Income Tax Appellate Tribunal – Delhi
Sumitomo Corporation India Pvt. … vs Neac, New Delhi on 24 November, 2021 IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCH “I-1”: NEW DELHI ]
BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
(Through Video Conferencing)
ITA. No. 507 & 508 /Del/2021 & SA No 81 & 82/ Del/2021
(Assessment Year : 2015-16 & 2016-17)
Sumitomo Corporation India The Assessing Officer,
Private Limited, Vs. Regional / National
302&303,3rd Floor,World Mark-2 e-Assessment Centre,
Asset No. 8, Aerocity Hospitality Delhi.
District, New Delhi – 110 037.
PAN: AABCS1887M
(Appellant) (Respondent)
Assessee by : Shri Himanshu Sinha, Adv.; &
Shri Bhuwan Dhooper, Advocate.
Department by : Shri Shashi Bhusan Shukla,
[CIT] – DR;
Date of Hearing : 11/10/2021
Date of pronouncement : 24/11/2021
ORDER
PER PRASHANT MAHARISHI, A. M. :
01 This appeal in ITA. No. 507 (Del) of 2021 is filed by Sumitomo
Corporation India Private Limited, against the assessment order
passed by the National e-Assessment Centre, Delhi, on 30th April,
2021, under Section 143(3) read with Section 144B of the Income
Tax Act, 1961 (the Act) for assessment year 2015-16.
02 The assessee has raised the following grounds of appeal:-
“1. That the Ld. AO has grossly erred both on facts and in law, in determining
the income of the Appellant at Rs. 44,17,63,259/- in assessment order dated
30 April 2021 framed under section 143(3) read with section 144B of the Act as
against the income of Rs. 19,70,11,810/- per the modified return of income
filed by the Appellant. In so doing, the Ld. AO has erred in making an addition
of Rs. 24,47,51,449/- in the arm’s length price of international transactions
entered by the Appellant with its associated enterprises (“AEs”).
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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:
2.1 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
2.2 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. The Ld. TPO has disregarded the transfer pricing approach adopted by the
Appellant to determine the arm’s length price (“ALP”) of its international
transactions. The Appellant’s use of Transactional Net Margin Method
(“TNMM”) with operating profit / operating expenses (“OP/OPEX”) as the profit
level indicator (“PLI”) has been disregarded without any justification
whatsoever.
5. The Ld. AO / TPO has disregarded the directions of the Ld. Dispute
Resolution Panel (“DRP”), wherein it is directed to the Ld. AO / TPO to
ascertain whether an appeal has been filed against the order of Hon’ble
Income-tax Appellate Tribunal (“ITAT”) in the Appellant’s own case for AY
2012-13 & AY 2013-14 or AY 2014-15; and in case no appeal has been
filed against the aforesaid orders, the benchmarking of the AE indent
segment has to be in line with the aforementioned ITAT orders and that
the adjustment made by the Ld. TPO in its original order on protective
basis has to be dropped.
While making the adjustment based on the directions of the Ld. DRP, the
Ld. AO / TPO has assumed that an appeal has been filed against the order
of ITAT for AY 2012-13 & AY 2013-14 or AY 2014-15, but have not
provided any evidence to substantiate the same. Therefore, the order of the
Ld. AO / TPO should be considered null and void-ab-initio due to non-
compliance with section 1440(10) and section 1440(13).
Substantive addition
6. The Ld. DRP / TPO erred in considering the average rate of commission
earned in non- AEs segment by applying Comparable Uncontrolled Price
(“CUP”) method to determine arm’s length commission rate for indenting
transactions with the AEs (other than those which are covered by the
Bilateral Advance Pricing Agreement with Japan). While doing so, the Ld.
