TMI Blog2013 (6) TMI 550X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee it is merely providing indenting services. At no point of time the title in goods or possession of the merchandise is in assessee's hands. The contract is entered into by SCJ and Indian customers directly whether for export or import. The negotiations are directly done by SCJ and the Indian customers and the assessee merely functions as a facilitator. Looking at the nature of services rendered and the arguments advanced which also remain unrebutted and as such are taken to be correct the assessee does not need to incur cost either for maintaining or storing the inventory or for the transportation as the title in goods is never held by the assessee for its indenting activity as a service provider. Consequently the assessee is not exposed to any credit risk in maintaining the inventory nor is the assessee exposed to price risk or the risk linked with offering credit sales. From the nature of the risk profile of the assessee and on considering the functions performed and the assets deployed it can be safely concluded to be that of a low risk business, which has also been the claim of the assessee. It is a matter of record that in these years the assessee has also sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its affiliates at one end and the customers in India also in their own names. In these unrebutted facts on record, the TPO was not correct in holding that the 'costs' as per the Rule were FOB value of goods. The unrebutted fact on record is that the assessee has been able to render services utilizing the network of the AE and all intangibles and patents etc. utilized internally belong to the AE and the level and degree of the qualification required of the personnel of the assessee is low and skill requirement is so low that no specific skills are required by the personnel who replace the existing personnel who may choose to move on for better options. The assessee does not need to and cannot restrain the leaving personnel from utilising any skills which they may have acquired during employment as no specific skills for indenting are required for indenting and acting as a facilitator. It is not the case of the department that the assessee is performing critical functions which admittedly are performed by the AE or that the assessee is contributing by way of analysis, reports and opinions, being provided as such value added services are being performed wherein the analysis/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in 2007-08 2008-09 assessment years read as under :- In ITA No.-5186/Del/2011 1. That the learned Deputy Commissioner of Income Tax, Circle 9(1), New Delhi has erred both on facts and, in law in determining income of the Appellant at ₹ 5,86,29,915/- in an order of assessment dated 22.09.2011 framed u/s 143(3) read with section 144C of the Act as against the declared income of the Appellant of ₹ 1,88,72,880/- 2. That the learned Additional Director of Income Tax, Transfer Pricing Officer-II(2), New Delhi (Ld. TPO)/Ld. AO have erred both in law and on facts in making an addition of ₹ 3,97,10,488/- on account of alleged understatement of arm's length price in respect of commission income earned by the Appellant from its Associated Enterprises ( herein after referred to as AEs ). The finding and conclusions in this regard have been reached without any material and is a vitiated finding. 3. The order of Ld. AO directions of Ld. DRP along with learned Transfer Pricing Officer's order under section 92CA(3) of the Act is based on complete disregard of the facts of the case of the Appellant and the statutory provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e different classes of transactions. 4. That the learned AO/TPO/DRP has erred in holding that the Appellant has created human and supply chain intangibles for which it is not being adequately compensated by the AE. 5. That on facts and in law the ld. AO/TPO/DRP erred in not granting relief of +/-5% under proviso to section 92C(2) of the Act; 6. On the facts and circumstances of the case, the Ld. DRP has erred in not examining the validity of initiation of penalty proceedings u/s271(1)(c). 7. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other. In ITA No.-5433/Del/2012 1. On the facts and circumstances of the case, the order passed by the learned Assessing Officer (AO) under Section 143(3) read with Section 144C of the Act is bad, both in the eyes of law and on the facts of the case. 2. On the facts and circumstances of the case, the learned AO has erred, both on facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee that the benefit of arms'' length range of + 5% be given in view of proviso to section 92C(2) of the Act. 9. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in disallowing an account of ₹ 25,965/- on account of depreciation on printer at the rate of 15% as against 60% claimed by the assessee, allowable under the Act. 10. On the facts and circumstances of the case, the learned AO has erred both on facts and law in levying interest under Section 234B of the Act. 11. The appellant craves leave to add, amend or alter any of the grounds of appeal. 