Sumitomo Corporation India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5850/DEL/2012

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4648 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 29-06-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 20-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: H K CHAUDHARY
• Keywords: Related party transaction; Transfer pricing; International transaction; Question of law; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646/DEL/2014 &1321/DEL/2016 ASSESSMENT YEARS: 2007-08 TO 2011-12 SUMITOMO CORPORATION INDIA PVT. LTD., 4 TH FLOOR, DLF CENTRE, SANSAD MARG, NEW DELHI. V. ACIT, CIRCLE-24(2), NEW DELHI. TAN/PAN: AABCS 1887M (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI HIMANSHU SINHA, ADV. RESPONDENT BY: SHRI H.K. CHAUDHARY, CIT-DR. DATE OF HEARING: 02 08 2018 DATE OF PRONOUNCEMENT: 22 10 2018 O R D E R PER AMIT SHUKLA, J.M.: IN ALL THE AFORESAID APPEALS, THE COMMON ISSUE INVOL VED RELATES TO DETERMINATION OF ARMS LENGTH PRICE OF THE INDENTING TRANSACTION OF THE ASSESSEE WITH ITS AE FOR VARIOUS A SSESSMENT YEARS IMPUGNED BEFORE US, ARISING OUT OF REMAND ORDE R PASSED BY THE HONBLE HIGH COURT. SINCE COMMON ISSUE IS INVOLV ED ARISING OUT OF IDENTICAL SET OF FACTS PERMEATING IN ALL THESE YEA RS, THEREFORE, SAME WERE HEARD TOGETHER AND ARE BEING DISPOSED OF B Y WAY OF THIS CONSOLIDATED ORDER. BACKGROUND AND FACTS OF THE CASE 2. BEFORE DECIDING THE APPEALS ON MERIT, IT WOULD BE RELEVANT TO DISCUSS THE BRIEF FACTS AND BACKGROUND OF THE CASE, BECAUSE APPEALS FOR THE ASSESSMENT YEARS 2007-08 TO 2010-11 H AVE BEEN I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 2 REMANDED BACK BY THE HON'BLE DELHI HIGH COURT VIDE ITS CONSOLIDATED ORDER AND JUDGMENT DATED 22.07.2016 PASSE D IN ITA NO.381/2013 & 382/2012, 702/2014 AND 738/2015, WITH CERTAIN DIRECTIONS. APPEAL FOR THE ASSESSMENT YEAR 2011-12 IS ARISING OUT OF FINAL ASSESSMENT ORDER DATED 31 ST DECEMBER, 2015 PASSED U/S.143(3) R.W.S. 144C(13) OF THE ACT IN PURSUANCE O F DRPS DIRECTION VIDE ORDER DATED 23.11.2015. THE ASSESSEE COMPANY, I.E., SUMITOMO CORPORATION INDIA PVT. LTD. IS A WHOLLY OWNED SUBSIDIARY OF SUMITOMO CORPORATION ASIA PTE LIMITED. SUMITOMO CORP ORATION JAPAN IS AN ULTIMATE HOLDING COMPANY OF THE GROUP. THE ASSESSEE COMPANY IN INDIA IS ENGAGED IN THE BUSINESS OF PROVI DING TRADE FACILITATION AND SUPPORT SERVICES AND SUCH SUPPORT SER VICES ARE PROVIDED ACROSS THE PRODUCTS AND SERVICE LINES BOTH TO ASSOCIATED ENTERPRISES AND UNRELATED PARTIES. THE BUSINESS TRANS ACTION OF THE ASSESSEE FALLS BROADLY INTO TWO CATEGORIES; FIRSTLY , INDENT/COMMISSION TRANSACTIONS WHEREIN THE ASSESSEE EARNED COMMISSIONER/FIXED SERVICE FEE; SECONDLY , THE TRADING TRANSACTIONS WHEREIN THE ASSESSEE PURCHASES AND SELLS GOODS AND EARNS TRADING PROFIT THE REON. 2.1. THE INDENT TRANSACTION COMPRISES OF THE PREDOM INANT PART OF THE ASSESSEE BUSINESS IN ALL THE YEARS AS COMPARED TO THE TRADING SEGMENTS WHICH IS QUITE SMALL WHEREIN IMPORTS AND EXPORTS OF GOODS INTO/FROM INDIA ARE AFFECTED ON PR INCIPAL TO PRINCIPAL BASIS. IN THE TRANSFER PRICING REPORT, THE F UNCTIONAL PROFILE REGARDING INDENT TRANSACTION HAVE BEEN STATED THAT ASSES SEE ACTS AS A MERE FACILITATOR AND SERVICE PROVIDER FOR WHICH IT EARN COMMISSION AND THEREFORE, SUCH TRANSACTION INVOLVED RELATIVELY VERY LOW FUNCTIONAL ACTIVITY WITH MINIMAL RISK. ONLY RISK IS ON THESE I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 3 TRANSACTION IS VOLUME RISK OR CUSTOMER RISK, I.E., THE TURNOVER OF THIS BUSINESS MAY NOT BE SUFFICIENT TO COVER THE COSTS. THE FUNCTIONS OF INDENT TRANSACTIONS ARE MAINLY MAINTAININ G CLOSE CONTACTS WITH SUPPLIERS TO ENSURE TIMELY DELIVERY OF ME RCHANDISE TO THE CUSTOMERS, IN THE QUANTITY AND GRADE DESIRED FOR EX PORTS. MAINTAINING CLOSE CONTACTS WITH AES CUSTOMERS IN INDIA TO UNDERSTAND THEIR NEEDS FOR IMPORTS; COMMUNICATING WITH AE OR ITS AFFILIATES; GATHERING INFORMATION ON DEMAND AND SUPPLY CONDITIONS OF THESE COMMODITIES IN INDIA; AND LIAISING WITH GOVE RNMENT OR INDUSTRY GROUPS. THE INCOME ARISING FROM INDENT TRANS ACTION IS IN THE NATURE OF SERVICE/COMMISSION INCOME. THE FUNCTION S HIGHLIGHTED IN THE TRANSFER PRICING STUDY REPORT WERE AS UNDER: SUMITOMO INDIA IS ORGANIZED UNDER COMMODITY WISE D EPARTMENTS, WHILE PROVIDING MARKETING SUPPORT SERVICES TO SUMITOMO GR OUP. SUMITOMO INDIA PROVIDES MARKETING SUPPORT TRANSACTI ONS, PERTAINING TO THE TRADING OF GOODS BY SUMITOMO GROUP. THE COMMISSIONS EARNED BY SUMITOMO INDIA WILL BE FROM: IMPORTS INTO INDIA EXPORTS FROM INDIA SUMITOMO INDIA WITH OFFICES IN DELHI, MUMBAI AND CH ENNAI, PROVIDES MARKETING SUPPORT SERVICES TO ITS AES. SUMITOMO IND IA HANDLED DIFFERENT PRODUCTS AND COMMODITIES DURING THE YEAR 2006-07 TH ROUGH ITS SEVEN OPERATING DIVISIONS WITH ELEVEN DEPARTMENTS. SUMITOMO INDIA MERELY PROVIDES MARKETING SUPPORT SE RVICES UNDER INDENT SALES. THESE TRANSACTIONS INVOLVE LOW-LEVEL ACTIVIT Y AND RELATIVELY LIMITED RISKS FOR SUMITOMO INDIA IN COMPARISON TO TYPICAL I NDIAN EXPORT/ IMPORT COMPANIES. SUMITOMO INDIA PROVIDES SERVICES IN RESPECT OF BOTH EXPORTING AND IMPORTING OF GOODS FROM AND TO INDIA. REGARDLESS OF THE TYPE OF TRANSACTION SUMITOMO INDIA ACTS AS AN INTERMEDIARY IN PURSUING BUSINESS OPPORTUNITIES FOR ITS CUSTOMERS, INCLUDING LOCAL PURCHASES, SUPPL IERS AND RELATED GROUP COMPANIES. I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 4 UNDER THE IMPORTS TO INDIA SUMITOMO GROUP PROCURES GOODS FROM THE JAPANESE AND/OR OTHER COUNTRIES [COLLECTIVELY 'OVER SEAS SUPPLIER') SUPPLIER AND EXPORTS THE SAME TO THE