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Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI S. S. GODARA, JM &DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr. A. L. Saini: The captioned two appeals filed by the Revenue, pertaining to Assessment Years2011-12&2012-13, are directed against the orders passed by the Ld. Commissioner of Income Tax (Appeals)- 22, Kolkata,which in turn arise out of an assessment order passed by the Assessing Officer u/s 143(3) read with section 144C, which incorporates the transfer pricing adjustment made by Transfer Pricing Officer in his order under section 92CA(3)of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
Since these two appeals filed by the Revenue pertain to same assessee, identical issues are involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
First we take Revenue`s appeal in Assessment Year 2011- 12. The grievances raised by the Revenue are as follows:
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 “1. "Whether on the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the upward adjustment, the addition of Rs.48,94,738/- without appreciating the fact that the assessee had entered into international transaction with its associated enterprises in which Arm’s Length Price is applicable. 2. “That the appellant craves for leave to add, delete, amend or modify any ground before or at the time of appellate proceedings.”
The facts of the case which can be stated quite shortly are as follows: M/s Emami Limited is in FMCG Industry, manufactures branded products such as Boroplus, Navaratna, Fair & Handsome, Zandu Balm, KesriJivan etc. It also manufactures specific products saleable in foreign countries such as Ayucare, Emita etc. These products sold within India have a higher market awareness than that in other countries. Thus, exports are priced comparatively below at prices of similar products in those countries. Also some product range varies country to country, so it is difficult to compare prices amongst them. Also if similar products are sold to different countries, variance in prices occurs due to market condition, product maturity, awareness and price competition. While commodities such as iron ore, copper and food grains etc, where prices are controlled through exchanges such as London Commodity Exchange etc, prices of these FMCG products are free from control.
During the year under consideration, the assessee has sold goods to its associated enterprises(AE)and also given loan, the details of these transactionsare given as under:
Name of AE Nature of Amount involved in ALP determined by transaction (Rs.) assessee Emami UK Ltd Sale of finished 95.64 lacs 95.64 lacs goods Emami International Do 2715.04. lacs 2715.04 lacs FZE Ltd Emami Bangladesh Do 781.44 lacs 995.86 lacs Ltd Emamin Receipt of interest 90.28 lacs 90.28 lacs International FZE The report in Form 3CEB was filed by the assessee along with its return of income for Assessment Year 2011-12. The Assessing Officer made a reference to the TPO u/s 92CA(1), for determination of arm’s length price in respect of international transactions entered by the assessee with its associated enterprises (AEs).
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 5. The Ld. Transfer Pricing Officer (TPO) after carrying out the detail analysis of the documentation and replies filed by the assessee noted that during the year under consideration the assessee has disclosed receipt of interest of Rs.90,28,352/- from loan given to Emami International FZE Ltd. The total loan amount as per Form No.3CEB was USD 45 million which when converted to average conversion rate for the F.Y 2010-11 comes to Rs.21.60 crores approximately. Interest on the loan was charged @8% p.a and it was stated that the loan was given in foreign currency and the interest cost of the assessee for the unsecured loan in US dollars was around 5% p.a. Accordingly, the assessee has computed the rate of interest 8% p.a charged by it for loan paid to its subsidiary is at Arm’s Length.
The ld TPO noted that the following factors should governed determination of ALP for interest of loan:
(i). What would be the probable cost of loan, if Emami International FZE Ltd. proceeded to procure the loan from the financial market without Emami Ltd. as guarantor of such loan.
(ii).The cost of funds of Emami Ltd which includes the cost of debts and the opportunity costs of the fund that was given as loan.
The Ld. TPO noted that the assessee did not provide any information regarding probable interest chargeable to loan taken by Emami International FZE independently from, the foreign banks for the financial institutions. The benchmark adopted was the interest cost of the foreign currency loan taken by Emami Ltd, however the pricing of such loan was based purely on the basis of the financial parameters of Emami Ltd, and financial parameters of Emami Ltd cannot be equated with financial parameters of Emami International FZE. While making comparison, the assessee had failed to take into consideration the financials of the Emami FZE Ltd. and eligibility for loan. It would be proper if the assessee made an effort to compare the interest charged by Emami, with interest chargeable on a loan of similar duration advanced by any banking company to a company having financial parameter of Emami International FZE. However, no such exercise has been undertaken by the assessee. That the benchmarking of the assessee cannot be accepted as the same failed to consider the financials of the Exami FZE and also failed to provide any information regarding possible rate of interest to be charge on M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 loan advanced to it by any banking company on the basis of the financials of Emami International FZE, independent of its holding company.
The ld. TPO further noted that an international bank would in principle, prices its loan on the basis of its own cost of unsecured fund and appropriate return on the risk taken by it while lending to any specific borrower. This involves measurement of risk undertaken while lending money to a borrower. The perceived risk is higher when the term of loan is longer, since it is always difficult to predict the business environment, economic conditions, market conditions, political environment of financial position of the borrower in the long term.
