchase of products required by itself. Thus becomes clear that the quid pro quo of interest waiver by the AE is the assurance of committed sales by the assessee to AE. In such a scenario, there does not remain any requirement for the assessee to grant reduction in price to the AE in consideration for non charging of interest, In such a scenario there is no need for any adjustment on this ground. The calculation of average rate per unit in the case of non AE, after the adjustment, is as follows SLNo. Name of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....required to be adopted for calculating arm's length price of sale of ANH chemicals. In other words, the ld.CIT(A) though upheld the application of CUP method, but did not upheld any adjustment in the rate of ANH chemicals sold to non-AE i.e. NTDCL. After order of the ld.CIT(A), the ld.AO was required to work out rate required to be applied for calculation of ALP of ANH, which was equivalent to the rate at which it was sold to non-AE. This aspect has been challenged by the Revenue in its ground no.1 and 2. On appeal, the ld.CIT(A) did not examine the issue in detail, rather observed that identical aspects considered in the Asstt.Year 2007-08, and therefore, the ld.CIT(A) followed the order of his predecessor in the Asstt.Year 2007-08, and upheld the adjustment made by the ld.TPO. The discussion made by the ld.CIT(A) on this issue read as under: "5. So far as ground No.1 and 2 are concerned, the same are in relation to the adjustment made in Arms' Length Price of International Transactions by the TPO. The appellant is engaged in the business of manufacturing of chemicals. The product range includes Aluminium Chloride Anhydrous (ANH), Mono-N-Butyl Tin Trichloride (MBTC....
X X X X Extracts X X X X
X X X X Extracts X X X X
....He finally held that CUP method is applicable to bench marking these transactions. 5.3. During the course of the appellate proceedings, I have considered the appellant's submission and the TPOs observations. So far as the issue relating to the method to be adopted for bench marking of transactions related to sale of finished goods is concerned, in the earlier assessment orders also, the appellant had adopted internal TNMM method for this purpose. But in the assessment order, the TPO adopted CUP method. Such action of the AO has been up held by the DRP in its order for AY 2006-07, in the appellate order passed by my predecessor in Appeal No. CABI/ 186/2010-11 dated 02.01.2012 for AY 2007-08 and in the appellate order for AY 2008-09, passed in Appeal No. CAB-IV/200/2012-13 dated 11.06.2013 passed by the CIT(A)-IV, Baroda. Since, the facts are similar, hence, the rejection of Internal TNMM method and adoption of CUP method, the appellant has filed detailed submission against the action of the AO of rejecting the internal TNMM method adopted by the appellant and thereafter applying CUP method to sale of individual products for bench marking the sale of these products as ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sential prerequisite for application of any method of ascertaining the ALP is the inputs necessary for that purpose. Whatever may be inherent edge of the direct methods of determining arm's length price of an international transaction over indirect methods of determining the arm's length price of international transactions, selection of the most appropriate method for determining arm's length price under the transfer pricing provisions, in a particular fact situation, is not an academic exercise which can be decided de hors the peculiar facts of that situation, and, therefore, there cannot be any straight-jacket formulas holding application of a particular method in case of a particular type of product or service. While rule 10B(1) of the Income Tax Rules 1962, provides that arm's length price in relation to an international transaction shall be determined by any of the methods, "being the most appropriate method", set out therein, Rule 10 C(1) provides the mechanism for selecting the most appropriate method "which is best suited to the facts and circumstances of each particular transaction" and "which provides the most reliable measure of arm's length price of the international tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....od outside the ambit of most appropriate method. Quite clearly, therefore, unless suitable reliable data inputs necessary for application of a particular method, as CUP in this case, are available, CUP method cannot be said to be most appropriate methods on the facts of this case. Let us, therefore, first examine whether sufficient inputs were indeed available. 11. At the outset, it is important to note that what has been relied upon by the TPO is Internal CUP data but then rather than taking the comparable uncontrolled price of the transaction, the TPO has compared average of intra-AE transactions and independent transactions. This approach, though in the case of application of Cost Plus Method, has been rejected by a coordinate bench of this Tribunal in the case of ACIT Vs Tara Ultimo Pvt Ltd [(2012) 143 TTJ 91 (Mum)], though the same reasoning will be equally applicable in respect of the CUP as well as the computation mechanism, in that respect, is materially similar. In this case, speaking through one of us (i.e. the Vice President), the coordinate bench had observed as follows: The way this rule works, the benchmark gross profit is to be applied on each trans....