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Income Tax Appellate Tribunal, DELHI BENCH “I-2”: NEW DELHI
Before: I. C. SUDHIR & SHRI PRASHANT MAHARISHI
M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 O R D E R PER PRASHANT MAHARISHI, A. M. ITA no 3132 & 3155 /Del /2013 A Y 2007-08 1. Captioned cross appeals are filed by the rival parties against the order for AY 2007-08 dated 18.03.2013 of the ld CIT (A)-XX, New Delhi.
The assessee has raised the following grounds of appeal for the Assessment Year 2007-08:-
1. That on the facts and circumstances of the case and in law, the Hon'ble Commissioner of Income Tax (Appeals)-XX, New Delhi ("CIT(A)") has erred in sustaining the assessment of business loss amounting to Rs. 21,73,85,388/- as against returned business loss amounting to Rs. 27,17,58,649/-.
2. That on the facts of the case and in law, the Hon'ble CIT (A) has erred in sustaining the order passed by learned Assistant Commissioner of Income Tax (OSD), CIT -V ("Ld. ACIT") dated October 22, 2010 and rejecting Comparable Uncontrolled Price ("CUP") method as the most appropriate method ("MAM") applied by the Appellant for the purposes of benchmarking the international transactions entered into with its Associated Enterprises ("AE").
2.1. That on the facts of the case and in law, the Hon'ble CIT(A) has summarily without assigning any reason whatsoever, grossly erred in concluding that a substantial portion of the international transactions entered into by the Appellant with its AE are unjustifiable in terms of Section 92 of the Income Tax Act, 1961.
2.1.1. That on the facts of the case and in law, the Hon'ble CIT (A) has erred in stating that: 2 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 "In view of the totality of the case, TPO was right in not considering some of the price quotations given by the appellant because substantial part of the international transaction would have gone unjustified under Section 92 of the IT Act"
2.2. That on the facts of the case and in law, the Hon'ble CIT (A) and the Ld. Transfer Pricing Officer ("TPO") have erred in concluding that reasonable adjustments could not be made to the data presented by the Appellant for the purposes of application of CUP to account for and ascertain the differences between uncontrolled transactions and transactions between the Appellant and its AE.
2.2.1. That on the facts and circumstances of the case, the Ld. TPO has erred in stating that:
..... I am of the considered view that CUP data relied upon by the assesses is unreliable and does not represent the true comparability....
2.3. That on the facts of the case, the Hon'ble CIT (A) has disregarded the adjustments made by the Appellant to account for the difference in the Inco terms for the purposes of carrying out comparability analysis under CUP method.
2.4. That on the facts of the case and in law, the Hon'ble CIT(A) has erred in sustaining the finding of the Ld. TPO that contracts entered into by the AE with unrelated parties cannot be used as CUP data, considering that the same do not represent transaction value.] M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 2.4.1 That on the facts and circumstances of the case and in law, the Hon'ble CIT (A)/Ld. TPO have erred in holding that contracts entered into by the AE with unrelated parties do not represent transaction value and that sufficient opportunity was not made available to the Appellant to furnish documentary evidence to substantiate the same.
2.5. That on the facts of the case and in law, the Hon'ble CIT(A) has erred in holding that publications of repute, given credence in the business, available within the public domain are not sufficient to benchmark the international transactions entered into by the Appellant with its AE.
That on the facts and circumstances of the case, the Hon'ble CIT (A) has wrongly applied Transactional Net Margin Method ("TNMM") as the MAM for determination of the Arm's Length Price ("ALP") in respect of the international transactions entered into by the Appellant with its AE.
3.1. That on the facts and circumstances of the case, the Ld. TPO's finding that application of CUP by the assessee is a covert attempt to hide its profits, being unmasked by TNMM is grossly misplaced.
3.1.1. That on the facts and circumstances of the case and in law, the Ld. TPO has erred in stating that:
It is pertinent to mention here that claim of the assessee to somehow apply CUP method is based on a covert objective of hiding the loss incurred by the assessee in a trading business which gets unmasked while using TNMM. I therefore reject the objection of the assesee in this regard and I am of the considered view that TNMM shall be the M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 most appropriate method for benchmarking the international transaction in this case.
3.2. That on the facts of the case and in law, the Hon'ble CIT(A)/ Ld. TPO have erred in adopting the net profit margin (PBIT/Total expense) at the entity level and the same is contrary to Rules 10B(e)(i) of the Income Tax Rules, 1962 which permits computation of ALP by taking profit level indicator ('PLI') at transaction level.
3.2.1. That on the facts and circumstances of the case and in law, the Hon'ble CIT(A)/ Ld. TPO have erred in ignoring the fact that international transactions with the AE constitute a very small portion of the Appellant's business.
3.3 .That on the facts of the case and in law, the Hon'ble CIT(A)/ Ld. TPO have not carried out proper Functional, Asset and Risk ('FAR') analysis of comparable companies selected by Ld. TPO for the purposes of application of TNMM.
3.4. That on the facts and in law, the Hon'ble CIT(A) has grossly erred in accepting 16 companies from the set of comparables furnished by Ld. TPO for application of the TNMM, despite having noted the lack of comparability in more than one instance in the set so furnished.
4. That on facts and circumstances of the case and in law, the Ld. Assessing Officer ("AO") erred in initiating penalty proceedings under Section 271(1)(c) of the Act.