3. From a perusal of the grounds in 2007-08 assessment year, it can be seen that out of the 7 grounds raised, which have been reproduced above, ground nos.-1 7 are general in nature and are specifically addressed vide ground nos.-2-5 qua the adjustment of ₹ 3.97 crores odd. We find that Ground no-6, is pre-mature and since it does not arise in the present proceedings the same is dismissed. 4. Similarly, on a perusal of the grounds agitated in 2008-09 assessment year reproduced in the earlier part of this order, it would be seen t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sojitz Corporation Japan has the ownership control of Sojitz Asia which in turn holds 100% share capital of Sojitz India. Sojitz Asia Pte Ltd (AE) Singapore 99.99% India Sojitz India Pvt. Ltd (Assessee) 6.1. The T.P.O considering the fact that the assessee company was a 100% subsidiary of Sojitz, AE (Associate Enterprises) Asia which was itself a 100% subsidiary of Sojitz Corporation, Japan, (hereinafter referred to as SCJ)who was providing services of a service provider had also undertaken some trading activities on its own required the assessee to explain why margins earned in the trading activity with non AE be not applied to the Margins earned in activity with the AEs. The TPO observed that the assessee had entered into the following international transaction in 2006-07 financial year:- S.No. Type of international transaction Method selected Total value of transaction (Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at this point to extract the relevant portion from the show cause notice reproduced in the TPO's order. 6.6. The same reads as under:- 8. On comparison of commission earned on trading, sales made in non AE segment and in your AE segment, the following position emerges : Particulars Non-AEs AE Total FOB Value of goods traded 959,808,865 12,151,252,480 Commission earned 17,393,089 180,227,181 197,620,270/- Segmental Gross Profit margin (as calculated) 1.81% 1.48% From an analysis of the above computation, it is seen that in your trading transaction with your AE, you have earned a gross profit margin of 1.48%. In the segment relating to trading with non AEs, you have earned a gross profit margin of 1.81%. On the basis of detailed examination of FAR analysis in your TP report, it is noticed that there is no significant difference between the functions performed, assets util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 6.10. Referring to the definition of the TNMM in Rule 10B(1)(e)(i) (ii), it was submitted that the cost referred therein did not include COGS because no such 'cost' has been incurred by the assessee in the performance of its business functions. The functions performed by the assessee are marketing supportive functions the cost of which is reflected in the operating expenses. 6.11. Addressing the observations of the TPO, in Para 4.7 in regard to the creation of human intangibles and supply intangibles, it was submitted that the detailed FAR analysis in the TP Report had characterized the assessee as low end service provider who bears a miniscule risk. The low end activities performed, it was submitted do not require any specific skills set as such no human intangibles or supply chain intangibles are created. The activities performed, it was stated are routine, preparatory and auxiliary in nature and it can not be said to create any intangibles. An intangible, it was contented would necessarily mean to be an asset which would be capable of being transferred or licensed for a consideration. The assessee, it was submitted merely acted as a link between the suppliers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading transaction' with its AE. Accordingly an arms' length adjustment of ₹ 3,97,10,488/- was made as under:- Commission Income earned from AEs @ 1.48% on ₹ 12,151,252,480/- =Rs. 180,227,181/- Arm's length commission income @1.81% on ₹ 12,151,252,480/-=Rs. 219,937,669/- Difference=Rs. 39,710,488/- % of arm's length margin to international transaction =22.03%. 6.14. Acting on the recommendation of the TPO, the AO made an adjustment of ₹ 3,97,10,488/- in the arm's length price. 7.1. Aggrieved by this, the assessee approached the Dispute Resolution Panel (hereinafter referred to as DRP) objecting to the adjustment recommended by the TPO and proposed by the AO in the draft assessment order. However, not convinced by the objections and the arguments advanced on behalf of the assessee, the DRP confirmed the action of the TPO. 7.2. Accordingly the AO passed the impugned order in conformity with the directions of the DRP. Aggrieved by which the assessee is in appeal before the Tribunal. Facts pertaining to 2008-09 assessment year :- 8. The assessee in the year under consideration declared an inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B Value of goods 12,129,455,163 Gross Margin as earned by the assessee in the Non AE Trading Segment 13.29% Gross arms's length margin 1,612,004,591 Less Gross Margin shown by the assessee 175,697,449 Difference for which adjustment