IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : `I : NEW DELHI
BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER
AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER
ITA No.6646/Del /2014
Assessment Year : 2010-2011
Sumitomo Corporation India Pvt. Ltd. Vs. DCIT, Circle-24(2),
4th Floor, DLF Centre New Delhi
Sansad Marg, New Delhi
(Appellant) (Respondent)
Date of Hearing : 02.06.2015
Date of Pronouncement : 05.062015
Assessee by : Sri C.S. Agarwal, Sr. Advocate And
Sri R.P. Mall Advocate
Respondent by: Sri Gunjan Prasad, CIR D.R.
ORDER
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
1. This appeal, by the assessee, has been directed against the order passed u/s
143(3) r.w.s. 144C of the Income Tax Act, 1961 (for short the `Act') dated 25.11.2014
passed in pursuant to the direction of the Dispute Resolution Panel (DRP) dated
21.10.2014 u/s 144C(5) of the Act.
2. The grounds raised by the assessee reads as under:-
"1. That the learned Deputy Commissioner of Income Tax, Circle 24(2), New Delhi
has grossly erred both on facts and, in law in determining the income of the
Appellant at Rs.1,11,09,85,160/- in an order of assessment dated November 25,
2014 framed uls 143(3) read with section 144C(13) of the Act as against the
declared income ofRs.6,13,95,092/-.
2. That the learned AO/DRP/TPO have grossly erred both in law and on facts in
making an addition of Rs.1,04,95,90,066/- on account of alleged understatement
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of arm's length price in respect of indenting transaction on which it earned
commission income from its Associated Enterprises ("herein after referred to as
AE"), by completely overlooking the findings of the Hon'ble Tribunal for the
three preceding years i.e. for AY 2007-2008, 2008-2009 and 2009-10, despite the
fact that facts and circumstances of instant assessment year were identical to the
preceding assessment years and no distinguishing facts are brought on record to
take a contrary view as such, finding of the learned AO/DRP/TPO are highly
arbitrary and thus the order is a vitiated order.
3. That in making the aforesaid addition, the learned Deputy Commissioner of
Income Tax had erred in referring the matter to the learned TPO u/s 92CA of the
Act on the following amongst other grounds, rendering the order of the learned
TPO as unsustainable both in law and on facts:
a) As the reference made by the learned AO to the learned TPO is not
in accordance with the provisions of Section 92CA(1) of the Act;
b) As no opportunity of being heard was granted at any stage of the
proceedings for this purpose, whether at the proposal or the
approval stage; and
c) By not furnishing the Letter of Reference ('LOR') to the Appellant.
3.1 That since the reference by the learned AO under section 92CA(1) of the Act was
bad in law and void-ab-initio, consequentially the entire proceedings by the
learned TPO, order of learned TPO, directions of Ld. DRP and, also the
impugned adjustment to the arm's length price ofRs.I,04,95,90,066/- is vitiated,
invalid, illegal and hence, a nullity.
4. The Order of Ld. AO/TPO and directions of Ld. DRP is based on complete
disregard of the facts of the case of the Appellant and the statutory provisions
contained in the Income Tax Act, 1961.
4.1 The learned AO/TPO/DRP has erred in disregarding the following objections
apparent on facts and in law on the facts and circumstances of the case of the
Appellant:
a) That the learned AO/TPO/DRP has erred in disregarding the transfer
pricing approach adopted by the Assessee to determine the arm's length
price ("ALP") of its international transactions. The Assessee's use of
TNMM with Operating Profit Margin upon Value Added Expenses ("OPN
AE") as the Profit Level Indicator ("PLI") has been disregarded without
any justification whatsoever;
b) That the learned AO/TPO/DRP has erred in making the transfer pricing
adjustment without establishing the existence of anyone of the four pre
conditions provided in Section 92C(3) which is a mandatory requirement,
for making an adjustment under section 92CA(3) of the Act.
