POS HYUNDAI STEEL MANUFACTURING PRIVATE LTD.,SRIPERAMBUDUR vs. CIT(A), CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

ITA No.30/Mds/2017 :- 2 -:

2.0 Grounds of appeal:

The grounds of appeal stated hereunder are independent of, and without prejudice to one another:

1. On the facts and the circumstances of the case, the impugned order passed by the learned Commissioner of Income Tax (Appeals) [“CIT(A)”] is erroneous and contrary to the principles of natural justice and bad in law.

The Learned CIT(A) erred in law and on facts in determining an erroneous arm’s length price (“ALP”) for the international transactions relating to import of steel coils, and in confirming the transfer pricing adjustment of INR 2,99,05,100 made by the Learned Transfer Pricing Officer (“TPO”).

Addition on Account of Differences in SPCEN and SPCD Manufacturint Grades

4. The Learned CIT(A) and the TPO erred in law and on facts in failing to aggregate the same class of international transactions undertaken by the Appellant during the year for the purpose of determination of ALP, thereby disregarding the provisions of Section 92C of the Income Tax Act, 1961 (‘the Act’), read with Rule 10B(1)(a) and Rule 10B(2) of the Rules. Specifically, the Learned CIT(A) and the TPO erred in taking into account only those transactions where the purchase price from Associated Enterprise was higher than the price to non-Associated Enterprise, ignoring the instances where the purchase price from Associated Enterprise was lower than the price to non-Associated Enterprise.

Addition on Account of Differences in SPCEN and SPCD Trading Grades

The Learned CIT(A) and the TPO grossly erred in disregarding the technical comparison report and the mill test certificates submitted, which evidence the material differences in quality, specification and end usage of the steel coils.

Selection of TNMM as the Most Appropriate Method

6. The Learned CIT(A) erred in law and on facts and circumstances of the case in rejecting the Transactional Net Margin Method (“TNMM”) analysis presented during the CIT(A) proceedings considering the limitations in applying the CUP method, and without considering the Functions, Assets and Risks performed by the Appellant and the comparables selected. The Learned CIT(A) erred in ignoring the fact that the Appellant’s net margin of 6.13 percent was higher than the arithmetic mean of comparables’ net margins, thereby indicating that the imports from AEs were at ALP.

The Learned CIT(A) erred in not examining the detailed analysis submitted by the Appellant using the TNMM, and in summarily rejecting the same without providing cogent reasons.

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The Appellant craves leave to add, alter, amend and/or withdraw any of the above grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.

3.0 Background of the Company Brief facts, International transaction and the method adopted by the assessee are extracted for the sake of convenience from the order of the TPO which reads asunder:

M/s.POS-Hyundai is a Joint Venture Company Promoted by three Korean Multi Nationals Hyundai Corporation (HC), Pohang Iron & Steel Company (POSCO) and POSCO Steel Service sand Sales Company (POSTEEL) to manufacture Steel Sheets and components out of cold rolled steel Coils for supply predominantly to Hyundai Motor India Limited (HMIL) and other Automobile & White Goods Industries.

POS-Hyundai was incorporated in 1997 with the main objects to carry on business of steel sheet fabrication and manufacture of steel components and parts in primary semi-finished and finished form for automobile, capital goods and other industries. Subsequently, the main object was inserted with the following:

“To carry on the business of import, trading & warehousing/storage facility through wholesale cash and carry route of items directly related to manufacturing process namely CR coils, HR coils and GI coils, etc”.

Vide a special Resolution passed in the EGM dated 05.12.2001.

Name and Address of the Associated Sl.No. Nature of relationship Enterprises Hyundai Corporation, 140-2, Kye-Dong, Chongro- Shareholding Company 1 Ku, Seoul, Korea (110 793) Hyundai Hysco, 265, Yumpo-Dong, Pok-ku, Ulsan, Group Company 2 Korea (683-040)

6.1 In the instant case, the assessee has adopted Comparable Uncontrolled Price Method as the most appropriate methods to arrive at Arm’s Length Price. The reason for adoption of CUP method and the step involved in arriving at the ALP by the Company has been spelt out in the TPD which is reproduced below:

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The Company’s activity is to import steel mother coils from our Shareholder Company M/s.Hyundai Corporation, Korea holding 70-50% of total equity shareholding, and the said mother coils are subject to a process of slitting and shearing operating and turn out a finished products called sheets, strips and skelp. As the entire source of raw material is from Hyundai Corporation, Korea and the certain similar steel coils are imported by the unrelated Indian importers from the shareholder Company, it is believed that the transactions entered into by Hyundai Corporation with unrelated importers in India being Internal Comparables would provide more reliable data as compared to the transactions by and between the third parties being external comparables. Above all the data required for external comparables may be difficult to obtain and interpret or it may be incomplete. For the aforesaid reasons, the assessee has chosen the internal comparables of Comparable Uncontrolled Price Method.

