TMI Blog2013 (12) TMI 594X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction with non-associated enterprises - Decided against the assessee. Legal and professional charges – Held that:- The assessee-company employs foreign nationals for the purpose of its business, as they have requisite expert knowledge of the markets outside India - The assessee-company has many of the foreign nationals, on its rolls, working at various managerial positions - As per the general policy of the assessee-company and the market wide practice, the company at the time of the departure of such foreign assignees, after completion of their assignments, bears the cost of their return journey to their respective home countries - The expenditures were incurred by the assessee on its employees who were returning to their home countries, after completion of the assignments. The expenditures were charges in connection with passenger baggage clearing – Decided in favour of assessee. Disallowance of deduction of deposits written off – Held that:- The assessee has debited an amount to the profit and loss account under head "Deposits written off - The AO misread the profit and loss account and amount claimed in the assessment year 2006-07 was understood by him as the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , whether at the proposal or the approval stage; (d) As no initial opinion was formed under section 92C(3) of the Act which is a jurisdictional precondition ; (e) By not furnishing the letter of reference ("LOR") to appellant. 3.1 That since the reference by the learned Assessing Officer was bad in law and void ab initio, consequentially the entire proceedings by the learned Transfer Pricing Officer, order of the learned Transfer Pricing Officer, directions of the learned Dispute Resolution Panel and, also the impugned addition of Rs. 55,26,16,748 is vitiated, invalid, illegal and hence, a nullity. 4. The order of learned Assessing Officer and directions of the learned Dispute Resolution Panel along with the learned Transfer Pricing Officer's order under section 92CA(3) of the Act is based on complete disregard of the facts of the case of the appellant and the statutory provisions of law. 4.1 The learned Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel has in fact erred in their orders by disregarding the following objections apparent on facts and in law on the facts and circumstances of the case of the appellant : (a) That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant ; the risk is limited to the commission amount and not to the gross amount of sales ; (g) That the learned Assessing Officer/Transfer Pricing Officer/ Dispute Resolution Panel has overlooked that in respect of indent based transactions, service tax is applicable and in respect of principal based transactions, sales tax is applicable. Thus, apparently, the two transactions are different class of transactions ; (h) The learned Dispute Resolution Panel erred in stating that the appellant has not provided conclusive evidence to show that the principal transactions and indent transactions are significantly different. The learned Dispute Resolution Panel further erred in completely overlooking the additional evidences filed by the appellant before the learned Dispute Resolution Panel on January 21, 2011 along with Form 35A. Thereby, the learned Dispute Resolution Panel operated with a pre-determined mindset to retain the adjustment made by the learned Transfer Pricing Officer without adhering to the critical evidences furnished by the appellant ; (i) The learned Dispute Resolution Panel erred in stating that the lease agreement dated January 5, 2007 between Omega Global Logis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) of the Income-tax Rules 1961. 6. That the learned Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel has erred in holding that the appellant has created human and supply chain intangibles for which it is not being adequately compensated by the associated enterprises. 7. That the learned Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel has erred in adopting a transfer pricing approach that is different from the earlier year despite there being no change in the facts and circumstances of the case of the appellant. 8. That the learned Assessing Officer/Dispute Resolution Panel has grossly erred both in law and on facts in proposing a disallowance of a claim of expenditure of Rs. 3,72,560 representing legal and professional charges incurred wholly and exclusively for the purpose of business of the appellant-company. 8.1 That the learned Assessing Officer and the Dispute Resolution Panel has failed to appreciate that, mere fact that, such expenditure had been disallowed in the preceding years could not be a basis much less valid basis to hold that, expenditure incurred towards writer relocations was a personal expenditure. In fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that on its indent trading transactions, Sumitomo India s roles is that of a mere service provider. On these transaction, Sumitomo India earns income in the form of commission, generally based on the total invoice price or quantity of merchandise. Most of Sumitomo India s commission receivable on these transactions are from Sumitomo Corporation. It was stated in the transfer pricing report that Sumitomo India provides marketing support services for facilitating both exports and imports in India through Sumitomo Corporation. The support services include gathering information about customer requirements, products, local prices, market trend, etc. During the financial year 2006-07, the assessee undertook the following international transactions : Sl. No. Type of International transaction Method selected Total value of transaction (Rs.) 1 Purchase of goods TNMM 10,28,25,122 2 Sale