is required to be made 1,436,307,142 9. In this year also the assessee agitated the addition made in the draft assessment order based on the TPO's order before the DRP. Accordingly before the DRP also the assessee raised various grounds as in the earlier year agitating the issues on the ground that re-characterization on the facts was not permissible under law; the method applied by the TPO was assailed, the action of holding that the commission is earned on the FOB values of goods was also assailed; the action was further assailed on the ground that absurd results would arise if the consequences of proposed addition were applied as then impossibly high operating profit and cost would be yielded. Similarly, the finding that the assessee had created human and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable on record, it was contended that the assessee is only a service provider to the various group entities of Sojitz Corporation, Japan (SCJ) and SCJ along with its affiliates has been in this line of business, for almost six decades. It was submitted that for more than 50 years, SCJ has an international presence and a global recognition amongst its customers spread over more than 17 odd countries and has been carrying on this business even prior to the existence of the assessee company who has come into existence only in March 2005. In the background where the assessee has been in existence as a service provider only for the last couple of years and in fact this is the first year in which the company is fully functional as a service provider, the occasion of creating human chain and supply chain intangibles did not arise. Referring to the material available on record, it was contended that it is an accepted position as far as the nature of services provided by the assessee to its group entities of SCJ, is concerned that the assessee is admittedly a service provider only. The services it was stated have been enumerated in both the years in the TPO's orders for both the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was elaborated that as is well known a trader ventures for himself, consequently he exposes himself to all the risks of buying and selling activities as such as a trader the assessee in the said activity has necessarily taken a price risk; an inventory risk; risk of capital deployment in inventory debtors etc. and is called upon to take risks on warranty and on credit extended etc. Accordingly the functions performed, the assets deployed and the risk assumed in trading activity are materially distinct and peculiar to the said activity and can no where to be stated to be identical to what risks a business support service provider would be exposed to. The risks being high, it was urged if the venture succeeds the rewards can also be high. As such the action of the TPO in treating the two separate sets of activities at par is unwarranted on law and facts. It was submitted that the DRP in upholding the order of the TPO had gravely erred in treating the trading activity and the activity of a support service provider also at par. The DRP has also erred on facts and law in presuming that the margins earned by the trader would necessarily apply to the support service provider ignoring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears. It was urged that the assessee, merely provided facilitating services to entities in the supply chain without ever being part of the supply chain. 10.6. In the above background, it was contended that the reasoning of the TPO for adding cost of goods sold while computing margin is not the correct approach and Rule 10B(1)(e)(i) specifically prohibits such an action. The said Rule, it was submitted, specifically provides, that net profit margin in relation to transaction entered into with an AE is to be computed in relation to cost incurred or sales affected or assets employed or to be employed by the enterprise. It was submitted that the cost incurred herein would mean the cost incurred by the enterprise which in the case of the assessee would mean the cost incurred in providing the services. As admittedly since no sales have been affected by the assessee, it would not be appropriate to take costs of sales for computing margin. 10.7. It was also argued by him that even otherwise it is not correct to apply commission rate based on the value of goods sold because it is an accepted fact that the commission would be dictated apart from other various factors also by the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Income 30,40,69,090 30,40,69,090 Total Expenditure 27,66,12,688 27,66,12,688 Profit Before Tax 2,74,56,402 1,46,37,63,544 PBT/Sales/revenue 9.03% 481.39% Capital 8,00,00,000 8,00,00,000 8,00,00,000 Reserves and surplus 1,98,15,112 1,98,15,112 Net worth 9,98,15,112 9,98,15,112 Return on capital employed 27.51% 1466.47% Perhaps, it is impossible to earn 1466.47% return on capital in any business. If we take the transfer pricing adjustment and reconstruct accounts with indent sales treating as trading sales, then the turnover ratio will be as below. 