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Income Tax Appellate Tribunal, DELHI BENCH “H” NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI PRASHANT MAHARISHI
ORDER
PER I.C. SUDHIR: JUDICIAL MEMBER The assessee has questioned order of the authorities below on the following grounds:
1. That on the facts and in the circumstances of the case and in law, the order passed by the learned Assessing Officer (“A.O.”) is bad in law and void ab-initio.
2. That on the facts and in the circumstances of the case and in law, the reference made by the learned A.O. suffers from jurisdictional error as the learned A.O. did not record any reasons in the draft assessment order based on which he reached the conclusion that it was “necessary or expedient” to refer the matter to the learned Transfer Pricing Officer (“TPO”) for computation of the arm’s 2 length price, as is required under section 92CA(1) of the Income- tax Act, 1961 (“Act”).
3. That on the facts and in the circumstances of the case and in law, the learned A.O. erred in making an addition of Rs.30,99,75,553 to the returned income of the Appellant by re-computing the arm’s length price of the international transactions under section 92 of the Act.
4. That on the facts and in the circumstances of the case and in law, the Ld. Assessing Officer/Ld.TPO/Ld.Dispute Resolution Panel (“DRP”) erred in rejecting Comparable Uncontrolled Price (CUP) method selected by the Appellant as the most appropriate method, under sec. 92C(1), wherein the appellant had relied on the data available in the Fertecon Report to determine the arm’s length price in relation to its international transactions.
5. That on the facts and in the circumstances of the case and in law, the Ld. A.O./Ld.TPO/Ld.DRP erred in disregarding the internal CUP details submitted by the appellant wherein the product characteristics, origination, and nature of the transaction is same/similar to the appellant thereby revealing the arm’s length price of its international transactions.
6. That on the facts and in the circumstances of the case and in law, the Ld. A.O./Ld.TPO/ Ld. DRP erred in rejecting the CUP as the most appropriate method, despite accepting the same during prior assessment year, without any change in facts and circumstances.
7. That on the facts and in the circumstances of the case and in law, the Ld. A.O./ Ld.TPO/ Ld. DRP erred in selecting and applying Transaction Net Margin Method (“TNMM”) as the most 3 appropriate method in a manner that is contrary to the provisions of the Act and Income Tax Rules, 1962 by: (a) Not appreciating the fact that the sale price for the commodity traded by the Appellant were subject to government control and regulations and hence any transfer pricing method targeting the net profitability would not be justified. (b)Selecting dissimilar companies as comparable, to the appellant and arbitrarily concluding that the all the companies had similar products and similar subsidy schemes as that of the appellant.
8. That on the facts and in the circumstances of the case and in law, the Ld. A.O./Ld. TPO/ Ld. DRP erred in denying the benefit of 5% margin allowed under the Proviso to Section 92C(2) of the Act by relying on an amendment applicable only from 1.04.2009 (and not applicable to the relevant assessment year 2006-07).
9. On the facts and circumstances of the case, the Ld. DRP has erred in not examining the validity of initiation of penalty proceedings under sec. 271(1)(c).
Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
The grounds raised involve mainly on three issues. Firstly, validity of addition of Rs.30,99,75,553 by recomputing the arm’s length price of the 4 international transactions under sec. 92 of the Income-tax Act, 1961. Secondly, validity of rejection of CUP method selected by the assessee and application of TNMM method by the authorities below and thirdly validity of denial of benefit of 5% margin by the authorities below.
The facts in brief are that the assessee incorporated on 01.06.2004 is engaged in the business of distribution of marketing of fertilizers in India. It is 100% subsidiary of GNS-II Corp. USA which is owned by the Mosaic Company, USA. During the year, the assessee has undertaken international transaction worth Rs.6,37,27,54,007 with its associated enterprises (AEs). Out of the total nine international transactions, the transactions pertaining to the “purchase of DAP” is under dispute. Remaining transactions have been accepted by the learned TPO to be at arm’s length. The assessee questioned the action of the learned TPO before the learned DRP that could not succeed on the issues raised in the above grounds. Hence, present appeal has been preferred.
