Pramod Kumar, Member (A) -
(1.) THIS appeal is directed against the order dated 14th October 2011 passed by the Deputy Commissioner of Income Tax, Circle 6(1), New Delhi (hereinafter referred to as 'the Assessing Officer') under section 143(3), read with section 144(C), of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), for the assessment year 2007 -08.
Core issues in this appeal which require our adjudication
(2.) ALTHOUGH the assessee has raised as many as fourteen grounds of appeal, there are only two issues which really require to be adjudicated upon by us, i.e.,: (a) whether or not the arm's length price adjustment of Rs. 68,15,17,853 under section 92C, is justified on the facts and in the circumstances of the case -referred to in grounds of appeal nos. 1 to 4, and subsidiary grounds of appeal set out in these main grounds of appeal; and (b) whether or not the disallowance of Rs. 102,17,16,483 under section 40(a)(i) is justified on the facts and in the circumstances of the case -referred to in grounds of appeal nos. 5 to 11, and subsidiary grounds of appeal set out in these main grounds of appeal. We will take up these issues in the same sequence.
Issue 1: Correctness of ALP adjustment of Rs. 68,15,17,853
So far as ALP adjustment of Rs. 68,15,17,853 is concerned, the relevant material facts are like this. Mitsubishi Corporation India Pvt. Ltd. (MCI, in short) is a wholly owned subsidiary of Mitsubishi Corporation Japan (MCJ, in short) -one of the leading sogo shosha establishments in Japan. While 'sogo shosha', a Japanese expression, can be transliterated as a 'general trading' and sogo shosha companies are, therefore, generally described as 'general trading companies', the true connotations of sogo shosha companies are quite different from a typical general trading company as can be discerned from the TPO's observation, set out in the TPO order itself, to the effect that, ".........These (sogo shosha) companies are unique in the world of commerce, and play an important role in linking buyers and sellers for products ranging from bulk commodities, such as grain and oil, to more specialized products, like industrial equipment" (Emphasis by underlining supplied by us). We will come back to the uniqueness of sogo shosha business model a little later, and deal with this aspect of the matter in more detail, but let us first complete setting out the relevant material facts as also the developments leading to this adjudication by us. Coming back to the TPO's order, Transfer Pricing Officer has, describing profile of the assessee, noted that, "MCI is a wholly owned subsidiary of MCJ.... (which)... is a general trading company and the group plays an important role in linking buyers and sellers for products in a variety of industry segments" and that "MCI is considered to be a low risk activity and the primary source of activity is in the nature of commission earned on the traded goods". The Assessing Officer further noted that the assessee had entered into following transactions with its AEs in the relevant financial period:
The proceedings at the assessment stage:
(3.) THE Transfer Pricing Officer further noted that the assessee has used TNMM (Transactional Net Margin Method) as the most appropriate method, and that the PLI (profit level indicator) selected is 'Berry Ratio' which, as stated in the transfer pricing study, benchmarks gross profit and/or net revenues (after subtraction of any potential cost of sales) against operating expenses. The assessee's claim was that since MCI's three year's average berry ratio is 1.19, whereas in the case of 22 comparables set out in the report, using three year data, the average berry ratio is 1.14 and adjusted average berry ratio is 1.13, the international transactions entered into by the assessee are at arm's length price.;