9911796707
TMI Blog2021 (11) TMI 1173X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the indent in business income from known the associated enterprises and not to consider the free on-board value of goods imported/exported while working out the arm s-length price from either operating income or operating expenditure of the assessee. The assessee is directed to submit fresh set of comparables. TPO is directed to examine the same, he may reject or include fresh comparables. Thus, the fresh comparability analysis is required to be conducted. - Shri Sudhanshu Srivastava, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Himanshu Sinha, Adv.; Shri Bhuwan Dhooper, Advocate. For the Department : Shri Shashi Bhusan Shukla, [CIT] DR. ORDER PER PRASHANT MAHARISHI, A. M. : 01 This appeal in ITA. No. 507 (Del) of 2021 is filed by Sumitomo Corporation India Private Limited, against the assessment order passed by the National e-Assessment Centre, Delhi, on 30th April, 2021, under Section 143(3) read with Section 144B of the Income Tax Act, 1961 (the Act) for assessment year 2015-16. 02 The assessee has raised the following grounds of appeal:- 1. That the Ld. AO has grossly erred both on fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment based on the directions of the Ld. DRP, the Ld. AO / TPO has assumed that an appeal has been filed against the order of ITAT for AY 2012-13 AY 2013-14 or AY 2014-15, but have not provided any evidence to substantiate the same. Therefore, the order of the Ld. AO / TPO should be considered null and void-ab-initio due to noncompliance with section 1440(10) and section 1440(13). Substantive addition 6. The Ld. DRP / TPO erred in considering the average rate of commission earned in non- AEs segment by applying Comparable Uncontrolled Price ( CUP ) method to determine arm's length commission rate for indenting transactions with the AEs (other than those which are covered by the Bilateral Advance Pricing Agreement with Japan). While doing so, the Ld. DRP / TPO disregarded: 6.1 the difference in the functions performed, risks assumed, number of transactions, value of transactions, nature of products, commission rates and geographical locations etc. in respect of transactions of Appellant with AEs (other than Sumitomo Corporation, Japan) and non-AEs; 6.2 the judgments of Hon'ble ITAT in Appellant's own cases for (i) AY 2007-08 to AY 2011-12 (ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Without prejudice to the contention that TNMM with Berry ratio (modified form of OP/OPEX) as the PLI should be accepted as the most appropriate method for determining ALP of the international transactions entered into by the Appellant in a proper manner, as has been upheld by the Hon'ble ITAT in earlier years, rather than the CUP method, the Ld. TPO and AO have erred in respect of the following while computing the protective adjustment amounting to INR 3,16,09,462: 8.1 including the free-on-board ( FOB ) value of goods transacted under indenting segment in the cost base, while calculating the ALP for transactions with AEs other than Sumitomo Corporation Japan. Further, the Ld. DRP / TPO has also erred in adding the FOB value of goods as part of the operating revenues of the Appellant; 8.2 using a set of companies for computation of the arm's length margin, most of whom are not comparable to the Appellant on various grounds; 8.3 not considering the companies as comparable, which were contained in the TP documentation prepared by the Appellant and also provided in form of a fresh search (during the course of transfer pricing assessment); and 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made based on confirmed sale orders. 04 Assessee filed its return of income on 27.11.2015 at Rs.9,40,97,200/-. The fact shows that the assessment year is one of the covered years as per bilateral advance pricing agreement under the category of roll back years. Assessee revised its return of income at Rs.19,70,11,810/- to give effect to such agreement of 18.10.2016. 05 Assessee has entered into international transactions and domestic transactions with its AE and, therefore, reference was made to Transfer Pricing Officer for determination of Arms Length price of its international transaction. 06 Assessee has entered into several international transactions. However, assessee has adopted Transactional Net Margin Method (TNMM). The assessee combined all transactions and adopted Transactional Net Margin Method. It adopted the profit level indicator of operating profit margin to value added expenses OP / VAE. The PLI of the assessee was at 7.58%. The assessee selected 20 comparables engaged in the business of providing support services and computed their margin 3.35%-5.12%. 