6.2 Analysis of Arm’s Length Price:

Step-1: The weighted average price of our imports is computed by taking the sum of total import value for the year 2002-03 for the particular spec/grade and divided by the total import quantity of particular spec. for the above period.

Step-2: Similarly the weighted average price of the unrelated imports is computed by taking the sum of total imports made during the current period from the same overseas supplier for a particular spec/grade and divided by the total import quantity of particular spec for the above period.

Step-3: On the above price of unrelated importer adjustment is made as appropriate towards volume discount. In the instant case, the import volume of particular grade of unrelated imported is 12 times more than our own imports for the same spec/grade. On a reasonable basis, a 5% discount adjustment is considered in their average import price.

Step-4: Adjusted import price of unrelated importer is arrived.

Step-5: The import price determined above, using the uncontrolled transaction of unrelated importer is more than the actual import price from the same supplier/related Company the actual import price is the Arm’s Length Price.

The import price determined above, using the uncontrolled transaction of unrelated importer is less than the actual import price from the same supplier/related Company, the unrelated import price is the Arm’s Length Price.

Step-6: If the Arm’s Length Price is less than the actual import price of particular spec/grade, there will be an addition to the total income taken for tax purpose. The addition is determined taking the difference of above two prices multiplied by the total actual import quantity of the particular spec/grade.

4.0 The assessee has adopted Comparable Uncontrolled Price (in short ‘CUP’) method as most appropriate method for computing the ALP on international transaction. The assessee has adopted weighted average method which is not accepted by the TPO the assessee also claimed 5 to 10% volume discount on the sale prices of non-AE. Further, the assessee sought adjustments for SPCEN and SPCD materials which is used for ITA No.30/Mds/2017 :- 5 -: manufacturing SPCEN-HMI and SPCD-HMI and the same was rejected by the TPO and determined the ALP at Rs.49,24,23,458/- against the International transaction admitted by the assessee at Rs.52,23,28,558/- and suggested for downward adjustment of Rs.2,99,05,100/- as under:

For import of Steel:

Value of international transaction as admitted by the assessee Rs. 52,23,28,558.00 Adjustment for differences as discussed above: SPCEN & SPCD Rs. 58,07,322.24 SPCEN-HMI & SPCD-HMI Rs.2,69,34,151.10 --------------------- Less: Amount to be reduced from purchase cost and added to total income Rs. 28,36,373.00 Rs. 2,99,05,100.00 --------------------- Arm’s Length Price now determined at Rs. 49,24,23,458.00 Total value of adjustments made as discussed above Rs. 2,99,05,100.00

The AO passed the Assessment Order making the above adjustments as suggested by the TPO. The assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) confirmed the order of the AO against which the assessee preferred an appeal before this Tribunal.

5.0 Ground No.1 is general in nature which do not require specific adjudication 6.0 Ground Nos.2 to 4 are related to the Volume Discount allowed by the AE for sale to third parties. During the TP proceedings, the assessee explained to the TPO that the AE has allowed 5% volume discount to non-

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AE enterprises depending on the turnover. It was brought to the notice of the TPO that AE has allowed 5% discount to Mahendra Intertrade Ltd., a comparable company since it had turnover of 12889 MT. Hence, the profit margin of non-AE Company has increased to that extent and accordingly sought for an adjustment of 5% volume discounts on the prices of Non AE.

The assessee also furnished a letter from Hyundai Corporation Ltd., stating that volume discounts are allowed to Mahindra Intertrade Ltd during the period under consideration @5% on its sales. The TPO rejected adjustment sought by the assessee on the reasoning that the prices of the non-AE Company was less even after volume discount and no further adjustment is required to be made. The Ld.CIT(A) has dismissed the assessee’s appeal for allowing the volume discount placing reliance on the Assessment Order. Hence the assessee is in appeal before us.

