TPO to consider objections of Assessee against the comparable selected by him to arrive at the ALP

IN THE ITAT BANGALORE BENCH ‘B’

Ecom Gill Cofee Trading (P.) Ltd.

versus

Deputy Commissioner of Income-tax, Circle – 11(3)

IT Appeal No. 853 (BANG.) of 2011

[Assessment year 2007-08]

SEPTEMBER 14, 2012

ORDER

N.V. Vasudevan, Judicial Member 

This is an appeal by the assessee against the order of the DCIT, Bangalore, passed u/s 143(3) of the Act, 1961 r.w.s.144C of the Act.

2. The grounds of appeal raised by the assessee are as follows:

“1.  The assessee is a co., regd. Under the Co’s Act, 1956 having its regd. Office at Bangalore. The Assessee commenced trading activities in the year 20000, trading coffee, cotton, cocoa and other commodities.

2.  During the impugned year, the assessee has traded only in coffee. The assessee procures green coffee beans from coffee planters or traders located in Karnataka.

3.  For the assessment year 2007-08, the assessee filed its return of income on 28-10-2007 declaring total income of Rs. 1,53,72,954/-. The ld. DCIT selected the assessee’s return for scrutiny by issuing a notice under section 143(2) on 09-8-2008.

4.  As the assessee’s international transaction exceeded Rs. 15.00 Crores the ld. DCIT made a reference to the ld. transfer pricing officer (TPO)

5.  The ld. TPO vide his order dated 06-10-2010 called for an adjustment in the ALP to the extent of Rs. 71,82,407/-

6.  Subsequently, the ld. DCIT, passed a draft assessment order, dated 16-12-2010 u/s 143(3) r.w.s.144C incorporating the adjustment to the ALP a suggested by the ld. TPO and raised a demand of Rs.1,18,67,167/-

7.  The assessee aggrieved by the aforesaid draft assessment order filed its objection before the Hon’ble Dispute Resolution Panel (DRP) in Form 35A on 19-01-2011. The Hon’ble DRP upheld the ALP adjustment as carried out by the ld. TPO in its order dated 05—09-2011, passed u/s144C r..w.s.144C(8).

8.  The ld. DCIT passed an assessment order u/s 143(3) r.w.s.144C considering the direction of the Hon’ble DRP and raised a demand of Rs.1,26,38,959/-“.

3. The assessee is a company encaged in the business of trading in Coffee, Cotton, Cocoa and other commodities. During the previous year, the assessee procured green Coffee beans from Coffee planters and traders located in Karnataka. The assessee sold green Coffee beans to one of its associated enterprises by name M/s Ecom Agro Industrial Corpn. Ltd., Switzerland (EACL). Since there was a international transaction with an Associated Enterprises (AE) the assessee had to support the price at which it sold green Coffee beans to its associated enterprises. In view of the provisions of Sec.92C of the Act, the assessee filed a report in Form No.3CEB in support of Arm’s Length Price (ALP) in respect of the international transaction with the associated enterprises. The assessee selected CUP method as the most appropriate method for determining the ALP. The assessee relied on the monthly prices quoted by the Coffee Board and compared it with that of the prices paid by the AE to the assessee. The TPO found that the T.P documents did not contain the details of how the CUP method was applied. The TPO also found that the assessee had charged prices to the AE which were less than the price at which Coffee Board supplied green Coffee. The TPO therefore, worked out the ALP and by bench marking the price at which the Coffee Board sold different varieties of Coffee seeds and arrived at a sum of Rs. 71,82,407.84 as difference in price which the assessee ought to have charged the AE. Accordingly, the TPO proposed addition of the aforesaid sum to the total income of the assessee.