END CUSTOMER IN INDIA. THE CONTRACT IS BETWEEN SUMITOMO GROUP AND THE OVERSEAS SUPPLIERS FOR THE S UPPLIES AND WITH THE INDIAN CUSTOMER FOR THE SALE. SINCE THE CUSTOMERS A RE LOCATED IN INDIA, SUMITOMO INDIA MAINTAINS THE RELATIONSHIPS WITH THE CUSTOMERS AND BASED ON THE REQUIREMENTS OF THE LOCAL MARKET INFORMS TO GROUP COMPANIES. IN MOST OF CASES THE CUSTOMERS BEING TRADITIONAL, T HE MARKETING EFFORTS IN IDENTIFYING THE CUSTOMERS ARE ALSO MINIMAL. THE CUS TOMERS AND SUMITOMO INDIA GETS IN TOUCH WITH EACH OTHER FOR THE REQUIRE MENTS AND ACCORDINGLY SUMITOMO INDIA INFORMS ITS GROUP COMPANIES. THE NEG OTIATIONS WITH THE SUPPLIERS AND CUSTOMERS ARE UNDERTAKEN BY SUMITOMO GROUP. SUMITOMO INDIA ACTS AS CONDUIT FOR PASSING THE INFORMATION B ETWEEN SUMITOMO GROUP AND THE CUSTOMERS. UNDER THE EXPORTS FROM INDIA THE CUSTOMERS ARE LOCA TED OVERSEAS AND THE SUPPLIERS ARE LOCATED IN INDIA. SUMITOMO INDIA MAIN TAINS THE RELATIONSHIPS WITH THE SUPPLIER ON REGULAR BASIS. SUMITOMO GROUP HELPS IN IDENTIFYING THE VARIOUS CUSTOMERS AND ACCORDINGLY INFORMS SUMITOMO INDIA FOR THE REQUIREMENTS. SUMITOMO INDIA HELPS IN CONNECTING TH E SUPPLIER WITH SUMITOMO GROUP. IN GENERAL FOR THE CURRENT YEAR, SUMITOMO INDIA'S T RADING TRANSACTIONS CAN BE CLASSIFIED INTO TWO GROUPS - INDENT SALES AND PR OPER SALES. INDENT SALES CAN ALSO BE CLASSIFIED INTO IMPORT FROM OTHER COUNT RY INTO INDIA, EXPORT FROM INDIA INTO OTHER COUNTRY. ON ITS INDENT TRADING TRA NSACTIONS, SUMITOMO INDIA'S ROLE IS THAT OF A MERE SERVICE PROVIDER. TH EREFORE, SUMITOMO INDIA NEVER TAKES TITLE OR POSSESSION OF THE MERCHANDISE AT ANY MOMENT AND BEARS NO INVENTORY RISK. ACCORDINGLY, SUMITOMO INDI A PROVIDES MARKETING SUPPORT SERVICES FOR FACILITATING BOTH EXPORTS AND IMPORTS IN INDIA THROUGH SUMITOMO GROUP AND OTHER GROUP COMPANIES. THE SUPPO RT SERVICES INCLUDE GATHERING INFORMATION ABOUT CUSTOMER REQUIREMENTS, PRODUCTS, LOCAL PRICES, MARKET TREND, ETC. SUMITOMO INDIA HAS ENTERED INTO VARIOUS ARRANGEMENT S WITH DIFFERENT SUBSIDIARIES OF SUMITOMO GROUP AND THE MAIN SERVICE S AMONG OTHERS INCLUDE THE FOLLOWING: NETWORKING WITH BUYERS AND SUPPLIERS OF STEEL I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 5 SUPPORT IN AFTER SALES SERVICES, BUSINESS PROMOTIO N COLLECTION OF MARKET INFORMATION PROVIDE KNOWLEDGE & EXPERIENCE COORDINATION WITH CUSTOMERS COLLECTION OF ACCOUNT RECEIVABLES FROM CLIENT ON B EHALF OF AE ADMINISTRATIVE SERVICES OTHER SUPPORT SERVICES SUMITOMO INDIA PROVIDES MARKETING SUPPORT SERVICES TO SUMITOMO GROUP. SUMITOMO INDIA HANDLES DIFFERENT PRODUCTS AND COMMO DITIES THROUGH ITS DIFFERENT COMMODITY DEPARTMENTS. SUMITOMO INDIA'S MAIN FUNCTION IN INDENT SALES BUSI NESS IS TO MAINTAIN CLOSE CONTACTS WITH THE SUPPLIERS TO ENSURE TIMELY DELIVERY OF MERCHANDISE TO THE CUSTOMERS, IN THE QUANTITY AND GRADE DESIRED (FOR EXPORTS); MAINTAINING CLOSE CONTACTS WITH SUMITOMO GROUP'S CU STOMERS IN INDIA TO UNDERSTAND THEIR NEEDS (FOR IMPORTS); COMMUNICATING WITH SUMITOMO GROUP OR ITS AFFILIATES; GATHERING INFORMATION ON DEMAND AND SUPPLY CONDITIONS OF THESE COMMODITIES IN INDIA; AND LIAISING WITH GOVER NMENT OR INDUSTRY GROUPS. 2.2. REGARDING ASSETS DEPLOYED, IT WAS STATED TH AT THE BUSINESS OF THE ASSESSEE DOES NOT REQUIRE MUCH ASSE TS AND DOES NOT HAVE SIGNIFICANT TANGIBLE ASSET AND ONLY I NTANGIBLE ASSET IS IN THE FORM OF SOFTWARE USE FOR ITS OPERAT ION. EVEN UNDER THE RISK PROFILE ALSO IT WAS STATED THAT IT B EARS VERY MINIMUM AND IS A LOW RISK PROVIDER ENGAGED IN TRADE FACILITATION. 3. IN THE TRANSFER PRICING APPROACH FOLLOWED B Y THE ASSESSEE TO DETERMINE THE ALP OF THE FUNCTIONAL TRA NSACTION, THE ASSESSEE AFTER CHARACTERIZING ITSELF AS A LOW R ISK SERVICE PROVIDER HAS ADOPTED TNMM AS THE MOST APPROPRIATE M ETHOD WITH BERRY RATIO AS PLI TO COMPUTE THE ALP. THE BERRY RATIO I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 6 WAS TAKEN AS GROSS PROFIT/OPERATING EXPENDITURE. CH OICE OF TNMM OVER THE OTHER METHODS INCLUDING CUP WAS ALSO ANALYZED IN DETAIL IN THE TRANSFER PRICING REPORT F OR ALL THE YEARS. FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12 , THOUGH THE PLI WAS TAKEN AS BERRY RATIO HOWEVER, IT WAS ADOPTED BY TAKING PROFIT/VALUE ADDED EXPENDITURE WH ICH IN FACT WAS A MEASURE THE RETURN ON OPERATING EXPENDIT URE. ACCORDINGLY, SET OF INDEPENDENT AND UNCONTROLLED EN TITIES WERE SELECTED FROM DATA BASE AND THE AVERAGE PROFIT MARGIN OF THESE COMPANIES WERE COMPARED WITH THAT OF THE ASSE SSEE AND SINCE THE ASSESSEE PROFIT MARGIN WAS FOUND TO BE BE TTER AS COMPARED TO THE COMPARABLES, HENCE IT WAS REPORTED THAT THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSE E WITH ITS AE WERE ARMS LENGTH. 4. THE TRANSFER PRICING OFFICER REJECTED THE AP PROACH ADOPTED BY THE ASSESSEE AND WITHOUT SPECIFICALLY RE JECTING THE TNMM, MAINLY DISAPPROVED THE PLI ON THE GROUND THAT IT DOES NOT TAKE INTO ACCOUNT OF THE FOB VALUE GOODS TRANSA CTED TO THE ASSESSEE AND DID NOT TAKE INTO ACCOUNT THE INTA NGIBLE CREATED BY THE ASSESSEE. HE HELD THAT ASSESSEE IS C REATING VALUABLE AND HUMAN SUPPLY CHAIN TANGIBLE WHICH IS BENEFITTING THE AES AND THE INDEPENDENT TRANSACTION WERE AKIN TO TRADING TRANSACTION, AND THEREFORE, GROSS P ROFIT MARGIN RATE EARNED WITH UNRELATED PARTIES, I.E., NON AE SE GMENT SHOULD BE TAKEN AS ALP OF THE COMMISSIONED TRANSACT ION. HE WAS OF THE OPINION THAT ASSESSEE-COMPANY HAD BEEN A LLOWED TO EARN A MEAGER COMMISSION INCOME DESPITE HAVING I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 7 UNDERTAKEN SIGNIFICANT RISK AND HAVING CREATED INTA NGIBLES. HE FURTHER OBSERVED THAT HUGE