of goods TNMM 12,94,773 3 Rendering of support services TNMM 30,45,25,711 4 Interest earned TNMM 7,22,621 5 Services received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transfer Pricing Officer observed that on examination of the computation in the case of comparable companies, it was found that profit level indicator had not been computed in the same manner as that of the tested party. The Transfer Pricing Officer observed that however, on examination of the computation of the tested party margin, it was noticed that the entire international transactions relating to sales and purchase of goods and commodities had remained out of computation of profit level indicator. Most importantly, the cost of sales was not included in the denominator of profit level indicator used. The Transfer Pricing Officer asked the assessee to furnish the FOB value of goods on which commission had been received for the purpose of determination of cost of goods sold. The assessee was also required to explain as to why Berry ratio was used to benchmark international transaction of the tested party. The Transfer Pricing Officer noted that the Income-tax Act or Income-tax Rules do not permit the use of "operating expenses" in the base which do not include the cost of sales. In accordance with the provision of rule 10B(1)(e)(i) the net profit margin realised by the enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which it is claimed that you have only rendered services to your associated enterprise, the commission and fee on such services has been calculated. The "gross profit margin" on the trading sales (associated enterprise and non-associated enterprise segment) has then been added to the commission earned (plus other income) to arrive at the numerator of your profit level indicator, i.e., gross profit on sales. This numerator has then been divided by "operating expenses" to arrive at computation of profit level indicator of Berry ratio. On examination of the computation in the case of comparable companies, it is found that profit level indicator has not been computed in the same manner as that of the tested party. 4. However, on examination of the computation of the tested party margin of the tested party margin, it is noticed that the entire international transactions relating to sales and purchase of goods and commodities have remained out of computation of profit level indicator. Most importantly, the cost of sales is not included in the denominator of the profit level indicator used. For the purposes of determination of cost of goods sold, you were required to furnish the FOB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26,840 totalling to Rs. 32,36,83,588. Vide your submission dated September 14, 2010, segmental accounts for Sumitomo Corp. India Pvt. Ltd as per Annexure-I have been furnished as under : Table I Particulars AEs (Rs.) Non-AEs (Rs.) Commission (Rs.) Other income (Rs.) Total (Rs.) Direct income 10,80,20,767 14,81,25,537 -- -- 25,61,46,304 Sales Commission -- -- 32,36,83,588 -- 32,36,83,588 Other income 2,73,93,863 2,73,93,863 Total (A) 10,80,20,767 14,81,25,537 32,36,83,588 2,73,93,863 60,72,23,755 Direct expenses Cost of materials 10,28,25,123 13,78,61,103 -- -- 24,06,86,226 Change in stock -- 36,65,508 -- -- 36,65,508 Total (B) 10,28,25,123 14,15,26,611 -- -- 24,43,51,734 Gross profit (C)=A-B 51,95,644 65,98,926 32,36,83,58 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries of Sumitomo group and the main services among others include the following : Networking with buyers and suppliers of steel Support in after sales services, business promotion Collection of market information Provide knowledge and experience Co-ordination with customers Collection of account receivables from client on behalf of associated enterprise Administrative services (iv) Sumitomo India provides marketing support ; service to Sumitomo group. (v) Sumitomo India handles different products and commodity through its different commodity departments. 10. You may therefore show-cause as to why the margin earned in your trading transaction in the non associated enterprises segment at 4.45 per cent should not be adopted to compute the margin that you should have earned on the FOB value of the goods transacted through you." 5. In response to the show-cause notice, the assessee submitted that its parent company, Sumitomo Corpn., Japan along with its group companies is a general trading group based in Japan. It was stated that the assessee provides support services to its associated enterprise such as providing information to associated enterprise wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractering commission/fee as return on sales was incorrect, arbitrary and unreasonable and contrary to transfer pricing principles. It was claimed that the cost as mentioned in rule 10B(1)(e) does not include cost of goods sold because no such cost has been incurred by the assessee. The assessee further quoted from rule 10B(1)(e)(i) to state that the rules permit, "having regard to any other relevant base". The Transfer Pricing Officer observed that the assessee has stated that the activities quoted in the show-cause notice were routine, preparatory and auxiliary in nature and cannot be said to create any intangible. The assessee submitted it was carrying out facilitation service for its associated enterprises and does not partake in the supply chain activities. It was also submitted that it was not creating transferrable human intangible. Therefore, it is not creating any human or supply chain intangible. The assessee further submitted a matrix to state that the non-associated enterprises trading segment cannot be compared with the service/commission segment. The assessee submitted following reasons for rejecting the argument that gross profit margin of 4.45 per cent earned in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 2.26 per cent. while it earned commission from associated enterprise at 1.58 per cent. The reasons for difference in percentage of commission earned was attributed to volume of business handled in associated enterprise segment and non-associated enterprise segment and credit risk as associated in non-associated enterprises segment. The assessee claimed that it earn commission from nonassociated enterprise at 2.26 per cent. on the base value of Rs. 84,72,49,524 whereas it has earned commission from associate enterprises at 1.58 percent. on base value of Rs. 19,25,49,38,946. In other words, it was claimed that Non-associated enterprise segment constitutes merely 4.2 per cent. of the total commission/service business of the assessee. Therefore, it was claimed that economic adjustment as mandated under law, is required to improve the comparability between commissions earned in associated enterprise segment vis-a-vis commission earned in non-associated enterprises segment. It was further submitted that it was customary in commercial dealings of broker/commission agent to offer discount on the basis of volume or value of business generated. Similarly, commission/brokerage charged from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction segment" with the commission/service fee it receives in the "indent segment" and taken it as the numerator of it profit level indicator a comparable. The Transfer Pricing Officer observed that the assessee has clubbed the two incomes, i.e., gross profit earned from the principal business and "commission/service fee" from the indent business in the numerator of its profit level indicator. The Transfer Pricing Officer further noted that it was explained that the transactions in the "principle transaction segment" are back to back transaction and the FAR of trading transactions and indent transactions was exactly the same and therefore, they have been clubbed together as overall gross profit and profit level indicator of gross profit/OP expense has been selected under the transactional net margin method. 7.1. The Transfer Pricing Officer referred to the following table to better understand the computation of margin of the assessee : Table I Particulars AEs (Rs.) Non-AEs (Rs.) Commission (Rs.) Other income (Rs.) Total (Rs.) Direct income 10,80,20,767 14,81,25,537 -- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprises trading segment at 4.45 per cent should not be taken as a margin for the indent segment as well. In this connection, the Transfer Pricing Officer referred to the FAR analysis in the transfer pricing Report. The Transfer Pricing Officer further observed that the assessee has itself stated that in the principal transaction segment the assessee Sumitomo India normally does not purchase product for resale, maintains no inventory. The purchase-sale transactions are essentially back to back transactions. The Transfer Pricing Officer further noted that it was stated by the assessee in this segment the assessee performs high sea sales wherein no possession of the goods is taken by the assessee. The Transfer Pricing Officer further observed from in the transfer pricing report that the assessee procures the finished goods upon receiving the conformed order from its customers and the buy and sale price is also determined. Hence, such transactions are back to back involving minimal risk. Accordingly the gross profit margin earned for such sales and purchases can be compared with profitability of a service provider. The Transfer Pricing Officer noted that the assessee has thus submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociated enterprises. However, these intangibles did not form part of the operation cost. Accordingly, the value of addition made by the assessee to the FOB value the goods sourced through it remained unremunerated and commission/service income model does not capture the compensation for value addition made through these intangibles. Accordingly, commission should be computed on FOB value of goods. (d) Most importantly, as has been discussed above, part of the income in the numerator has been calculated as gross margin on cost of goods sold. However, for the commission/service income, i. e., FOB value of goods traded through the assessee of Rs. 20,10,21,88,471 on which commission/service fee of Rs. 32,36,83,588 has been earned has been completely ignored while calculating the said income." 9. In view of the above finding, the Transfer Pricing Officer held that the correct compensation model at the arm's length price, in this case, would be commission of FOB cost of goods sourced from India. The Transfer Pricing Officer further observed that the Income-tax Act and Income-tax Rules do not recognize Berry ratio as appropriate profit level indicator under transactional net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference in the FAR of the trading segment as compared to the service/commission segment. He observed that the assessee has not been able to offer any explanation as to why it has earned gross margin of 4.80 per cent. in identical transactions of trading with associated enterprises (where goods are not even transferred and the sales and purchase take place on high seas). The Transfer Pricing Officer further referred to the assessee's arguments regarding the volume. He noted that the assessee has argued that the indent segment constitute 95 per cent of its business, whereas the trading segment constitute only 5 per cent of its business. The Transfer Pricing Officer further noted that the assessee-company only provides marketing support and other support services in the indent segment. He noted that as per the assessee there is no assumption of title in the indent segment and therefore, the commission earned is adequate compensation for service provided. The Transfer Pricing Officer noted that the assessee in its transfer pricing report has calculated the return earned on its total costs to demonstrate that it has been adequately compensated for its services as compared with similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that its service/commission model has been reA-characterised. Referring to his findings in the preceding paragraphs, the Transfer Pricing Officer observed that it has been explained above that the compensation model of the assessee has been analysed based on each international transactions and not re-characterisation has been done. The Transfer Pricing Officer further noted that the assessee has submitted the associated enterprises performs more functions, assumes more risks and deploys more resources as compared to the assessee. In this connection, the assessee gave risk matrix between the assessee and the assessee associated enterprises. Based on FAR matrix, the assessee has stated that the associated enterprise gross profit margin is lower than 4.45 per cent even after performing more functions and more risks as compared to the assessee. The assessee further submitted that the assessee cannot earn more gross profit margin than associated enterprises itself. The Transfer Pricing Officer observed that the assessee has stated associated enterprise gross profit margin is lower than the at 4.45 per cent proposed in the case of the assessee. The Transfer Pricing Officer noted that how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is more than a single transaction in either the non-associated enterprise commission segment, non associated enterprise trading segment or the associated enterprise trading segment. It has been demonstrated in the order above, that the assessee is earning less gross margin for goods transacted with associated enterprise on which it earns commission/service income as compared with gross margin in the trading segment. The assessee in its alternative, without prejudice submission has also demonstrated that the commission/ service income earned from associated enterprises does not represent the arm's length remuneration as compared with commission/service income earned under the uncontrolled circumstances in the nonassociated enterprises segment." 12. The Transfer Pricing Officer further referred to the assessee's submission that its business model, nature of international transactions and transfer pricing methodology has remained unchanged since assessment year 2003-04 and the same has been accepted by the Revenue. In this regard, the Transfer Pricing Officer held that the assessee has misdirected itself in placing reliance of the earlier order. He noted that assumption of risk a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee by an amount of Rs. 55,26,16,748 while computing its total income." 14. The assessee filed objections against the draft assessment order framed by the Deputy Commissioner of Income-tax read with section 144C of the Income-tax Act to the Dispute Resolution Panel. The Dispute Resolution Panel held that objections have been duly dealt with by the Transfer Pricing Officer in the draft assessment order and accordingly, the Dispute Resolution Panel did not find any reason to differ with the Transfer Pricing Officer's view. The Dispute Resolution Panel concluded that no interference was needed in the adjustment proposed by the Assessing Officer/ Transfer Pricing Officer on transfer pricing issue. 15. We have heard the rival contentions in light of the material produced and precedent relied upon. Learned counsel for the assessee submitted that the activity of purchase and sale involves risks and finances ; whereas in the activity of "indenting transactions" which are undertaken by the assessee, the assessee has either not to incur any such financial obligation or carry any significant risks ; that the nature of the two activities are thus evidently and entirely different. It has f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two circumstances mentioned in para 1.65 of the OECD transfer pricing guidelines, business structure of the assessee company should be accepted. It has been further been submitted that the indent business of the assessee was nothing but trade facilitation and is purely of indent nature both in form and substance. It has further been submitted that no material has been brought to record the indent transactions by any stretch of imagination as trading transactions. It has further been submitted that the Transfer Pricing Officer has mentioned that the assessee is creating human chain and supply chain intangible. It has been alleged by the Transfer Pricing Officer that by so creating such intangible, the assessee is not being adequately compensated by the associated enterprise. In this regard, the assessee submitted that despite request, which of the intangible has been created, the Transfer Pricing Officer has failed to identify any such alleged intangible. That the Transfer Pricing Officer has completely overlooked the assessee is mainly providing support services to its associated enterprises and, there can be thus no justification to allege that, any human chain and supply chain i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee while calculating the margin of profit as per the berry ratio, since the assessee does not incur any cost and payment made by the customer is not to be made to the assessee as it is not party to the contract. That the commission income earned by the assessee from its associated enterprises in the year under consideration was Rs. 30.45 crores on the FOB value of goods of Rs.1,925.49 crores ; whereas in the non-associated enterprises segment, there are trading transaction are of only Rs. 14.81 crores