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TMI Blog2015 (6) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... all 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. The grounds raised by the assessee reads as under:- 1. That the learned Deputy Commissioner of Income Tax, Circle 24(2), New Delhi has grossly erred both on facts and, in law in determining the income of the Appellant at ₹ 1,11,09,85,160/- in an order of assessment dated November 25, 2014 framed uls 143(3) read with section 144C(13) of the Act as against the declared income ofRs.6,13,95,092/-. 2. That the learned AO/DRP/TPO have grossly erred both in law and on facts in making an addition of ₹ 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing an adjustment under section 92CA(3) of the Act. c) That the Ld. AO/TPO/DRP grossly erred in adopting Internal Resale Price Method as the most appropriate method of determining arm's length price of international transactions without either explaining the basis thereof and failed to comprehend that the transactions 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 its method compared to earlier years which in her view is in contradiction to the claim of the Assessee that there has been no change in functions performed by it. e) Ld. AO/TPO/DRP has erred in concluding that indenting business and the trading business of the Assessee are similar and homogeneous in nature and in holding that the Functions performed, and risks assumed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 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 transactions of the Assessee company with AEs are akin to trading transactions of non- AEs; n) That the learned AOITPOIDRP having found the Indenting transactions entered into with non-AE's on identical circumstances are indenting transactions i.e. service based transactions, he has erred in holding that, similar transactions with AE's are trading transactions and therefore, addition proposed is based on an inconsistent stand and contradictory approach; 0) That the learned TPO has erred in disregarding 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces [although the orders have been appealed against by the Assessee and the matter has been admitted by the High court. 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 finding of the learned ORP that both the segment are comparable without any adjustment of volume is wholly erroneous as the volume of transaction is highly relevant to determine the value of the transaction and hence unless suitable adjustment including volume adjustment is made, both the segments are not comparable; w) That the learned AO/TPO/DRP conclusions are arbitrary and based on conjectures and surmises. 5. That the learned AO/TPO/DRP has erred in not making adjustments to the uncontrolled transaction to account for the material impact of the economic differences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee preceding years i.e. for AYs. 2007-08, 2008-09 and 2009-10, despite the fact that the facts and circumstances of the instant assessment year under consideration are similar and identical to the preceding three assessment years and no distinguishing facts are brought on record by the authorities below to take a contrary view as such, has held that the findings and conclusion of the AO/DRP/TPO are highly arbitrary and not sustainable and not in accordance with law. 4. Ld. Senior Counsel vehemently contended that the margin of commission 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 commission on FOB value of goods amounting to ₹ 21,20,88,46,377/- of ₹ 38,83,69,718/- at the rate of 1.83% of the FOB value of the goods which is hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) trading / proper transaction wherein the assessee purchased good and earned trading margin thereon. The above two types of transaction has been entered into both with AEs and Non-AEs. 23. We agree with the assessee s proposition that the nature of indenting transaction is different from the trading transactions. The trading transaction involves risks and finances, whereas in the indenting transaction the assessee has not to incur any such financial obligation or carry any significant risk. Moreover, 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 facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. The assessee has not demonstrated as to how the difference in the turnover has influenced the result of the comparables. It is accepted economic principles and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin 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) Ltd. (Supra) in para 23 following proposition was laid down:- Now the question is whether these cases, which are otherwise comparables, should be disregarded simply on the ground of smallness of turnover when compared with that of the assessee. Considering the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition 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 Segment. 9. We further observe that in the similar manner the Tribunal in the order dated 14.07.2014 for AY 2009-10 following the order of the Tribunal for AYs 2007-08 and 2008-09 has deleted similar addition with the following observations and conclusions:- 5. We have heard the rival submissions and perused the relevant material on record. It is noticed that the TPO relied on the view taken by him for preceding years in proposing the transfer pricing adjustment. The ld. AR also candidly admitted that 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 pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed and the application of TNMM as employed by the assessee should be accepted leading to no addition on account of TP adjustment. To buttress his contention for the application of TNMM, he placed on record a copy of the order passed by the Delhi bench of the 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 immediately two preceding assessment years, we cannot tinker with the same. We, therefore, hold that the commission percentage on the basis of FOB value of goods from transactions with non-AEs be computed and taken as arm s length rate of commission for the purposes of the transactions with AEs under the Indenting business segment. In this regard, the ld. AR submitted that the percentage of commission from AE transactions for the instant yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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