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TMI Blog2020 (11) TMI 1102X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant with its AEs 2. That in making the aforesaid addition, the Ld. AO has erred in making a reference under section 92CA(1) of the Act to the Ld. Transfer Pricing Officer ('TPO') on the following amongst other grounds, rendering the order of the Ld. TPO as unsustainable both in law and on facts: a) As the reference made by the Ld. AO to the Ld. TPO is not in accordance with the provisions of Section 92CA(1) of the Act; and b) As no opportunity of being heard was granted at any stage of the proceedings for this purpose, whether at the proposal stage or even later at the time of grant of approval 3. The Ld. TPO has erred in making the transfer pricing adjustment without establishing the existence of any one of the four pre-conditions provided in section 92C(3) of the Act, which is a mandatory requirement for making an adjustment under section 92CA(3) of the Act 4. That in making the aforesaid addition, the Ld. DRP has grossly erred in in its jurisdiction when it directed the Ld. AO / TPO to make an adjustment on substantive basis of Rs. 19,00,34,764, which amounted to 'modifying' of the order of the Ld. TPO u/s 92CA(3) of the Act. 5. That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s arm's length price for indenting transactions with the AEs, it had to be established that there is no significant variation in the rate of commission between different products and without conducting any such enquiry, such average rate of commission could not be adopted as arm's length. 12.The Ld. DRP has failed to appreciate the huge difference in FOB value on which commission had been earned from third parties viz. Rs. 51,31,23,599 and FOB value of indent transaction with AEs (other than Sumitomo Corporation Japan) viz. Rs. 12,53,46,49,034. Further, there are huge difference in the geographical locations and business segments due to which, per the judgement of the Hon'ble High Court in Appellant's own case, the average commission rate earned from third parties cannot be used for making adjustment in relation to transactions with AEs The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other. 3. The facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Sales(A) 543,544,968 20,975,803 962,004,322 1,526,525,093 (-) Cost of Goods Sold 498,314,582 18,299,895 853,870,004 1,370,484,481 45,230,386 2,675,908 108,134,318 156,040,612 (+) Commission Fee 603,840,855 189,765,102 92,411,946 886,017,903 (-) Commission Paid - - - - (+) Trading Interest 75,140 - - 75,140 (-) Bank Charges - - - - GROSS PROFIT ON SALES- (A) 649,146,381 192,441,010 200,546,264 1,042,133,655 Details of Operating Expenses Employees Cost as per audited financials 355,064,692 Administrative Expenses (as per Note 1 below) 472,227,829 Depreciation as per audited financials 17,376,622 OPERATING EXPENSES (OPEX) 844,669,143 AE OPEX Allocation 52,87,54,805 15,67,50,637 15,91,63,702 844,669,143 OPERATING PROFIT (OP)- (B) 1203,91,576 356,90,373 413,82,562 1974,64,512 ACTUAL OP/OPEX % 22.77% 22.77% 26.00% TARGET OP/OPEX % 22.50% /22.50% 22.50% 6. From the above, the TPO noted that the operating profit margin of the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts AE during the impugned assessment year are as under:- International Transaction Total Value of Transaction [Amount in INR] Sale of goods 47,82,797 Purchase of goods 477,077,786 Trade payable 297,206,390 Re-imbursement of Expenses received/receivable 14,523,365 Miscellaneous income 75,140 Provision of services 793,606,244 Availment of services 79,383,171 Trade and other receivables 35,38,197 Trade receivables 228,428,160 Managerial Remuneration 88,244,006 Rendering of Services 793,605,957 10. On being asked by the AO/TPO, the assessee furnished the details of FOB value of goods imported/exported in respect of Sumitomo, Japan, AEs other than Sumitomo Corporation and non-AEs the details of which are as under:- Particulars SC) AE Others Total AE Non AE Commission 60,38,40,855 18,97,65,102 793,605,957 1,55,47,705 FOB value of commission 19,34,95,67,570 12,53,46,49,034 31,88,42,16,604 51,31,23,599 Rate of Commission 3.12% 1.51 % 2.49% 3.03% 11. The TPO noted that the commission income earned on FOB value of goods was worked out at 3.03% of FOB value of goods exported/imported in the case of non-AEs and at 2.49% of FOB v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st appropriate method. Despite the same, the TPO further proceeded to make protective adjustment. However, the DRP has held that such protective adjustment to be made on substantive basis. He submitted that the aforesaid approach of the TPO is highly arbitrary and totally unfounded. He submitted that once the transactions entered into by the assessee with its AEs are held to be at arm's length, there is no justification to have proceeded to make any protective adjustment under the regime of TP adjustment. He submitted that there is no concept of protective adjustment in TP assessment and the TPO has only to determine whether the international transactions entered into by an assessee with its AE are at arm's length and no more. Therefore, once it is found by the TPO that the transactions entered by the assessee with its AE Sumitomo, Japan are at arm's length which gave a margin of 22.77% as against the claim of the assessee at 24.52%, on the basis of TNMM which has been held to be the most appropriate method, the approach of the TPO in making protective adjustment itself is without justification. He submitted that the TPO has first to choose/select which is the method to be adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment. However, since appeal is in process of being filed in H'ble H.C. against the ITAT order dated 21.05.2019, the TPO/AO is directed to make adjustment on substantive basis." 