M/S. GHARDA CHEMICALS LTD, MUMBAI V. THE DCIT -9(1), MUMBAI

ITA 2242/MUM/2006

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1555 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Assessment Year: 2002-2003
• Appeal Filed On: 12-04-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARENDER SINGH
• Keywords: Transfer pricing; International transaction; Additional evidence; Wholly owned subsidiary; Avoidance of tax; Set aside
• Section: 92B; 92F; 92A; 92E; 80HHC; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L,MUMBAI BEFORE SHRI R.S. SYAL (A.M) AND SMT. P.MADHAVI DEVI (J.M) ITA NO.2242/MUM/06(A.Y. 2002-03) GHARDA CHEMICALS LTD. 5/6, JER MANSION, W.P.VARDE MARG, OFF TURDNER ROAD, MUMBAI 50. PAN: AAACG 1255E (APPELLANT) VS. THE DCIT 9(1), MUMBAI. (RESPONDENT) APPELLANT BY : SHRI PERCY PARDIWALA RESPONDENT BY : SHRI NARENDER SINGH ORDER PER R.S.SYAL, A.M THIS APPEAL BY THE ASSESSEE EMANATES FROM THE ORD ER PASSED BY CIT(A) IX, MUMBAI ON 07.02.2006 IN RELATION TO THE ASSESSMENT YEAR 2002-03. 2. FIRST GROUND IS AGAINST THE CONFIRMATION OF ADD ITION OF RS.6,06,70,534/- MADE TO THE VALUE OF THE CLOSING STOCK ON ACCOUNT OF UNUTILIZED MODVAT CREDIT. THE FACTS OF THIS GROUND ARE THAT THE A.O, TAKING NOTE OF THE PROVISI ONS OF SECTION 145A, CAME TO THE CONCLUSION THAT THE ASSESSEE HAD NOT MADE CORRECT V ALUATION OF THE CLOSING STOCK BY NOT INCLUDING THE UNUTILIZED MODVAT CREDIT. RESULTANT LY THE SAID SUM WAS ADDED TO THE VALUE OF CLOSING STOCK AN ADDITION WAS MADE ACCORDI NGLY. NO RELIEF WAS ALLOWED IN THE FIRST APPEAL. ITA NO.2242/MUM/06(A.Y. 2002-03) 2 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. SECTION 145A HAS BEEN INSERTED BY THE FIN ANCE (NO. 2) ACT 1998 W.E.F. 1.4.1999. AS PER THIS SECTION VALUE OF PURCHASE AN D SALE OF GOODS AND INVENTORY IS TO BE MADE IN ACCORDANCE WITH THE METHOD OF ACCOUNTIN G REGULARLY EMPLOYED BY THE ASSESSEE AND FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF TAX, DUTY, CESS ETC. ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOO DS TO THE PLACE OF ITS LOCATION AND CONDITION. THE HONBLE DELHI HIGH COURT IN CIT VS . MAHAVIR ALLUMINIUM LTD. (2008) 297 ITR 77 (DEL) HAS HELD THAT THE UNUTILISED MODVAT CR EDIT IS TO BE INCLUDED IN THE VALUE OF THE CLOSING STOCK AND AT THE SAME TIME FOR THE PUR POSES OF GIVING EFFECT TO SECTION 145A, THERE MUST NECESSARILY BE MADE A CORRESPONDING ADJ USTMENT IN THE VALUE OF OPENING STOCK OF THAT YEAR. SIMILAR VIEW HAS BEEN EXPRESSE D BY THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. MAHALAXMI GLASS PVT. LTD. (2009) 3 18 ITR 116(BOM). RESPECTFULLY FOLLOWING THE BINDING PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF A.O FOR GIVING EF FECT TO THE PROVISIONS OF SECTION 145A IN ENTIRETY AND NOT RESTRICTING ITS OPERATION TO THE VALUE OF CLOSING STOCK ALONE. 4. GROUND NO.2 IS AGAINST CONFIRMATION OF DISALLOWA NCE OF DEDUCTION UNDER SECTION 80HHC. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT IN THE ABSENCE OF ANY PROFIT AVAILABLE TO THE ASSESSEE FR OM EXPORTS, THE BENEFIT OF DEDUCTION UNDER SECTION 80HHC WAS RIGHTLY NOT AVAILABLE. IN OUR CONSIDERED OPINION THE LD. CIT(A) WAS JUSTIFIED IN REJECTING THE GROUND OF THE ASSES SEE ON THE CLAIM OF DEDUCTION UNDER SECTION 80HHC IN THE ABSENCE OF ANY ELIGIBLE PROFIT . THIS GROUND IS, THEREFORE, NOT ALLOWED. ITA NO.2242/MUM/06(A.Y. 2002-03) 3 5. THE ONLY OTHER ISSUE RAISED IN THIS APPEAL THROU GH VARIOUS GROUNDS IS AGAINST THE CONFIRMATION OF AO/TPOS ACTION IN DETERMINING ARM SS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION OF EXPORTS OF DICAMBA AT RS.25,64,24,779/- AS AGAINST THAT DETERMINED BY THE ASSESSEE AT RS.19,19,72,067/-, TH EREBY CONFIRMING ADDITION OF RS.6,44,52,712/-. 