LOCATION SAVINGS HAVE BEEN GENERATED TO THE ADVANTAGE OF THE AES FOR WHICH THE ASSESSEE HAS NOT BEEN COMPENSATED. THE TPO, IN HIS CONCLUSIO N, HAS RE-CHARACTERIZED THE INDENT TRANSACTIONS AS TRADING TRANSACTIONS AND HELD THAT FOR THE GROSS PROFIT MAR GIN EARNED BY THE ASSESSEE FROM THE UNRELATED PARTIES SHOULD B E THE BENCH MARK ARMS LENGTH COMMISSION RATE WHICH ASSES SEE EARNED AT THE FOB VALUE OF GOODS TRANSACTED THROUGH IT. FOR THE ASSESSMENT YEAR 2011-12, THE TPO INSTEAD OF USI NG THE GP MARGIN OF THE NON AE TRADING SEGMENT OF THE ASSE SSEE HAS IDENTIFIED TRADING COMPANIES AS COMPARABLES AND ADO PTED THEIR MEAN GP MARGIN AS THE BASIS OF ARMS LENGTH P RICE. THE REASON BEING IN THIS YEAR, THE GP MARGIN IN NON-AE SEGMENT WAS LOWER THAN THE PROFIT MARGIN EARNED BY THE AE I NDENT SEGMENT. THIS LED TO THE ADJUSTMENTS OF THE TRANSFER PRICING OF THE COMMISSION AND SERVICE FEE RECEIVED BY THE ASSE SSEE FROM ITS AES LEADING TO HUGE ADDITIONS OF VARYING AMOUNT IN ALL THE FIVE YEARS. IN SO FAR AS TRADING SEGMENT IS CONCERN , THE SAME WAS ACCEPTED BY THE TPO TO ITS ARMS LENGTH. 5. THE DRP FOR THE ASSESSMENT YEARS 2007-08 TO 2010-11 HAS UPHELD THE APPROACH OF THE TPO WITHOUT ANY VARI ATION. HOWEVER, IN THE ASSESSMENT YEAR 2011-12, THE DRP HA S DISAGREED WITH TPOS APPROACH OF DETERMINING THE AL P OF THE INDENT TRANSACTIONS BY RE-CHARACTERIZING THEM AS TR ADING TRANSACTIONS. IT WAS HELD THAT THE METHOD MANDATED BY THE TRIBUNAL IN THE ASSESSMENT YEARS 2007-08 TO 2010-11 WAS I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 8 THE MOST SUITABLE METHOD AND DIRECTED THE TPO TO AP PLY THE SAME AND BENCHMARK THE ALP OF THE INDENT TRANSACTIO N. 6. IN THE ASSESSMENT YEARS 2007-08 TO 2010-11, THE MATTER HAD REACHED UP TO THE TRIBUNAL, WHEREIN THE TRIBUNAL HAS REJECTED THE APPROACH ADOPTED BY THE TPO AND HE LD THAT INDENT AND TRADING TRANSACTIONS CANNOT BE TREATED A S COMPARABLE ON ACCOUNT OF DISSIMILAR FUNCTIONS, ASSE TS AND RISK INVOLVED IN THE TWO TYPES OF TRANSACTIONS AND THEREFORE, SUCH A RE-CHARACTERIZATION WAS NOT PERMISSIBLE UNDE R LAW. HOWEVER, THE TRIBUNAL HAS ADOPTED ALTOGETHER A DIFF ERENT APPROACH TO DETERMINE THE ALP OF THE INDIAN TRANSAC TION WITH THE AES. IT WAS HELD THAT AVERAGE COMMISSION RATE O F NON AE SEGMENT SHOULD BE TAKEN AS THE ALP FOR THE COMMISSI ONED TRANSACTION OF THE AES SEGMENT. IN OTHER WORDS THE AE AND NON AE TRANSACTION WERE DIRECTED TO BE BENCHMARKED TO DETERMINE THE ALP OF INDENT TRANSACTION. THOUGH EXP LICITLY IT WAS NOT STATED THAT IT IS A CUP METHOD, HOWEVER IN FACT CUP METHOD WAS FOLLOWED TO DETERMINE THE SAID TRANSACTI ONS. ONE IMPORTANT FACT TO BE NOTED HERE IS THAT, IN THE ASS ESSMENT YEAR 2010-11, AFTER GIVING EFFECT TO THE ITAT ORDER , THE TRANSACTION ENTERED BY THE ASSESSEE WITH ITS AE WAS FOUND TO BE AT ARMS LENGTH AND NO ADDITION/ADJUSTMENT TO TH E ALP HAS BEEN MADE, FOR THE REASON THAT THE AVERAGE COMMISSI ON RATE EARNED BY THE ASSESSEE IN RESPECT OF INDIAN TRANSAC TION WITH AE WAS HIGHER THAN THE COMMISSION RATE EARNED FROM THE NON AES AND CONSEQUENTLY THE ADJUSTMENT TO THE ALP WAS FOUND TO NIL. I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 9 7. THE ASSESSEE AGGRIEVED BY THE ORDER OF THE TRIB UNAL RIGHT FROM THE ASSESSMENT YEARS 2007-08 TO 2010-11 WENT IN APPEAL U/S.260A BEFORE THE HON'BLE HIGH COURT. THE HONBLE HIGH COURT VIDE ITS CONSOLIDATED ORDER AND JUDGMENT DATED 22.07.2016 HAD THREADBARE ANALYZED AND DISCUSS THIS ISSUE. THE SUBSTANTIAL QUESTION OF LAW FORMULATED BY THE H ON'BLE HIGH COURT FOR ITS ADJUDICATION READ AS UNDER: (1) WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS RIGHT IN APPLYING AND COMPUTING ARMS LENGTH PRICE WITH ASSOCIATED ENTERPR ISE ON INDENTING TRANSACTIONS BY APPLYING AVERAGE RATE OF COMMISSION WITH NON-ASSOCIATED ENTERPRISE IN SPITE OF DIFFERENCE IN THE TURNOVER A ND THE PURPORTED SEGMENTS AND NO SUCH CORRECTION/COMPUTATION ON THIS ACCOUNT WAS MADE BY THE TRANSFER PRICING OFFICER? (2) WHETHER THE INCOME TAX APPELLATE TRIBUNAL HAS D ISREGARDED THE ASSESSEES CLAIM THAT THEY HAD FOLLOWED TRANSACTION AL NET MARGIN METHOD? (THIS QUESTION WILL INCLUDE THE SUBMISSION OF THE APPELLANT THAT THE TRANSFER PRICING OFFICERS ORDER DOES NOT ADOPT ANY SPECIFIED METHOD). 7.1 AFTER DISCUSSING THE ENTIRE FACTS, ARGUMENTS P LACED BY THE PARTIES AND CONSIDERING THE RELEVANT PROVISIONS OF THE LAW, THEIR LORDSHIPS OPINED AND HELD AS UNDER: 31. THE ASSESSEE HAD, FOR REASONS INDICATED IN ITS TRANSFER PRICING REPORT, ADOPTED TNMM AS THE MOST APPROPRIATE METHOD WITH BERRY RATIO AS THE PLI. ALTHOUGH, THE TPO FOUND FAULT IN THE USE OF BERRY RATIO - ACCORDING TO HIM, THE SAME WAS NOT PERMISSIBLE UN DER RULE 10B(1)(E) OF THE RULES - HE DID NOT PROCEED TO SELECT THE MOS T APPROPRIATE METHOD FOR COMPUTATION OF ALP. THIS, IN OUR VIEW, WOULD BE ESSENTIAL AS THE RELIABILITY OF THE DETERMINATION OF THE ALP IS IN T URN DEPENDENT ON THE EFFECTIVENESS OF THE METHOD IN RELATION TO THE CONT ROLLED TRANSACTION BEING TESTED. IN THE PRESENT CASE, THE DISPUTE ESSE NTIALLY RELATES TO THE I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 10 COMMISSION EARNED BY THE ASSESSEE IN RESPECT OF TRA NSACTION WITH ITS AES. 32. WE ARE INCLINED TO ACCEPT MR AGARWAL'S CONTENTI ON THAT ALTHOUGH THE TPO HAD DISCARDED THE METHOD ADOPTED BY THE ASS ESSEE, IT HAD NOT FOLLOWED ANY PARTICULAR METHOD IN MAKING THE AL P ADJUSTMENT. IT APPEARS THAT THE TPO HAS ADOPTED A HYBRID METHOD. H E IMPUTED THE CHARACTER OF TRADING TRANSACTIONS TO THE INDENTING TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES. HAVING DONE SO, HE COMPARED THE PROFIT MARGIN REALIZED BY THE AE FROM SUCH TRANSACT IONS WITH PROFIT MARGIN REALIZED BY THE AE FROM A COMPARABLE UNCONTR OLLED TRANSACTION. THE SAID APPROACH WAS REJECTED BY THE TRIBUNAL - AND, IN OUR VIEW, RIGHTLY SO - AS IT WAS NOT PERMISSIBLE FO R TPO TO RE- CHARACTERIZE THE TESTED TRANSACTION. 