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Commissioner Of Income Tax-8 Vs. Sumitomo Corporation India Pvt. Ltd
May, 16th 2015
                                                 Decided on: May 05, 2015.
+      ITA 83/2015
       COMMISSIONER OF INCOME TAX-8                      ..... Appellant
                         Through      Ms. Suruchii Aggarwal and Mr.
                                      Abhishek Sharma, Advs.
                         Through      Mr. C S Aggarwal, Sr. Adv. with Mr.
                                      Prakash Kumar, Adv.


1.     The Revenue is in appeal claiming to be aggrieved by the order of the
Income Tax Appellate Tribunal (ITAT) in ITA No.328/Del/2014 for AY
2009-2010.     The question of law it commenced for this Court's
consideration is that the impugned order directing determination of the arms
length price (ALP) in the assessee's case - originally leading to adjustments
to the tune of 88,40,13,476/-, is in consonance with the provisions of the
2.     Briefly the facts are that the assessee is inter alia engaged in
facilitating the import and export activities both directly and indirectly on
behalf of various customers ­ domestic and overseas. It has two distinct

ITA 83/2015                                                                Page 1
business segments i.e. commission business derived on FOB value
sold/purchased by the customers, and secondly trading activities undertaken
by it. For the concerned AY it reported an income of 19.43 crores part.
The matter was referred to the TPO who after considering the report,
directed adjustment of 88,40,13,476/-. This was accepted by the AO. The
TPO ­ (1) did not accept the assessee's report clubbing both transactions for
the purpose of ALP determination; (2) rejected the TNMM (transactional net
margin method) suggested by the assessee based upon previous year's
orders, for ALP determination; (3) made adjustment in respect commission
segment business by adopting the margin of profit for trading with non-AE
of the assessee. The assessee approached the ITAT contending that the
AO's order disturbed the consistent view adopted by the Revenue for past
years whereby the TNMM was accepted. It was also contended that the
TPO ­ and consequently the AO fell into error in not accepting the clubbing
of transactions suggested by the assessee. Most importantly the assessee
was aggrieved by comparison of what was facially incomparable i.e. after
rejection of the AO's method of comparing two transactions which was
deemed to be dissimilar in the first instance.
3.     The ITAT in the impugned order discussed the nature of transactions
and noticed that for benchmarking international transactions the AE had
adopted the most appropriate method i.e. ANMM with PLI ratio (Indian law
gives the dictates of Rule 10B of Income Tax Rules). The assessee had
introduced three years' data as well as comparable to demonstrate its cross
profit over operating cost at different levels for some of the previous years
and had urged that it was better than that of comparables which indicated the
profit margin to be 1.08%. The TPO had required the assessee to furnish

ITA 83/2015                                                             Page 2
segmental data for commercial as well as trading business ­ separately. This
was complied with.       The transactions with the AEs under the trading
segment was at 3.9% and that from non-AE transactions was at 5.82% (in
the trading segment). This data was not disputed. The ITAT recorded its
disapproval at the approach adopted by the AO; firstly disturbing the
consistent application of TNMM method, and more importantly in adopting
the profit of one segment of the business i.e. the trading transactions, and
comply it to, what according to him was a dissimilar segment i.e. the
commission income. The ITAT noticed that the percentage of commission
from AE transactions for the concerned AY was reported on 1.83% as
against 2.86% from non-AEs. The ITAT has held as follows :

       "5. We have heard the rival submissions and perused the
       relevant material on record. It is noticed that the TPO relied on
       the view taken by him for preceding years in proposing the
       transfer pricing adjustment. The ld. AR also candidly admitted
       that the order for the current year is replica of the earlier years
       order passed except for the change in figures. The position
       which, therefore, admittedly emerges is that the facts and
       circumstances of the instant year are mutatis mutandis similar
       to those of the preceding two years. The appeal of the assessee
       for the AY 2007- 08, in which transfer pricing adjustment was
       made under similar circumstances, came up for consideration
       before the Tribunal in ITA No.5095/Del/2011. Vide order dated
       31.01.13, the Tribunal has held that the 'Indenting transactions'
       are different from 'Trading transactions' in terms of functional
       differences, risks undertaken and assets employed, and hence
       both cannot be considered as uniform. The Tribunal held that
       the commission earned by the assessee from its AEs under the
       'Indenting segment' was required to be benchmarked on the
       basis of commission earned by the assessee from non-AEs
       under 'Indenting segment'. The assessee's contention before the
       Tribunal that discount of 50% should be given from

