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The Tax Publishers The State Fisheries Development Corporation Ltd. v. ACIT [ITA No. 1281/Kol/2009, dt. 19-4-2016] : 2016 TaxPub(DT) 2195 (Kol-Trib) Additions in TP due to customs valuation on imports from AE *Facts:* Assessee in the business of selling luxury sun-glasses, had imported raw material and finished goods from AE from Italy. The said goods were procured from third party in Italy and then marked up and sent to the assessee. Since imports being from related parties the same was subjected to Special valuation branch provisions for manifesting that there was no customs duty evasion. Since the prices were charged by the AE under customs was more than the direct purchase from the third party, the values were treated as at ALP for customs requirements. While benchmarking TP the assessee segregated his AE transactions into 3 classes, in which class I had raw material and class II had finished goods. TNMM was adopted as the right benchmark. For raw material TPO held CUP to be the ideal method, and additions were made based on customs valuation. The plea of assessee was if they were to buy directly from the third party it would fetch them discount there is change of hands at Italy hence the cost is more, unimpressed the TPO made addition based on CUP method with customs value as the base. The addition was negated in Commissioner (Appeals). On finished goods the assessee was read to be a limited risk distributor so Resale price method (RPM) was applied and additions were made here as well based on customs valuation. This was also negated in appeal. Aggrieved department went in appeal to the ITAT on both points. Held against the assessee with appeal admitted for statistical purposes that the case required a remand for fresh hearing for following reasons: CUP was the correct method which was adopted by the TPO for raw materials. But because he had taken the price charged by the internal comparable of penultimate sale without looking at external CUP the case requires a remand. An external comparable uncontrolled transaction will exist when similar goods are purchased by some another Indian party from a non-AE. Similarly, some internal comparable uncontrolled transaction will exist when the assessee purchases similar goods from a non-AE. The essence of the matter is that a pre-transaction of purchase by the foreign AE from another unrelated foreign party cannot constitute an internal CUP for determining the ALP of the same goods purchased by an Indian assessee from its AE. It is axiomatic that the CUP method requires comparison of the price charged in a comparable uncontrolled transaction and then making transfer pricing adjustment for the difference, if required. It does not say that the international transaction must be on cost to cost basis and no profit element can be charged. In our considered opinion, profit margin, if any charged by the AE from the assessee cannot be considered for determining the ALP of a comparable uncontrolled transaction. Even if the AE charges a reasonable mark-up on its cheap comparable purchase price, the price so charged will be ALP so long such price charged is less than what other comparable companies charge in uncontrolled transactions. For the finished goods RPM is the correct method also agreed by the Commissioner (Appeals). The Commissioner (Appeals) took the resale margin as 50% as sold by the dealers in India and then subtracted VAT 12.5% and then benchmarked this to the margin of assessee at 37.5% which was found to be at par. VAT is an indirect tax and it cannot affect the gross margin. This was failed to be noticed by the Commissioner (Appeals). Thus remanded for consideration afresh ALP computation also for the reason TPO has not brought forward any similar comparable goods which were resold. When we talk of profit margin, the same covers all the costs. Vat/sales tax is an indirect tax and unlike income-tax is a charge against income and not appropriation of income. Its inclusion firstly in the sale price and then claim of deduction, neutralizes both the sides. The net result is that its simultaneous receipt and payment do not impact the ultimate profit margin so as to warrant a separate adjustment on account of its payment alone. The learned Commissioner (Appeals) failed to take note of this important aspect and went on to consider only the payment part in isolation of the receipt part of VAT/sales tax. He further failed to consider the assessee's contention before the Customs Authorities that: 'they have submitted the details of these imports and that this shows that the price to the Indian company is higher than the price to the unrelated parties.' As such, we are constrained to disapprove the view taken by the learned Commissioner (Appeals) in deleting the addition on this slippery reasoning. In other words, the existence of a comparable uncontrolled transaction giving gross profit margin accruing from purchase and resale of similar goods is an essential condition for determining the ALP under RPM. The TPO has not brought on record any comparable uncontrolled case and thus has not eventually determined gross profit margin from purchase and resale of similar goods in a comparable uncontrolled transaction. In the absence of availability of any comparable uncontrolled transaction, we cannot approve the action of the assessing officer in making such an addition, as the same has not been done in the manner prescribed under the rule.

The Tax Publishers

The State Fisheries Development Corporation Ltd. v. ACIT [ITA No. 1281/Kol/2009, dt. 19-4-2016] : 2016 TaxPub(DT) 2195 (Kol-Trib)

Additions in TP due to customs valuation on imports from AE

Facts:

Assessee in the business of selling luxury sun-glasses, had imported raw material and finished goods from AE from Italy. The said goods were procured from third party in Italy and then marked up and sent to the assessee. Since imports being from related parties the same was subjected to Special valuation branch provisions for manifesting that there was no customs duty evasion. Since the prices were charged by the AE under customs was more than the direct purchase from the third party, the values were treated as at ALP for customs requirements. While benchmarking TP the assessee segregated his AE transactions into 3 classes, in which class I had raw material and class II had finished goods. TNMM was adopted as the right benchmark. For raw material TPO held CUP to be the ideal method, and additions were made based on customs valuation. The plea of assessee was if they were to buy directly from the third party it would fetch them discount there is change of hands at Italy hence the cost is more, unimpressed the TPO made addition based on CUP method with customs value as the base. The addition was negated in Commissioner (Appeals).

On finished goods the assessee was read to be a limited risk distributor so Resale price method (RPM) was applied and additions were made here as well based on customs valuation. This was also negated in appeal.

Aggrieved department went in appeal to the ITAT on both points.

Held against the assessee with appeal admitted for statistical purposes that the case required a remand for fresh hearing for following reasons:

CUP was the correct method which was adopted by the TPO for raw materials. But because he had taken the price charged by the internal comparable of penultimate sale without looking at external CUP the case requires a remand.

An external comparable uncontrolled transaction will exist when similar goods are purchased by some another Indian party from a non-AE. Similarly, some internal comparable uncontrolled transaction will exist when the assessee purchases similar goods from a non-AE. The essence of the matter is that a pre-transaction of purchase by the foreign AE from another unrelated foreign party cannot constitute an internal CUP for determining the ALP of the same goods purchased by an Indian assessee from its AE.

It is axiomatic that the CUP method requires comparison of the price charged in a comparable uncontrolled transaction and then making transfer pricing adjustment for the difference, if required. It does not say that the international transaction must be on cost to cost basis and no profit element can be charged. In our considered opinion, profit margin, if any charged by the AE from the assessee cannot be considered for determining the ALP of a comparable uncontrolled transaction. Even if the AE charges a reasonable mark-up on its cheap comparable purchase price, the price so charged will be ALP so long such price charged is less than what other comparable companies charge in uncontrolled transactions.

For the finished goods RPM is the correct method also agreed by the Commissioner (Appeals).

The Commissioner (Appeals) took the resale margin as 50% as sold by the dealers in India and then subtracted VAT 12.5% and then benchmarked this to the margin of assessee at 37.5% which was found to be at par. VAT is an indirect tax and it cannot affect the gross margin. This was failed to be noticed by the Commissioner (Appeals). Thus remanded for consideration afresh ALP computation also for the reason TPO has not brought forward any similar comparable goods which were resold.

When we talk of profit margin, the same covers all the costs. Vat/sales tax is an indirect tax and unlike income-tax is a charge against income and not appropriation of income. Its inclusion firstly in the sale price and then claim of deduction, neutralizes both the sides. The net result is that its simultaneous receipt and payment do not impact the ultimate profit margin so as to warrant a separate adjustment on account of its payment alone. The learned Commissioner (Appeals) failed to take note of this important aspect and went on to consider only the payment part in isolation of the receipt part of VAT/sales tax. He further failed to consider the assessee's contention before the Customs Authorities that: 'they have submitted the details of these imports and that this shows that the price to the Indian company is higher than the price to the unrelated parties.' As such, we are constrained to disapprove the view taken by the learned Commissioner (Appeals) in deleting the addition on this slippery reasoning.

In other words, the existence of a comparable uncontrolled transaction giving gross profit margin accruing from purchase and resale of similar goods is an essential condition for determining the ALP under RPM.

The TPO has not brought on record any comparable uncontrolled case and thus has not eventually determined gross profit margin from purchase and resale of similar goods in a comparable uncontrolled transaction. In the absence of availability of any comparable uncontrolled transaction, we cannot approve the action of the assessing officer in making such an addition, as the same has not been done in the manner prescribed under the rule.