TaxTMI 
TaxTMI 
2020 (11) TMI 1102
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....e of international transactions entered by the Appellant with its AEs 2. That in making the aforesaid addition, the Ld. AO has erred in making a reference under section 92CA(1) of the Act to the Ld. Transfer Pricing Officer ('TPO') on the following amongst other grounds, rendering the order of the Ld. TPO as unsustainable both in law and on facts: a) As the reference made by the Ld. AO to the Ld. TPO is not in accordance with the provisions of Section 92CA(1) of the Act; and b) As no opportunity of being heard was granted at any stage of the proceedings for this purpose, whether at the proposal stage or even later at the time of grant of approval 3. The Ld. TPO has erred in making the transfer pricing adjustment without establishing the existence of any one of the four pre-conditions provided in section 92C(3) of the Act, which is a mandatory requirement for making an adjustment under section 92CA(3) of the Act 4. That in making the aforesaid addition, the Ld. DRP has grossly erred in in its jurisdiction when it directed the Ld. AO / TPO to make an adjustment on substantive basis of Rs. 19,00,34,764, which amounted to 'modify....
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....t's own case has held that in case the average rate of commission earned from third parties was to be considered as arm's length price for indenting transactions with the AEs, it had to be established that there is no significant variation in the rate of commission between different products and without conducting any such enquiry, such average rate of commission could not be adopted as arm's length. 12.The Ld. DRP has failed to appreciate the huge difference in FOB value on which commission had been earned from third parties viz. Rs. 51,31,23,599 and FOB value of indent transaction with AEs (other than Sumitomo Corporation Japan) viz. Rs. 12,53,46,49,034. Further, there are huge difference in the geographical locations and business segments due to which, per the judgement of the Hon'ble High Court in Appellant's own case, the average commission rate earned from third parties cannot be used for making adjustment in relation to transactions with AEs The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at t....
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....der the agreement. The transaction of the assessee with AEs other than Sumitomo, Japan, during the year are not covered under BAPA. The TPO analysed the AE-wise transaction with profitability, the details of which are as under:- Particulars SCJ AE Others Non-AE Total Sales(A) 543,544,968 20,975,803 962,004,322 1,526,525,093 (-) Cost of Goods Sold 498,314,582 18,299,895 853,870,004 1,370,484,481 45,230,386 2,675,908 108,134,318 156,040,612 (+) Commission Fee 603,840,855 189,765,102 92,411,946 886,017,903 (-) Commission Paid - - - - (+) Trading Interest 75,140 - - 75,140 (-) Bank Charges - - - - GROSS PROFIT ON SALES- (A) 649,146,381 192,441,010 200,546,264 1,042,133,655 Details of Operating Expenses Employees Cost as per audited financials 355,064,692 Administrative Expenses (as per Note 1 below) 472,227,829 Depreciation as per audited financials 17,376,622 OPERATING EXPENSES (OPEX) &n....
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.... 499,988,190 Change in Stock 16,626,287 Total (C) 516,614,477 - Gross Profit [D = (A-C)] 47,906,294 793,605,957 Operating Expenses Total Operating Expenses 38,473,761 637,348,528 Operating Profit 9,432,533 156,257,429 OP/VAE (Treating interest income as nonoperating in nature) 24.52% 24.52% 9. From the various details furnished by the assessee, the TPO noted that the total international transaction between the assessee and its AE during the impugned assessment year are as under:- International Transaction Total Value of Transaction [Amount in INR] Sale of goods 47,82,797 Purchase of goods 477,077,786 Trade payable 297,206,390 Re-imbursement of Expenses received/receivable 14,523,365 Miscellaneous income 75,140 Provision of services 793,606,244 Availment of services 79,383,171 Trade and other receivables 35,38,197 Trade receivables 228,428,160 Managerial Remuneration 88,244,006 Rendering of Services 793,605,957 10. On being asked by the AO/TPO, the assessee furnished the details of FOB value of goods imported/e....