During the TPO proceedings, the assessee submitted a letter dated 23/01/2015, along with an offer letter from Citibank dated 19/01/2015, offering loan to Emami International FZE. The letter was submitted for the purpose of benchmarking the interest charged by the assessee. However, Ld. TPO was of the view that the benchmarking should not be acceptable, as the financial condition of Emami International FZE as on 19/01/2015 differs substantially from the financial condition in the F.Y 2010-11. The offer letter however mentioned that the interest chargeable on the proposed loan at LIBOR plus 600 bps. The assessee was asked to explain why the suitable risk premium may not be added with its cost of funds for benchmarking the loan and for determination of ALP of the loan. The assessee in its submissions reiterated that LIBOR should be used for benchmarking. Theld TPO, based on the reason already stated, rejected the contention of the assessee and held that regarding pricing of loan, the practice of the lending institutions are to add credit spread on the cost of funds. In this instant case, the assessee provided its cost of funds at 5%. Accordingly, on the basis of above facts of the case, the ld. TPO determined Arm’s Length of interest at 5% (assessee’s cost of ECB loan) plus 600 bps (as per information available regarding pricing of loan by banks),that is 11% p.a. Accordingly the ld. TPO computed the ALP of interest chargeable as follows:
Amount of loan (USD) Period Interest @11% p.a. (USD) 675,000 365 days 74,250 225,000 325 days 22,038 1500,000 323 days 1,46,014 100,000 247 days 7,444 575,000 100 days 17.329 600,000 98 days 17,720 850,000 80 days 20,493 650,000 21 days 4,114 Page | 4
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 Total 3,09,402 Arm’s length price of INR value @ (Rs.45/USD x Rs.1,39,23,090/- interest 3,09,402 ) Less: Interest offered Rs.90,28,352/- Upward adjustment Rs.48,94,738/-
Aggrieved by the order of the TPO/Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the transfer pricing adjustment of Rs.48,94,738/-.The ld CIT(A) observed that the cost of 1 Year LIBOR during the period being below 1.2%, and the loan being advanced at much higher rate of 8%, it does not warrant any further adjustments. Further, there is no dispute that the cost of funds in the hands of appellant is 5% as pointed out by the Ld. TPO and also accepted by the appellant. Therefore, even if accepting the approach of Ld. TPO / AO and we apply suitable risk premium, the same cannot be 300bps. The ld. CIT(A) referring to the credit rating of the assessee company, which was BBB/BBB+, observed that even if the credit rating of the wholly owned subsidiary is considered two notches lower that the credit rating of the assessee company, in that scenario also the difference in US bond yield i.e. the risk premium works out to a figure which is much lower than 300 bps.
Further, while passing Order u/s 92CA(3) for the preceding assessment years i.e. A.Y. 2009-10, A.Y. 2010-11, as also for the two assessment years succeeding the subject A.Y, namely A.Y. 2012-13 & A.Y. 2013-14 after due consideration, the Ld. TPO himself has accepted the same rate of notional interest offered by the assessee-company without any further adjustments and therefore ld CIT(A) deleted ALP adjustment to the tune of Rs. 48,94,738/-.
9. Aggrieved by the order of the ld. CTI(A), the Revenue is in appeal before us.The ld. DR for the Revenue has primarily reiterated the stand taken by theld TPO/ Assessing Officer which we have already noted in our earlier para and is not being repeated for the sake ofbrevity.
On the other hand, the ld. Counsel for the assessee has submitted that during the year under consideration the assessee had grated loan to its AE namely, Emami International FZE of USD 45 Million and charged interest @8% p.a. The assessee benchmarked the aforesaid international transaction with the AE involving lending of Page | 5
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 monies by applying the CUP method. Before the TPO, the assessee submitted that the foreign currency USD denominated loan was benchmarked at the prevailing USD LIBOR rate, which was 1.2% during the relevant year. The assessee further justified the ALP of the interest of 8% charged on the loan given to the associated enterprise (AE) with reference to the quote received from an unrelated third party i.e. CITI Bank wherein they had expressed their willingness to advance loans to the AE, Emami FZE at LIBOR + 600bps, viz. 7.20%.The ld. TPO was however disregarding the method applied by the assessee computed the ALP of the loan at 11% viz., 5% being the cost of funds in the hands of appellant plus a markup of 600 bps.