and therefore, it would be an absurd and, preposterous proposition to treat one group of small isolated transactions as the basis of benchmarking the income of diverse range of commission transaction spread across time, sectors, products and service lines ; that in each of the years commencing from the assessment year 2002-03, nature of transaction has been accepted as such by the Transfer Pricing Officer/Assessing Officer and since there has been no change in the operating model or the business activities of the assessee-company, thus, even following the rule of consistency, no adjustment is warranted. In this regard, the assessee has placed reliance upon following case law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, as we have our own transfer pricing legislation on the statute book. Besides, India is not a signatory to OECD itself. That section 37 and section 92 operate in different spheres. For this proposition, the learned Departmental representative relied upon the case of Deloitte Consulting India P. Ltd. v. Dy. CIT [2012] 19 ITR (Trib) 378 (Mumbai) and decision in the case of Perot Systems TSI (India) Ltd. v. Deputy CIT [2010] 5 ITR (Trib) 106 (Delhi) That the mere difference in turnover is not sufficient for treating two entities, or two transactions, as not comparable to each other. In this regard, the learned Departmental representative has placed reliance upon the case of Symantec Software Solutions P. Ltd. v. Asst. CIT [2012] 15 ITR (Trib) 323 (Mumbai). 19. The learned Departmental representative further placed reliance upon the decision in the case of Bayer Material Science P. Ltd. v. Asst. CIT in I.T.A. No. 3829/Del/2010 [2012] 17 ITR (Trib) 275 (Mumbai). 20. With regard to the assessee's contention of adhering to the rule consistency, the learned Departmental representative referred to the decision of the hon'ble apex court in Distributors (Baroda) P. Ltd. v. Union of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 per cent was to be applied on non-associated enterprises 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 associated enterprises and non-associated enterprises segment. 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 Symantec Software Solutions P. Ltd. [2012] 15 ITR (Trib) 323 (Mumbai) in paras 36 and 37 following has been laid down ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely. It shows that the rate of commission in such business does not vary on the basis of turnover." 27. Hence when the indent/commission transaction with the associated enterprises is to be benchmarked, the same should be done with indent/ commission transaction with non-associated enterprises. Hence there is a no need to dwell further on the comparison between indenting transaction and trading transaction. 28. On the basis of the above discussion and precedents we reject the assessee's contention that discount of 50 per cent is required in commission percentage in the non-associated enterprises segment to make it comparable with commission percentage in the associated enterprises 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 the apex court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC) that to perpetuate an error is no heroism. To rectify is the compuls ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , an amount of Rs. 3,72,560 was disallowed and added to the total income of the assessee in the draft assessment order. 33. On this issue the Dispute Resolution Panel's directed the Assessing Officer to verify whether the Department has filed any appeal against the order of the learned Commissioner of Income-tax (Appeals) for the assessment year 2006-07. If no appeal is filed, then only the Assessing Officer is directed to delete the addition. On the above directions, the Assessing Officer noted that in the assessment year 2006-07, the Department has not accepted the decision of the learned Commissioner of Income-tax (Appeals) and an appeal was filed before the Tribunal on this issue. In view of this the disallowance of Rs. 3,72,560 on account of legal and professional charges was added to the income of the assessee. 34. Against the above order, the assessee is in appeal before us. 35. We have heard the rival contentions in light of the material produced and precedent relied upon. Learned counsel for the assessee submitted that the assessee-company employs foreign nationals for the purpose of its business, as they have requisite expert knowledge of the markets outside India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermore, for the assessment 2008-09 the Assessing Officer disallowed similar expenditure, he was directed to delete the same by the Dispute Resolution Panel. Accordingly, learned counsel for the assessee prayed that this addition may be deleted. 37. The learned Departmental representative on the other hand, relied upon the order of the Assessing Officer. 38. We have carefully considered the submissions. We find that these expenditures were incurred by the assessee on its employees who were returning to their home countries, after completion of the assignments. The expenditures were charges in connection with passenger baggage clearing. Similar expense was also allowed by the learned Commissioner of Incometax (Appeals) in the assessment year 2006-07. The Dispute Resolution Panel has also allowed expenditure in the assessment year 2008-09. Under the circumstances, we hold that the assessee has cogent submissions, the addition in this regard cannot be sustained. Accordingly, we delete the addition. 39. Ground No. 9 reads as under : "That the learned Assessing Officer/Dispute Resolution Panel has further erred both in law and on facts in making a disallowance claim of d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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