33. WE FIND NO INFIRMITY WITH THE TRIBUNAL'S FINDIN G THAT INDENTING TRANSACTIONS REPORTED BY THE ASSESSEE WERE PLAINLY IN THE NATURE OF FACILITATING TRADE WHERE THE ASSESSEE WAS REQUIRED TO DO NOTHING MORE THAN TO FOLLOW UP THE CUSTOMERS FOR FACILITATION OF THE TRANSACTION. THE ASSESSEE WAS NOT REQUIRED TO RAISE ANY INVOICE FOR SALE AND PURCHASE AND ITS FINANCIAL COMMITMENT AND RISK WERE INCONSID ERABLE. 34. HOWEVER, WE FIND THAT THE TRIBUNAL ERRED IN PRO CEEDING TO DETERMINE THE ALP ON THE BASIS OF THE RATE OF COMMI SSION REPORTED BY THE ASSESSEE IN RESPECT OF INDENTING TRANSACTIONS W ITH NON-AES, WITHOUT FURTHER EXAMINATION AS TO THE SIMILARITY BE TWEEN THE TWO TRANSACTIONS. THE TRIBUNAL EFFECTIVELY USED THE CUP METHOD FOR IMPUTING THE ALP OF ASSESSEE'S INDENTING TRANSACTIO N WITH AES. THIS MAY WELL BE THE MOST APPROPRIATE METHOD TO BE USED FOR DETERMINING THE ALP. HOWEVER, IF THE TRIBUNAL THOUGHT THAT THIS WAS THE CASE, IT WAS NECESSARY FOR THE TRIBUNAL TO CONDUCT A FURTHER IN-DEPTH INQUIRY AS TO THE RELEVANT UNCONTROLLED TRANSACTIONS. IT IS WELL SETTLED THAT IN APPLYING THE CUP METHOD, A VERY HIGH DEGREE OF SIMI LARITY BETWEEN THE I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 11 CONTROLLED AND UNCONTROLLED TRANSACTIONS IS REQUIRE D. IT IS THE ASSESSEE'S CASE THAT VOLUME OF SUCH TRANSACTIONS IN THE NON-AES SEGMENT WAS INSIGNIFICANT AS COMPARED TO THE TRANSA CTIONS IN THE AE SEGMENT AGAINST SUCH TRANSACTIONS WERE ONLY IN A FE W PRODUCT CATEGORIES. IF THE AVERAGE RATE OF COMMISSION ON SU CH TRANSACTIONS WAS TO BE APPLIED TO THE FOB VALUE OF THE GOODS INV OLVED IN THE INDENTING TRANSACTIONS WITH AES, THE TRIBUNAL WOULD HAVE TO SATISFY ITSELF THAT THERE IS NO SIGNIFICANT VARIATION IN TH E RATE OF COMMISSION BETWEEN DIFFERENT PRODUCTS. THIS WOULD CONFIRM THAT THE DISSIMILARITY BETWEEN THE PRODUCT CATEGORIES DID NOT HAVE A VITAL BEARING ON THE RATE OF COMMISSION. THE TRIBUNAL DID NOT CONDUCT AN Y SUCH ENQUIRY AND IT IS MATERIAL TO NOTE THAT THE TPO ALSO DID NO T CONDUCT ANY SUCH EXERCISE. IN OUR VIEW, THIS METHODOLOGY WAS USED BY THE TRIBUNAL AT A STAGE AT WHICH - GIVEN THE EXTENT OF THE EXAMINATIO N REQUIRED - IT MAY NOT BE FEASIBLE. 7.2. IN SO FAR AS THE USE OF BERRY RATIO OF PL I IS CONCERNED, THEIR LORDSHIPS HELD THAT THE SAME IS PERMISSIBLE U NDER THE RULES AND WHERE OPERATING EXPENSES IS CONSIDERED AS A RELEVANT BASE THEN THERE WOULD BE NO DIFFICULTY IN USING BERRY RATIO AS PLI IN TERMS OF RULE 10B(1)(E) OF THE RUL ES. FROM THE AFORESAID OBSERVATIONS OF THE HON'BLE HIGH COURT, T HE INFIRMITIES HIGHLIGHTED IN THE TRIBUNALS ORDER CAN BE SUMMARIZED AS UNDER: A) THE TRIBUNAL ERRED IN PROCEEDING TO DETERMINE TH E ALP ON THE BASIS OF THE AVERAGE PERCENTAGE OF COMMISSIO N REPORTED BY THE ASSESSEE IN RESPECT OF INDENTING TRANSACTIONS WITH NON-AES, WITHOUT FURTHER EXAMINAT ION AS TO THE SIMILARITY BETWEEN THE TWO TRANSACTIONS. (B) THE TRIBUNAL EFFECTIVELY USED THE CUP METHOD FO R I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 12 COMPUTING THE ALP OF ASSESSEES INDENTING TRANSACTI ON WITH AES. (C) THIS MAY WELL BE THE MOST APPROPRIATE METHOD TO BE USED FOR DETERMINING THE ALP. HOWEVER, IF THE TRIBUNAL THOUGHT THAT THIS WAS THE CASE, THEN IT WAS NECESSA RY FOR THE TRIBUNAL TO CONDUCT A FURTHER IN-DEPTH INQUIRY AS TO THE RELEVANT UNCONTROLLED TRANSACTIONS. (D) IT IS THE ASSESSEES CASE THAT VOLUME OF SUCH TRANSACTIONS IN THE NON-AES SEGMENT WAS INSIGNIFICA NT AS COMPARED TO THE TRANSACTIONS IN THE AE SEGMENT, BEC AUSE SUCH TRANSACTIONS WERE ONLY IN A FEW PRODUCT CATEGO RIES. (E) IF THE AVERAGE RATE OF COMMISSION ON SUCH TRANS ACTIONS WAS TO BE APPLIED TO THE FOB VALUE OF THE GOODS INV OLVED IN THE INDENTING TRANSACTIONS WITH AES, THE TRIBUNAL W OULD HAVE TO SATISFY ITSELF THAT THERE IS NO SIGNIFICANT VARIATION IN THE RATE OF COMMISSION BETWEEN DIFFERENT PRODUCTS. THIS WOULD CONFIRM THAT THE DISSIMILARITY BETWEEN THE PR ODUCT CATEGORIES DID NOT HAVE A VITAL BEARING ON THE RATE OF COMMISSION. (F) THE TRIBUNAL DID NOT CONDUCT ANY SUCH ENQUIRY A ND IT IS MATERIAL TO NOTE THAT THE TPO ALSO DID NOT CONDUCT ANY SUCH EXERCISE. 8. THUS, IN THE WAKE OF AFORESAID DIRECTION OF THE HON'BLE HIGH COURT, THIS TRIBUNAL IS REQUIRED TO EXAMINE TH E SIMILARITY OF THE INDENT AE TRANSACTIONS FOR EACH OF THE ASSES SMENT YEAR AND TO SEE WHETHER THE HIGHER STANDARD OF COMPARABI LITY REQUIRED UNDER THE CUP METHOD ARE MET OR NOT. I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 13 ARGUMENTS BY THE PARTIES AND OUR DECISION 9. WE HAVE HEARD BOTH THE PARTIES AND ALSO PERUSED THE RELEVANT FINDINGS GIVEN IN THE JUDGMENT OF THE HON' BLE HIGH COURT AND THE ORDERS OF THE AUTHORITIES BELOW. NOW OUR ENDEAVOR WOULD BE TO EXAMINE THE FACTS AND MATERIAL ON RECORD BASED ON THE GUIDELINES AND THE DIRECTIONS G IVEN BY THE HON'BLE HIGH COURT, AS TO; FIRSTLY , UNDER THE FACTS AND CIRCUMSTANCES WHETHER THE CUP CAN BE APPLIED BY TAKING THE AVERAGE COMMISSION RATE OF NON AE SEGMENT TO ADOPT AT ARMS LENGTH BEN CH MARK FOR AE INDENT SEGMENT; SECONDLY , IF AFTER CONSIDERING THE HIGH STANDARD OF COMPARABILITY ANALYSIS REQUIRED UNDER THE CUP METHO D, GETS FAILED, THEN WHETHER TNMM CAN BE CONSIDERED TO BE THE MOST APPROPRIATE METHOD; THIRDLY, IF TNMM IS CONSIDERED AS MAM, THEN WHETHER BERRY RATIO CAN BE TAKEN AS PLI AS THE HON'BLE HI GH COURT HAS OTHERWISE HELD THAT BERRY RATIO IS A VA LID PLI WHICH IS PERMISSIBLE UNDER THE PROVISIONS OF THE RU LES CONTAINED IN SECTION 10B(1)(E). 