The ld Counsel pointed out that it is now a well settled principle that LIBOR / EURIBOR is to be accepted as the most suitable bench mark for judging Arms' length price in case for foreign currency loan and for that he relied on the following judicial pronouncements:
Cotton Naturals (I) Pvt Ltd [TS-117-HC-2015(DEL)-TP] Tata Autocomp Systems Ltd. [TS-45-HC-2015[BOM)-TP) Bhansali& Co. (TS-461-ITAT-2014(Mum)-TP) M/s Four Soft Ltd vs DCIT (ITA No.1495/HYD/2010) DCIT vs Tech Mahindra Ltd (ITA No. 1176/Mum/2010) Mahindra & Mahindra Limited vs DCIT (ITA No.7999 /Mum/2011)
In view of the above decisions and having regard to the facts of the present case, it shall be appreciated that the interest rate of 8% charged by the assessee far exceeded the LIBOR rate of 1.2%.
11. The ld Counsel pointed out that the AE had received an offer from an unrelated third parry, i.e, Citibank which was willing to advance similar loan facility to the AE at LIB0R + 600 bps, which worked out to 7.20%, therefore, the external quote received from a Banking Institution by the AE is a fair and reasonable parameter for determining the arm's length price. In the circumstances since the interest rate proposed to be charged by an unrelated third party is comparatively lower than the interest rate charged by the assessee from the AE, the transaction was at arm's length and no transfer pricing adjustment was warranted.
12.The ld Counsel further pointed out that in the transfer pricing assessments of the assessee company, framed u/s 92CA(3) for preceding assessment years i.e. A.Y. 2009-10, Page | 6
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 A.Y. 2010-11 & following assessment years i.e. A.Y. 2012-13 & A.Y. 2013-14, the CUP benchmarking analysis conducted by the assessee on identical fact situation and 8% interest rate charged by Emami from its AE has been accepted by the Revenue to be at arm's length and no transfer pricing adjustment whatsoever in this regard has been made.
We have given a careful consideration to the rival submissions and perused the materials available on record, we note that assessee had granted loan to its AE namely, Emami International FZE of USD 45 million and charged interest @8% p.a. The ld. TPO while passing the order u/s 92CA(3) has computed ALP of such loan at 11% p.a. ( 5% + 600bps) and made an upward adjustment of Rs.48,94,738/-. The assessee adopted comparable uncontrolled price(CUP), as the most appropriate method for bench marking its interest charged to the associate enterprise (AE). The assessee’s cost of procurement of funds was 5% whereas it has already charged 8% p.a.( that is, cost of fund 5% + 3% risk premium) by applying risk premium of 3%.We note that with regard to the methodology followed by the ld. TPO to benchmark the loan at 11%, we accept the working of cost of funds at 5% but the risk premium of 600 bps taken by the TPO is excessive. On the facts of the assessee’s case, the suitable risk premium could not exceed 3%, by referring to the credit rating of the assessee company, which was BBB/BBB+, and even if the credit rating of the wholly owned subsidiary is considered two notches lower than the credit rating of the assessee company, in that scenario also the difference in US bond yield i.e. the risk premium works out to a figure which is much lower than 300 bps. In view of the aforesaid findings, the Ld. CIT(A) held that even following the methodology proposed by the Ld. TPO viz., cost of funds plus risk premium; the ALP of the loan would work out to 8%.We note that the ld. TPO/Assessing Officer has grossly erred in applying notional interest @11% (i.e. cost of procurement of funds by assessee @5% + 600 basis points) whereas the cost of procurement of similar funds from third part was LIBOR + 600 basis points, which comes at 7.20%.(that is, prevailing USD LIBOR rate, which was 1.2% plus 600bps).
Now, we deal with submissions of ld Counsel based on the consistency principle. It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular's view or proposition in the past, it is not open for the Revenue to take a entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the Assessing Officer on the basis of change in facts.For that we rely on the order
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 of the Hon’ble Supreme Court in RadhasoamiSatsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows:
We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee – we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken.
We are of the view that the above cited precedents on principle of consistency are squarely applicable to the assessee under consideration. In the facts of the assessee's case, the Ld. TPO has not pointed out the change in facts or any provision of law which led him to take a view contrary to the view taken by his predecessors. Admittedly, the loan was advanced to the AE in earlier years which continued in the relevant FY 2010-11 and the subsequent years as well. In the circumstances when the Revenue has accepted the interest of 8% charged on the same loan to be at arm's length in the earlier as well as succeeding transfer pricing assessments, there was no cogent reason to adopt a contrary view in the relevant year. That is, the Department cannot take a contrary view and disturb the settled facts unless there is a change in law or facts.
