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TMI Blog2020 (11) TMI 1102X X X X Extracts X X X X X X X X Extracts X X X X ..... hmark 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. Needless to say, the AO/TPO shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes. - ITA No.8932/Del/2019 - - - Dated:- 3-11-2020 - SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For the Assessee : Shri C.S. Aggarwal, Sr. Advocate For the Revenue : Ms Anshu Shukla Pandey, CIT-DR ORDER PER R.K. PANDA, AM: This appeal filed by the assessee is directed against the order passed by the AO u/s 143(3) r.w. section 144C of the IT Act, 1961 for A.Y. 2014-15. 2. The grounds raised by the assessee are as under:- 1. That 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 App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Further, the Ld. DRP / TPO also failed to appreciate that the Hon'ble High Court as well as the Hon'ble Tribunal has also held that percentage of average commission earned from third parties cannot be used as a basis for making adjustment in respect of related party transactions. 8. The Ld. TPO while making the adjustment of Rs. 19,00,34,764 was under assumption that the method adopted by the Hon'ble Tribunal could have been accepted. In fact, the Hon'ble Tribunal itself did not find favour with the adjustment so made, after remand from the Hon'ble High Court. 9. The Ld. TPO has erred in failing to appreciate that while proposing or making upward adjustment in the arm's length price, the Ld. TPO has not adopted any prescribed method and the alleged method on which variation had been proposed in the draft order was wholly arbitrary and totally unwarranted both on facts and in law. 10.The Ld. TPO has erred in disregarding the transfer pricing approach adopted by the Appellant (being TN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee Company revised its ITR at an income of Rs 22,72,93,710/- to give effect to the BAPA on 18.10.2016. Since the assessee had entered into certain international transactyions with its AE, the AO referred the matter to the TPO for determination of the arm s length price of the international transaction. The TPO, during the course of assessment proceedings, observed that the international transactions and the analysis carried by the assessee are as under:- International Transaction Transfer Pricing Method Sumitomo India Comparable Profit Level Indicator [ PLI ] Total Value of Transaction [Amount of INR] Margin Findings Arithmetic Mean Sale of goods TNMM OP/VAE 4,782,797 Purchase of coods Trade Payable 477,077,786 24.52% 3.39 % 297,206,390 Rei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SALES- (A) 649,146,381 192,441,010 200,546,264 1,042,133,655 Details of Operating Expenses Employees Cost as per audited financials 355,064,692 Administrative Expenses (as per Note 1 below) 472,227,829 Depreciation as per audited financials 17,376,622 OPERATING EXPENSES (OPEX) 844,669,143 AE OPEX Allocation 52,87,54,805 15,67,50,637 15,91,63,702 844,669,143 OPERATING PROFIT (OP)- (B) 1203,91,576 356,90,373 413,82,562 1974,64,512 ACTUAL OP/OPEX % 22.77% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchases 499,988,190 Change in Stock 16,626,287 Total (C) 516,614,477 - Gross Profit [D = (A-C)] 47,906,294 793,605,957 Operating Expenses Total Operating Expenses 38,473,761 637,348,528 Operating Profit 9,432,533 156,257,429 OP/VAE (Treating interest income as nonoperating in nature) 24.52% 24.52% 9. From the various details furnished by the assessee, the TPO noted that the total international transaction between the assessee and its AE during the impugned assessment year are as under:- International Transaction Total Value of Transaction [Amount in INR] Sale of goods 47,82,797 Purchase of goods 477,077,786 Trade payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm's Length commission 626732452 Commission received from the AE 189765102 Adjustment 436967350 International transaction 189765102 3% of International transaction 5692953 12. The AO accordingly made the addition of Rs.43,69,67,350/- to the total income of the assessee. The assessee filed objections against the draft order before the DRP wherein the DRP directed the TPO to apply 3.03% as CUP for adjustment on substantive basis as against protective addition made by the TPO. The TPO thereafter computed the arm s length price of the international transaction in the nature of receipt of commission income at Rs.19,00,34,764/- as against earlier upward adjustment of Rs.43,69,67,350/-. The AO accordingly passed the order u/s 143(3) r.w. section 144C, determining the total income at Rs.41,73,28,470/- wherein he made the addition on account of TP adjustment at Rs.19,00,34,764/-. 13. Aggrieved with such order of the AO/TPO/DRP, the assessee is in appeal before the Tribunal. 14. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is placed at pages 248-279 of the paper book, the ld. Counsel for the assessee drew the attention of the Bench to page 251 of the paper book and thereafter drew the attention of the Bench to the question No.2 which reads as under:- (2) Whether the Income Tax Appellate Tribunal has disregarded the assessee s claim that they had followed Transactional Net Margin Method? (This question will include the submission of the appellant that the Transfer Pricing Officer s order does not adopt any specified method) 15. He submitted that the Hon ble High Court held that TNMM is the most appropriate method. He submitted that after the decision of the Hon ble High Court restoring the matter to the Tribunal, the Tribunal, vide order dated 22nd October, 2018 in ITA No.5095/Del/2011 and batch of other appeals for AYs 2007- 08 to 2011-12, held that CUP method cannot be applied and other methods admittedly are inapplicable of capturing the true arm s length result and accordingly held that TNMM should be taken as the most appropriate method for benchmarking the transaction. He submitted that despite the aforesaid findings, the TPO had without jurisdiction proceeded to determine the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantive basis by the DRP is entirely erroneous and, therefore, to be vacated. 16.1 Referring to the decision of the coordinate Bench of the Tribunal in the case of MSD Pharmaceuticals (P) Ltd. vs. ACIT, vide ITA No.7569/Del/2018, he submitted that the Tribunal has laid down the principle that protective addition along with substantive addition of an item of income can be made only when the identity of the real owner of the income is unclear. He submitted that similar principle has also been upheld by the Tribunal in the case of Samsung India Electronics Pvt. Ltd. vs. ACIT, vide ITA No.2511/Del/2018. 17. Regarding the observation of the DRP that appeal is in process of being filed before the Hon ble High Court against the order of the Tribunal dated 21st May, 2019, he submitted that no such appeal has been filed since the assessee has not yet received any such notice. He submitted that the Tribunal had merely followed its order dated 22nd October, 2018 passed by it for A.Y. 2007-08 to 2011-12 on the basis of an order dated 21st April, 2019 for AYs 2012-13 and 2013-14. Here also, it was held that the TNMM is the most appropriate method. He accordingly submitted that the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee of the non AEs. The adjustment commission for higher degree of functions discharged for the AE as compared to the commission earned from non AE (at 3.03%) is estimated at 5% of the FOB value of the export/import and it was proposed to be treated as arm s length price of the international transaction of commission income from AE. In view of the same, the TPO is directed to apply 3.03% as CUP for adjustment. 20. It is the submission of the ld. Counsel that once the Hon ble High Court has held that TNMM is the most appropriate method, therefore, CUP method cannot be applied and other methods are admittedly inapplicable. It is also his submission that once the TPO has held that the transactions entered into by the assessee with its AEs are at arm s length, there arises no justification to have proceeded to make any protective adjustment under the regime of TP adjustment. We find, identical issue was decided by the Tribunal after the order of the Hon ble High Court in ITA No.5095/Del/2011 and batch of appeals for AYs 2007-08 to 2011-12 vide order dated 22nd October, 2018. The Tribunal has held that berry ratio should be accepted as the most appropriate P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Italy, Switzerland, Thailand, whereas with non AE it is India. Likewise in electronics segment the transaction undertaken with the AE are 253, whereas with the non AE it is 5 and again not only the products are different but also geographical location are different with that of non-AE which are mostly with Indian parties and all AE transactions are with various foreign countries. 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, differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Otherwise also we have held that CUP method cannot be applied and other methods admittedly are incapable of capturing the true arm s length result and therefore, we hold that TNMM should be taken as a most appropriate method for benchmarking the said transaction. 18. Now having accepted that TNMM is the most appropriate method, the second issue which needs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are huge differences in volume on F.O.B. basis and the geographies dealt with in AE and non-AE segment are entirely different. The products involved in controlled and uncontrolled transactions are not similar and identical in volume value market and geographical location. The pricing factor which largely depends upon the geographical locations are different in AE and non-AE segment and therefore CUP cannot be applied 94 determining ALP of transaction either with AE or with non-AE. Therefore TNMM is most appropriate method under such circumstances instead of CUP. Considering fact that assessee is a low risk service provider and that there is no change in FAR from assessment year 2003-04 to 2018-19 as has been observed by this Tribunal in preceding assessment year, we do not find any reason to deviate by adopting any other method other than TNMM. Respectfully following view taken by this Tribunal in preceding years, we remand the issue back to file of Ld. TPO to examine and benchmark international transaction by adopting TNMM as most appropriate method by taking Berry ratio as PLI, as has been approved by Hon'ble High Court. Needless to say that asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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