5. That the order passed by Ld. TPO, Ld. AO and Hon'ble CIT(A) is bad in law and void ab-initio.
M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 3. Revenue has raised the following grounds of appeal:- “1. The ld CIT(A) has erred in law and on facts in rejecting one company namely M/s Kotak Ginning and Pressing Inds Ltd. from the list of comparables, considering the same as manufacturing company though the financials of the company examine from the capitaline database of sales turnover is from the trading activity;
2. The ld CIT(A) has erred in law and on facts in not appreciating the facts that the Transfer Pricing Officer (TPO) has specifically mentioned in his order that the company namely M/s. Kotak Ginning and Pressing Inds Ltd has shown that more than 90% turnover is from cotton trading and hence, predominately a trading company;
3. The ld CIT(A) has erred in law and on facts inn not appreciating the fact that it is segment level profitability which has been compared with the appropriate comparables and not the profitability from the international transactions alone.”
4. The assessee is a private limited company formed by the name of Andagro Foods Pvt. Ltd. and was 100% subsidiary of M/s. Noble Resources and Trading India Pvt. Ltd. Later on this company merged with M/s. Noble Resources and Trading India Pvt. Ltd. w.e.f. 01.01.2006. It is primarily involved in the business of trading of bulk agro commodities involving exports of soyabean meal, seasame seed and export of iron ore and chemicals. During the year, it has also imported crude soyabean oil, coal, crude, palm oil and pulses. For A Y 2007-08, assessee company filed its return of income on 30.10.2007 declaring loss of Rs. 82975690/- and same as merged appellant company i.e. Noble Resource and Trading India Pvt. Ltd on M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 the same date at Rs .182121130/-. Subsequently, on merger the appellant revised the return of income at a loss of Rs. 27,17,58,649/-.
5. The assessee has entered into following international transactions of export and import of goods and they were benchmarked using CUP method as the most appropriate method for these transactions. The reference was made to ld TPO to determine arm‟s length price u/s 92CA(3) in respect of these international transactions. The ld TPO rejected the CUP method as most appropriate method adopted by the assessee and considered TNMM as the most appropriate method for benchmarking international transactions. The ld TPO also took PBT/ sales as the PLI which is (-) 13.73% in case of the assessee. Ld TPO selected 17 comparables, which are engaged in trading in agricultural crops and trade in minerals and energy sources. The international transactions and its benchmarking is as under:- Sr Transactions of Export Nature Amount (in Most Method No of INR) appropriate adopted Transa method as per by TPO ction TP documentation 1 Export of Soya Bean Meals Export 25824331 CUP TNMM 2 Export of chemicals Export 46396 CUP TNMM 3 Export of Iron Ore Export 416548930 CUP TNMM 4 Import of Crude degummed Import 111100319 CUP TNMM soya bean oil 5 Import of coal Import 118689670 CUP TNMM 6 Import of crude palm oil Import 63075499 CUP TNMM 7 Import of pulses Import 75046618 CUP TNMM 8 Commission income 323797 CUP TNMM 9 Payment of expenses 29815250 CUP TNMM
6. The ld TPO of total international transactions of Rs. 735285145/- computed arm‟s length margin @ 3.71% thereof and determined ALP at Rs. 27279079/-. Against this the margin shown by the assessee was computed applying PLI at (-) Rs. 21470326/- and proposed an adjustment of Rs. 48749405/-. The ld Assessing Officer accordingly determined total loss of M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 Rs. 22,30,09,240/- and passed an assessment order u/s 143(3) on 22.12.2010. Against this assessee preferred appeal before ld CIT (A), who in turn upheld the order of ld. Transfer Pricing Officer with regard to most appropriate method as well as comparables. However, ld CIT(A) adjudicating ground No. 7 of the appeal has held exclusion of Kotak Ginning and Pressing Industries ltd. from the list of comparables and restricting adjustment to the proportion of international transactions only. Against the order of the ld CIT (A), rival parties are in appeal before us as per Grounds of appeal
stated above.
7. We first take up the appeal of the assessee in ITA No. 3132/Del/2013. The first ground of appeal is general in nature and therefore it is dismissed.
8. The second ground of the appeal is against rejecting the comparable uncontrolled price (CUP) method as the most appropriate method applied by the appellant for benchmarking the international transactions entered with its AE.
9. The first major dispute is regarding the most appropriate method for benchmarking the international transactions. As stated above the assessee has computed the most appropriate method as CUP, however, for comparability study assessee has used the quotations of Solvent Processors Association of India, Third Party contracts between AE and other parties, prices published by Platts and Coal Trader International Book, Custom data of third parties based on shipping bills, brokers confirmation notes etc. The ld TPO rejected this method holding that OECD has laid emphasis not only on the product comparability but also on broader business functions of the comparables. According to ld TPO CUP data provided by the assessee does not support for functional comparability. Further, ld TPO was also of the view that data provided by the assessee is not covered within the provisions of Rule 10D(3) of the Income Tax Rules, 1962. Hence, he rejected the CUP method. On appeal before the ld CIT(A), he confirmed the rejection of CUP method by the ld TPO holding that transactions compared should be an actual transaction and not a hypothetical or yet to be undertaken on 8 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 the date of comparison. Further, according to ld CIT(A) the contract between the third parties and AE also cannot be taken as data for CUP method.