We note that if the loan is given in foreign currency then LIBOR rate, should be considered to benchmark the loan provided by the Indian enterprise to its associated enterprise. For that we rely on the judgment of Coordinate Bench Income Tax Appellate Tribunal Bench 'A' Chennai, AY 2006-07 in M/s Siva Industries & Holdings Ltd. v The Assistant Commissioner of Income Tax, 46 SOT 112 (CHENNAI), which has provided that the selection of LIBOR over the assessee's cost of funds should be considered to benchmark the loan provided by the Indian enterprise to its associated enterprise. The relevant extracts of the Ruling is as follows:
"Once the transaction between the assessee and the associated enterprise is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability Page | 8
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that if LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. In the circumstances, the addition as made by the Assessing Officer on this count is deleted. "
Based on the above facts and circumstances and principle of consistency as discussed above, we note that the ld. TPO/Assessing Officer has grossly erred in applying notional interest @11% (i.e. cost of procurement of funds by assessee @5% + 600 basis points) whereas the cost of procurement of similar funds from third part was LIBOR + 600 basis points, which comes at 7.20%. ( that is, prevailing USD LIBOR rate, which was 1.2% plus 600bps). Therefore, we are of the view that the interest rate of 8% charged by the assessee from its AE should be at arm's length. That being so, we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby confirmed and grounds of appeal raised by the Revenue is dismissed.
16. In the result, the ground raised by the Revenue in for A.Y. 2011-12, is dismissed.
Now, we shall take Revenue`s Appeal in for assessment year 2012-13,wherein the Revenue has raised the following grievances:
1.Whether on facts and in the circumstances of the case, the ld CIT(A) has erred in deleting the upward adjustment, the addition of Rs.3,51,30,741/-, without appreciating the fact that the assessee had entered into international transaction with its associated enterprises in which Arm`s Length Price is applicable. 2. That the appellant craves for leave to add, delete, amend or modify any ground before or at the time of the appellate proceedings
The facts of the case may be briefly stated.The Assessee Company is primarily engaged in the business of manufacturing and dealing in medicinal, toiletries & cosmetics. During the previous year, relevant to this assessment year 2012-13, the assessee has, inter alia, entered into international transactions pertaining to providing loans to its AEs and sale of various products to associated enterprises (AEs). An order u/s 92CA(3) was passed by the Transfer Pricing Officer (TPO) on 29.01.2016, making adjustment of Rs.8,84,55,897/-, later, which was rectified vide order dated 02.03.2016 to Page | 9
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 Rs.3,51,30,741/-. The same has been confirmed by Assessing Officer while passing the order u/s 143(3) dated 17.03.2016. The assessee had applied TNMM method to benchmark its transactions of sale of finished goods to its associate enterprises (AE). However, the ld. TPO rejected the said method and computed Arm’s Length Price using comparable uncontrolled price (CUP) method. The assessee-company had sold goods to its wholly owned subsidiaries in Bangladesh, Dubai and the United Kingdom and applied TNMM method to benchmark its transaction of sale of Finished Goods to its Associated Enterprise. The assessee also exports goods directly in other countries like Sri Lanka, Nepal, Africa, etc. The Ld. Transfer Pricing Officer,during the course of assessment under section 92C, substituted this with CUP method to benchmark the transaction. As a result, adjustment of Rs.3,51,30,741/- were made by the Ld. TPO.
In the TP Study Report the assessee had benchmarked the sale transactions with AEs applying TNMM Method. From the annual accounts and the details available on record, it was gathered that the assessee had also sold similar products to unrelated and uncontrolled parties as well. During the TPO proceedings, the assessee was therefore asked to furnish the comparative prices and sales realization of different products sold to AEs as well as non-AEs. In response, Vide letter dated 15.06.2015 & 15.11.2015, the assessee furnished the comparative list giving the details as requisitioned. From the details made available before the ld TPO, it was observed by him that the assessee had sold similar and functionally comparable products to AEs as well as non-AEs.In the course of TPO proceedings u/s 92CA(3), the assessee was asked to justify the benchmark for applying TNMM Method. It was noted by ld TPO that the CUP Method was rejected stating that data for similar products sold abroad to non-AEs was not available. However, from the details gathered during the course of transfer pricing assessment, it was noted that the company has sold exactly similar products in the export segment to various non-AEs abroad. The ld TPO also furnished the assessee, a statement of the comparative data of the prices at which the similar products were sold to AEs as well the non-AEs.
In response, the assessee submitted before the ld TPO that CUP method for benchmarking international transactions, does not applicable to the assessee. Therefore, the ld TPO, was grossly erred in applying CUP method without assigning any reasons for rejecting the TNMM as the most appropriate method (MAM). It has been further contended that the Ld. TPO was not fair in applying CUP method by benchmarking sales of AE with non-AE although the goods sold to AE and non-AE are not comparable. The Page | 10
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 assessee also submitted before the Ld. TPO that necessary adjustments on account of sales promotions, advertisements, administration, selling and distribution overheads borne by the AE while applying CUP method, has not been done, and the ldTPO erred in comparing different sized products by proportionately adjusting the prices after allowing quantitative pricing adjustment of 3% on account of difference in prices of larger sizes of products. The Ld. TPO allowed quantitative pricing adjustment of only 3% on account of difference in prices of larger sizes of products without any basis whereas actual difference of assessee's products was much higher.
