Section 92C of the Act – if taxpayer has exported goods to AE at cost and AE, in turn, has sold them at its purchase price, the transaction meets arm’s length standard, ALP adjustment addition is not justified.
Facts
The taxpayer was an Indian company and a membercompany of Pepsico Group. During the relevant assessment year, the taxpayer had exported certain goods, which, based on the functions performed by the taxpayer, could be classified in two categories. In respect of the first category of goods, the taxpayer performed all the functions and undertook risks similar to that of a normal trader in ordinary course of business. In respect of second category of goods, the taxpayer acted as mere facilitator and performed the function of a service provider. The taxpayer grouped all the exports together and benchmarked them.
According to the taxpayer, it enjoyed Star Export House status. To retain it, it had to export certain minimum value of goods. The sellers and the prices of the goods that it exported were finalized by the buyers and the taxpayer acted as mere facilitator. Hence, it exported the goods at the same price at which it purchased them. The loss incurred by it was due to forex rate fluctuations.
In his report, the Transfer Pricing officer (TPO) observed that: the taxpayer had incurred losses by exporting the goods to its AE at the same price at which it purchased; the taxpayer had not even recovered cost incurred on storage, transportation and interest; as per OECD transfer pricing guidelines, two or more transactions can be aggregated only if they are closely interlinked or continuous or form one integral whole and cannot be analysed separately.
The TPO further observed that not recovering remuneration from AE amounts to shifting of profits and, there was no justification for the taxpayer to undertake forex risk. Therefore, TPO determined the ALP and the adjustment to the income of the taxpayer.
Held
It was an admitted fact that the loss incurred by the taxpayer was only on account of foreign exchange fluctuation as the commodities were sold to the AE at the same rate at which these were purchased from the local market.
On a similar issue, in DCIT vs. Global Vantedge P Ltd4 (ITA Nos. 1432 & 2321/ Del/2009 and 116/Del/2011) the ITAT held that ALP adjustment cannot exceed the amount received by the AE from the customer and the actual value of international transactions (i.e. the amount received by the taxpayer in respect of international transactions).
In the present case, the taxpayer had sold goods to AE at the same price at which they were purchased from the local market. The AE, in turn, had sold them to the customers at the same price at which they were purchased from the taxpayer.
Hence, the international transactions with AE met the arm’s length standard. Therefore, addition on account of arm’s length price of international transactions was not justified.