On appeal before us it was submitted by the ld AR that for AY 2006-07 on identical facts and circumstances the ITAT has held that the CUP is the most appropriate method for benchmarking trading transactions. During the course of hearing assessee submitted a chart wherein the assessee justified that trading transactions of the assessee are at arm‟s length based on certain external CUPs and internal CUPs. He further submitted that Rule 10AB which is though inserted with effect from 01.04.2012 wherein for the purpose of the benchmarking any method which takes into account the prices which has been charged or paid or would have been charged or paid for the same was similar transactions under similar circumstances shall be accepted for the sixth method u/s 92C(1)(f). He submitted that though it is effective from 01.04.2012 , applicable from AY 2012-13 it is retrospective in effect from the time when transfer pricing provisions introduced in India. For this proposition, he relied on the decision of coordinate bench in Toll Global Forwarding India Pvt. Ltd. Vs. DCIT 51 Taxmann.com 342 and Geodis Overseas Pvt. Ltd. Vs. DCIT 53 Taxmann.com 362. Regarding the acceptability of quotations and external CUP data submitted by the assessee he relied on the decision of Hon‟ble Gujarat High Court in CIT Vs. Adani Wilmar Ltd.[ Tax Appeal No.240 of 2014 dated 07.04.2014] wherein Hon‟ble High Court rejected the objection of the TPO where the transactions were benchmarked relying on quotations. Hon‟ble High Court considered the provisions of Rule 10D (3)(c) of the Income Tax Rules, 1962. Therefore, his argument was that CUP method should be applied for these transactions and for comparability analysis, the quotation and other evidences supplied by the assessee should be acceptable. .
Ld DR submitted that the CUP is a good method in itself but there should be comparable data for comparability analysis and in absence of that, the method becomes irrelevant. He further 9 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 relied on the Page 15 of CIT(A) order for rejection of CUP method. He further submitted that in assessee‟s own case ITAT has rejected the acceptance of quotations and therefore, in this year too the assessee has benchmarked the transactions based on quotations, therefore, the CUP method cannot be applied. He further submitted that these data are not authentic.
We have carefully considered the rival contentions and we are of the view that in the assessee‟s own case for AY 2006-07 , the coordinate bench in ITA No. 5722/Del/2010 has held relying on several Tribunal decisions that the CUP is the most appropriate method in case of trading transactions and internal CUP has been held to be more appropriate than external CUP data for comparability analysis. Before the coordinate bench the international transaction were sale of traded goods and purchases of traded goods as it is in the present year before us also. The Hon‟ble Bench has held as under:- “4. We have heard the rival submissions and perused the relevant material on record. It is observed that the foremost point of difference between the assessee and the Revenue is the application of the most appropriate method and then the selection of comparables under TNMM. Whereas the assessee adopted CUP as the most appropriate method, the Revenue rejected it and insisted on the application of TNMM. The viewpoint canvassed by the Revenue in such rejection is that the necessary details required for the application of CUP method were not forthcoming from the assessee‟s side. Several Benches of the Tribunal has held that CUP is the most appropriate method in case of trading transactions provided the uncontrolled transactions relied by the assessee are really comparable and necessary data requiring adjustments, if any, is available. Internal CUP has been held as more appropriate than the external CUP. The net effect of this discussion is that if the assessee‟s similar transactions with non Associated enterprises are available then it is always better to go by such internally comparable uncontrolled transactions for benchmarking the price charged/paid from/to its associated enterprises in comparable transactions. At the same time, it is relevant to observe that if complete data of such comparable uncontrolled transaction is not available, then the Revenue is at liberty to discard the CUP method and resort to any other suitable method.
5. Adverting to the facts of the instant case, it is seen that the details of its export transactions of Soyabean meal to its AEs is available on pages 64 & 65 of the paper book. Major transactions are of export to AE in Singapore and few transactions are of export to its AE in Indonesia. Page 135 of the paper book is a copy of Invoice dated 21.3.2006 pursuant to contract dated 2.3.2006 in which price of Rs. 193 per MT has been charged. The assessee also supplied similar products to its non-AE in Singapore, a copy of which is available on page 287 of the paper book. Similarly, the details regarding export of Sesame seed made to its AEs is available on page 66 of the paper 10 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 book, for which the ld. AR contended that though no actual comparable uncontrolled transactions was available but the assessee could show the price actually charged by comparables. As regards the export of Iron ore of its AEs, the detail of which is available on page 67 of the paper book, the assessee tried to show that its invoices to its AE were comparable with that charged from non-AEs. In the like manner the assessee tried to show that the comparable data of non-AEs was very much available, which the authorities below have refused to look into. From the order passed by the DRP, we find that there is no worthwhile discussion about the objections taken by the assessee in Form No. 35A. It can be seen from the DRP‟s order that it is summary of the view canvassed by the AO/TPO for making addition of Rs. 7.23 crores without properly noting or dealing with the objections raised by the assessee. The Tribunal in Evalueser Co. Pvt. Ltd. Vs Income-tax Officer (2014) 134 ITD 546 (Delhi) has restored the matter to the file of DRP for passing a detailed order when the objections of the assessee were not dealt with. The ld. AR contended that the assessee has full details to satisfy the authorities below as regards the application of CUP method and hence the matter should be restored to the file of TPO instead of DRP, who had also failed to appreciate the contentions made before him. We can observe from the order of the TPO as well that though detailed submissions were filed before him, but those have not been appropriately considered while proposing the addition of Rs. 7.23 crores. The ld. DR, though relied on the impugned order but suggested that if the matter was to be sent back then it should go to the TPO instead of DRP. Considering the entire conspectus of the case, we are of the considered opinion that the ends of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of TPO. We order accordingly. However, we do not approve, in principle, the contention of the ld. AR that quotations etc. or the price as per some publications can be considered for benchmarking the assessee‟s international transactions under the CUP method. The comparison is required to be done with the actual uncontrolled transactions and not quotations etc. If the assessee succeeds in providing appropriate data relevant for comparison under the CUP method, then the TPO should determine the ALP under the CUP method. If however, it turns out that necessary details furnished by the assessee are incomplete or not relevant, then the TPO may proceed with any other appropriate method. Needless to say the assessee will be allowed a reasonable opportunity of being heard in such de-novo proceedings and will also have full right to place any fresh material in its support.” [underlined by us] 13. The ld DR could not controvert the above decision as far as applicability of CUP method in the impugned transactions during the year as well as in AY 2006-07, in fact he agreed that CUP method is the most appropriate method in the trading transactions. Therefore respectfully following the decision of the coordinate bench, we hold that the CUP method shall be the most appropriate method for benchmarking the trading transactions with its AE in this year too.
