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Income Tax Appellate Tribunal, DELHI BENCH : FRIDAY I-2 : NEW DELHI
Before: SHRI R.K. PANDA & SMT. BEENA A. PILLAI
(Appellant) (Respondent) Assessee by : Shri Hiren Mehta, CA Revenue by : Shri A. Srinivas Rao, Sr. DR Date of Hearing : 21.02.2019 Date of Pronouncement : 17.05.2019 ORDER
PER R.K. PANDA, AM:
This appeal filed by the assessee is directed against the order of the CIT(A)-44, New Delhi, dated 29th February, 2016 relating to assessment year 2010-11.
Facts of the case, in brief, are that the assessee, Otsuka Chemicals India Pvt. Ltd. (OCIPL), is a company wherein Otsuka Chemical Company Japan (OCCJ) owns 92.05% of shares and 7.53% shares are held by Dhanuka Laboratories Ltd. Rest of the shareholding is held by individuals and outsiders. OCIPL is engaged in manufacture / production of GCLE (Advance Cephalosporin Drug Intermediate) which is finally used by customers for making advance stage of Anti-Biotic Bulk Drugs. The Company is into only one business segment and is a single product company manufacturing / producing GCLE. Certain By- Products also emerge / get produced in the manufacturing process of GCLE. The assessee filed its return of income on 29th September, 2010 declaring nil income. A reference u/s 92CA of the Act was made by the Assessing Officer to the TPO for determining the ALP of the international transactions entered into by the assessee. The TPO, during the course of TP assessment proceedings, observed that the assessee has entered into the following international transactions with its AE:-
No. Nature of transaction Method Amount 1 Sale of finished goods GCLE CUP 27,83,68,478 2 Purchase of raw material (Raw GCLE) CUP 2,66,97,330
The assessee has used CUP method to benchmark the transactions. It was seen that it has sold finished goods (GCLE) to both AEs and non-AEs. Finished GCLE has been sold at an average FOB rate of Rs.49.57/- per Kg to AEs and at an average FOB rate of Rs.3050/- per Kg to Non-AEs and hence the transaction of sale of finished goods to AEs was found to be at arm’s length.
The TPO noted that the assessee during the year under consideration has purchased raw GCLE from AE @ US $ 60 per Kg. and at the rates of 65, 65.50 and 70 from non-AEs as per the following details:-
Date AE? Particulars Invoice no Type Qty in Kg. Rate-USD Amount-USD 28-10-2009 Non-AE Lupin Ltd *09000951 CIF 2,010.00 65.00 1,30,650.00 13-11-2009 Non-AE Orchid Chemicals *09000952 CIF 2,520.00 70.00 1,76,400.00 26-12-2009 Non-AE Dhanuka Labs *09001227 CIF 5,010.00 65.50 3,28,155.00 266,97,330 16-07-2009 AE Otsuka India RAW GCLE CIF 9,090.00 60.00
He, however, noted that the date of transactions are not same and there are fluctuations in price of GCLE over a period of time. Hence, the assessee was asked to give comparable CUP data of Raw GCLE price at the same time when the same has been purchased from the AE. However, the same could not be furnished. In absence of the same, the prices of finished GCLE were examined on the relevant dates viz. the dates of purchase of raw GCLE from AE and non-AEs. It was seen that there were few transactions exactly on the relevant dates so the search was widened to find sale prices of finished GCLE to non-AEs during the period from a date 10 days before the relevant date to a date 10 days after the relevant date. The Assessing Officer, applying the ratio of FG/RM i.e., finished goods by raw material, calculated the average rate of 55.67 per Kg. and took the same as arm’s length price and, accordingly suggested an adjustment of Rs.19,26,657/-. The assessee intimated that it does not intend to file objections before the DRP and accordingly requested that final assessment order may be passed in the case. The Assessing Officer, accordingly made adjustment of Rs.19,26,657/- to the total income of the assessee on account of transfer pricing adjustment.
In appeal, the ld.CIT(A) upheld the action of the Assessing Officer by observing as under:-
“3.3 Decision I have carefully considered the assessment order, transfer pricing order, written submission and oral arguments of the Ld AR.
