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Income Tax Appellate Tribunal, AHMEDABAD BENCH ‘D’, AHMEDABAD
Per Pramod Kumar, Vice President:
By way of this appeal, the Assessing Officer has challenged correctness of the order dated 18th March 2016 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income-tax Act, 1961, for the assessment year 2011-12 on the following ground:-
“The ld. CIT(A) has erred in law and on facts in deleting the Upward Adjustment u/s 92CA amounting to Rs.3,72,62,891/- ”
Briefly stated, relevant material facts are like this. The assessee before us, i.e. Hazira LNG Pvt Ltd, is a joint venture between Shell Gas BV (74%) and Total Gaz Electricite Holdings (26%). The assessee, with the approval of Foreign Investment Promotion Board (Government of India) owns, operates and maintains terminal facilities for Liquified Natural Gas (LNG) at Hazira terminal. The assessee purchases LNG from its foreign associated enterprises and sells the re-gasified LNG (R-LNG) to its customers in India. During the relevant previous year, the assessee purchased 14 such cargo
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 2 of 17 from its AEs abroad. These imports were on CIF basis, and as is the convention in this line of business, the price for such imports was decided on the basis of per million British Thermal Units (MMBTU). In its transfer pricing report, the assessee adopted Retail Price Method (RPM) as most appropriate method for ascertaining the arm’s length price of intra AE imports. For the purpose of benchmarking these transactions, the assessee adopted Petronet LNG Limited (PLL) and GAIL India Limited (GAIL). During the relevant previous year, the assessee earned gross profit margin per MMBTU at 35.79 which was greater than arm’s length margin of PLL and GAIL at 30.23 per MMBTU. It was on this basis that the transactions were claimed to be at arm’s length. The Transfer Pricing Officer, however, rejected this approach. He held that the CUP method is the most appropriate method for ascertaining arm’s length price, and in any case, rejected the PLL and GAIL as valid comparables. Accordingly, by adopting CUP method, the TPO made an ALP adjustment of Rs.3,72,62,891/-. Aggrieved, assessee carried the matter in appeal before the CIT(A) who, following the views adopted by the Dispute Resolution Panel in the assessment year 2009-10 and 2010-11 and following his predecessor’s order for the assessment year 2008-09 in assessee’s own cases, reversed the action of the authorities below, deleted the said ALP adjustment. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.
We have heard the rival contentions, perused the material on record and considered facts of the case in the light of the applicable legal position.
We find that the orders relied upon by the CIT(A) were challenged in appeal before this Tribunal, but the co-ordinate benches vide separate orders dated 27th December 2016, confirmed the findings therein and declined to interfere in the matter. In the lead order, which is also reported as DCIT vs. Hazira LNG Pvt Ltd (163 ITD 223), the co-ordinate bench has, inter alia, observed as follows:-
“12. We have noted that the LNG is not an item which is sold and purchased in an open commodity market so that its prevailing prices can be known to all concerned. A lot of emphasis has been placed by the learned Departmental Representative on the fact that the prices of LNG and the crude oil have moved in the same direction, and, thus even the information in public domain could indeed be used for arriving at the valid CUP input. However, apart from whatever be the lack of merits of this argument, this argument is being taken up for the first time at this stage. What the TPO has actually done in this case is to adopt the prices at which PLL has imported LNG as CUP input, despite the variation in dates and variations in the origin of the LNG. Therefore, taking up the crude oil prices, as base material, or referring to Henry Hub prices at this stage will be giving a new twist to this case and attempting to thereby improve the case of the revenue- which is not permissible. Learned Departmental Representative has laid a lot of emphasis on the observation made in the TP report to the effect that “The price of natural gas mirrored international crude oil prices in terms of volatility” but
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 3 of 17 then their rate of variation may not be the same even as it may be in the same direction. That is clear from the graph showing movement of these prices, as filed by the assessee, clearly shows. It is not even the case of the Departmental Representative that there is a direct formula with the help of which prices of LNG can be derived nor is it clear to us as to how can the prices of LNG be derived from the prices of crude oil, which are in public domain. Learned Departmental Representative has pointed out that the Japanese LNG import is bench marked on the basis of JCC prices which is based on Japan’s Customs Crude Oil Clearance, and that in the North America, the prices of LNG are determined by Henry Hub prices, and contented that “there are prices available for different regions in the world can be applied with reasonable adjustments” but then he does not explain the mechanism of this adjustment process. In any event, what application of CUP method requires, as a first step, is that “the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified” but then 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 was possible to fix forward purchases using a formula linked to a commodity index. Due to unavailability of any domestic uncontrolled price point and absence of any substantial (re)sale, HLPL had to use a price discovery mechanism based on an independent exchange. Henry Hub is a natural gas trading hub for settlement of gas inflows into the US. It is not possible to buy natural gas at Henry Hub for imports to India. Therefore price at Henry Hub exchange does not reflect the spot LNG prices in the international market and the same can in no way be taken as an indicative price for the purposes of benchmarking the subject international transaction
In the year in which the Henry Hub prices were used, primarily the commissioning of the project was to take place, and, therefore, the operations of assessee’s business were of different nature. The fact that the assessee had used Henry Hub prices in the first year of operations, therefore, cannot be
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used as estoppel against the assessee. In any case, these prices are of a significantly different geographical market and a different product inasmuch neither US, as a market, can be compared with Indian energy market, nor LNG prices CIF Hazira can be compared with the domestic prices of natural gas in US. This is, of course, besides the fact that the TPO has not even relied upon Henry Hub, or, for that purpose, any other prices in public domain.
What has been done by the TPO is to adopt the prices, at which PLL has imported LNG in spot transactions, as external comparables. There is no dispute that this information was never in public domain, and that it was in response to the requisition under section 133(6) of the Act that the PLL furnished, vide letter dated 1st February 2012, to the Transfer Pricing Officer. In this letter, PLL has, inter alia, stated that “each spot cargo transaction is distinct and are not comparable” and that PLL “is presently operating in one segment i.e. R-LNG”. The information so furnished by the PLL is as follows:
Spot Cargoes Purchased by Petronent lNG Ltd During FY 2008-09 Loading Port Supplier Ship Unloading MMBTU Price Booking LC Date USD/ Date* Requir MMBTU ed Ras Laffan, RasGas AI Thakhira 11/5/2008 3,262,720.00 13,3000 24/4/2008 Y Qatar Arzew, Algeria Sonatrach M Didouche 15/06/08 2,854,894.10 13,9500 28/5/2008 Y
Idku Port, Egypt Gaz De Gasleys 11/10/2008 3,286,422.00 18,5000 17/09/2008 Y France Arzew, Algeria Sonatrach Galea 20/10/08 3,190,940,23 16,0000 4/10/2008 Y
Withnell Bay, North West AI Thakhira 26/10/2008 3,362,960.00 17,5000 10/10/2008 Y Australia Shelf, Australis Qalhat, Oman Qalhat Ibara LNG 7/11/2008 3,346,090.00 13,2500 4/11/2008 Y
Ras Laffan, RasGas MRL 22/11/08 3,092,090.00 12,3000 5/11/2008 Y Qatar Point Fortin BG Blue Sky 17/12/08 3,087,330.00 11,9000 25/11/2008 Y T&T Bonny, Nigeria BG LNG Akwa 3/1/2009 2,724,260.00 11,9000 25/11/2008 Y Ibom Bintulu, BP Seri Angkasa 11/3/2009 3,274,231.00 6,2500 3/3/2009 Y Malaysia Point Fortin BP Brit Innovator 29/03/09 2,779,225.03 5,8000 12/3/2009 Y T&T *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 during FY 2008-09 S. Name of Source Date of Date of Price Net Qty. Value in Value in No Ship Confirmat- Arrival USD Unloaded books books (INR) ion notice (USD) 1 Al Thakira Qatar 2-Apr-08 11-Apr-08 13.98 3,264,240 45,634,075 1,845,898,342 2 Galea Algeria 14-Apr-08 23-Apr-08 13.98 3,138,060 43,870,079 1,774,544,687 3 Excel Abu 17-Apr-08 24 May-08 13.42 3,221,030 43,226,223 1,750,662,015 Dhabi, UAE
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4 Arctic Nigeria 21-Apr-08 20-May-08 13.42 3,196,130 42,529,725 1,722,453,846 Lady 5 LNG Nigeria 23-Apr-08 1-May-08 13.35 2,829,290 37,771,022 1,527,837,820 Finima 6 Excel Abu 28-Apr-08 15-May-08 13.40 2,069,420 27,730,228 1,123,074,234 Dhabi, UAE 7 Simaisma Qatar 5-May-08 9-May-08 13.48 3,262,990 43,985,105 1,781,396,761 8 Gracilis Equatorial 13-May-08 15-Jun-08 13.59 3,016,290 40,991,381 1,766,728,525 Guinea 9 Galea Algeria 22 May-08 30-May-08 13.59 3,150,350 42,813,257 1,733,936,888 10 Mithane Idku, 2-July-08 28-Jul-08 18.80 3,178,840 59,762,192 2,581,726,694 Shirley Egypt Elisabeth 11 Berge Algeria 7-July-08 22-Jul-08 16.99 3,113,000 52,889,870 2,284,842,384 Arzew 12 Maesk Guinea 15-July-08 18-Sep-08 20.45 3,422,600 69,992,170 3,062,157,438 Methane 13 Arctic Norway 21-July-08 13-Aug-08 19.55 3,272,270 63,972,879 2,722,045,980 Lady 14 Seri Alam Guinea 23-July-08 24-Sep-08 19.55 3,058,230 59,788,397 2,615,742,347 15 Seri Alam Nigeria 28-July-08 8-Aug-08 18.70 3,166,660 59,216,542 2,519,663,862 16 Berge Algeria 13-Aug-08 22-Aug-08 20.37 3,118,180 63,517,327 2,702,662,247 Arzew 17 Seri Guinea 18-Aug-08 12-Oct-08 20.50 3,158,740 64,754,170 3,027,257,448 Bijasksan a 18 Borno Nigeria 26-Aug-08 30-Aug-08 20.50 3,265,070 66,933,935 2,848,038,934 19 Seri Belgium 4-Sep-08 10-Sep-08 20.00 3,234,050 64,681,000 2,829,793,750 Begawan 20 Salalah Oman 21-Sep-08 2-Oct-08 19.95 3,397,770 67,785,512 2,965,616,128 LNG 21 Gallina Nigeria 20-Oct-08 29-Oct-08 17.20 2,781,230 47,837,156 2,407,644,061 22 Granosa Western 31-Dec-08 09-Jan-09 9.06 3,319,130 30,071,318 1,449,437,518 Australia 23 Sohar Oman 26-Feb-09 3-Mar-09 7.15 3,162,030 22,608,515 1,137,208,279 LNG 24 British Trinidad, 6-Mar-09 31-Mar-09 5.65 3,153,020 17,814,563 869,072,519 Ruby W.I. 25 Al Qatar 10-Mar-09 15-Mar-09 6.00 3,487,040 20,922,240 1,052,388,672 Marrouna 26 Al Hamla Qatar 23-Mar-09 28-Mar-09 4.50 2,152,450 9,686,025 487,207,058
