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TMI Blog2019 (5) TMI 1440X X X X Extracts X X X X X X X X Extracts X X X X ..... oses. - ITA No. 7261 & 7262/Del/2018 - - - Dated:- 21-5-2019 - Sri R.K. Panda, Accountant Member And Smt. Beena A Pillai, Judicial Member For the Appellant : Sh. C.S.Aggarwal, Sr.Adv., Sh. Himanshu Sinha, Adv. For the Respondent : Sh. H.K.Choudhary, CIT, DR ORDER PER BEENA A PILLAI, JUDICIAL MEMBER Present appeals has been filed by assessee against order dated 29/10/18, for assessment year 2012-13 and order dated 31/10/18 for assessment year 2013-14 passed by Ld. DCIT, Circle 24 (2), New Delhi on following grounds of appeal: ITA No. 7261/Del/2018 AY: 2012-13 1. the Ld. Deputy Commissioner of Income Tax ('AO'), Circle 24(2), New Delhi has grossly erred both on facts and in law, in determining the income of the Appellant at ₹ 66,81,20,610 in assessment order dated October 29, 2018 framed under section 143(3) read with section 144C(13) of the Act, as against the income of ₹ 21,08,72,380, per the revised return filed by the Appellant. 2. That in making the aforesaid addition, the Ld. AO has erred in making a reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the absence of any adverse finding in respect of such comparability analysis, the said rate of 22.50 per cent could not have been made the basis for the alleged adjustment. c) in 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 26 per cent, which was negotiated in the BAPA. While doing so, the Ld. TPO failed to allocate the operating expenses based on gross margin of the respective segment. 7. The Ld. TPO while making the adjustment on protective basis, on facts and in law, has erred in respect of the following: a) in making an adjustment without any justification, which is contrary to the Ld. TPO's own findings in Para 7 of the order under section 92CA(3) of the Act, where the Ld. TPO has held that Transactional Net Margin Method ('TNMM') with OP/OPEX as the PLI is the most appropriate methodology. b) in disregarding the transfer pricing approach adopted by the Appellant to determine the arm's length price ('ALP') of its international transactions. The Appellant's use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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: c) 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 d) 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 preconditions provided in section 92C(3) under section which is a mandatory requirement, for making an adjustment under section 92CA(3) of the Act. 4. The Ld. TPO has grossly erred in making transfer pricing adjustment and that too without giving a show-cause notice. The adjustment has been made overlooking that no opportunity to showcause was granted for making the aforesaid addition. The adjustment made is highly arbitrarily and in violation of princip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Appellant's use of TNMM with OP/OPEX as the PLI in the transfer pricing documentation, has been disregarded without any justification whatsoever. c) in disregarding the Judgment of Hon'ble Tribunal in Appellant's own case for AY 2007-08 to AY 2011-12 wherein TNMM with Berry ratio (modified form of OP/OPEX) as the PLI has been accepted as the most appropriate method for benchmarking the transactions relating to the indent segment. d) in disregarding the transfer pricing approach adopted by the Appellant (being TNMM as the most appropriate method with OP/OPEX as the PLI), despite the fact that this methodology has been agreed upon in the BAPA signed between the Appellant and the Central Board of Direct Taxes. e) in computing ALP for indent transactions by adopting 5 per cent commission rate on arbitrary basis, thereby disregarding that the aforesaid commission rate was not based on any comparable and did not represent arm's length price. 8. The Ld. Dispute Resolution Panel ('DRP') has failed to comprehend that it could not have upheld such a finding of the Ld. TPO which was made without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sub clause (d) of clause 10 of BAPA. As the assessee had modified the return of income acknowledging the terms of the agreement dictated under clause 10 of BAPA in respect of M/s SCJ in respect of the AY in question it applied for withdrawal of the objections filed before the Panel. Since the panel ceases to exercise jurisdiction over the assessee post modification of the Return of Income before the competent AO, in accordance with the section 92CD of the Act the dispute presented before the panel is treated as non est. Going by the above said provision of the Act, the AO is directed by us to comply interalia with clause 12 para 2, clause 13 and 14 of BAPA in toto. For international transactions entered into by the assessee with its other AEs, i.e. apart from SCJ the AO shall follow the provisions under chapter X of the Act and relevant rules of the IT Rules 1962 to determine the ALP in respect of all such international transactions undertaken with the AEs other than SCJ in regard to which there has not been any settlement between the assessee and the CBDT under BAPA. 2.2 . Ld.TPO on 09/10/17, passed order under section 92 CA for assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to by assessee during years under consideration. 