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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 ..... 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 predominant part of the assessee business in all the years as comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the supplier on regular basis. Sumitomo Group helps in identifying the various customers and accordingly informs Sumitomo India for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilitation. 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 comparables, hence it was reported that the international transaction undertaken by the assessee with its AE were arm's length. 4. The transfer pricing officer rejected the approach adopted by the assessee and without specifically reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 effect to the ITAT order, the transaction entered by the assessee with its AE was found to be at arm's length and no addition/adjustment to the ALP has been made, for the reason that the average commission rate earned by the assessee in respect of Indian transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndenting 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 ALP on the basis of the rate of commission reported by the Assessee in respect of indenting transactions with Non-AEs, without further examination as to the similarity between the two transactions. The Tribunal effectively used the CUP Method for imputing the ALP of Assessee's indenting transaction with AEs. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions. (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 aforesaid direction of the Hon'ble High Court, this Tribunal is required to examine the similarity of the indent AE transactions for each of the Assessment Year and to see whether the higher standard of comparability required under the CUP method are met or not. Arguments by the parties and our Decision 9. We have heard both the parties and also perused the relevant findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the ld. Senior Counsel was to show that there are huge product and geographic dissimilarities besides the difference in volume, value and exact product description. Mr. Agrawal submitted that the Hon'ble High Court had categorically observed that average commission rate of non AE segment can only be adopted as arm's length bench mark for AE indent segment, only when it can be found that volume and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 terms, volume, value, markets and geographic locations are required to be seen. 12. One very important fact brought to our notice by Mr. Agrawal was that, Advance Pricing Agreement (APA) has been signed by the assessee and the CBDT on 02.08.2016 in respect of assessee's indent transaction with its AEs which is applicable for the Assessment Years 2014-15 to 2018-19 and Assessment Years 2011-12 to 2013-14. Under this APA, the CBDT has agreed to tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and hence same should be applied. 15. We have heard the parties at length and also perused the material referred to before us as discussed herein above. The approach of determining the ALP on the basis of average percent of commission reported by the assessee in respect of indenting transactions with the non AEs as held by the Tribunal has not found judicial favour with the Hon'ble High Court and matter has been remanded back for further examination of similarity be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 paid for the property transferred has to be identified and the differences between the international transaction and the comparable uncontrolled transactions has to be seen which could materially affect the price in the open market. The price of different products cannot be the same as it depends upon the negotiation based on volumes, value and other contractual terms. Further different market and geographical location also affects the pricing factors and therefore, if there are differences on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 office, furniture and fixtures to run its business and also there is no intangible creation by the assessee company. Besides there is no trading capital employed as goods are neither bought nor sold by the assessee in the indenting segment. Under these facts and circumstances, the profit derived by the assessee is mainly depended on its operating expenditure as the value of goods does not enter in its financial. As a low risk service provider, it seeks to obtain adequate return on its operating expenses as the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer has held that these expenditures are personal in nature. It has been submitted before us that in the Assessment Year 2006-07 the ld. CIT (A) has deleted the said disallowance and in Assessment Year 2008-09, DRP has directed the Assessing Officer to delete the said disallowance. 24. After considering the entire facts and findings given in the impugned order, it is seen that these expenses have been incurred as per the details given above. It is quite apparent that these are routine expenditure incurred during the regular course of business and nowhere has it been alleged by the Assessing Officer that these are for non business purpose and are not related to the assessee's business. Once similar addition has been deleted in the earlier and subsequent year which has attained finality then no addition could be made here, accordingly the same is deleted. 25. As regards claim of deduction of deposit written off, it has been brought to our notice that assessee has not written off any such deposit in the instant year, albeit the same was debited in the Assessment Year 2006-07 and that was claimed in the same year only and the Assessing Officer has completely misun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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