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of mark up on costs on transactions with AEs vis-a-vis mark up on costs on transactions with non AEs [Emphasis, by underlining, supplied by us now] 12. It is also important to note that the TPO has justified application of internal CUP on the basis of deviations in prices at which products are sold to different AEs and, by implication, using one intra AE price to bench the other intra AE price. That is wholly incorrect. It is well settled in law that it is only an uncontrolled price which can be compared with controlled price and used for any benchmarking. This position has been well summarized in a coordinate bench decision in the case of Sabic Innovative Plastic India (P.) Ltd. v. Dy. CIT [2013] 59 SOT 138/35 taxmann.com 177 (Ahd.), and we are in considered agreement with the same. 13. When comparing the prices of products sold in intra AE transactions vis-à-vis independent transactions, it is not sufficient to compare the prices de hors the economic circumstances in which the respective AE and non AE transactions take place. This principle is beyond any doubt or controversy. In the OECD Guidelines for Multinational Enterprises and Tax Administ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s sheet showing 17 months advance payment but rejects it as agreement refers to only 120 days advance payment. That does not belittle the fact that whatever may have been payment terms under the intra AE agreement, the payment was actually received substantially in advance. The question we must ask ourselves is that whether such substantial advance payments, which ensure availability of working capital to the assessee, can be compared with normal business transactions allowing, on the contrary, credit period to the customers. The answer is clearly in negative as the economic circumstances in which these two sets of transactions operate are substantially different. The very character of these transactions is different. 15. It is also important to bear in mind the undisputed fact that the AE had an obligation to buy at least 50% of its products and the assessee was reseller rather than an end user. These contractual terms and the difference in functions also seriously affect the comparability. The reasons given by the CIT(A) for rejecting these variations are wholly superficial and devoid of any legally sustainable merits. The variations in quantities between the AE....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s cannot be made, for this reason alone, CUP method ceases to be workable on the facts of this case. The contradiction in the approach is also evident from the fact that the CIT(A) has upheld application of CUP method on the sole basis that accurate adjustments can be made to take care of variations in the intra AE and independent transactions but then one of the points made before us, in the written submissions, is that "if total adjustment of 36% claimed in those years was allowed, prices would come down to such unrealistic levels that one of the international transaction, including sales to non AEs, were made anywhere neat them". Clearly, there is no meeting ground between these diametrically opposed stands by the authorities. As regards the decision of coordinate bench in the case of Serdia Pharmaceuticals (supra), that was a case in which no dispute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. 16. A lot of emphasis has been placed on the fact that the assessee on its own was using the Internal CUP method in past, an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spute was raised with respect to the comparables cases except on account of quality for which suitable adjustment was allowed. This precedent, therefore, does not offer any help to the case of the revenue. All that has been relied upon is internal CUP and for the detailed reasons set out by the CIT(A), which meets our approval, these CUP inputs were not reliable enough. In any case, differences due to variations in FAR due to nature of trade relationship with AEs have not been accounted for and suitable adjusted. The external CUP inputs are not even referred to and relied upon by the TPO. There are no other independent comparable transactions brought to the analysis by the TPO or the learned Commissioner (DR). All these factors put together donot make out a case for application of CUP in this case. Not only that there is no justification, beyond vague generalities, for CUP in the present case and not only that that CUP method application mechanism is incorrect, we find that sufficient quantity of reliable CUP inputs are not available on the facts of this case. that In the light of these discussions, as also bearing in mind entirety of the case, we donot see legally sustainable meri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on actual basis wherever these are directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee had further submitted that "in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects". We have noted that the TPO did not have any specific comment on this request and he simply rejected the explanation of assessee as "not accepted". In appeal also, no specific adjustments were suggested to the allocations made in the segmental accounts and the discussions were confined to generalities. In these circumstances, we see no reasons to disturb the internal TNMM adopted by the assessee. ............. 5. There are some variations in this year, such as the advance payment in this year is for 13.97 months on an average, as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, and reject ground no.1 and 2 taken by the Revenue. 