M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 14. Now the issue comes that whether the „quotations‟ in the form of external CUP and custom data of third party shipping bills, brokers rates, SOPA Rates etc whether these can be considered as the reliable comparable data or not and whether they satisfy the requirement of Rule 10D (3)(c) of the Income Tax Rules, 1962. The coordinate bench in the assessee‟s own case has rejected that quotations etc. or the prices as per some publications for benchmarking the assessee‟s international transactions under the CUP method. However, ld AR has relied on the decision of Hon'ble Gujarat High Court in case of CIT Vs. Adani Wilmar Ltd. wherein the Hon'ble High Court has held that the price publication as long as same are authentic and reliable would be relevant material for the purpose of Rule 10D(3)(c). The Hon'ble High Court considered the quotations of Malaysian Palm Oil Board prices and quotation by One Oil World for comparability analysis Before us the ld DR has stated that that these data are not authentic. However, we do not find a whisper in the order of ld. Transfer Pricing Officer that the internal and external comparable data have been examined at all with respect to their authenticity. They have been simply rejected relying on Rule 10D(3) of the Income Tax Rules. On the issue before the Hon'ble Gujarat High Court in case of CIT Vs. Adani Wilmar Ltd. was not on unacceptability of quotations but TPO only objected with respect to the geographical location of the transactions and the quotations. Therefore, even before the Hon‟ble Gujarat High court the quotations were accepted as external CUPs. The Hon‟ble Gujarat High Court has held as under:-
“3. Questions B to D pertain to computation of Arms Length Price. The Transfer Pricing Officer (hereinafter referred to as 'the TPO') adopted Comparable Uncontrolled Prices (CUP) method. In the process, the assessee had presented two sets of prices claiming them to be comparable. One set of transactions relied on by the assessee was supplied by Malaysian Palm Oil Board (hereinafter referred to as 'the MPOB'). Simultaneously, the assessee also relied on the quotations by one Oil World, an organisation based in Germany. The assessee adopted the average of two sets of prices and claimed that the price variance between the assessee's transaction and the average of two sets of prices did not exceed 5% and, 12 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 therefore, no additions were necessary. The TPO, however, took into account only the rates mentioned by the MPOB and totally discarded the rates quoted by the German organisation. He, therefore, rejected the arithmetic mean of two sets of the prices in order to determine the Arms Length Price. This was on the basis of mainly two objections of his. One was that the MPOB was a Government Nodal Agency for Palm Oil Industry in Malaysia, whereas the quotations of Oil World did not have any statutory authority. The second objection was that Oil World was an independent organisation registered in Germany and had nothing to do with the oil prices prevailing in Malaysia. He relied on Rule 10D)(3)(a) of the Income tax Rules (hereinafter referred to as 'the Rules'), to place heavy reliance on the price list of the MPOB.
4. The assessee carried the matter in appeal. The Commissioner of Income tax (CIT) (Appeals) discarded both the objections of the TPO. Referring to section 92C of the Income tax Act, 1961 (hereinafter referred to as 'the Act') and Rule 10(D)(3) of the Rules, he found that the quotations of the Oil World could not have been discarded. He observed as under : "4.4 I have also gone through the few publications of Oil World which is independent organization established in 1958 in Germany. This provides the independent forecasting services for oil seeds, oils and beans and providing primary information and professional analysis. The oil world compiles information of various countries in the oil sector. This publishes daily, monthly and yearly journals in oil sector. This compiles information of various countries and, therefore, is broad based data base. The quotation adopted by the appellant from Oil World is for Malaysia and not for Germany. Therefore, it is an authentic independent trade quotations and is duly covered under the various documents which has been listed in sub rule (3)(b) & (c) of Rule 10D of the IT, Rules. As this is an independent organization which is giving quotation of different countries, this cannot be ignored by the TPO without any valid reason. As the international transaction entered with AE is less than 5% of the arithmetical mean of these two quotations i.e. MPOB and Oil World, as per proviso to Section 92(c) the appellant was justified in taking the international transaction at arm length. Therefore, no adjustment u/s.92(c) was required as all the prices at which the purchase have been made less than 5% of the arithmetical mean. Besides the above, I also find that the appellant has entered into contract with AE on long term basis for continuous supply of constant quality to ensure continuity in production into continuous plant which is also an important factor for considering the ALP and due weightage is required to be given while comparing the rates given by MPOB. Even the average price paid by the appellant is lower than average price on the basis of rates of MPOB. Therefore, in view of these facts, circumstances and the legal position the AO/TPO were not justified in making the adjustment to the purchase price and, accordingly, the addition on account of adjustment of the price is hereby deleted. Accordingly, this ground is decided in favour of the appellant."
