ITAT DELHI BENCH ‘G’
Sumitomo Corporation India (P.) Ltd.
versus
Deputy Commissioner of Income-tax
IT Appeal No. 5095 (Delhi) OF 2011
[ASSESSMENT YEAR 2007-08]
JANUARY 31, 2013
ORDER
Shamim Yahya, Accountant Member
This appeal by the Assessee is directed against the order of the Assessing Officer passed u/s. 143(3) read with section 144C of the I.T. Act for assessment year 2007-08.
2. The grounds raised read as under:-
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. 70,71,96314/- in an order of assessment dated 25.10.2011 framed u/s 143(3) read with section 144C of the Act as against the declared income of Rs. 15,39,50,749/-.
2. That the learned Additional Director of Income Tax, Transfer Pricing Officer-11(2) New Delhi (Ld. TPO)/Ld. AO have erred both in law and on facts in making an addition of Rs. 55,26,16,748/- on account of alleged understatement of arm’s length price in respect of commission income earned by the Appellant from its Associated Enterprises (“hereinafter referred to as AE”). The aforesaid findings and conclusions have been reached without any material and is a vitiated finding.
3. That in making the aforesaid addition the learned Assistant 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 TPO as unsustainable both in law and on facts:
(a) As none of the pre- conditions laid down under section 92C(3) of the Act were satisfied, there was no occasion for determination of arm’s length price by the AO and the value of the international transactions ought to have been accepted;
(b) 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;
(c) As no opportunity of being heard was granted at any stage of the proceedings for this purpose, whether at the proposal or the approval stage;
(d) As no initial opinion was formed u/s 92C(3) of the Act which is a jurisdictional precondition;
(e) By not furnishing the Letter of Reference (‘LOR’) to Appellant.
3.1 That since the reference by the learned AO was bad in law and void-ab-initio, consequentially the entire proceedings by the learned TPO, order of learned TPO, directions of Ld. DRP and, also the impugned addition of Rs. 55,26,16,7481- is vitiated, invalid, illegal and hence, a nullity.
4. 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.
4.1 The learned AO/TPO/DRP has in fact erred in their orders by disregarding the following objections apparent on facts and in law on the facts and circumstances of the case of the Appellant:
(a) That the learned AO/TPO/DRP has erred in disregarding the transfer pricing approach adopted by the Appellant to determine the arm’s length price (“ALP”) of its international transactions. The Appellant’s use of Transaction Net Margin Method (“TNMM”) with Berry Ratio as the Profit Level Indicator (“PLI”) has been discarded without any valid justification whatsoever;
(b) That the learned AOITPOIDRP has erred in adopting his own method to determine the ALP of the Appellant’s international transactions without demonstrating the existence of anyone 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 TPO has erred in arbitrarily assuming and concluding that indent based transactions of the Appellant with its AE’s have same functions and, risks as the principal transactions with non- AE’s, the action of re-characterization of indent business as trading business is based on no valid basis;
(d) That in absence of valid basis much less any valid material, the learned AO/TPO/DRP has erred in holding that, indent based transactions of the Appellant with AE’s are comparable to principal transactions of non- AE’s;
(e) That the learned AOITPO/DRP having found the transactions entered into with non-AE’s on identical circumstances are indent transactions i.e. service based transactions, he has erred in holding transactions and therefore, addition IS based on an inconsistent stand and, contradictory approach;
(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 transactions, service tax is applicable and in respect of principal based transactions, sales tax is applicable. Thus, apparently, the two transactions are different class of transactions;
(h) Ld. DRP erred in stating that the Appellant has not provided conclusive evidence to show that the principal transactions and indent transactions are significantly different. Ld. DRP further erred in completely overlooking the additional evidences filed by the Appellant before the Ld. DRP on January 21, 2011 along with Form 35A. Thereby, the Ld. DRP operated with a pre-determined mindset to retain the adjustment made by Ld. TPO without adhering to the critical evidences furnished by the Appellant;
(i) Ld. DRP erred in stating that the lease agreement dated 05.01.2007 between Omega Global Logistic Pvt. Ltd. & the Appellant is in relation to a fully furnished office space without verifying the Annexure 1 of the lease agreement which states that the premise is an office cum warehouse equipped with electrical connection, telephone connection, tables, chairs etc.