21.However, the ld TPO rejected the contention of the assessee and held as follows:
“7. The contentions raised by the assessee are being considered under the overall perspective arm's length pricing of an international transaction pertaining to sales to AEs. As per section 92C(1) of the Act, the arm's length price of an international transaction has to be determined by any of the following methods, being the most appropriate method: (a) comparable uncontrolled price method (hereafter CUP method); (b) resale price method (hereafter RPM); (c) cost plus method (hereafter CPM); (d) profit split method (hereafter PSM); (e) transactional net margin method (hereafter TNMM); and (t) any other method prescribed by the board (yet to be prescribed). Further, section 92C(2) mentions that the most appropriate method shall be applied in the manner as may be prescribed. The prescription, accordingly, has been provided in Rule 10B of IT Rules, 1962. 8.The most appropriate method is a method, which in the facts and the circumstances of a particular international transaction is best suited to provide a reliable measure of an arm's length price. The TP Rules have prescribed the following factors to determine the most appropriate method: The class of the AEs entering into the transaction and the functions performed by them, including the assets employed and risks assumed; The availability and reliability of the data necessary for application of a particular method; Comparability between the international transaction and the uncontrolled transaction; The extent to which reliable adjustments can be made to take into account the differences between the international transactions and the uncontrolled transactions; The nature, extent and reliability of the assumptions required to be made in the application of a particular method, etc.
CUP has been defined as a price charged by an entity to another independent entity in an uncontrolled transaction, In this method, the price charged or paid in a comparable uncontrolled transaction is identified and adjusted to account for differences between the Page | 11 M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 international transaction and the uncontrolled transaction. This adjusted price is taken to be the arm's length price in relation to the international transaction between the AEs.
10. The OECD Guidelines define CUP Methods as: "a transfer pricing method that compares the price for property or services transferred in controlled transaction to the price charged for property or services transferred in comparable uncontrolled transactions in comparable circumstances.”
Rule 10B (1) (a) of the Rules describe CUP method as follows: "(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;" 11.1 Sub rule (2) of Rule 10B lays down the guidelines to judge the comparability of international transaction with AEs with the uncontrolled transactions with unrelated enterprises, which is as follow: For the purpose of sub rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a). The specific characteristics of the property transferred or services provided in either transaction; (b). The functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; ( c). The contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d). Conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
In view of the above definition of CUP and rules specified for application of CUP, and also the details available on record, it is observed that internal CUP is the most suitable and appropriate method in the present case, In the present case the assessee is engaged in the business of manufacturing & marketing of cosmetics & toiletries. It manufactures & markets hair oils, face cream, face wash, balm etc, both in India and outside India. In the foreign market, the assessee sells its products under established brand names such as "Zandu", "Emami", "Emita", "Fair & Handsome", "Himani" etc, to Page | 12
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 both its Associated Enterprises as well as other unrelated & uncontrolled enterprises. On applying the Rules specified in Rule 10B for application of CUP method, it is observed that the internal CUP Method is most appropriate and suitable in the present case. The applicability of CUP method to the present case is elaborated below. 12.1 In order to apply CUP, it is first relevant to ascertain as to whether both AE & Non- AE belongs to the same class/category. In the present case, it is observed that the sales are made abroad both to AEs as well as non-AEs. Both AEs as well as non-AEs are distributors of the products manufactured and sold by the assessee. Neither the AEs nor the non-AEs are the ultimate consumers. The products purchased by the AEs & non-AEs are sold further to retailers and /or third party customers. In the circumstances the class of AEs as well as non-AEs are comparable, 12.2 Next one has to ascertain as to whether the Functions, Assets & Risks Performed with regard to transactions with AE are comparable with the transactions with non-AEs. In the present case, the assessee has sold its various to AEs as well as non-AEs. All the production & manufacturing functions are performed by the assessee. The sales and marketing functions are undertaken by the AEs as well as the non-AEs in their respective countries. 12.2.1 All the manufacturing and productive assets used in respect of the finished goods sold to AEs & non-AEs were employed by assessee. The products sold to AEs & non-AEs are under the same & common trademark, brand name. 12.2.2 As regards the Risk analysis, the market Risk in respect of assessment the demand conditions and market positioning of the products purchased from the assessee are borne both by AEs as well as non-AEs. The assessee bears the foreign exchange risk and product Liability Risk in either case. Accordingly, it shall be observed that the functions performed, Assets Employed & Risks Undertaken in the sales made to AEs are comparable with the sales made to non-AEs."
Based on the above reasoning the total upward adjustment of the total income of the assessee was computed at Rs.8,84,55,897/-, which was rectified, later on, vide order dated 02.03.2016 to Rs.3,51,30,741/-.