10. THE ASSESSEE BEFORE US HAD FILED VARIOUS CHART S GIVING DETAILS OF THE PRODUCTS AND TRANSACTION UNDERTAKEN WITH THE AE AND NON AE TO DEMONSTRATE THAT THE NATURE OF TRANSACTIONS WITH AE AND NON AE IN INDENT SEGMENTS ARE COMPLETELY DISSIMILAR AND INCOMPARABLE. FOR EXAMPLE , IN THE ASSESSMENT YEAR 2007-08, LD. SR. COUNSEL, SHRI C.S. AGRAWAL I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 14 POINTED OUT FROM THE DETAILS FILED BEFORE US THAT T HE ASSESSEE HAS DEALT IN TEN DIFFERENT PRODUCT CATEGORIES, COMP RISING OF AUTOMOTIVE, CHEMICALS, ELECTRONICS, FOOD AND FERTIL IZER, MINERALS, POWER, STEEL, TELECOMMUNICATION, TEXTILES AND TRANSPORT. IN EACH OF THESE PRODUCT CATEGORIES, THE RE WERE NUMEROUS PRODUCTS THAT HAVE BEEN TRANSACTED. FOR IN STANCE, UNDER THE PRODUCT CATEGORY, AUTOMOTIVE, THE MAJOR PRODUCTS TRANSACTED WERE AUTOMOBILE, EQUIPMENT, INDUSTRIAL M ACHINERY AND SPARE PARTS, ETC. ALL THESE PRODUCTS WERE TRANS ACTED ONLY IN THE AE INDENT SEGMENT AND NOT IN NON-AE SEGMENT, I.E., THERE WERE NO UNRELATED PARTY TRANSACTIONS IN THESE PRODUCTS. SIMILARLY FROM THE DETAILS PERTAINING TO THE CHEMI CAL PRODUCT CATEGORY, IT WAS SHOWN BEFORE US THAT THE PRODUCTS DEALT WITH THE AE INDENT SEGMENT WERE COMPLETELY DIFFERENT FRO M THE PRODUCTS TRANSACTED IN THE NON AE SEGMENT. FOR INST ANCE, IN AE SEGMENT, ASSESSEE HAS TRANSACTED THE ITEMS LIKE, POTASSIUM MANUFACTURING PRODUCTS, POLYPROPY, RESIN, ACRYLIC RESIN, AROMATIC HYDROCARBON, PESTICIDES, THERMOPLAS TICS, ADHESIVE PAINTS, DYESTUFF AND PHARMACEUTICAL INTERM EDIATES. IN THE NON AE SEGMENT, THE PRODUCTS TRANSACTED WERE INORGANIC, INDUSTRY CHEMICALS, DIMETHYL TEREPHALATE , ADHESIVE AND PAINTS. WHILE MOST OF THE PRODUCTS DEALT WERE D IFFERENT BARRING TWO PRODUCTS, VIZ., THE PHARMACEUTICAL INTE RMEDIATES AND ADHESIVE AND PAINTS. DESPITE THIS SIMILARITY OF TWO PRODUCTS, IT WAS POINTED OUT BY HIM THAT THE UNRELA TED PARTIES WHO HAD TRANSACTED WITH THE ASSESSEE IN PHARMACEUTI CAL INTERMEDIATES AND ADHESIVE AND PAINTS WERE IN INDIA AS I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 15 AGAINST THE AES WHO HAD DEALT WITH THE SAME PRODUCT LOCATED OVERSEAS. THUS, IT WAS SUBMITTED BY HIM THAT VOLUME , CONTRACTUAL TERMS AND DESCRIPTION OF PRODUCTS DIFFE RED WITHIN THE SAME PRODUCT DISTRIBUTION. OUR ATTENTION WAS AL SO DRAWN TO VARIOUS INVOICES ON SAMPLE BASIS TO SHOW THE DIF FERENCE IN VOLUME AND PRODUCTS. THE ENTIRE THRUST OF THE LD. S ENIOR COUNSEL WAS TO SHOW THAT THERE ARE HUGE PRODUCT AND GEOGRAPHIC DISSIMILARITIES BESIDES THE DIFFERENCE I N VOLUME, VALUE AND EXACT PRODUCT DESCRIPTION. MR. AGRAWAL SU BMITTED THAT THE HON'BLE HIGH COURT HAD CATEGORICALLY OBSER VED THAT AVERAGE COMMISSION RATE OF NON AE SEGMENT CAN ONLY BE ADOPTED AS ARMS LENGTH BENCH MARK FOR AE INDENT SE GMENT, ONLY WHEN IT CAN BE FOUND THAT VOLUME AND PRODUCT A RE SAME AND IF THERE ARE HUGE VARIATION IN COMMISSION RATE ACROSS VARIOUS PRODUCTS AND PRODUCT CATEGORIES IN THE NON AE SEGMENT, THEN SAME CANNOT BE COMPARED. THE ENTIRE E NDEAVOR OF MR. AGRAWAL AFTER REFERRING TO THE VARIOUS CHART S AND DETAILS FOR ALL THE YEARS HAS BEEN THAT, NOT ONLY THERE IS A WIDE VARIATION OF COMMISSION RATES IN THE NON AE SEGMENT BUT ALSO THE PRODUCT CATEGORY DEALT WITH THE ASSESSEE IN THE NON AE SEGMENT WERE FAR LESS IN NUMBER AS COMPARED TO THE INDENT SEGMENT IN EACH OF THE ASSESSMENT YEAR AND THEREFOR E, BY ANY STRETCH IT WOULD BE UNFAIR TO COMPARE THE COMMISSIO N RATE OF TRANSACTION OF SMALL VALUE/VOLUMES WITH THE COMMISS IONED RATES EARNED ON TRANSACTION WITH VALUE AND VOLUMES MULTIPLE TIMES HIGHER. THE AE INDENT TRANSACTIONS WERE INVAR IABLY MUCH BIGGER AND HIGHER. THE STRIKING DISSIMILARITIE S I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 16 HIGHLIGHTED BY THE LEARNED COUNSEL IN HIS WRITTEN S UBMISSIONS WITH REFERENCE TO THE MATERIAL PLACED BEFORE US WER E AS UNDER: A) DISSIMILARITY OF THE PRODUCTS, I.E., THE PRODUC TS INTENDED WITH NON AES ARE DISSIMILAR IN AS MUCH AS IN MANY OF THE PRODUCT SEGMENT, THERE ARE NO TRANSACTIONS WITH NON-AES, TH OUGH THERE ARE INDENT TRANSACTIONS WITH AES. WHERE THERE ARE T RANSACTIONS WITH NON-AES SUCH TRANSACTIONS ARE OF MUCH SMALLER VALUE AND VERY FEW IN NUMBERS AS COMPARED TO THE TRANSACTIONS WITH THE AES. B) THE TRANSACTIONS WHICH HAD BEEN ENTERED INTO WI TH AES AND NON-AES ARE NOT IDENTICALLY ENTERED AS THEY ARE ON DIFFERENT DATES AND OF DIFFERENT VOLUMES WHICH EFFECT THE MARGIN OF COMMISSION DEPENDING UPON THE DAY TO DAY TRANSACTION ENTERED B Y THE ASSESSEE WITH NON-AES. (C) THE COMMISSION RATES WITHIN NON-AE SEGMENT VAR Y A LOT FROM PRODUCT TO PRODUCT AND FROM DATE TO DATE. IN SOME C ASES EVEN IN THE SAME PRODUCT AND ON THE SAME DATE THE COMMISSIO N RATE VARIES (E.G. COMMISSION ON SALE OF DIMETHYL TEREPHA LATE ON 1-7- 2007 TO TWO DIFFERENT PARTIES HAS RESULTED IN COMMI SSION RATES OF 0.39% AND 0.43%). SOME OF THE PRODUCTS LIKE ATENOLO L HAS YIELDED COMMISSION RATE OF 7.14% AND ON THE OTHER HAND SEVE RAL PRODUCTS HAVE YIELDED COMMISSION RATES OF LESS THAN 1%. A SI MILAR VARIATION CAN BE SEEN IN THE AE SEGMENT. ACCORDINGL Y, IT IS QUITE CLEAR THAT AVERAGES CANNOT BE TAKEN FOR AN APPROPRI ATE COMPARISON. D) GEOGRAPHICAL LOCATIONS OF THE AES ARE DIFFERENT AS COMPARED WITH GEOGRAPHICAL LOCATIONS OF THE NON-AES. FROM THE PERUSAL OF THE DETAILS REGARDING THE CONTR OLLED AND I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 17 UNCONTROLLED