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 of Liberty Agri Products Pvt Ltd Vs ITO [(2012) 49 SOT 79 (Chennai)], a coordinate bench of this Tribunal has held that even when a comparison with respect to customs data is to be made, it should be for the data in respect of the day on which contract was entered into and not a different date. The data obtained by the TPO from PLL would also show that there are variations in the prices of LNG imported within a gap of even 1 day. On 4.11.2008, PLL entered into spot deal @ US $ 13.2500 per mmbtu but on
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the very next day, i.e. on 5.11.2008, the next spot deal was @ US $ 12.3000 per mmbtu. Similarly, on 4.10.2008, PLL entered into spot deal of LNG imports @ US $ 16 per mmbtu, but in less than a week, on 10.10.2008, PLL entered into another spot deal of LNG import @ USS $ 17.5 per mmbtu. The business situations can never be so static, particularly in the case of a product like LNG spot deals which are purely based on one to one negotiations, that the market prices on a day other than the day on which transaction has been entered into by the assessee can be used as a valid CUP input, and that is precisely what the coordinate bench has held and the information given by the TPO clearly corroborates. On the basis of information used by the TPO himself, and in the light of the law laid down by the coordinate bench in the case of Liberty Agri Products (supra), even if CUP method was to be adopted in the manner in which it has been adopted by the TPO, the impugned addition was to be deleted anyway. We have also noted that in all the assessment years in which such adjustments are made, not only the data is of dates, which are different from the date of transactions, and in many a cases of subsequent dates, as will be evident from the chart given below:
AY HLPL PLL AY Source Booking Price Source Booking Price (USD) 2007-08 date (USD) date Qatar 12-09-06 9.95 Egypt 04-09-06 8.60 Egypt 15-09-06 9.37 Egypt 04-09-06 8.60 Malaysia 03-01-07 9.30 Qatar 28-12-06 8.30
AY Source Booking Price Source Booking Price 2008-09 Date (USD) Date (USD) Oman 18-01-08 16.75 Qatar 29-01-08 15 Oman 31-01-08 16.45 Qatar 29-01-08 15
AY Source Booking Price Source Booking Price 2009-10 date (USD) date (USD) Oman 21-09-08 19.95 Egypt 17-09-08 18.50
AY Source Booking Price Source Booking Price 2010-11 date (USD) date (USD) Russian 06-04-09 5 Egypt 13-04-09 4.8 Federation Withnell 25-05-09 3.87 Australia 22-05-09 3.50 Bay, WA Russian 02-06-09 3.87 Australia 22-05-09 3.50 Federation Guinea 02-06-09 4.20 Australia 22-05-09 3.50 Russian 25-08-09 5.15 Qatar 20-08-09 4.65 Federation Qatar 03-09-09 5.15 Qatar 01-09-09 4.70 Trinidad, 02-09-09 5.15 Qatar 01-09-09 4.70 W.I
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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 benchmarked on that basis. These transactions cannot, therefore, be benchmarked anyway. Clearly, CUP cannot, for this short reason alone, cannot be the most appropriate method in this case. As we hold so, we may also refer to rule 10C(2C) which states that, in selecting the most appropriate method for ascertaining the arm’s length price, “the availability, coverage and reliability of data necessary for application of the method” is essentially to be taken into account. The appropriateness of a method of ascertaining the arm’s length price cannot be decided in a vacuum and de hors the availability of relevant data. No matter how desirable is the use of CUP method in a particular type of transaction, or in every plain vanilla commodity purchase transaction- as learned Departmental Representative puts it, it essentially depends on availability, coverage and reliability of data necessary for application of such a method. Learned Departmental Representative’s case fails on this test as well.
