TaxTMI 
TaxTMI 
2015 (6) TMI 213
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....rned AO/DRP/TPO have grossly erred both in law and on facts in making an addition of Rs. 1,04,95,90,066/- on account of alleged understatement of arm's length price in respect of indenting transaction on which it earned commission income from its Associated Enterprises ("herein after referred to as AE"), by completely overlooking the findings of the Hon'ble Tribunal for the three preceding years i.e. for AY 2007-2008, 2008-2009 and 2009-10, despite the fact that facts and circumstances of instant assessment year were identical to the preceding assessment years and no distinguishing facts are brought on record to take a contrary view as such, finding of the learned AO/DRP/TPO are highly arbitrary and thus the order is a vitiated order. 3. That in making the aforesaid addition, the learned Deputy Commissioner of Income Tax had erred in referring the matter to the learned TPO u/s 92CA of the Act on the following amongst other grounds, rendering the order of the learned TPO as unsustainable both in law and on facts: a) As the reference made by the learned AO to the learned TPO is not in accordance with the provisions of Section 92CA(1) of the Act; b) ....
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....cluding that the Assessee has changed its method compared to earlier years which in her view is in contradiction to the claim of the Assessee that there has been no change in functions performed by it. e) Ld. AO/TPO/DRP has erred in concluding that indenting business and the trading business of the Assessee are similar and homogeneous in nature and in holding that the Functions performed, and risks assumed in the non-AE trading segment is similar to functions and risks in indenting segment completely disregarding the assertions and evidences filed by the Assessee in this regard. f) Ld. AO/TPO/DRP has erred in disregarding the commercial agreements entered into by the Assessee with AEs and non-AEs without any valid and cogent reasons and has assumed that the Assessee functions as a trader of goods in relation to indenting segment; g) Ld. AO/TPO/DRP have failed to appreciate that the books of accounts of the Assessee have duly been audited by a Chartered Accountant and no adverse observations have been made by the Chartered Accountant in his audit report. Thus, the Id. TPO had grossly erred in adding the FOB value of goods sourced by the AEs/other parties a....
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....g the reliance placed by the Assessee on the HC judgment in Li & Fung case. The Learned TPO completely overlooked the Hon'ble Delhi High Court judgment where it was stated that for a service provider company operating margin on costs is an appropriate profit level indicator and remuneration of such a company cannot be linked with the value of goods bought/sold by the AE of the Assessee Company. The Assessee being a service provider company gets covered by the said Hon'ble Delhi High court ruling; p) Ld. AO/DRP has failed to appreciate that if the addition proposed in the order under" section 92CA(3) by the Id. TPO was to be adopted as ALP, the Assessee would be required to earn an absurdly high operating profit on cost of 355% q) That the learned TPO has failed to appreciate the difference in risk profile of the indenting and trading transactions. It is relevant to note that there is vast difference in indenting and trading activities. Trading activity requires effort for business creation, undertakes the risk in maintaining inventory, realization of sale proceeds, incurring interest and other costs in respect of maintaining and keeping the stock. In such ....
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....able without any adjustment of volume is wholly erroneous as the volume of transaction is highly relevant to determine the value of the transaction and hence unless suitable adjustment including volume adjustment is made, both the segments are not comparable; w) That the learned AO/TPO/DRP conclusions are arbitrary and based on conjectures and surmises. 5. That the learned AO/TPO/DRP has erred in not making adjustments to the uncontrolled transaction to account for the material impact of the economic differences between the controlled and uncontrolled transactions as mandated under Rule 10B(3) of the Income Tax Rules 1962. The Ld. TPO has further erred in negating the applicability of Li & Fung decision of the Delhi High Court and in concluding that the approach of the assessee in respect of volume and value of transactions is contradictory with its assertion regarding indenting and trading being separate and distinct segments. 6. That the learned AO/TPO/DRP has erred in holding that the Appellant has created human and supply chain intangibles for which it is not being adequately compensated by the AE which finding was reached on mere assumptions and had ....
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....rom the AE. Ld. Senior Counsel drawn our attention towards Page 461 of the assessee's Paper Book and submitted that the assessee earned commission on FOB value of goods amounting to Rs. 86,22,96,437/- from non associated enterprises (AE) of Rs. 1,47,60,299/- which is 1.71% of FOB value of the goods. Ld. Senior Counsel further pointed out that the assessee earned commission on FOB value of goods amounting to Rs. 21,20,88,46,377/- of Rs. 38,83,69,718/- at the rate of 1.83% of the FOB value of the goods which is higher than the commission income/service fees earned from the non associated enterprises, therefore, imposed addition on account of alleged understatement arms' length price is not sustainable and in accordance with law. 5. Ld. Senior Counsel further took us to order of the Tribunal in assessee own case for AY 2007-08 and submitted that in the similar facts and circumstances, the addition made by the AO/TPO was deleted by holding that the commission percentage of non AE segment and the same is at the arm's length and no addition is sustainable. Ld. Senior Counsel further drawn our attention towards order of the Tribunal in assessee own case for AY 2008-09 dated 15.03.2013 ....
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....ntered into both with AEs and Non-AEs. 23. We agree with the assessee's proposition that the nature of indenting transaction is different from the trading transactions. The trading transaction involves risks and finances, whereas in the indenting transaction the assessee has not to incur any such financial obligation or carry any significant risk. Moreover, we note that in respect of indenting transaction with non-AE's, the average mean margin of profit of 2.26% has been accepted by the TPO. We further find that the indent business of the assessee was nothing but trade facilitation and is purely of indent nature both in form and substance. No material has been brought on record to regard the indent transaction as trading transactions. 24. Assessee itself has agreed with the proposition that an appropriate comparison would be to compare the commission/ service income earned by the assessee from AEs to that of the non-AEs. This aspect of assessee's submission has not been rebutted by the Revenue. However, the assessee has contended that the reason of difference between them was attributable to volume of business handled in AE segment and non AE segment and credit ri....
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.... in competitive market condition. Therefore, unless and until it is brought to record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself." - Similarly in the case of M/s Bayer Material Sciences (P) Ltd. (Supra) in para 23 following proposition was laid down:- "Now the question is whether these cases, which are otherwise comparables, should be disregarded simply on the ground of smallness of turnover when compared with that of the assessee. Considering the fact that the assessee did not come out with any comparable case to justify its price at arm's length and further the TPO found out these cases having functionally identical activities duly confronted to the assessee, it is not possible to disregard such cases merely on the ground that the volume of turnover is lower in comparison to that handled by the assessee. One more important factor which cannot be lost sight of is that in the case of M/s Rathi Brothers Madras Ltd. indenting commission i....
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....order of the Tribunal for AYs 2007-08 and 2008-09 has deleted similar addition with the following observations and conclusions:- 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 'Indenti....
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....ed 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 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 ra....