Bayer Material Science Private Limited Vs Additional CIT (ITAT Mumbai)
Facts of the case:
- The taxpayer is engaged in the business of manufacturing, trading and indenting of chemical products. The taxpayer had clubbed the trading and indenting activity for the purpose of benchmarking.
- However, since the functions, assets employed and risks undertaken in indenting business are completely different from trading, the Transfer Pricing Officer (“TPO”) held that both the activities should be benchmarked separately and asked the taxpayer to furnish segmental accounts for the same.
- The taxpayer had allocated all the expenses in the ratio of turnover between trading and indenting segment except employee cost and rent which was allocated in the ratio of 1:1. The TPO did not accept the allocation of employee cost and rent and revised the segmental to apportion aforesaid expenses also in the ratio of turnover.
- Based on the same, the operating profit to sales in trading segment and indenting segment was arrived at 9.63% and 0.04% respectively.
- In the aforementioned calculation, the TPO rejected the taxpayer’s contention of considering the gross commission as the turnover rather than turnover achieved by taxpayer’s associated enterprise (“AE”) through its efforts. The TPO accepted the net profit margin in trading activity as being arm’s length. As regards the indenting activity, the TPO gave opportunity to the taxpayer to submit the comparable companies to justify that indenting commission earned from its AEs is at arm’s length.
- The taxpayer did not provide any comparable companies and hence the TPO himself undertook the exercise of identifying comparable companies. However, as no data for the uncontrolled transactions of similar nature was readily available, the TPO considered it appropriate to apply data of controlled transactions.
- Accordingly, TPO identified three comparables cases, namely, Huntsman International Pvt. Ltd.; M/s INEOS ABS (India) Ltd. and M/s Rathi Bros. Madras Ltd., who all were earning indenting commission in the range of 5% to 6% of indenting turnover. In light of these comparable cases, the TPO held the ALP of the indenting commission should be @ 5% of the indenting turnover as against the indenting commission @ 1.5% of the indenting turnover of the tax payer and made the consequent adjustment.
- The TPO rejected the Transactional Net Margin Method (“TNMM”) and applied Comparable Uncontrolled Price (“CUP”) Method.
Ruling of the Tribunal:
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