3 . Aggrieved by additions made by Assessing Officer for years under consideration in hands of assessee, appeal has been filed before this Tribunal. 3.1 . It has been submitted by Ld.Counsel that facts and circumstances in years under consideration are similar and identical. Accordingly, both appeals are being disposed off by way of common order. 3.2 . For sake of convenience we analyse facts regarding international transactions entered into by assessee for assessment year 2012-13. 3.3 . It has been submitted that Sumitomo Corporation (AE) is ultimate parent company of Sumitomo group. It is one of largest trading companies or sogoshosha in Japan. A sogoshosha is an integrated business enterprise with fundamental role of facilitating trade between buyers and sellers market. Sumitomo Corporation is involved in a very broad range of industries and operations and there are 8 business lines as under: metal products transportation and construction systems infrastructure media, network an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trade receivables 121,799, 3.7 . During Transfer Pricing proceedings assessee entered into BAPA which covered assessment year 12-13 and 13-14 under the category, rollback years. It was observed by Ld. TPO that said agreement defined and covered transaction as under: The international transactions between Sumitomo Corporation India Pvt.Ltd. and Sumitomo Corporation Japan, as described i. SCIN s commission income from SCJ ( Indent Transaction ) ii. SCIN s purchase of goods from SCJ, and SCIN s sale of goods to SCJ (Principal Transactions) iii. SCIN s service fee income from SCJ, shall be covered transactions for the agreement and this agreement shall apply to these international transactions. 3.8. In BAPA assessee has been considered to be the tested party and TNMM as most appropriate method and OP/OPEX as a PLI. The arm s length range was determined to be from 22.5% to 29.5%. It was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- in relation to its transaction with Sumitomo Japan, as per terms and conditions of BAPA. Therefore post modified return of income filed by assessee, transaction between assessee and its AE Sumitomo Japan, was held to be at arm s length price, which was in consonance with terms and conditions laid down in BAPA. 3.11 . However, in respect of transactions entered into by assessee with AEs other than Sumitomo Japan, which was not covered under BAPA, benchmarking was carried out to determine arm s length price. Ld.TPO observed that assessee used TNMM method to benchmark these transaction, and that there was no functional difference between transaction of assessee with Sumitomo Japan and other AEs were found. It was thus recorded by Ld.TPO that transactions shall be benchmarked at same rate of profitability as applied for transactions with Sumitomo Japan. Accordingly transfer pricing adjustment was calculated at ₹ 1,16,22,485/-, on substantive basis in the hands of assessee, in respect of transactions entered into by assessee with AEs, other than Sumitomo Japan. 3.12 . Subsequently Ld. TPO benchmarked international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ₹ 7,50,43,686/- and with the non AE it is only ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses as the operating expenses incurred represents the value added carried on by the assessee. In other words, the operating expenses adequately and sufficiently represents the functions performed and the risk undertaken by the assessee. Thus, we hold that the berry ratio should be accepted as the most appropriate PLI for taking as base under TNMM while determining the ALP of the Indian transaction for all the five years under appeal. 19. Accordingly, we remand the matter back to the file of the TPO to examine and benchmark the international transaction by adopting TNMM as the most appropriate method by taking berry ratio as PLI. The assessee has to substantiate its margin by bringing comparable uncontrolled transactions to demonstrate that its commission earned in this segment is at arm s length; and the TPO shall examine the same and decide accordingly. Needless to say that TPO shall give due and effective opportunity to the assessee to substantiate its ALP as per direction given above. 20. In the result, the appeal for all the Assessment Years are treated as partly allowed for statistical purposes. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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