DRP / TPO disregarded:
6.1 the difference in the functions performed, risks assumed, number of
transactions, value of transactions, nature of products, commission rates
and geographical locations etc. in respect of transactions of Appellant with
AEs (other than Sumitomo Corporation, Japan) and non-AEs;
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6.2 the judgments of Hon’ble ITAT in Appellant’s own cases for (i) AY
2007-08 to AY 2011-12 (based on the order of High Court), (ii) AY 2012-13
and AY 2013-14 and (iii) AY 2014-15, wherein Hon’ble ITAT has held that
the average rate of commission earned in non-AEs segment cannot be
considered to determine arm length’s commission rate; and held that
TNMM with Berry ratio (modified form of OP/OPEX) as the PLI should be
accepted as the most appropriate method;
6.3 the directions of the Hon’ble High Court of Delhi in Appellant’s own
case for AY 2007-08 to AY 2010-11 that in case the average rate of
commission earned from third parties was to be considered as 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; and
6.4 the transfer pricing approach agreed upon in the Bilateral Advance Pricing
Agreement (“BAPA”) signed between the Appellant and the Central Board of
Direct Taxes (“CBDT”), where TNMM has been selected as the most appropriate
method with OP/OPEX as the PLI for similar transactions with Sumitomo
Corporation Japan.
7. The Ld. DRP / TPO has erred in applying and computing ALP for indenting
transactions by applying 3.36 per cent commission rate (by first applying 2.92
per cent and then adding 0.44 per cent based on OP/OPEX of comparable
companies). While doing so, the Ld. DRP / TPO erred in:
7.1 alleging that the functions performed by the Appellant were far more for
the AEs as compared to the non-AEs, without providing any justification /
empirical evidence thereof;
7.2 applying a flawed methodology of adding a mark-up of Cf.44 per cent to the
commission earned from the non-AEs, which does not fall under any of the
specified methods in Section 92C of the Act, read with Rule 10B of Income-tax
Rules, 1962 (”the Rules”);
7.3 using a set of companies for calculation the mark-up of 0.44 per cent (i.e.
15.07 per cent of 2.92 per cent), most of whom are not comparable to the
Appellant on various grounds; and
7.4 not considering the companies as comparable, which were contained in the
TP documentation prepared by the Appellant and also provided in form of a
fresh search (during the course of transfer pricing assessment).
Protective addition
8. Without prejudice to the contention that TNMM with Berry ratio (modified
form of OP/OPEX) as the PLI should be accepted as the most appropriate
method for determining ALP of the international transactions entered into by
the Appellant in a proper manner, as has been upheld by the Hon’ble ITAT in
earlier years, rather than the CUP method, the Ld. TPO and AO have erred in
respect of the following while computing the protective adjustment amounting
to INR 3,16,09,462:
8.1 including the free-on-board (“FOB”) value of goods transacted under
indenting segment in the cost base, while calculating the ALP for transactions
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with AEs other than Sumitomo Corporation Japan. Further, the Ld. DRP / TPO
has also erred in adding the FOB value of goods as part of the operating
revenues of the Appellant;
8.2 using a set of companies for computation of the arm’s length margin, most
of whom are not comparable to the Appellant on various grounds;
8.3 not considering the companies as comparable, which were contained in the
TP documentation prepared by the Appellant and also provided in form of a
fresh search (during the course of transfer pricing assessment); and
8.4 computing the segmental profitability of the Appellant by allocating
expenses to the non-AE segment, so as to fix the profit level (i.e. OP/OPEX) of
such segment to be 15.07 per cent (being the median margin of the set of
comparable companies). While doing so, the Ld. DRP / TPO failed to appreciate
that the OP/OPEX should be determined using the actual figures reflected in
the profit and loss account. Since the gross profit and operating expenses are
undisputed, the operating expenses should be allocated in the ratio of gross
profit of each segment and not by assuming an arbitrary OP/OPEX for non-AE
segment.
9. The addition of INR 3,16,09,462/- to the total income of the Appellant on
protective basis is completely misconceived both in law and on facts. The Ld.
DRP / TPO erred in making an adjustment on protective basis in respect of an
issue on which substantive addition has also been made, which is not
permissible in law as the concept of substantive and protective adjustment is
relevant only when an income is to be added in the hands of more than one
taxpayer. This is without prejudice to the contention that TIM MM with Berry
ratio (modified form of OP/OPEX) as the PLI should be accepted as the most
appropriate method for determining ALP of the international transactions
entered into by the Appellant in a proper manner, as has been upheld by the
Hon’ble ITAT in earlier years, rather than the CUP method.
10. That on the facts and circumstances of the case and in law, the AO have
erred in levying / charging interest under sections 234B and 234C of the Act.