There is, however, an even more fundamental issue that we must briefly touch upon, and that is whether on the basis of secret comparables, i.e. which are not in public domain at all, the CUP method can be thrust upon the assessee. The information obtained by the TPO under section 133(6), on the basis of which the use of CUP method is justified, was not in the public domain, nor did the assessee have any information about the same unless the assessee was confronted with the same by the TPO. To suggest that in view of the information so made available to the assessee now, the assessee should have used CUP method is to expect an impossibility being performed by the assessee. What is important to note in the present case is that the method of ascertaining the ALP is being sought to be changed on the basis of alleged availability of necessary CUP data in the nature of secret comparables. That, in our humble understanding, cannot be done. As we say so we are alive to the fact that in certain decisions by the coordinate benches, even when secret comparables are used by the TPO, the same has been broadly upheld with the rider that the assessee should be confronted with the secret comparables used by the TPO but then the present case is materially different. Here is a case in which secret comparables, which have been obtained by the TPO under section 133(6), are not in respect 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
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 8 of 17 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.
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.
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 that natural gas is transported in liquefied state, using specialized LNG gas tankers, and at the LNG terminals receiving this liquefied gas, the liquefied natural gas is turned back into gaseous state (regasified) after unloading from ships, and then distributed across the network. While on the subject, it may be useful to also take note of the fact that Liquefied Natural Gas (LNG) was developed in 1964 as a solution to the problem of transporting the gas, which was, until that point of time and because of the inherent limitations of transporting the gas, seen as a product for domestic use only. With LNG, gas is liquefied and transported internationally via tankers and then regasified into its original state for distribution and sale. Additionally, the hydrocarbon takes up significantly less space as a liquid than a gas; LNG is approximately 1/600th the volume of the same amount of natural gas. LNG has transformed the natural gas market, making previously unrecoverable natural gas finds an economic reality. In other words, stranded gas reservoirs, for which pipelines were too costly to construct, can now be produced, transformed into LNG and transported via tanker. Natural gas is liquefied by lowering the temperature of the hydrocarbon to approximately -260 degrees Fahrenheit (-160 degrees Celsius). This temperature drop liquefies the methane present in the natural gas, making transportation at atmospheric pressure in the form of LNG possible LNG is then introduced into specially insulated tankers and transported around the world. Once it has reached its destination, the LNG is offloaded from the tanker and either stored or regasified. The LNG is dehydrated into a gaseous state again through a process that involves passing the LNG through a series of vaporizers that reheat the fuel above the -260 degree Fahrenheit (-160 degrees Celsius) temperature mark. The fuel is then sent via established transportation methods, such as pipelines, to the end users. The work typically done at the LNG terminal, by way of a diagram, can be shown as follows:
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(source: http://www.marineinsight.com/wp-content/uploads/2013/05/lng- diagram.jpg)
We have noted that what is imported by the assessee is natural gas, which is liquefied because it can be transported internationally only after being liquefied, and what is sold is also natural gas. The process of liquification 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.
