ACIT, CHENNAI V. M/s. Coastal Energy Pvt. Ltd., CHENNAI

ITA 63/CHNY/2008

• Counselvise Citation: 6321714 RSA 2008
• Duration Of Justice: 7 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2015
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 21-09-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 11-01-2008
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: DR ANITA SUMANTH
• Keywords: Transfer pricing; International transaction
• Section: 92C; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , ! ' , # $% BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ./ ITA NO. 63/MDS/2008 / ASSESSMENT YEAR : 2004-05 THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-1(3), CHENNAI-34. ( /APPELLANT) VS M/S. COASTAL ENERGY PVT. LTD., NO.5, MOORES ROAD, CHENNAI-600006. PAN AAACC4160A ( /RESPONDENT) / APPELLANT BY : SHRI PATHLAVATH PEERYA, CIT / RESPONDENT BY : DR. ANITA SUMANTH, ADVOCATE / DATE OF HEARING : 21.09.2015 ! / DATE OF PRONOUNCEMENT: 28.10.2015 / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) DATED 11 .10.2007. - - ITA 63/08 2 2. THE ONLY GROUND RAISED BY THE REVENUE IN THIS AP PEAL IS THAT THE CIT(APPEALS) ERRED IN DELETING THE ADDITIO N OF ` 30,07,072/- TOWARDS ADJUSTMENT OF ARMS LENGTH PRIC E. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E HAS IMPORTED COAL AND SUPPLIED TO VARIOUS PARTIES IN IN DIA. THE COAL WAS IMPORTED FROM DUBAI AND SUCH COAL HAD THE ORIGI NAL OF CHINESE, SOUTH AFRICAN AND INDONESIA COUNTRIES. TH ERE WAS A PRICE DIFFERENCE BETWEEN THESE VARIETIES KEEPING IN VIEW THEIR QUALITY AND OTHER FACTORS AND THERE ARE SEVEN SUCH TRANSACTIONS, WHICH IS AS FOLLOWS : ORIGIN SALE BY CON TO CEPL ARMS LENGTH VARI- ATION (%) QTY RATE/ M.TON VALUE ($) RATE/ M.TON VALUE CHINESE 54611.00 33.15 1810354.65 33.15 1810354.65 - SOUTH AFRICAN SHIP- MENT-I 17185.00 80.25 1379096.25 76.40 1312934.00 (5.04) INDO- NESIAN -NO.1 20000.00 32.60 652000.00 33.57 671400.00 2.89 -NO.2 1000.00 22.05 22050.00 22.05 671400.00 - -NO.3 16477.54 71.93 1185229.31 70.76 1165950.59 (1.65) -NO.4 38500.00 22.75 875875.00 27.35 1052889.57 16.81 -NO.5 45450.00 42.00 1908900.00 42.00 1908900.00 - - - ITA 63/08 3 SINCE, THERE IS PRICE VARIATION FOR MORE THAN FIVE PERSONS, THE ASSESSING OFFICER CONSIDERED THE TP ADJUSTMENT AT ` 30,07,072. THE ASSESSEE CARRIED THE MATTER TO THE CIT(APPEALS) . 