In support of the grounds, the learned AR has furnished following submissions: “Mosaic India Private Limited (“the Appellant / MIPL”) was incorporated on June 1, 2004 and is engaged in the business of distribution and marketing of fertilizers in India. The Appellant operates as a 100% subsidiary of GNS II Corp USA which, in turn, is owned by The Mosaic Company, USA. (page 141 of the paper book)
The appeal is directed primarily against the addition made to the arm’s length price charged/paid by the Appellant, with respect to international transactions undertaken by it, during the year under consideration i.e. FY 2005-06. During FY 2005-06,the Appellant had undertaken the following international transactions with its Associated Enterprises (‘AEs’) (page 47-101 – Form 3CEB, and page 153- TP documentation of the paper book): Method used by Value of the Appellant for Description of S.No. International the determination PLI International Transactions Transactions of Arm's Length Price Comparable Purchase of DAP Uncontrolled 1 6,127,282,481 N.A. Fertilizer Price Method (CUP) Transactional Net Provision of Agency 58,236,593 Operating Profit 2 Margin Method Services Margin (TNMM) Provision of Support Cost Plus Method Gross Profit 3 1,248,307 Services (CPM) Margin N.A. N.A. 4 Corporate IT Recharge 2,165,378 N.A. N.A. 5 Dispatch Earnings 11,378,684 N.A. N.A. 6 Distribution Support 69,866,037 N.A. N.A. 7 Ocean Freight Savings 77,790,257 N.A. N.A. Reimbursement of 8 18,417,172 N.A. N.A. Expenses Interest on Extended 9 6,369,098 CUP N.A. Credit Period Total value of International 6,372,754,007 Transactions The Appellant had undertaken a transactional analysis and benchmarked the above transactions to test whether the same meet the arm’s length standard as required by Indian TP regulations. As per the benchmarking analysis conducted by the Appellant the above transactions were found to be at arm’s length (refer pages 161- 201 of the paper book which is a part of the TP document prepared by the Appellant).
The Appellant would like to mention that out of the above international transactions, the transaction pertaining to “Purchase of DAP” mentioned at S.No.1 in the above table alone is under dispute, rest all the transactions have been accepted by the Ld. TPO to be at arm’s length. The Appellant would like to highlight the factthat the above transactionis coveredin the Appellant’s own case in AY 2005-06 (order of the Hon’ble Tribunal placed before the Hon’ble bench) Summary of the Functional profile of the Appellant and a brief background of the product which is under dispute During FY 2005-06, the Appellant was mainly engaged in trading of fertilizers. The Appellant imported DAP fertilizer from Mosaic Fertilizer LLC and resold the same in India. The imports were made by the Appellant from US Gulf region. The term “US Gulf region” denotes an area in USA starting from west of Florida in US. (Page 658 of the Paper Book) In this regard, the Appellant wishes to highlight the fact that DAP fertilizer is a commodity of which the Maximum Retail Price (MRP), subsidies, distribution restrictions, imports and even choice of technology, feedstock are all controlled / regulated by the government. Because of the regulations, the importer does not have any control over the sale price and is forced to sell at a price fixed by the regulators, which may be lower than the purchase price. The Government of India (GOI) has a system of compensating the fertilizer companies through a subsidy mechanism. Herein, it may not be out of place to mention that the GOI also uses data published in Fertecon Report to compute the amount of subsidy to be granted to companies engaged in manufacture and trade of DAP fertilizers. The significant impact exerted by these regulations on the market price and market forces can be gauged from the fact that the subsidy amount, received by MIPL for FY 2005- 06 constituted about 40-45% of total revenue. Summary of Transfer Pricing approach followed by the Appellant CUP Analysis As discussed above, the main international transaction undertaken by the Appellant, during the year, was import of fertilizers. The Appellant imported DAP fertilizer from its AEs and resold the same in India at the price fixed by the GOI. Based on the functional, asset and risk profile of theAppellant, Comparable Uncontrolled Price (‘CUP’) was selected as the Most Appropriate Method for establishing the arm’s length nature of its international transactions relating to import of DAP fertilizer. The above methodology of the application of CUP as the most appropriate method has been duly accepted by Hon’ble ITAT in AY 2005-06 in the Appellant’s own case. In the application of CUP method, the Appellant has used the prices of DAP fertilizers as published in Fertecon Price Service Report (hereinafter referred to as “Fertecon report”). Besides the price data, this report also provides freight rates for transport of goods between various locations including US Gulf – India. (page 503 of the Paper Book) Fertecon report is a report published by Fertecon Limited which provides prices at which the DAP fertilizer is traded internationally. The data provided by Fertecon is widely acknowledged within the fertilizer industry to be most accurate, comprehensive, and authoritative, providing timely and detailed foresight into the developments of the global fertilizer industry. Data published by Fertecon is used by all the leading corporations, trade bodies, and government agencies belonging to the fertilizer industry, throughout the world. Herein, it may be worth mentioning that these Fertecon prices are also adopted by the Government of India while determining the subsidy for DAP fertilizer. The Appellant has also relied on the same source to benchmark its international transaction.
