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2018 (2) TMI 1639 - AT - Income TaxAddition on account of difference in Arm’s Length Price - characterization of the business function of the taxpayer - whether the taxpayer is a business support services provider or a trader and the FOB value of goods sourced from India by the taxpayer is to be included in the operating cost of the taxpayer in order to compute its margin? - Held that:- In view of the undisputed fact that AEs of the taxpayer is into trading activities of various products, such as, textiles, machinery, information and communications related products, metals, products related to oil and other energy resources, general merchandise chemicals, provisions and food and the taxpayer is merely rendering business support services to these AEs in the form of facilitation services to source goods from India. So, the limited activities carried out by the taxpayer for its AEs in the nature of licensing and facilitation of business of its AEs separates the taxpayer from the Sogo Shosha traders. When the taxpayer is not proved to be a risk bearer in the nature of credit risk, price risk, inventory risk, storage and handling risk etc., it cannot be treated as a trader. Moreover when undisputedly the taxpayer has not developed any intangible or accorded locational savings to its AEs and has earned net operating profit margin on cost of 129.34% against the margin of comparable at 14.05%, it cannot be said that the taxpayer has not been adequately compensated. As has been held in Li & Fung India Pvt. Ltd. (2014 (1) TMI 501 - DELHI HIGH COURT) the determination of 2.58% margin over the FOB value of the AEs contract not sustainable in the eyes of law. Rather TPO has artificially enhanced the cost base of the taxpayer and proposed a mark up of the FOB value of goods sourced by AEs and as such this approach is not available in TNMM under Rule 10B(1)(e) of the Act. So, the TPO has wrongly recharacterized the business function of the taxpayer from a business support service provider to a trader. - Decided against revenue
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