………….
The technological advancement in the use of liquefied natural gas (LNG) provided, the gas industry with new methods to solve the problems of storage and transportation. Natural gas can be reduced to
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 10 of 17 1/600 of the volume occupied in the gaseous state by cryogenic processing, safely stored or transported in double-walled insulated metal containers at near atmospheric pressure and when required, can be re-gasified.
It cannot, therefore, be said that the product being imported and the product being sold in the market are different from each other. Once Hon’ble Supreme Court holds so, it cannot be open to us to take any other view of the matter.
As for the process involved in regasification, it is the same process which is involved in the comparable PLL, and the same is the position with regard to the foreign exchange risk. The process involved makes it all the more comparable. As we have noted earlier, it is the business model of the assessee to import the natural gas in liquefied form and then convert it back into natural gas form again so as to make it saleable, but then it does not change the character of the transaction which is in the nature of import of a product and selling the same. The costs incidental to storage and transportation do not alter the character of transactions carried on by the assessee. The FAR analysis for the assessee and at least PLL are not any different. There is a process of custom clearance, unloading, storage, regasification and delivery to the agreed point involved in the work of the assessee as also the PLL.
A lot of emphasis is then placed by the learned Departmental Representative on the proposition that since there is special process involved in storage and sale of product, the RPM should not apply. However, as will be evident from the following guidance in the UN Transfer Pricing Manual and the OECD Transfer Pricing Guidelines, such a fact only calls for, at best, economic adjustments, where required, and the higher margin:
6.2.9.5. As the gross profit margin remunerates a sales company for performing marketing and selling functions, the Resale Price Method especially depends on comparability regarding functions performed, risks assumed and assets used. The Resale Price Method thus focuses on functional comparability. A similar level of compensation is expected for performing similar functions across 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 fre- quently reflected in different operating expenses.
[UN Transfer Pricing Manual]
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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 commercial activity but only transfers the goods to a third party, the resale price margin could, in light of the functions performed, be a small one. The resale price margin could be higher where it can be demonstrated that the reseller has some special expertise in the marketing of such goods, in effect bears special risks, or contributes substantially to the creation or maintenance of intangible property associated with the product. However, the level of activity performed by the reseller, whether minimal or substantial, would need to be well supported by relevant evidence. This would include justification for marketing expenditures that might be considered unreasonably high; for example, when part or most of the promotional expenditure was clearly incurred as a service performed in favour of the legal owner of the trademark. In such a case the cost plus method may well supplement the resale price method.
[OECD Transfer Pricing Guidelines]
As for the point regarding the assessee being a full risk distributor, and for that reason RPM should not apply, we are unable to see merits in this approach either. Firstly, the TPO has not adopted any alternate approach, which is sustainable in law and which is more appropriate than the approach of the assessee. Secondly, the comparable, particularly PLL, is assuming the same risks. Thirdly, at best some economic adjustments, as may be appropriate in a case, may be done in such a situation but then no such adjustments are made by the TPO nor even suggested by the learned Departmental Representative. Finally, it is for the tax administration to show as to how another approach to the benchmarking, in a particular fact situation, will be more appropriate and unless that is done, the assessee’s approach to benchmarking the transactions cannot be discarded. What the TPO had suggested was the CUP method, but, for the detailed reasons set out earlier in this order, we have held that CUP method cannot be applied to the facts of this case. No method of determining ALP is perfect, but it is from these imperfect methods that we have to find out which is more appropriate a method. There is nothing on record or in the arguments of the learned Departmental Representative which can demonstrate to us as to why the RPM can be discarded and a more appropriate method of determining ALP can be adopted. We are, therefore, not persuaded by this plea either.
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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.
The first issue against the comparability is of high related party (i.e. intra AE) transactions.
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.