4. Before the DRP, the assessee took a stand that the CUP method s not the most appropriate method for determining the ALP. In this regard, the assessee pointed out that in assessment year 2006-07 in assessee’s own case the revenue adopted Transactional Net Margin Method (TNMM) as the most appropriate method rejecting the CUP method adopted by the assessee. The assessee pointed out that in assessment year 2006-07, while working out the ALP on the basis of CUP method the assessee relied on the public price of the Coffee Board which was rejected by the revenue. The assessee thus, submitted that the revenue cannot blow hot and cold in the same breathe. The DRP did not accept the aforesaid plea of the assessee and held when the assessee himself has applied CUP method there is every justification for the TPO to accept the same. The DRP also held that it is a mere fact that the CUP method was also rejected in assessment year 2006-07 by the TPO does not mean in assessment year 2007-08 the said method should not be accepted the TPO. The DRP also held that the assessee trades in Coffee beans, Coffee beans are an agricultural product. It is a fact of common knowledge in micro-economics that most homogenous market exists in case of agricultural products. That is why in case of agricultural products in the same market, the prices are almost same from one trader to another. If one trader charges higher price he cannot sell his stock as consumers will go to other traders. Likewise, if one trader charges less price he may attract more consumers in short run but ultimately he will be out of business in view of the fact that he will sustain loss. This being the position n case of agricultural products, monthly price list issued by the Coffee Board of India in respect to different qualities of Coffee beans is reliable and can be used as uncontrolled comparable price in CUP method. The decision of Hon. ITAT in the case of Aztech Software & Technology Services Ltd. v. Asstt. CIT [2007] 294 ITR (AT) 32 (Bang.) does not contradict our observation in case of Coffee beans. The Tribunal decided that industry average billing rates cannot be considered in case of software cases whereas we are arguing that Coffee Board prices can be considered as they are related to Agricultural Sector. Software billing rate is case of each vendor vary significantly as it involves a number of verticals each one quite different from the other and hence, not comparable. Therefore, average billing rate is not the right basis for comparison in case of software sector. But we do not consider that it equally true in case of agricultural products.

The DRP thus, confirmed the addition proposed by TPO.

Aggrieved by the order of DRP, the assessee has filed the present appeal before the Tribunal.

We have heard the rival submissions.

At the time of hearing before us, it was brought to our notice that in the assessment year 2006-07 in ITA No. 1389(B)/2010, the Tribunal in assessee’s own case on an identical issue held as follows:

“6. Having heard both the parties and having considered the rival contentions, we find that both the TPO as well as the DRP have not considered the objections raised by the assessee against the comparables selected by the TPO for arriving at the ALP. As seen from the submissions of the assessee, the glaring differences that appears to us are that “India Products Ltd.,” is in the business of processing and trading in spices, whereas the assessee is in the business of trading in Coffee. Further, the TPO has also observed in his remand report to the DRP that the annual accounts of the company “India Products Ltd” are not available in the public domain. Thus, in our view without proper information relating to the activities carried on by the company “India Products Ltd.,” and also the segmental information relating its income from various sources and activities, the said company cannot be taken as comparable for computing the ALP. According to us, the DRP has not dealt with the issue in a judicious manner. In view of the same, we deem it fit and proper to remit the issue to the file of the AO/TPO for reconsideration of the objections raised by the assessee against the method of computing the ALP i.e. what is the most appropriate method, CUP or TNMM and also the comparables adopted by the TPO. Thus, the issues are set aside for de-novo consideration. Needless to mention that the assessee shall be given ample opportunity of hearing.

As can be seen from the aforesaid order of the Tribunal, the Tribunal has restored the issue as o which is the most appropriate method for computing the ALP in the case of the assessee to the TPO for fresh consideration. In our view, in the present assessment year also it would be appropriate to consider as to which the most appropriate method for determining the ALP to the TPO for fresh consideration. We are also of the view that the fact the assessee adopted CUP method as the most appropriate method will not be conclusive and the endeavour of the assessee and the revenue should be to arrive at the correct ALP.

The learned counsel for the assessee also made submissions before us that the price at which the Coffee Board sells Coffee seeds should not be taken as bench mark. We are of the view that it is open to the assessee to put forth his contentions in this regard, before the TPO, who shall consider the same in accordance with law. Respectfully following the decision of the Tribunal referred to above, we set aside the order of the AO as confirmed y the DRP and remand the matter to the TPO for fresh consideration in the light of the observations made above and in the light of the directions given by the Tribunal in assessment year 2006-07. For statistical purpose, the appeal filed y the revenue is treated as allowed.

In the result, the appeal filed by the revenue is allowed for statistical purpose.