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TMI Blog2018 (10) TMI 1785X X X X Extracts X X X X X X X X Extracts X X X X ..... es not enter in its financial. As a low risk service provider, it seeks to obtain adequate return on its operating expenses as the operating expenses incurred represents the value added carried on by the assessee. 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. 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. Disallowance of claim of expenditure incurred under the head legal and professional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Delhi High Court vide its consolidated order and judgment dated 22.07.2016 passed in ITA No.381/2013 382/2012, 702/2014 and 738/2015, with certain directions. Appeal for the Assessment Year 2011-12 is arising out of final assessment order dated 31st December, 2015 passed u/s.143(3) r.w.s. 144C(13) of the Act in pursuance of DRPs direction vide order dated 23.11.2015. The assessee company, i.e., Sumitomo Corporation India Pvt. Ltd. is a wholly owned subsidiary of Sumitomo Corporation Asia Pte Limited. Sumitomo Corporation Japan is an ultimate holding company of the group. The assessee company in India is engaged in the business of providing trade facilitation and support services and such support services are provided across the products and service lines both to associated enterprises and unrelated parties. The business transaction of the assessee falls broadly into two categories; firstly, indent/commission transactions wherein the assessee earned commissioner/fixed service fee; secondly, the trading transactions wherein the assessee purchases and sells goods and earns trading profit thereon. 2.1. The indent transaction comprises of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, including local purchases, suppliers and related Group companies. Under the Imports to India Sumitomo Group procures goods from the Japanese and/or other countries [collectively Overseas Supplier ) supplier and exports the same to the end customer in India. The contract is between Sumitomo Group and the overseas suppliers for the supplies and with the Indian customer for the sale. Since the customers are located in India, Sumitomo India maintains the relationships with the customers and based on the requirements of the local market informs to Group Companies. In most of cases the customers being traditional, the marketing efforts in identifying the customers are also minimal. The customers and Sumitomo India gets in touch with each other for the requirements and accordingly Sumitomo India informs its Group Companies. The negotiations with the suppliers and customers are undertaken by Sumitomo Group. Sumitomo India acts as conduit for passing the information between Sumitomo Group and the customers. Under the Exports from India the customers are located overseas and the suppliers are located in India. Sumitomo India maintains the relationships with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave significant tangible asset and only intangible asset is in the form of software use for its operation. Even under the risk profile also it was stated that it bears very minimum and is a low risk provider engaged in trade facilitation. 3. In the transfer pricing approach followed by the assessee to determine the ALP of the functional transaction, the assessee after characterizing itself as a low risk service provider has adopted TNMM as the most appropriate method with berry ratio as PLI to compute the ALP. The berry ratio was taken as gross profit/operating expenditure. Choice of TNMM over the other methods including CUP was also analyzed in detail in the transfer pricing report for all the years. For the Assessment Years 2010-11 and 2011-12, though the PLI was taken as berry ratio however, it was adopted by taking profit/value added expenditure which in fact was a measure the return on operating expenditure. Accordingly, set of independent and uncontrolled entities were selected from data base and the average profit margin of these companies were compared with that of the assessee and since the assessee profit margin was found to be better as compared to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in the Assessment Years 2007-08 to 2010-11 was the most suitable method and directed the TPO to apply the same and benchmark the ALP of the indent transaction. 6. In the Assessment Years 2007-08 to 2010-11, the matter had reached up to the Tribunal, wherein the Tribunal has rejected the approach adopted by the TPO and held that indent and trading transactions cannot be treated as comparable on account of dissimilar functions, assets and risk involved in the two types of transactions and therefore, such a re-characterization was not permissible under law. However, the Tribunal has adopted altogether a different approach to determine the ALP of the Indian transaction with the AEs. It was held that average commission rate of non AE segment should be taken as the ALP for the commissioned transaction of the AEs segment. In other words the AE and non AE transaction were directed to be benchmarked to determine the ALP of indent transaction. Though explicitly it was not stated that it is a CUP method, however in fact CUP method was followed to determine the said transactions. One important fact to be noted here is that, in the Assessment Year 2010-11, after giving eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e inclined to accept Mr Agarwal's contention that although the TPO had discarded the method adopted by the Assessee, it had not followed any particular method in making the ALP adjustment. It appears that the TPO has adopted a hybrid method. He imputed the character of trading transactions to the indenting transactions entered into by the Assessee with its AEs. Having done so, he compared the profit margin realized by the AE from such transactions with profit margin realized by the AE from a comparable uncontrolled transaction. The said approach was rejected by the Tribunal - and, in our view, rightly so - as it was not permissible for TPO to recharacterize the tested transaction. 33. We find no infirmity with the Tribunal's finding that indenting transactions reported by the Assessee were plainly in the nature of facilitating trade where the Assessee was required to do nothing more than to follow up the customers for facilitation of the transaction. The Assessee was not required to raise any invoice for sale and purchase and its financial commitment and risk were inconsiderable. 34. However, we find that the Tribunal erred in proceeding to determine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CUP method for computing the ALP of Assessee s indenting transaction with AEs. (c) This may well be the most appropriate method to be used for determining the ALP. However, if the Tribunal thought that this was the case, then it was necessary for the Tribunal to conduct a further in-depth inquiry as to the relevant uncontrolled transactions. (d) It is the assessee s case that volume of such transactions in the Non-AEs segment was insignificant as compared to the transactions in the AE segment, because such transactions were only in a few product categories. (e) If the average rate of commission on such transactions was to be applied to the FOB value of the goods involved in the indenting transactions with AEs, the Tribunal would have to satisfy itself that there is no significant variation in the rate of commission between different products. This would confirm that the dissimilarity between the product categories did not have a vital bearing on the rate of commission. (f) The Tribunal did not conduct any such enquiry and it is material to note that the TPO also did not conduct any such exercise. 