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Overview
The Mumbai Bench of Income Tax Appellate Tribunal (“the Tribunal”) in its recent ruling in the case of Cheminova India Ltd.1 (“the assessee”) has held that the totality of facts, circumstances and commercial considerations surrounding an international transaction need to be taken into account when determining its arm’s length price.
Facts
The assessee was engaged in the manufacture of agrochemicals and formulations, mainly in the form of pesticides, weedicides and plant growth stimulators.
The assessee had imported the raw material, Di- Ethylithiophosphoral Chloride (“DETPCL” or “the chemical”) from its associated enterprise (“AE”) Cheminova, Denmark, and also from non-associated enterprises (“Non-AEs”). Imports from the former
1 ACIT v. Cheminova India Ltd. [2010-TII-19-ITAT-MUM-TP]
constituted almost 80 per cent of the total imports of DETPCL. For the transfer pricing analysis of the import of DETPCL, the assessee adopted the Comparable Uncontrolled Price (“CUP”) Method as the most appropriate method and established arm’s length price (“ALP”) for the import of DETPCL from AE, by providing prices of the chemical purchased from Non-AEs as internal comparables. In addition, the assessee also filed the prices of DETPCL imported by an independent party, viz., AIMCO Pesticides Ltd. (“AIMCO”), as was published in the ‘Chemical Weekly’, a weekly magazine containing details of chemicals imported from Mumbai Port.
During the course of the assessment proceedings, the Transfer Pricing Officer (“TPO”) observed that the DETPCL purchased by the assessee from its AE was at an average price of USD 2.023 per kg. This was higher than the price charged by a Chinese Non-AE of USD 1.582 per kg, despite equivalent purity levels. The TPO also issued a notice under section 133(6) of the Income Tax Act, 1961 (“the Act”) to AIMCO, so as to determine
Underlying economic circumstances and commercial rationale need to be considered while determining arm’s length price Tax & Regulatory Services
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2 July, 2010
PricewaterhouseCoopers 2 the factual position. AIMCO responded to this by saying that it had not purchased the
chemical from Cheminova, Denmark. Accordingly, the TPO adopted the average price of USD 1.582 per kg as the ALP for the transaction of importing DETPCL from AEand made an adjustment to the import price.
In addition to the above, the Assessing Officer (“AO”) interalia reduced the claim under sections 80IB and 80HHC by excluding the interest received from debtors on the grounds that the interest did not have any direct nexus with the assessee’s business. On merits, these adjustments were later reversed by the Commissioner of Income-tax (Appeals) (“CIT(A)”) and the Tribunal concurred with the CIT(A)’s views.
The assessee appealed before the CIT(A), who deleted the additions made by the TPO on the basis of the following:
• The assessee had purchased DETPCL from the domestic market at a higher price than the import price from AE.
• The quality control department of the assessee had reported that in the initial part of the year, DETPCL from the Chinese Non-AE was not established on the market.
It was only after receipt of a proper quality report of DETPCL purchased from the Chinese Non-AE that the assessee started importing the same.
Appeal before the Tribunal
The Revenue appealed before the Tribunal against the order of the CIT(A) by placing reliance on the AO’s order.
The assessee submitted the following contentions before the Tribunal:
• The TPO cannot pick and choose only the data favourable to the Revenue for determining ALP, and discard other data.
• DETPCL was a critical raw material and the assessee was not initially sure about the quality of DETPCL imported from the Chinese Non-AE. Only when its quality was established and there was no risk relating to its purity / quality, only then did the assessee proceed to import from the Chinese Non- AE.
• An international transaction cannot be doubted just because it was entered into with an AE. Prices paid to AEs have to be examined in light of any unusual circumstances which may result in higher prices being paid to AEs.
Ruling of the Tribunal
There was no dispute regarding the most appropriate method for determining the ALP as both the assessee and the TPO accepted the CUP Method to be most appropriate method. As for determining the arm’s length price of import of DETPCL from its AE, the Tribunal found force in the assessee’s arguments, and thereby confirmed the findings of the CIT(A).
Conclusion
The Tribunal has re-emphasised in this ruling that Revenue cannot pick and choose only that data which is favourable to it. The Tribunal has also reinforced the significance of duly considering the underlying economic circumstances and commercial rationale while evaluating the arm’s length nature of international transactions with AEs. At the same time, this ruling demonstrates the importance of placing on record proper documentation evidencing the underlying economic circumstances and commercial rationale.
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