INDENT TRANSACTIONS, IT CAN CLEARLY BE SEEN THAT THERE IS A COMPLETE DISSIMILARITY BETWEEN THEM ON ACCOUNT OF DIFFERENT PRODUCT LINES, FOR DIFFERENT PERIODS, DIFFERENT GEO GRAPHICAL LOCATIONS AND IN MANY OF THE PRODUCTS THERE ARE NO TRANSACTIONS AT ALL. 11. AFTER DRAWING OUR ATTENTION TO THE FACTUAL AS PECTS OF THE INDENT TRANSACTIONS BETWEEN THE AES AND NON AES S EGMENTS FOR ALL THE ASSESSMENT YEAR IMPUGNED BEFORE US, MR. AGRAWAL REFERRED TO THE OCED AND THE UN COMMENTARIES/GUIDEL INES ON TRANSFER PRICING TO SHOW HOW HIGHER DEGREE OF COMPARABILITY IS REQUIRED WHILE APPLYING CUP AT TRA NSACTIONAL LEVEL AND SUCH HIGHER DEGREE OF SIMILARITY BETWEEN THE TRANSACTIONS IN TERMS OF PRODUCTS, CONTRACTUAL TERM S, VOLUME, VALUE, MARKETS AND GEOGRAPHIC LOCATIONS ARE REQUIRE D TO BE SEEN. 12. ONE VERY IMPORTANT FACT BROUGHT TO OUR NOTICE BY MR. AGRAWAL WAS THAT, ADVANCE PRICING AGREEMENT (APA) H AS BEEN SIGNED BY THE ASSESSEE AND THE CBDT ON 02.08.2016 I N RESPECT OF ASSESSEES INDENT TRANSACTION WITH ITS A ES WHICH IS APPLICABLE FOR THE ASSESSMENT YEARS 2014-15 TO 2018 -19 AND ASSESSMENT YEARS 2011-12 TO 2013-14. UNDER THIS APA , THE CBDT HAS AGREED TO TREAT THE ASSESSEE AS A LOW RISK SERVICE PROVIDER AND HAS AGREED TO APPLY TNMM AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF THE INTE RNATIONAL TRANSACTIONS OF THE INDENT AND TRADING TRANSACTIONS . THE APA CONTAINS A DETAILED FAR (FUNCTIONS, ASSETS AND RISK S) ANALYSIS AND IT WAS POINTED OUT THAT THE FAR OF THE ASSESSEE HAS I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 18 REMAINED THE SAME OVER THE YEARS AND THEREFORE, SUC H AN AGREEMENT ALSO JUSTIFIES THE ASSESSEES CONTENTION THAT TNMM SHOULD BE THE MAM FOR BENCH MARKING THIS SEGMENT. O NE OF THE APPEALS BEFORE US PERTAINING TO A.Y. 2011-12 IS THUS STATED TO BE COVERED BY THE SAID APA. IN THIS BACKG ROUND, THE ASSESSEE HAS ALSO AMENDED ITS GROUNDS OF APPEAL THA T THE ISSUES AGREED TO HAVE BEEN RESOLVED IN ANY APA SHOU LD BE FOLLOWED AND THE APPEAL FOR THE A.Y. 2011-12 IS NOW RESTRICTED TO THE INDENT TRANSACTIONS WITH THE AES WHICH ARE I N COUNTRIES OTHER THAN JAPAN (BECAUSE THE APA IS CONF INED TO INTERNATIONAL TRANSACTIONS WITH AES IN JAPAN). MR. AGRAWAL SUBMITTED THAT IT WOULD BE APPROPRIATE THAT THE APP ROACH AND METHOD ADOPTED IN THE APA SHOULD ALSO BE APPROVED F OR THE YEARS IN QUESTION, BECAUSE AS FAR AS THE FAR AND INTERNATIONAL TRANSACTIONS CONTINUE TO BE THE SAME IN ALL THE YEARS. HE THUS CONCLUDED BY SUBMITTING THAT TNMM SH OULD BE THE MOST APPROPRIATE METHOD WHICH SHOULD BE TAKE N TO DETERMINE THE ALP OF THE INDENTING TRANSACTIONS OF THE ASSESSEE WITH ITS AES. 13. MR. AGRAWAL FURTHER EMPHASIZED THAT OPERATIN G PROFIT MARGIN IN RELATION TO OPERATING EXPENSES IS THE RIG HT PLI WHICH SHOULD BE TAKEN, BECAUSE THE SAME HAS BEEN AP PROVED BY THE CBDT ALSO AS THE ASSESSEE HAS BEEN RIGHTLY CHARACTERIZED AS A LOW RISK SERVICE PROVIDER. HE FI NALLY SUBMITTED THAT, SINCE THE APA DOES NOT REVEAL ANY S PECIFIC INDEPENDENT COMPARABLE COMPANIES AS HAVING BEEN TAK EN WHILE COMPUTING THE ARMS LENGTH PROFIT MARGIN, IT WOULD BE I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 19 APPROPRIATE TO REMAND THE FILE TO THE TPO WITH THE DIRECTIONS TO FIND SUITABLE LOW RISK SERVICE PROVIDER COMPANIE S WHICH CAN BE CHOSEN UNDER TNMM FOR THE COMPUTATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS IN QUESTION. 14. ON THE OTHER HAND, LD. CIT-DR SUBMITTED THAT H ERE IN THIS CASE AE AND NON AES INDENT SEGMENTS ARE SIMILA R AND THE APPROACH ADOPTED BY THE TRIBUNAL IN ITS EARLIER YEARS WAS LOGICAL WHICH NEEDS TO BE FOLLOWED. THE COMMISSION EARNED FROM UNRELATED PARTIES COULD SERVE AS A VALID CUP B ENCHMARK TO DETERMINE THE AVERAGE COMMISSION RATE OF THE AE INDENT TRANSACTIONS. REGARDING VALUE AND VOLUME ITSELF, HE SUBMITTED THAT SAME SHOULD BE COMPARED ON TRANSACTIONAL LEVEL , I.E., TRANSACTION TO TRANSACTION RATHER THAN BY COMPARING THE TRANSACTION WITH EACH PARTY TOGETHER IN ONE BUNDLE. REGARDING APA, HE SUBMITTED THAT APA IS A NEGOTIATED AGREEMEN T AND SHOULD NOT BE USED AS A PRECEDENT FOR THE OTHER YEA RS. THE ASSESSEE IN ITS TP STUDY REPORT HAS TREATED TRADING AND INDENT SEGMENT AS A SINGLE SEGMENT AND HAS APPLIED TNMM, W HEREAS THE TPO HAD APPLIED GROSS MARGIN ON THE TURNOVER AN D HAS BENCHMARKED SIMILAR TRANSACTION TAKEN BY THE AE WIT H NON AES. THUS, IN THE CASE OF THE ASSESSEE SUCH TRANSAC TION WITH AE AND NON AE IS A CLASSICAL CASE OF INTERNAL CUP A ND HENCE SAME SHOULD BE APPLIED. 15. WE HAVE HEARD THE PARTIES AT LENGTH AND ALS O PERUSED THE MATERIAL REFERRED TO BEFORE US AS DISCUSSED HER EIN ABOVE. THE APPROACH OF DETERMINING THE ALP ON THE BASIS OF AVERAGE I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 20 PERCENT OF COMMISSION REPORTED BY THE ASSESSEE IN R ESPECT 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 TRANSACTI ONS AND TO CONDUCT FURTHER IN DEPTH INQUIRY TO EXAMINE THE HIG H DEGREE OF COMPARABILITY OF RELEVANT CONTROL AND UNCONTROLL ED TRANSACTIONS. FURTHER, IF THE AVERAGE RATE OF COMMI SSION ON SUCH TRANSACTIONS WAS TO BE APPLIED TO THE FOB VALU E OF GOODS INVOLVED IN THE INDENTING TRANSACTIONS WITH THE AES , THEN THIS TRIBUNAL HAS TO SATISFY ITSELF THAT THERE IS NO SIG NIFICANT VARIATION IN THE RATE OF COMMISSION BETWEEN DIFFERE NT PRODUCTS. FROM THE PERUSAL OF THE INDENTING TRANSAC TIONS UNDERTAKEN BY THE ASSESSEE WITH AE AND NON AE UNDER VARIOUS PRODUCT SEGMENTS, IT IS DISCERNED THAT, FOR INSTANCE IN THE PRODUCT SEGMENT AUTOMOTIVE, THE ASSESSEE HAS UNDERTAKEN 249 TRANSACTIONS WITH AE AND ONLY 4 WITH NON AE AND IN THE