6. THE FACTS APROPOS THESE GROUNDS ARE THAT THE AS SESSEE FILED REPORT IN FORM NO.3CEB DETAILING THE INTERNATIONAL TRANSACTIONS CO VERED BY SECTION 92E OF THE ACT. A REFERENCE WAS MADE TO TPO VIDE LETTER DATED 14.8.03 WITH THE APPROVAL OF THE CIT, MUMBAI. THE ADDTL. CIT (TP-I) PASSED AN ORDER UNDE R SECTION 92CA(3) OF THE ACT DATED 070.7.2004 REQUIRING ADJUSTMENT OF RS. 6.44 CORES T O THE TOTAL INCOME. THE SAID AMOUNT WAS ADDED BY THE A.O. AT THIS STAGE IT WILL BE USE FUL TO MAKE REFERENCE TO THE ORDER PASSED BY THE TRANSFER PRICING OFFICER UNDER SECTI ON 92CA OF THE ACT. IN THE PRESENT APPEAL WE ARE CONCERNED ONLY WITH THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE TOWARDS SALE OF DICAMBA TO GHARDA USA I NC.( HEREINAFTER CALLED AS A.E), A WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE COMPANY. T OTAL AMOUNT RECEIVED/RECEIVABLE BY THE ASSESSEE AS ALP TOWARDS EXPORT OF DICAMBA WAS DECLARED AT RS. 20.71 CRORES. THE ASSESSEE HAD DETERMINED THE ALP BY COMPARABLE UNCONTROLLED PRICE METHOD (HEREINAFTER REFERRED AS CUP METHOD). THE TPO NOTE D THAT THE SALE OF DICAMBA TO UNRELATED PARTIES WAS ALSO MADE BY THE ASSESSEE IN VARIOUS OTHER COUNTRIES AT THE RATES RANGING BETWEEN 19.47 US$ TO 25.00 US $ PER KG. A S AGAINST THAT THE DICAMBA SOLD BY THE ASSESSEE TO ITS AE WAS AT THE RATE OF 14.66 US $. HERE IT WILL BE RELEVANT TO MENTION THAT THE TOTAL QUANTITY EXPORTED BY THE ASS ESSEE TO DIFFERENT COUNTRIES WAS ITA NO.2242/MUM/06(A.Y. 2002-03) 4 418803 KGS. INCLUSIVE OF 272100 KGS. SOLD TO ITS AE . THE TPO DETERMINED THE AVERAGE RATE OF SALE TO ALL INDEPENDENT ENTERPRISES AT 20.6 7 US $ PER KG., WHICH WAS FOUND TO BE SUBSTANTIALLY HIGHER THAN 14.66 US $ CHARGED BY TH E ASSESSEE FROM ITS AE. THE TPO ALSO RECORDED THE STATEMENT OF SHRI DIVAKAR K. SHEN OY, DGM (PRODUCTION) OF THE ASSESSEE. IN RESPONSE TO QUESTION NO.13 HE STATED THAT THE MINIMUM PURITY FOR DICAMBA WAS 97% AND THERE WERE NO SEPARATE GRADES O F DICAMBA. THE TPO OBSERVED FROM THE INVOICES OF SALES TO AE AND UNRELATED P ARTIES THAT THE DESCRIPTION OF THE GOODS WAS GIVEN SIMILAR AS `DICAMBA TECHNICALLY 97% MINI MUM. ON BEING SHOW CAUSED AS TO WHY THE AVERAGE RATE OF 20.67 US $ BE NOT APPLIE D IN RESPECT OF SALE TO AE, THE ASSESSEE FURNISHED A REPORT OF MR.BUHN, WHICH INDI CATED THAT THE PRICE CHARGED BY THE ASSESSEE FROM ITS AE WAS HIGHER THAN THE PRICE CHAR GED BY CHINA FROM SIMILAR GOODS EXPORTED TO USA TO SOME OTHER PARTY. A CHART HAS B EEN DRAWN AT PAGE 12 OF THE ORDER OF THE TPO, FROM WHICH IT CAN BE SEEN THAT IN RESPE CT OF SOME TRANSACTIONS OF IMPORT BY ALBAUGH INC. FROM CHINA THE RATE QUOTED IS 5.44 US $, BEING THE CIF VALUE PER LB. TECHNICAL. AGAINST CERTAIN OTHER INSTANCES THE REM ARKS GIVEN IN THE RATE COLUMN ARE UNKNOWN, NOT GIVEN. THE TPO FURTHER OBSERVED T HAT THERE WAS NO AUTHENTICITY OF THE REPORT OF MR. BUHN AS NO RELIABLE DATA WAS CON SIDERED BY HIM FOR HIS THIS PURPOSE. EVEN CREDENTIALS OF MR. BUHN WERE DOUBTED AS IT WA S NOT KNOWN THAT IN WHICH CAPACITY HE WAS MAKING SUCH REPORT. IN THE LIGHT OF THESE F ACTS, THE TPO CAME TO THE CONCLUSION THAT THE EXTERNAL CUP, BEING THE REPORT OF MR. B UHN COULD NOT BE CONSIDERED IN PREFERENCE TO THE INTERNAL CUP, BEING THE PRICE AT WHICH THE ASSESSEE SOLD THE GOODS TO OTHER UNRELATED PARTIES IN SEVERAL OTHER COUNTRI ES. THE ASSESSEES ALTERNATIVE SUBMISSION FOR ADOPTION OF RESALE PRICE METHOD FO R CALCULATING ALP WAS ALSO NOT ITA NO.2242/MUM/06(A.Y. 2002-03) 5 FOUND TO BE ACCEPTABLE. IN THE FINAL ANALYSIS THE TPO DETERMINED THE ALP AT 19.587 US $ PER KG BY REDUCING 2.03 US $ TOWARDS SELLING & D ISTRIBUTION EXPENSES ALONG WITH GEOGRAPHICAL DIFFERENCES FROM THE AVERAGE PRICE CHA RGED FROM INDEPENDENT ENTERPRISES AT 20.67 US $. THE RESULTANT PRICE WAS FURTHER IN CREASED WITH 0.92 US $ ON ACCOUNT OF FREIGHT DIFFERENTIAL AND EXCESS CREDIT PERIOD. TH IS RESULTED INTO AN ADDITION OF RS. 6.44 CRORES. 