10.9. Addressing the past history in assessee's own case, it was his argument that this itself wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under consideration has been accepted and in the immediately subsequent assessment years, no addition was made by the TPO. Accordingly where the nature of services remain the same applying the margin earned in the trading activity is not the correct approach either under law or on facts. 10.12. Emphasis was laid on the aspect that there is no dispute over the fact that the nature of services provided by the assessee have remained the same. As such there was no occasion for the TPO to re-characterize the transaction of business support services as trading activity. Reiterating the facts reliance was placed on the past history of the assessee on the issue it was urged that absurd conclusions can be drawn if the said action is upheld. Attention was invited to the adjustment of ₹ 3 crore odd and ₹ 143 crore odd proposed by the TPO more or less from the same turnover from the very same activities applying the margins of 1.81% and 13.29%, would result where cost as adopted by the TPO based on FOB value of goods is varying between ₹ 1215 crore odd and ₹ 1212 crore odd. The commission earned by the assessee, it was urged is commensurate with the volume namely & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature and recovered from the customers and assessee was a mere intermediary between the vendor and the ultimate customers. The assessee had followed net revenue recognition method and the Tribunal upheld the CIT(A)'s action in holding that mark up is to be applied to the cost incurred and not the cost of rendering advertising space on behalf of AE. Accordingly it was the contention that the proposed additions upheld by the DRP proved by the AO deserves to deleted. 11. The Ld. DR, on the other hand relied upon the order of the TPO's and the DRP which confirmed the TPO's order in both the years. 11.1. In support of the same, it was contended that the TPO has held that the method adopted by the assessee is not the correct method as such heavy reliance is being placed thereon. It was also his argument that no doubt the assessee is a service provider but for bench-marking what better comparison than assessee's own activity with non-AE. Inviting attention to the well accepted common practice in the market, it was his submission that it is a well known fact that commission in respect of business transaction is always computed with reference to the value of goods for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame and due importance has not been given by the assessee in the course of the arguments, to the said fact. As such these are assets of the assessee company and while determining the arms' length price, the assets so used have to be taken into consideration. 11.7. It was also his submission that it is a well known fact that in such a business, the basis of the starting point is always the gross value of the goods in respect of which services have been rendered and most definitely not the cost incurred in providing indenting services. For the said purpose, reliance was placed upon, order dated 16/12/2012 ITA No.-7977/Mum/2010 in the case of Bayer Material Science Pvt. Ltd. v. ACIT. 11.8. Reliance was also placed upon the judgement of the Coordinate Bench in the case of Li and Fung India Pvt. Ltd. 12 ITR (TRIB) 748 wherein it has been held that the Indian entity should get 80% of the total margin earned by its associates enterprise on account of the fact that there was a human chain intangibles asset which the assessee had deployed. 11.9. Attention was also invited to another order of the Delhi Bench of the Tribunal which had already been relied upon by the Ld. AR namely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst to consider the nature of the business and the business profile of the assessee for our purposes in order to decide the issues before us. The relevance and importance of such an exercise cannot be over emphasized as it is on this edifice that the conclusion in the context of the Rules and provisions, in TP matters can be drawn. Similarly the applicability of the principles of law, as considered in the judgements and orders on which reliance has been placed upon by the parties can be thus considered. In the facts present in the case at hand it is trite law to mention that a judgement decides only what it is called upon to decide. Contextually the principles laid down therein are to be considered in the context of the questions which are required to be considered in peculiar facts and circumstances of that specific case. Thus emboldened by the over-riding and imperative necessity and obsessive compulsions of addressing the facts correctly, we propose to set out once again for out consideration the facts available on record despite, the fact that they had been discussed in the earlier past of this order. Being a fact driven branch of law to our minds the said exercise is necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncipal operating arms of the Group, Nichimen Corporation and Nissho Iwai Corporation were merged to form a new single entity, Sojitz Corporation on April 1, 2004. SCJ is a Japanese entity headquartered in Tokyo. SCJ is a general trading company (also popularly known as sogo shosha in Japanese terms) dealing in a wide range of products and services. Sojitz group has operations in around 50 countries worldwide and operates with a network of 740 consolidated subsidiaries and affiliated companies in Japan and overseas. Sojitz' business activities are wide-ranging, covering machinery and aerospace, energy and mineral resources, chemicals and plastics, real estate development and forest products, consumer lifestyle-related business, and new business development including IT solutions. 