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% respectively of the equity capital of these companies is held by the President of India. In effect, thus, the indirect shareholding of the President of India in these companies can be computed as follows:
Sr. % of holding of % holding in PLL Holding No. Government of India 1 74.14 12.5% 9.2675 2 78.92 12.5% 9.865 3. 84.93 12.5% 10.61625 4. 57.36% 12.5% 7.17 Total 36.91875
The question that we are now called upon to adjudicate is whether these four companies can be said to be associated enterprises of the assessee before us. 31. Section 92 A, as relevant to the issue requiring our adjudication, provides as follows: Meaning of associated enterprise. 92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, “associated enterprise”, in relation to another enterprise, means an enterprise—
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 13 of 17 (a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,— (b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or ………………. …………..….. 32. It is thus clear that where a person or an enterprise holds, directly or indirectly, shares carrying not less than 26% of voting powers in each such enterprises, the requirements of Section 92A(2)(b) will be fulfilled, and that where a person, directly or indirectly, or through one or more intermediaries, participates in the management, control or capital of these companies, the requirements of Section 92A(1)(b) will be fulfilled. The law is also settled that conditions of both the limbs of Section 92A are to be fulfilled, and only then the enterprises 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 in accordance with this Constitution”. It is also important to note that the voting rights are not exercised or controlled by the President of India, but by the Union of India. Essentially, therefore, the equity shareholding of the asseesse,
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 14 of 17 even though in the name of the President of India, is held by the Union of India. The shares are held by the Union of India which is a sovereign. As for the President of India being treated as an artificial juridical person, as is contended by the learned Departmental Representative, we are unable to see any merits in this plea either. An artificial juridical person is a creature of law but the President of India is a creation of the constitution. In the case of IC Gokal Nath & Ors Vs State of Punjab & Anr (AIR 1967 SC 1643), as pointed out by the learned counsel for the assessee, Hon’ble Supreme Court has observed that, “The distinction between the Constitution and the laws is so fundamental that the Constitution is not regarded as a law or a legislative act”. Clearly, therefore, President of India cannot be treated as a creation of law, which, as has been noted above, qualitatively different from creation of the Constitution. While on this issue, it is also useful to take note of the Circular No.9/76 [13/127/6-CL-VI and 1/1/76-CL-V] dated 19.5.1976 issued under the Companies law by the Ministry of Corporate Affairs for the purpose of section 370(1B)(3) of the erstwhile Companies Act, 1956. In the said circular the issue was “whether the Government Companies will be deemed to be falling under the same management for the purposes of above stated section as the President of India or the Governor of a State, as the case may be, holds the major shares and exercise and control the voting rights”, and In the Ministry of Corporate Affairs clarified that for the purpose of section 370, the Companies will not be deemed to be under the same management as the President or the Governor does not hold shares and exercises or controls voting rights as an individual in the Government Companies. Of course, the scope of section 370 (1B), in the Companies Act in force at that point of time, was with respect to the expression ‘individual’ as against ‘person’ in the present case, but then the same position, for the detailed reasons set out above, holds good in the present context, i.e. in the context of ‘person’, as well. If all the public sector 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 contended that entire cost of PLL is passed through including foreign exchange risk which makes its business model a low risk business model not comparable with the assessee. It is then pointed out that
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 15 of 17 PLL has entered into certain long term contracts for purchase of LNG whereas the assessee has solely purchased LNG in spot deals. 36. We find nothing on record to substantiate the claim of the learned Departmental Representative that the PLL was charging separate fees for regasification. In our considered view, regasification is an integral part of assessee’s trading activity as unpacking of a consignment to put the same in a saleable state and fit for transportation by the available mode. The process of regasification cannot be seen in isolation with the main activity carried on by the assessee. What has been sold by the assessee is regasified LNG (R- LNG) as is evident from the financial statements of the assessee. The business models of HLPL and PLL are similar in the sense that the entire cost, whether it is a long term or a short term contract, is passed on to the customer in India as no trader will keep the cost to itself including the foreign exchange fluctuation. To that extent, leaned Departmental Representative indeed seems to have erred in observing that in the case of PLL, the entire fuel cost including the exchange rate fluctuation is passed on to the customers, whereas the same is not the case of HLPL as it is a full risk distributor. In any case, as a plain look at the financial statements of PLL would show the PLL has booked, in its profit and loss account, foreign loss