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2015 (6) TMI 213 - ITAT DELHI

2015 (6) TMI 213 - ITAT DELHI - TMI - Transfer pricing adjustment - 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 - Held that:- 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 duri .....

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R.S. SYAL AND SHRI CHANDRA MOHAN GARG, JJ. For the Appellant : Sri C.S. Agarwal, Sr. Advocate And Sri R.P. Mall Advocate For the Respondent: 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. T .....

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f ₹ 1,04,95,90,066/- on account of alleged understatement 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 .....

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earned 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 TP .....

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nd 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 .....

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ransactions did not involve resale 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 .....

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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 .....

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red 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 grant .....

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ting 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 transaction .....

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ding 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 Hi .....

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rt 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 .....

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nsactions 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 dif .....

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rt. 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 ₹ 1,04,95,90,066/- is misconceived, misplaced, arbitrary and hence thus, unsustainable; v) That learned DRP has further failed to appreciate that the fi .....

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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 segment .....

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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 .....

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nst the declared income of ₹ 6,13,95,092/-. The Ld. Senior Counsel further contended that Ld. AO/DRP/TPO have grossly erred in making an addition of ₹ 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- .....

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ssion 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 ₹ 86,22,96,437/- from non associated enterprises (AE) of ₹ 1,47,60,299/- which is 1.71% of FOB value of the goods. Ld. Senior Counsel further pointed out that the assessee earned c .....

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he 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 AY 2007-08 dated 31.01.2013 for AY .....

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nd 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 fr .....

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considered the submissions and perused the records. The tribunal in assessee s own case vide aforesaid order has held as under:- 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) tradi .....

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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 commissi .....

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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 arriv .....

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reating 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 .....

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n 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) .....

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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 cor .....

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ired 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. .....

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e 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 Segmen .....

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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 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 31.01.1 .....

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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 .....

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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, i .....

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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 immedia .....

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he 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 .....

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lso 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 .....

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