4. THE LD. AR, SUBMITTED BEFORE THE CIT(APPEALS) TH AT ON ACCOUNT OF GEOGRAPHICAL DIFFERENCE BETWEEN THE VARI OUS SUPPLIERS FROM DIFFERENT COUNTRIES, SOME VARIATION AS POINTED OUT BY THE ASSESSEE DOES ARISE, WHICH HAS BEEN PROPERLY EXPLAI NED. IT WAS ALSO SUBMITTED THAT IF AT ALL, ANY ADJUSTMENTS WERE REQUIRED, THE SAME SHOULD HAVE BEEN MADE IN ACCORDANCE WITH THE P ROVISIONS OF SEC.92C(2) OF THE ACT, WHEREBY THE TPO HAS TO AD OPT THE ARITHMETICAL MEAN OF THE SAME PRODUCT FOR DETERMINI NG THE ARMS LENGTH PRICE(ALP). ACCORDING TO THE LD. AR, THE TP O HAS NOT PROPERLY APPLIED THE ARITHMETIC MEAN AS GIVEN IN TH E PROVISO TO SEC.92(C) OF THE ACT. FURTHER, THE LD. AR SUBMIT TED THAT IT IS AN AVERAGE OF ALL THE TRANSACTIONS WITH REGARD TO IMPO RT OF COAL WHICH SHOULD BE CONSIDERED, WHEREAS THE TPO HAS MIS-DIREC TED IN APPLYING COAL SUPPLY FROM SOUTH AFRICA ONLY. 4.1 THE CIT(APPEALS), ACCEPTING THE CONTENTION OF T HE LD. AR OBSERVED THAT THE OBJECTIVE BEHIND INTRODUCTION OF TRANSFER PRICING REGULATIONS IN INDIA IS TO CURB EROSION OF TAXES BY MANIPULATION OF - - ITA 63/08 4 PRICES. ACCORDING TO HIM, CIRCULAR NO.12 OF THE CB DT STATED THAT THERE IS A NEED TO ENSURE THE TAX PAYER ARE NOT PUT TO AVOIDABLE HARDSHIP UNNECESSARILY. HE FURTHER OBSERVED THAT T HE ASSESSEE IS CARRYING ON IMPORT AND SUPPLY OF COAL AND DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2004-05, THERE WERE 7 SHIPMENTS OF COAL. HE OBSERVED THAT THE CONTENTION OF THE ASSESSEE WAS THAT CUP IS THE MOST APPROPRIATE METH OD FOR THE PURPOSE OF ARRIVING AT THE ALP AND THE ASSESSEE COM PARED THE PRICES CHARGES BY THE AE VIZ. COAL AND OIL LLC FOR THE SUPPLIES MADE TO THE ASSESSEE AS AGAINST PRICES CHARGED TO O THERS BEING COMPARABLE, UNCONTROLLED TRANSACTIONS. FURTHER, HE OBSERVED THAT THE PLEA OF THE ASSESSEE WAS THAT THE PRICE VA RIATION IN IMPORTED COAL IS DUE TO LOCATION OF DIFFERENT PORTS AND DIFFERENCE IN PRICE IS DUE TO DIFFERENCE IN FREIGHT RATE AND D IVERSION CHARGES. THE CIT(APPEALS) FURTHER OBSERVED THAT THE TPO ADOP TED THE PRICE PAID FOR THE THIRD PARTY AS ALP IN RESPECT OF COAL SHIPMENTS FROM SOUTH AFRICA ONLY. ACCORDING TO HIM, IN THE SAID SHIPMENT THE VARIATION WAS 5.04%, THE TPO RECOMMENDED ADJUST MENTS OF ` 30,07,072/- AS ADJUSTED PRICE DIFFERENCE, WHICH WA S ADOPTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER. - - ITA 63/08 5 4.2 THE CIT(APPEALS) OBSERVED THAT THE TPO HAS NOT PROPERLY APPLIED THE ARITHMETICAL MEAN IN RESPECT O F ALL THE SHIPMENTS. ACCORDING TO THE CIT(APPEALS), AS PER PROVISO TO SEC.92C(2) OF THE ACT, WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ALP SHALL BE TA KEN TO THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION O F THE ASSESSEE, THE PRICE WHICH MAY VARY FROM THE ARITHME TICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. HE FURTHER OBSERVED THAT THE DICTIONARY MEANING OF ARI THMETICAL MEAN IS THE AVERAGE OF A SET OF QUANTITIES. ACCO RDING TO HIM, FROM THE ABOVE ARITHMETICAL MEANS THE SUM TOTAL DIV IDED BY THE NUMBER OF UNITS PERFORMED. THEREFORE, HE HELD THAT SINCE THERE ARE 7 SHIPMENTS WHICH THE ASSESSEE IMPORTED, THE A RITHMETICAL MEAN IN RESPECT OF ALL THESE SHIPMENTS SHOULD BE AR RIVED AT IN DETERMINING THE PERCENTAGE OF VARIATION TO SEE WHET HER THE VARIATION IS EXCEEDING 5% OF ARITHMETICAL MEAN. FU RTHER, THE CIT(APPEALS) OBSERVED THAT THE ARITHMETICAL MEAN IN CLUDING INTEREST, PENAL CHARGES AND OTHER SUPPLIERS PURCHA SES IS 1.92% AND BEFORE THESE CHARGES, THE ARITHMETICAL MEANS IS 1.86%. ACCORDING TO HIM, THE ASSESSEE HAS DEMONSTRATED IT S IMPORTS OF - - ITA 63/08 6 COAL IS AT ALP FROM INDIAN TRANSFER PRICING PERSPEC TIVE AND THERE IS NO BASIS FOR ANY ADJUSTMENT. ACCORDINGLY, HE DE LETED THE ADDITION. AGGRIEVED BY THIS, THE REVENUE IS IN APP EAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IN THIS CASE, THE MAIN CONTENTION OF TH E LD. AR IS THAT ARITHMETICAL MEAN IN RESPECT OF SEVEN SHIPMENTS SHO ULD BE ARRIVED AT DETERMINING THE ALP AND IF IT IS VARIATI ON IS BELOW 5%, THERE COULD NOT BE ANY TP ADJUSTMENT IN VIEW OF SEC .92(C) OF THE ACT. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT TRANSACTIONS CAN BE CONSIDERED AS ONE UNIT ONLY IF THEY ARE CLOS ELY LINKED. WE HAVE GONE THROUGH RULE 10A(D) AND 10B OF THE I.T. R ULES. ON A COMBINED READING OF THESE TWO RULES, A NUMBER OF TR ANSACTIONS CAN BE AGGREGATED AND CONSTRUED AS A SINGLE TRANSAC TION FOR THE PURPOSES OF DETERMINING THE ALP PROVIDED THAT SUCH TRANSACTIONS ARE CLOSELY LINKED. OSTENSIBLY THE RATIONALE OF AGGREGATING CLOSELY LINKED TRANSACTIONS TO FACILITATE DETERMI NATION OF ALP ENVISAGED A SITUATION WHERE IT WOULD BE INAPPROPRIA TE TO ANALYSIS THE TRANSACTIONS INDIVIDUALLY. THE PROPOSITION THA T A NUMBER OF INDIVIDUAL TRANSACTIONS CAN BE AGGREGATED AND CONST RUED AS A COMPOSITE TRANSACTION IN ORDER TO COMPUTE ALP ALSO FINDS AN - - ITA 63/08 7 ECHO IN THE OECD GUIDELINES UNDER CHAPTER III. CON SIDERING THE LEGISLATIVE INTENT MANIFESTED BY WAY OF RULE 10A(D) R.W. RULE 10B OF THE RULES, IT CLEARLY EMERGES THAT IN APPROPRIAT E CIRCUMSTANCES WHERE CLOSELY LINKED TRANSACTIONS EXIST, THE SAME S HOULD BE TREATED AS ONE COMPOSITE TRANSACTION AND A COMMON T RANSFER PRICING ANALYSIS BE PERFORMED FOR SUCH TRANSACTIONS BY ADOPTING THE MOST APPROPRIATE METHOD. IN OTHER WORDS, IN A GIVEN CASE WHERE A NUMBER OF CLOSELY LINKED TRANSACTIONS ARE S OUGHT TO BE AGGREGATED FOR THE PURPOSES OF BENCH MARKING WITH U NCONTROLLED TRANSACTIONS, SUCH AN APPROACH CAN BE SAID TO BE WE LL ESTABLISHED IN THE TRANSFER PRICING REGULATION HAVI NG REGARD TO RULE 10A(D) OF THE RULES. THOUGH IT IS