Ld AR has explained that in present case, the AE of the appellant has been taken as tested party and the AE of the appellant has sold similar goods from Japan to India to the appellant as well as to third party. Ld AR has explained that TPO has wrongly considered the sale by the parent company i.e. AE to third party as the transactions of the AE. However, this fact will not change the position that the price of raw GCLE has wide fluctuation with the date. Therefore, it was relevant to consider nearby dates for the rate of raw GCLE sold to non-AE.
As the TPO has observed the fluctuation, it was asked the appellant to provide the prices of raw GCLE at which were sold to independent third party by AE for nearby purchase dates of the appellant. In absence of instances exact date of purchase by the appellant from its AE, the TPO has considered the data during 10 days prior to invoice and 10 days after invoice. On the basis of finished goods by raw material ratio it was concluded that the cost of raw GCLE should be 54.58 US$ instead of 60 $ charged by the AE. The appellant has objected that instead of +/-10 days the period should be taken +/-20 days or +/-30 days and provided such data. The average of +/-20 days and +/-30 days came to 55.75 and 55.58 US$ and average of these two rates came 55.67 and the Ld TPO has applied this rate for computing arm’s length price.
Main arguments of the Ld AR that under CUP the prices have to be compared and not the ratios. I have considered this argument carefully, I agree with the findings of the TPO that he has not compared with the ratio but trying to find out the prices of raw GCLE at the near date of the transactions. While doing so, he has applied the ratio of FG/RM (finished goods/raw material). Applying this ratio also infact it is the only cost which has been at any profit while taking this ratio. In absence of the data relating to purchase price of third party in India for raw GCLE on similar date it is proper to apply ratio to obtain such data in absence of wide fluctuation in cost of GCLE. Therefore, this argument of the Ld AR is rejected.
Second argument of the Ld AR is that the Ld TPO has rejected the CUP as the most appropriate method. I do not agree with this argument. The TPO has not rejected CUP per say but only modified the price for independent party at near date of actual transaction by applying the ratios. Therefore, the said ratio of FG/RM (finished goods/raw material) has been properly applied to arrive at the market rate as per CUP. Accordingly, this argument is also rejected. Considering the entire facts and circumstances of the case and the market rate of raw GCLE near to purchase date has rightly been computed at US$ 55.67 per kg and the same should be taken as arm’s length price. Accordingly, adjustment made by the TPO in ALP is hereby confirmed. These grounds of appeal s are dismissed.
4. As a result, appeal is dismissed.”
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:-
“1. That on the facts and circumstances of the case and in law, the Order passed by Hon’ble CIT (A) is contrary to the facts and bad in law. 2. That on the facts and circumstances of the case and in law, Hon’ble CIT (A) erred and was not justified in confirming the addition of Rs. 19,26,657/- on account of transfer pricing adjustment on the basis of order passed by Ld. TPO U/s 92CA(3) on the following grounds a) rejecting the direct evidence in form of sales invoices showing sales of Raw GCLE by AE to the assessee and to non-related parties. b) arriving at the price of Raw GCLE by applying the ratio FG/RM (Finished Goods / Raw Material) by alleging that there is difference in dates of transactions between AE with assessee and AE with non- related parties, thereby comparing the profits and not prices. c) rejecting the CUP by upholding the order of TPO stating that, TPO has not rejected CUP but only modified the price for independent parties at near date of the actual transactions by applying the ratios FG/RM (Finished Goods / Raw Material), whereas the Ld TPO had rejected the CUP applied by the assessee.
3. That the Appellant craves leave to add, alter, amend, modify any of the ground during the course of appeal.”
The ld. counsel for the assessee strongly objected to the order of the CIT(A).