7. DURING THE COURSE OF FIRST APPELLATE PROCEED INGS THE ASSESSEE FILED DETAILED SUBMISSIONS AND PAPER BOOK CONTAINING SEVERAL NEW E VIDENCES. THE LD. CIT(A) CALLED FOR THE REMAND REPORT FROM THE TPO THROUGH AO. TH E SAID REMAND REPORT WAS TENDERED BEFORE THE LD. CIT(A) BY WHICH NO CHANGE WAS MADE I N THE ORIGINAL OPINION OF THE TPO REITERATING THAT IN MAKING SALES TO THE AE, THE AS SESSEE HAS EARNED GROSS PROFIT OF 2.11% AS AGAINST 31.2% EARNED ON SALE TO INDEPENDEN T PARTIES. AGAIN NO CREDIBILITY WAS GIVEN TO MR. BUHNS REPORT. IT WAS SUGGESTED T HAT : THEREFORE, THE ADDITIONAL EVIDENCE SUBMITTED BY THE ASSESSEE AND THE FURTHER SUBMISSIONS MADE BY THE ASSESSEE NEED TO BE REJECTED. THE LD. CIT(A) APPROVED THE VIEW TAKEN BY THE AO BY HOLDING THAT THE ASSESSEE SOLD DICAMBA AT A VERY CHEAPER RATE TO ITS AE AS COMPARED TO THE INTERNATIONAL PRICE OF THE SAME CHARGED FROM UNCONT ROLLED PARTIES. HE FURTHER OBSERVED THAT THE VARIOUS EVIDENCES FILED BEFORE HIM FOR TH E FIRST TIME IN SUPPORT OF THE CREDIBILITY OF THE REPORT OF MR. BUHN, WERE NOT SUBMITTED AT THE TIME OF ORIGINAL PROCEEDINGS. IN HIS OPINION, INTERNAL CUP METHOD AS ADOPTED BY THE TPO WAS CORRECT IN DETERMINING THE ALP IN THIS CASE IN PREFERENCE TO EXTERNAL CUP METH OD AS ARGUED BY THE ASSESSEE. HE FURTHER CAME TO THE CONCLUSION THAT ALL THE EVIDENC ES FILED BY THE ASSESSEE WERE NEW ITA NO.2242/MUM/06(A.Y. 2002-03) 6 AND THE SAME COULD NOT BE ADMITTED IN VIEW OF RULE 46A BECAUSE SUFFICIENT OPPORTUNITY WAS GIVEN BY THE TPO AT THE ASSESSMENT PROCEEDINGS. IN THE ULTIMATE ANALYSIS THE SAID ADDITION OF RS. 6.44 CRORES WAS UPHELD. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AT LENGTH A ND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. COUNSEL FOR THE ASSESSEE CONTE NDED THAT THE PROVISIONS OF SECTION 92CA WERE NOT APPLICABLE IN THE PRESENT CASE BECAU SE THERE WAS NO REDUCTION IN THE TAX LIABILITY OF THE ASSESSEE. HE STATED THAT IT WA S NOT A CASE IN WHICH THE ASSESSEE HAD ENDEAVORED TO REDUCE ANY INCOME OR THE INCIDENCE O F TAX. IT WAS POINTED OUT THAT DICAMBA WAS EXPORTED BY THE ASSESSEE TO USA AND OTH ER COUNTRIES. DIRECT EXPORT TO USA WAS NOT PERMISSIBLE AND IN ORDER TO OVERCOME TH IS DIFFICULTY, THE LD. AR SUBMITTED THAT IT WAS ESSENTIAL TO HAVE ENTERPRISE AT USA. KE EPING INTO CONSIDERATION THE BUSINESS INTEREST, IT WAS DECIDED BY THE ASSESSEE TO CREATE ITS AE UNDER THE NAME OF GHARDA USA INC. IT WAS PUT FORTH THAT TOTAL QUANTITY SOLD BY THE ASSESSEE TO ITS AE WAS 2,72,100 KGS. DICAMBA AS AGAINST THE TOTAL SALE OF 4,18,803/- KGS. TO SEVERAL OTHER DESTINATION COUNTRIES INCLUDING THE EXPORT TO AE. THE LD. A.R POINTED OUT THAT GHARDA USA INC. WAS ACTUALLY IN LOSSES OVER A PERIOD OF YE ARS AS AGAINST THE ASSESSEE HAVING POSITIVE INCOME. SHRI PARDIWALA SUBMITTED THAT THE SALE OF DICAMBA TO AE @ 14.66 US $ PER KG. DID NOT RESULT INTO LOWERING OF THE TAX I NCIDENCE IN VIEW OF THE FACT THAT IF HIGHER PRICE HAD BEEN CHARGED FROM AE, THAT WOULD H AVE RESULTED INTO FURTHER LOSSES IN THE HANDS OF AE. BY SELLING DICAMBA AT THIS RATE T O AE, THE LD. A.R STATED THAT THERE WAS NO ULTIMATE EFFECT ON THE TAX LIABILITY OF THE ASSESSEE, WHEN CONSIDERED IN TOTALITY ITA NO.2242/MUM/06(A.Y. 2002-03) 7 ALONG WITH ITS AE. IN VIEW OF THESE FACTS IT WAS P UT FORTH THAT THE ENTIRE EXERCISE DONE BY THE TPO BE DECLARED AS ILLEGAL AND THE ALP DECLARED BY THE ASSESSEE BE ACCEPTED. 