NOT FEASIBL E TO DEFINE THE PARAMETERS IN A WATER TIGHT COMPARTMENT AS TO WHAT TRANSACTIONS CAN BE CONSIDERED AS CLOSELY LINKED, SINCE THE SA ME WOULD DEPEND ON FACTS AND CIRCUMSTANCES OF EACH CASE. SO , HOWEVER, AS PER AN EXAMPLE NOTED BY THE INSTITUTE OF CHARTER ED ACCOUNTANTS OF INDIA, IN ITS GUIDANCE NOTES ON TRAN SFER PRICING, IT IS STATED THAT TWO OR MORE TRANSACTIONS CAN BE SAID TO BE CLOSELY LINKED, IF THEY EMANATE FROM A COMMON SOURCE, BEIN G AN ORDER OR CONTRACT OR AN AGREEMENT OR AN ARRANGEMENT, AND THE NATURE, - - ITA 63/08 8 CHARACTERISTIC AND TERMS OF SUCH TRANSACTIONS SUBST ANTIALLY FLOW FROM THE SAID COMMON SOURCE. 6. CONSIDERING THE FACTS OF THE PRESENT CASE, WE FI ND THAT ALL THE SEVEN SETS OF INTERNATIONAL TRANSACTIONS UNDERT AKEN BY THE ASSESSEE CANNOT BE CONSIDERED AS CLOSELY LINKED. WE, THEREFORE, REFUSE TO ACCEPT THE CONTENTION OF THE A SSESSEES COUNSEL. BEING SO, WE FIND THAT THE JUDGMENT RELIE D ON BY THE LD. DR IN THE CASE OF DEVELOPMENT CONSULTANTS (P) LTD. V. DCIT (23 SOT 455), WHEREIN IT WAS HELD THAT THE ALP SHOULD B E DETERMINED ON A TRANSACTION-BY-TRANSACTION BASIS AN D NOT ON AN AGGREGATE BASIS AS ARGUED BY THE ASSESSEES COUNSEL . THE SAME VIEW WAS TAKEN BY THE TRIBUNAL IN THE CASE OF ACIT V. UE TRADE CORPORATION (INDIA) (P.) LTD., 44 SOT 457 (DE LHI), WHEREIN IT WAS HELD THAT THE ASSESSING OFFICER WAS WITHIN H IS JURISDICTION FOR THE PURPOSE OF DETERMINING OF ALP BY EXAMINING EACH TRANSACTION SEPARATELY. 7. FURTHER, IN THIS CASE, PRICE VARIATION IS MORE T HAN 5%, ASSESSING OFFICER IS JUSTIFIED IN MAKING ADJUSTMENT OF ALP DETERMINED BY THE TAX PAYER AND THE PROVISO TO SEC. 92C PROVIDES THAT WHERE MORE THAN ONE PRICE MAY BE DETERMINED BY THE MOST - - ITA 63/08 9 APPROPRIATE METHOD, THE ALP SHALL BE TAKEN TO BE TH E ARITHMETICAL MEAN OF SUCH PRICES. IN THE INSTANT CASE ONLY ONE PRICE HAS BEEN DETERMINED UNDER MOST APPROPRIATE METHOD, THE QUEST ION OF APPLICATION OF THE PROVISO DOES NOT ARISE. THIS VI EW IS SUPPORTED BY THE DECISION RELIED ON BY THE LD. DR IN THE CASE OF ACIT V. M/S. ESSAR STEEL LTD. IN ITA NO.228 OF 2008 DATED 25.1.2011[VISAKHAPATNAM). ACCORDINGLY, THE ASSESSE E IS NOT ENTITLED FOR CONCESSION AS PRESCRIBED IN THE PROVIS O TO SEC.92C(2) OF THE ACT. 8. IN THE RESULT, THE REVENUES APPEAL IS ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 28 TH OF OCT., 2015 AT CHENNAI. SD/- SD/- ( ' . . ' . #$ ) ( % & ' ( ) ) N.R.S.GANESAN * )+,-./0-1223-04* 5 67 /JUDICIAL MEMBER 6789::2;.<-.<=>?@>0 %5 /CHENNAI, A6 /DATED, THE 28 TH OCT., 2015. MPO* 6$ BCDC /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. E)* /CIT(A) 4. E /CIT 5. CF# G /DR 6. #HI /GF.