Commissioner of Income-tax-8 v. Sumitomo Corporation India Pvt Ltd
[Citation -2015-LL-0505-4]

Citation 2015-LL-0505-4
Appellant Name Commissioner of Income-tax-8
Respondent Name Sumitomo Corporation India Pvt Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 05/05/2015
Assessment Year 2009-10
Judgment View Judgment
Keyword Tags reasonable opportunity • export activities • trading business • transfer pricing • profit margin • fob value • tpo
Bot Summary: 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. The transactions with the AEs under the trading segment was at 3.9 and that from non-AE transactions was at 5.82. 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. 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. 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. 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.


IN HIGH COURT OF DELHI AT NEW DELHI Decided on: May 05, 2015. + ITA 83/2015 COMMISSIONER OF INCOME TAX-8 ..... Appellant Through Ms. Suruchii Aggarwal and Mr. Abhishek Sharma, Advs. versus SUMITOMO CORPORATION INDIA PVT. LTD..... Respondent Through Mr. C S Aggarwal, Sr. Adv. with Mr. Prakash Kumar, Adv. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % 1. Revenue is in appeal claiming to be aggrieved by order of Income Tax Appellate Tribunal (ITAT) in ITA No.328/Del/2014 for AY 2009-2010. question of law it commenced for this Court s consideration is that impugned order directing determination of arms length price (ALP) in assessee s case - originally leading to adjustments to tune of 88,40,13,476/-, is in consonance with provisions of Act. 2. Briefly facts are that assessee is inter alia engaged in facilitating 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 customers, and secondly trading activities undertaken by it. For concerned AY it reported income of 19.43 crores part. matter was referred to TPO who after considering report, directed adjustment of 88,40,13,476/-. This was accepted by AO. TPO (1) did not accept assessee s report clubbing both transactions for purpose of ALP determination; (2) rejected TNMM (transactional net margin method) suggested by assessee based upon previous year s orders, for ALP determination; (3) made adjustment in respect commission segment business by adopting margin of profit for trading with non-AE of assessee. assessee approached ITAT contending that AO s order disturbed consistent view adopted by Revenue for past years whereby TNMM was accepted. It was also contended that TPO and consequently AO fell into error in not accepting clubbing of transactions suggested by assessee. Most importantly assessee was aggrieved by comparison of what was facially incomparable i.e. after rejection of AO s method of comparing two transactions which was deemed to be dissimilar in first instance. 3. ITAT in impugned order discussed nature of transactions and noticed that for benchmarking international transactions AE had adopted most appropriate method i.e. ANMM with PLI ratio (Indian law gives dictates of Rule 10B of Income Tax Rules). assessee had introduced three years data as well as comparable to demonstrate its cross profit over operating cost at different levels for some of previous years and had urged that it was better than that of comparables which indicated profit margin to be 1.08%. TPO had required assessee to furnish ITA 83/2015 Page 2 segmental data for commercial as well as trading business separately. This was complied with. transactions with AEs under trading segment was at 3.9% and that from non-AE transactions was at 5.82% (in trading segment). This data was not disputed. ITAT recorded its disapproval at approach adopted by AO; firstly disturbing consistent application of TNMM method, and more importantly in adopting profit of one segment of business i.e. trading transactions, and comply it to, what according to him was dissimilar segment i.e. commission income. ITAT noticed that percentage of commission from AE transactions for concerned AY was reported on 1.83% as against 2.86% from non-AEs. ITAT has held as follows : 5. We have heard rival submissions and perused relevant material on record. It is noticed that TPO relied on view taken by him for preceding years in proposing transfer pricing adjustment. ld. AR also candidly admitted that order for current year is replica of earlier years order passed except for change in figures. position which, therefore, admittedly emerges is that facts and circumstances of instant year are mutatis mutandis similar to those of preceding two years. appeal of assessee for AY 2007- 08, in which transfer pricing adjustment was made under similar circumstances, came up for consideration before Tribunal in ITA No.5095/Del/2011. Vide order dated 31.01.13, Tribunal has held that '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. Tribunal held that commission earned by assessee from its AEs under 'Indenting segment' was required to be benchmarked on basis of commission earned by assessee from non-AEs under 'Indenting segment'. assessee's contention before Tribunal that discount of 50% should be given from ITA 83/2015 Page 3 commission earned from non-AEs to make it comparable with commission earned from AEs, was rejected. It was finally held that commission percentage from AE transactions should be compared with 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 assessee should have earned commission from AE transactions. Similar view was taken by Tribunal in its order for AY 2008-09 in which 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 facts and circumstances of instant year are admittedly similar to those of two preceding years, respectfully following precedents, we hold that action of TPO/AO in determining ALP in respect of indenting business by applying profit percentage earned by assessee from non-AE transactions under 'Trading business segment' cannot be upheld. It goes without saying that both trading as well as commission businesses are functionally different from each other, apart from having varying risks and capital employed. We hold that commission percentage from AE transactions should be benchmarked on basis of commission rate from non-AE transactions under 'Indenting business' and addition on account of transfer pricing adjustment, if any, should be made in consonance with view taken by tribunal in immediately two preceding years. 6. ld. AR tried in vain to impress upon us that view taken by tribunal in preceding two years should not be followed and application of TNMM as employed by assessee should be accepted leading to no addition on account of TP adjustment. To buttress his contention for application of TNMM, he placed on record copy of order passed by Delhi bench of tribunal in Marubeni India P. Ltd. VS. DCIT (ITA no. 5397/Del/2912). This contention was countered by ld. DR by stating that TPO has applied internal RPM as assessee's TNMM was faulted with due to reasons ITA 83/2015 Page 4 given in order. We are not convinced with contention of ld. AR urging us to observe departure from earlier view taken by tribunal for obvious reason that when Tribunal in identical facts has taken particular view in assessee's own cases for immediately two preceding assessment years, we cannot tinker with same. We, therefore, hold that commission percentage on basis of FOB value of goods from transactions with non-AEs be computed and taken as arm's length rate of commission for purposes of transactions with AEs under 'Indenting business' segment. In this regard, ld. AR submitted that percentage of commission from AE transactions for instant year stood at 1.83% as against 2.86% from non-AEs. We find that rates of commission now sought to be placed before us, are not emanating from orders of authorities below. Under such circumstances, we set aside impugned order and remit matter to file of AO/TPO with direction to find out rate of commission income on FOB value of transactions with non-AEs under 'Indenting business' segment and then apply same rate to FOB value of goods in AE transactions under 'Indenting business' segment, as was directed in earlier years. Needless to say, assessee will be allowed reasonable opportunity of being heard in such proceedings. 4. We have heard counsel for Revenue, who urges that Berry ratio, which was suggested by assessee is alien to Indian law. She also urged that application of TNMM method is matter of debate since for previous year question of law has been framed and is pending consideration by this Court. 5. This Court notices at outset that issue which it is concerned with is AY i.e. 2009-2010 involves extremely restricted one. Having clubbed transactions for purpose of ALP determination whether TPO/AO could have refused to follow logic and consider comparable ITA 83/2015 Page 5 profits from non-AE transactions in both segments is in issue. All that ITAT did, in our view, was to cure this defect or anomaly and direct AO to consider margin of commission in each segment while determining ALP. We at same time clarify that AO who is now directed to carry out exercise shall do so by applying principles in Rule 10(B) of Income Tax Rules. 6. appeal is disposed of but in terms of above directions. It is clarified that this Court is not in any way disturbing Tribunal s direction to determine rate of commission in either segment. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) MAY 05, 2015 vld ITA 83/2015 Page 6 Commissioner of Income-tax-8 v. Sumitomo Corporation India Pvt Ltd
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