Commissioner of Income Tax vs Adani Wilmar Ltd.

Akil Abdul Hamid Kureshi, J.—The Revenue is in appeal against the judgment of the income tax Appellate Tribunal (hereinafter referred to as "the Tribunal") dated June 21, 2013, raising the following questions for our consideration:

A. Whether the Appellate Tribunal has substantially erred in restricting the disallowance u/s 14A of Rs. 75,360 to Rs. 7,536 overlooking the facts that the assessee had earned exempt income, had made investment of Rs. 2.01 crores and had claimed administrative and other expenses of Rs. 72.13 crores?

B. Whether the Appellate Tribunal has substantially erred in deleting the addition of Rs. 58,48,771 made u/s 92CA(3) of the Act?

C. Whether the Appellate Tribunal is right in considering the quotation of Malaysian oil price from ''Oil World'' which is an independent agency of Germany engaged in providing forecasting services for the purpose of deciding the arm''s length price (ALP) of Malaysian palm oil?

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

Question A pertains to the disallowance which was restricted by the Tribunal, however, looking to the smallness of the sum involved, we are not inclined to consider the same without entering into the legal aspects sought to be raised by the Revenue.

Questions B to D pertain to computation of the arm''s length price. The Transfer Pricing Officer (hereinafter referred to as "the TPO") adopted comparable uncontrolled prices (CUP) method. In the process, the assessee had presented two sets of prices claiming them to be comparable. One set of transactions relied on by the assessee was supplied by Malaysian Palm Oil Board (hereinafter referred to as "the MPOB"). Simultaneously, the assessee also relied on the quotations by one Oil World, an organisation based in Germany. The assessee adopted the average of two sets of prices and claimed that the price variance between the assessee''s transaction and the average of two sets of prices did not exceed 5 per cent and, therefore, no additions were necessary. The Transfer Pricing Officer, however, took into account only the rates mentioned by the MPOB and totally discarded the rates quoted by the German organisation. He, therefore, rejected the arithmetic mean of two sets of the prices in order to determine the arm''s length price. This was on the basis of mainly two objections of his. One was that the MPOB was a Government nodal agency for palm oil industry in Malaysia, whereas the quotations of Oil World did not have any statutory authority. The second objection was that Oil World was an independent organisation registered in Germany and had nothing to do with the oil prices prevailing in Malaysia. He relied on rule 10D(3)(a) of the income tax Rules (hereinafter referred to as "the Rules"), to place heavy reliance on the price list of the MPOB.

The assessee carried the matter in appeal. The Commissioner of income tax (Appeals) discarded both the objections of the Transfer Pricing Officer. Referring to section 92C of the income tax Act, 1961 (hereinafter referred to as "the Act") and rule 10D(3) of the Rules, he found that the quotations of the Oil World could not have been discarded. He observed as under:

4.4 I have also gone through the few publications of Oil World which is an independent organization established in 1958 in Germany. This provides the independent forecasting services for oil seeds, oils and means and providing primary information and professional analysis. The Oil World compiles information of various countries in the oil sector. This publishes daily, monthly and yearly journals in oil sector. This compiles information of various countries and, therefore, is broad based data base. The quotation adopted by the appellant from the Oil World is for Malaysia and not for Germany. Therefore, it is an authentic independent trade quotations and is duly covered under the various documents which has been listed in sub-rule (3)(b) and (c) of rule 10D of the income tax Rules. As this is an independent organization which is giving quotation of different countries, this cannot be ignored by the Transfer Pricing Officer without any valid reason. As the international transaction entered with the associated enterprise is less than 5 per cent of the arithmetical mean of these two quotations, i.e., the MPOB and the Oil World, as per the proviso to section 92C the appellant was justified in taking the international transaction at arm''s length. Therefore, no adjustment u/s 92C was required as all the prices at which the purchase have been made less than 5 per cent of the arithmetical mean. Besides the above, I also find that the appellant has entered into contract with the associated enterprise on long-term basis for continuous supply of constant quality to ensure continuity in production into continuous plant which is also an important factor for considering the arm''s length price and due weightage is required to be given while comparing the rates given by the MPOB. Even the average price paid by the appellant is lower than the average price on the basis of rates of the MPOB. Therefore, in view of these facts, circumstances and the legal position the Assessing Officer/Transfer Pricing Officer were not justified in making the adjustment to the purchase price and, accordingly, the addition on account of adjustment of the price is hereby deleted. Accordingly, this ground is decided in favour of the appellant.

The matter was carried in appeal before the Tribunal by the Revenue. The Tribunal confirmed the view of the Commissioner of income tax (Appeals) and, hence, this appeal.

Having heard the learned counsel for the parties, we notice that the determination of the arm''s length price u/s 92C of the Act is to be done as per the Rules contained in rule 10B clause A to sub-section 10. Rule 10B of the Rules pertains to the CUP method. Rule 10D pertains to "Information and documents to be kept and maintained u/s 92D". Sub-rule (3) provides, inter alia, that the information specified in sub-rule (1) shall be supported by authentic documents, which may include the following:

10D. Information and documents to be kept and maintained u/s 92D.--(1) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely:--

(b) a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions have been entered into by the assessee, and ownership linkages among them;

(c) a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted;

In terms of clause (c) of sub-rule (3) of rule 10D of the Rules, these price publications as long as the same were authentic and reliable, would be relevant materials. In this background, mere base of the organisation would be of no consequence. Further, though the price quotations of the MPOB would be entitled to its due and full weightage and respect, would not necessarily mean that the other quotations would lose their significance, unless, of course, it is pointed out that such quotations lack basis. In this context, we may recall that the only objections with the Transfer Pricing Officer to take into consideration the rate quotations of the Oil World were, that were not based in Malaysia and that it was an independent organisation, which had nothing to do with the oil price prevailing in Malaysia. When the Commissioner of income tax (Appeals) as well as the, Tribunal have accepted the reliability and authenticity of the organisation and its publication of rate list, such objection of the Transfer Pricing Officer must be overruled. Learned advocate, Mr. Bhatt, for the Revenue, however, strenuously attempted to persuade us that the Oil World is a forecasting agency and further that such rates were not based on actual transactions. Quite apart from the observations of the Commissioner of income tax (Appeals) and the Tribunal being to the contrary, these were not the objections of the Transfer Pricing Officer. We would, therefore, focus on the grounds on which the Transfer Pricing Officer desired to reject such price quotations. Under the circumstances, we do not find any error giving rise to any substantial question of law. The tax appeal is, therefore, dismissed.