c) That the Ld. AO/TPO/DRP grossly erred in adopting Internal Resale
Price Method as the most appropriate method of determining arm's length
ITA No 6646/DEL/14
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price of international transactions without either explaining the basis
thereof and failed to comprehend that the transactions did not involve re-
sale between the Assessee and associated enterprises; Infact, the
determination of the 'Arm's Length Price' as envisaged u/s 92C( 1) of the
Act by the learned TPO is not based on any of the methods prescribed
under sub-section (1) of section 92C and the adjustment made is based on
an highly arbitrary approach adopted by the learned TPO and affirmed in
the directions by the DRP.;
d) The Ld. AO/TPO/DRP has erred in concluding that the Assessee has
changed its method compared to earlier years which in her view is in
contradiction to the claim of the Assessee that there has been no change
in functions performed by it.
e) Ld. AO/TPO/DRP has erred in concluding that indenting business and the
trading business of the Assessee are similar and homogeneous in nature
and in holding that the Functions performed, and risks assumed in the
non-AE trading segment is similar to functions and risks in indenting
segment completely disregarding the assertions and evidences filed by the
Assessee in this regard.
f) Ld. AO/TPO/DRP has erred in disregarding the commercial agreements
entered into by the Assessee with AEs and non-AEs without any valid and
cogent reasons and has assumed that the Assessee functions as a trader of
goods in relation to indenting segment;
g) Ld. AO/TPO/DRP have failed to appreciate that the books of accounts of
the Assessee have duly been audited by a Chartered Accountant and no
adverse observations have been made by the Chartered Accountant in his
audit report. Thus, the Id. TPO had grossly erred in adding the FOB value
of goods sourced by the AEs/other parties as part of total cost of the
Assessee which tantamount to altering the accounting practices followed
by the Assessee;
h) Ld. AO/TPO/DRP has erred in choosing incorrect internal comparable
and preferring the same over the external comparable without
appreciating the facts and legal position involved in the case of the
Assessee.
I) That the learned AO/TPO/DRP has erred in assuming and concluding
that indenting based transactions of the Assessee company with its AEs
have same functions and, risk as the trading transactions with non-AEs
overlooking the factual and legal submissions furnished by the Assessee
during the transfer pricing proceedings.
J) That the Ld. AO/TPO/DRP has erred in holding that difference in volume
of indenting and trading transactions need to be analyzed on transaction
to transaction basis and not on an aggregate basis and in not granting
adjustment to account for-the difference in the volume of the two segments
despite the fact that it was admitted that volume of transaction in the AE
and non AE is not same;
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k) Without prejudice to the ground above, there is a huge difference in the
volume of each trading transaction with indenting transaction entered on
a standalone basis and, therefore, the Ld. TPO erred in disregarding the
difference in volume of trading and indenting transaction while
concluding on comparability of indenting and trading transactions;
l) The Ld. AO/TPO/DRP has erred in holding that the Assessee has assumed
all major risks in its indenting business and also assumed "single
customer risk", "risk associated with development and use of intangibles",
"risk associated with quality service", and "capacity utilization risk".
m) That in absence of valid basis much less any valid material, the learned
AO/TPO/DRP has erred in holding that, indenting based transactions of
the Assessee company with AEs are akin to trading transactions of non-
AEs;
n) That the learned AOITPOIDRP having found the Indenting transactions
entered into with non-AE's on identical circumstances are indenting
transactions i.e. service based transactions, he has erred in holding that,
similar transactions with AE's are trading transactions and therefore,
addition proposed is based on an inconsistent stand and contradictory
approach;
0) That the learned TPO has erred in disregarding the reliance placed by the
Assessee on the HC judgment in Li & Fung case. The Learned TPO
completely overlooked the Hon'ble Delhi High Court judgment where it
was stated that for a service provider company operating margin on costs
is an appropriate profit level indicator and remuneration of such a
company cannot be linked with the value of goods bought/sold by the AE
of the Assessee Company. The Assessee being a service provider company
gets covered by the said Hon'ble Delhi High court ruling;
p) Ld. AO/DRP has failed to appreciate that if the addition proposed in the
order under" section 92CA(3) by the Id. TPO was to be adopted as ALP,
the Assessee would be required to earn an absurdly high operating profit
on cost of 355%
q) That the learned TPO has failed to appreciate the difference in risk profile
of the indenting and trading transactions. It is relevant to note that there
is vast difference in indenting and trading activities. Trading activity
requires effort for business creation, undertakes the risk in maintaining
inventory, realization of sale proceeds, incurring interest and other costs
in respect of maintaining and keeping the stock. In such a case, the
functions also include unloading the goods, bringing them to its
warehouse, loading and unloading at the customer's place so on and so
forth. On the other hand, the indenting activity is confined only in
assisting and providing support services in the nature of trade facilitation
and other auxiliary services. There are no financial risks involved in
indenting activity and further the costs incurred herein are substantially
ITA No 6646/DEL/14
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less when compared with the trading activity. From here, it follows that
trading and indenting activities are quite distinct from each other;
r) That the learned AO/TPO/DRP has overlooked that in respect of
indenting based transactions, service tax is applicable and in respect of
trading based transactions, sales tax is applicable. Thus, apparently, the
two transactions are different class of transactions.