07 Assessee entered into the bilateral advance pricing agreement on 2.08.2016 covering assessment year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,11,810/- was made against the returned income of Rs.19,70,11,810/- and the total income was determined at Rs.60,42,03,333/-. Interesting to note in this case is that in the draft assessment order the substantive addition of Rs.17,13,35,198/- and protective addition of Rs.23,58,56,325/- aggregating to Rs.40,71,91,523/- was made. 10 The assessee preferred an objection before the ld. Dispute Resolution Panel that passed its direction on 24th December 2020. In para No. 7.5.1 of the direction, the ld. DRP noted that if the Revenue has not filed an appeal against the order of the co-ordinate bench in assessee s own case in earlier years the protective adjustment should be dropped, it held that the addition made on the basis of the CUP method should be used and substantive addition should be made on that basis. It further held that the average commission earned by the appellant from non-AEs should be taken as ALP of the commission transaction with Associated Enterprise other than Japan. It further held that the Transactional Net Margin Method should only be used to make a protective addition. 11 Based on the above directions, the ld. Transfer Pricing Officer passed an order on 25t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made in the hands of the same assessee with respect to the same source of income. He relied on plethora of judicial precedents. He further submitted that Transactional Net Margin Method applied by the ld. Transfer Pricing Officer is also not correct. He stated that the TPO has used the FOB value of goods transacted by the Associated Enterprises on which commission income has been earned which the Assessing Officer had added to the commission income as well as to the operating expenses. He referred to the order of the co-ordinate bench of earlier years and stated that FOB value of goods is neither an income nor expense of the assessee, but it is merely a cost for the Associated Enterprise. He further submitted that the TPO has also not used the PLI of operating profit margin on operating expenses as mandated in the orders of the co-ordinate bench. Thus, the working is not proper. 16 He further stated that the Assessing Officer has assumed the margin of 15.04% without any basis. 17 He further submitted that the TPO has rejected 18 comparables out of 20 comparables selected by the assessee and retained only 2 comparables without giving any reasons. The TPO further added 3 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2018] 99 taxmann.com 319 (Delhi - Trib.) has held as under:- 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 per cent 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 between the two transactions and to conduct further in depth inquiry to examine the high degree of comparability of relevant 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 24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son 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 account of these factors CUP cannot be held to be 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Considered the median of the range as per the comparable set as the arm s-length operating profit/operating expenses 15.07% 3 Computed the arm s-length income by applying OP/OPEX 1,476,71,81,337 4 In respect of commission received from the associated enterprises, included the FO be value of goods to derive at the revised operating income (₹ 12,622,161,684 + ₹ 211,054,043 1,284,29,20,639 5 Calculated the difference between revised operating income and the arm s-length income (step 3-step 4) 192,42,60,698 6 Computed the proportion of international transactions (i.e. commission earned from associated enterprise) to the revised operating income (₹ 210,968,199/ ₹ 12,842,920,639 1.64% 7 Calculate the transfer pricing adjustment by restricting the difference (as per step 5) to the proportion of international transaction (i.e. commission earned from associated enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of transfer, pricing assessment assessee has submitted a fresh set of potential comparable companies, which are engaged in business support services. Those set of comparables were rejected. 32 In view of the above facts we hold that benchmarking of the commission income from associated enterprises other than Japan is required to be computed as Under:- i. The learned assessing officer/transfer pricing officer is directed to not to adopt CUP method for computation of the arm s-length price of the indent in business from non-Japan associated enterprises. ii. The learned assessing officer/transfer pricing officer is directed to adopt transactional net margin method adopting the berry ratio for computing the arm s-length price of the indent in business income from known the associated enterprises. iii. The learned assessing officer/transfer pricing officer is directed to not to consider the free on-board value of goods imported/exported while working out the arm s-length price from either operating income or operating expenditure of the assessee. iv. The assessee is directed to submit fresh set of comparables. The learned transfer-pricing officer is directed to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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