Aggrieved by the stand of the Assessing Officer, assessee carried the matter in appeal before the CIT(A) with success. The ld CIT(A) noted that the main justification advanced by Ld. TPO while applying CUP method, was that exact comparability of products is not required and CUP method can be applied even if the products are similar and have more or less same composition, and sales are made to distributors in foreign countries to both AE's as well as non AE's, which are further sold to ultimate consumers, therefore, the class of AE's as well as Non -AE's are comparable. However, the ld CIT(A) did not agree with this contention of the Ld. TPO that CUP method is the most appropriate method.
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 The ld CIT(A) explained that in the assessee`s case under consideration the CUP method is not applicable due to following reasons as summarized under:
(i) The CUP method should not be applied on products that are not being sold in different countries/continents where economy, profile of consumers, preference amongst consumers, purchasing power, etc. are completely different. In the instant case, the appellant had sold its products to independent third parties in different countries like Kenya, Congo, Angola, Uganda, Sri Lanka, USA, etc. The prices at which the products were sold to third party distributors in these countries are being compared by the Ld. TPO with those sold to appellant's wholly owned subsidiaries in Bangladesh, Dubai and UK without any adjustments to the difference in economies of these countries. It is a settled position that for application of the CUP method, highest degree of comparability is required. The CUP cannot be applied without adjustments on account of differences in market and economic conditions of countries in which products have been sold to independent third parties. In case of Internet India Private Limited (2010) 39 SOT 93, the Hon'ble Mumbai Tribunal has observed that standard of comparable data while applying CUP method is more stringent and need to be of similar economic relevant transactions is of paramount importance. (ii) While applying CUP method by the Ld.TPO, it was seen that in few instances [12 products out of 56, as picked up for comparison by the Ld.s TPO] have been sold at a price which is higher than those sold to Non-AE. These products were later eliminated by the Ld. TPO. Further, as per the pricing of the Ld. TPO of applying proportionate pricing, ALP of some products exceeds even the value at which they were finally sold by AE's to independent distributors. For instance, Himani Fast Relief F & I 1000 ml ALP computed by TPO is USD 38 whereas the price at which it was sold to independent third party is USD 29.51. Therefore, the correctness and credibility of applying the CUP Method remains quite uncertain. (iii) In some instances, where sizes of the products were not same, the Ld. TPO has applied proportionate pricing and applied 3%. This action of the Ld. TPO also does not find any precedence by way of approval by Hon'ble Courts, nor is it mentioned in the OECG Guidelines.
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 (iv) While applying CUP method, necessary economic adjustments be made to ALP on account of functional differences in sales promotion activities, administrative expenditure, etc. incurred by AE has not been dealt with by the Ld. TPO.
Based on the above reasons, the ld CIT(A) held that CUP method is not applicable to the assessee and therefore deleted the upward transfer pricing adjustment of Rs. 3,51,30,741/- made by ld TPO.
Aggrieved by the order of Ld CIT(A), the Revenue is in appeal before us.
The Ld. DR for the Revenue has primarily reiterated the stand taken by the ld.TPO/ Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
On the other hand, the Learned counsel for the assessee begins by pointing out that the assessee has undertaken a sound comparability analysis in respect of the aforesaid transactions in view of the requirements laid down under sections 92A to 92F of the Act and rules 10A to 10E of the Rules in order to compute its income having regard to ALP and has also maintained necessary information and documents to support the same. The assessee humbly submits that maintenance of TP documentation and determination of arm's length margin for the aforesaid transactions had been done in good faith, without any intention of avoidance of tax. Further, Ld. TPO has not demonstrated or brought on record any evidence to infer that the subject transactions have not been undertaken on arm's length terms or with mala fide intent to avoid tax. Out of more than 250 products that are sold to AE's and Non AE's, the TPO shortlisted only 56 products which were deemed to be similar in terms of function, which were sold to AE and Non AE. Out of 56 products compared, 12 products were sold at higher price to non -AE and thereby ignored. In few instances, ALP as computed by TPO exceeded the price at which the products were finally sold to independent third party distributors. In most of the case, the compared products were of dissimilar sizes and hence not comparable, However, FOB rate was compared to compute ALP even in those cases where the sizes were different and ALP was calculated proportionately to compare prices at which products were sold to AE and Non AE. The same is not acceptable in FMCG industry as prices are M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 never done proportionately in FMCG sector. This way, the ld Counsel for the assessee, defended the order passed by the ld CIT(A).
We have heard learned arguments on both sides, perused the material available on record, and before we proceed to record our view and opinion on the issue under consideration, it is worthwhile to quota here the relevant provisions of Rule 10B of Income Tax Rules. Clause (a) of sub-rule (1) of Rule 10B defines the comparable uncontrolled price method ( CUP-Method) as follows:
Rule 10B. Determination of arm’s length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a) comparable uncontrolled price method, by which,— (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm’s length price in respect of the property transferred or services provided in the international transaction; We note that ld TPO/AO in the assessee`s case under consideration has ignored the conditions prescribed in sub-clause (a) (ii) of sub rule (1), which states that comparable uncontrolled price method, by which, such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market. In order to make applicable, the Comparable uncontrolled price method (CUP-method), these conditionsare essential to fulfill.