s) That the learned AO/TPO/DRP has failed to appreciate that, accountants
report is merely an expression of opinion and, what is determinative is the
real nature of transaction as held by Apex Court in the case of National
Cement Mines Industries Ltd. v CIT reported in 42 ITR 69;
t) That the learned AO/TPO/DRP has erred in overlooking that transactions
made by the Assessee Company are of different product segments and, at
different intervals and different volumes and, therefore, as such the
indenting transactions cannot be compared to the trading transactions.
u) That without prejudice& in the alternative (without admitting) the-
learned AO/TPO/DRP has erred in disregarding the order of the
Honorable Tribunal for the AY 2007-2008, AY 2008-2009 and AY 2009-
10 in Assessee's own case and on identical facts and circumstances
[although the orders have been appealed against by the Assessee and the
matter has been admitted by the High court. For AY 2009- 10, the order of
High Court admitting the appeal is yet to be received),by comparing
indenting based transactions of AE's with trading transactions of non-
AE's and not with indenting transaction of non-AE after allowing
appropriate adjustments(like volume, business segments etc.) and, hence
the addition so made of Rs.1,04,95,90,066/- is misconceived, misplaced,
arbitrary and hence thus, unsustainable;
v) That learned DRP has further failed to appreciate that the finding of the
learned ORP that both the segment are comparable without any
adjustment of volume is wholly erroneous as the volume of transaction is
highly relevant to determine the value of the transaction and hence unless
suitable adjustment including volume adjustment is made, both the
segments are not comparable;
w) That the learned AO/TPO/DRP conclusions are arbitrary and based on
conjectures and surmises.
5. That the learned AO/TPO/DRP has erred in not making adjustments to the
uncontrolled transaction to account for the material impact of the economic
differences between the controlled and uncontrolled transactions as mandated
under Rule 10B(3) of the Income Tax Rules 1962. The Ld. TPO has further erred
in negating the applicability of Li & Fung decision of the Delhi High Court and
in concluding that the approach of the assessee in respect of volume and value of
transactions is contradictory with its assertion regarding indenting and trading
being separate and distinct segments.
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6. That the learned AO/TPO/DRP has erred in holding that the Appellant has
created human and supply chain intangibles for which it is not being adequately
compensated by the AE which finding was reached on mere assumptions and had
been found to be without substance and without any material on record for the
preceding years on identical facts and circumstances and erred in relying on
excerpts from the Sumitomo Corporation of America (sic) to conclude that the
Assessee is creating human assets intangibles for which it is not being
remunerated.
7. That even otherwise, the learned Deputy Commissioner of Income Tax has erred
in proposing the addition on theoretical and, mathematical calculations adopted
by the learned TPO to determine the arm's length price, which is not in
accordance with law and is highly arbitrary and, untenable."
Ground Nos. 1 to 7
3. Apropos these grounds of the assessee, we have heard arguments of both the
sides and carefully perused the relevant material placed on the record before us, inter-
alia, the order of the TPO dated 17.01.2014, direction of the DRP dated 21.10.2014 and
impugned order of the AO dated 25.11.2014 and two paper books of the assessee spread
over 778 pages and written contentions of the assessee placed in ground no.4. Ld. Sr.