9. WE ARE NOT CONVINCED WITH THIS SUBMISSION FOR TH E REASON CHAPTER X CONTAINS SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX. SE CTIONS 92 TO 92F DEAL WITH THE COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIO NS HAVING REGARD TO ALP. SECTION 92(1) STATES THAT INCOME ARISING FROM AN INTERNATIO NAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP. THERE IS NO DISPUTE ON THE FACT THAT M/S. GHARDA USA INC. IS AN ASSOCIATED ENTERPRISE OF THE ASSESSEE WITHIN THE MEANING SECTION 92A AND AS SUCH THE TRANSACTIONS OF THE SALE OF DICAMBA BY THE ASS ESSEE TO ITS AE ARE INTERNATIONAL TRANSACTIONS AS PER SECTION 92B OF THE ACT. IN SUC H A SITUATION COMPUTATION OF ALP IS REQUIRED TO BE MADE ACCORDING TO THE PROVISIONS OF SECTION 92C. THE RATIONALE BEHIND THE TRANSFER PRICING PROVISIONS IS TO CURTAIL THE A VOIDANCE OF TAX IN INDIA. THE ARGUMENT ADVANCED BY THE LD. A.R THAT THE TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE IN VIEW OF THE TOTAL INCIDENCE OF TAX REMAINING AT THE SAME LEVAL DUE TO LOSSES INCURRED BY AE OFFSETTING THE INCOME OF THE ASSESSEE, DOES NOT M ERIT ACCEPTANCE. THE INTENT AND PURPOSE OF THESE PROVISIONS IS NOT TO ENSURE THAT THERE IS NO DIMINUITION IN THE TAX LIABILITY OF INDIAN ENTERPRISE AS WELL AS ITS AE ON A TOTAL BASIS. RATHER THE LOGIC IS TO MAKE CERTAIN THAT THE TRANSACTIONS BETWEEN THE ASS OCIATED ENTERPRISES SHOULD NOT BE ARRANGED IN SUCH A WAY THAT THE ULTIMATE TAX PAYABL E IN INDIA IS ARTIFICIALLY REDUCED. IF GOODS WORTH RS. 100/-, WHICH ARE SOLD FOR RS. 125/- TO UNRELATED PARTIES ARE SOLD TO THE AE AT RS. 105/-, THERE IS REDUCTION OF INCOME TO TH E EXTENT OF RS. 20/- IN THE HANDS OF INDIAN ENTERPRISE. IF THE INDIAN ENTERPRISE HAD CH ARGED THE SAME PRICE FROM ITS AE AS ITA NO.2242/MUM/06(A.Y. 2002-03) 8 THAT FROM THE UNRELATED PARTIES, ITS PROFIT WOULD H AVE BEEN RS. 25/- INSTEAD OF RS. 5/- BY WAY OF A SALE TO AE. HOW MUCH TAX IS PAID BY THE FOREIGN AE IS NOT RELEVANT IN THE DETERMINATION OF CORRECT TAX LIABILITY IN THE HANDS OF THE INDIAN ENTERPRISE. WHAT IS MATERIAL IS THAT THE RIGHTFUL TAX PAYABLE IN INDIA SHOULD NOT SUFFER DUE TO THE ADJUSTMENT OF PRICE FOR GOODS OR SERVICES BETWEEN THE RELATED ENTERPRISES. THE CONTENTION OF THE LD AR THAT THE ENTIRE EXERCISE OF DETERMINING ALP OF THE TRANSACTIONS BETWEEN THE TWO ENTERPRISES IS USELESS AS THE PRICE CHARGED OR PAID BY ONE ENTERPRISE TO ANOTHER AE IS TAX-NEUTRAL ON TOTALITY, THEREFORE, IS SANS MERIT. THE PAYMENT OF TAX BY THE AE ABROAD DOES NOT CONTRIBUTE ANYTHING TO THE INDIAN EXCHEQUE R. IMPORTANT FACTOR IS THE PAYMENT OF TAX QUA INDIA AND NOT QUA THE ASSESSEE ALONG WITH ITS AE ON A WHOLE. . IF W E AGREE WITH THIS SUBMISSION OF THE LD. A.R THAT AS THE UL TIMATE TAX LIABILITY OF THE ASSESSEE TOGETHER WITH ITS AE DOES NOT VARY EVEN IF THE LOW ER PRICE IS CHARGED INTER SE, AND HENCE THE EXERCISE DONE BY THE TPO BE HELD AS FRUITLESS, THEN THE PROVISIONS OF SECTION 92 TO 92F WOULD BECOME REDUNDANT. SINCE THE PROVISIONS R EQUIRE THE DETERMINATION OF THE ALP IN AN INTERNATIONAL TRANSACTION BETWEEN THE ASS OCIATED ENTERPRISES, IT IS IMPERATIVE TO UNDERGO THIS EXERCISE SO AS TO PREVENT ANY LOSS TO THE COFFERS OF INDIA KITTY. WE THEREFORE, REJECT THIS SUBMISSION MADE ON BEHALF OF THE ASSESSEE AS DEVOID OF ANY MERIT. 