IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM
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.
PAN : AABCS1887M
(Appellant) (Respondent)
Assessee By : Shri C.S. Aggarwal, Sr. Advocate &
Shri Himanshu S. Sinha, Advocate
Department By : Shri Yogesh Kumar Verma, CIT, DR
ORDER
PER R.S. SYAL, AM:
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
adjustment.
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
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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
Transactions
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
software
6. Purchase of software license 15,938
7. Reimbursement of expenses CUP 22,008,239
received
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
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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
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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
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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
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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
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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
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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.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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