16. He submitted that the TPO had adopted an approach to make the protective addition based upon the method used earlier by the Tribunal in its order which was subject matter of appeal u/s 260A of the Act in ITA No.381/2013 and others. The DRP overlooked that the said method used to make protective addition has been negatived by the Hon'ble High Court by its judgment dated 22nd July, 2016 wherein it is held that the if the Tribunal thought that this was the case, it was necessary for the Tribunal to conduct a further in-depth enquiry as to relevant uncontrolled transactions. He submitted that the DRP further failed to appreciate that the TPO had not conducted any further in-depth enquiry as to the relevant uncontrolled transactions in the manner so directed by the Hon'ble High Court. Further, the DRP also overlooked that even the Tribunal vide its order dated 22nd October, 2018, after the remand had held that TNMM is the most appropriate method and no other method is applicable. He accordingly submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 2019 for AYs 2012-13 to 2013-14 has restored the issue to the file of TPO to examine and benchmark the international transaction by adopting TNMM as the most appropriate method by taking the "berry ratio" as PLI. It was directed that the assessee has to substantiate its margin by bringing comparable uncontrolled transactions to demonstrate that its commission earned in this segment is at arm's length and the TPO shall examine the same and decide. He accordingly submitted that he has no objection if the matter is restored to the file of the AO/TPO with similar directions. 19. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the TPO, in the instant case proposed an adjustment of Rs.43,69,67,350/- on protective basis in respect of indent segment of AEs other than Sumitomo Corporation, Japan by considering 5% as the arm's length commission rate for commission received. We find, the DRP while holding that no protective adjustment is required and the addition has to be made on substantive basis, directed the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not found judicial favour with the Hon'ble High Court and matter has been remanded back for further examination of similarity between the two transactions and to conduct further in depth inquiry to examine the high degree of comparability of relevant control and uncontrolled transactions. Further, if the average rate of commission on such transactions was to be applied to the FOB value of goods involved in the indenting transactions with the AEs, then this Tribunal has to satisfy itself that there is no significant variation in the rate of commission between different products. From the perusal of the indenting transactions undertaken by the assessee with AE and non AE under various product segments, it is discerned that, for instance in the product segment 'Automotive', the assessee has undertaken 249 transactions with AE and only 4 with non AE and in the Assessment Year 2007-08 the volume of transaction, FOB value wise is 'Nil' in the case of non AE; and the commission earned with the AE is Rs. 7,50,43,686/- and with the non AE it is only Rs.9,672/-. Similarly the products dealt with AE in automotive segment are entirely different and the geographies involved are Switzerl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms. Further different market and geographical location also affects the pricing factors and therefore, if there are differences on account of these factors CUP cannot be held to be the most appropriate method for bench marking the arm's length price. Here in this case, under the indenting segment there are various dissimilarities in the transaction with the AE and non AE as discussed above and for this reason alone the average commission earned cannot be the benchmarking factor for determining the ALP, and therefore, we hold that neither the CUP method can be applied nor the transaction with the AE and non AE can be taken for the purpose of comparability analysis. Thus, we reject the CUP method by taking the average commission earned in the transaction with the AE and non AE. 17. Now, in these circumstances, we have to see whether TNMM can be considered as most appropriate method. First of all, it has been brought on record before us that right from the Assessment Years 2003-04 to 2006-07, TNMM has been accepted as the most appropriate method by the TPO. However, instead of 'berry ratio' as PLI, TPO has taken OP/TC as PLI. Further, it has been brought to our notice that from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods does not enter in its financial. As a low risk service provider, it seeks to obtain adequate return on its operating expenses as the operating expenses incurred represents the value added carried on by the assessee. In other words, the operating expenses adequately and sufficiently represents the functions performed and the risk undertaken by the assessee. Thus, we hold that the 'berry ratio' should be accepted as the most appropriate PLI for taking as base under TNMM while determining the ALP of the Indian transaction for all the five years under appeal. 19. Accordingly, we remand the matter back to the file of the TPO to examine and benchmark the international transaction by adopting TNMM as the most appropriate method by taking 'berry ratio' as PLI. The assessee has to substantiate its margin by bringing comparable uncontrolled transactions to demonstrate that its commission earned in this segment is at arm's length; and the TPO shall examine the same and decide accordingly. Needless to say that TPO shall give due and effective opportunity to the assessee to substantiate its ALP as per direction given above. 20. In the result, the appeal for all the Assessment Years ar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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