He submitted that in order to benchmark the transactions, the assessee had used direct evidence i.e., transactions entered into by the AE with unrelated parties for identical goods. Transactions of sale of identical goods by the AE with unrelated parties were available during the F.Y. 2009-10 and, therefore, the assessee used CUP (Internal CUP) for benchmarking the transaction pertaining to sale of raw GCLE between OCCJ and OCIPL. He submitted that during the impugned assessment year OCCJ sold raw GCLE at an average CIF rate of US $ 60 per Kg., to assessee enterprise and the comparable average CIF rate for sale of identical goods to unrelated parties was 66.58 per Kg. The ld. counsel for the assessee filed the following chart:-
“Table: Sale of Raw GCLE by OCCJ to OCIPL (Assessee Enterprise) and to other enterprises during the Financial Year 2009-10 are tabulated below for comparison:- Particulars Quantity of Raw Value of Raw Average Rate per GCLE sold GCLE sold during Kg. at which during F.Y. 2009- F.Y. 2009-10 (in goods were sold 10 (in Kg.) USD) (in USD) Assessee Enterprise (OCIPL) 9,090 5,45,000/- 60.00 Other Enterprises 9,540 6,35,205 66.58 8.1 However, average rate of USD 66.58 for sale of identical goods by AE to non- related enterprises is calculated in table below.
Date of Rate in Invoice Particulars Invoice no Type Qty in Kg. USD Amount-USD Sales by AE to Others 28-10-2009 Lupin Ltd *09000951 CIF 2,010 65.00 1,30,650.00 13-11-2009 Orchid Chemicals *09000952 CIF 2,520 70.00 1,76,400.00 26-12-2009 Dhanuka Labs *09001227 CIF 5,010 65.50 3,28,155.00 Average rate of Sales by AE to Others 66.58
He submitted that a copy of confirmation from OCCJ stating that goods sold by OCCJ to OCIPL and other third parties in India are identical in nature was submitted before the TPO. The fact that goods being benchmarked and the comparables are identical in nature was accepted by the TPO at the time of transfer pricing proceedings and no doubts were raised by the TPO in this regard. He submitted that the TPO has taken Sales Prices / Average Sales Prices of Finished GCLE near the date of purchase of Raw GCLE which indirectly results in comparison of margins whereas CUP Method is all about comparing prices of identical goods. Referring to para 2.10 of the order of the TPO he submitted that he has made assumption that variation in price of Raw GCLE will be almost in same proportion as the variation in price of finished GCLE. He has incorrectly assumed that the prices of finished GCLE and raw GCLE will move in same proportion. The ld. AR submitted that the price of GCLE will be governed not only because of movement in price of raw material but it will also depend on cost of other direct inputs like labour, power etc., and assuming it to be linked only to movement of price of raw material was incorrect. He submitted that the assessee company was incurring huge losses since it started production 2 years back and that the Financial Year under consideration was the first profitable year of the assessee. The assessee was able to earn profit during the year under consideration only because of the fact that the AE purchased GCLE from Assessee at much higher prices when compared to sale of identical goods to non-related parties. He submitted that the assessee had to import raw GCLE from AE because of fire occurred at the plant of the company at Kotputali, Rajsthan on 29th June 2009 and to fulfill the pending orders and 7 to retain the existing customers, the company had to import raw GCLE from its parent company in Japan. To support Indian subsidiary at the time of accident, the parent company supplied Raw GCLE at low / reasonable prices. He submitted that that this is the only purchase made by the assessee from AE till date which strengthens the point that the parent company OCCJ supplied goods to the assessee company at low/reasonable prices when it was in great need to retain its existing customers and avoid the contractual repercussions which otherwise would have been faced by OCIPL had it not complied with the delivery schedule committed to its customers.
Referring to the decision of the Mumbai Bench of the Tribunal in the case of DCIT Vs. Isagro (Asia) Agrochemicals (P) Ltd. [2013] 31 taxmann.com 388 (Mum.) he submitted that the Tribunal in the said decision held that that the CUP cannot be rejected simply because of difference in dates of transactions with AE's & Non AE's.
Referring to the decision of the Ahmedabad Bench of the Tribunal in the case of Sabic Innovative Plastic India (P) Ltd. Vs. DCIT [2013] 35 taxmann.com 177 (Ahmedabad - Trib.), he submitted that the Tribunal in the said decision has held that: a) Where CIT(A)'s order upheld internal CUP but deals with margins instead of prices, it is an incorrect application of internal CUP and matter restored to CIT(A)'s file for fresh adjudication. b) Any application of any CUP (Comparable Uncontrolled Price) method involves dealing with prices of a product not the profit margin earned thereon. c) Even in the case of 'internal CUP', the arm's length price to be adopted is the price, subject to admissible adjustments, at which the similar transactions are carried out between the assessee and an independent enterprise.
He submitted that internal CUP has nothing to do with the margins earned by the same enterprises from other transactions, as is the case before the Tribunal. He submitted that the ld. CIT(A)'s reliance on the decision of a coordinate bench of this Tribunal, in the case of Bayer Material Science Pvt. Ltd v. Addl. Commissioner of Income Tax(134 ITD 582), is also no longer sustainable in law. He accordingly submitted that the order of the CIT(A) be set aside and the addition made by the A.O.
The ld. DR, on the other hand, heavily relied on the order of the CIT(A).
We have considered the rival arguments made by both the sides and perused the material available on record. We find the Assessing Officer in the instant case has made addition of Rs.19,26,657/- by adjusting the price of purchase of raw GCLE from 60 US$ to 55.67 US $. We find the ld. CIT(A) upheld the action of the Assessing Officer the reasons for which have already been reproduced in the preceding paragraphs. It is the submission of the ld. counsel that the assessee has used direct evidence i.e., the transactions entered into by the AE with unrelated parties for identical goods according to which OCCJ sold raw GCLE at an average CIF rate of US $ 60 per Kg., to assessee enterprise whereas similar goods were sold to unrelated parties at US $ 66.58 per Kg. and, therefore, the internal Comparable Uncontrolled Price (CUP) method used by the assessee for benchmarking the transactions pertaining to sale of raw GCLE is correct. It is also his submission that the TPO has taken Sales Prices / Average Sales Prices of Finished GCLE near the date of purchase of Raw GCLE which indirectly results in comparison of margins whereas CUP Method is all about comparing prices of identical goods. We find force in the above argument of the ld. counsel for the assessee. We find, the assessee, during the course of TP assessment proceedings had filed the copy of the confirmation from Otsuka Chemical Company, Japan, which has been taken as the tested party stating that goods sold by OCCJ to OCIPL and other third parties in India are identical in nature. The ld. counsel for the assessee submitted that this was accepted by the TPO at the time of transfer pricing proceedings and no doubts were raised by the TPO in this regard. The ld. DR could not controvert the above submission of the ld. counsel for the assessee.
We also find merit in the submission of the ld. counsel that the TPO has taken Sales Prices / Average Sales Prices of Finished GCLE near the date of purchase of raw GCLE which indirectly results in comparison of margins whereas CUP Method is all about comparing prices of identical goods. We also find merit in the argument of the ld. counsel that the TPO has incorrectly assumed that the price of finished GCLE and raw GCLE will move in same proportion. In our opinion, the price of GCLE will be governed not only because of movement in price of raw material but it will also depend on cost of other direct inputs like labour, power etc., and assuming it to be linked only to movement of price of raw material was incorrect. We further find merit in the argument of the ld. counsel of the assessee that it was able to earn profit during the year under consideration only because of the fact that the AE purchased GCLE 10 from the assessee at much higher prices when compared to sale of identical goods to non-related parties. The submission of the ld. counsel for the assessee that because of fire occurred at the plant of the company at Kotputali, Rajsthan on 29th June 2009 and to fulfill the pending orders and to retain the existing customers, the company had to import raw GCLE from its parent company in Japan who, in turn, supplied Raw GCLE at low / reasonable prices also finds merit especially when this is the only purchase that has been made by the assessee from AE till date. Therefore, we find merit in the argument of the ld. counsel for the assessee that it is beyond doubt that the assessee has never tried to pass on profits to its parent AE and, on the contrary, it had benefitted by making sales of Rs.27.84 crores to parent company at higher rates. Further, in our opinion, the internal CUP has nothing to do with the margin earned by the same enterprises from other transactions. The various decisions relied on by the ld. counsel for the assessee also supports its case. In this view of the matter, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition. The grounds raised by the assessee are accordingly allowed.