10. THE LD. COUNSEL FOR THE ASSESSEE NEXT CONTENDED THAT THE ALP DETERMINED BY IT AT 14.66 US $ PER KG. WAS BASED ON REPORT OF MR. BUHN AND THE SAME DESERVED TO BE ACCEPTED. HE STATED THAT THE ASSESSEE OPTED FOR EX TERNAL CUP METHOD FOR DETERMINING THE ALP. ELABORATING FURTHER HE POINTED OUT THAT T HE PRICE CHARGED BY THE ASSESSEE FROM OTHER NON-USA PARTIES WAS FOR SMALL LOTS REFLECTING THE DIRECT EXPORT TO THEM AS AGAINST ITA NO.2242/MUM/06(A.Y. 2002-03) 9 THE SALE MADE TO ITS AE ON WHOLESALE BASIS FOR MAKI NG FURTHER SALE TO VARIOUS CUSTOMERS IN USA ON RETAIL BASIS. HE STATED THAT DUE TO LOCA L LAWS OF USA IT WAS NOT POSSIBLE FOR THE ASSESSEE TO MAKE DIRECT EXPORTS TO THE CUSTOMER S, WHICH NECESSITATED THE BRINING INTO EXISTENCE ITS AE SO THAT DICAMBA COULD BE SO LD IN USA. AT THIS STAGE THE LD. A.R ARGUED THAT THE ASSESSEE CATEGORICALLY SUBMITTED BEFORE THE LD. CIT(A) THAT INSTEAD OF CUP METHOD, THE RESALE PRICE METHOD FOR DETERMINATI ON OF ALP SHOULD BE CONSIDERED. BY REFERRING TO CERTAIN PAGES OF THE PAPER BOOK IT WAS STATED THAT GHARDHA USA INC. HAD ACTUALLY SUFFERED LOSSES AND THE RESALE PRICE METH OD WAS MOST APPROPRIATE AS THE ALP CANNOT BE ASCERTAINED AT AN EXORBITANT FIGURE IN DI SREGARD TO THE STARK REALITY OF THERE BEING LOSS IN THE HANDS OF THE AE. IN SUCH SITUATI ON, IT WAS SUBMITTED, THAT THERE WAS NO REASON TO CONSIDER THE PRICE OF 19.587 US $ PER KG. OF DICAMBA AS ALP. THE ARGUMENTS WERE CONCLUDED BY STATING THAT EITHER TH E RESALE PRICE METHOD SHOULD BE CONSIDERED FOR DETERMINING THE ALP OR EXTERNAL CU P METHOD BASED ON THE REPORT OF MR. BUHN BE EMPLOYED FOR THE SAID PURPOSE. 11. IN THE OPPOSITION THE LD. D.R STATED THAT THE INTERNAL CUP METHOD PRESSED INTO SERVICE BY THE TPO WAS MOST APPROPRIATE IN THIS CAS E AND THERE WAS NO NEED FOR RELYING ON EXTERNAL CUP METHOD AS THE EXTERNAL EVI DENCE, BEING THE REPORT OF MR. BUHN WAS NOT RELIABLE FOR SEVERAL REASONS. HE SUBMITTED THAT PRIMARILY THERE WAS NO MATERIAL TO INDICATE AS TO WHETHER MR. BHUN, A PRIVATE INDIV IDUAL CLAIMED BY THE ASSESSEE AS EXPERT IN THIS FIELD, WAS EVEN COMPETENT TO ISSUE SUCH REPORT, WHICH, IN TURN, WAS IN THE ITA NO.2242/MUM/06(A.Y. 2002-03) 10 NATURE OF A SELF SERVING EVIDENCE. HE THEN SUBMIT TED THAT THE PRICE STATED IN THIS REPORT WAS NOT BACKED BY ANY DATA FROM SOME GOVERNMENT AG ENCY IN USA. IT WAS POINTED OUT THAT MR. BUHN TOOK INTO CONSIDERATION ONLY CE RTAIN INSTANCES OF IMPORT MADE BY ONE USA PARTY FROM CHINA WHICH WAS INAPPROPRIATE IN AS MUCH AS IT WAS IMPERATIVE TO CONSIDER THE IMPORT PRICE OF DICAMBA IN RELATION TO ALL THE PARTIES IN USA SO AS TO DETERMINE THE CORRECT AND FAIR ALP OF THE TRANSACTI ON BETWEEN ASSESSEE AND AE. SINCE THE ASSESSEE HAD ITSELF EFFECTED EXPORTS TO OTHER COUNTRIES, THE LD. D.R STATED THAT THE PRICE CHARGED FROM OTHER UNRELATED CUSTOMERS THREW A PROPER LIGHT ON THE CORRECT ALP WHICH WOULD HAVE BEEN CHARGED BY IT FROM ITS AE. 12. AFTER CONSIDERING THE RIVAL SUBMISSIONS ON THIS POINT AND PERUSING THE RELEVANT MATERIAL ON RECORD WE FIND THAT SECTION 92C(1) LIS TS CERTAIN METHODS FROM (A) TO (F) AS RELEVANT FOR DETERMINING THE ALP. IT HAS BEEN MENT IONED THAT THE MOST APPROPRIATE METHOD SHOULD BE CONSIDERED HAVING REGARD TO THE NA TURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS ETC. TH E FIRST IS COMPARABLE UNCONTROLLED PRICE METHOD AND THE SECOND IS RESALE PRICE METHOD . IN THE PRESENT APPEAL WE ARE CONCERNED WITH THE CHOICE BETWEEN THESE TWO METHOD S ONLY, AS NO PARTY HAS RELIED ON ANY OTHER METHOD. 