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IN THE ITAT DELHI BENCH 'I'
Sinosteel India (P.) Ltd. VS DCIT Circle 8(1)
R.S. SYAL, ACCOUNTANT MEMBER
AND A.D. JAIN, JUDICIAL MEMBER
IT APPEAL NO. 175 (DELHI) OF 2012
[ASSESSMENT YEAR 2006-07]
DECEMBER 13, 2013

R.S. Syal, Accountant Member - 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.

2. 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 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, 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
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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.
4. 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) 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 ;
(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.
7. 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
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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."
8. 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 '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 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 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
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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 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 therefore, hold that the authorities below were fully justified in making the addition at
this level.
13. In the result, the appeal is dismissed.