PCIT Vs. Gulbrandsen Chemicals Pvt. Ltd. (Gujarat High Court)
The Tribunal has taken into consideration the voluminous documentary evidence on record for the purpose of coming to the conclusion of adoption of TNMM by the assessee as the Most Appropriate Method of arriving at ALP. The Delhi High Court in the case of Make My Trip India (P.) Ltd. (supra) has also held that difference of opinion as to the appropriateness of one or the other method cannot be gone into in the appeal under Section 260A of the Act, 1961 by observing as under:
“5. The Court is of the opinion that no substantial question of law arises. The difference of opinion between the CIT (A) and the TPO, as to the appropriateness of one or the other methods, cannot per se be a ground for interference; the appropriateness of the method unless shown to be contrary to the Rules specially Rules 10B and 10C, in the opinion of the Court, are hardly issues that ought to be gone into under Section 260A of the Income tax Act.”
12. In the overall view of the matter, we are convinced that the decision of the Tribunal is correct and requires no interference and no question of law much less any substantial question of law can be said to have arisen from the impugned order of the Tribunal. In the result, these appeals fail and are hereby dismissed, with no order as to costs.
FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT
1.These Tax Appeals under Section 260A of the Income Tax Act, 1961 (for short ‘the Act, 1961’) are at the instance of the Revenue and are directed against the orders passed by the Income Tax Appellate Tribunal, Ahmedabad ‘D’ Bench, Ahmedabad (for short ‘the Tribunal’).
2.Tax Appeal No. 751 of 2019 is arising out of the order of the Tribunal dated 12.02.2019 in ITA No. 2276/AHD/2013 for A.Y. 200809.
3.Tax Appeal Nos. 752 of 2019 and 753 of 2019 are arising out of the common order of the Tribunal dated 12.02.2019 for A.Y. 200708 in ITA No. 760/AHD/2012 filed by the revenue and ITA No. 874/AHD/2012 filed by the assessee.
4.Since common issues are arising in these appeals, the same were heard analogously and are being disposed of by this common order. For the sake of convenience, Tax Appeal No. 753 of 2019 is treated as the lead matter.
5. The revenue has proposed the following three questions of law as substantial questions of law for the consideration of this Court so far as Tax Appeal Nos. 752 of 2019 and 753 of 2019 are concerned, which pertains to A.Y. 200708:
(a) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in deleting the upward adjustment of Rs.2,78,02,502/ made by the AO/TPO and confirmed by CIT (A) on account of Transfer Pricing adjustments in respect of international transactions of sale of chemical products by the assessee to its Associated Enterprises (Aes)?
(b) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in rejecting the TPO’s approach of rejecting the Transactional Net Margin Method (TNMM) and adopting Comparable Uncontrolled Price (CUP) Method as Most Appropriate Method (MAM)?
(c) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in allowing following appropriate adjustments claimed by the assessee for material differences in contractual term, underlying commercial
circumstances, functions, risk and other economic factors between assessee’s transactions with AEs visàvis assessee’s transactions with non AEs while applying the Comparable Uncontrolled Price (CUP) method:
vi. Adjustment on account of business volumes difference.
vii. Adjustment for advance payment received from AE.
viii. Adjustment for marking and selling expenses not required to be incurred for AE sales visàvis non AE sales.
ix. Adjustment for credit risk not required to be borne by the assessee for AE sales visàvis non AE sales.
x. Adjustment for interest free ECB loan received from AE?
6. Brief facts of the case are as under:
6.1. It appears from the material on record that the respondent – assessee filed his return of income for A.Y. 200708 on 05.11.2007 declaring the income at Rs.99,43,677/. The case of the assessee was selected for scrutiny assessment and a notice under Section 143(2) and 142 (1) of the Act, 1961 were issued.
6.2. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act, 1961. The TPO passed an order dated 19.10.2010 under Section 92CA (3) of the Act, 1961 determining the total transfer pricing adjustment of Rs.3,91,40,456/ by discarding the Transactional Net Margin Method (TNMM) and adopted Comparable Uncontrolled Price (CUP) method as Most Appropriate Method (MAM) by the assessee in respect of the international transactions.
6.3. On the basis of the order passed by the TPO, the Assessing Officer adopted the upward transfer pricing calculated by the TPO and passed the assessment order.