13. FIRSTLY WE SHALL DEAL WITH THE SUBMISSION OF LD. A.R ABOUT THE APPLICABILITY OF RESALE PRICE METHOD. IN ORDER TO PROPERLY APPRECIA TE THIS CONTENTION, IT WILL BE RELEVANT TO CONSIDER RULE 10B FOR DETERMINING OF ALP. CLAUS E (B) OF RULE 10B(1) READS AS UNDER:- ITA NO.2242/MUM/06(A.Y. 2002-03) 11 (B) RESALE PRICE METHOD, BY WHICH, ( I ) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVICES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED; ( II ) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A N ORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATED ENTER PRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROVIDING THE SAME OR SIMILAR SERVICES, IN A COMPARABLE UNCON TROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS; ( III ) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE PURCHASE OF PROPE RTY OR OBTAINING OF SERVICES; ( IV ) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERENCES IN ACCOUNT ING PRACTICES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS P ROFIT MARGIN IN THE OPEN MARKET; ( V ) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE ( IV ) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE PROP ERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM THE ASSOCIATED ENTE RPRISE; (EMPHASIS SUPPLIED BY US) 14. A BARE PERUSAL OF SUB-RULE (B) BRINGS T O FORE THAT IT IS APPLICABLE WITH REFERENCE TO THE PROPERTY PURCHASED OR SERVICES OBTAINED BY AN ENTERPRISE FROM ITS AE WHICH IS THEREAFTER RESOLD OR ARE PROVIDED TO THE UNRELATED ENTERPRISE. IT SHOWS THAT IF THE INDIAN ENTERPRISE PURCHASES GOOD OR OBTAINS SERVICES FROM ITS AE IN AN INTERNATIONAL TRANSACTION, THEN THE ALP SHALL BE DETERMINED BY AD JUSTING THE PRICE AT WHICH THE PROPERTY IS PURCHASED OR SERVICES ARE OBTAINED BY T HE INDIAN ENTERPRISE. IN THE INSTANT CASE WE ARE DEALING WITH A SITUATION IN WHICH THE PROPERTY IS SOLD AND NOT PURCHASED BY AN INDIAN ENTERPRISE FROM ITS AE ABROAD IN AN INTE RNATIONAL TRANSACTION. EX CONSEQUENTI THE RESALE PRICE METHOD CANNOT BE INVOKED IN THE HANDS OF THE ASSESSEE ITA NO.2242/MUM/06(A.Y. 2002-03) 12 IN INDIA FOR THE DETERMINATION OF ALP. IF THE SITU ATION HAD BEEN OTHERWISE THAT THE ASSESSEE HAD PURCHASED THE GOODS FROM ITS AE SITUAT ED IN USA, THEN THIS METHOD COULD HAVE BEEN INVOKED FOR DETERMINING THE ALP. FOR THE SE REASONS WE HOLD THAT RESALE PRICE METHOD IS NOT EVE APPROPRIATE, WHAT TO TALK OF THE MOST APPROPRIATE METHOD FOR DETERMINING OF ALP IN THE PRESENT INTERNATIONAL T RANSACTIONS. 15. NOW WE COME TO CUP METHOD BY WHICH THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED IN COMPARABLE UNCONTROLLED TRANSACTION IS IDENTIFIED. SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES WHICH COULD MATERIALLY A FFECT THE PRICE IN THE OPEN MARKET. THE ADJUSTED PRICE, SO ARRIVED AT, IS TAKEN AS ALP . FROM THE LANGUAGE OF RULE 10B(1)(A) IT IS PALPABLE THAT THE CUP METHOD IS APP LICABLE BOTH IN THE CASES WHERE PROPERTY IS PURCHASED OR SOLD. THE ONLY REQUIREMEN T IS THAT THE PRICE WHICH IS CHARGED OR PAID IN COMPARABLE UNCONTROLLED TRANSACTION SHOU LD BE ADJUSTED TO ACCOUNT FOR DIFFERENCES. IN VIEW OF OUR CONCLUSION ON NON-APPL ICABILITY OF RESALE PRICE METHOD SUPRA , WE ARE LEFT WITH DETERMINATION OF ALP ON THE BAS IS OF CUP METHOD, WHICH IS AS PER SUB-RULE (A) OF RULE 10B(1). THUS THE CONTROVE RSY IS NARROWED DOWN TO FIND OUT THE ALP ON THE BASIS OF INTERNAL CUP METHOD AS IS THE C ASE OF THE REVENUE OR THE EXTERNAL CUP METHOD AS ARGUED BY THE ASSESSEE. 