We note that in assessee`s case under consideration, no adjustments have been made by ld TPO on account of differences in market and economic conditions of countries in which products have been sold to independent third parties. The ld TPO has failed to take into account the profile of consumers, preference amongst consumers, purchasing Page | 16
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 power, etc. In the assessee`s case under consideration, the assessee had sold its products to independent third parties in different countries like Kenya, Congo, Angola, Uganda, Sri Lanka, USA, etc. The prices at which the products were sold to third party distributors in these countries are being compared by the Ld. TPO with those sold to assessee's wholly owned subsidiaries in Bangladesh, Dubai and UK without any adjustments to the difference in economies of these countries. It is a settled position that for application of the CUP method, highest degree of comparability is required. The CUP cannot be applied without adjustments on account of differences in market and economic conditions of countries in which products have been sold to independent third parties. For that we rely on the judgment of the Coordinate Bench Mumbai in case of Internet India Private Limited (2010) 39 SOT 93, wherein it was held as follows:
We heard both parties. From the submissions made by the assessee the economic and market conditions of Thailand and Vietnam are totally different. The ld. CIT (A) has held that both the countries are located in Far East Asia and have similar demographical constitution.......... We find that the TPO and the CIT(A) have assumed similarity of markets and economic conditions and have made adjustments only for the volume discount, credit offered and a small adjustment of credit risk. They have completely ignored the disparate economic and market conditions of Thailand and Vietnam and have made no adjustment for the same ...
In the assessee`s case under consideration, the ld TPO/AO has ignored the disparate economic and market conditions of Kenya, Congo, Angola, Uganda, Sri Lanka, USA, and have made no adjustment for the same. The Prices of small packaged products per unit are usually higher than per unit price of large size products in order to promote higher sales and achieve economies of scale and ld AO/TPO has not made adjustment on that account. These factors could materially affect the price in the open market and the ld TPO/AO has ignored them. It was noted by the ld CIT(A) that in few instances [12 products out of 56, as picked up for comparison by the Ld.s TPO] have been sold at a price which is higher than those sold to Non-AE. These products were later eliminated by the Ld. TPO without assigning any reason.
We note that ld TPO/AO has failed to do adjustment on account of market preference and customer preference. In addition to this, the market strategy to sale the product has not been taken into account, for instance, the ld TPO, vide his order para No.12.3 serial No.1 of the table, he compared “Emita Skin Care Body lotion-All purpose:444:ml” with “Emita Skin Care Body Lotion- Rose &Glycerine:100ml”. We note that there are huge Page | 17
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 difference in terms of volume, that is, “444ml Vis-à-Vis100ml”. There is difference in terms of quality that is, “All Purpose Vis-à-Vis “Rose & Glycerine”. There could be difference on account of customer preference, normally the customer prefers to buy the product, where he gets 1+1, that is, where he gets one free unit, on purchase of one unit. There is market preference also, the market for the same product in USA is different than in Bagaladesh. We note that ld TPO/AO failed to do necessary adjustment on account of customer preference, market preference and market strategy to sale the product in different geographical area, therefore, the application of CUP method in the assessee`s case under consideration fails.
We note that the assessee had sold over 250 different products to AEs. The Ld. TPO however selectively shortlisted only 56 products to conduct benchmarking analysis under CUP Method. Even in respect of these 56 products, the Ld. TPO, later on, noted that 12 products were showing that the prices at which assessee had sold products to its AE's were higher. Accordingly, the Ld. TPO made adjustment with reference to prices of 44 products. The Ld. TPO however, conveniently missed out to benchmark the remaining 194 (250 - 56) products sold to AEs & non-AEs. We note that Compared Products by Ld TPO are not same. Even though both the compared products appear to be similar in terms of basic function i.e. cream, lotion, powder, etc but their labelling, packaging, ingredients are different. It is by now well settled principle that CUP requires high degree of comparability and where the product mix, material, composition etc. are not identical, application of CUP fails.In most of the instances, where compared products were of dissimilar sizes, Ld. TPO calculated FOB Rate of goods sold to AE and Non-AE of different sizes based on proportionate price per unit. This methodology is devoid of any merit, as in FMCG sector the pricing of product, as per unit/quantity is never done proportionately. The rationale is that in FMCG sector packaging cost, transportation cost, handling cost, marketing cost can never be proportionate to the unit size of the product. Prices of small packaged products per unit are usually higher than per unit price of large size products in order to promote higher sales and achieve economies of scale. It should be noted that in some instances the Ld. TPO has made an ad hoc 3% revision on account of larger size difference. The arbitrary rate of 3% adopted by the Ld. TPO has no empirical basis or logic whatsoever but is a pure estimation based on Ld. TPO's conjectures & surmise.
