Income Tax Appellate Tribunal - Delhi
Sinosteel India Pvt. Ltd., New Delhi vs Assessee on 17 October, 2005
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I' NEW DELHI
BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER
AND
SHRI A. D. JAIN, JUDICIAL MEMBER
I.T.A .No.-175/Del/2012
(ASSESSMENT YEAR-2006-07)
M/s Sinosteel India Pvt. Ltd. Vs. DCIT
12th Floor, EROS Corporate Tower, Circle-8(1)
Nehru Place, Room No. 163
New Delhi-110019 C. R. Building
New Delhi
PAN: AAJCS1181N
(APPELLANT) (RESPONDENT)
Assessee by:- Shri Krishan Malhotra & Sh.
Ankur Goel, AR.
Revenue by:- Sh. Peeyush Jain, CIT. DR
ORDER
PER R. S. SYAL, AM.
This appeal by the assessee arises out of the order dt. 13.12.2011 passed by the Assessing Officer u/s 143(3) r.w.s. 144C(5)/254 of the Income-tax Act, in relation to the assessment year 2006-07.
22. The only issue raised in this appeal through various grounds is against the determination of arm's length price (ALP) of certain international transactions at Rs.4,14,53,877 as against the declared value of Rs.1,58,12,470/-, thereby making addition by way of transfer pricing adjustment to the tune of Rs.2,87,72,311/-.
3. Briefly stated the facts of the case are that the assessee is a wholly owned subsidiary of Sinosteel Corporation, China. It is engaged in the business of providing support and assistance to its Associated Enterprises (AEs) with respect to procuring and supplying metallurgical materials and related activities. In lieu of such services rendered during the previous year relevant to the assessment year under consideration, the assessee received a sum of Rs.1,58,12,470/- as commission from its AEs. The assessee benchmarked such international transactions by using internal `Comparable Uncontrolled Price' (CUP) method. On being called upon to substantiate the price so charged at ALP, the assessee submitted before the TPO that it earned commission at the rate of $0.50/DMT in a transaction with 3 an independent third party viz., Top Resources Hong Kong Ltd. in the financial year 2005-06. A copy of invoice dated 17.10.2005, evidencing such receipt, relevant to the year in question, was also filed. It was noticed by the TPO that there were three international transactions in which the assessee had charged commission. In respect of the first transaction with Sinosteel International Macao Commercial Offshore Ltd. (SIMCO), the assessee charged commission at the rate of 0.50 USD per DMT with volume of 164357 DMT. This was accepted by the TPO at ALP. The TPO noticed that in respect of the other two international transactions, the assessee charged commission at a lower rate. In such first transaction with Sinosteel International Holding Co. Ltd., the commission was charged @ $ 0.15 per DMT with volume of 1844150 DMT and in the other transaction with China Sinosteel Pvt. Ltd. (Singapore), the assessee charged commission at the rate of $0.33/WMT with volume of 33,000 WMT. The TPO determined ALP in respect of these two transactions by applying the rate of commission at $ 0.50 per DMT, being the rate at which commission was charged by the assessee from SIMCO, 4 being the internal comparable case; and from Top Resources Hong Kong Ltd., being the external comparable case. This led to the proposal for TP adjustment at Rs.2,87,72,311/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP), which upheld the TP adjustment and resultantly the addition for such amount was made by the AO in the final order. The assessee filed certain additional evidence before the tribunal in the shape of a quotation given by Jyoti Enterprises, Orissa to the assessee's holding company which indicated reducing rate of commission with the increase in volume. The Tribunal remitted the matter to the DRP for consideration of additional evidence and consequently deciding the issue afresh. The DRP vide its order dated 25.11.2011 came to hold that the quotation of Jyoti Enterprises was of no consequence and did not assist the case of the assessee. Resultantly the addition was sustained at the same level. The AO vide the impugned order upheld the addition of Rs.2.87 crore as originally made. The assessee is in appeal against the sustenance of such addition.
54. We have heard the rival submissions and perused the relevant material on record. The solitary contention of the ld. AR in support of the deletion of addition before us has been that the rate of commission charged by the assessee from its AEs in respect of two transactions was in accordance with the rate quoted by Jyoti Enterprises to Sinosteel International Holding Company Ltd. and hence the price so quoted should be considered as comparable uncontrolled price. There is no quarrel over the fact that the assessee adopted CUP method to demonstrate that its international transactions were at ALP. The Revenue has also not disputed the application of this method as the most appropriate method. Now the question which looms large on our canvass for consideration is whether a quotation can be considered for benchmarking an international transaction under CUP method ?
5. Section 92 (1) provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92C deals with the computation of 'arm's length price'. Sub-section (1) 6 provides that : `The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe..'. In so far as the year under consideration is concerned, there have been enshrined five specific methods and the last being : `such other method as may be prescribed by the Board.' The mechanism for computation of ALP under these five specific methods is provided in rule 10B(1). The assessee admittedly claimed its international transactions at ALP on the basis of the CUP method, the working under which has been provided for in clause(a) of rule 10B(1), which reads as under :-
"(a) comparable uncontrolled price method, by which,--
(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ;7
(ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ;
(iii) the adjusted price arrived at under sub-
clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction ;"
6. It is apparent from the above clause that the ALP is required to be determined under three steps which cover three sub-clauses. First step, as provided for in sub-clause
(i), mandates that `the price charged or paid' for services provided in a comparable uncontrolled transaction should be identified. Step two as per sub-clause (ii) provides for making adjustment to `such price' [that is `the price charged or paid' as per sub-clause(i)] on account of differences between the international transaction and the comparable uncontrolled transaction. Under step three, the adjusted price arrived at under sub-clause (ii) is taken to be an ALP in respect of the services provided in the international transaction.