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....nged the order passed by the AO/TPO/DRP by making addition to the tune of Rs.19,00,34,764/-. He submitted that the assessee had determined the percentage of profit by allocating expenses incurred on the basis of gross margin earned by AEs other than Sumitomo Corporation Japan, and by non-AEs whereas the TPO had allocated after assuming 26% of the gross profit earned by non-AEs and, thereafter had allocated expenses in proportion of gross profit. He submitted that the TPO had accepted when he held that the profit earned with AE's are at arm's length and has also accepted the same while computing the arm's length price by selecting the TNMM as the most appropriate method. Despite the same, the TPO further proceeded to make protective adjustment. However, the DRP has held that such protective adjustment to be made on substantive basis. He submitted that the aforesaid approach of the TPO is highly arbitrary and totally unfounded. He submitted that once the transactions entered into by the assessee with its AEs are held to be at arm's length, there is no justification to have proceeded to make any protective adjustment under the regime of TP adjustment. He submitted that there is no con....
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.... even without making in-depth enquiry whether the transactions can be held to be comparable. He submitted that there is no method whereby the average margin of commission should be applied straightaway without appreciating the nature of transaction entered by the assessee with its AEs and non-AEs which cannot be regarded as comparable so held by the Hon'ble High Court. 15.1 Referring to page 7 of the order of the DRP, the ld. Counsel drew the attention of the Bench to para VIII where the DRP has observed as under:- "VIII. The TPO has brought forward that the method used in earlier years as directed by the Hon'ble ITAT has been used to make protective assessment. However, since appeal is in process of being filed in H'ble H.C. against the ITAT order dated 21.05.2019, the TPO/AO is directed to make adjustment on substantive basis." 16. He submitted that the TPO had adopted an approach to make the protective addition based upon the method used earlier by the Tribunal in its order which was subject matter of appeal u/s 260A of the Act in ITA No.381/2013 and others. The DRP overlooked that the said method used to make protective addition has been negatived by the Hon'ble ....
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....eleted. 18. The ld. DR, on the other hand, submitted that it is not a covered matter as argued by the ld. Counsel. Referring to the decision of the Hon'ble High Court and the observation of the DRP, he submitted that the Hon'ble High Court has held that the approach used by the TPO/DRP and the ITAT for considering average rate of commission earned from non-AEs in indent segment as the arm's length price for the commission earned from the AEs needs further examination and indepth enquiry to decide that CUP method is the most appropriate method. He submitted that the Tribunal in separate orders dated 22nd October, 2018 for AYs 2007-08 to 2011-12 and the order dated 21st May, 2019 for AYs 2012-13 to 2013-14 has restored the issue to the file of TPO to examine and benchmark the international transaction by adopting TNMM as the most appropriate method by taking the "berry ratio" as PLI. It was directed that the assessee has to substantiate its margin by bringing comparable uncontrolled transactions to demonstrate that its commission earned in this segment is at arm's length and the TPO shall examine the same and decide. He accordingly submitted that he has no objection if the matter ....
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....ile determining the ALP of the international transaction for all the five years under consideration. Thereafter, the Tribunal restored the matter to the file of the TPO to examine and benchmark the international transaction by adopting TNMM as the most appropriate method by taking 'berry ratio' as PLI. The relevant observation of the Tribunal from para 15-19 of the order reads 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 percent 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 it....
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....graphical location. 16. It is quite settled proposition that while applying CUP method, a very high degree of similarity has to be seen between the control and uncontrolled transactions not only in terms of products, contractual terms, volume, value but also market and geography locations. The reason 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 ....
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....and purchase in its financial commitment and risk are insignificant. As a service provider, the key business driver for the assessee is operating expenses incurred on establishment and operation of business, i.e., salary, rent and other such expenses and it does not employ any significant assets in the business except for routine assets like office, furniture and fixtures to run its business and also there is no intangible creation by the assessee company. Besides there is no trading capital employed as goods are neither bought nor sold by the assessee in the indenting segment. Under these facts and circumstances, the profit derived by the assessee is mainly depended on its operating expenditure as the value of goods does not enter in its financial. As a low risk service provider, it seeks to obtain adequate return on its operating expenses as the operating expenses incurred represents the value added carried on by the assessee. In other words, the operating expenses adequately and sufficiently represents the functions performed and the risk undertaken by the assessee. Thus, we hold that the 'berry ratio' should be accepted as the most appropriate PLI for taking as base under TNMM ....