Counsel of the assessee submitted that the Assessing Officer has grossly erred both on
facts and in law in determining the taxable income of the assessee at
Rs.1,11,09,85,160/- in the impugned order as against the declared income of
Rs.6,13,95,092/-. The Ld. Senior Counsel further contended that Ld. AO/DRP/TPO
have grossly erred in making an addition of Rs.1,04,95,90,066/- on account of alleged
understatement of arm's length price (ALP) in respect of indenting transaction on
which the assessee earned commission income from its Associate Enterprises (for short
`AE') by completely overlooking and ignoring the findings of the Tribunal for the
earlier three preceding years i.e. for AYs. 2007-08, 2008-09 and 2009-10, despite the
fact that the facts and circumstances of the instant assessment year under consideration
ITA No 6646/DEL/14
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are similar and identical to the preceding three assessment years and no distinguishing
facts are brought on record by the authorities below to take a contrary view as such, has
held that the findings and conclusion of the AO/DRP/TPO are highly arbitrary and not
sustainable and not in accordance with law.
4. Ld. Senior Counsel vehemently contended that the margin of commission earned
by the assessee from uncontrolled transaction with non associate enterprises is less than
the commission earned from the AE. Ld. Senior Counsel drawn our attention towards
Page 461 of the assessee's Paper Book and submitted that the assessee earned
commission on FOB value of goods amounting to Rs.86,22,96,437/- from non
associated enterprises (AE) of Rs.1,47,60,299/- which is 1.71% of FOB value of the
goods. Ld. Senior Counsel further pointed out that the assessee earned commission on
FOB value of goods amounting to Rs.21,20,88,46,377/- of Rs.38,83,69,718/- at the rate
of 1.83% of the FOB value of the goods which is higher than the commission
income/service fees earned from the non associated enterprises, therefore, imposed
addition on account of alleged understatement arms' length price is not sustainable and
in accordance with law.
5. Ld. Senior Counsel further took us to order of the Tribunal in assessee own case
for AY 2007-08 and submitted that in the similar facts and circumstances, the addition
made by the AO/TPO was deleted by holding that the commission percentage of non
AE segment and the same is at the arm's length and no addition is sustainable. Ld.
Senior Counsel further drawn our attention towards order of the Tribunal in assessee
own case for AY 2008-09 dated 15.03.2013 in ITA 5850/Del/2012 and submitted that
the similar kind of addition was further deleted by following order of the Tribunal for
ITA No 6646/DEL/14
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AY 2007-08 dated 31.01.2013 for AY 2007-08, therefore, in the similar set of facts and
circumstances, impugned addition made by the AO is also not sustainable.
6. Ld. Senior Counsel also drawn our attention towards order of the Tribunal dated
14.07.2014 for AY 2009-10 in ITA No.328/Del/2014 and submitted that in the similar
line of preceding AYs. 2007-08 and 2008-09 the Tribunal also deleted the same addition
made by the AO/DRP in assessee's own case. It was also contended that the impugned
addition on the similar set of facts and circumstances of the present case is not
sustainable and not in accordance with law and, therefore, the same may be directed to
be deleted.
7. Ld. Departmental Representative supported the order of the AO/TPO. However,
he submitted that the figures shown by the assessee at Page 461 of the assessee's paper
book are not disputed and he fairly accepted that the commission earned by the assessee
during financial period under consideration from non AE segment is 1.71%, whereas
commission earned from Associated Enterprises segment is 1.83% of FOB value of the
goods.
8. On careful consideration of our submissions of both the sides, at the very outset,
we respectfully take cognizance of the decision of the Tribunal for AY 2008-09 wherein
following the view taken by the Tribunal for AY 2007-08 in ITA No.509/Del/2011
(supra) similar kind of addition have been found to be unsustainable. The relevant
observations and conclusion of the Tribunal in AY 2008-09 read as under:-
"6. We have carefully considered the submissions and perused the
records. The tribunal in assessee's own case vide aforesaid order has held as
under:-
ITA No 6646/DEL/14
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21. We have carefully considered the submissions and perused the
records. We agree with the proposition that in transfer pricing analyses
internal comparable are preferable over external comparables.