The Appellant had duly made economic adjustments to the arm’s length price in order to arrive at a comparable price. The adjustments are mentioned below: a) The Appellant included the freight cost in the FOB prices as reported in the Fertecon report so as to compare the same with the import price paid by the Appellant. b) The Appellant also undertook working capital adjustments to account for the differences in the credit period which has been duly accepted by the TPO as well. The detailed working of the calculation of comparable uncontrolled price and its comparison with the import price paid by the Appellant was duly documented in the transfer pricing report as well as also provided to the Ld. TPO during the course of the hearings. Findings of Hon’ble ITAT order in the Appellant’s own case for AY 2005-06 and its implication on the current years a) During the year AY 2005-06, the Appellant had applied CUP as the appropriate method to benchmark the international transaction of “purchase of DAP”. The same has been upheld by the Hon’ble ITAT in its order dated December 18th, 2013. b) The Appellant would like to highlight that there is no change in the functional, asset and risk profile of the Appellant in the current year i.e. AY 2006-07 as compared to that from AY 2005-06 and the TPO has not challenged the same in his order for AY 2006-07. c) In AY 2005-06 the Appellant had applied CUP as the most appropriate method in order to benchmark the transaction under the dispute which has been accepted by the TPO. d) The Differential factor in the application of CUP by the Appellant and TPO in AY 2005-06 was that the Appellant had used US FOB price (plus US to India freight, as mentioned in the Fertecon report) in order to arrive at the arm’s length price of the purchase of DAP. On the other hand, the TPO had used India CFR price (as mentioned in the Fertecon report) in order to arrive at the arm’s length price of the purchase of DAP. i. US Gulf FOB prices indicate the Free On Board (‘FOB’) prices for DAP fertilizers for the goods exported from US Gulf region ii. India CFR prices indicate an average of purchase price of DAP from different parts of the world plus and average of freight to purchase DAP e) The Appellant wishes to submit that during the current year even if the TPO’s methodology of last year is applied i.e. the arm’s length price of the above transaction is determined by using India CFR prices (as per Fertecon reports) even then the Appellant’s transaction would be at arm’s length. During the current year, TPO has changed f) his methodology of benchmarking the transaction of “purchase of DAP” by applying Transaction Net Margin Method (TNMM) as compared to CUP method in the previous year. g) For all subsequent years, i.e. from AY 2007-08 to AY 20102-13, the TPO has accepted CUP as the most appropriate method to benchmark the above transaction and no adverse inference has been drawn on the same.(Attached as Annexure 2). Application of TNMM by the TPO: Comparable Companies selected by the TPO in the application of TNMM to determine the arm’s length price Without prejudice to the other sections of this synopsis and the arguments taken by the Appellant, the Appellant wishes to submit that the comparable companies selected by the TPO are functionally not comparable to the Appellant for the following reasons:
Particulars/N Chambal S Shiva Fertilizers Deepak Agro ame of the Appellant Fertilizers and No. Ltd. Solutions Company Chemicals Ltd. The company is The company is engaged in The company is engaged in manufacturing engaged in manufacturing (56%) as well as manufacturing (29%) (63%) as well as trading as well as trading The Appellant is trading activities(44%). activities(69%). engaged in activities(23%). However no However no 1 Functions trading of However no segmental breakup segmental breakup fertilizers (100% segmental breakup for the same is for the same is trading). for the same is available. Thus, available. Thus, this available. However this company company cannot be the TPO has cannot be compared with considered entity compared with trading functions of level margins. trading functions the Appellant of the Appellant The Company deals in the following products: DAP, MOP, Bio- Fertilizer, Urea, Pesticides, Seeds, SSP, Zinc, and Deals in cereals, NPK, Micro micro nutrients, Single super Nutrient and primary and Phosphate and 2 Products Frozen vegetables DAP Fertilizers secondary nutrients Mix fertilizer and fruits and also whereas DAP is a Segments engaged in multi-nutrient shipping business. fertilizer Mainly engaged in production and trading of Urea. (Urea is a single nutrient fertilizer whereas DAP is a Particulars/N Chambal S Shiva Fertilizers Deepak Agro ame of the Appellant Fertilizers and No. Ltd. Solutions Company Chemicals Ltd. multi-nutrient fertilizer) DAP fertilizer is a commodity of which MRP, Urea production by subsidies, Indian restrictions, manufacturers is import and even governed by group choice of financing schemes technology , which guarantees a feedstock etc are return of 12% on Related Party all control by net sales at 90% 3 Others transactions are Government of capacity utilization. 56% of total sales. India . Thus the This is in contrast importer has no to Phosphate and control over sale Potash fertilizers price and is where retention forced to sell at pricing scheme was a price fixed by discontinued in regulators which 1992 is lower than purchase price Turnover(In 4 641.23 2,758.43 41.28 11.44 INR cr.)