ITA 83/2015                                                                  Page 3
       commission earned from non-AEs to make it comparable with
       the commission earned from AEs, was rejected. It was finally
       held that the commission percentage from AE transactions
       should be compared with the commission percentage from non-
       AE transactions. That is how, it was directed that such
       commission percentage at 2.26% from non-AE transactions
       should be taken as arm's length rate at which the assessee
       should have earned commission from AE transactions. Similar
       view was taken by the Tribunal in its order for the AY 2008-09
       in which the commission percentage @ 2.23% from non-AE
       transactions was held to be arm's length rate of commission to
       be applied in respect of transactions with AEs. As the facts and
       circumstances of the instant year are admittedly similar to
       those of two preceding years, respectfully following the
       precedents, we hold that the action of the TPO/AO in
       determining the ALP in respect of indenting business by
       applying profit percentage earned by the assessee from non-AE
       transactions under the 'Trading business segment' cannot be
       upheld. It goes without saying that both the trading as well as
       commission businesses are functionally different from each
       other, apart from having varying risks and capital employed.
       We hold that the commission percentage from AE transactions
       should be benchmarked on the basis of commission rate from
       non-AE transactions under the 'Indenting business' and the
       addition on account of transfer pricing adjustment, if any,
       should be made in consonance with the view taken by the
       tribunal in the immediately two preceding years.

       6. The ld. AR tried in vain to impress upon us that the view
       taken by the tribunal in the preceding two years should not be
       followed and the application of TNMM as employed by the
       assessee should be accepted leading to no addition on account
       of TP adjustment. To buttress his contention for the application
       of TNMM, he placed on record a copy of the order passed by
       the Delhi bench of the tribunal in Marubeni India P. Ltd. VS.
       DCIT (ITA no. 5397/Del/2912). This contention was countered
       by the ld. DR by stating that the TPO has applied internal RPM
       as the assessee's TNMM was faulted with due to the reasons

ITA 83/2015                                                               Page 4
       given in the order. We are not convinced with the contention of
       the ld. AR urging us to observe departure from earlier view
       taken by the tribunal for the obvious reason that when the
       Tribunal in identical facts has taken a particular view in
       assessee's own cases for the immediately two preceding
       assessment years, we cannot tinker with the same. We,
       therefore, hold that the commission percentage on the basis of
       FOB value of goods from transactions with non-AEs be
       computed and taken as arm's length rate of commission for the
       purposes of the transactions with AEs under the 'Indenting
       business' segment. In this regard, the ld. AR submitted that the
       percentage of commission from AE transactions for the instant
       year stood at 1.83% as against 2.86% from non-AEs. We find
       that the rates of commission now sought to be placed before us,
       are not emanating from the orders of the authorities below.
       Under such circumstances, we set aside the impugned order
       and remit the matter to the file of the AO/TPO with a direction
       to find out the rate of commission income on FOB value of the
       transactions with non-AEs under the 'Indenting business'
       segment and then apply the same rate to the FOB value of
       goods in AE transactions under the 'Indenting business'
       segment, as was directed in the earlier years. Needless to say,
       the assessee will be allowed a reasonable opportunity of being
       heard in such proceedings."
4.     We have heard counsel for the Revenue, who urges that "Berry" ratio,
which was suggested by the assessee is alien to Indian law. She also urged
that the application of TNMM method is a matter of debate since for the
previous year the question of law has been framed and is pending
consideration by this Court.
5.     This Court notices at the outset that the issue which it is concerned
with is AY i.e. 2009-2010 involves extremely restricted one.          Having
clubbed the transactions for the purpose of ALP determination whether the
TPO/AO could have refused to follow the logic and consider the comparable

ITA 83/2015                                                               Page 5
profits from non-AE transactions in both segments is in issue. All that the
ITAT did, in our view, was to cure this defect or anomaly and direct the AO
to consider the margin of commission in each segment while determining
the ALP. We at the same time clarify that the AO ­ who is now directed to
carry out the exercise shall do so by applying principles in Rule 10(B) of the
Income Tax Rules.
6.     The appeal is disposed of but in terms of above directions.        It is
clarified that this Court is not in any way disturbing the Tribunal's direction
to determine the rate of commission in either segment.

                                                      S. RAVINDRA BHAT

                                                                R.K. GAUBA
MAY 05, 2015

ITA 83/2015                                                              Page 6
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