ASSESSMENT YEAR 2007-08 THE VOLUME OF TRANSACTION, FOB VALUE WISE IS NIL IN THE CASE OF NON AE; AND THE COMMISSION EARNED WITH THE AE IS RS. 7,50,43,68 6/- AND WITH THE NON AE IT IS ONLY RS.9,672/-. SIMILARLY TH E PRODUCTS DEALT WITH AE IN AUTOMOTIVE SEGMENT ARE ENTIRELY DI FFERENT AND THE GEOGRAPHIES INVOLVED ARE SWITZERLAND, SINGAPORE , THAILAND AND JAPAN WHEREAS NON AE TRANSACTIONS ARE WITH SUZU KI MOTORCYCLE INDIA PVT. LTD. AND BAJAJ AUTO LTD IN IND IA. LIKEWISE UNDER THE PRODUCT CHEMICALS THE ASSESSEE HAS UNDERTAKEN 1044 TRANSACTION WITH AE AND ONLY 112 I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 21 TRANSACTION WITH NON AE AND THE COMMISSION WITH AE IS 1.28%, WHEREAS NON AE IT IS 2.26%. SIMILARLY, THE P RODUCTS DEALT WITH AE AND NON AE UNDER THIS SEGMENT ARE QUI TE DIFFERENT AND GEOGRAPHY INVOLVED WITH AE ARE SPAIN, JAPAN, ITALY, SWITZERLAND, THAILAND, WHEREAS WITH NON AE I T IS INDIA. LIKEWISE IN ELECTRONICS SEGMENT THE TRANSACTION U NDERTAKEN WITH THE AE ARE 253, WHEREAS WITH THE NON AE IT IS 5 AND AGAIN NOT ONLY THE PRODUCTS ARE DIFFERENT BUT ALSO GEOGRAPHICAL LOCATION ARE DIFFERENT WITH THAT OF NO N-AE WHICH ARE MOSTLY WITH INDIAN PARTIES AND ALL AE TRANSACTI ONS ARE WITH VARIOUS FOREIGN COUNTRIES. SIMILAR DIFFERENCES ARE NOTED IN ALL ACROSS 10 TO 11 PRODUCTS DEALT BY THE ASSESS EE WITH AES AND NON AES. THE TOTAL NUMBER OF TRANSACTIONS WITH THE AE DURING THE YEAR WAS 3,145 AND WITH NON AE IT WAS ON LY 371. THUS, APPARENTLY THERE IS A HUGE DIFFERENCE IN VOLU ME ON FOB BASIS AND THE GEOGRAPHIES DEALT ARE ALSO ENTIRELY D IFFERENT. THE AMOUNT OF AVERAGE COMMISSION EARNED WITH THE AE, IS 1.58% WHEREAS IN THE CASE OF NON AE IT IS 2.26. ALL THESE DIFFERENCES ARE PERMEATING IN ALL THE ASSESSMENT YEARS AS HIGHL IGHTED BY THE ASSESSEE IN THE CHART SUBMITTED BEFORE US AND O N PERUSAL OF THE SAME, IT IS QUITE GLARING THAT UNDER BOTH TH E TRANSACTIONS, I.E., CONTROLLED TRANSACTION WITH THE AE AND UNCONTROLLED TRANSACTION WITH THE NON AES, THERE AR E HUGE DISSIMILARITY BETWEEN THE PRODUCTS, DIFFERENCE IN V OLUME, DIFFERENCE IN VALUE, MARKETS AND GEOGRAPHICAL LOCAT ION. 16. IT IS QUITE SETTLED PROPOSITION THAT WHILE APPLYING CUP METHOD, A VERY HIGH DEGREE OF SIMILARITY HAS TO BE SEEN I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 22 BETWEEN THE CONTROL AND UNCONTROLLED TRANSACTIONS N OT ONLY IN TERMS OF PRODUCTS, CONTRACTUAL TERMS, VOLUME, VALUE BUT ALSO MARKET AND GEOGRAPHY LOCATIONS. THE REASON BEING UN DER CUP, PRICE CHARGED OR PAID FOR THE PROPERTY TRANSFE RRED HAS TO BE IDENTIFIED AND THE DIFFERENCES BETWEEN THE INTER NATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS HAS TO BE SEEN WHICH COULD MATERIALLY AFFECT THE PR ICE IN THE OPEN MARKET. THE PRICE OF DIFFERENT PRODUCTS CANNOT BE THE SAME AS IT DEPENDS UPON THE NEGOTIATION BASED ON VO LUMES, VALUE AND OTHER CONTRACTUAL TERMS. FURTHER DIFFEREN T MARKET AND GEOGRAPHICAL LOCATION ALSO AFFECTS THE PRICING FACTORS AND THEREFORE, IF THERE ARE DIFFERENCES ON ACCOUNT OF T HESE FACTORS CUP CANNOT BE HELD TO BE THE MOST APPROPRIATE METHO D FOR BENCH MARKING THE ARMS LENGTH PRICE. HERE IN THIS CASE, UNDER THE INDENTING SEGMENT THERE ARE VARIOUS DISSI MILARITIES IN THE TRANSACTION WITH THE AE AND NON AE AS DISCUS SED ABOVE AND FOR THIS REASON ALONE THE AVERAGE COMMISS ION EARNED CANNOT BE THE BENCHMARKING FACTOR FOR DETERM INING THE ALP, AND THEREFORE, WE HOLD THAT NEITHER THE CU P METHOD CAN BE APPLIED NOR THE TRANSACTION WITH THE AE AND NON AE CAN BE TAKEN FOR THE PURPOSE OF COMPARABILITY ANALY SIS. THUS, WE REJECT THE CUP METHOD BY TAKING THE AVERAGE COMM ISSION EARNED IN THE TRANSACTION WITH THE AE AND NON AE. 17. NOW, IN THESE CIRCUMSTANCES, WE HAVE TO SEE WHETHER TNMM CAN BE CONSIDERED AS MOST APPROPRIATE METHOD. FIRST OF ALL, IT HAS BEEN BROUGHT ON RECORD BEFORE US THA T RIGHT FROM THE ASSESSMENT YEARS 2003-04 TO 2006-07, TNMM HAS B EEN I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 23 ACCEPTED AS THE MOST APPROPRIATE METHOD BY THE TPO. HOWEVER, INSTEAD OF BERRY RATIO AS PLI, TPO HAS T AKEN OP/TC AS PLI. FURTHER, IT HAS BEEN BROUGHT TO OUR NOTICE THAT FROM THE ASSESSMENT YEARS 2011-12 TO 2018-19 UNDER THE M AP AGREEMENT IT HAS BEEN AGREED THAT TNMM SHOULD BE TH E MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF THE INTE RNATIONAL TRANSACTION OF THE INDENT KEEPING INTO THE FACT THA T ASSESSEE IS A LOW RISK SERVICE PROVIDER AND THERE IS NO CHANGE IN FAR RIGHT FROM ASSESSMENT YEARS 2003-04 TO 2018-19. ONC E TNMM HAS BEEN ACCEPTED UNDER THE SIMILAR FAR, WE DO NOT FIND ANY REASON TO DEVIATE BY ADOPTING SOME OTHER M ETHOD. OTHERWISE ALSO WE HAVE HELD THAT CUP METHOD CANNOT BE APPLIED AND OTHER METHODS ADMITTEDLY ARE INCAPABLE OF CAPTURING THE TRUE ARMS LENGTH RESULT AND THEREFOR E, WE HOLD THAT TNMM SHOULD BE TAKEN AS A MOST APPROPRIATE MET HOD FOR BENCHMARKING THE SAID TRANSACTION. 