(j) That the learned AO/TPO/DRP has failed to appreciate that, accountants report is merely an expression of opinion and, what is determinative is the real nature of transaction as held by Apex Court in the case of National Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69;
(k) That the learned AO/TPO/DRP has erred in overlooking that, transactions made by the Appellant are of different product segments and, at different intervals and different volumes and, therefore, as such the indent transactions cannot be compared to the proper sales transactions.
(l) That furthermore the learned AO/TPO/DRP has erred in comparing indent based transactions of AE’s with principa1based transactions of non-AE’s and not with indent transaction of non-AE after allowing appropriate adjustments and, hence the addition is misconceived, misplaced and, unsustainable;
(m) That the learned AO/TPO/DRP has erred m 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;
(n) 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(l);
(o) That the learned AOITPO/DRP’s conclusions are arbitrary and based on conjectures and surmises; and
5. That the learned AOITPOIDRP 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 1961.
6. That the learned AOITPOIDRP 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.
7. That the learned AO/TPO/DRP has erred in adopting a transfer pricing approach that is different from the earlier year despite there being no change in the facts and circumstances of the case of the Appellant.
8. That the Ld. AO/DRP has grossly erred both m law and, on facts in proposing a disallowance of a claim of expenditure of Rs. 3,72,560/- representing legal and, professional charges incurred wholly and exclusively for the purpose of business of the appellant company.
8.1 That the Ld. Assessing Officer and DRP has failed to appreciate that, mere fact that, such expenditure had been disallowed in the preceding years could not be a basis much less valid basis to hold that, expenditure incurred towards Writer Relocations was a personal expenditure. In fact, they have failed to appreciate that, it is well settled position of law that, a company does not have any personal expenditure and as such, entire expenditure incurred ought to have been allowed as such.
8.2 That the ld. DRP has grossly erred both in law and, on facts in directing the AO to make the addition only if the department has not preferred an appeal before Hon’ble ITAT against the addition deleted by the CIT(A) in the AY 2006-07 on the similar ground.
9. That the ld AO/DRP has further erred both in law and on facts in making a disallowance claim of deduction of deposits written off of Rs. 2,56,257/- on factually incorrect and, legally erroneous considerations and thus, the same is not tenable.
10. On the facts and circumstances of the case, the Ld. DRP has erred in not examining the validity of initiation of penalty proceedings u/s 271(1)(c).
11. 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.
Ground No. 1 to 7 – Transfer Pricing issue
3. M/s Sumitomo Corporation is a Japnese entity headquartered in Tokyo. Sumitomo Corporation is a main company of the Sumitomo Group. It is one of the largest trading companies or sogo shosho in Japan. A sogo sosho is an integrated business enterprise with the fundamental role of facilitating trade between buyers and sellers market. Sumitomo Corporation undertakes its trading activities in India through Sumitomo India. In case of import of goods for buyers in India, Sumitomo Corporation has a contract with the Japanese suppliers. Sumitomo Corporation also enters into contract with the buyers in India.
3.1 Sumitomo India, established in January, 1997 is a subsidiary company of Sumitomo Corporation. The trading transaction of the Sumitomo India can be classified into two groups – indent sales and proper sales. Indent can also be classified into – import from other country into India, export from India into other countries. In the Transfer Pricing report it was claimed that on its indent trading transactions, Sumitomo India’s roles is that of a mere service provider. On these transaction, Sumitomo India earns income in the form of commission, generally based on the total invoice price or quantity of merchandise. Most of Sumitomo India’s commission receivable on these transactions are from Sumitomo Corporation. It was stated in the Transfer Pricing Report that Sumitomo India provides marketing support services for facilitating both exports and imports in India through Sumitomo Corporation. The support services include gathering information about customer requirements, products, local prices, market trend etc. During the financial year 2006-07 the assessee undertook the following international transactions :-