12.3. The profile of the SCJ Corporation is as under :- 2.2. Profile of the Group There are two major categories of trading companies in Japan: a sogo Shosha, which is a general or integrated trading company, and specialized trading companies that deal only in specific fields. These sogo shosha are a unique type of business enterprise that is seen only in Japan. They supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Division * Oil, gas, and LNG Oil and gas includes upstream investments and loans; FPSO (floating production, storage, and offloading) vessel ownership; the sale of production equipment and devices; and petroleum product trading, imports, and sales throughout Asia. LNG operations involve investments in gas liquefaction facilities and receiving terminals; LNG vessel ownership; and the import and sale of LNG. * Coal *Coal involves investing in, developing and operating coal mines and the sale of steaming, coking and PCI (pulverized coal injection) coal. * Mineral resources Mineral resources activities include investments in mines and the sale of ore; importing of iron ore, aluminum ingots and copper billet to Japan; and trading of precious metals. * Power and energy chemicals plants Power and energy chemicals plants operations include energy and chemical plants, and the supply and operation of power plants in Japan and overseas. * Renewable energy Chemicals Plastics Division * Chemicals Chemical products involve the handling of about 1,400 items worldwide, including organic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup * ICT Information Communication Technology (ICT) operations include consolidated subsidiary Nissho Electronics Corporation, which provides customers with highly advanced network solutions. * Content Content operations include the provision of capital to a production committee and the export of anime and other content through Sojitz' overseas network. * Environment Environmental operations include a comprehensive recycling business that primarily involves the recycling of automobiles and the proper management of waste materials. * Healthcare In its healthcare business Sojitz undertakes a broad range of activities from supplying the latest medical equipment to acting as licensing agent for drug discovery ventures, providing health foods and essential healthcare services, as well as clinical trial support and other services. Over the years, SCJ expanded to become a major commercial enterprise trading both in Japan and overseas. It operates through 12 domestic and 91 foreign branches with consolidated employee strength of 18,642 employees, offering a truly global network of services. These companies p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * Telecommunications; * Chemical; and * Iron Ore etc. Primarily, Sojitz India deals in export of iron ore, chemicals, marine products and any other industrial products to Japan and other parts of the world. Imports consist of chemicals, high technology machinery, components for the automobile and telecommunication industry, and items of general merchandise. In general, Sojitz India's trading transactions can be classified into two groups-indent sales and proper sales. Indent can also be classified into-import from other country into India, export from India into other country. On its indent trading transactions, Sojitz India's role is that of a mere service provider. Therefore, Sojitz India never takes title or possession of the merchandise at any moment and bears no price risk on inventory. Commission earned by Sojitz India in the indent sales accounts for around 88.67% of its total turnover during FY 2006-07. Majority of the commission earned is from AE. And among the Group Companies Sojitz India's majority of the commission is from Sojitz Japan. Sojitz India's only risk on these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne Matheson in Hong Kong; and Bousteadco and Inchcape in Singapore. 