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. ”
03 The fact shows that appellant is a subsidiary of Sumitomo
Corporation, Japan, engaged in providing trade facilitation and
support services to its AE as well as non-AE parties. It earns
revenue from intending transactions wherein it facilitate import and
export of goods to and from India. The services are co-ordination,
communication, collection of information and liaison with
customers. It also carries out trading of goods without maintaining
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any inventory and purchases are made based on confirmed sale
orders.
04 Assessee filed its return of income on 27.11.2015 at
Rs.9,40,97,200/-. The fact shows that the assessment year is one of
the covered years as per bilateral advance pricing agreement under
the category of roll back years. Assessee revised its return of income
at Rs.19,70,11,810/- to give effect to such agreement of 18.10.2016.
05 Assessee has entered into international transactions and domestic
transactions with its AE and, therefore, reference was made to
Transfer Pricing Officer for determination of Arms Length price of its
international transaction.
06 Assessee has entered into several international transactions.
However, assessee has adopted Transactional Net Margin Method
(TNMM). The assessee combined all transactions and adopted
Transactional Net Margin Method. It adopted the profit level
indicator of operating profit margin to value added expenses OP /
VAE. The PLI of the assessee was at 7.58%. The assessee selected
20 comparables engaged in the business of providing support
services and computed their margin 3.35% – 5.12%.
07 Assessee entered into the bilateral advance pricing agreement on
2.08.2016 covering assessment year 2011-12 to 2018-19. As per
that agreement, TNMM was accepted as the most appropriate
method and operating profit margin of operating expenses was
selected as proper level indicator. It was agreed that the margin of
the assessee should be in the range of 22.5% to 29%. The assessee
revised its return of income on 18.10.2016 and offered the income
arising from transactions with Sumitomo Corporation, Japan.
However, the transactions with other AEs other than Sumitomo
Corporation, Japan, were retained. The ld. Transfer Pricing Officer
accepted the ALP of transactions with Sumitomo Corporation,
Japan, and all other trading transactions. Now the only dispute
remains is with respect to the earning of the commission income
with its Associated Enterprises other than Sumitomo Corporation,
Japan. The ld. Transfer Pricing Officer passed an order under
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Section 92CA (3) on 31.10.2019. The ld. TPO noted that the BAPA
Agreement provides ACP of the commission of 22.5% to 29.5%. The
Arms Length margin of the AEs other than Japan should be taken at
26%. He selected 11 comparables and found average third PLI
24.35%. He applied Arms Length percentage of margin at 26% on
operating expenses of Rs.1283,94,65,686/- and thereafter
determined the difference between operating cost and Arms
Length price of Rs.333,48,06,125/-. He noted that international
transactions are to the extent of Rs.65,98,41,761/- and, therefore,
proportionate adjustment @ 5.14% was determined at
Rs.17,13,35,198/-. He proposed the above adjustment to the
commission income of the assessee on substantive basis.
08 He also proposed a protective adjustment in the hands of the
assessee by adopting CUP Method and using internal CUP i.e.
commission earned from Associates Enterprise with commission
income earned from non-associates enterprises. He found that the
rate of commission from AE is 1.67 percentages whereas from non-
AEs it is 2.92% of FOB value of goods. Accordingly, he found that
Arms Length commission received from AE is Rs.11,09,68,199/- of
FOB value of sales of Rs.1262,21,61,684/- and its Arms Length
price is Rs.44,68,24,524/-. Accordingly, he proposed an adjustment
of Rs.23,58,56,325/- on protective basis. He passed an order on
31.10.2019.
09 Against which the draft assessment order was passed on 12th
December, 2019 wherein the addition of Rs.40,71,91,523/- was
made against the returned income of Rs.19,70,11,810/- was made
against the returned income of Rs.19,70,11,810/- and the total
income was determined at Rs.60,42,03,333/-. Interesting to note in
this case is that in the draft assessment order the substantive
addition of Rs.17,13,35,198/- and protective addition of
Rs.23,58,56,325/- aggregating to Rs.40,71,91,523/- was made.
10 The assessee preferred an objection before the ld. Dispute Resolution
Panel that passed its direction on 24th December 2020. In para No.