In view of the above, the CUP method used by the appellant could not be rejected by the TPO. The following factors need be considered: (1) The TPO has himself accepted CUP as the most appropriate method in the preceding year as also in all the subsequent years. A chart was place before the Hon’ble Bench to demonstrate the same. Thus, for AY 05-06 and from AY07-08 to 2011-12, the method stands accepted and ought not be disturbed in a singular year particularly when there is no change in either the profile of the assesse or in the nature of the transaction. The Rule of consistency needs to be respected. (2) The CUP method was upheld by the ITAT in the preceding year. The matter was restored back to the AO only for the issue of adopting CFR bulk price from the same report and not the FOB price. A copy of the order was placed before the Hon’ble Bench.
(3) The TNMM method is not an appropriate method for the reason that the sale price is regulated by the Government and the margin of net profit is not under the control of the taxpayer. (4) The TNMM would also not be the appropriate method for the reason that nearly 40-45% of receipts are by way of subsidy from the Govt. and not from sale of the product. (5) The relevant data for the application of CUP method is available in public domain and the availability of the data and its reliability is not in dispute. It needs to be appreciated that the crucial factors for determining the appropriateness of the method to be applied are the availability and reliability of the data. As an alternative submission, it is urged that the comparables chosen by the TPO are not at all the right comparables as these entities are engaged in the manufacture and sale of the product and not in the trading of the product as the assessee is. Reference is drawn to page to page 711 of the Paper Book in the case of Chambal Fertilisers, on page 792 in the case of Shiva Fertilisers and page 809 in the case of Deepak Agro. This is all the more reason that in the absence of right comparables, TNMM could not be applied. Hence the appeal deserves to be allowed.”
The learned AR pointed out that the issue of applicability of appropriate method to benchmark the international transaction of purchase of DAP was also raised before the ITAT in the case of the assessee itself for the assessment year 2005-06 in and Ors. under the similar set of facts and circumstances as in the present assessment year and vide order dated 18.12.2013, the issue was set aside to the file of the learned TPO to readjudicate it afresh and in compliance the learned TPO has accepted application of CUP as most appropriate method to benchmark the international transaction of purchase of DAP. Copies of these orders have 12 been furnished for the perusal of the bench. He submitted that though principle of res-judicata is not applicable in the tax matter but consistency in the approach of Revenue on an issue under similar facts of the case is required to be maintained. In support, he placed reliance on the following decisions: i) Radhasoami Satsang vs. CIT- 193 ITR 321 (SC); ii) CIT vs. ARJ Security Printers – 266 ITR 276 (Del.) – SLP filed by Revenue has been dismissed – 266 ITR 4.
In support of the alternative plea that comparables apply by the authorities below are not proper as they are functionally different, the Learned AR referred page Nos. 442 and 443 of the paper book – volume-2. He submitted that Chambal Fertilizers & Chemicals Ltd.- manufactures fertilizers segments which includes manufacture and marketing of urea which is a controlled commodity, the price and distribution of which is regulated by the Government of India. The company is engaged in manufacturing and trading of fertilizers in the proportion of 64% and 23% respectively while the assessee is 100% distributor of fertilizers and is not engaged in any manufacturing activity. They deal in several products whereas the assessee is mainly engaged in the distribution of DAP. Likewise Shiva Fertilizers Ltd. is engaged in the manufacturing and trading of single
13 super phosphate (SSP) and NPK Fertilizers. The proportion of their manufacturing and sales activities comes out to 56% and 44% respectively whereas the assessee is 100% distributor of fertilizers. Again, Deepak Agro Solution is engaged in the manufacturing and trading of micro-nutrients in the ratios of 29% and 69% respectively.
On the other hand, the Learned CIT(DR) has placed reliance on the orders of the authorities below. He submitted that in the assessment year 2005-06, the ITAT had no occasion to compare TNMM and CUP methods hence the said decision is not helpful to the assessee. The learned TPO has dealt with the issue in detail as per which TNMM method is to be applied. On the alternative plea on application of comparable, the Learned CIT(DR) submitted that purchase price of the fertilizers is not in control of the government only the sale price is controlled by the government. He submitted that profit element has already been considered by the government while controlling the price keeping in view the subsidiary. He submitted that A.E. is manufacturer and the assessee is distributor thereof. Thus, both the activities cannot be seen in isolation. The three comparables selected by the learned TPO are just and proper. He submitted further that DAP contents
14 other nutrients fertilizers as well hence it does not make difference whether it is DAP or urea. 9. In rejoinder, the Learned AR submitted that in the assessment year 2005-06, the learned TPO himself has applied CUP method as most appropriate method for establishing the arms length nature of its international transaction relating to import of DAP Fertilizers. He submitted that urea is entirely different fertilizers as DAP contents 18% of nitrogen and 50% of phosphate.
Considering the above submissions, we find that only dispute in the present case is regarding the international transaction pertaining to “purchase of DAP” mentioned at Sr. No.1 in the above table. Remaining transactions have been accepted by the learned TPO to be at arm’s length. In this regard, contention of the assessee also remains that the issue is covered by the decision of the ITAT in the case of assessee itself for the assessment year 2005-06 as in compliance of setting aside orders of the ITAT, the learned TPO has accepted the application of CUP method as an appropriate method in order to benchmark the transaction under the dispute. We find that for the assessment year 2005-06 and from assessment years 2007-08 to 2011-12, the application of CUP as the most appropriate method in order to benchmark
15 the transaction under dispute has been accepted by the learned TPO. In the assessment year 2005-06, the ITAT (supra) has set aside the matter to the file of the Assessing Officer on the issue of adopting CFR bulk price from the same report and not the FOB price. In compliance, the learned TPO has found it appropriate to apply CUP method. We thus fully concur with the contention of the assessee that Rule of Consistency needs to be respected in the approach of the Revenue in the application of CUP method as the most appropriate method particularly when there is no change in either the profile of the assessee or in the nature of the transaction. We also agree with the submission of the assessee that TNMM method is not an appropriate method since the sale price in the present case is regulated by the government and the margin of net profit is not under the control of the tax payers. It is not appropriate to apply TNMM method also for the reason that merely 40% to 45% of the receipts are by way of subsidy from the government and not from sale of the product. The submission of the assessee that the relevant data for the application of CUP method is available in public domain has not been disputed by the Revenue. It is an undisputed position as well that crucial factor for determining the appropriateness of the method to be applied are the availability and reliability of the data. In view of these material facts, we come to the conclusion that CUP is the most appropriate 16 method in order to benchmark the transaction pertaining to purchase of DAP Fertilizers and direct the learned TPO to apply the same for the benchmarking the transaction in question. In view of the above findings, the alternative plea of the Learned AR that the comparable chosen by the learned TPO are not at all the right comparable as these entities are engaged in manufacturing and sale of the product and not in the trading of the product as the assessee is, does not need consideration. The ground Nos. 3 to 7 are thus accordingly allowed. The ground No. 1 is general in nature, hence does not need any independent adjudication. No arguments have been advanced in support of ground Nos. 2 and 8. These grounds are accordingly rejected as not pressed. Ground No.9 questioning the order of the DRP in not examining validity of initiation of penalty proceedings under sec. 271(1)(c) of the Income-tax Act, 1961 is premature, hence, does not need adjudication.