Case Law Details
Court :Mumbai Bench of the Income-tax Appellate Tribunal
Citation :Cheminova India Ltd Vs ACIT, Mumbai (ITA No. 4865/Mum/05) [13 ITAT INDIA 240 (Mum)]
Brief : Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (‘the Tribunal’) in the case of Cheminova India Ltd Vs ACIT, Mumbai (ITA No. 4865/Mum/05) [13 ITAT INDIA 240 (Mum)]., accepted higher price paid to its Associated Enterprises (‘AEs’) (as compared to unrelated parties) under Comparable Uncontrolled Price (‘CUP’) Method to be the arm’s length price (‘ALP’) based on the economic and commercial justification.
Facts of the case
1. The taxpayer is an Indian company engaged in manufacturing of agrochemicals, pesticides, weedicides and plant growth stimulators. The taxpayer filed its return of income for assessment year (‘AY’) AY 2002-03 declaring a total income of Rs.8.52 crores.
2. During AY 2002-03, the taxpayer entered into various international transactions with its AE. The taxpayer purchased a raw material called Di Ethylthiophosphrol Chloride (‘DETPCL’) from its AE and Non-AEs.
3. The taxpayer benchmarked the import of DETPCL from its AE selecting the CUP method as the most appropriate method to justify its ALP on the basis of the following:
– Import price paid to other with Non-AEs for DETPCL;
– Making references to the ‘chemical weekly’, a magazine published by Sevak Publications, Mumbai, which provides details of chemicals imported through the Mumbai Port.
4. During the course of transfer pricing assessment proceedings the Transfer Pricing Officer (‘TPO’) observed that the taxpayer purchased a total of 399,900 kgs of DETPCL during the year. Out of which 315,900 kgs were imported from its AE at an average price of US$ 2.023 per kg. However, the purchase of DETPCL from Non¬AEs was at an average price of US$ 1.582.
5. The Assessing Officer (‘AO’) noted that the taxpayer imported DETPCL from Non-AE in China at a price lower that the price paid to its AE despite the fact that the purity level of the product was almost the same in both the cases.
6. Based on the above, the TPO adopted the average price of US$ 1.582 per kg to be the ALP for the import of DETPCL from its AE and made an adjustment of Rs. 64.53 lacs.
7. Considering the transfer pricing order of the TPO, the AO made an adjustment of Rs. 64.53 lacs to the total income of the taxpayer.
Aggrieved by the order of the AO, the taxpayer filed an appeal with the Commissioner of Income Tax (Appeals) [‘CIT(A)’].
CIT(A)’s Observations :-The CIT(A) deleted the adjustment made by the AO based on the following reasons:
1. The taxpayer purchased DETPCL from the domestic market at a higher rate than the price paid to AE.
2. Quality control department of the taxpayer reported that in the initial part of the year, DETPCL imported from China had not been established in the market and the taxpayer started using the Chinese originated DETPCL in the later part of the year only after receipt of a proper quality report of DETPCL.
Aggrieved by the order of CIT(A), the revenue filed an appeal before the Tribunal.
Tribunal’s Ruling :-The Tribunal, after considering the rival submissions and perusing the material on record, made the following observations:
- · The TPO has cherry picked the data favorable to the revenue and disregarded the other comparable data.
- · The AO did not give importance to the fact that DETPCL is a very important material which is mainly used in formulation process. Accordingly, the DETCPL from China could not be used unless a proper quality check was done. Only after establishing the purity of DETPCL from China, the taxpayer started importing the same from China.
- · In the course of business, there could be compelling circumstances under which more prices are paid compared to the product available with uncontrolled enterprises.
In light of the above arguments the Tribunal held that though the taxpayer was initially importing the DETPCL from its AE, however, on ascertaining that there was no risk in the quality of DETPCL of Chinese origin, the taxpayer stopped importing the same from its AE and started using the DETPCL from China.
Accordingly, the price paid by the taxpayer to its AE was considered to be at ALP based on the internal CUP of purchases from domestic market.
Our Comments :- The Tribunal recognized the importance of economic and commercial factors that affect the determination of the price of a product, and has in a way, endorsed that these factors also need due consideration at the time of conducting a proper transfer pricing analysis.
Moreover, the Tribunal’s indirect acknowledgement of the fact that in the course of business operations, there could be compelling circumstances under which higher prices are paid to AEs (compared to the product available with uncontrolled enterprises), is a positive assertion. Nevertheless, going forward, it would be prudent to analyze and evaluate the facts and circumstances of each individual case before randomly placing reliance on the above contentions of the Tribunal.