18. NOW HAVING ACCEPTED THAT TNMM IS THE MOST APPROPRIATE METHOD, THE SECOND ISSUE WHICH NEEDS TO BE CLARIFIED IS WHAT SHOULD BE THE BASE FOR COMPUTING THE PLI. AS STATED ABOVE, THE HON'BLE HIGH COURT HAS APPROVED T HE PERMISSIBILITY OF USING ALL BERRY RATIO AS PLI IN A SITUATION WHERE THE FUNCTIONS PERFORMED DID NOT ENTAIL HUGE C REATION OF VALUABLE INTANGIBLES. THE NATURE OF THE ASSESSEES BUSINESS IS A ROUTINE BUSINESS SUPPORT SERVICES AND THERE IS NO CREATION OF ANY HUMAN CAPITAL OR SUPPLY CHAIN INTANGIBLE. TH E HON'BLE HIGH COURT HAS HELD THAT BERRY RATIO CAN ONLY BE APPLIED WHERE THE VALUE OF GOODS IS NOT DIRECTLY LINKED TO THE QUANTUM I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 24 OF PROFITS AND THE PROFITS ARE MAINLY DETERMINED ON EXPENSES INCURRED. HERE IN THIS CASE, THE ASSESSEE IS ACTING AS AN INDENTING AGENT COMMISSION SERVICE PROVIDER, I.E., AS A FACILITATOR OF A TRADE AND HAS NO FINANCIAL RISK, B ECAUSE ASSESSEE WAS NOT REQUIRED TO RAISE ANY INVOICE FOR SALE AND PURCHASE IN ITS FINANCIAL COMMITMENT AND RISK ARE INSIGNIFICANT. AS A SERVICE PROVIDER, THE KEY BUSIN ESS DRIVER FOR THE ASSESSEE IS OPERATING EXPENSES INCURRED ON ESTA BLISHMENT AND OPERATION OF BUSINESS, I.E., SALARY, RENT AND O THER SUCH EXPENSES AND IT DOES NOT EMPLOY ANY SIGNIFICANT ASS ETS IN THE BUSINESS EXCEPT FOR ROUTINE ASSETS LIKE OFFICE, FUR NITURE AND FIXTURES TO RUN ITS BUSINESS AND ALSO THERE IS NO I NTANGIBLE CREATION BY THE ASSESSEE COMPANY. BESIDES THERE IS NO TRADING CAPITAL EMPLOYED AS GOODS ARE NEITHER BOUGHT NOR SO LD BY THE ASSESSEE IN THE INDENTING SEGMENT. UNDER THESE FACT S AND CIRCUMSTANCES, THE PROFIT DERIVED BY THE ASSESSEE I S MAINLY DEPENDED ON ITS OPERATING EXPENDITURE AS THE VALUE OF GOODS DOES NOT ENTER IN ITS FINANCIAL. AS A LOW RISK SERV ICE PROVIDER, IT SEEKS TO OBTAIN ADEQUATE RETURN ON ITS OPERATING EXPENSES AS THE OPERATING EXPENSES INCURRED REPRESENTS THE V ALUE ADDED CARRIED ON BY THE ASSESSEE. IN OTHER WORDS, T HE OPERATING EXPENSES ADEQUATELY AND SUFFICIENTLY REPR ESENTS THE FUNCTIONS PERFORMED AND THE RISK UNDERTAKEN BY THE ASSESSEE. THUS, WE HOLD THAT THE BERRY RATIO SHOULD BE ACCE PTED AS THE MOST APPROPRIATE PLI FOR TAKING AS BASE UNDER TNMM WHILE DETERMINING THE ALP OF THE INDIAN TRANSACTION FOR A LL THE FIVE YEARS UNDER APPEAL. I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 25 19. ACCORDINGLY, WE REMAND THE MATTER BACK TO THE FILE OF THE TPO TO EXAMINE AND BENCHMARK THE INTERNATIONAL TRANSACTION BY ADOPTING TNMM AS THE MOST APPROPRIAT E METHOD BY TAKING BERRY RATIO AS PLI. THE ASSESSEE HAS TO SUBSTANTIATE ITS MARGIN BY BRINGING COMPARABLE UNCO NTROLLED TRANSACTIONS TO DEMONSTRATE THAT ITS COMMISSION EAR NED IN THIS SEGMENT IS AT ARMS LENGTH; AND THE TPO SHALL EXAMINE THE SAME AND DECIDE ACCORDINGLY. NEEDLESS TO SAY TH AT TPO SHALL GIVE DUE AND EFFECTIVE OPPORTUNITY TO THE ASS ESSEE TO SUBSTANTIATE ITS ALP AS PER DIRECTION GIVEN ABOVE. 20. IN THE RESULT, THE APPEAL FOR ALL THE ASSESSMEN T YEARS ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 21. IN ASSESSMENT YEAR 2007-08, ANOTHER GROUND RAI SED RELATES TO DISALLOWANCE OF CLAIM OF EXPENDITURE INC URRED OF RS.3,72,560 UNDER THE HEAD LEGAL AND PROFESSIONAL CHARGES; AND ADDITION OF RS.2,56,257/- ON ACCOUNT OF BAD DEB TS AND DEPOSITS WRITTEN OFF. 22. AS REGARDS DISALLOWANCE OF CLAIM OF EXPENDITUR E UNDER THE HEAD LEGAL AND PROFESSIONAL CHARGES, IT HAS BE EN STATED BEFORE US THAT THE DETAILS OF SUCH EXPENDITURE ARE AS UNDER: S . NO. NAME OF THE PAYEE REMARKS DATE AMOUNT 1. WRITER RELOCATIONS CHARGES OF UNACCOMPANIED PASSENGER BAGGAGE CLEARING NEW DELHI TO 21.06.2006 RS. 1,33,000/ - 2. - DO - CHARGES OF UNACCOMPANIED PASSENGER BAGGAGE CLEARING NEW DELHI TO 21.06.2006 RS. 34,000/ - I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 26 3. - DO - CHARGES OF UNACCOMPANIED PASSENGER BAGGAGE CLEARING NEW DELHI TO JAPAN MRS. RIE NAGASHIMA. 30.03.2007 RS. 70,000/ - 4. -DO- CHARGES OF UNACCOMPANIED PASSENGER BAGGAGE CLEARING NEW DELHI TO TOKYO, JAPAN MRS. RIE NAGASHIMA 31.03.2007 RS.47,5000/ - CHARGES OF UNACCOMPANIED PASSENGER BAGGAGE CLEARING MUMBAI TO NEW DELHI MRS. RIE NAGASHIMA 02.08.2006 23,200/ - 5. -DO- CHARGES OF UNACCOMPANIED PASSENGER BAGGAGE CLEARING NEW DELHI TO CHIBA, JAPAN MRS. RIE NAGASHIMA 23.11.2006 61,360/ - 23. THE ASSESSING OFFICER HAS HELD THAT THESE EX PENDITURES ARE PERSONAL IN NATURE. IT HAS BEEN SUBMITTED BEFOR E US THAT IN THE ASSESSMENT YEAR 2006-07 THE LD. CIT (A) HAS DELETED THE SAID DISALLOWANCE AND IN ASSESSMENT YEAR 2008-0 9, DRP HAS DIRECTED THE ASSESSING OFFICER TO DELETE THE SA ID DISALLOWANCE. 24. AFTER CONSIDERING THE ENTIRE FACTS AND FINDIN GS GIVEN IN THE IMPUGNED ORDER, IT IS SEEN THAT THESE EXPENSES HAVE BEEN INCURRED AS PER THE DETAILS GIVEN ABOVE. IT IS QUIT E APPARENT THAT THESE ARE ROUTINE EXPENDITURE INCURRED DURING THE REGULAR COURSE OF BUSINESS AND NOWHERE HAS IT BEEN ALLEGED BY THE ASSESSING OFFICER THAT THESE ARE FOR NON BUSINE SS PURPOSE AND ARE NOT RELATED TO THE ASSESSEES BUSINESS. ONC E SIMILAR ADDITION HAS BEEN DELETED IN THE EARLIER AND SUBSEQ UENT YEAR WHICH HAS ATTAINED FINALITY THEN NO ADDITION COULD BE MADE HERE, ACCORDINGLY THE SAME IS DELETED. I.T.AS. NO.5095/DEL/2011, 5850/DEL/2012, 328 & 6646 /DEL/2014 & 1321/DEL/2016 27 25. AS REGARDS CLAIM OF DEDUCTION OF DEPOSIT WRIT TEN OFF, IT HAS BEEN BROUGHT TO OUR NOTICE THAT ASSESSEE HAS NO T WRITTEN OFF ANY SUCH DEPOSIT IN THE INSTANT YEAR, ALBEIT THE SAME WAS DEBITED IN THE ASSESSMENT YEAR 2006-07 AND THAT WAS CLAIMED IN THE SAME YEAR ONLY AND THE ASSESSING OFF ICER HAS COMPLETELY MISUNDERSTOOD AND HAS TAKEN THE FIGURE F ROM THE P&L ACCOUNT OF ASSESSMENT YEAR 2006-07 AND HAS BEEN UNDERSTOOD TO HAVE BEEN CLAIMED AND ASSESSMENT YEAR 2007- 08. IN FACT DRP HAS DIRECTED THE ASSESSING OFFICER TO DELETE THE SAME IF THE SAME HAS NOT BEEN DEBITED AND YET T HE ASSESSING OFFICER HAS NOT CARRIED OUT THE DIRECTION OF THE DRP. ACCORDINGLY, WE HOLD THAT THE ADDITION MADE BY THE ASSESSING OFFICER IS UNJUSTIFIED ON FACTS AND SAME IS DIRECTED TO BE DELETED. 26. IN THE RESULT ALL THE APPEALS ARE PARTLY ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND OCTOBER, 2018. SD/- SD/- [O. P. KANT] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 22 ND OCTOBER, 2018 PKK: