TP adjustments must be made on the basis of actual transactions with AE

IN THE ITAT MUMBAI BENCH ‘C’

Pennzoil Quaker State India Ltd.

versus

Deputy Commissioner of Income-tax, Range 1(2)

IT Appeal No. 8885 (Mum.) of 2010

[Assessment year 2006-07]

August 3, 2012

ORDER

Rajendra Singh, Accountant Member

This appeal by the assessee is directed against the order of AO dated 30.9.2010 passed in pursuance of direction under section 144C issued by The Dispute Resolution Panel-II. The assessee in this appeal has raised several grounds which relate to the transfer pricing adjustment made by AO as per direction of DRP, principle of natural justice and levy of interest under section 234B. In addition, the assessee vide letter dated 29.3.2012 also filed additional ground before the Tribunal in which the TNMM method followed by AO for computing transfer pricing adjustment was challenged. Thereafter the assessee again filed a letter dated 7.5.2012 raising another additional ground regarding computation of transfer pricing adjustment by AO in relation to the total purchases instead of considering only purchases from associate enterprises.

2. At the time of hearing of the appeal before the Tribunal, the ld. AR for the assessee did not press any of the grounds raised in the memorandum of appeal. The additional ground raised vide letter dated 29.3.2012 was also not pressed. The ld. AR pressed only the ground raised in the letter dated 7.5.2012 regarding computation of adjustment with respect to total purchases and not limiting the same to the purchases from associate enterprises. We, therefore, dismiss the grounds/additional grounds raised by the assessee as not pressed except the ground relating to claim of computation of adjustment with respect to purchases from associate enterprises and not with respect to total purchases.

3. Before we proceed to deal with the ground relating to the computation of transfer pricing adjustment, it will be appropriate to give a brief background of the case. The assessee who was engaged in the business of processing, procurement and sale of lubricant oil, greases and coolants and other car products, had entered into several international transactions which included import of base oil of Rs.10,40,94,103/- and import of additives for Rs.5,40,03,872/- from associate enterprises. Since the assessee had made transactions with associate enterprises, the AO had referred the issue of computation of arms-length-price to the Transfer Pricing Officer (TPO) under section 92CA. The assessee had conducted a transfer pricing study and selected six comparables which had yielded average operating margin of 3.56% against margin of 7.54% declared by the assessee on the transactions with associate enterprises. Therefore, as per the assessee, no adjustment was required to be made. The TPO, however, conducted his own study of prowess database for identification of comparables and selected eight comparables which gave an average margin of 4.8%. Based on the order of TPO, the AO prepared a draft order for making the transfer pricing adjustment to which assessee filed before the Dispute Resolution Panel (DRP). The DRP after hearing the objections of the assessee, directed the TPO to include three more comparable for computing transfer pricing adjustment as mentioned below:-

(i)  Balmer Lawrie & Co. Ltd.

(ii)  Gulf Oil Corporation Ltd.

(iii)  Valcoline Cummins

3.1 The AO, therefore, computed transfer pricing adjustment based on 11 variables including three suggested by DRP which gave an average profit margin of 4.22% as per details below :-

3.2 The AO computed the transfer pricing adjustment with respect to gross sales of Rs.119.04 crores. The AO computed the operating profit based on the profit margin of 4.22 % at Rs.5.02 crores against the operating profit of Rs. .42 crore declared by the assessee. The AO thus made adjustment of Rs.4.60 crores in relation to the import of base oil and additives for Rs.15.81 crores. Aggrieved by the decision of AO, the assessee is in appeal before the Tribunal.

4. Before us, the ld. AR submitted that the assessee was not raising any dispute either in the matter of the selection of comparables used by the AO on the direction of DRP for the purpose of transfer pricing study or about TNMM method used for this purpose by the AO. The limited dispute was whether the AO was justified in computing the adjustment with reference to gross sales of Rs.109.04 crores when the total purchases from associate enterprises were only to the tune of Rs.15.81 crores. It was argued that the adjustment had to be made only with respect to transactions with respect to associate enterprises. Reliance for the said proposition was placed on the decision of Pune Bench of the Tribunal in the case of Demag Cranes & Components (India) (P.) Ltd. v. Dy. CIT [2012] 49 SOT 610and on the decision of Mumbai Bench of the Tribunal in the case of Dy. CIT v. Starlight [2010] 40 SOT 421. It was pointed out that in case adjustment was computed with respect to transactions with associate enterprises, addition could be made only to the tune of Rs.81.00 lacs as purchases from associate enterprises constituted only 17.65% of total purchases. The ld. Departmental Representative on the other hand submitted that the claim made by the assessee regarding computation of adjustment of Rs.81.00 lacs required verification at the level of AO/TPO. The ld. AR stated that he had no objection to any such verification.

5. We have perused the records and considered rival contentions carefully. The limited dispute raised is regarding transfer pricing adjustment in relation to international transactions entered into by the assessee with associate enterprises. There is no dispute either regarding TNMM method followed by the AO or about variables selected for computation of transfer pricing adjustment. The only dispute raised by the assessee is whether the transfer pricing adjustment should be computed with respect to gross turnover of the assessee or should be limited to volume of transaction entered into with the associate enterprises. The AO has computed the transfer pricing adjustment with respect to gross sales of the assessee of Rs.119.04 crores on the basis of arms-length-margin of 4.22%. The case of the assessee is that total purchases by the assessee with associate enterprises in relation to which transfer pricing provisions have been applied was only to the tune of Rs.15.81 crores. Therefore, adjustment has to be made only with respect to purchases with associate enterprises. In our view the claim of the assessee is very reasonable as the adjustment has to be made only with respect to transactions with associate enterprises based on arms-length price and not with respect to total purchases/sales. This view is supported by several decisions of the Tribunal, some of which have been referred to by the ld. AR in para-4 earlier. We, therefore, restore the issue to the file of AO/TPO for fresh computation of transfer pricing adjustment after necessary examination in the light of the observations made above and after allowing opportunity of hearing to the assessee.

6. In the result, appeal of the assessee is allowed for statistical purposes.

Order pronounced in the open court on 3.8.2012.