7.5.1 of the direction, the ld. DRP noted that if the Revenue has not
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filed an appeal against the order of the co-ordinate bench in
assessee’s own case in earlier years the protective adjustment should
be dropped, it held that the addition made on the basis of the CUP
method should be used and substantive addition should be made on
that basis. It further held that the average commission earned by
the appellant from non-AEs should be taken as ALP of the
commission transaction with Associated Enterprise other than
Japan. It further held that the Transactional Net Margin Method
should only be used to make a protective addition.
11 Based on the above directions, the ld. Transfer Pricing Officer passed
an order on 25th February 2021. The ld. TPO made the substantive
adjustment using the CUP method amounting to Rs.21,31,41,987/-.
He also computed the protective addition amounting to
Rs.3,16,09,462/-. For computing the protective adjustment, he
determined the operating expenses and added that too the FOB
value of goods and reached an amount of Rs.1283,32,15,727/-. To
this figure he applied the profit level indicator of operating profit to
operating expenses of 15.07% and computed the Arms Length
income to Rs.1476,71,81,337/-. With respect to the commission
received from the Associated Enterprise, he derived the commission
income by making an addition of FOB value of goods at the revised
operating income of Rs.1284,29,20,639/-. Based on the above
working he calculated the difference between revised operating
income and the Arms Length income of Rs.192,42,60,698/-. He
determined that 1.64% is the proportion of international transaction
and applied it to the revised operating income and calculated the
transfer pricing adjustment of Rs.3,16,09,462/-. Thus, on CUP
basis he made addition of Rs.21,31,41,987/- adopting CUP method
and on protective basis adopted TNMM method Rs.3,16,09,462/-.
12 Accordingly the final assessment order was passed on 30th April
2021 wherein addition on substantive basis was made of
Rs.21,31,41,987/- and on protective basis Rs.3,16,09,462/-. The
total income of the assessee was determined at Rs.44,17,63,260/-.
Against this order, the assessee is aggrieved.
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13 The ld. AR submitted that substantive addition made using CUP
method has already been dealt with by the co-ordinate bench in
assessee’s case in prior 8 assessment years starting from
assessment year 2008-09 to assessment year 2014-15. He referred
to those orders, which are placed in paper book and, therefore,
submitted that addition made of Rs.21,31,41,987/- is covered in
favour of the assessee in assessee’s own case.
14 It was further stated that the ld. TPO has failed to follow the binding
directions of the ld. DRP. He submitted that the DRP has held that
substantive addition using CUP method should only be made if there
is an appeal filed against the order of the co-ordinate bench before
the Hon’ble High Court. He, therefore, submitted that the ld. TPO
has exceeded his jurisdiction.
15 The ld. AR further submitted that both protective adjustment and
substantive adjustment could not be made in the hands of the same
assessee with respect to the same source of income. He relied
on plethora of judicial precedents. He further submitted that
Transactional Net Margin Method applied by the ld. Transfer Pricing
Officer is also not correct. He stated that the TPO has used the FOB
value of goods transacted by the Associated Enterprises on which
commission income has been earned which the Assessing Officer
had added to the commission income as well as to the operating
expenses. He referred to the order of the co-ordinate bench of earlier
years and stated that FOB value of goods is neither an income nor
expense of the assessee, but it is merely a cost for the Associated
Enterprise. He further submitted that the TPO has also not used the
PLI of operating profit margin on operating expenses as mandated in
the orders of the co-ordinate bench. Thus, the working is not
proper.
16 He further stated that the Assessing Officer has assumed the margin
of 15.04% without any basis.
17 He further submitted that the TPO has rejected 18 comparables out
of 20 comparables selected by the assessee and retained only 2
comparables without giving any reasons. The TPO further added 3
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comparables whose functional analysis is different. Some of the
comparables added by the ld. Transfer Pricing Officer are engaged in
cargo handling and shipping business and some of the comparables
are in logistic business. The whole comparability analysis is without
any reason. He objected to the comparability analysis of the ld. TPO
and DRP.
18 The ld. DR referred to the order of the ld. DRP. He extensively
referred to para No. 6 of the order of the ld. DRP with respect to the
substantive adjustment and para No. 7 with respect to the protective
adjustment and supported it.