16. ALBEIT NO SUCH DISTINCTION BETWEEN INT ERNAL AND EXTERNAL CUP METHOD IS RECOGNIZED IN THE ACT OR RULES BUT SINCE THE ARGUME NTS OF THE RIVAL PARTIES AND FINDINGS OF THE AUTHORITIES BELOW HAVE REVOLVED AROUND THES E TWO, WE WILL TRY TO ASCERTAIN THE DIFFERENCE BETWEEN THEM. BASICALLY THE PURPOSE OF COMPUTING ALP ON THE BASIS OF CUP ITA NO.2242/MUM/06(A.Y. 2002-03) 13 METHOD IS TO COMPARE THE ADJUSTED PRICE CHARGED FRO M OR PAID TO THE ASSESSEE FOR THE INTERNATIONAL TRANSACTIONS WITH ITS AE VIS--VIS TH AT CHARGED FROM OR PAID TO THE UNRELATED PARTIES UNDER SIMILAR CIRCUMSTANCES. IN CASE OF DIF FERENCE, THE PRICE SETTLED IN THE UNCONTROLLED TRANSACTIONS, AS ADJUSTED AS PER RULE, IS TAKEN AS ALP WITH THE AE. THE INTERNAL CUP METHOD ENVISAGES COMPARING THE UNCON TROLLED TRANSACTIONS OF THE ASSESSEE ITSELF WITH OTHER UNRELATED PARTIES SO AS TO DETERMINE THE ALP WITH THE AE. HOWEVER THE EXTERNAL CUP METHOD DISREGARDS THE PRI CE CHARGED OR PAID BY THE ASSESSEE TO OR FROM ITS UNRELATED PARTIES AND CONTE MPLATES THE COMPARISON OF THE PRICE SO CHARGED FROM OR PAID TO ITS AE WITH SOME EXTER NAL INDEPENDENT RELIABLE PRICE DATA UNDER SIMILAR CIRCUMSTANCES OF TRANSACTIONS WITH AE . ORDINARILY THE INTERNAL CUP METHOD SHOULD BE PREFERRED OVER THE EXTERNAL CUP M ETHOD AS IT NEUTRALIZES SEVERAL DISTINGUISHING FACTORS, SUCH AS THE LOCAL FACTORS AND THE ECONOMIES AVAILABLE OR UNAVAILABLE TO THE ASSESSEE IN PARTICULAR, HAVING BEARING OVER THE COMPARISON OF PRICE CHARGED FROM UNRELATED PARTIES AND AE. THE ESSENCE OF DETERMINING ALP UNDER CUP METHOD IS TO ENSURE THAT THE PRICE CHARGED BY THE I NDIAN ENTERPRISE FROM ITS AE SHOULD BE CONSISTENT WITH THAT CHARGED FROM UNRELATED PART IES UNDER SIMILAR CIRCUMSTANCES. THE IMPORTANCE OF THE SIMILAR CIRCUMSTANCES CAN NOT BE LOST SIGHT OF IN THIS CONTEXT BECAUSE A ROUND CANNOT BE COMPARED WITH A SQUARE A ND A RECTANGLE WITH A TRIANGLE. IN OTHER WORDS THE UNCONTROLLED TRANSACTIONS WHICH AR E CONTEMPLATED FOR COMPARISON SHOULD BE ALIKE, IF NOT IDENTICAL. SIMILARITY BETWE EN THE TWO SETS OF TRANSACTIONS CAN BE JUDGED BY THE QUALITY, GRADE AND QUANTITY OF THE MA TERIAL. IN ADDITION, THE FACTORS LIKE THE LOCATION OF THE PARTIES, AVAILABILITY OF RAW MATERI AL; DEMAND AND SUPPLY EQUATION ALSO PLAY PIVOTAL ROLE IN FINDING OUT AS TO WHETHER THE TWO ARE REALLY COMPARABLE OR NOT. THUS ITA NO.2242/MUM/06(A.Y. 2002-03) 14 IN THE INTERNAL CUP METHOD THE LOCAL FACTORS OF AE IN THE OTHER COUNTRY AND ALL THE RELEVANT FACTORS WHICH COULD HAVE BEARING ON THE P RICE SO CHARGED FROM AE MUST BE TAKEN INTO CONSIDERATION. WE ARE DEALING WITH A CA SE IN WHICH THE ASSESSEE HAS ITS AE IN USA AND RATE CHARGED IS 14.66 US$ PER KG OF DIC AMBA. THERE IS NO OTHER EXPORT BY THE ASSESSEE TO USA. THE UNCONTROLLED TRANSACT IONS OF EXPORT MADE BY THE ASSESSEE ARE TO OTHER COUNTRIES SUCH AS UK, NETHERL ANDS, NEWZEALAND, AUSTRALIA, FRANCE ETC. IN RESPECT OF WHICH AVERAGE RATE OF 20. 67 US $ PER KG. OF DICAMBA HAS BEEN DETERMINED BY THE TPO FOR COMPUTING THE ALP. ALL OTHER TRANSACTIONS OF EXPORT BY THE ASSESSEE ARE TO NON-USA COUNTRIES. THE PRICE ON WHICH A PARTICULAR PRODUCT IS AVAILABLE IN ONE COUNTRY MAY LARGELY VARY FROM THE PRICE PREVAILING IN OTHER COUNTRIES DUE TO HOST OF FACTORS. THE COUNTRY WHICH IS PRODU CER OF A PARTICULAR COMMODITY OR ITS RAW MATERIAL MAY HAVE LOWER SALE PRICE IN COMPARISO N WITH THE COUNTRY WHICH IS SHORT OF SUCH NATURAL RESOURCES. SIMILARLY THE PRICE MAY VA RY FROM ONE COUNTRY TO ANOTHER DEPENDING UPON CLIMATIC CONDITIONS AND THE DEMAND AND SUPPLY FACTORS. THUS THE PRICE CHARGED BY AN INDIAN PARTY FROM UK OR AUSTRAL IA MAY BE AT MUCH VARIANCE WITH THAT CHARGED FROM USA. IN SUCH A SCENARIO NO VAL ID COMPARISON CAN BE MADE BETWEEN THE PRICE CHARGED BY THE ASSESSEE FROM OTHER COUNTR IES WITH THAT FROM USA, MORE PARTICULARLY WHEN WE VIEW THE QUANTITY EXPORTED TO USA ON WHOLESALE BASIS WITH THAT TO OTHER COUNTRIES IN SMALL LOTS ON RETAIL BASIS. WE, THEREFORE, HOLD THAT THE INTERNAL CUP