SUMITOMO CORPORATION INDIA PRIVATE LIMITED Vs. DCIT
INCOME TAX APPELLATE TRIBUNAL
Sumitomo Corporation India Private Limited
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R.S.Syal, Member (A) -
(1.) THESE two appeals by the assessee - one against quantum and the other against penalty u/s. 271(1)(c) of the Income -tax Act, 1961 (hereinafter also called 'the Act') - are directed against the separate orders passed by the ld. CIT(A) in relation to the Assessment year 2003 -04.
ITA No. 2307/Del/2009 - QUANTUM
(2.) BRIEFLY stated, the facts of the case are that the assessee is a 99.9% subsidiary of Sumitomo Corporation, Japan. The major holding company is the ultimate parent company of Sumitomo Group, which is one of the five largest trading companies of Soga Shosha of Japan. Soga Shosha is an integrated business enterprise with the fundamental role of facilitating trade between buyers and sellers. Sumitomo Corporation, Japan has overseas branches, liaison offices and other subsidiaries across the globe. These affiliates, like the assessee, act as support centres and render facilitation and market support services. Thus, the assessee is a facilitator of transactions between its foreign associated enterprises (AEs) and customers/vendors in India. The major role of the assessee is to mediate between its AEs and vendors/customers to/from India and also to provide information to the AEs which helps them in taking effective business decisions about transacting from or to India, though such decisions are taken by such AEs alone. For rendering such services, the assessee gets commission on sales from the transactions in which it mediates and also a fixed service charge for providing market support services by making available data about Indian market and advertisements/articles etc. from the information available in India. Apart from rendering the said services to its AEs, the assessee also undertook certain trading transactions at its own during the year under consideration. The assessee reported four types of international transactions in its audit report in Form 3CEB. There is no dispute on three international transactions. The entire controversy revolves around the fourth one, which is a set of international transactions of 'Commission received for trading related administrative/commercial services' for which the assessee was allowed commission and fee totaling Rs. 18,16,75,474/ -. To benchmark this international transaction, the assessee followed Profit Split Method (PSM) in its Transfer pricing study by taking average of its three years' profits. Sixteen comparable companies were chosen whose Berry ratio (ratio of gross profit over operating expenses) was shown at 1.09% again on the basis of three years' data. The TPO rejected the assessee's adoption of Berry ratio; and also the use of multiple -year data both for the assessee and sixteen comparables. He opined that the Transactional Net Margin Method (TNMM) was the most appropriate method to be applied by considering the data for the current year alone. On being called upon to supply information in this fashion, the assessee furnished its operating profit margin in which interest on deposits amounting to Rs. 1,90,85,506/ - was considered as part of its Operating revenue. The TPO held such interest to be non -operating. He also worked out OP/TC of sixteen comparables cited by the assessee at 9%, by considering the current year's data alone. That is how, the TP adjustment of Rs. 2,88,64,285/ - was proposed, which was eventually made by the AO in the assessment order passed u/s. 143(3) read with section 144C of the Act. The assessee contended before the ld. CIT(A) that the interest income should be considered as part of operating revenue. This contention again met with the fate of rejection. However, the ld. CIT(A) made an estimation of administrative and other costs incurred by the assessee at Rs. 5 lac in making these FDRs on which such interest income was earned. He, therefore, directed the Assessing Officer to reduce this sum of Rs. 5 lac from the overall cost/expenses taken by the TPO for the purposes of calculating the operating profit margin. The assessee in the present appeal is aggrieved against the exclusion of interest income of Rs. 1.90 crore from operating revenue and in the alternative and without prejudice to the main argument, on the estimation of expenses at a meager sum of Rs. 5 lac.
(3.) WE have heard the rival submissions and perused the relevant material on record. Before proceeding further, it is paramount to note that the ld. AR has not disputed the application of TNMM as the most appropriate method and also the consideration of current year's figures alone of the assessee as well as comparables for the purposes of determining the ALP.;
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