6.4. The Assessing Officer adopted the CUP method as Most Appropriate Method (MAM), due to following reasons as recorded by the Tribunal in the impugned order:
“5. The material facts and circumstances of the case are like this. The assessee company is a wholly owned subsidiary of EW Limited, Mauritius a group entity of Gulbrandsen Inc, USA and Gulbrandsen EU Limited UK inasmuch as the shareholders of EW Limited, i.e. Peter Gulbrandsen and Donald Gulbrandsen, are also majority shareholders of Gulbrandsen Inc, USA and Gulbrandsen EU Limited UK. The assessee is engaged in the manufacturing of chemicals for its divergent industrial customers, its product range includes Aluminium Chloride Anhydrous (ANH), Meno N Butyl Trichloride (MBTC), Stannic Chloride (TTC), Dibutyl Tin Oxide (DBTO)/ Dibutyl Tin Tin Dilaurate (DBTAA) and Tri Chloro Benzene and these products are supplied to the industries including petrochemical industry, pharmaceutical and chemical intermediate users. The assessee has also sold these products to its AEs, namely Gulbrandsen Chemicals Inc, USA, and Gulbrandsen EU Limited, UK. During the course of assessment proceedings, the matter regarding ascertainment of arm’s length price was referred to the Transfer Pricing Officer. The Transfer Pricing Officer noticed that the assessee had, deviating from the stand taken in the earlier years in which internal CUP method was adopted for benchmarking the sale to the AEs, computed the arm’s length price of these transactions on the basis of Transactional Net Margin Method (TNMM). In effect thus, the assessee moved, in the current year, from internal CUP to TNMM. This, however, did not find favour with the TPO. The TPO was of the view, for the detailed reasons set out in his order, that, given the facts of the case, the internal CUP was the most appropriate method and it has been used all along in the earlier years. The reasoning adopted by the TPO was like this. It was noted that the assessee had sold 40% of its products to the associated enterprises, and earned margin of PBIT/Cost at 2.07%, as against the sale of 70% of its products in the immediately preceding year and earning margin of PBIT/Cost at 3.26%. The TPO computed the total cost per kg for each type of chemicals and compared it with average sale rate to AEs so as to compute the GP/Cost (%) and noted that “the assessee has charged very nominal margin to the AEs”. Coming to the Internal TNMM adopted by the assessee and the TPO’s view that the basis of allocating the overheads was not clear, it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these are directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee further submitted that “in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects”. While the TPO did not have any specific comment on this request, he simply rejected the explanation of assessee as “not accepted”. It was also explained to the TPO that the CUP method is not really appropriate to the facts of this case as the assessee has long term business arrangements with the AEs, whereas there are no such long term arrangements with non AEs and that the contractual, economic, commercial, functional and risk profile differences, between the AE transactions visàvis non AE transactions, make the comparison of prices irrelevant. The attention was invited to the fact that, as also stated in OECD Guidelines for Multinational Enterprises and Tax Administrators, application of CUP method “requires high degree of comparability not only in the products sold and services provided but also in the economic circumstances in which the respective AE and non AE transactions take place”. It was thus submitted that the economic circumstances in which sales have taken place with the AEs are not at all comparable with the economic circumstances in which non AE sales have taken place. It was also explained that the AEs, to which the assessee has sold the products, are resellers whereas non AEs are end consumers, and that while these AEs are located in US and UK, the non AE customers are in Asia and Middle East. Emphasis thus was placed on the fact that the geographical location of markets was different and the comparison was thus inappropriate. It was also highlighted that the volume of sales to the AEs was substantially higher than sales to non AEs. The attention was also invited to the fact that while AEs make, on an average, 17 months advance payment for the purchases while non AEs are extended 6090 days credit period. It was thus contended that there was no credit risk to AE sales. The assessee further pointed out that the AEs also reimburse the assessee the basic research and development costs with 110% mark up under long term business arrangement, over and above the sale price, and that the assessee has also benefited from interest free ECB loans from the AEs. None of these submissions impressed the TPO. The TPO noted the objections of the assessee for the application of Internal CUP but rejected the same mainly on the ground that “since 200304, the assessee company has been using internal CUP as the most appropriate method” and “the assessee company has shifted from internal CUP method to internal TNMM without giving any appropriate reasons. So the contention of the assessee is rejected”. As regards the justification of TNMM on the ground that the volume of sales to the AEs is several times higher than the sale to non AEs, the TPO observed that “it means that the assessee has sold huge volume to AEs at a lower rate and shifted the huge profits from India to other countries” and, therefore, “the contention of the assessee is not acceptable”. As regards the credit period and advance payments, the TPO observed, on a superficial note again, “contention of the assessee is considered but is not acceptable because in USA and UK market, the price of TTC, MBTC and DBTC are higher than non AE price rate”. As regards guaranteed purchase of 50% production, the TPO observed that “it is seen that the assessee has been earning profits only from the non AE transactions (and) at least 50% guaranteed selling to AEs mean that the assessee is making loss and shifting the profits from India to other countries”. On reimbursement of R&D costs also, the Assessing Officer did only observe, in rather general terms, that the plea is “not acceptable because the assessee has sold the products to its AEs at very lower rate and shifted the profits from India to outside India” The same was the comment in respect of interest free ECB loans from the AEs. As for the need of adjustment on account of various factors, the TPO simply observed that “the assessee has charged very nominal margin to its AEs (and) therefore, there is no any issue for any adjustment”. He then proceeded to make the adjustment by observing as follows: 10. Computation of Arm’s Length Price