M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 5. The matter was carried in appeal before the Tribunal by the Revenue. The Tribunal confirmed the view of the CIT (Appeals) and, hence, this appeal.
Having heard the learned counsel for the parties we notice that the determination of Arms Length Price under section 92C of the Act is to be done as per the Rules contained in Rule 10B Clause A to subsection 10. Rule 10B of the Rules pertains to CUP method. Rule 10D pertains to 'Information and documents to be kept and maintained under section 92D'. Sub rule (3) provides inter alia that the information specified in sub rule (1) shall be supported by authentic documents, which may include the following : "Information and documents to be kept and maintained under section 92D. 10D. (1) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely : (a) xxx xxx xxx (b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them; (c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted; 7. In terms of clause (c) of subsection (3) of Rule 10D of the Rules, these price publications as long as the same were authentic and reliable, would be relevant materials. In this background, mere base of the organisation would be of no consequence. Further, though the price quotations of the MPOB would be entitled to its due and full weightage and respect, would not necessarily mean that the other quotations would lose their significance, unless, of course, it is pointed out that such quotations lack basis. In this context , we may recall that the only objections with the TPO to take into consideration the rate quotations of the Oil World were, that were not based in Malaysia and that it was an independent organisation, which had nothing to do with the old price prevailing in Malaysia. When the CIT (Appeals) as well as the Tribunal have accepted the reliability and authenticity of the organisation and its publication of ratelist, such objection of the TPO must be overruled. Learned advocate Mr.Bhatt for the Revenue, however, strenuously attempted to persuade us that the Oil World is a forecasting agency and further that such rates were not based on actual transactions. Quite apart from the observations of the CIT (Appeals) and Tribunal being to the contrary, M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 these were not the objections of the TPO. We would, therefore, focus on the grounds on which the TPO desired to reject such price quotations.”
We would also draw support for use of „Quoted Prices‟ , if they are authentic for comparability analysis in CUP method from OECD BEPS Action Plan also. For this we refer to the release of new guidance on cross border commodity transactions by OECD on its Base Erosion and Profit Shifting (BEPS) plan actions 8 and 10, 2015 Final Reports, wherein there is an addition to Chapter II of the Transfer Pricing Guidelines relating to commodity transactions [ Extracted from OECD publication Aligning Transfer pricing Outcomes with value creation OECD 2015] as under:- The following paragraphs are added to Chapter II of the Transfer Pricing Guidelines, immediately following paragraph 2.16. 2.16A Subject to the guidance in paragraph 2.2 for selecting the most appropriate transfer pricing method in the circumstances of a particular case, the CUP method would generally be an appropriate transfer pricing method for establishing the arm‟s length price for the transfer of commodities between associated enterprises. The reference to “commodities” shall be understood to encompass physical products for which a quoted price is used as a reference by independent parties in the industry to set prices in uncontrolled transactions. The term “quoted price” refers to the price of the commodity in the relevant period obtained in an international or domestic commodity exchange market. In this context, a quoted price also includes prices obtained from recognised and transparent price reporting or statistical agencies, or from governmental price-setting agencies, where such indexes are used as a reference by unrelated parties to determine prices in transactions between them. 2.16B Under the CUP method, the arm‟s length price for commodity transactions may be determined by reference to comparable uncontrolled transactions and by reference to comparable uncontrolled arrangements represented by the quoted price. Quoted commodity prices generally reflect the agreement between independent buyers and sellers in the market on the price for a specific type and amount of commodity, traded under specific conditions at a certain point in time. A relevant factor in determining the appropriateness of using the quoted price for a specific commodity is the extent to which the quoted price is widely and routinely used in the ordinary course of business in the industry to negotiate prices for uncontrolled transactions comparable to the controlled transaction. Accordingly, depending on the facts and circumstances of each case, quoted prices can be considered as a reference for pricing commodity transactions between associated enterprises. Taxpayers and tax administrations should be consistent in their application of the appropriately selected quoted price. 15 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 2.16C For the CUP method to be reliably applied to commodity transactions, the economically relevant characteristics of the controlled transaction and the uncontrolled transactions or the uncontrolled arrangements represented by the quoted price need to be comparable. For commodities, the economically relevant characteristics include, among others, the physical features and quality of the commodity; the contractual terms of the controlled transaction, such as volumes traded, period of the arrangements, the timing and terms of delivery, transportation, insurance, and foreign currency terms. For some commodities, certain economically relevant characteristics (e.g. prompt delivery) may lead to a premium or a discount. If the quoted price is used as a reference for determining the arm‟s length price or price range, the standardised contracts which stipulate specifications on the basis of which commodities are traded on the exchange and which result in a quoted price for the commodity may be relevant. Where there are differences between the conditions of the controlled transaction and the conditions of the uncontrolled transactions or the conditions determining the quoted price for the commodity that materially affect the price of the commodity transactions being examined, reasonably accurate adjustments should be made to ensure that the economically relevant characteristics of the transactions are comparable. Contributions made in the form of functions performed, assets used and risks assumed by other entities in the supply chain should be compensated in accordance with the guidance provided in these Guidelines. 2.16D In order to assist tax administrations in conducting an informed examination of the taxpayer‟s transfer pricing practices, taxpayers should provide reliable evidence and document, as part of their transfer pricing documentation, the price-setting policy for commodity transactions, the information needed to justify price adjustments based on the comparable uncontrolled transactions or comparable uncontrolled arrangements represented by the quoted price and any other relevant information, such as pricing formulas used, third party end-customer agreements, premia or discounts applied, pricing date, supply chain information, and information prepared for non-tax purposes. 2.16E A particularly relevant factor for commodity transactions determined by reference to the quoted price is the pricing date, which refers to the specific time, date or time period (e.g. a specified range of dates over which an average price is determined) selected by the parties to determine the price for commodity transactions. Where the taxpayer can provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled commodity transaction at the time the transaction was entered into (e.g. proposals and acceptances, contracts or registered contracts, or other documents setting out the terms of the arrangements may constitute reliable evidence) and this is consistent with the actual conduct of the parties or with other facts of the case, in accordance with the guidance in Section D of Chapter I on accurately delineating the actual transaction, tax administrations should determine the price for the commodity transaction by reference to the pricing date agreed by the associated enterprises. If the pricing date specified in any written agreement between the associated enterprises is inconsistent with the actual conduct of the parties or with other 16 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 facts of the case, tax administrations may determine a different pricing date consistent with those other facts of the case and what independent enterprises would have agreed in comparable circumstances (taking into considerations industry practices). When the taxpayer does not provide reliable evidence of the pricing date agreed by the associated enterprises in the controlled transaction and the tax administration cannot otherwise determine a different pricing date under the guidance in Section D of Chapter I, tax administrations may deem the pricing date for the commodity transaction on the basis of the evidence available to the tax administration; this may be the date of shipment as evidenced by the bill of lading or equivalent document depending on the means of transport. This would mean that the price for the commodities being transacted would be determined by reference to the average quoted price on the shipment date, subject to any appropriate comparability adjustments based on the information available to the tax administration. It would be important to permit resolution of cases of double taxation arising from application of the deemed pricing date through access to the mutual agreement procedure under the applicable Treaty.” [ underline supplied by us] 16. Therefore respectfully following the decision of Hon‟ble Gujarat High Court and drawing support from OECD BEPS Action Plan , we are of the view that even the „quoted prices‟ which is authentic may be acceptable as per Rule 10D(3) of the Income Tax Rules for comparability analysis.
The ld AR has also submitted that now the „sixth method‟ has been prescribed by the board as per Rule 10D (1)(f) and which is held to be retrospective with effect from when transfer pricing provisions were introduced in India. For this ld DR relied on the decision of the coordinate bench in Toll Global Forwarding India Pvt. Ltd. Vs. DCIT (supra) which held as under:-
“22. Viewed thus, adopting a pedantic approach in determination of arm‟s length price, which serves letter of the law but leads to the conclusion diametrically opposed to the spirit of the law, has to be deprecated. We are in considered agreement with this school of thought. To that extent, the methods of determination of arm‟s length prices have to be essentially implemented in a reasonable and pragmatic manner so as to achieve its laudable objectives without any collateral damage.
23. The lawmakers have also not been oblivious of this compelling need of a certain degree of flexibility in the methods of determining arm‟s length price.
M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 Central Board of Direct Taxes, vide notification dated 23rd May 2012, has introduced, in addition to Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM) and Transactional Net Margin Method (TNMM), the following additional method: “………………any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between nonassociated (i.e. independent) enterprises, under similar circumstances considering all the relevant facts”.
24. Very significantly, the above method, which is only method prescribed under „any other method‟ under section 92C(1)(f) read with rule 10B(1)(f) , is not a residual method in the sense that it is not a condition precedent for the application of this method that all other methods, i.e. methods set out in section 92C (1)(a)to 92C(1)(e) and as elaborated under rule 10B(1)(a) to (e), must fail and only then this method can be applied. This method is at par with all other methods of determining the arm‟s length price, as set out in sections 92C(1)(a) to (f), and, in terms of Section 92C(2), the most appropriate method, referred to in Section 92C(1), “shall be applied, for determination of arm‟s length price, in the manner prescribed”. Therefore, as long as the method covered by rule 10AB, which is duly covered by Section 92C(1) satisfies the test of being the „most appropriate method‟, it can be applied to a fact situation. There is clearly no bar on its applicability just because a method specified in rule 10B, even if indirect method like TNMM, can also be applied to the same. Quite to the contrary, as noted by the coordinate benches in the cases of ACIT Vs. MSS India Pvt Ltd (supra), direct methods, such as CUP and the „other method‟ under rule 10B which, as we will see in a short while, is only a variant of the CUP method, have an inherent edge over indirect methods, such as TNMM, and, therefore, as long as it is possible to do so, a direct method of ascertaining the arm‟s length method should be applied. In the case of Serdia Pharmaceuticals Pvt Ltd Vs ACIT (44 SOT 391), a coordinate bench of the Tribunal has observed that,”….even as the transfer pricing legislation does not provide for an order of preference of methods of determining ALP, such an order of preference being drawn up is an integral, though somewhat subliminal, part of the process of determining the ALP” and that whenever a direct method of ascertaining arm‟s length price can be used, it should be preferred over an indirect method. In view of these discussions, method under rule 10BA, which is a direct method of ascertaining arm‟s length price- as is the case with Comparable Uncontrolled Price (CUP) method, Resale Price Method (RPM) and Cost Plus Method (CPM), has an inherent edge over indirect methods such as Transactional Net Margin Method (TNMM) and Profit Split Method (PSM) .
