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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 ..... facts in making an addition of Rs. 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 the Hon'ble Tribunal for the three preceding years i.e. for AY 2007-2008, 2008-2009 and 2009-10, despite the fact that facts and circumstances of instant assessment year were identical to the preceding assessment years and no distinguishing facts are brought on record to take a contrary view as such, finding of the learned AO/DRP/TPO are highly arbitrary and thus the order is a vitiated order. 3. That in making the aforesaid addition, the learned Deputy Commissioner of Income Tax had erred in referring the matter to the learned TPO u/s 92CA of the Act on the following amongst other grounds, rendering the order of the learned TPO as unsustainable both in law and on facts: a) As the reference made by the learned AO to the learned TPO is not in accordance with the provisions of Section 92CA(1) of the Act; b) As no opportunity of being heard was granted at any stage of the proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 non-AE trading segment is similar to functions and risks in indenting segment completely disregarding the assertions and evidences filed by the Assessee in this regard. f) Ld. AO/TPO/DRP has erred in disregarding the commercial agreements entered into by the Assessee with AEs and non-AEs without any valid and cogent reasons and has assumed that the Assessee functions as a trader of goods in relation to indenting segment; g) Ld. AO/TPO/DRP have failed to appreciate that the books of accounts of the Assessee have duly been audited by a Chartered Accountant and no adverse observations have been made by the Chartered Accountant in his audit report. Thus, the Id. TPO had grossly erred in adding the FOB value of goods sourced by the AEs/other parties as part of total cost of the Assessee which tantamount to altering the accounting practices followed by the Assessee; h) Ld. AO/TPO/DRP has erred in ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any 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 Delhi High court ruling; p) Ld. AO/DRP has failed to appreciate that if the addition proposed in the order under" section 92CA(3) by the Id. TPO was to be adopted as ALP, the Assessee would be required to earn an absurdly high operating profit on cost of 355% q) That the learned TPO has failed to appreciate the difference in risk profile of the indenting and trading transactions. It is relevant to note that there is vast difference in indenting and trading activities. Trading activity requires effort for business creation, undertakes the risk in maintaining inventory, realization of sale proceeds, incurring interest and other costs in respect of maintaining and keeping the stock. In such a case, the functions also include unloading the goods, bringing them to its warehouse, loading and unloading at the customer's place so on and so forth. On the other hand, the indenting activity is confined only in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e; 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 between the controlled and uncontrolled transactions as mandated under Rule 10B(3) of the Income Tax Rules 1962. The Ld. TPO has further erred in negating the applicability of Li & Fung decision of the Delhi High Court and in concluding that the approach of the assessee in respect of volume and value of transactions is contradictory with its assertion regarding indenting and trading being separate and distinct segments. 6. That the learned AO/TPO/DRP has erred in holding that the Appellant has created human and supply chain intangibles for which it is not being adequately compensated by the AE which finding was reached on mere assumptions and had been found to be without substance and without any material on record for the preceding years on identical facts and circumstances and erred in relying on excerpts from the Sumitomo Corporation of America (sic) to conclude that the Assessee is creating human assets intangibles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the goods. Ld. Senior Counsel further pointed out that the assessee earned commission on FOB value of goods amounting to Rs. 21,20,88,46,377/- of Rs. 38,83,69,718/- at the rate of 1.83% of the FOB value of the goods which is higher than the commission income/service fees earned from the non associated enterprises, therefore, imposed addition on account of alleged understatement arms' length price is not sustainable and in accordance with law. 5. Ld. Senior Counsel further took us to order of the Tribunal in assessee own case for AY 2007-08 and submitted that in the similar facts and circumstances, the addition made by the AO/TPO was deleted by holding that the commission percentage of non AE segment and the same is at the arm's length and no addition is sustainable. Ld. Senior Counsel further drawn our attention towards order of the Tribunal in assessee own case for AY 2008-09 dated 15.03.2013 in ITA 5850/Del/2012 and submitted that the similar kind of addition was further deleted by following order of the Tribunal for AY 2007-08 dated 31.01.2013 for AY 2007-08, therefore, in the similar set of facts and circumstances, impugned addition made by the AO is also not sustainable. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation 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 facilitation and is purely of indent nature both in form and substance. No material has been brought on record to regard the indent transaction as trading transactions. 24. Assessee itself has agreed with the proposition that an appropriate comparison would be to compare the commission/ service income earned by the assessee from AEs to that of the non-AEs. This aspect of assessee's submission has not been rebutted by the Revenue. However, the assessee has contended that the reason of difference between them was attributable to volume of business handled in AE segment and non AE segment and credit risk associated in non AE segment. Therefore, it has been argued that economic adjustment is required to improve the comparability between commission earned in AE segment vis-a-vis commission earned in Non-AE segment. It has further been submitted that it is customary in commercial dealing of broker/commission agent to offer dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee did not come out with any comparable case to justify its price at arm's length and further the TPO found out these cases having functionally identical activities duly confronted to the assessee, it is not possible to disregard such cases merely on the ground that the volume of turnover is lower in comparison to that handled by the assessee. One more important factor which cannot be lost sight of is that in the case of M/s Rathi Brothers Madras Ltd. indenting commission is 5% to 6% with turnover of Rs. 10.65 crores. The same rate of commission of 5% prevails in the case of M/s Huntsman International (P) Ltd. and M/s Ineos ABS (India) Ltd. with turnover of around Rs. 75 cores and around Rs. 80 cores respectively. It shows that the rate of commission in such business does not vary on the basis of turnover." 27. Hence when the indent/ commission transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pricing adjustment was made under similar circumstances, came up for consideration before the Tribunal in ITA No.5095/Del/2011. Vide order dated 31.01.13, the Tribunal has held that the 'Indenting transactions' are different from 'Trading transactions' in terms of functional differences, risks undertaken and assets employed, and hence both cannot be considered as uniform. The Tribunal held that the commission earned by the assessee from its AEs under the 'Indenting segment' was required to be benchmarked on the basis of commission earned by the assessee from non-AEs under 'Indenting segment'. The assessee's contention before the Tribunal that discount of 50% should be given from commission earned from non-AEs to make it comparable with the commission earned from AEs, was rejected. It was finally held that the commission percentage from AE transactions should be compared with the commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OB 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 year stood at 1.83% as against 2.86% from non-AEs. We find that the rates of commission now sought to be placed before us, are not emanating from the orders of the authorities below. Under such circumstances, we set aside the impugned order and remit the matter to the file of the AO/TPO with a direction to find out the rate of commission income on FOB value of the transactions with non-AEs under the 'Indenting business' segment and then apply the same rate to the FOB value of goods in AE transactions under the 'Indenting business' segment, as was directed in the earlier years. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. 10. In view of above submission of both the sides and order of the Tribunal for preceding AYs 2007-08, 2008-09 and 2009-10, we observe that in the similar set of facts and circumstances, it was held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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