19 With respect to the objection of making an addition of FOB value to
the commission income and also to the operating cost of the
assessee, he submitted that the commission is earned on FOB value
and, therefore, it is required to be added in the income and then also
required to be considered as cost of the assessee to work out the
correct margin.
20 With respect to the comparables, he relied on the order of the ld.
Transfer Pricing Officer.
21 In rejoinder, the ld. AR submitted that the issue is covered in favour
of the assessee by the earlier decisions of the co-ordinate bench
where the CUP method is rejected. He submitted that computation
of adjustment on the basis of TNMM method is faulty. He stated
that the FOB value is neither an income nor an expense of the
assessee. With respect to the comparables, he reiterated his
arguments already advanced. He submitted that the binding
directions of the DRP are not followed by the ld. TPO.
22 We have carefully considered the rival contentions and perused the
orders of the lower authorities. We find that in the case of the
assessee for assessment years 2007-08 to 2011-12, the co-ordinate
bench has decided the issue by order dated 22nd October, 2018
(2018) 99 Taxmann.com 390 wherein it has held that the CUP
method could not be applied and only TNMM was to be taken as the
most appropriate method for bench marking transaction. An
identical view has also been taken by the co-ordinate bench in
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assessee’s own case for assessment years 2012-13 and 2013-14 by
order dated 21st May, 2019 (2020) 116 Taxmann.com 752. There is
no change in the facts and circumstances of the case in assessment
years 2015-16 and 2016-17. The co-ordinate bench in
Sumitomo Corporation India (P.) Ltd. v. Assistant Commissioner of
Income Tax, Circle-24 (2), New Delhi* [2018] 99 taxmann.com 319 (Delhi –
Trib.) has held as under:-
“15. We have heard the parties at length and also perused the material
referred to before us as discussed herein above. The approach of
determining the ALP on the basis of average per cent of commission
reported by the assessee in respect of indenting transactions with the
non-AEs as held by the Tribunal 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 Switzerland, Singapore, Thailand and
Japan whereas non AE transactions are with Suzuki Motorcycle India
Pvt. Ltd. and Bajaj Auto Ltd in India. Likewise under the product
‘chemicals’ the assessee has undertaken 1044 transaction with AE and
only 112 transaction with non AE and the commission with AE is
1.28%, whereas non AE it is 2.26%. Similarly, the products dealt with
AE and non-AE under this segment are quite different and geography
involved with AE are Spain, Japan, Italy, Switzerland, Thailand,
whereas with non-AE it is India. Likewise in ‘electronics’ segment the
transaction undertaken with the AE are 253, whereas with the non AE it
is 5 and again not only the products are different but also geographical
location are different with that of non-AE which are mostly with Indian
parties and all AE transactions are with various foreign countries.
Similar differences are noted in all across 10 to 11 products dealt by the
assessee with AEs and non AEs. The total number of transactions with
the AE during the year was 3,145 and with non AE it was only 371.
Thus, apparently there is a huge difference in volume on FOB basis and
the geographies dealt are also entirely different. The amount of average
commission earned with the AE, is 1.58% whereas in the case of non AE
it is 2.26. All these differences are permeating in all the Assessment
Years as highlighted by the assessee in the chart submitted before us and
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on perusal of the same, it is quite glaring that under both the
transactions, i.e., controlled transaction with the AE and uncontrolled
transaction with the non AEs, there are huge dissimilarity between the
products, difference in volume, difference in value, markets and
geographical location.
16. It is quite settled proposition that while applying CUP method, a
very high degree of similarity has to be seen between the control and
uncontrolled transactions not only in terms of products, contractual
terms, volume, value but also market and geography locations. The
reason being under CUP, price charged or paid for the property
transferred has to be identified and the differences between the
international transaction and the comparable uncontrolled transactions
has to be seen which could materially affect the price in the open
market. The price of different products cannot be the same as it depends
upon the negotiation based on volumes, value and other contractual
terms. 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 the
Assessment Years 2011-12 to 2018-19 under the MAP agreement it has
been agreed that TNMM should be the most appropriate method to
determine the ALP of the international transaction of the indent keeping
into the fact that assessee is a low risk service provider and there is no
change in FAR right from Assessment Years 2003-04 to 2018-19. Once
TNMM has been accepted under the similar FAR, we do not find any
reason to deviate by adopting some other method. Otherwise also we
have held that CUP method cannot be applied and other methods
admittedly are incapable of capturing the true arm’s length result and
therefore, we hold that TNMM should be taken as a most appropriate
method for benchmarking the said transaction.”