7.0 Appearing for the assessee, the Ld.AR argued that the AE has granted 5% volume discount for sale of third party sales which was not granted to the assessee. Therefore, the Ld.AR requested an adjustment of 5% volume discount on its purchases. The assessee has taken us to Paper Book Page No.241 wherein M/s.Hyundai Corporation has given a letter to the Ld.CIT(A) stating that 5% overseas volume discount is allowed on C&F price who purchases in excess of 10000 MT and accordingly, it was stated that M/s.Mahendra Intertrade Ltd., was allowed trade discount @5% since it has purchased 12889 MT. Hence, the assessee sought for adjustment towards the volume discount of 5%. The ITA No.30/Mds/2017 :- 7 -:

Ld.AR of the assessee has not produced any copy of the agreement entered by the non-AE company with M/s.Hyundai Corporation for granting volume discount. On the other hand, the Ld.DR relied on the lower authority’s Orders.

8.0 We have considered the submissions of both the parties and perused the material placed before us. We re-produce the certificate given by the M/s.Hyundai Corporation to the Ld.CIT(A) which is made available at Page No.241 as under:

To The Commissioner of Income Tax, Appeal (x), Chennai-600 034. Sub: Offering of volume discount to overseas cutomers – Reg. Kindly refer to our earlier letter dated February 10, 2006, in continuation of the same we wish to sate theat during the priod April 2002 to March 2003, it was our business practice to offer volume discount of 5% on CIF price in USD/MT to our overseas customer who purchase in excess of 10,000 metric tons. Accordingly, we had given a volume discount of 5% to M/s.Mahendra Intertrade Ltd., for having purchased 12.889 metric tons during that period. Kindly acknowledge receipt of the same. Thanking you, Yours truly, For Hyundai Corporation.

8.1 The Hyundai Corporation has given general letter addressed to the Ld.CIT(A) stating that M/s.Mahendra Intertrade Ltd., a non-AE company was allowed 5% discount on the supplies made to the non-AE. This copy of the letter was submitted by the assessee before the Ld.CIT(A). It is general letter without referring to any agreement or the bills. Such general letters cannot be taken cognizance of unless it is evidenced by bill

ITA No.30/Mds/2017 :- 8 -: to bill discount. Further, the assessee is a joint venture company M/s.Hyundai Corporation and there is every reason to extend all the concessions to the assessee by AE. The Ld.AR also did not place any agreement entered in to by AE with Non AE companies for such volume discounts. Arms Length price is determined on transaction to transaction or on number of transactions basis in cup method. In the absence of bill to bill or invoice to invoice details of discounts allowed and the prices of comparable company such adjustments are not permissible. The purpose of transfer pricing is to plug the diversion and transfer profits outside the country without payment of due taxes. The assessee company is a joint venture company of AE which expects more concessions than unrelated companies. In the instant case, the assessee has not demonstrated that it did not get volume discount with relevant bills of the comparable companies. The ALP is determined to arrive at the reasonable and fair price to the assessee from AE to plug diversion of profits. Since the assesse failed to prove that the Non AE company was allowed volume discount with relevant bill or account copy, we are unable to accept the adjustments sought by the assessee on account of volume discount and accordingly dismissed the appeal of the assessee on this issue.

9.0 Ground No.5 is related to the addition on account of difference in SPCEN and SPCD Trading Grades.

The assessee argued that both the SPCEN and SPCD Trading Grades are different degrees in comparability, characteristics for applying the CUP

ITA No.30/Mds/2017 :- 9 -: method. However, no evidence is placed before us to establish the argument. The Ld.AR argued that this ground was raised before the CIT(A) but the Ld.CIT(A) has not adjudicated the ground and hence requested to remit the matter back to the file of CIT(A) for adjudication.

The Ld.DR did not make any objection for remitting the matter back to the file of the CIT(A).

9.1 We have heard both the parties and observe that the assessee has raised this ground before the Ld.CIT(A) but the Ld.CIT(A) has not adjudicated this ground. Therefore, we remit the matter back to the file of the Ld.CIT(A) to decide this ground on merits. The assessee’s appeal on this ground is allowed for statistical purposes.

10.0 Ground No.6 is selection of Most Appropriate Method:

The assessee has selected CUP method as most appropriate method and held that the transactions are at ALP. The TP study was done by the assessee by adopting CUP method. The AO accepted the CUP method and completed the TP study and suggested for downward adjustment of purchases after making the search process and TP study. The TPO also given opportunity to the assessee. After completion of the TP study and determining the ALP, and completion of assessment proceedings the assessee has raised this ground before the Ld.CIT(A) for substituting TNMM as most appropriate method. The Ld.CIT(A) called for the Remand Report and the AO submitted the Remand Report why the CUP method is ITA No.30/Mds/2017 :- 10 -: more suitable and TNMM method cannot be adopted. The same has been reported in the Ld.CIT(A) Order in Page Nos.9 & 10 which is re-produced as under:

‘In the additional grounds of appeal submitted by the assessee during the appeal proceedings, assessee requested to adopt TNMM method for comparing the margins of the tested party and submitted some comparables after doing the comparability analysis. In this regard, it is submitted as under:

During the TP proceedings in the TP documentation submitted by the assessee, the CUP method was adopted as the Most Appropriate Method and the assessee has given reasons for adopting the said method as follows:

“The company’s activity is to import steel mother coils from our shareholder company M/s.Hyundai Corporation, Korea holdins 70.50 of total equity shearing operating and turn out a finished product called sheets, strips and skelp. As the entire source of raw material is from Hyundai Corporation, Korea and the certain similar sheet steel coils are imported by the unrelated entered into by Hyundai Corporation with unrelated importers in India being Internal Comparable would provide more reliable data as compared to the transactions by and between the third parties being external comparable. Above all, the data required for external comparables may be difficult to obtain and interpret or it may be incomplete. For the aforesaid reasons, the assessee has chose the internal comparables of comparable uncontrolled price method.”

In such a scenario, having taken a stand to adopt CUP method and now during the appellate proceedings, resorting to TNMM method by the assesee, is only an afterthought and cannot be accepted. Hence, in the presence of reliable internal comparable data, CUP method was adopted by the TPO and difference in prices calculated.

In the TP analysis, only in the absence of internal comparables, the external comparables will be taken for the comparability purpose using the TNMM method. But in assessees case, the internal comparables are very much available and also the various factors, that would be analyzed in the CUP method, ware also satisfied. The items purchased between AE and 3d party were also very well comparable in the assessee’s case. Hence, CUP is the suitable method.

While analyzing the assessee’s additional comparability analysis submitted during the appellate proceedings as additional grounds of appeal, the majority of the comparables are functionally different and they are into multiple activities. Also assessee has taken weighted average data pertaining to 3 financial years, which is not in accordance with the extant rules.

In view of the above discussion, it is requested that assessee’s additional grounds of appeal may be rejected and TPO’s approach of adopting CUP method may be upheld.

Further, TPO has stated as under vide para 6 of the order dt: 16.03.2006 on the method adopted by the assessee:

“In the Instant case, the assessee has adopted Comparable Uncontrolled Price Method as the most appropriate methods to arrive at Arms’ Length Price. The reason for adoption of CUP method and the step involved in arriving at the ALP by the company has been spelt out in the TPO which is reproduced below:

The company’s activity is to import steel. mother coils from our shareholder company M/s. Hyundai Corporation, Korea holding 70.50% of total equity shareholding, and the said mother coils are subject to a process of slitting and shearing operating and turn out a finished products called sheets, strips and skelp. As the entire source of raw material is from Hyundai Corporation, Korea and the certain similar steel coils are imported by the unrelated India importers from the shareholder company, it is believed that the ITA No.30/Mds/2017 :- 11 -: transactions entered into by Hyundai Corporation with unrelated importers in India being internal comparables would provide more reliable data as compared to the transactions by and between the third parties being external comparables. Above all the data required for external comparables may be difficult to obtain and interpret or it may be incomplete. For the aforesaid reasons, the assessee has chosen the Internal comparables of comparable uncontrolled price method”.

Before this Tribunal, the assessee argued that considering the facts and merits of the case, functions, assets and risks involved TNMM as most appropriate method and argued for substitution of TNMM method.

11.0 We have considered the rival submissions and perused the material placed on record.

The assessee in his TP study given a detailed reasoning why the CUP method is most appropriate method for arriving the ALP. On the basis of the TP study conducted by the assessee, the AO after making analysis, collecting the information, completing the enquiries, accepted the method adopted by the assessee and determined the ALP and suggested for downward adjustment of purchases. After completing the proceedings and passing the assessment orders u/s 143(3) making argument for substitution of another method as most appropriate method amounts to reopening of assessment. Re-opening of assessment is possible as per the provisions of Sec.147 of IT Act in the specific facts and circumstances provided in the relevant provisions of IT Act. Merely to suit the needs of the assesse, the completed assessments cannot be allowed to re-open.

The Transfer Pricing provisions are not an exception. Since, the assessee

ITA No.30/Mds/2017 :- 12 -: itself has adopted the CUP method and made TP study which was accepted by the TPO/AO we do not find any infirmity in the Orders of the Ld.CIT(A) and the assessee’s ground on this issue is dismissed.

12.0 In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the Open Court on 26th April, 2017, at Chennai.