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Sumitomo Corporation India Pvt. Ltd., 4th Floor, DLF Centre, Sansad Marg, New Delhi. Vs. Addl. CIT, Range-9, New Delhi.
July, 15th 2014
               DELHI BENCHES : I : NEW DELHI


                        ITA No.328/Del/2014
                     Assessment Year : 2009-10

Sumitomo Corporation India       Vs.   Addl. CIT,
Pvt. Ltd.,                             Range-9,
4th Floor, DLF Centre,                 New Delhi.
Sansad Marg,
New Delhi.


  (Appellant)                             (Respondent)

           Assessee By       :    Shri C.S. Aggarwal, Sr. Advocate &
                                  Shri Himanshu S. Sinha, Advocate
           Department By     :    Shri Yogesh Kumar Verma, CIT, DR



     This appeal by the assessee is directed against the order

passed by the Assessing Officer (AO) u/s 143(3) read with section

144C of the Income-tax Act, 1961 (hereinafter also called `the

Act') on 12.12.2013 in relation to the assessment year 2009-10.
                                                      ITA No.328/Del/2014

2.   The only issue assailed before us is against the addition of `

88,40,13,476/- made by the AO on account of transfer pricing


3.   Briefly stated, the facts of the case are that the assessee,

established in India, is a subsidiary company of Sumitomo

Corporation, Japan (SCJ) holding 99.99% of assessee's share

capital with the remaining 0.01% held by Sumitomo Corporation

Singapore Pte Ltd. SCJ is the ultimate parent company of

Sumitomo group which is one of the largest trading companies of

sogo shosha in Japan.     Sogo shosha is an integrated business

enterprise with the fundamental role of facilitating trade between

buyers' and sellers' market across the globe. SCJ and its other

group companies situated in different countries undertook trading

activities in India with the support and assistance of the assessee

company.      The assessee is broadly engaged in `Indenting

transactions' and also `Trading transactions' at its own.             In

indenting transactions, the assessee acts as facilitator for which it

earns   service   fee/commission.      Such   transactions    involve

relatively low functional activity with minimal risk between

suppliers and buyers.     On the other hand, the assessee also
                                                       ITA No.328/Del/2014

enters into certain trading transactions on principal to principal

basis, which obviously entails higher financial risks with the

requirement of large capital. The assessee in its report in Form

3CEB declared the following seven international transactions :-

       S.No. Nature of Transaction          Method    Value of

       1.    Sale of Goods                              464,454,166
       2.    Purchase of goods                          581,727,448
       3.    Provision of services                      469,298,294
       4.    Receipt of services               TNMM      41,469,552
       5.    Purchase      of    computer                 1,744,986
       6.    Purchase of software license                    15,938
       7.    Reimbursement of expenses          CUP      22,008,239

4.   For benchmarking the international transactions listed at

items 1 to 6, the assessee applied Transactional Net Margin

Method (TNMM) as the most appropriate method with the profit

level indicator of Berry ratio [GP/OC]. The assessee used three

years' data of the tested party as well as comparables to

demonstrate that its GP/OC at 1.47% for AY 2008-09, 1.69 for AY

2007-08 and 1.79% for AY 2006-07 was better than that of the

comparables, again using three years' data, computed at 1.08%.

The TPO required the assessee to furnish segment-wise results of

                                                     ITA No.328/Del/2014

commission business as well as trading business separately. The

assessee furnished the same showing GP/OC from transactions

with the Associated enterprises (AEs) under the `Trading segment'

at 3.29% and that from non-AE transactions under the same

segment at 5.28%.     The TPO held that the assessee was not

justified in using multiple year data and also clubbing of the

international transactions of Indenting and Trading business

under one segment and then applying TNMM. He also held that

the Profit level indicator (PLI) as employed by the assessee, being

the Berry ratio (GP/OC), was alien to the transfer pricing methods.

He did not dispute the profit margin from trading transactions

with AEs and accepted the same at arm's length price (ALP). His

only concern was with the international transactions under the

`Indenting business' segment.        Not accepting the assessee's

manner of computing ALP under the Indenting segment, the TPO

opined that the FOB value of the goods under the indenting

business segment was required to be considered.        He adopted

such FOB value of goods at ` 2562.00 crore.       By applying the

margin of 5.28%, being the ratio of the assessee's gross profit

margin to sales earned from non-AEs under the `Trading

                                                     ITA No.328/Del/2014

segment', he proposed the TP adjustment of ` 88.40 crore.            In

drawing the above conclusions, he mainly relied on the view

taken by him in assessee's own case for the immediately

preceding years. The assessee remained unsuccessful before the

Dispute Resolution Panel (DRP).        Eventually, this led to the

addition of `88.40 crore by the AO in his final order passed u/s

143(3) read with section 144C(13) of the Act.     The assessee is

aggrieved against such addition.

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
                                                       ITA No.328/Del/2014

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 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

                                                            ITA No.328/Del/2014

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
                                                     ITA No.328/Del/2014

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 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

                                                           ITA No.328/Del/2014

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.

7.        In the result, the appeal is partly allowed.

          The order pronounced in the open court on 14.07.2014.

               Sd/-                                        Sd/-

       [A.T. VARKEY]                                  [R.S. SYAL]
     JUDICIAL MEMBER                              ACCOUNTANT MEMBER
Dated, 14th July, 2014.


Copy forwarded to:

     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                    AR, ITAT, NEW DELHI.

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