25. In effect, thus, it would appear that as long as one can come to the conclusion, under any method of determining the arm‟s length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm‟s length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression „price which….would have been charged on paid” is used in rule 10BA, dealing with this method, in this method the place of “price charged or paid”, as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only 18 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm‟s length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle, meets the test of arm‟s length price determination under rule 10BA as well.
No doubt, rule 10BA as also the corresponding enabling rule 10B(1)(f) are inserted by the Income Tax (Sixth Amendment) Rules 2012 and are specifically stated to be effective from 1st April 2012, i.e. assessment year 2012- 13 onwards. However, in Hon‟ble Supreme Court‟s five judge constitutional bench‟s landmark judgment, in the case of CIT Vs Vatika Townships Pvt Ltd (2014 TIOL 78 SC), the legal position in this regard has been very succinctly summed up by observing that “(i)f a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect” Hon‟ble Supreme Court has observed that “This (the foregoing analysis) exactly is the justification to treat procedural provisions as retrospective”. Their Lordships then further observed that, “In Government of India & Ors. v. Indian Tobacco Association (2005) 7 SCC 396 the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation” and that “The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra & Ors. (2006) 6 SCC 286. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature.” Their Lordships also noted that this retrospectively being attached to benefit the persons, is sharp contrast with the provision imposing some burden or inability where the presumption attaches towards prospectively.
It may appear to be some kind of a dichotomy in the tax legislation but the well settled legal position is that when a legislation confers a benefit on the taxpayer by relaxing the rigour of pre-amendment law, and when such a benefit appears to have been the objective pursued by the legislature, it would a purposive interpretation giving it a retrospective effect but when a tax legislation imposes a liability or a burden, the effect of such a legislative provision can only be prospective. What logically follows from the law so settled by a constitutional bench of Hon‟ble Supreme Court, is that the operation of rule 10BA, which confers the benefit of an additional method of ascertaining arm‟s length price and, inter alia, relaxes the rigour of CUP method, can only be retrospective in effect. In our considered view, therefore, rule 10BA is to be held as effective from 1st April 2002, i.e. the time when transfer pricing provisions were introduced in India.”
In view of above, we hold that ; M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 i. The CUP is the most appropriate method to be applied for the international transactions of import and export of traded goods of the assessee. ii. The assessee is required to support the international transaction by authentic documents which may also include quoted prices. iii. the assessee may support its international transactions benchmarking analysis by the other method u/s 92C(1)(f) of the act which is held to be retrospective by the decision of the coordinate bench. iv. In the event assessee fails to adduce and support its transactions under CUP method or under the sixth method then ld TPO and AO are entitled to resort to other method of benchmarking and comparability analysis after granting assessee a proper opportunity of hearing.
In view of this, we set aside ground No. 2 of the appeal of the assessee holding that ld AO and TPO are directed to first benchmark the international transaction of the assessee by applying the CUP method. In the event the assessee is unable to support its international transactions by that method then the international transactions of the assessee may be benchmarked by adopting other methods including the sixth method after granting assessee adequate opportunity of hearing.
As we have already held in ground No. 2 of the appeal regarding the most appropriate method for benchmarking the international transaction the other grounds of appeal
of the assessee becomes infructuous and therefore ground Nos. 3, 4 and 5 are dismissed.
21. The appeal of the revenue is against the order of the ld CIT(A) for excluding one comparable while applying TNMM as the most appropriate method. In view of our finding in the appeal of the assessee about the most appropriate method for benchmarking , the appeal of the revenue becomes infructuous and hence, dismissed.
M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 22. In the result the appeal of the assessee in ITA No. 3132/Del/2013 is partly allowed and the appeal of the revenue in ITA No. 3155/Del/2013 is dismissed.
This appeal is preferred by the assessee against the order of the ld Assessing Officer, dated 30.10.2012 u/s 143(3) read with section 144 C of the Income Tax Act for the AY 2008-09 incorporating the direction passed on 03.08.2012 by the Dispute Resolution Panel-II, New Delhi.
The brief facts of the case is that the assessee filed its return of income on 29.03.2010 showing income of Rs. 755107/-. During the year the assessee entered into following transactions with its AE and benchmarked it as under:- Nature of international transactions Method applied Amount (in INR) Export of Iron Ore 460948307 Export of chemical 56924750/- Export of cotton 1682336173 Export of pulses 14228519 Import of vegetable oil 323693950 CUP Import of chemical 149325359 Import of coal 503027489 Commission received on sale of coal 594811 Commission received on sale of cotton 17375651 Other transactions CPM 77033955
Ld TPO vide its order dated 05.10.2011 rejected the TP study of the assessee and applying the TNMM method as the most appropriate method and adopting OP/TC as the profit level indicator, taking 9 comparables computed the arm‟s length price of the transaction and proposed an adjustment u/s 92CA of the act of Rs. 2887388546/- . Based on this ld Assessing 21 | P a g e M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 Officer passed draft assessment order on 08.11.2011 computing the total income of Rs. 289493953/-. Against which the assessee filed objection before Dispute Resolution Panel on 14.12.2011 which were disposed by ld Dispute Resolution Panel vide its direction dated 03.08.2012 u/s 144C(5) of the Income Tax Act. The Ld DRP has held that CUP method is not appropriate method in the assessee‟s own case and TNMM would capture the business realities much better as it would take into account the broader business functions of the assessee and would take care of the problem of accurate adjustment that need to be made while using CUP. Ld DRP further confirmed the entity vide approach followed by TPO for application of TNMM. The ld DRP further directed for exclusion of two comparables. Pursuant to those directions final order u/s 143(3) read with Section 144C of the Act was passed by ld AO determining total income of Rs. 219941443/- against the return income of the assessee of Rs.755107/-.
26. The assessee has preferred this appeal raising following grounds:-
1. That on the facts and circumstances of the case and in law, the Learned Assessing Officer ("Ld. AO")/Learned Transfer Pricing Officer ("Ld. TPO")/ Hon'ble Dispute Resolution Panel ("DRP") has erred in determining business income of Rs.21,99,41,443/- as against a returned income of Rs. 7,55,107/-, resulting in an addition of Rs. 21,91,86,336/-.
2. That the Ld. AO/Ld. TPO/ Hon'ble DRP has grossly erred in rejecting Comparable Uncontrolled Price ("CUP") as the Most Appropriate Method ("MAM") applied by the Appellant for the purposes of determination of Arm's Length Price ("ALP") of international transactions relating to export of Iron Ore, Chemical, Cotton and Import of Pulses, Vegetable Oil, Coal and Cotton undertaken with its Associated Enterprises during the year relevant to the assessment year. 3. That the Hon'ble DRP erred both on fact and law in accepting the Ld. TPO's observations that the benchmarking exercise conducted by the Appellant consisted of many infirmities.
M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 3.1. That the Ld.AO/Ld.TPO/Hon'ble DRP and Ld. TPO without appreciating the facts of the case and the underlying documentation has erred holding that the instances of the comparable and other information provided by the Appellant during the course of the proceedings are not relevant for the purposes of ALP. 3.2. That on the facts of the case and in law, the Ld. AO/Ld. TPO Hon'ble DRP has erred in concluding that application of CUP for the purposes of determination of ALP requires strict identity thereby misconstruing the Rule 10B(l)(a)(ii) of the Income-tax Rules, 1962 ("the Rules"). 3.3. That on the facts of the case, the Ld. AO/Ld. TPO/Hon'ble DRP has erred in holding that the Appellant has not carried out any adjustments in the analysis. 3.3.1.That on the facts of the case the Ld.AO/Ld. TPO/Hon'ble DRP has erred in not taking in consideration adjustments on account of Inco-terms made by Appellant. 3.4. That on the facts of the case the Ld. AO/Ld. TPO/DRP has erred in providing a restricted meaning to the items enumerated in Rule 10D(3) of the Rules, to hold that only actual fructified transactions be adopted as a comparable uncontrolled transaction for the purposes of determining the ALP.
That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/DRP has grossly erred in applying the Transactional Net Margin Method ("TNMM") as the MAM for the purpose of determining the ALP of international transactions.
That on the facts of the case the search process and methodology adopted by the Ld. TPO, in applying TNMM is flawed and contrary to law. 5.1 That on the facts of the case and in law, the Ld. TPO has applied different formula for calculating Profit Level Indicator ("PLI") in case of comparable companies as compared to formula used in case of the Appellant. 5.2 That on the facts of the case the methodology followed by the Ld. TPO in compiling the set of comparables for the purposes of application of TNMM is not in consonance with Rule 10C of the Rules. 5.3 That on the facts of the case, the Ld. TPO has not carried out proper Functional Asset and Risk Analysis while applying TNMM.
M/s Nobel Resources and Trading India Private Limited V DCIT & DCIT V M/s Nobel Resources and Trading India Private Limited & 3155/Del/2013 & ITA No 6740/Del/2012 A Y 2007-08 & A Y 2008-09 6. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO has wrongly taken the PLI at enterprise level, contrary to Rule 10B(e) of the Rules. 6.1. That on the facts of the case and ignoring the documents filed by the Appellant, Hon'ble DRP erred in holding that in absence of segment wise accounting of the Appellant PLI can be computed at enterprise level.
That on the facts of the case and in law, the Ld. AO erred in not taking into consideration the eligible brought forward losses under Section 72 for the purposes of computing total income.
That on the facts and circumstances of the case and in law, the ld AO erred in initiating penalty proceedings u/s 271(1)(c) of the Act.
That the order passed by the ld AO/ld TPO/DRP is bad inn law and void ab-initio.”