2013 (9) TMI 369 - AT - Income Tax

Transfer pricing adjustments - ALP - Commission Received Whether commission @ 30 per MT received by the assessee from its AE, its parent company is at ALP - Held that - The benchmarking adopted by the TPO as well as the DRP treating the assessee itself as a comparable was not correct - The assessee was involved in the manufacturing activity also and marketing its own products i.e. iron powder - The assessee was importing iron product and marketing the same that was a trading activity - Nothing had been brought out on record by the DRP as well as the TPO that the assessee has to incur cost for the sales achieved by the parent company as in the case of its own marketing - the risk involved and asset employed by the assessee-company compared to its own marketing with that of the marketing of the parent company, of which commission was paid, was unmatched. The principles for determining the ALP were well settled by different judicial pronouncements - What was to be considered while adopting the comparable were the functions performed, capital utilized and risks assumed - It was pertinent to note here that the DRP as well as TPO had not questioned the nature of the functions to be performed by the parent company - The assessee s claim was that there was a minimal risk and no cost was involved for acquiring the business by the parent company, for which assessee was paid commission - The sale price of the product was not considered but weight was considered - The assessee received commission which worked out to 1.49% to the sales achieved by the parent company i.e. Hoganas AB Sweden minimum risk was involved as the assessee was not directly involved in any of the sale transactions by the parent company. As per the agreement with Hoganas AB Sweden, the sales directly made by the parent company in India and other Asia region, the assessee had to receive commission @ 30 per MT - The assessee-company worked out the profit level indicator as operating profit or operating revenue of the aforesaid distribution activity at 15.37% and according to the assessee the arithmetic mean of the profit level indicator of the comparable trading companies was at 1.96% only - While filing the working before the TPO as well as the DRP, the assessee aggregated the sales of the manufactured goods and traded goods and accordingly worked out the percentage of SADA Decided in favour of Assessee.

Issues Involved:
1. Assessment of total income.
2. Adjustment to international transaction of receipt of sales commission.
3. Aggregation of transactions for benchmarking.
4. Arm's length price (ALP) determination for sales commission.
5. Functions performed and risks assumed in marketing activities.
6. Calculation of arm's length percentage of commission.
7. Application of the proviso to section 92C(2) regarding price variance.

Issue-wise Detailed Analysis:

1. Assessment of Total Income:
The appellant challenged the assessment order where the total income was assessed at Rs. 11,69,71,550/- against the returned income of Rs. 11,42,29,221/-. The dispute primarily revolves around the addition of Rs. 28,54,085/- made to the international transaction of receipt of sales commission.

2. Adjustment to International Transaction of Receipt of Sales Commission:
The core issue was the adjustment made by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP) concerning the commission received by the assessee from its parent company, Hoganas AB Sweden. The TPO made an adjustment under section 92CA(3) of the Income-tax Act, 1961, leading to an addition of Rs. 28,24,085/-.

3. Aggregation of Transactions for Benchmarking:
The appellant argued that the transaction of receipt of sales commission and import of traded goods were closely linked and should be aggregated under the segment "Distribution Activity" as per rule 10A(d). However, the TPO and DRP did not accept this aggregation for benchmarking purposes.

4. Arm's Length Price (ALP) Determination for Sales Commission:
The TPO observed that the commission received by the assessee was not at a standard rate and calculated the internal rate of return attributable to the marketing functions of the assessee, which worked out to 4.44%. The TPO proposed this rate instead of the 1.49% worked out against the sales of Hoganas AB Sweden, leading to the disputed adjustment.

5. Functions Performed and Risks Assumed in Marketing Activities:
The TPO noted that the assessee undertakes similar marketing functions, assumes similar risks, and employs similar assets for its own marketing functions and for earning sales commission. The assessee contended that the functions and risks assumed while acting as an agent of Hoganas AB Sweden were insignificant compared to its manufacturing segment.

6. Calculation of Arm's Length Percentage of Commission:
The TPO calculated the net profit attributable to Selling and Distribution Activities (SADA) expenses at 4.44% and made an adjustment based on the difference between this rate and the 1.49% commission received. The assessee argued that the internal rate of return was incorrectly calculated and should be 1.46%.

7. Application of the Proviso to Section 92C(2) Regarding Price Variance:
The appellant contended that the benefit of the option available under the proviso to section 92C(2) of the Act, which allows a price variance of not more than 5% from the arm's length price, should be granted. However, the TPO and DRP did not grant this benefit.

Conclusion:
The Tribunal concluded that the benchmarking adopted by the TPO and DRP was incorrect. It was noted that the functions performed, risks assumed, and assets employed by the assessee for its own marketing activities were not comparable to those for earning sales commission from the parent company. The Tribunal found that the minimal risk and no specific cost involved for acquiring the business by the parent company were not considered correctly. Therefore, the addition made by the TPO was deleted, and the appeal filed by the assessee was allowed.

Order:
The appeal was allowed, and the addition made by the TPO on the directions of the DRP was deleted. The order was pronounced in the open court on 11/01/2013.

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