14. Next item for which ALP adjustment was recommended by the TPO is with regard to payment made for availing of sales promotion and marketing services amounting to Rs. 2,24,01,998/-. The ld.TPO worked out ALV of this expenditure at NIL. He has assigned three reasons for taking ALP of this transaction as NIL. 15. Brief facts of the case are that upto the Asstt.Year 2008-09, the AE of the assessee did not charge any sales and marketing commissions to the assessee for the services. In the year under consideration i.e. 2009-10, an agreement was executed on 31.7.2008 between the assessee and its AE whereby it was provided that on these services, the assessee would pay a commission to the AE at the rate of 5% on non-AE export sale of the assessee. Copy of this agreement is available on page no.198 of the paper book. The assessee has benchmarked this internal transaction by applying TNMM method. The ld.TPO while determining ALP of this transaction at NIL, assigned three reasons viz. (a) no documentary evidence of the relevant year was furnished to conclusively prove that AE rendered services; (b) no documentary evidence produced....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ppellant avails the marketing and selling services of its AE as the appellant does not have its own sales and marketing team for export market and it is cost effective for the appellant to avail the services from its AE who also manufactures and sells similar chemical products in international market and has necessary resources to do selling and marketing activity. 2.2. The nature of the services provided by the AE is set out in the selling and marketing service agreement at pg.198 of PB and further elaborated at Para 4.2.1.3 of TPSR at pg.82 of PB. 2.3. Ld. TPO has no jurisdiction to question the commercial expediency of the transaction. Reliance is placed on case laws mentioned in clause B.2(l) above. 3) As to rendition of services: 3.1. The following documents furnished to Ld. TPO/CIT(A) amply establishes that the AE has in fact rendered the services and the transaction is a bonafide transaction: a) Selling and marketing service agreement between the appellant and the AE placed at Page 198 of PB. b) Email communications between appellants' employees and AE's marketing and sales team as well as between AE and non-AE cu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as not established that AE has not rendered the services and neither Ld. TPO brought on record any documents to establish that the AE has not rendered the service. Case laws for rendition of service. I. It is not necessary that all the services shall be evidenced by some document. Copy of the agreements between the parties could establish the factum of services having been rendered by the AE. Reliance is placed on Commissioner of Income-tax, Jalandhar-1, Jalandhar Vs. Max India Ltd. ([2016] 75 taxmann.com 268 (Punjab & Haryana), HC-Punjab and Haryana) (para 23 to 26) II. It is a sufficient compliance by the assessee to discharge its initial onus of establishing rendition of service if the appellant places on record the relevant agreement with the AE pursuant to which services from AE are availed. Reliance is placed on Durovalves India (P.) Ltd. v Asst. Commissioner of Income-tax, Circle-I, Aurangabad ([2015] 63 taxmann.com 173, Pune-Trib) (Para 8 to 8.1) III. It is not always possible to establish the rendition of services by the AE with documentary evidences. Reliance is placed on TNS India (P) Limited v/s ACIT ([2014] 48 taxmann.com 128 (Hydera....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not mean that AE is not entitled to receive selling commission from the appellant. In FY 08-09, the AE undertook these activities on its own without taking help of any sub-agent for certain geographies and hence it is entitled to arm's length commission at the rate of 5%. The AEs commission is not dependent on AE having paid commission to its sub-agent. It is at the discretion of the AE to take the help of sub-agent or not. 5) The Ld. TPO himself has accepted the payment of selling commission at 5% to AE at arm's length in the very succeeding year i.e. AY 10-11 based on same set of documentary evidences. Please refer to para 6.6 of TPO order for AY 10-11 (Pg. 562 of PB). It cannot be the case that in the succeeding year the transaction is considered at arm's length and in immediately preceding year it is considered as not at arm's length, though the payments are under the same agreement, to the same AE and for the same services. Rule of consistency shall apply. Reliance is placed on Radhasoami Satsang v. Commissioner of Incometax ([1992] 60 taxman 248 (SC)) (Para 13). 6) The Ld. TPO cannot determine the ALP at Nil. Reliance is placed on th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... increased with regard to non-AE sales also. Its export sales to non-AE have increased from Rs. 9 crores approx. in F.Y.2005- 06 to Rs. 44.56 crores in the F.Y.2008-09. Therefore, taking into consideration the complete details, we are of the view that no adjustment could have been made at the recommendation of the TPO on this issue because it was not in the jurisdiction of the TPO to question requirement of services, and also ascertain rendition of services, and on these two reasoning, he cannot benchmark the ALP of these services at NIL. It is also pertinent to observe that in A.Y.2010-11, assessee has paid Rs. 160,16,780/- to its AE for these services and that transaction was referred to the TPO. The ld.TPO did not recommend any adjustment in A.Y.2010-11. Therefore, no adjustment is required in the Asstt.Year 2009-10. We allow this ground also, and delete adjustment recommended at Rs. 2,24,01,998/-. Accordingly, ground no.2 of the assessee's appeal in the Asstt.Year 2009-10 is allowed. 21. Ground No.3 in the Asstt.Year 2009-10 is connected with ground no.2 of the assessee's appeal in the Asstt.Year 2010-11. In the grounds of appeal, the assessee has challenged initiation of pe....