22. We note that assessee has entered into two types of transaction (i)
indent/ commission transaction where the assessee earned commission /
fixed service fee, (ii) trading / proper transaction wherein the assessee
purchased good and earned trading margin thereon. The above two
types of transaction has been entered into both with AEs and Non-AEs.
23. We agree with the assessee's proposition that the nature of
indenting transaction is different from the trading transactions. The
trading transaction involves risks and finances, whereas in the indenting
transaction the assessee has not to incur any such financial obligation or
carry any significant risk. Moreover, we note that in respect of indenting
transaction with non-AE's, the average mean margin of profit of 2.26%
has been accepted by the TPO. We further find that the indent business of
the assessee was nothing but trade facilitation and is purely of indent
nature both in form and substance. No material has been brought on
record to regard the indent transaction as trading transactions.
24. Assessee itself has agreed with the proposition that an
appropriate comparison would be to compare the commission/ service
income earned by the assessee from AEs to that of the non-AEs. This
aspect of assessee's submission has not been rebutted by the Revenue.
However, the assessee has contended that the reason of difference
between them was attributable to volume of business handled in AE
segment and non AE segment and credit risk associated in non AE
segment. Therefore, it has been argued that economic adjustment is
required to improve the comparability between commission earned in AE
segment vis-a-vis commission earned in Non-AE segment. It has further
been submitted that it is customary in commercial dealing of
broker/commission agent to offer discount on the basis of volume or value
of business generated; that similarly commission/brokerage charged from
low value / small customers is much higher on account of the premium
rate of commission charged from them. Hence the assessee has come to
the conclusion that discount of 50% was to be applied on Non-AE segment
commission percentage to arrive at the arm's length commission
percentage.
25. However, we do not agree with the proposition that in the facts and
circumstances of the case volume impacts the rate of commission. For
each and every single transaction a separate contract is entered and the
commission rate / service fee is mentioned in this context. It is also not
the case of the assessee that volume of a single transaction varies in the
AE and Non-AE segment.
ITA No 6646/DEL/14
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26. We find that mere difference in turnover is not sufficient for
treating two entities or two transactions as not comparable or warrant
any adjustment. In this regard we refer to the follow case laws.
- In the case of M/s Symantec Software (Supra) in ara 15 following has
been laid down:-
"In the case in hand, the assessee raised these objections only
because some of the comparables are having high profit and also
high difference in the turnover and not because of the high or low
turnover has influenced the operating margin of the comparables.
All the objections and contentions raised by the assessee in respect
of this issue are general in nature and no specific fact has been
brought on record to show that due to the difference in turnover
the comparables become non-comparables. The assessee has not
demonstrated as to how the difference in the turnover has
influenced the result of the comparables. It is accepted economic
principles and commercial practice that in highly competitive
market condition, one can survive and sustain only by keeping low
margin turnover. Thus, high turnover and low margin are
necessity of the highly competitive market to survive.
Similarly, low turnover does not necessarily mean high margin in
competitive market condition. Therefore, unless and until it is
brought to record that the turnover of such comparables has undue
influence on the margins, it is not the general rule to exclude the
same that too when the comparables are selected by the assessee
itself."
- Similarly in the case of M/s Bayer Material Sciences (P) Ltd.
(Supra) in para 23 following proposition was laid down:-
"Now the question is whether these cases, which are otherwise
comparables, should be disregarded simply on the ground of
smallness of turnover when compared with that of the assessee.
Considering the fact that the assessee did not come out with any
comparable case to justify its price at arm's length and further the
TPO found out these cases having functionally identical activities
duly confronted to the assessee, it is not possible to disregard such
cases merely on the ground that the volume of turnover is lower in
comparison to that handled by the assessee. One more important
factor which cannot be lost sight of is that in the case of M/s Rathi
Brothers Madras Ltd. indenting commission is 5% to 6% with
turnover of ` 10.65 crores. The same rate of commission of 5%
prevails in the case of M/s Huntsman International (P) Ltd. and
M/s Ineos ABS (India) Ltd. with turnover of around ` 75 cores and
around ` 80 cores respectively. It shows that the rate of
commission in such business does not vary on the basis of
turnover."
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27. Hence when the indent/ commission transaction with the AE is to
be benchmarked, the same should be done with indent / commission
transaction with Non-AE. Hence there is a no need to dwell further on
the comparison between indenting transaction and trading transaction.
28. On the basis of above discussion and precedents we reject the
assessee's contention that discount of 50% is required in commission
percentage in the Non-AE segment to make it comparable with
commission percentage in the AE segment.
29. Now we come to argument of the assessee that there is no change
in the operating model or the business activity of the assessee company,
hence, rule of consistency should be followed and hence no adjustment is
warranted. In this regard we are of the opinion the res judicata is not
applicable to taxation cases. Moreover, as held by Apex Court in
Distributors (Baroda) P Ltd. vs. Union of India & Ors. 155 ITR 120 that
to perpetuate an error is no heroism. To rectify is the compulsion of the
judicial conscience.
30. In light of the discussions and precedents cited above, we are of the
opinion that commission percentage in AE segment should be compared
with commission percentage in Non-AE segment. Accordingly, the
commission percentage @ 2.26% in Non-AE segment should be taken as
the arm's length rate at which assessee should have earned its
commission income in the AE segment."
7. From the above we note that in assessee's own case the tribunal has passed the
order as above. Hence, in our considered opinion, the same proposition has to be
followed. Accordingly, we hold that commission percentage in AE Segment should
be compared with the commission percentage in non-AE segment. Accordingly, the
commission percentage @ 2.30% in non-AE Segment to be taken as the arm's
length price on which the assessee should have earned its commission income in
the AE Segment."
9. We further observe that in the similar manner the Tribunal in the order dated
14.07.2014 for AY 2009-10 following the order of the Tribunal for AYs 2007-08 and
2008-09 has deleted similar addition with the following observations and conclusions:-
5. We have heard the rival submissions and perused the relevant
material on record. It is noticed that the TPO relied on the view taken by him
for preceding years in proposing the transfer pricing adjustment. The ld. AR
also candidly admitted that the order for the current year is replica of the
earlier years order passed except for the change in figures. The position
which, therefore, admittedly emerges is that the facts and circumstances of
the instant year are mutatis mutandis similar to those of the preceding two
ITA No 6646/DEL/14
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years. The appeal of the assessee for the AY 2007-08, in which transfer
pricing adjustment was made under similar circumstances, came up for
consideration before the Tribunal in ITA No.5095/Del/2011. Vide order
dated 31.01.13, the Tribunal has held that the `Indenting transactions' are
different from `Trading transactions' in terms of functional differences, risks
undertaken and assets employed, and hence both cannot be considered as
uniform. The Tribunal held that the commission earned by the assessee from
its AEs under the `Indenting segment' was required to be benchmarked on
the basis of commission earned by the assessee from non-AEs under
`Indenting segment'. The assessee's contention before the Tribunal that
discount of 50% should be given from commission earned from non-AEs to
make it comparable with the commission earned from AEs, was rejected. It
was finally held that the commission percentage from AE transactions should
be compared with the commission percentage from non-AE transactions.
That is how, it was directed that such commission percentage at 2.26% from
non-AE transactions should be taken as arm's length rate at which the
assessee should have earned commission from AE transactions. Similar view
was taken by the Tribunal in its order for the AY 2008-09 in which the
commission percentage @ 2.23% from non-AE transactions was held to be
arm's length rate of commission to be applied in respect of transactions with
AEs. As the facts and circumstances of the instant year are admittedly
similar to those of two preceding years, respectfully following the
precedents, we hold that the action of the TPO/AO in determining the ALP in
respect of indenting business by applying profit percentage earned by the
assessee from non-AE transactions under the `Trading business segment'
cannot be upheld. It goes without saying that both the trading as well as
commission businesses are functionally different from each other, apart from
having varying risks and capital employed. We hold that the commission
percentage from AE transactions should be benchmarked on the basis of
commission rate from non-AE transactions under the `Indenting business'
and the addition on account of transfer pricing adjustment, if any, should be
made in consonance with the view taken by the tribunal in the immediately
two preceding years.
6. The ld. AR tried in vain to impress upon us that the view taken by the
tribunal in the preceding two years should not be followed and the
application of TNMM as employed by the assessee should be accepted
leading to no addition on account of TP adjustment. To buttress his
contention for the application of TNMM, he placed on record a copy of the
order passed by the Delhi bench of the tribunal in Marubeni India P. Ltd.
VS. DCIT (ITA no. 5397/Del/2912). This contention was countered by the ld.
DR by stating that the TPO has applied internal RPM as the assessee's
TNMM was faulted with due to the reasons given in the order. We are not
convinced with the contention of the ld. AR urging us to observe departure
from earlier view taken by the tribunal for the obvious reason that when the
Tribunal in identical facts has taken a particular view in assessee's own
cases for the immediately two preceding assessment years, we cannot tinker
ITA No 6646/DEL/14
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with the same. We, therefore, hold that the commission percentage on the
basis of FOB value of goods from transactions with non-AEs be computed
and taken as arm's length rate of commission for the purposes of the
transactions with AEs under the `Indenting business' segment. In this regard,
the ld. AR submitted that the percentage of commission from AE transactions
for the instant year stood at 1.83% as against 2.86% from non-AEs. We find
that the rates of commission now sought to be placed before us, are not
emanating from the orders of the authorities below. Under such
circumstances, we set aside the impugned order and remit the matter to the
file of the AO/TPO with a direction to find out the rate of commission income
on FOB value of the transactions with non-AEs under the `Indenting
business' segment and then apply the same rate to the FOB value of goods in
AE transactions under the `Indenting business' segment, as was directed in
the earlier years. Needless to say, the assessee will be allowed a reasonable
opportunity of being heard in such proceedings.
10. In view of above submission of both the sides and order of the Tribunal for
preceding AYs 2007-08, 2008-09 and 2009-10, we observe that in the similar set of
facts and circumstances, it was held that the commission percentage, on the basis of
FOB value of the goods, from the transactions with non-AE, are at arm 's length under
the "indenting business" segment. The Tribunal also observed that the percentage of
commission earned from AE transaction is higher than the commission earned from the
non AE transactions in the indenting business segment, therefore, no further addition in
this regard is required. In the present case, Ld. DR has supported the action of the
AO/DRP/TPO wherein impugned addition was directed to be made and the AO made
impugned addition by passing order in pursuant to direction of DRP. However, Ld. DR
has fairly accepted that the figures shown by the assessee at Paper Book Page 461
which was also filed before the authorities below are undisputed and correct. We further
note that as per said figures, commission earned from non AE transaction comes to
1.71% and commission earned from AE transactions comes to 1.83% of the FOB value
of the goods. In view of above, it is vivid that the assessee earned higher percentage of
ITA No 6646/DEL/14
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commission income from AE transactions in comparison to non AE transaction on
"indenting business" segment. It is said legal proposition that when internal comparable
is available then the same should be considered as suitable and appropriate comparable
for assessing the arm's length price of the International transaction undertaken with AE
on a particular segment.
11. In the instant case, the commission earned from non AE transaction is an
appropriate a suitable internal comparable for the purpose of comparing the
international transactions affected by the assessee with Associate Enterprise pertaining
to similar segment during the financial period under consideration. In view of above,
respectfully following the view taken by the Tribunal for AY 2008-09 (Supra), we
inclined to hold that the issue is squarely covered in favour of the assessee and the
impugned addition made by the AO in pursuant to direction of the DRP by passing the
impugned order u/s 142(3) r.w.s. 144C of the Act is not sustainable and the AO/DRP is
directed to delete the same. Accordingly, the Ground Nos. 1 to 7 of the assessee are
allowed.
12. Ground No. 8 & 9 are consequential and in view of above our conclusion on the
main issues these grounds becomes academic and infructuous and we dismiss the same
without any further deliberation.
13. In the result, appeal of the assessee is allowed.
(Order pronounced in the open Court on 05.06.2015)
Sd/- Sd/-
(R.S. SYAL) (CHANDRAMOHAN GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBE
Dated: 5 th June, 2015.
Aks/-
ITA No 6646/DEL/14
15
Copy forwarded to
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi
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