Loading judgment…
Facts
The assessee, a subsidiary of a German company, provides marketing and after-sales services for endoscopic instruments in India. The Transfer Pricing Officer (TPO) re-characterized the assessee's services as commission agency instead of marketing support, leading to a significant addition to income. The Commissioner of Income Tax (Appeals) partly allowed the appeal, and the assessee appealed further.
Held
The Tribunal held that the department's re-characterization of the assessee's services as commission agency without a material change in facts or law was inconsistent. The Tribunal allowed the appeal for statistical purposes, restoring the matter to the TPO/AO for a de novo Transfer Pricing Analysis with correct filters.
Key Issues
Whether the TPO/AO erred in re-characterizing the assessee's services from marketing support to commission agency without justifying the change, and if the comparable selection and analysis were appropriate.
Sections Cited
143(3), 92CA, 92C(2), 92C(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH: “I”:NEW DELHI
Before: SHRI RAMIT KOCHAR & SHRI SUDHIR KUMAR
Assessee by Shri V.K. Sabharwal, Adv. Shri Ravi Kapoor, CA Shri Rajiv Kumar Adv. Revenue by Shri Shankar Gupta Sr. DR Date of hearing 10.07.2025 Date of 10.07.2025 pronouncement ORDER
PER SUDHIR KUMAR, JUDICIAL MEMBER:
The assessee preferred the captioned appeal, challenging the order dated 07-03-2016 passed by the Commissioner of Income Tax A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 2 (Appeals)-44 New Delhi (herein after referred {Ld.CIT(A)} pertaining to assessment order dated 10-02-2012 for Assessment year 2009-09 under Sections 143(3) of the Income Tax Act, 1961 (“The Act for short”).
The assessee has raised the flowing grounds in appeal:
1. 1. That on facts and in law, the Learned AO and TPO have erred in making an addition of Rs. 2,08,15,974 to the taxable income of the Appellant under Section 143(3) of the Income Tax Act, 1961.
2. That on facts and in law, the Learned AO, TPO, and CIT(A) have erred in conducting a fresh Transfer Pricing Analysis based on the keywords "Commission Agents Services" and "Commission/Brokerage," whereas the Appellant is engaged in marketing service support (MSS) activities, resulting in unusual and incongruous outcomes.
3. That on facts and in law, the Learned AO, TPO, and CIT(A) have erred in selecting companies as comparables that are functionally different from the Appellant in relation to the international transactions under consideration.
4. That on facts and in law, the Learned AO, TPO, and CIT(A) have erred in selecting ICC International Agencies Ltd. as a comparable, despite it failing the filter of a minimum 75% commission income to total income applied by the TPO in the fresh search.
5. That on facts and in law, the Learned AO, TPO, and CIT(A) have erred in computing the Operating Profit/Operating Cost (OP/OC) of the Appellant and of the comparables:
A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 3 a) That on facts and in law, the Learned AO, TPO, and CIT(A) have erred in computing the OP/OC of Brand Reality Pvt. Ltd. by considering non-operating income under the "Others" segment and allocating operating expenses to "Others" segment b) That on facts and in law, the Learned AO and TPO have erred in computing the operating margin of Priya International Ltd. at 86.60% by allocating common expenses in the proportion of segment revenue in place of gross margin. c) That on facts and in law, the Learned AO, TPO, and CIT(A) have erred in arbitrarily allocating common expenses of comparables based on gross revenue without applying the same methodology to the Appellant. On the principle of parity, the same methodology should have been applied to the Appellant.
6. That on facts and in law, the Learned AO and TPO have erred in failing to make appropriate adjustments to account for differences in working capital employed by the Appellant vis-à-vis the comparable companies.
7. That on facts and in law, the Learned AO, TPO, and CIT(A) have erred by not considering that any adjustment to the arm's length price (ALP), if required, should be restricted to the lower end of the 5% range tolerance as provided under the second proviso to Section 92C(2) of the Act. The Appellant submits that each of the above grounds and sub- grounds is independent and without prejudice to the others.
A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 4 The appellant craves leave to add, alter, vary, amend, substitute or withdraw the above grounds of appeal at any time before or during the hearing of the appeal to enable the Hon’ble Tribunal to adjudicate the appeal in accordance with law.
3. The above appeal was dismissed on 16-12-2019, later on recalled on the application of the assessee on 17-01-2022 for hearing.
4. Brief facts of the case of the assessee are that the assessee company is a 100 % subsidiary company of Karl Storz GmbH & Co. KG. Germany. The assessee company is engaged in import of sale of Endoscopic Instruments and providing after sale services to its customers, company also provide marketing support and in warranty and post warranty repair and maintenance services on behalf of m/s Karl Storz Germany in respect of the equipment sold through other distributors. The assessee also provides marketing support services to the existing dealer net work of AE in India. The assessee company filed return of income declaring an income of Rs. 65,000/- on 30-09- 2008. The return was processed u/s 143(1) of the Act. The case of assessee was taken for scrutiny and notice was issued to the assessee u/s 143(2) of the Act which was served upon the assessee. During the proceedings the assessee company filed revised return of income A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 5 declaring NIL income. According to AO the assessee had undertaken international transaction with associated enterprises. The value of the international transactions was more than Rs. five crore and the matter referred to the Transfer Pricing officer for determining the Arm’s Length Price with the provisions of section 92CA of the Act. The Ld. TPO during the proceedings, rejected the information and data used for computation of arms’ length price by the assessee and invoked the provisions of the section 92C(3) (c ) of the Act. The Ld. TPO then proceeded with a fresh search by applying the TNMM method for bench marking in respect of the transactions of receipts of commission for marketing support services by treating the company as commission Agents and made the addition Of Rs. 2,08,15,974/-. Aggrieved the order of the TPO the assessee has filed the appeal before the Ld. CIT(A) who vide order dated 07-03-2016 partly allowed the appeal. In the compliance of the Ld. CIT(A) the Ld. TPO revised the order and made the adjustment of Rs, 1,76,15,974/-. Being aggrieved the order the assessee is in appeal before the Tribunal. Ld. CIT(A) observed in his order as under:
A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 6 “I have perused the transfer pricing order in respect of fresh search undertaken by the TPO in respect of function related to commission income. Ld TPO has used the word commission income or commission as the functionality to conduct the search on the public data base namely prowess and capitaline. Ld AR has argued that the functionality for this international transaction is technical support and marketing support to its AE and not as a commission agent. Ld AR has argued that, the appellant does advertisement, conferences etc. and supports post warranty services in respect of goods sold by its AE which cannot be termed as commission. agency word. I have considered these arguments carefully. Even for commission income an assessee has to support its principle by way of advertisement, sometime recovery of debtors and even may conduct conference for its principles. These functional details will depend on the terms of commission business. In any case, undoubtedly, the appellant was receiving commission at fixed rate on the sale value of its principles i.c. AE. Therefore, the functionality of the appellant broadly comes under commission income as market and technical support and other support services is a keen to commission function broadly. I have perused the final outcome of the fresh search conducted by the TPO A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 7 which led selection of 9 comparables whose functionality in broader way similar to the appellant. During the TP proceedings, the TPO has provided the details of methodology of the search conducted and entire financials either obtained through public domain or by calling information u/s 133(6) to the appellant. Therefore, I do not foresee any regularly in conducting fresh search and its methodology. I have perused various filters applied by Ld TPO for arriving at final set of comparables. The appellant has objected in respect of each filter which has been dealt adequately by the TPO in his order. Considering the entire facts and circumstances of the case, I approve the fresh search conducted by the TPO as proper to arrive at final comparables. However, in case of any discrepancy for improper application of filters or functionality in respect of any comparables, I will deal in the next paragraph when I will examine the objection of the appellant in respect of each comparables.”
The Ld. AR of the assessee has submitted the written submission and stated that the Ld. Transfer Pricing Officer and Ld. CIT(A) have erred both on facts and in law while determining the Arm’s length price in respect of the international transaction. The authorities have A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 8 failed to conduct a proper Function, Assets and Risks analysis incorrectly characterized the nature of services provided by the assessee company and relied upon an improper set of comparable selected through a flawed search methodology. Failure to undertake proper FAR Analysis: (i) Ld. AR submitted that the Ld. TPO has grossly erred in selecting comparables without undertaking a proper FAR (Functions performed, assets employed and risks assumed) analysis. The FAR analysis forms is the back bone of any transfer pricing analysis as it ensures that the comparables selected mirror the economic substance of the tested party’s transactions. (ii) Mischaracterization of Appellant’s functions: Ld. AR also stated that in the course of transfer pricing proceedings for assessment year 2008-09, the Ld. TPO characterized the assessee as a commission agent without rejection of the functional profile of marketing support services contended by the assessee. The assessee is engaged in providing marketing support services to the AE. The scope of the services includes sponsorship of seminars, organizing A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 9 conferences for the medical community, running advertisement campaigns, and post-sales support. The assessee does not undertake any direct sales activity or broker and sales contracts between the dealer network and customers. The assessee provides the marketing and service support to the existing dealer network of AE in India. The sale activity is done by the present dealer network of AE in India not by the assessee. This contention of the assessee was accepted by the department in the year 2007-08 and 2009-10 and subsequent years where the assessee has been considered as marketing service support provider in respect of receipt of commission income. He also submitted that commission agents are intermediaries between the buyer and seller whereas the assessee was providing marketing support services to the AE.
Ld. Sr. DR has relied the orders of the lower authorities and submitted that the assessee was rightly characterized as a commission agent.
We have heard the parties and gone through the material available on record. The ld. AR of the assessee submitted that the assessee A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 10 provides marketing and service support to the existing dealers net- work of AE in India. The assessee company was not receiving the commission at the fixed rate. We find that for the A.Y. 2007-08, &2009-10 and the subsequent year the assessee was considered as marketing service support provider by the department, which can be seen from assessment order 2007-08 & 2009-10 (P.B. page No. 64 to 67 ). The order passed by Additional commissioner of income Tax under section 92CA (3) of the Act for the A.Y. 2007-08 as under:
It was also found that for the subsequent year the assessee was considered as a marketing service support provider by the department. In the present case the department re-characterization the assessee without mentioning the reasons of change in facts or law for the A.Y.2008-09. The Ld. TPO also applied the study by classified the commission income of the assessee. The department must have A.Y. 2008-09 M/s. Karl Storz Endoscopy Vs. ITO 13 maintained the consistency in characterizing functions unless there is a material change in facts or law. The appeal of the assessee is allowed for statistical purposes and the matter is restored to the file of the TPO/ AO for denovo undertaking Transfer Pricing Analysis by applying correct filter. All contentions are kept open accordingly.
In the result the appeal of the assessee is allowed for the statistical purposes. Order pronounced in the open court on 10/07/2025.