exchange loss separately to the tune of Rs 33 crores approximately, and thus it cannot be said that the PLL had passed on entire foreign exchange fluctuation risk to its customers. It has also been noted that sale to customers in India by both PLL as also the assesse is foreign currency (USD) denominated and, therefore, the foreign currency risk is a pass through costs for both HLPL and PLL to that extent. We have also noted, as pointed out by the learned counsel, that LNG Prices are floating in long term trade as well since they are generally linked to certain Oil exchange prices. As an example, it has been noted that PLL sourced LNG from Rasgas, Qatar under a 25 year SPA for which prices were linked to Japan Custom Cleared (“JCC”) crude oil of US$ 20/bbl in the period 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 from a single month to over a year.” In this view of the matter, we agree that the mere fact that PLL also has long term arrangements for
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 16 of 17 purchases of LNG, it does not cease to be a valid comparable for this reason alone. 37. As regards GAIL as a comparable, the first objection of the learned Departmental Representative is with respect to the related party transactions but then, in view of the discussions earlier in this order, the inter se transactions between the public sector undertakings cannot be treated as transactions between the associated enterprises, and, for this reason alone, this objection is to be deleted. The second point is regarding the GAIL not owning any regasification facilities and it is dealing in only natural gas. That objection does not hold good either as even GAIL is trading in natural gas and has made considerable investments in its distribution network of gas pipes. Learned Departmental Representative does accept that GAIL is also involved in trading in natural gas though with a difference that it does not have its own terminal and regasification facilities but then he has not pointed as to what comparability adjustment is required on that account. As for the point that the GAIL is selling natural gas on administered prices, this objection is found to be incorrect inasmuch asin response to the RTI application dated June 24, 2013, it has been clarified that Government that it does not regulate / fix / control the prices of imported LNG. In any event, even if GAIL is to be excluded from comparables, it does not make any difference to the conclusion that the margin earned by the assessee are well within the comparable margin earned by PLL.
In view of the above discussions, as also bearing in mind entirety of the case, we hold that the comparables adopted by the assessee are appropriate. Having said that, we may also point out in the grounds of appeal before us, there is no specific grievance against exclusion of any specific comparable, and the grievance is confined to the applicability of the RPM as CUP is said to be more appropriate to the facts of this case. That grievance, for the detailed reasons set out above, has already been rejected by us on merits.
We may also add that there is a specific finding in the order of the Dispute Resolution Panel that in the light of this Tribunal’s decision in the case of Liberty Agri Products (supra), even for the purposes of CUP, the prices prevailing on the day of transaction can only be compared with the comparable uncontrolled prices prevailing on that day only and not on some other dates, and that in none of the cases the TPO has used the prices prevailing on that particular day. This finding remains unchallenged and this principle has not been called into question by the appellant. Therefore, even if CUP method is to be applied, the impugned adjustment will have to be deleted anyway. Viewed thus, the grievances raised in this appeal may be viewed as somewhat academic and of no practical consequence. However, without any offence or prejudice to this line of reasoning, we have dealt with the issue on merits and given our categorical findings on the same.
In the light of these discussions above, and for the detailed reasons set out above, we see no merits in the grievances raised before us. All the
ITA No. 1491/Ahd/2016 DCIT vs. Hazira LNG Pvt Ltd Assessment year: 2011-12 Page 17 of 17
grounds of appeal, which we had taken up together, are, therefore, dismissed.”
Learned representatives fairly agree that the above decision will squarely apply mutatis mutandis for this year as well, even though learned Departmental Representative nevertheless relied upon the stand at the assessment stage and justified the same.
We see no reasons to take any other view of the matter than the view so taken by the co-ordinate benches. Respectfully following the same, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
In the result, the appeal is dismissed. Pronounced in the open court today on the 4th day of March, 2019.
Sd/- Sd/-
Justice P P Bhatt Pramod Kumar (President) (Vice President) Ahmedabad, dated the 4th day of March, 2019
Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File By order etc True Copy Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad
Date of dictation: ...order prepared as per the five pages manuscripts of Hon’ble VP which are attached herewith........04.03.2019.......... 2. Date on which the typed draft is placed before the Dictating Member: .... 04.03.2019....... 3. Date on which the approved draft comes to the Sr. P.S./P.S.: …04.03.2019... 4. Date on which the fair order is placed before the Dictating Member for Pronouncement:… 04.03.2019… 5. Date on which the file goes to the Bench Clerk : ...... 6. Date on which the file goes to the Head Clerk : ……………………………. 7. The date on which the file goes to the Assistant Registrar for signature on the order: …. 8. Date of Despatch of the Order: ………………......