12.6. The nature of services rendered by the assessee are also not disputed for which payments have been made as commission namely (i) Support services for facilitating the trading activities of AE: (ii). Networking with customers; (iii). Identifying potential customers or suppliers etc. 12.7. A perusal of volume I page 214-296 of the assessee's paper book which contains a transfer pricing documentation for the year under consideration would show that the description of assessee's business profile describes assessee as a mere facilitator for import/export of goods for SCJ. The contract entered into by SCJ is directly with the Indian buyer or seller as the case may be and the assessee only provides services of a facilitator. In its business profile, it is also set out in its TP study that the transactions which the assessee enters into can be classified into two groups namely a) indent sales and ii) proper sales. The indent sales have been further classified into import from another country into India and export from India to another country. 12.8. On the indenting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g functions and the assessee provides only support services. The functions of the AE as informed whether as an exporter or an importer and even as a domestic trader in Japan involves sourcing products and developing business opportunities worldwide, marketing and distribution of wide variety of products. The AE enters into a contract with the buyer/seller with regard to the supply of goods directly. 12.12. The T.P study further shows that the development of strategies, entering new ventures, marketing and sales functions are all performed by the AE, all major decisions relating to servicing the contract and related services are also taken by the AE in terms of the extent, timing, sequence and prioritization etc. Further decisions relating to entering into new markets and forays into emerging technologies are also taken by the AE. The assessee on the other hand undertakes indent sales on behalf of SCJ. The transactions involved as per page 240 of the paper book (internal page 23 of the TP study), are described as low level activity and relatively limited risk for the assessee in comparison to a typical Indian export/import company. 12.13. It is seen that it is claimed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nty risk borne by the assessee). Considering all these aspects the assessee is classified as low risk borne company. Accordingly after considering the detailed, FAR analysis of the assessee considered the TP study available on record which has not been controverted by the TPO or the DRP, it is seen that as far as the indenting activities are concerned the assessee is engaged in a low risk activity. 12.16 A further study of its transfer policy report shows that the assessee, for selecting the most Appropriate Method (MAM), considering the applicability/ feasibility of each of the prescribed methods namely * Comparable Uncontrolled Price Method (CUP) * Resale Price Method (RPM) * Cost Plus Method (CPM) * Transaction Net Margin method (TNMM) * Profit Split Method.(PSM) discards all except TNMM, for the reasons given at pages 251 to 255. Since the selection of method is not an issue in the present proceedings reference there to is being avoided. Considering the nature of the transaction and the availability of relevant comparable data, TNMM was considered to be the most appropriate method in selecting the comparables. Discussion t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omers directly whether for export or import. The negotiations are directly done by SCJ and the Indian customers and the assessee merely functions as a facilitator. Looking at the nature of services rendered and the arguments advanced which also remain unrebutted and as such are taken to be correct the assessee does not need to incur cost either for maintaining or storing the inventory or for the transportation as the title in goods is never held by the assessee for its indenting activity as a service provider. Consequently the assessee is not exposed to any credit risk in maintaining the inventory nor is the assessee exposed to price risk or the risk linked with offering credit sales. From the nature of the risk profile of the assessee and on considering the functions performed and the assets deployed it can be safely concluded to be that of a low risk business, which has also been the claim of the assessee. It is a matter of record that in these years the assessee has also shown profits on its own trading with non AEs. In the facts available on record, nothing has been brought on record by the TPO to either justify that the assessee has made a wrong claim on facts while claiming t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases. Transfer pricing litigation as we have seen is very fact drive. Consequently for appreciating the principles laid down in the judgements and orders, a detailed factual study of the business model FAR analysis and even economic conditions, if need be, have to be closely examined. Only then the applicability or relevance of the principle laid down be considered. The issues being purely factual necessarily warrant a detailed discussion. 12.23. In the facts of the present case it is seen that the assessee is using the network of SCJ for rendering its services. Reference may also be made to page 248 of the paper book which contains the TP study of the assessee the same is reproduced for ready reference. Patents, License Rights, and other Intellectual Property Rights The various intangibles required to carry out the operations of the Assessee namely trademark, patents, licence, are owned by Sojitz Japan. Sojitz Japan possesses entrepreneurial knowledge with respect to the operation of the global trading network. Sojitz India has not developed and does not use any intangible assets in its business operations in India. 12.24. As such it is see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the Income Tax Act and the rules there under has the powers to re-characterize the transaction if so warranted on facts, in the facts of the present case, this power has been erroneously exercised. On a detailed consideration of the functions performed by the assessee in the two separate class of activities and, considering the assets utilized by the assessee in the two ventures and on a consideration of the risks to which the assessee is exposed to in the two activities as discussed above we are of the considered that on facts re-characterization was not called for and further the margin earned in one cannot be blindly applied to the other activity in the facts of the present case. 12.28. Thus in view of the above the answer posed in (b) which was to be answered only if (a) was in the affirmative, has still been decided as parties had addressed and the facts were available on record, is also necessarily answered in the negative. 12.29. The query posed in (c) calls upon us to decide whether as per Rule 10B(1)(e)(i), the TPO, in the facts of the present case, was justified in holding that net profits margins should be computed in relation to FOB value of goods/ or the oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been addressed as such we propose to addresses these also at this stage. Since we are of the view that issues in transfer pricing are very fact specific and conclusion necessarily are fact driven as such it may be pertinent to add that while deliberating on facts we have also taken into consideration the orders relied upon by the parties, specifically the department, while deciding the issue in assessee's favour. However in order to maintain coherence and lucidity in our findings which are fact driven, we propose to discuss the judgements subsequently. For the present purposes on consideration of the functions performed by the assessee, the assets deployed using the intangibles of SCJ networks, the risks to which the assessee is consequently exposed we are unable to concur with the conclusion of the TPO that the assessee has created human assets and supply chain intangibles. The unrebutted fact on record is that the assessee has been able to render services utilizing the network of the AE and all intangibles and patents etc. utilized internally belong to the AE and the level and degree of the qualification required of the personnel of the assessee is low and skill require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en accepted though adjustments have not been made as the margins in the trading activity vis- -vis the indenting activity, declined. The Ld. CIT D.R has been at pains to emphasize that no doubt no adjustment was made in the TP proceedings for 2009-10 assessment year but no deviation has been made from the stand taken by the department in the TP proceedings. 12.35. Accordingly on facts for the detailed reasoning given hereinabove on the issues addressed before us we are of the view that the TPO's action upheld by the DRP cannot be upheld by us. 13. We now propose to discuss the orders/judgements which have been referred to by the parties, for our consideration which we have considered before arriving at the conclusion. The principles laid down in the judgements/orders in the facts of the cases have been kept in mind before arriving at the conclusion. However for the sake of convenience and lucidity they are being discussed separately hereunder:- 13.1. The first order which we propose to discuss is the order dated 16.12.2011 in 13.1.2 ITA No.07977/Mum/2010 in the case of Bayer Material Science Pvt. Ltd. 13.1.1 It is seen that therein the stand of the assessee, was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, and second, a payment for dividend, royalty or other income is made to the foreign AE in the garb of payment made to the foreign AE is wrongly characterized as payment of goods or services, it is only a natural corollary of this finding that the payment so made in excess of arm's length price must have some other character. While a lower deduction, on account of ALP adjustment, neutralizes the erosion of domestic tax base caused by reporting artificially lower profits, a simplictor ALP adjustment does not neutralize the non-taxability, in source country, of the payment of dividend, royalty or other incomes to the foreign AEs, in the garb of payment for goods or services. Many countries, including Canada- by way of Section 247(2) of Canadian Income Tax Act, neutralize this ill effect of a payment in excess of arm's length price by providing for re-characterizing the amount paid in excess of ALP. In India, re characterization provisions in respect of payments made in excess of ALP have not yet been legislated, but that does not mean that judicial precedents from the countries where re-characterization of payment in excess of ALP payment is permissible, cease to be releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However for doing so the nature of service/product in respect of which transactions, have been undertaken with related parties and unrelated parties are necessarily have to be the same and identical. 13.3.2 In the facts of the present case, looking at the diverse nature of trading activities entered into by the associated enterprise with its Indian customers ranging from machinery and aerospace, energy and mineral resources, chemical and plastics, real estate development and forest products, consumer lifestyle related business and new business development including IT solutions wherein the assessee is a service provider and the trading activity which the assessee has done at its own level is limited to some sales to local entities. No comparison has been made and the material distinction in the two activities namely that of a facilitator and those of a trader are separate and distinct which makes the conclusion arrived at in the said order/inapplicable. 13.3.3. There is no similarity between the internal comparables applied and the international transactions of support services entered into with the AE. Not only the two activities are entirely distinct which is the material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es for the services computed on the basis of cost plus mark up method. 13.5.2 The crucial fact for holding that FOB value of goods should be the basis for commission of the assessee was the fact that the assessee admittedly utilizing its human intangibles and supply chain intangibles which had created by it at its own cost had performed all, the critical functions and in the facts of that case and the AE demonstrably and admittedly had no competence to execute the contracts on its own and thus being completely dependent on assessee for rendering the services, was earning commission on FOB value of goods and the assessee, on the other hand was being meagerly compensated by cost plus mark up. 13.5.3 Thus in those facts where all the critical functions were being performed by the assessee utilizing its unique intangibles, who had the professional and technical capabilities which was further demonstrated from the fact as the assessee in the facts of that case in the earlier years was claiming and had been allowed Sec 80.0 deductions. Thus the existence of expert knowledge and the demonstrated core competence of the assessee was on record. There is no such evidence/material availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e were internal comparables in the same nature of transactions they were the preferable, comparables. Relevant findings are reproduced hereunder from the said order:- 23. We agree with the assessee's proposition that the nature of indenting transaction is different from the trading transactions. The trading transaction involves risks and finances. Whereas in the indenting transaction the assessee has not to incur any such financial obligation or carry any significant risk. Moreover, we note that in respect of indenting transaction with non-AEs, the average mean margin of profit of 2.26% has been accepted by the TPO. We further find that the indent business of the assessee was nothing but trade facilitation and is purely of indent nature both in form and substance. No material has been brought on record to regard the indent transaction as trading transactions. Accordingly it is seen that no strength can be derived by the Revenue from the said order as in the facts of the present case it supports the case of the view taken. 13.7 Reliance has also been placed on order dated 18.09.2012 in ITA No-5147/Del/2011 in the case of Gap International Sourcing (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate PLI will be net profit/total cost and not the % of FOB value of goods sourced by AE. Accordingly, we uphold the net profit/total cost remuneration model adopted by the assessee. Having held so now we proceed to decide the percentage of markup to be applied to assessee's cost. 13.7.3. Since in the facts of GAP International Sourcing the assessee had applied cost plus 15 % ALP and the entire commission of Li Fung Group to Li Fung India was worked out as per the calculations provided by the assessee's counsel, his suggestion that the OP/TC of Li Fung India worked out of 32.43 % be applied. The said proposal of the assessee was accepted and 32% cost plus mark up was accepted in GAP International. In the facts of the present case the said findings has no role to play as it was a concession given by the assessee in the said case. 14. Accordingly for the reasons discussed hereinabove on facts and law in the light of the arguments advanced before the Bench and the material available on record the ground no 2-5 in ITA No-5186/Del/2011 and ground NO 3 to 8 in ITA No- 543e/Del/2012 are decided in assessee's favour. 15. In ITA 54331/Del/2012 in the remaining ..... X X X X Extracts X X X X X X X X Extracts X X X X
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