METHOD IS NOT SUITABLE IN THE PRESENT CIRCUMSTANCE S. 17. NOW WE COME TO THE EXTERNAL CUP METHOD WHICH H AS BEEN ARGUED BY THE LD. A.R TO BE THE MOST APPROPRIATE IN THE GIVEN CIRCU MSTANCES. AS DISCUSSED ABOVE, THIS METHOD CONTEMPLATES COMPARISON OF THE PRICE CHARGED BY THE ASSESSEE FROM ITS AE WITH ITA NO.2242/MUM/06(A.Y. 2002-03) 15 THAT AT WHICH THE GOODS ARE AVAILABLE IN THE OPEN M ARKET IN THAT COUNTRY FROM TRANSACTIONS BETWEEN THE UNRELATED THIRD PARTIES. WITH A VIEW TO DETERMINE THE PRICE AT WHICH SUCH GOODS ARE AVAILABLE IN THE OPEN MARKET IN THAT COUNTRY, IT IS SINE QUA NON TO CONSIDER THE PRICE AT WHICH SUCH GOODS ARE IMPORTED BY OTHER PARTIES ON AN AVERAGE BASIS. SUCH AN AVERAGE PRICE SHOULD BE SOME REALIST IC PRICE REPRESENTING THE PRICE FROM THE WHOLE OR THE LARGE PART OF WHOLE OF THE IMPORTS MADE IN USA OF THIS PRODUCT AND NOT SOME ISOLATED OR A STRAY TRANSACTION. IF PRODUCT A IS IMPORTED BY HUNDRED PARTIES AT THE RATES RANGING BETWEEN 50 US$ TO 70US$ FROM DIFFEREN T COUNTRIES, THEN THE LOWEST PRICE OF 50US$ CANNOT BE TREATED AS ALP. RATHER IN SUCH A SITUATION THE AVERAGE PRICE OF 60US$ SHOULD BE TAKEN AS ALP. ADVERTING TO THE FACTS OF THE CASE, WE FIND THAT THE ASSESSEE IS RELYING ON THE REPORT OF MR. BUHN IN SU PPORT OF THE PRICE SHOWN BY IT AS ALP. IN OUR OPINION THE REPORT OF MR. BUHN, AS IT IS, C ANNOT BE THE SOLE BASIS FOR DETERMINING THE ALP ON COMPARABLE UNCONTROLLED PRICE METHOD FO R THE REASON THAT MR. BUHN IS NOT A GOVERNMENT AGENCY OF USA, WHO COULD VOUCH FOR THE PRICE AT WHICH DICAMBA IS IMPORTED IN USA FROM VARIOUS COUNTRIES. HE, IN TUR N, HAS RELIED ON CERTAIN STRAY INSTANCE OF M/S. ALBAUGH INC. IMPORTING DICAMBA FR OM CHINA AT CIF VALUE/ LB. TECHNICAL AT 5.44 US $ PER KG. RELIANCE ON SUCH SELECTIVE DATA, WHEN HE HIMSELF IS ACKNOWLEDGING THAT FOR CERTAIN TRANSACTIONS IN THIS LOT TOO, THE RATE IS `NOT KNOWN AND FURTHER THE PRICE WHICH HAS BEEN TAKEN NOTE OF BY HIM IS NOT SUBSTANTIATED BY ANY GOVERNMENT AGENCY OF USA, CANNOT BE A BEST GUIDE FO R THE DETERMINATION OF ALP. AS SUCH WE ARE NOT INCLINED TO ACCEPT THE PRICE SHOWN IN THE REPORT OF MR. BUHN AS REPRESENTING THE CORRECT ALP. ITA NO.2242/MUM/06(A.Y. 2002-03) 16 18. THE LD. COUNSEL FOR THE ASSESSEE HAS PLACE D ON THE RECORD ONE PAPER BOOK CONTAINING ADDITIONAL EVIDENCE, WHICH IN HIS OPINIO N HAS CERTAIN DATA FROM THE GOVERNMENT OF USA AGENCY RELEVANT FOR DETERMINING A LP OF DICAMBA. SINCE THE AUTHORITIES BELOW HAVE GONE BY THE DETERMINATION OF ALP ON THE BASIS OF INTERNAL CUP METHOD, WHICH IN OUR CONSIDERED OPINION IS NOT APPR OPRIATE IN THE GIVEN CIRCUMSTANCES, IT WILL BE IN THE INTEREST OF JUSTICE IF IMPUGNED O RDER IS SET ASIDE ON THIS SCORE AND THE MATTER IS RESTORED TO THE FILE OF A.O. WE ORDER AC CORDINGLY AND DIRECT HIM TO GET THE FRESH ALP DETERMINED FROM THE TPO IN THE LIGHT OF O UR FOREGOING DISCUSSION. NEEDLESS TO SAY THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPOR TUNITY OF BEING HEARD AND WILL ALSO BE ENTITLED TO LEAD FRESH EVIDENCE IN SUPPORT OF IT S CASE. 19. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 30 TH DAY OF NOV. 2009. SD/- SD/- (P.MADHAVI DEVI) (R.S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT. 30 TH NOV. 2009 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT(A)IX 4. THE CIT IX 5. THE D.RL BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. FIT FOR PUBLICATION (J.M) (A.M) ITA NO.2242/MUM/06(A.Y. 2002-03) 17 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 26/11/09 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 27/11/09 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER *