Quotations Can Be Comparables for Arms Length Pricing Determination!

Selection of comparables is one of the most contentious issue between the taxpayer and the Transfer Pricing Officer (TPO) . This post is restricted to an issue whether the quotation from parties can be taken as comparabales for the purpose of the determination of arms length pricing (ALP) -whether for international transactions or specified domestic transactions . Biggest objection is that the quotation is not the actual data , so it should not be compared with actual data. But , that problem is no more..

Quotations Not a Comparable for CUP Method

The concept of comparable-internal and external- is one to find out whether the transaction was actually done at arms length pricing. Since the quotation from parties are merely pricing which were quoted , but not tested or actually applied to a transaction , comparing such pricing through quotation is objected by the authorities .

ITAT, Delhi in its order dated 13th December 2013 in case of Sinosteel India Pvt Ltd vs DCIT ,Circle 8(1) [2013] 40 taxmann.com 240 (Delhi – Trib.) held that the any ‘quotation’ which has not fructified into a ‘transaction’ cannot be substituted with the actual price charged or paid in a transaction, therefore cannot be basis for determining ALP. Here is the excerpt

The essence of section 92C(2) is that the ALP should be determined as per the most appropriate method ‘in the manner as may be prescribed’. A bare perusal of the above discussed legal provisions in the light of the ratio of the Special Bench order, it is manifest that the ALP under the CUP method can be determined with the starting point of ‘the price charged or paid’ in a comparable uncontrolled transaction as per sub-clause (i). It is this price which is adjusted to account for differences under sub-clause (ii). The nitty-gritty of sub-clause (i) is that there should firstly be available some ‘price charged or paid’ to start with the procedure as per this clause. When the statute read with rules specifically provides that the ALP under the CUP method should be determined by considering ‘the price charged or paid’ in a comparable uncontrolled ‘transaction’. Any ‘quotation’ which has not fructified into a ‘transaction’ cannot be substituted with the actual price charged or paid in a transaction. As the law provides for considering the price charged or paid in a comparable uncontrolled transaction, there can be no scope for considering a quotation price in isolation which is not preceded with or succeeded by any actual transaction. [Para 8]

ITAT , Delhi maintained this position in another case Noble Resources & Trading India (P.) Ltd vs ACIT [2014] 44 taxmann.com 62 (Delhi – Trib.) by holding as under

However, we do not approve, in principle, the contention of the ld. AR that quotations etc. or the price as per some publications can be considered for benchmarking the assessee’s international transactions under the CUP method. The comparison is required to be done with the actual uncontrolled transactions and not quotations etc [Para 5 ]

That case relates to the year 2014. In assessee’s own case in DCIT Circle 13(1) vs Noble Resources & Trading India (P.) Ltd ,[2016] 70 taxmann.com 300 (Delhi – Trib.) order dated 5th May 2016 , the ITAT , Delhi gave a different verdict relying on  on the Gujarat High Court decision  in  CIT v. Adani Wilmar Ltd. [2014] 363 ITR 338  and OECD BEPS  . The ITAT  set aside the order with following orders:

In view of this ground, the Assessing Officer and TPO are directed to first benchmark the international transaction of the assessee by applying the CUP method. In the event the assessee is unable to support its international transactions by that method then the international transactions of the assessee may be benchmarked by adopting other methods including the sixth method after granting assessee adequate opportunity of hearing. [Para 19]

What in essence was held that if TPO finds that  CUP method  is not correct , then the quotations that is reliable  can be used as comparable for the  sixth method u/s 92C(1)(f).

Sixth Method Under Section 92C(1) & Quotation

Section 92C of the Income Tax Act , provides six methods of determination of Arms Length Pricing . The provision is as under :

92C. (1) The arm’s length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :—

(a)  comparable uncontrolled price method;

(b)  resale price method;

(c)  cost plus method;

(d)  profit split method;

(e)  transactional net margin method;

(f)  such other method as may be prescribed by the Board.

For section 92C(1)(f), the Central Board of Direct Taxes (the Board)  notified the “other method” vide Notification No. 18/2012 [F. No. 142/5/2012-TPL], dated 23-5-2012, and Rule 10AB was inserted in the Income-tax Rules, 1962 (the Rules)  w.e.f. April 1, 2012 and applicable to assessment year 2012-13 and subsequent years. As per Rule 10AB of the Rules, the “other method” has been described as follows:

Other method of determination of arm’s length price .
10AB . For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm’s length price in relation to an international transaction or a specified domestic transaction]shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts

The wordings Charged or Paid or Would have been charged is  significant . This phrase has caught the attention of ITAT , Delhi in recent decision in Noble Resources case,

This logic was applied by Mumbai , ITAT in case of  Gulf Energy Maritime Services (P.) Ltd. Vs ITO Ward 8(1)(4), Mumbai [2016] 178 TTJ 683 (Mumbai – Trib.), in which it held that quotations can be comparable but on a different rule and provision.

The facts in brief was that the assessee-company was engaged in the business of providing ship management services to its parent company, namely, Gulf. The services so rendered were benchmarked on the basis of CUP method, and the comparable uncontrolled price inputs were the quotations from comparables. The assessee had taken the stand that since it had charged higher price for the services rendered to the AE, when compared with the rates offered in these quotations, the price of the services should be accepted as an arm’s length price.

The TPO did not accept the quotations of the third parties, which had no credibility. Thus, the assessee had not properly benchmarked the said receipt

The ITAT held in favour of assesse by holding that if the A.O did not find any error with the veracity of quotation, he can not simply reject such quotation. The hon’ble tribunal held that the assessee had given certain quotations, the Assessing Officer duly examined these quotations and did not dispute the bonafides of these quotations. The rejection by the Assessing Officer is only on the basis of his observation that no actual transactions have taken place on the basis of these quotations, and, therefore, these quotations cannot be valid inputs for the CUP method. Undoubtedly, under rule 10B(1)(a), the valid inputs for CUP method can only be ‘the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions’. This rigidity about the price being for an actual transaction has, however, been considerably relaxed when one take into account the rule 10AB which allows hypothetical price of a transaction being taken into account as well. The scheme of law, as evident from reading of rule 10B(1)(a) read with rule 10AB, now admits a price ‘which would have been charged or paid in comparable uncontrolled conditions’ to be taken into account.

Gujarat High Court decision in case of CIT v. Adani Wilmar Ltd. [2014] 363 ITR 338 is quite significant in this regard . One of the four grounds raised by the department in thsi case was

Whether the Appellate Tribunal is right in overlooking the fact that MPOB is a Govt. Nodal agency for Malaysia palm oil and hence the quotation obtained from this agency does not require further adjustment ?” 

The High Court approved the order of the ITAT against the department as under :

7. In terms of clause (c) of sub-section (3) of Rule 10D of the Rules, these price publications as long as the same were authentic and reliable, would be relevant materials

Similarly , ITAT, Pune in Cargill Foods India Ltd vs DCIT ,Circle , Pune [2015] 69 SOT 40 (Pune – Trib.)(URO) held that the quotations , price list of wold renowned organization can be taken as comparable . The fact in brief as that the assessee was engaged in the business of manufacture and trading of edible oil and plastic films. It procured various categories of oil for manufacturing purposes from associated enterprises as also from third parties which was further refined/processed for sale to ultimate customers predominantly in the domestic market to third party customers.

In its transfer pricing study, assessee adopted the Comparable Uncontrolled Price (CUP) method in order to determine the arm’s length price in relation to the international transaction of import of soyabean and sunflower oils. Justifying the adoption of the CUP method as the most appropriate method, the assessee referred to the Broker Price Notes issued by a reputed broker firm MMSPL which showed the prices prevailing in the market on the respective dates when assessee transacted the import of soyabean and sunflower oils from its associated enterprises. The assessee also obtained sample quotes from Sunvin group, the price publications of Oil World, an independent publication, and justified before the TPO that the prices so published were appropriate to benchmark the price paid by the assessee for the transaction of import of oils from the associated enterprises.

The TPO, however, concluded that what had been relied upon by the assessee was only a Broker Price Note and that the same could not take the character and characteristics of a comparable uncontrolled transaction. He also did not consider sample quotes obtained by the assessee from Sunvin group and the price publications of Oil World, as external comparable uncontrolled transactions. Accordingly, the TPO rejected the CUP method adopted by the assessee and applying TNMM, proposed certain TP adjustment to stated value of the international transactions.

The DRP approved the order of TPO and rejected the assessee’s objections against proposed adjustment.

ITAT , Pune on an appeal by the assessee held under Para 19 , by relying on order of Gujarat High Court in Case of Adani Wilmar Ltd held that the rejection by the TPO of the price publication of Oil World and the prices quoted by MMSPL, which are based on the rates quoted on CBDT, Chicago, is not justified

Excerpt from the order

In Tax Appeal No. 240 of 2014 in the case of CIT v. Adani Wilmar Ltd. [2014] 363 ITR 338/224 Taxman 51/45 taxmann.com 365 (Guj.). The High Court of Gujarat held that the price publications are also relevant material for the purposes of carrying out the comparability analysis in the course of application of CUP method; so however, such price publications ought to be authentic and reliable. The High Court of Gujarat was considering an objection of the Transfer Pricing Officer, that the price publication of Oil World only reflect quotations and not actual transactions. The said argument did not find favour with the High Court and it noted that the reliability and authenticity of the material stood established.

Based on the aforesaid judgment of the High Court of Gujarat, rejection by the TPO of the price publication of Oil World and the prices quoted by MMSPL, which are based on the rates quoted on CBDT, Chicago, is not justified. [Para 19]

Conclusion about Using Quotation 

  1. Quotations from parties can be comparable after the notification of Rule 10AB .
  2. In order to take the quotation as comparable , the reliability or authenticity of quotations is of paramount importance.
  3. Publicly published quotations can be used as comparable even in case of CUP and other methods .

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