IN THE ITAT PUNE BENCH ‘B’
Hoganas India (P.) Ltd.
versus
Deputy Commissioner of Income-tax
IT Appeal No. 1463 (Pune) of 2010
[ASSESSMENT YEAR 2006-07]
JANUARY 11, 2013
ORDER
R. S. Padvekar, Judicial Member
This appeal is filed by the assessee challenging the assessment order dated 7.10.2010 passed under section 143(3) of the Income-tax Act, 1961 read with directions under section 144C(5) of the Act for assessment year 2006-07. The assessee has taken the following grounds (revised) in the appeal:-
1.1 The ld. Assessing Officer erred in assessing the total income of the appellant company at Rs. 11,69,71,550/- as against the returned income of Rs. 11,42,29,221/- as filed by the company.
1.2 The ld. Assessing Officer erred in making an addition of Rs.28,54,085/- to the international transaction of receipt of sales commission by the appellant company of Rs. 14,41,555/- for arriving at the arm’s length price of this international transaction.
2. The Hon’ble Dispute Resolution Panel, Pune and/or the ld. Transfer Pricing Officer/the ld. Assessing Officer erred in not appreciating that the transaction of receipt of sales commission and import of traded goods by the appellant company were closely linked transactions and that for the purpose of benchmarking the above transactions were to be aggregated under the segment “Distribution Activity” in accordance with the provisions of rule 10A(d).
3. Without prejudice to ground No.2, the Hon’ble Dispute Resolution Panel, Pune and/or the ld. Transfer Pricing Officer/the ld. Assessing Officer erred in not appreciating that US $ 30 per MT was the arm’s length price of the aforesaid international transaction.
4. The Hon’ble Dispute Resolution Panel, Pune and/or the ld. Transfer Pricing Officer/the ld. Assessing Officer erred in not appreciating that the functions performed and risks assumed by the appellant company when acting as an agent of Hoganas AB Sweden were insignificant vis-à-vis functions performed and risks assumed in the marketing activity carried on by the appellant company in its manufacturing segment.
5. The Hon’ble Dispute Resolution Panel, Pune and/or the ld. Transfer Pricing Officer/the ld. Assessing Officer erred in working out the arm’s length percentage of the commission received from the appellant company’s AE @ 4.44% instead of @ 0.95% being the correct percentage and considering the fact that the sales commission received by the appellant company worked out to 1.49% of the actual sales price, no upward adjustment/addition was warranted on the facts of the case.
6. The Hon’ble Dispute Resolution Panel, Pune and/or the ld. Transfer Pricing Officer/the ld. Assessing Officer erred in not appreciating that inadvertently the internal rate of return attributable to the marketing functions of the appellant company for the manufacturing segment was worked out @ 4.44% by multiplying the percentage of PBIT of manufacturing segment of the company with the numerator of Selling and Administration Overheads (instead of only Selling Overheads as the correct numerator) and dividing by denominator being aggregate of Selling and Administrative Overheads and Factory Overheads.
7. The Hon’ble Dispute Resolution Panel, Pune and/or the ld. Transfer Pricing Officer/the ld. Assessing Officer erred in not appreciating that on the facts of the case and in law, the benefit of option available to the appellant under the proviso to section 92C(2) of the Act and as per CBDT’s Circular No.12 of 2001 dated August 23,2001 of adopting arm’s length price, a price which varies by not more than 5% from the arm’s length ought to be granted and that the upward addition had to be made in respect of the balance amount, if any.”
2. The only issue in controversy is in respect of adjustment made by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel, Pune (DRP) in respect of commission received by the assessee-company from its parent company and the said adjustment is made by the TPO under section 92 CA(3) of the Income-tax Act, 1961.
3. The assessee is in the manufacturing, distribution and marketing of iron and ferrous powders in India. The assessee filed the return of income declaring a total income of Rs.11,42,91,720/- for the assessment year 2006-07. As the assessee has intimated the international transactions with AE i.e. associated enterprises, a reference was made by the Assessing Officer under section 92CA(1) of the Act to the TPO for determination of Arm’s Length Price (ALP) of the international transactions reported by the assessee in its audit report. The assessee has adopted TNMM method for determining the ALP. Apart from international transactions relating to purchase of iron powder for manufacturing, purchase of trading materials, export of iron powders, purchase of consumables and spares, the assessee also undertook international transactions relating to provision of market services to its parent company, for which it has received commission. The issue in controversy before us is in respect of the commission received by the assessee, to which adjustment has been made by the TPO leading to an addition of Rs.28,24,085/-. Hence we restrict our order to the said addition only as that is disputd in this appeal.
4. The assessee was paid commission of Rs.14,41,555/- by Hoganas AB Sweden. The sales achieved by Hoganas AB Sweden stood at Rs. 9,66,22,606/- and the commission received by the assessee is at Rs. 14,41,555/- which works to 1.49% of the corresponding sales achieved by Hoganas AB Sweden in India. The TPO has noted that the commission received by the assessee was not on the standard rate. The assessee received commission of $ 30 per MT of the product sold of its AE in India, irrespective of the sale price of the product or the type of the product. The TPO observed that the assessee undertakes similar marketing functions, assumes similar risk and employs similar assets for its own marketing functions for the products manufactured by it and as in respect of earning of sales commission. The TPO observed that for the purpose of benchmarking transaction relating to receipt of sales commission, there is an internal comparable available which is the profit attributable to the marketing functions of the assessee for the products manufactured by it i.e. the internal rate of return attributable to the marketing functions of the assessee is comparable to the functions undertaken for earning the sales commission. As noted by the TPO, the sales commission received by the assessee by conducting internal rate of return attributable to the marketing functions of the company worked out to 4.44% and therefore the TPO asked the assessee why the said rate should not be adopted in place of 1.49% worked out against the sales of the Hoganas AB Sweden. The assessee resisted the action of the TPO by submitting that the net profit earned by the assessee is not only the result of the functions performed under the factory overheads and the SADA expenses, but also result of the functions performed under the head “raw material cost” and accordingly while attributing the net profit of SADA expenses, such profit should also be attributed towards the cost of raw materials. The assessee also filed the working showing that the internal rate of return was to the extent of 1.46% as against 1.49% that was in respect of the commission received from Hoganas AB Sweden. The TPO did not agree with the working made by the assessee. It appears that the assessee filed the working of the attribution of the net profit for each expense head, which is reproduced at page 13 of the TPO’s order. The assessee also filed net profit working attributable to SADA expenses, which was not accepted by the TPO. The TPO made the working of the net profit attributable to SADA expenses as under:-
“Net profit attributable to SADA Expenses:
