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Commissioner Of Income Tax Versus Marubeni India Pvt. Ltd

2015 (4) TMI 948 - DELHI HIGH COURT

Transactional Net Margin Method (“TNMM”) - Transfer pricing adjustment - whether TNMM was the most appropriate method for transfer pricing determination in arriving at the arm’s length price (ALP) to bench mark the assessee/respondent’s international transaction regarding “provision of agency and marketing support services” for AY 2008-09? - Held that:- TPO discarded TNMM as the most appropriate method, holding that the assessee assumed significant risks, and relied on unique intangibles thus re .....

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ween them and Indian enterprises in the transactions arranged independently between them. The observations that the AE’s decisions were taken by the assessee is a general one, unsupported by any independent material; it is anecdotal and based on the TPO’s belief, rather than objective fact based analysis. There was, as a result, no question of its assuming higher risk or using its highly valued intangibles.

This court also concurs with the ITAT’s finding that the assessee’s risk was l .....

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ged in arranging for feasibility studies, industry analysis, and project evaluation for potential projects identified by its AEs. It is quite evident that the TPO based his findings and conclusions on the decision of the ITAT in Li Fung (2011 (9) TMI 204 - ITAT, New Delhi), which was subsequently reversed by this Court. Resultantly, we hold that the ITAT’s conclusion that the TNMM was the most appropriate method and that the TPO had to make a fresh determination of the ALP of the disputed intern .....

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Ravindra Bhat 1. The revenue, in this appeal, questions a decision of the Income Tax Appellate tribunal (ITAT) in ITA No. 5397/Del/2012 dated 03-06-2014. It is argued that the impugned order erred in holding that the Transactional Net Margin Method ( TNMM ) was the most appropriate method for transfer pricing determination in arriving at the arm s length price (ALP) to bench mark the assessee/respondent s international transaction regarding provision of agency and marketing support services for .....

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goods and services; inter alia it is independently engaged in trading. For AY 2008-09, five international transactions were reported by it. The controversy in this appeal is with respect to one international transaction, i.e. provision of Agency and marketing support services. The assessee was compensated ₹ 32,18,11,018/- during the assessment year. It selected the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit Level Indicator (PLI) of OP/OC and repo .....

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or to India. The TPO held that the assessee's functions to its AEs were not only confined to providing marketing support services but also in arranging for feasibility studies, industry analysis and project evaluation for potential projects identified by the AEs. It was held that besides providing agency support and acting in the capacity of liaising agent for various AEs, the assessee helped them to make conscious sale and purchase decisions. The TPO noticed that the assessee made sizeable .....

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n in receiving compensation. It was also held that the assessee performed all the critical functions in the process of rendering services to its AEs by assuming significant risks. The TPO therefore held that the assessee was inadequately compensated by its AEs and the Profit Split Method (PSM) had to be applied for determining the ALP of the international transactions under this segment. In reaching this conclusion, the TPO relied on an order passed by the Delhi Bench of the ITAT in M/s Li & .....

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PO applied a ratio of 70:30 in favour of the assessee by holding that 70% of the total profit earned by its AEs from the goods traded from or to India should have been given to the assessee. He considered total volume of trading transactions of MCJ group on global basis at ₹ 4,35,000 crores and odd; worked out OP/OC of the MCJ group on global level at 1.78%; determined FOB value of goods outsourced from India at ₹ 24,208 crores; applied ratio at 1.78% on such FOB value to determine t .....

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djustment of ₹ 30.14 crores on the basis of PSM was applied by relying on the Tribunal s order in M/s Li & Fung (supra). 4. The assessee unsuccessfully objected to the addition, before the Dispute Resolution Panel (DRP) against the draft order passed by the Assessing Officer. The DRP approved the application of PSM by relying on the decision of the Tribunal in the case of M/s Li & Fung (supra). Aggrieved by the addition of ₹ 30.14 crores, the assessee approached the ITAT. 5. .....

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India, AEs and the assessee. The assessee acted as a mediator between its AEs and customer/vendor from India. The facts showed that on the one hand, the responsibilities of AEs extended to contracting, pricing, sourcing, scheduling, procuring, inventory management, logistics, marketing, credit management, quality and compliance of global laws etc.; those of the vendors/customer from India extend to contracting, pricing, scheduling, negotiating, inventory etc. On the other hand, the assessee was .....

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e critical functions of its AEs. This finding was unsubstantiated especially with regard to any specific functions performed by the assessee. The TPO did not elaborate any critical function except saying that the assessee was also engaged in arranging for feasibility studies, industry analysis, and project evaluation for potential projects identified by its AEs. 6. It was held that the ITAT s order in Li and Fung (supra) influenced the decision (of the TPO) that the assessee should get 70% share .....

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prises in the transactions arranged independently between them. There was, as a result, no question of its assuming higher risk or using its highly valued intangibles. The ITAT held that the TPO repeatedly reiterated that the assessee played a crucial role in the transactions between AEs and Indian parties by using valuable intangibles which has benefited the group as a whole, but never substantiated those conclusions. On the basis of its appreciation of the facts and the decision of this Court .....

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, the conclusion drawn by the authorities in applying the PSM by basing their finding on the strength of the order of the Tribunal in the case of M/s Li & Fung (supra) cannot be sustained because of its reversal by the Hon'ble Delhi High Court. Ergo, we set aside the impugned order in making the transfer pricing adjustment of ₹ 30.14 crore. The ITAT lastly concluded that there was no reference to the names of comparables in the TPO's order while working out the alternative, PSM .....

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e ALP of the disputed international transactions of Provision of Agency and marketing support services' amounting to ₹ 32.18 crore. We order accordingly. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such de novo determination of the ALP. 7. It is contended by Ms. Suruchi Agarwal on behalf of the revenue that the ITAT fell into error in holding that the TNMM was the most appropriate method and rejecting the PSM adopted by TPO and confirmed by .....

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y that assessee were never challenged and the TP exercise was accepted. 8. It was next argued that the ITAT erred in holding that FOB value of the goods sourced from India should be taken as the cost base for the purpose of computing ALP to benchmark the international transaction in respect of agency and marketing support services. It was argued that the assessee s submission on its business model, in the larger supply chain of Sogo Shosha Group of Companies, and the erroneous assumption that it .....

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e PSM as the most appropriate method. 9. The TPO, in his order, after discussing the rival contentions and further elaborately noticing various decisions, recorded practically no reasons why the TNMM was not appropriate. His allusion to development of unique intangibles or assumption of significant risks was not based on any logic, much less materials. That order was an incantation of the statute and conditions spelt out in the rules. To hold that the PSM should be applied, it was stated that: T .....

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not tenable in view of the fact that the Assessee is creating unique intangibles which have given an advantage to the AE in the form of the low cost of the product, quality of the product and enhanced the profitability of the AE. These intangibles have increased profit potential of the AE though cost for development and use of intangibles was not taken for computations of routine markup earned by the appellant. The reply of the assessee is without any basis. As mentioned in the preceding paragra .....

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eloped and used the supply chain and human intangible. The assessee is providing all critical functions and the majority of work related to these exports is performed by assessee itself. Associate enterprise had no capacity to execute the work on its own. The critical and all crucial work is done by assessee himself. It has further been held by the Hon'ble ITAT that the AE is paying back to the assessee only on the basis of cost plus mark up. Such an arrangement cannot be said at arm's l .....

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fact that majority and crucial services rendered by assessee, the Assessee is not being compensated on an arm's length basis. Accordingly, the distribution of compensation, received by AE on the FOB value of the goods sourced from India, between the assessee and the associated enterprise should be in the ratio of 70 : 30. The assessee must get 70% of the profit earned from the goods sourced from India. The assessee has raised a point that in the show cause notice, while calculating the opera .....

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s, including the Tribunal, misdirected themselves in holding that LFIL assumed substantial risk. Whilst this court would neither state that LFIL performed functions with a limited risk component, as it does not engage itself in manufacturing of garments (which is LFIL's stance), apart from the broad assumptions made by the Revenue, no material on record testifies to that fact such that it can be the basis for an arm's length price adjustment. Indeed, LFIL has neither made investment in t .....

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nufactured independently. Thus, attributing the costs of such third party manufacture, when LFIL does not engage in that activity, and more importantly, when those costs are clearly not LFIL's costs, but those of third parties, is clearly impermissible. A contrary conclusion would amount to treating it (the appellant) as the vendor/exporters partner in their manufacturing business-a completely unwarranted inference. 43. Indeed, having done the work, LFIL has developed experience and expertis .....

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t did not bear any financial risk. To the contrary, its costs towards establishment, transportation, salaries, etc., were fully reimbursed and it was insulated from any economic or financial downside to any particular transaction. In other words, its remuneration was based entirely on the costs borne by it. In essence, it is a low risk contract service provider exclusively rendering sourcing support to the associated enterprise. It does not bear any significant operational risks for its function .....

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unique intangibles thus resulting in higher profits of the AE which should be attributed to it. In a given case, concededly this can be argued if the facts can logically support such a conclusion. However, the revenue cannot merely state that significant risks, such as credit, operational, manpower and other risks were borne or that the assessee s business was subjected to fluctuations. It merely mediated between the AEs and customers/vendors in India. Furthermore, it only supplied information .....

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