Rule 10 B (1)(e)(i) does not suggest that the ‘costs’ would mean the FOB value of goods in transfer pricing calculation

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH: “I” NEW DELHI

BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER

AND

SHRI B.C.MEENA, ACCOUNTANT MEMBER

IN I.T.A .Nos.-5186/Del/2011 & 5433/Del/2012

(ASSESSMENT YEARs-2007-08 & 2008-09)

Sojitz India (P) Ltd.,

7th Floor, EROS Corporate Towers,

Nehru Place, New Delhi.

PAN-AAICS8883N

(APPELLANT)

Vs

DCIT,

Circle-9(1),

C.R. Building,

New Delhi

 (RESPONDENT)

Appellant by: Sh.Ved Jain, FCA

Respondent by: Sh.Peeyush Jain, CIT DR TP

ORDER

PER DIVA SINGH, JM

In both these appeals filed by the assessee against the assessment orders for 2007-08 and 2008-09 assessment years, there is a common issue of arms’ length price adjustment. As such it is considered appropriate to decide the appeals by way of a common order.

2. The grounds raised by the assessee in 2007-08 & 2008-09 assessment years read as under:-

In ITA No.-5186/Del/2011

“1. That the learned Deputy Commissioner of Income Tax, Circle 9(1), New Delhi has erred both on facts and, in law in determining income of the Appellant at Rs.5,86,29,915/- in an order of assessment dated 22.09.2011 framed u/s 143(3) read with section 144C of the Act as against the declared income of the Appellant of Rs.1,88,72,880/-

2. That the learned Additional Director of Income Tax, Transfer Pricing Officer-II(2), New Delhi (Ld. TPO)/ Ld. AO have erred both in law and on facts in making an addition of Rs.3,97,10,488/- on account of alleged understatement of arm’s length price in respect of commission income earned by the Appellant from its Associated Enterprises (“herein after referred to as AEs”). The finding and conclusions in this regard have been reached without any material and is a vitiated finding.

3. The order of Ld. AO & directions of Ld. DRP along with learned Transfer Pricing Officer’s order under section 92CA(3) of the Act is based on complete disregard of the facts of the case of the Appellant and the statutory provisions of law.

The learned AO/TPO/DRP has erred in disregarding the following apparent on facts and in law on the facts and circumstances of the case of the Appellant:

a) That the Appellant has complied with the Indian transfer pricing regulations by maintaining appropriate documentation as mandated by Section 92D of the Act and Rule 10D of the Income-tax Rules, 1962 (“Rules”).

Further, the Appellant’s use of Transaction Net Margin Method (“TNMM”) with OP/TC as the Profit Level Indicator (“PLI” has been discarded without any justification whatsoever;

b) That the learned AO/TPO/DRP has erred in adopting his own method to determine the ALP of the Appellant’s international transactions without demonstrating the existence of any one of the four conditions provided in Section 92C(3) which is a mandatory requirement for making adjustment under section 92CA(3) of the Act;

c) That the learned AO/TPO/DRP’s method of computing the arm’s length price is not in accordance with any of the methods specified in Section 92C(1);

d) That the learned TPO has erred in recharacterizing the commission/indent transactions of the Appellant as trading/proper transactions and by applying the gross profit margin earned from trading transactions in the non-associated enterprise segment on the value of goods on which commission was earned.

e) That the learned TPO has erred in treating the commission and trading transactions as comparable without any regard to principles laid down in sub-rules (2) and (3) of Rule 10B;

f) That the learned AO/TPO/DRP has failed to appreciate the difference in risk profile of the indent and proper transactions. In particular in the indent based transactions there are negligible credit risk and foreign exchange risk on account of fluctuation of rate of exchange.

In fact, in the indent based transactions, the function is to merely follow up on behalf of the customers and not deal with the prospective customers of the customers of the Appellant; the risk is limited to the commission amount and not to the gross amount of sales;

g) That the learned AO/TPO/DRP has overlooked that in respect of indent based transaction, service tax is applicable and in respect of principal based transactions, sales tax is applicable. Thus, apparently, the two transactions are different classes of transactions.

4. 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.

5. That on facts and in law the ld. AO/TPO/DRP erred in not granting relief of +/-5% under proviso to section 92C(2) of the Act;

6. On the facts and circumstances of the case, the Ld. DRP has erred in not examining the validity of initiation of penalty proceedings u/s271(1)(c).

7. 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 the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other.”

 “1. On the facts and circumstances of the case, the order passed by the learned Assessing Officer (AO) under Section 143(3) read with Section 144C of the Act is bad, both in the eyes of law and on the facts of the case.

2. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in assessing the income of the Appellant at Rs.146,77,09,241/- as against income of Rs.3,13,76,134/- declared by the Appellant.

3. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in making an addition of Rs.143,63,07,142/- as difference in arms’’ length price determined by Transfer Pricing Officer (TPO) and the appellant.

4(i) On the facts and circumstances of the case, the Hon’ble DRP has erred, both on facts and in law, in making addition on account of arm’s length price by applying the gross profit margin earned from trading transaction with non-associated enterprises on the value of goods on which commission has been earned.

(ii) On the facts and circumstances of the case, the TPO has erred, both on facts and in law, in altering the business model of the Appellant by recharacterizing the commission transactions of the Appellant as trading transactions, and by applying the Gross Profit margin earned from trading transactions with non-associated enterprises on the value of goods on which commission income has been earned by the Appellant.

5. On the facts and circumstances of the case, the learned TPO has erred, both on facts and in law, in making the above addition on the basis that the assessee has created “human intangibles” and “supply chain intangibles” for which it has not been adequately compensated ignoring the nature of the business transaction undertaken by the appellant.

6. Without prejudice to above, the learned TPO has failed to appreciate the fact that even if the addition proposed to the total income of the Appellant is accepted the Appellant’s operating profit on cost would increase to an absurdly high figure of more than 973%.

7(i) On the facts and circumstances of the case, the learned TPO has erred, both on facts and in law, in  rbitrarily rejecting the detailed transfer pricing study done by the assessee as per Section 92D of the Act.

(ii) On the facts and circumstances of the case, the learned TPO has erred, both on facts and in law in determining the arm’s length price of commission earned from Associated Enterprises based on conjecture and surmises.

8. On the facts and circumstances of the case, the Hon’ble DRP has erred, both on facts and in law, in rejecting the contention of the assessee that the benefit of arms’’ length range of + 5% be given in view of proviso to section 92C(2) of the Act.

9. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in disallowing an account of Rs.25,965/- on account of depreciation on printer at the rate of 15% as against 60% claimed by the assessee, allowable under the Act.

10. On the facts and circumstances of the case, the learned AO has erred both on facts and law in levying interest under Section 234B of the Act.

11. The appellant craves leave to add, amend or alter any of the grounds of appeal.”

3. From a perusal of the grounds in 2007-08 assessment year, it can be seen that out of the 7 grounds raised, which have been reproduced above, ground nos.-1 & 7 are general in nature and are specifically addressed vide ground nos.-2-5 qua the adjustment of Rs.3.97 crores odd. We find that Ground no-6, is pre-mature and since it does not arise in the present proceedings the same is dismissed.

4. Similarly, on a perusal of the grounds agitated in 2008-09 assessment year reproduced in the earlier part of this order, it would be seen that in all the assessee has raised 11 grounds . Out of these, ground nos.-1,10 & 11 are general in nature as such stand covered in ground nos.-3-8 which are raised agitating the addition of Rs.143.63 crores, vide ground no-9, it is agitated that the depreciation on computer printer should be allowed at 60% as against 15% allowed by the Assessing Officer (hereinafter referred to as the AO)

5. We first propose to discuss the facts available on record qua each of the years separately.

Facts pertaining to 2007-08 assessment year:

6. In 2007-08 assessment year, the assessee declared an income of Rs.1,88,72,880/- by way of filing a return. The business profile/ownership structure of the assessee as discussed by the

transfer police officer (hereinafter referred to as the TPO)of his order all as under and extracted here under:-

2. Business Profile :-

Profile of the Company:-

The Sojitz was formed through the business integration between Nichimen Corporation and Nissho Iwai Corporation. These two companies have a history of over a century. This business integration took shape in Dec 2002 and was followed on April 2003 by the incorporation of a joint holding company. The principle operating arm’s of the Group, Nichimen Corporation and Nissho Iwai Corporation were merged to form a new single entity, Sojitz Corporation on April 1, 2004.

Sojitz Corporation Japan (SCJ) is a entity headquartered in Tokyo. SCJ is a general trading company (also popularly known as sogo shosha in Japanese terms) dealing in a wide range of products and services. Sojitz Group has operations in around 50 counties worldwide and operates with a network of 740 consolidated subsidiaries and affiliated companies in Japan and overseas. Sojitz’ business activities are wide ranging, covering machinery and aerospace, energy and mineral resources, chemical and plastics, real estate development and forest products, consumer lifestyle related business and new business development including IT solutions.

The services typically provided by Sojitz India are as follows:-

• Support Services for facilitating trading activities of AE.

• Networking with customers.

• Identifying potential customers or suppliers.

Please check the full Judgment in the attached file