PPG COATINGS INDIA P.LTD,MUMBAI vs. DCIT CIR 9(2), MUMBAI

Vipul Dye Chem Ltd. 4.86 5.29 NA 5.08 Average 2.82% PLI of the assessee 1.12% During the course of TP proceedings the assessee was called upon to update the margin of the above four comparable companies using AY 2009-10 data on standalone basis.The assessee, vide its letter dt.7.11.2012,submitted the updated margin for the AY 2009-10 was as under : Sr.No. Company Name Updated PLI using data for FY 2008-09 1. Indokem Ltd. 3.06 2. Jaysynth Dyestuff (India) Ltd. 8.06 3. Mahalaxmi Dyes & Chemicals Ltd. 1.76 4. Vipul Dye Chem. Ltd. 7.46 Average 5.09 The TPO observed that the assessee had imported protective and marine coatings from its AE and had also sold same material to its AEs,that it had aggregated the transaction of purchase and sale of finished goods with its other international transactions and had bench marked the same by considering TNMM as the most appropriate method. The TPO was of the opinion that assessee was not into trading of protective and marine coatings,therefore, the transaction had to be benchmarked applying Re-sale Price Method (RPM). In its replies dt. 7.12.2012 and 14. 12.2012 the assessee submitted that ideally RPM should have been applied,that sufficient reliable information was not available,that TNMM was used as benchmark.The assessee objected to application of RPM. After considering the submission of the assessee,the TPO held that a transaction by transaction benchmarking approach should be followed to the extent possible,that where it was not possible a combined transaction approach could be adopted,that in the case under consideration the transaction were required to be bench marked separately to determine the ALP of the assessee’s trading activity,that in case of trading concern the RPM was more appropriate than any other method,that it focused on comparison of gross margins and did not get disturbed by the general and administrative overheads,that the assessee was a trader, that the principal transactions were of purchase and sale of finished goods.The TPO conducted a fresh search and identified four comparables,namely,Hard Castle and Waud Mfg Co. Ltd., Castrol India Ltd., Hindustan Petroleum Ltd. and Indian Oil Corpn. Ltd. He required assessee to furnish a detailed reasoning so as to why the above referred 4 companies should not be considered as valid comparables.Vide its letter,dt.11.1.13,the assessee made elaborate submissions before the TPO.After considering the comparables selected by the assessee the TPO selected final set of comparables.The final comparables were as under :- SN. Company Name Functions Margins as per assessee computed from the annual reports FY 2008-09 1. Hardcastle & Waud Mfg. Co. Ltd. Heat Treatment/metal Work 32.46 Prod 2. Castrol India Ltd. Lubricants-Oils/Greases 40.47 etc.

Hindustan Petroleum Corporation Greases 60.20 Limited 4. Indian Oil Corporation Ltd. Lubricants-Greases 48.46 5. Indokem Ltd. Synthetic Organic and dyes 22.34 2093/Mum/14-PPG Coating

Jaysynth Dyestuff (India) Ltd. Organic colourants, 20.80 pigments and reactive dyes 7. Mahalaxmi Dyes & Chemicals Ltd. Solvents as well as 6.12 specialty chemicals 8. Vipul Dye chem Ltd. Dyes, chemicals and 18.55 intermediates Average 31.68 The TPO held that the gross margin earned by the assessee was 28.45%, that it was less than the gross margin earned by the comparable companies, that ALP of the purchase and sale of finished goods could not be considered at ALP. He computed the adjustment as under : Particulars PPG India’s GM% (A) 28.45% As submitted by Assessee Income received (B) 37,11,29,418 As submitted by Assessee COGS( C) 26,55,26,716 As submitted by Assessee Actual GM 10,56,02,702 As submitted by Assessee Arm’s Length GM% (D) 31.68 Arms’Length GM(E=B*D) 11,75,73,799 Arm’s Length COGS(F=B-E) 25,35,55,618 Amount of adjustment 1.19 Crores (Trading)(G=C-F) Based on the order of the TPO,the AO issued a draft order to the assessee.

3.Aggrieved by the draft order of the AO the assessee filed objections before the Dispute Resolution Panel(DRP).Before it,the assessee submitted that the international transaction on purchase and sale of finished goods,purchase of SAP license,commission income, cost sharing expenses were inexplicably linked to its trading activities,that same had to be bench marked on an aggregate basis considering the TNMM as the most appropriate method, that it had consistently benchmarked its transaction with the AEs on an aggregate basis adopting TNMM,that the TPO had accepted the method and benchmarking in the earlier years, that the TPO had failed to appreciate that given the limitation of applicability of RPM it was not the most appropriate method for benchmarking,that the assessee had conducted a contemporaneous scientific study to arrive at a final set of comparables, that the TPO had used current data base and had ignored the contemporaneous data available, that he had not used the key words similar to the words used by the assessee, that the TPO had selected four comparables engaged in other businesses like manufacturing lubricating oil, grease, oil and gas,that they were not comparables to the assessee,that he had erroneously computed the gross margin at of the comparable companies at 31.68%,that it had filed rectification letter dated 18.2.2013 u/s.154 of the Act, that the TPO had not passed the order till filing of the objections,that the revised gross margin of the comparables worked out to 19.35%, that the companies were not comparable to the assessee,that the gross margin earned by the assessee was higher than the gross margin of comparable companies,that the quantum of AE purchase was less than as compared to the total purchases(12.69%).Alternatively it was argued that even if TP adjustments were warranted same had to be restricted to the value of international transactions entered into by the assessee with its AE.s After considering the submission of the assessee and TPOs order the DRP held that assessee had entered into seven different kind of transactions,that same were different in nature and scope,that the assessee had aggregated all the transactions worth Rs.14.26 crores for bench - marking at entity level,that the transactions were different in their nature and their scope and that their separate evaluation and benchmarking was possible,that the TPO was justified in rejecting entity level benchmarking,that the TPO had used the identical key words for finding 2093/Mum/14-PPG Coating out a set of four comparable for the benchmarking at the entity level of transactions, that there was no value addition at the level of the assessee,that the RPM was the most appropriate method to benchmark international transaction relating to purchase and sale of finished goods,that the assessee had adopted ex-post approach,that it could not constrain the TPO to use the data that was available at the time of TP study.Referring to the provisions of section 92CA r.w.s.92C(3)of the Act,it was held that those sections empowered the TPO to determine the ALP on the basis of such material which was available to him, that non availability of data at the time of TP study could be a reason for not considering it for the study,that it could not act as a bar on use of the data subsequently by the TPO if the same was available,that every selected comparable had to stand the test of FAR analysis,that the TPO had used contemporaneous data of the assessee to bench mark the transactions.Finally, the DRP upheld the order of the TPO. 4.Before us,the Authorised Representative(AR)made the same submissions that were advanced before the DRP.He further stated that the gross margin earned by the assessee was 28.45%(Pg-390 of the PB),that the TPO had arrived at the average of 31.68%, that even if correctness of the method adopted was not challenged the assessee held within the range of +/- 5%.The departmental representative (DR) supported the order of DRP. 5.We find that during the year under consideration,the assessee had entered into four international transaction i.e.purchase of finished goods(Rs.3.19crores),sale of finished goods (Rs79.22 lakhs),purchase of SAP license(Rs.47.80lakhs)and expenses incurred (Rs.60,364/-), that it had benchmarked the transaction applying TNMM on an aggregate basis, that the assessee had selected 4 comparable companies under TNMM,that the arithmetic mean was 2.82%,that the PLI of the assessee worked out at 1.12%,that availing the benefit of ± 5% the assessee had claimed that international transaction entered into were at arm’s length, that the TPO had held that transactions related with purchase and sale of finished goods were to be benchmarked separately,that the TPO used RPM for determining the ALP of the transact - ions,that in the earlier years the assessee had benchmarked the international transactions on an aggregate basis adopting TNMM for earlier years and the AO had accepted the method, for the purpose of benchmarking,that the TPO had considered eight comparables as the final set,that the assessee had submitted a chart and had claimed that correct gross margin of comparable companies should have been 19.35% instead of 31.68%, that the gross margin of the assessee was 28.45% .We find that the assessee had filed an application u/s. 154 of the Act,before the TPO to rectify the mistakes in his order, that same was never disposed off.It is observed that the TPO had computed GP margin @31.6%, that the assessee group margin was at 28.45%.We find that there is a difference in the GP margins reported by the TPO and computed by the assessee in the cases of Hindustan Petroleum Corporation Ltd, India Oil Corporation Ltd, Indokem Ltd. Jaysynth Dyestuff (I) Ltd and Mahalaxmi Dyes & Chemicals. A perusal of PgNo.892-896 of PB reveal that the GP margin was 6.88% 9.6%, 20.67%, 19.71% 6.50% respectively of the above referred five comparables as against the 64.20%, 48.46%, 22.34%, 20.80% and 6.12% respectively.There is huge variation in the gross margin of HPCL and IOCL.The TPO had taken the margin of these companies @ 64.20% and 48. 64%,whereas the reported margin is 6.88% and 9.6%.The DRP ignored the abnormally high margin and did not call for a remand report from the TPO.We are unable to understand that as to how such glaring mistake was allowed to continue. The object of the TP provisions is to make adjustment,if it is found that the international transactions were not at Arm’s length.The provisions were not incorporated to make adjustment at any cost and ignoring the basic facts. If the correct figure of GP margin is taken it works out to 19.35%.The assessee’s gross margin(28.45%) is higher than the margin of 19.35% of the comparables. Therefore, in our