87. The Special Bench of the Tribunal in the case of LG Electronics has held vide Para 22.11 that : ` Rule10B has specified a set procedure to be followed for determining the ALP distinctly under the five methods. It is equally not permissible to invent a new procedure and try to fit such procedure within any of the existing procedures prescribed as per these methods. No one is authorized to add one or more new steps in the prescribed procedure or to substitute any other mechanism with the one prescribed under the rule. It is neither possible to invent a new method nor to substitute a new methodology in place of the one prescribed in the rule.' Elaborating further, it has been held in para 23.5 that : "One has to necessarily pass through these steps for determining ALP under the ....method. ....... When the rule prescribes a particular method to be followed and the steps so given are unambiguous, it is impermissible to substitute such steps with any other mode."
98. At this juncture, it is of paramount importance to note the directive of sub-section (2) of section 92C, which provides that :`The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed." The essence of the provision is that the ALP should be determined as per the most appropriate method `in the manner as may be prescribed'. A bare perusal of the above discussed legal provisions in the light of the ratio of the Special Bench order, it is manifest that the ALP under the CUP method can be determined with the starting point of `the price charged or paid' in a comparable uncontrolled transaction as per sub-clause (i). It is this price which is adjusted to account for differences under sub-clause (ii). The nitty-gritty of sub-clause (i) is that there should firstly be available some `price charged or paid' to start with the procedure as per this clause. When the statute read with rules specifically provides that the ALP under the CUP method should be determined by considering `the price charged or paid' in a comparable uncontrolled `transaction', we fail to comprehend as to how any 10 `quotation' which has not fructified into a `transaction' can be substituted with the actual price charged or paid in a transaction. As the law provides for considering the price charged or paid in a comparable uncontrolled transaction, there can be no scope for considering a quotation price in isolation which is not preceded with or succeeded by any actual transaction.
9. Adverting to the facts of the instant case, we find that there is only this quotation which has been pressed into service by the assessee so as to bring home the point that the international transaction was at ALP. On a pertinent query, the ld. AR candidly admitted that there was no evidence available with him to indicate the actual rate of commission charged by Jyoti Enterprises from similar uncontrolled transactions either with the assessee's holding company or any other third party. In fact, the matter ended with the quotation from this concern to the assessee's holding company. There is no material to indicate that the assessee's holding company actually availed any such services from such concern. As such, we are unable to 11 accept the argument that the rate as per this quotation should be accepted as `the price charged or paid' under the CUP method. This contention, being bereft of any force deserves to be and is hereby given the fate of rejection.
10. Having held that the bare quotation price cannot be accepted under the CUP method for the purposes of benchmarking, we still need to find out if there is any further scope for allowing relief on the basis of some rationality for lower rate of commission on the increased volume, as argued by the ld. AR. We find some vigor in the submission of the ld. AR that there is a possibility of reduction in the rate of commission with the increase in volume. But this rule is not absolute. It may or may not turn out true. It can be seen from the facts of the extant case that the assessee received commission at the same rate of $.50 per DMT from its SIMCO with the volume of 1,64,357 DMT and from Top Resources Hong Kong Ltd with the volume of 40,418 DMT. There is no variation in the rate of commission despite the fact the volume is almost four times in transaction with its AE. However, as observed 12 earlier, the possibility of lower rate of commission with much increased volume cannot be ruled out. The contention of the assessee that the rate of commission decreased with much higher volume could have been taken to a logical conclusion by substantiating with the lower rate of commission charged in some uncontrolled transaction with higher volume. Unfortunately, there is no material on record to indicate that in some other comparable uncontrolled transaction, the rate of such commission suffered a dip with the increase in turnover.
11. This fact can not be lost sight of that we are dealing with the transfer pricing provisions, which fall under the Chapter X. The marginal note of this Chapter is : `Special provision relating to avoidance of tax'. The onus probandi under this Chapter to prove that the international transaction is at ALP is on the assessee. It is worthwhile to note that there is a departure under such provision from the normal provisions in the sense that here it is the assessee who has to substantiate that the price charged is at ALP and not vice versa. The assessee has to face the music if it fails 13 to prove so. Such a burden can be discharged by positively demonstrating and proving with the help of some comparable cases that the price charged or paid in an international transaction is at ALP. If the assessee does not bring on record any comparable case to indicate that the price charged in another comparable uncontrolled transaction should be differed, then the price so charged or paid in the given comparable uncontrolled transaction has to be accepted as ALP.
12. Adverting to the facts of the instant case, we find that the assessee charged commission from SIMCO as well as some third party at $ 0.50 per DMT. Such rate, unless shown with the help of some other comparable case to be not applicable in respect of the other two international transactions because of different volume, cannot be ignored. We are of the considered opinion that under the given circumstances, it is only this rate of commission, which is required to be considered under sub-clause (i) of rule 10B(1)(a), being the price charged for services provided in a comparable uncontrolled transaction. We 14 therefore, hold that the authorities below were fully justified in making the addition at this level.
13. In the result, the appeal is dismissed.
Order pronounced in the open Court on 13/12/2013.
Sd/- Sd/-
( A. D. JAIN ) (R. S. SYAL)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 13/12/2013
*AK VERMA*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTR
15
Date Initial
1. Draft dictated on 09-12- PS
2013
2. Draft placed before author 11-12- PS
2013
3. Draft proposed & placed before the 11-12-13 JM/AM
second member
4. Draft discussed/approved by Second JM/AM
Member.
5. Approved Draft comes to the 13/12/13 PS/PS
Sr.PS/PS
6. Kept for pronouncement on 13/12/13 PS
7. File sent to the Bench Clerk PS
8. Date on which file goes to the AR
9. Date on which file goes to the Head
Clerk.
10. Date of dispatch of Order.
*