2015 (6) TMI 213 - AT - Income Tax

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 during the financial period under consideration. In view of above, respectfully following the view taken by the Tribunal for AY 2008-09 we inclined to hold that the issue is squarely covered in favour of the assessee and the impugned addition made by the AO in pursuant to direction of the DRP by passing the impugned order u/s 142(3) r.w.s. 144C of the Act is not sustainable and the AO/DRP is directed to delete the same. Decided in favour of assessee.

Issues Involved:
1. Determination of income by the Assessing Officer (AO).
2. Addition on account of alleged understatement of arm's length price (ALP).
3. Reference to the Transfer Pricing Officer (TPO).
4. Disregard of the transfer pricing approach adopted by the assessee.
5. Errors in adopting Internal Resale Price Method.
6. Errors in comparing indenting and trading transactions.
7. Errors in assuming risks in indenting business.
8. Errors in disregarding commercial agreements.
9. Errors in choosing incorrect internal comparables.
10. Errors in holding that indenting and trading transactions are similar.
11. Errors in not granting volume adjustments.
12. Errors in assuming creation of human and supply chain intangibles.
13. Errors in proposing addition based on theoretical calculations.

Detailed Analysis:

1. Determination of Income by AO:
The assessee contested the determination of income at Rs. 1,11,09,85,160/- against the declared income of Rs. 6,13,95,092/-. The tribunal observed that the AO erred both on facts and in law, leading to an arbitrary and unsustainable order.

2. Addition on Account of Alleged Understatement of ALP:
The AO/DRP/TPO added Rs. 1,04,95,90,066/- for alleged understatement of ALP in respect of indenting transactions. The tribunal noted that the facts and circumstances were identical to preceding years (AY 2007-08, 2008-09, and 2009-10), where similar additions were deleted. The tribunal found the AO's approach arbitrary and not in accordance with law.

3. Reference to TPO:
The reference to TPO under Section 92CA was contested. The tribunal found that the reference was not in accordance with the provisions, and the entire proceedings by the TPO were vitiated, invalid, illegal, and hence, a nullity.

4. Disregard of Transfer Pricing Approach:
The AO/TPO/DRP disregarded the transfer pricing approach adopted by the assessee, which used the Transactional Net Margin Method (TNMM) with Operating Profit Margin upon Value Added Expenses (OPN AE) as the Profit Level Indicator (PLI). The tribunal found no justification for disregarding this approach.

5. Errors in Adopting Internal Resale Price Method:
The tribunal found that the AO/TPO/DRP erred in adopting the Internal Resale Price Method without explaining the basis and failed to comprehend that the transactions did not involve resale between the assessee and associated enterprises.

6. Errors in Comparing Indenting and Trading Transactions:
The AO/TPO/DRP concluded that indenting and trading businesses were similar, disregarding the differences in functions performed and risks assumed. The tribunal found that the two types of transactions were distinct and should not be compared directly.

7. Errors in Assuming Risks in Indenting Business:
The AO/TPO/DRP assumed that the assessee assumed major risks in its indenting business, including "single customer risk," "risk associated with development and use of intangibles," "risk associated with quality service," and "capacity utilization risk." The tribunal found no valid basis for these assumptions.

8. Errors in Disregarding Commercial Agreements:
The AO/TPO/DRP disregarded commercial agreements entered into by the assessee with AEs and non-AEs without valid reasons. The tribunal found this approach arbitrary.

9. Errors in Choosing Incorrect Internal Comparables:
The AO/TPO/DRP chose incorrect internal comparables over external comparables without appreciating the facts and legal position. The tribunal found this choice flawed.

10. Errors in Holding Indenting and Trading Transactions Similar:
The AO/TPO/DRP held that indenting and trading transactions were similar, overlooking the factual and legal submissions by the assessee. The tribunal found that these transactions were distinct and should not be treated as homogeneous.

11. Errors in Not Granting Volume Adjustments:
The AO/TPO/DRP did not grant adjustments for the difference in volume of transactions between AE and non-AE segments. The tribunal found that volume adjustments were necessary to ensure comparability.

12. Errors in Assuming Creation of Human and Supply Chain Intangibles:
The AO/TPO/DRP assumed that the assessee created human and supply chain intangibles without any material evidence. The tribunal found these assumptions baseless.

13. Errors in Proposing Addition Based on Theoretical Calculations:
The AO/TPO/DRP proposed additions based on theoretical and mathematical calculations, which were found to be arbitrary and untenable by the tribunal.

Conclusion:
The tribunal, following the precedents set in the assessee's own cases for AY 2007-08, 2008-09, and 2009-10, held that the commission percentage from AE transactions should be compared with the commission percentage from non-AE transactions under the indenting business segment. The tribunal directed the AO/DRP to delete the impugned addition, finding the AO's order unsustainable and not in accordance with law. The appeal of the assessee was allowed.

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