Bayer Material Science (P.) Ltd. v. Additional Commissioner of Incometax

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The Tax Publishers2012 TaxPub(DT) 0970 (Mum-Trib) : (2012) 134 ITD 0582 : (2012) 148 TTJ 0581 : (2012) 075 DTR 0119 : (2012) 017 ITR (Trib) 0275 INCOME TAX ACT, 1961 --Transfer picing--Computation of ALPComparables for benchmarking transactions in indenting turnover of business--The assessee entered into international transactions with its Associated Enterprises (AEs). The assessing officer referred the matter of determining the Arm's Length Price (ALP) to the Transfer Pricing Officer (TPO). The TPO passed order under section 92CA(3) by making an upward adjustment to ALP of Rs. 25.56 crores on account of transactions with the overseas AE. The assessing officer proposed addition of Rs. 25.56 crores in the draft assessment order. The assessee filed objections before the DRP, who rejected such objections and confirmed the stand of the Department. Based on the TPOs order and the draft order approved by the DRP, the assessing officer made addition of Rs. 25.56 crores. At this stage, it would be relevant to consider the order of TPO passed on 29-10-2009. From this order it can be seen that during the year in question, the assessee entered into the certain international transactions with its AEs. The assessee furnished segmental accounts in respect of manufacturing and trading activities showing net profit margin in respect of manufacturing at 13.49% and trading at 6.41%. In the opinion of the TPO, the entire Employee cost was required to be bifurcated on the basis of trading and indenting turnover. He, therefore, allocated a sum of Rs. 4.60 crores to the indenting segment. Similarly, as regards Rent totalling Rs. 53.90 lakhs, the assessee attributed equal amount to both the activities. Applying the same yardstick of apportioning in turnover ratio, the TPO allocated Rs. 50.94 lakhs to indenting segment and Rs. 2.96 lakhs to trading segment. In this way, he revised the segmental accounts in respect of trading and indenting activities. The assessee was given an opportunity to give the names of the comparable companies which were indulging in such kind of indenting business in chemicals to prove that its price was at ALP. The assessee failed to discharge this burden. In the light of comparable cases, selected by TPO the TPO held that the arms length commission earned by the assessee on indenting turnover of Rs. 734.83 crores @ 5% would be Rs. 36,74,16,044. As the actual amount received by the assessee was at Rs. 11,17,16,623, the TPO proposed adjustment of Rs. 25,56,99,421. It is this amount of Rs. 25.56 crores which was added by the assessing officer, against which the assessee has come up in appeal. Held: The TPO, in the absence of having been pointed out any comparable uncontrolled case by the assessee or himself finding any such case, was right on the question of picking up the cases having controlled transactions for determining the ALP of the assessees international transactions. When the rate of arm's length indenting commission at 5% is applied to the turnover of Rs. 734.83 crores, the amount of arm's length commission comes to Rs. 36.74 crores. As against that, the assessee showed only a sum of Rs. 11.17 crores as indenting commission. The assessing officer was right in making addition of Rs. 25.56 crores. It is seen that the list of comparable cases initially given by the assessee was meaningless for benchmarking the transactions in the indenting business. Despite the TPOs request, the assessee failed to furnish the names of any comparable cases. The TPO did not find any data of uncontrolled transactions in this activity because of its peculiar nature. It was only thereafter, that he proceeded with the three cases, namely, M/s H International Pvt. Ltd., M/s INEOS ABS (India) Ltd. and M/s R Brothers Madras Ltd. The TPO, in the absence of having been pointed out any comparable uncontrolled case by the assessee or himself finding any such case, was right on the question of picking up the cases having controlled transactions for determining the ALP of the assessees international transactions. [Para 21] Now one will examine the comparability of these cases with that of the assessee. [Pasra 22] It is evident that the similarity in the nature of business and other relevant facts in these cases with that of the assessee, except the volume of turnover, is not in doubt. Now, the question is whether these cases, which are otherwise comparable, should be disregarded simply on the ground of smallness of turnover when compared with that of the assessee. Considering the fact that the assessee did not come out with any comparable case to justify its price at arm's length and further the TPO found out these cases having functionally identical activities duly confronted to the assessee, it is not possible to disregard such cases merely on the ground that the volume of turnover is lower in comparison to that handled by the assessee. One more important factor which cannot be lost sight of is that in the case of M/s R Brothers Madras Ltd. indenting commission is 5% to 6% with turnover of Rs. 10.65 crores. The same rate of commission of 5% prevails in the case of M/s H International Pvt. Ltd. and M/s INEOS ABS (India) Ltd. with turnover of around Rs. 75 crores and around Rs. 80 crores respectively. It shows that the rate of commission in such business does not vary on the basis of turnover. [Para 23] The TPO was justified in considering the three cases as comparable for benchmarking the profits from the assessees indenting activity. The further contention of the AR that the data of these three cases was not in public domain and hence the assessee could not properly distinguish such cases is sans merits. Firstly, it is noted that the TPO confronted and the assessee duly dealt with such cases in its written submissions before the TPO. Further ground no. 14 challenging the lack of adequate opportunity given by the assessing officer and TPO, set out in the memorandum of appeal, has specifically been not pressed by the AR. When the rate of arms length indenting commission at 5% is applied to the turnover of Rs. 734.83 crores, the amount of arms length commission comes to Rs. 36.74 crores. As against that, the assessee showed only a sum of Rs. 11.17 crores as indenting commission. The assessing officer was right in making addition of Rs. 25.56 crores. [Para 25] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0970 (Mum-Trib) : (2012) 134 ITD 0582 : (2012) 148 TTJ 0581 : (2012) 075 DTR 0119 : (2012) 017 ITR (Trib) 0275

INCOME TAX ACT, 1961

--Transfer picing--Computation of ALPComparables for benchmarking transactions in indenting turnover of business--The assessee entered into international transactions with its Associated Enterprises (AEs). The assessing officer referred the matter of determining the Arm's Length Price (ALP) to the Transfer Pricing Officer (TPO). The TPO passed order under section 92CA(3) by making an upward adjustment to ALP of Rs. 25.56 crores on account of transactions with the overseas AE. The assessing officer proposed addition of Rs. 25.56 crores in the draft assessment order. The assessee filed objections before the DRP, who rejected such objections and confirmed the stand of the Department. Based on the TPOs order and the draft order approved by the DRP, the assessing officer made addition of Rs. 25.56 crores. At this stage, it would be relevant to consider the order of TPO passed on 29-10-2009. From this order it can be seen that during the year in question, the assessee entered into the certain international transactions with its AEs. The assessee furnished segmental accounts in respect of manufacturing and trading activities showing net profit margin in respect of manufacturing at 13.49% and trading at 6.41%. In the opinion of the TPO, the entire Employee cost was required to be bifurcated on the basis of trading and indenting turnover. He, therefore, allocated a sum of Rs. 4.60 crores to the indenting segment. Similarly, as regards Rent totalling Rs. 53.90 lakhs, the assessee attributed equal amount to both the activities. Applying the same yardstick of apportioning in turnover ratio, the TPO allocated Rs. 50.94 lakhs to indenting segment and Rs. 2.96 lakhs to trading segment. In this way, he revised the segmental accounts in respect of trading and indenting activities. The assessee was given an opportunity to give the names of the comparable companies which were indulging in such kind of indenting business in chemicals to prove that its price was at ALP. The assessee failed to discharge this burden. In the light of comparable cases, selected by TPO the TPO held that the arms length commission earned by the assessee on indenting turnover of Rs. 734.83 crores @ 5% would be Rs. 36,74,16,044. As the actual amount received by the assessee was at Rs. 11,17,16,623, the TPO proposed adjustment of Rs. 25,56,99,421. It is this amount of Rs. 25.56 crores which was added by the assessing officer, against which the assessee has come up in appeal. Held: The TPO, in the absence of having been pointed out any comparable uncontrolled case by the assessee or himself finding any such case, was right on the question of picking up the cases having controlled transactions for determining the ALP of the assessees international transactions. When the rate of arm's length indenting commission at 5% is applied to the turnover of Rs. 734.83 crores, the amount of arm's length commission comes to Rs. 36.74 crores. As against that, the assessee showed only a sum of Rs. 11.17 crores as indenting commission. The assessing officer was right in making addition of Rs. 25.56 crores.

It is seen that the list of comparable cases initially given by the assessee was meaningless for benchmarking the transactions in the indenting business. Despite the TPOs request, the assessee failed to furnish the names of any comparable cases. The TPO did not find any data of uncontrolled transactions in this activity because of its peculiar nature. It was only thereafter, that he proceeded with the three cases, namely, M/s H International Pvt. Ltd., M/s INEOS ABS (India) Ltd. and M/s R Brothers Madras Ltd. The TPO, in the absence of having been pointed out any comparable uncontrolled case by the assessee or himself finding any such case, was right on the question of picking up the cases having controlled transactions for determining the ALP of the assessees international transactions. [Para 21] Now one will examine the comparability of these cases with that of the assessee. [Pasra 22] It is evident that the similarity in the nature of business and other relevant facts in these cases with that of the assessee, except the volume of turnover, is not in doubt. Now, the question is whether these cases, which are otherwise comparable, should be disregarded simply on the ground of smallness of turnover when compared with that of the assessee. Considering the fact that the assessee did not come out with any comparable case to justify its price at arm's length and further the TPO found out these cases having functionally identical activities duly confronted to the assessee, it is not possible to disregard such cases merely on the ground that the volume of turnover is lower in comparison to that handled by the assessee. One more important factor which cannot be lost sight of is that in the case of M/s R Brothers Madras Ltd. indenting commission is 5% to 6% with turnover of Rs. 10.65 crores. The same rate of commission of 5% prevails in the case of M/s H International Pvt. Ltd. and M/s INEOS ABS (India) Ltd. with turnover of around Rs. 75 crores and around Rs. 80 crores respectively. It shows that the rate of commission in such business does not vary on the basis of turnover. [Para 23] The TPO was justified in considering the three cases as comparable for benchmarking the profits from the assessees indenting activity. The further contention of the AR that the data of these three cases was not in public domain and hence the assessee could not properly distinguish such cases is sans merits. Firstly, it is noted that the TPO confronted and the assessee duly dealt with such cases in its written submissions before the TPO. Further ground no. 14 challenging the lack of adequate opportunity given by the assessing officer and TPO, set out in the memorandum of appeal, has specifically been not pressed by the AR. When the rate of arms length indenting commission at 5% is applied to the turnover of Rs. 734.83 crores, the amount of arms length commission comes to Rs. 36.74 crores. As against that, the assessee showed only a sum of Rs. 11.17 crores as indenting commission. The assessing officer was right in making addition of Rs. 25.56 crores. [Para 25]