23 In view of the above facts and the binding precedents in assessee’s
own case, we respectfully following the same hold that the CUP
method cannot be applied in the case of the assessee for making an
adjustment to the commission income of the assessee. The co-
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ordinate bench has also held that TNMM is the only method, which
can be applied. Accordingly, the addition made by the ld. Transfer
Pricing Officer of Rs.21,31,41,987/- on substantive basis adopting
the CUP method is deleted. Accordingly, ground Nos. 6 & 7 of the
appeal are allowed.
24 Now we come to the protective addition of Rs.3,16,09,462/- made by
the ld. Transfer Pricing Officer pursuance to the direction of the ld.
Dispute Resolution Panel adopting TNMM method.
25 The ld. Transfer Pricing Officer has added FOB value of goods of
Rs.1262,21,61,684/- to the operating expenses of the assessee as
well as to the commission income of the assessee. For the sake of
clarity, the steps of the computation are as under:-
steps Basis Amount
1 added the free on-board value of 1,283,32,15,727
goods to the operating expenses
(₹ 1,262,21,61,684+ ₹
21,10,54,043
2 Considered the median of the 15.07%
range as per the comparable set
as the arm’s-length operating
profit/operating expenses
3 Computed the arm’s-length 1,476,71,81,337
income by applying OP/OPEX
4 In respect of commission 1,284,29,20,639
received from the associated
enterprises, included the FO be
value of goods to derive at the
revised operating income (₹
12,622,161,684 + ₹ 211,054,043
5 Calculated the difference 192,42,60,698
between revised operating
income and the arm’s-length
income (step 3-step 4)
6 Computed the proportion of 1.64%
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international transactions (i.e.
commission earned from
associated enterprise) to the
revised operating income (₹
210,968,199/ ₹ 12,842,920,639
7 Calculate the transfer pricing 3,16,09,462
adjustment by restricting the
difference (as per step 5) to the
proportion of international
transaction (i.e. commission
earned from associated
enterprises)
26 Now in the above steps we find that while calculating step 1, there is
no justification given by the learned transfer-pricing officer of
making an addition to the operating expenses of the free on-board
value of goods on which the commission is earned. There is no
justification also while calculating step 4 that why free on-board
value of goods are also added to the operating income. Neither the
learned transfer-pricing officer nor the learned dispute resolution
panel has given any justification for making the above adjustment.
The learned departmental representative also could not show us any
reason that why the free on-board value is required to be added to
the operating expenses as well as to the operating income derive at
the arm’s-length price of the indent commission on by the assessee
from associated enterprises other than Japan.
27 We find that the coordinate bench in eight prior assessment years
has held that the transactional net margin method with berry ratio
as the profit level indicator should be adopted. Therefore,
respectfully following the coordinate bench in assessee’s own case
for earlier years we find that only the berry ratio needs to be
adopted. Further the tribunal in earlier year has also held that FO
be value of goods is the cost and revenue of the buyer and the seller
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and not the commission agent. Therefore, such an adjustment could
not have been made.
28 It is also argued that the segmental accounts prepared by the
learned transfer-pricing officer with respect to the operating
expenses, certain assumptions have been made. There is no
justification given that how the operating expenditure amounting to
₹ 924,309,577 has been bifurcated by the learned transfer-pricing
officer with respect to the transactions with Sumitomo Corp Japan,
other associated enterprises other than Japan and independent
parties.
29 Further with respect to selection of the comparables, the learned
transfer pricing officer and the learned dispute resolution panel have
rejected 18 out of the 20 comparables selected by the assessee and
retained only two comparables. However, there are no reasons given
for the same.
30 Further the learned transfer pricing officer has also included two
comparables which are engaged in the business of cargo handling
and sipping services activities
31 During the course of transfer, pricing assessment assessee has
submitted a fresh set of potential comparable companies, which are
engaged in business support services. Those set of comparables
were rejected.