8. Thus, in the wake of aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was shown before us that the products dealt with the AE indent segment were completely different from the products transacted in the non AE segment. For instance, in AE segment, assessee has transacted the items like, potassium manufacturing products, polypropy, resin, acrylic resin, aromatic hydrocarbon, pesticides, thermoplastics, adhesive paints, dyestuff and pharmaceutical intermediates. In the non AE segment, the products transacted were inorganic, industry chemicals, dimethyl terephalate, adhesive and paints. While most of the products dealt were different barring two products, viz., the pharmaceutical intermediates and adhesive and paints. Despite this similarity of two products, it was pointed out by him that the unrelated parties who had transacted with the assessee in pharmaceutical intermediates and adhesive and paints were in India as against the AEs who had dealt with the same product located overseas. Thus, it was submitted by him that volume, contractual terms and description of products differed within the same product distribution. Our attention was also drawn to various invoices on sample basis to show the difference in volume and products. The entire thrust o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts like Atenolol has yielded commission rate of 7.14% and on the other hand several products have yielded commission rates of less than 1%. A similar variation can be seen in the AE segment. Accordingly, it is quite clear that averages cannot be taken for an appropriate comparison. d) Geographical locations of the AEs are different as compared with geographical locations of the non-AEs. From the perusal of the details regarding the controlled and uncontrolled indent transactions, it can clearly be seen that there is a complete dissimilarity between them on account of different product lines, for different periods, different geographical locations and in many of the products there are no transactions at all. 11. After drawing our attention to the factual aspects of the indent transactions between the AEs and non AEs segments for all the Assessment Year impugned before us, Mr. Agrawal referred to the OCED and the UN commentaries/guidelines on Transfer Pricing to show how higher degree of comparability is required while applying CUP at transactional level and such higher degree of similarity between the transactions in terms of products, contractual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service provider companies which can be chosen under TNMM for the computation of the ALP of the international transactions in question. 14. On the other hand, ld. CIT-DR submitted that here in this case AE and non AEs indent segments are similar and the approach adopted by the Tribunal in its earlier years was logical which needs to be followed. The commission earned from unrelated parties could serve as a valid CUP benchmark to determine the average commission rate of the AE indent transactions. Regarding value and volume itself, he submitted that same should be compared on transactional level, i.e., transaction to transaction rather than by comparing the transaction with each party together in one bundle. Regarding APA, he submitted that APA is a negotiated agreement and should not be used as a precedent for the other years. The assessee in its TP study report has treated trading and indent segment as a single segment and has applied TNMM, whereas the TPO had applied gross margin on the turnover and has benchmarked similar transaction taken by the AE with non AEs. Thus, in the case of the assessee such transaction with AE and non AE is a classical case of internal CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntries. Similar differences are noted in all across 10 to 11 products dealt by the assessee with AEs and non AEs. The total number of transactions with the AE during the year was 3,145 and with non AE it was only 371. Thus, apparently there is a huge difference in volume on FOB basis and the geographies dealt are also entirely different. The amount of average commission earned with the AE, is 1.58% whereas in the case of non AE it is 2.26. All these differences are permeating in all the Assessment Years as highlighted by the assessee in the chart submitted before us and on perusal of the same, it is quite glaring that under both the transactions, i.e., controlled transaction with the AE and uncontrolled transaction with the non AEs, there are huge dissimilarity between the products, difference in volume, difference in value, markets and geographical location. 16. It is quite settled proposition that while applying CUP method, a very high degree of similarity has to be seen between the control and uncontrolled transactions not only in terms of products, contractual terms, volume, value but also market and geography locations. The reason being under CUP, price charged or pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be clarified is what should be the base for computing the PLI. As stated above, the Hon'ble High Court has approved the permissibility of using all berry ratio as PLI in a situation where the functions performed did not entail huge creation of valuable intangibles. The nature of the assessee s business is a routine business support services and there is no creation of any human capital or supply chain intangible. The Hon'ble High Court has held that berry ratio can only be applied where the value of goods is not directly linked to the quantum of profits and the profits are mainly determined on expenses incurred. Here in this case, the assessee is acting as an indenting agent commission service provider, i.e., as a facilitator of a trade and has no financial risk, because assessee was not required to raise any invoice for sale and purchase in its financial commitment and risk are insignificant. As a service provider, the key business driver for the assessee is operating expenses incurred on establishment and operation of business, i.e., salary, rent and other such expenses and it does not employ any significant assets in the business except for routine assets like o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assenger baggage clearing new Delhi to 21.06.2006 ₹ 1,33,000/- 2. -Do- Charges of Unaccompanied passenger baggage clearing new Delhi to 21.06.2006 ₹ 34,000/- 3. -Do- Charges of unaccompanied passenger baggage clearing new Delhi to Japan Mrs. Rie Nagashima. 30.03.2007 ₹ 70,000/- 4. -Do- Charges of unaccompanied passenger baggage clearing new Delhi to Tokyo, Japan Mrs. Rie Nagashima 31.03.2007 ₹ 47,5000/- Charges of unaccompanied passenger baggage clearing Mumbai to New Delhi Mrs. Rie Nagashima 02.08.2006 23,200/- 5. -Do- Charges of unaccompanied passenger baggage clearing New Delhi to Chiba, Japan Mrs. ..... 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