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 28. We note that no cogent reasons given by the ld. TPO for rejecting the TP Study Memorandum and the selection of TNMM Method as the most appropriate method(MAM). The assessee has undertaken a sound comparability analysis in respect of the aforesaid transactions in view of the requirements laid down under sections 92A to 92F of the Act and rules 10A to 10E of the Rules,in order to compute its income having regard to ALP and has also maintained necessary information and documents to support the same. The TP documentation and determination of arm's length margin for the aforesaid transactions had been done as per the procedure laid down in the Act. We note that the assessee selected TNMM method, as the most appropriate method, in order to benchmark the transaction involving sale of goods in view of facts and circumstances of the case and availability of reliable data. We note that the assessee has been consistently exporting goods to its AEs located abroad. In all the earlier years, the transactions involved sale of goods were benchmarked under the TNMM Method, as evident from the TP study report for the earlier Assessment Years 2010-11 & 2011-12. In none of the past assessments, the Revenue has rejected the TP analysis and the transactions were accepted to be at arm’s length under the TNMM method, therefore it was imperative for the Ld. TPO to bring on record the change in facts or law and give cogent reasoning before departing from the settled position and rejecting the application of TNMN Method. It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular's view or proposition in the past, it is not open for the Revenue to take a entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the Assessing Officer on the basis of change in facts. For that we rely on the order of the Hon’ble Supreme Court in Radhasoami Satsang vs. CIT 193 ITR 321 (SC).
The cornerstone of Transfer Pricing principle is the comparability analysis of a controlled transaction with an uncontrolled transaction which is substratum of arriving at Arm’s length price. The controlled and uncontrolled transactions are comparable if none of the differences between the transactions materially affect the factor being examined in a given methodology, whether determination of prices or for profit margin and for such determination a reasonable accurate adjustment can be made to eliminate the material effects of any such differences. Rule 10B(2) of Income Tax Rules, provides the comparability of the transaction with uncontrolled transaction which has to be judged with reference to specific characteristics of the property transferred or services provided; FAR analysis; contractual terms; conditions prevailing in the markets, that is, economic conditions in which respective parties transact or operate including Page | 19
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 geographical locations, size etc. Thus, comparison of attributes of the transaction is carried which would affect conditions in Arm’s length dealing. Rule 10B (3) specifically provides as under:-
“An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences”.
This, Rule specifically recognizes that reasonably accurate adjustment should be made to eliminate the material effects of differences, if any. Sub-rule (2) lays down the factors for determining comparability whereas; sub-rule (3) lays down the standard of comparability. The standard comparability not necessarily entails complete identity between the two transactions but sufficient similarity. It can be held to be sufficient similar if the differences between them is not material so as to effect price or profit in the open market and if there is one such thing, then such a material difference needs to be eliminated through adjustments. The factors governing the price or profit in a transaction may depend upon business strategies, market conditions, competitions, market penetration schemes, geographical locations, climatic conditions, etc. Guidelines issued by OECD also recognized the business strategies adopted by the companies which have a bearing on profitability levels. Para 1.60 and 1.62 of OECD guidelines for the sake of ready reference are reproduced hereunder:
“Para 1.60 of the Guidelines states as under: “Business strategies also could include market penetrate schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. Furthermore, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs (e.g. due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market”.
Further, para 1.62 of the OECD Guidelines states as under:
“When evaluating a taxpayer’s claim that it was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of Page | 20
M/s. Emami Limited & 1066/Kol/2017 Assessment Years: 2011-12 & 2012-13 the parties to determine if it is consistent with the professed business strategy …. Another factor to consider is whether the nature of the relationship between the parties to the controlled transaction would be consistent with the taxpayer bearing the costs of the business strategy. For example, in arm’s length dealings a company acting solely as a sales agent with little or no responsibility for long- term market development would generally not bear the costs of a market penetration strategy ….”
Thus, business strategies, market penetration, increase or save its market share are relevant and material factors determining prices and profit. All these factors have to be taken into consideration while eliminating the material effects which warrants some kind of reasonable accurate adjustments. Therefore, after going through the facts of the assessee`s case under consideration, it seems to us that selective application of CUP Method by TPO is ad hoc, and without any cogent basis, hence the entire approach followed by the Ld. TPO in rejecting the TP study memorandum of assessee for application of TNMM method is unjustified. For the reasons set out above, we find no infirmity in the order passed by the ld CIT(A). That being so, we decline to interfere in the order of ld CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed.
In the result, the appeal filed by the Revenue ( in for A.Y.2012-13), is dismissed.
Order is pronounced in the open court on 15.06.2018.