32 In view of the above facts we hold that benchmarking of the
commission income from associated enterprises other than Japan is
required to be computed as Under:-
i. The learned assessing officer/transfer pricing officer is
directed to not to adopt CUP method for computation of the
arm’s-length price of the indent in business from non-Japan
associated enterprises.
ii. The learned assessing officer/transfer pricing officer is
directed to adopt transactional net margin method adopting
the berry ratio for computing the arm’s-length price of the
indent in business income from known the associated
enterprises.
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iii. The learned assessing officer/transfer pricing officer is
directed to not to consider the free on-board value of goods
imported/exported while working out the arm’s-length price
from either operating income or operating expenditure of the
assessee.
iv. The assessee is directed to submit fresh set of comparables.
The learned transfer-pricing officer is directed to examine the
same, he may reject or include fresh comparables. Thus, the
fresh comparability analysis is required to be conducted.
33 In view of our above finding in ground number 8 and 9 of the appeal
of the assessee are allowed with above directions.
34 Ground number 10 is with respect to the charging of interest u/s
234B and 234C of the act, which is consequential in nature and
therefore dismissed.
35 Accordingly appeal of the assessee in ITA number 507/Del/2021
assessment year 15 – 16 is partly allowed.
36 ITA number 508/del/2021 assessment year 2016 – 17 filed by the
assessee against the assessment order passed u/s 143 (3) read with
Section 144C (13) read with Section 144B of the income tax act on
4/3/2021.
37 It was submitted by the parties that the facts and issue involved in
assessment year 2016 – 17 identical to that of assessment year 2015
– 16. Their arguments also remain the same.
38 We find that the assessee filed its original return of income on
28/11/2016 declaring a total taxable income of ₹ 147,791,830/-. As
assessee has entered into the similar international transactions the
matter was referred to the learned transfer-pricing officer for
determination of the arm’s-length price. The learned transfer pricing
officer passed an order u/s 92CA (3) of the act on 31/10/2019
wherein the total addition of ₹ 396,080,318 was made to the total
income of the assessee on account of adjustment to the value of
international transaction entered into by the assessee. The learned
transfer pricing officer made an adjustment of ₹ 166,639,618/- on
substantive basis and further adjustment of ₹ 229,440,700 on
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account of protective basis. The draft assessment order was passed
on 12/12/2019 wherein the total income of the assessee was
computed at ₹ 396,080,318. The objections were filed before the
learned dispute resolution panel. The learned DRP passed directions
on 10/1/2020. Accordingly the learned dispute resolution panel
proposed the substantive addition of ₹ 211,237,219 and protective
addition of ₹ 31,671,649/-. Accordingly both these additions on
substantive basis as well as on protective basis were made and
against the returned income of ₹ 147,791,830/- the total income of
the assessee was computed at ₹ 390,700,780/-. The assessee is
aggrieved with that order and has preferred this appeal.
39 We have considered orders of the lower authorities, grounds of
appeal as well as the arguments of both the parties. We find that
the issue is identical to the issue decided by us for the assessment
year 2015 – 16. As the facts and circumstances are not disputed by
the parties, on the similar reasons given by us, we give the similar
direction to the learned assessing officer/transfer pricing officer as
well as to the assessee.
40 Accordingly, ITA number 508/del/2021 filed by the assessee for
assessment year 2016 – 17 is partly allowed.
41 The stay petitions filed by the assessee in SA number 81 and
82/del/2021 for assessment year 15 – 16 becomes infructuous and
hence dismissed.
Order pronounced in the open court on : 24th November 2021.
Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 24/11/2021.
*MEHTA*
Copy forwarded to
1. Appellant;
2. Respondent
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3. CIT
4. CIT (Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
Date of dictation 24.11.2021
Date on which the typed draft is placed before the 24.11.2021
dictating member
Date on which the typed draft is placed before the other 24.11.2021
member
Date on which the approved draft comes to the Sr. PS/ 24.11.2021
PS
Date on which the fair order is placed before the 24.11.2021
dictating member for pronouncement
Date on which the fair order comes back to the Sr. PS/ 24.11.2021
PS
Date on which the final order is uploaded on the website 24.11.2021
of ITAT
date on which the file goes to the Bench Clerk 24.11.2021
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant
Registrar for signature on the order
Date of dispatch of the order
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