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Marubeni Itochu Steel India Pvt. Ltd., New Delhi Versus DCIT, Circle 16 (1) , New Delhi

2015 (7) TMI 915 - ITAT DELHI

Transfer pricing adjustment - addition on account of alleged understatement of arm's length price in respect of commission income earned by the appellant from its AEs - according to the Ld DR, the TPO rightly rejected the Berry Ratio (PLI) adopted by the assessee and the TPO after rejecting the Berry ratio of the assessee, choose to follow OP/TC as the PLI for computing net profit margin in the support services segment - Held that:- As decided in Mitsubishi Corporation India Pvt. Ltd case [2014 .....

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for use of intangibles was unwarranted.

the use of berry ratio as PLI is appropriate to the facts and circumstances of this case, the objections taken by the authorities below to the use of berry ratio are unsustainable in law, and the adjustments for use of intangibles and locational savings are unwarranted. With these observations, the computation of ALP so far as buy sell segment of assessee’s activities are concerned stands restored to the assessment stage. The matter will be exa .....

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take into account the costs which are not borne by the assessee – following the decision in LI And Fung India Pvt. Ltd. Versus Commissioner of Income Tax [2014 (1) TMI 501 - DELHI HIGH COURT] - It is no longer open to the revenue authorities to reconstruct the financial statements of the assessee by including the cost of products incurred by the AEs, in respect of which services are rendered, in its reconstructed financial statements, and then putting the hypothetical trading profits, so arrive .....

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nt : Shri Judy James, Standing Counsel, DR And Shri Aamir Aziz, Advocate DR. ORDER PER: A.T. VARKEY., J.M. This appeal, at the instance of the assessee, is directed against the assessment order dated 21.01.2015 passed u/s 143(3) r.w.s144C (13) of the Income Tax Act, 1961 (hereinafter the Act ). The relevant assessment year is 2010-11. 2. The brief facts of the case are that the assessee is engaged in the business of trading of steel items and provides liasioning support services to its parent an .....

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Japan (hereinafter referred to as "MO") was formed by the merger of the steel products divisions of major general trading companies Itochu Corporation and Marubeni Corporation. The profile of the Marubeni Group in particular is domestic trading, import/export, and overseas trading of iron and steel and other related products. Marubeni Group is a global trading house with activities in chemicals, energy, infrastructure projects, resource development, telecommunications, multimedia and e .....

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ing support services to its parent and affiliates for purchase and sale of goods from India. It acts as a communication channel between its parent/affiliates companies and third parties in India. 5. The assessee states that it is engaged in undertaking two types of transactions with its Group Companies : a) Provision of support services to its Group Companies - Service Segment - where sales and purchases in relation to the import and export is recorded in the books of AE. The services include th .....

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e of the AE's transactions, as instructed by the AE. b) Purchase of steel products from its Group Companies, for the purpose of resale in India - Trading Segment : • Back to back trading transactions on the basis of confirmed orders for the purpose of resale to preidentified customers in India. 6. During the financial year 2009-10 relevant to AY 2010-11, the assessee company had entered into the following international transactions with its AEs: S.No. Nature of international Transaction .....

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price (ALP) of its international transactions entered with its Associated Enterprises (AEs), the appellant company had undertaken a Transfer Pricing study (pages 55-121 of P.B.) as provided under Rule 10D of the Income-tax Rules, 1962 (hereinafter referred to as "Rules") read with section 92D of the Act. 8. The appellant company had applied Transaction Net Margin Method (hereinafter referred to as "TNMM") as the most appropriate method and, Operating Profit/Value Added Expen .....

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ers) by applying appropriate search filters and average OP/VAE of these comparable companies was computed at 7.52% (using multiple-year data i.e. data for financial years 2007-08, 2008- 09 and 2009-10)( page 102 of P.B.). The appellant computed its own OP/VAE at 7.91 % for the financial year 2009-10 ( page 118 of the Paper Book).Since the OP/VAE (7.91%) of the appellant is better than the OP/VAE (7.52%)of the comparables, as such, indenting transaction entered with the AE was claimed to be at Ar .....

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is better than the mean margin of the comparables, as such, trading transaction entered with the AE was claimed to be at Arm's length. 10. However, the Transfer Pricing Officer (herein after referred to as "TPO") re-characterized the indent based transactions as trading transactions. That vide an order dated 24.01.2014 (pages 145-174 of appeal documents), the TPO rejected the approach adopted by the assessee and recomputed the arm's length price of international transactions p .....

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on such allegations, the TPO added the value of ₹ 955.85 Crores i.e. value of goods on which the assessee has earned commission, to the cost base of service fee and commission segment pertaining to AEs without realizing that value of ₹ 955.85 crores was recorded as sales/purchases in the books of AEs. Subsequently, TPO undertook a fresh search of companies purportedly engaged in steel trading activities and OP/TC margin of selected trading companies i.e. 2.26% was used as the benchma .....

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ployed or to be employed. The Rules do not prescribe for value added cost or value added expenditure to be considered as base for computing the net profit margins. In view of above provision, the claim of the assessee for use of Berry ratio is not acceptable being contrary to Rules 10B(l)(e); (b) Treated the service fee/commission segment as equivalent to trading business, and disregarded the functional and risk differences between the two segments; (emphasis added) (c) Added ₹ 948 Crores .....

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f the assessee is equivalent to the trading business and accordingly compared the assessee with trading companies and also the companies involved in manufacturing activities; (g) The assessee as part of this network and the synergy created by the same should be deriving income commensurate to the intangibles involved. The network of which assessee is a part consists of wholesaler, manufacturer, chemical dealers, paper traders etc. It is doing procurement and as well as sourcing for manufacturers .....

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ributable to the assessee on account of location saving; and (j) The assessee has performed all the critical functions, assumed significant risks and used both tangibles and intangibles developed over a period of time. 12. Relying upon the TPO order dated 24.01.2014, the Assessing Officer vide his order dated 07.02.2014 determined the income of the appellant company at ₹ 212,713,840/-. 13. Aggrieved against the aforesaid draft order of the assessment, the assessee filed its objections befo .....

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onal transactions. And, DRP upheld the order of the AO/TPO in respect of all other grounds. 14. Thereafter, the TPO issued effect order dated 14.01.2015 in accordance with the directions issued by the DRP adopting ₹ 648 crore as the correct FOB value for the purpose of computing adjustment for the value of international transactions. The revised adjustment computed by TPO was ₹ 14,20,93,288. 15. That pursuant to the directions of the DRP and order giving effect by the TPO, the AO in .....

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llant from its AEs. 18. The Ld counsel for the assessee submitted that the TPO/AO has added ₹ 648 crore (recorded as sale/purchase in the books of the AEs) in the AE segment which according him tantamount to treating the service/commission business of the assessee as that of a trader without stating any reason whatsoever. According to him, no basis for arriving at this conclusion has been stated in the said order. No evidence or material has been brought on record by the TPO/ AO to reach t .....

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valent without assigning any reason to arrive at this conclusion. However, the Ld counsel pointed out that the assessee on the contrary has pointed out extensive dissimilarities in detail and took our attention to the chart which reflects the summary of functions & risks of service segment & trading as provided in TPO report is reproduced below for quick reference : 19. A perusal of the chart below shows the Summary of risk borne by MIIP& Group Companies 20. Further, the assessee als .....

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ons are those activities that determine the positioning of a firm's products in a market, and establish marketing techniques that bring products to the customers' attention. Yes No or very limited functions Higher remuneration in trading business should be attributed to additional functions performed and additional risks assumed in trading business as compared to service/ commission business. Sales and Pricing : Product pricing has strategic and tactical components. Strategic pricing inv .....

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enable the firm to locate customers, determine their needs, and provide services or products to meet those needs. In addition, these networks enhance firm's development of a trademark/trade name. Yes Very limited After-sales Service: After-sales service is a mean by which a firm differentiates its products from those of others. After-sales service includes developing technical support and training for distributors and dealers; providing distributors with advice and training to improve opera .....

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ties. Yes No Inventory Risk : Inventory risk relates to the losses associated with carrying finished product inventory. Losses include obsolescence, shrinkage, or market collapse, such that products are only saleable at prices that produce a loss Yes No Inventory carrying cost like warehouse rent and insurance cost Yes No Customer Credit Risk: Customer credit risk is borne by a firm when it supplies products or services to a customer. Yes No Foreign Exchange risk: Foreign exchange risk occurs wh .....

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e commercial world there are various types of business models which are selected by the entities based on commercial factors and expediency. Service fee and commission model is one of the business models. The assessee has chosen to follow the business model of service fee commission and there is no justification for thrusting the business model of trading business to service fee/commission model. 22. On this aspect, the observations of the Co-ordinate bench in the case of Sojitz India Pvt. Ltd. .....

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the action of the TPO in re characterizing the transactions, we are of the view that on the basis of the detailed FAR analysis of the assessees, the "costs" referred to in Rule 10 B (1)(e)(i) does not suggest that in the facts of a case like the present case the 'costs' would mean the FOB value of goods. The assessee demonstrably is a low risk entity as a service provider functioning as a facilitator who is not exposed to price risk, warranty risk, inventory risk, etc., whose .....

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A. No. 50421De1l1l] wherein it was held by the ITAT that: 80. Coming to the service feel commission segment, we have noted that as regards the service feel commission segment, the TPO has re-characterized the same as trading activities as he was of the view that the right course of action will be to treat the same as equivalent to trading segment, because what the assessee has disclosed as service/ commission income is in fact trading income. Accordingly, the cost of goods sold by the AEs, which .....

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nal transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must be AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application of the TNMM. Rule 10B(1) (e) recognizes that "the net profit margin realized by the enterprise .....

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hance the assessee's cost base by considering the cost of manufacture and export of finished goods, i.e., ready-made garments by the third party vendors (which cost is certainly not the cost incurred by the assessee), is nowhere supported by tile TNMM under Rule 10B(1)(e) of tile Rules. Having determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded .....

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t risk." 25 The Ld Counsel thereafter submitted that it also needs to be noted that the question of adding the FOB value on which the assessee has earned service fee/commission as cost of goods sold (COGS) in the cost base does not arise because the assessee does not trade in any goods while performing the service of facilitation of trade and such transaction has never been routed through the books of the assessee. It does not take any title of the goods in form or in substance while perfor .....

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urchases in the books of AEs. According to him, it does not make any sense to include this value in the assessee's service/commission segment. Cost incurred by the assessee in providing such sales support and coordination services are already built in the profit and loss account and does not warrant any addition to the cost base of the assessee. 26, The Ld counsel submits that the AO has proposed to apply a set of trading and manufacturing companies to determine the arm's length price of .....

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l, the application of a set of steel trading companies that assume all entrepreneurial risks is unjustified. Over and above this, the Ld counsel submitted that selecting manufacturing companies as part of the comparable set is a gross misapplication of the Transfer Pricing provisions in India. 27. The Ld counsel submitted that the TPO has erred in stating that the assessee as part of this network and the synergy created by the same should be deriving income commensurate to the intangibles involv .....

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parable companies confronted by the show-cause notice is not acceptable. 28. According to the Ld counsel, the TPO alleged the following while stating that the assessee owns supply chain management intangibles and stated that the assessee has mentioned these functions in its TP report for which the assessee met the allegation as given below : Allegation of TPO Remark of the Assessee Qualifying the contract manufacturer The assessee is not involved in Qualifying the contract manufacturer. Further, .....

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assessee is not involved in Control over contracted manufacturer and quality control over manufacturing process. Further, this function is also not mentioned in the TP Report. Scheduling of the products and order tracing The assessee is involved in scheduling of the products and order tracing. Packaging and labeling The assessee is not involved in Packaging and labeling. Further, this function is also not mentioned in the TP Report. Quality control The assessee is not involved in Quality control .....

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eck prior to shipping. Further, this function is also not mentioned in the TP Report. 29. It was pointed out by the Ld counsel that in addition, the TPO alleged that the assessee is bearing single customer risk wherein the assessee could not work with any other unrelated party as per agreement with the AE. This allegation according to Ld counsel is based on assumption and contrary to the evidences furnished by the assessee that it is dealing with many customers and does not undertake any single .....

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ears capacity utilization risk which according to him, are purely based on assumptions and without any material or evidence on record. 31. It was submitted by the Ld counsel that the TPO has also alleged that the assessee own proprietary information with respect to commission business which is nothing but an intangible asset. Such allegation is also based on assumption. Remark of the assessee with respect to each point is provided below in table : Proprietary information owned by assessee as all .....

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iness. Knowledge of distribution and supply The assessee is engaged in providing support services and therefore knowledge of distribution and supply is irrelevant. Knowledge of quality control Quality control function is undertaken by a manufacturer and not by a service provider, particularly support services as rendered by the assessee. Knowledge of storage The assessee is engaged in providing support services and therefore knowledge of storage is irrelevant. Knowledge of logistics involved in .....

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the location savings in the facts of the case present before him. The Ld counsel reiterated that the assessee has performed coordination and sales support activities for its AEs. The assessee earns commission or service fee for coordination and sales support activities. In fact the very basis on which the TPO has concluded that location savings should be attributed to the assessee is wrong. It is the AEs which procure goods from suppliers in India or sells goods to buyers in India. The terms an .....

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rs of the AEs. It was pointed out by the Ld counsel that the assessee is not a captive service provider as it is not bound to provide services to its AEs only. 34. Strong reliance was placed by the Ld counsel on the Hon ble Delhi High Court ruling of Li & Fung India Pvt. Ltd. (ITA 306/2012) wherein the Hon ble High Court has rejected the application of principles of location savings and human and supply intangibles without any basis. The Hon ble High Court has also held that the cost of good .....

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said submission, it was pleaded that addition made be held as unsustainable. 36. On the other hand the ld. DR submitted that the assessee is aggrieved that his Transfer pricing approach has been rejected and that his Commission/service business has been characterized as that of a trading business and also that FOB value has been included in the cost base, amongst various other grounds. According to Ld DR M/s Marubeni India is a service and trading company and provides liasioning support services .....

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10B. 37. It was submitted by the ld. DR that functions performed, assets employed and risks assumed by respective parties to the transactions are intrinsically linked and intertwined with the method to be adopted for the purpose of computing the PLI of an assessee. Further it was also submitted by the Ld DR that the approach of the tax payer while preparing the TP study should follow the mandate of Section 92C read with Rule 10B of the Act and Income-tax Rules, 1962 respectively. According to Ld .....

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e it is worth noticeable that the Taxpayer has failed to follow the prescribed approach in the true sense, thereby hoodwinking the tax authorities for the purpose of adopting the method to be adopted as per Sub rule (l)(e). According to the Ld DR, TNMM method prescribes three bases namely, cost, assets and sales and also any other relevant base. This forms the denominator of the PLI which ultimately calculates the net profit margin. Applying the doctrine of ejusdem genereis, where particular wor .....

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ing net profit margin in the support services segment. In order to find the appropriate PLI, it is critically important to have relevant data before the Tax authorities such as those enumerated in Rule 10B{2}. The assessee in the instant case has not demonstrated before the Tax authorities, the following :- (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orde .....

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y records that a substantial portion of the profits which the assessee would have earned had the arrangement between the taxpayer and its associated enterprises been at arm's length. At Page 167 of the appeal paper book where the TPO records that the TP report does not demonstrate whether AE has either technical capacity or manpower to assist the assessee. In the absence of any credible evidence, such general remarks to somehow prove the involvement of the AE cannot be accepted. 41. The Ld D .....

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f the TP report, the assessee has the following risk in connection with support services, namely, Market risk, product/service liability risk, credit risk, foreign exchange risk, manpower risk, legal and statutory risk and volume risk. 42. The Ld DR submitted that it is worthwhile to read the provisions of Rule 10B(2)(supra) in general and more particularly Rule 10B(2)(d) with the study conducted by the assessee and farther contended that it will be amply clear that the assessee has failed to co .....

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ntion to the copy of the order of Hon ble Supreme Court admitting the SLP of the department. However we note there is no stay granted by Hon ble Supreme Court while admitting the SLP. 44. According to ld. DR, in LI and FUNG India, the assessee was a captive offshore sourcing provider and was merely a support service provider, whereas in the instant case, the assessee deals in both trading as well as support service (assessee 's admission in the TP study). So at the outset the segments in whi .....

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sk being intrinsically connected to the function performed and the assets deployed, the level of risk demonstrated by the taxpayer in the instant case is inadequate and hence it can only be presumed that the assessee was involved in the key functions of the business, unless categorically rebutted with sufficient evidence. The decision in the case of LI and FUNG proceeded on a different footing and cannot be of any help to the assessee. So the Ld DR does not want us to interfere in the order impu .....

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ng from bulk commodities, such as, grain and oil to more specialised products like industrial equipments, ranging from noodles to missiles. The peculiarities of Sogo Shosha companies have been given elaborately by the Coordinate Bench of this Tribunal in Mitsubishi Corporation India Pvt. Ltd. Vs. DIT (ITA No.5042/Del/2011 order dated 21.10.2014) were also like the assessee (Marubeni Itochu Steel India Pvt. Ltd.) also belonged to the Sogo Shosha establishment in Japan. In the said case also, we f .....

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ed cost or value added expenditure to be considered as base for computing net profit margins. On the said reasoning, the claim of the assessee for use of Berry Ratio was not accepted by the TPO which, according to him, being contrary to Rule 10B(1)(e)(i). The same issue, we find, was before the Coordinate Bench in Mitsubishi Corporation India Pvt. Ltd. (supra) wherein the Tribunal dealt with the same and negated the contention of TPO and upheld the assessee s action of use of berryratio, and we .....

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d that the TPO has also taken up a point regarding locational savings which, according to him, have accrued to the AEs but the compensation model, which provides for a mark up on costs, does not take into account the benefits from the locational savings. It is elementary that locational savings can only relate to net savings in costs that may be derived by an MNE group that relocates some of its activities to a place where labour or real estate expenditures, to cite only a couple of examples, ar .....

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such purchases of goods or services per se donot give rise to a locational saving for the purpose of ALP determination. In the present case, the price advantage to the assessee, on account of sourcing his purchases from India, thus may not amount to any locational savings at all, but then, as we could make out from a perusal of material on record, that precisely is the case of the TPO. No doubt United Nations Practical Manual on Transfer Pricing for Developing Countries does include locational .....

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Es actually buying the goods and not the assessee assisting such buying by way of acting as an intermediary. In a recent OECD report, released as part of a series of deliverables pursuant to the Action Plan on Base Erosion and Profit Shifting (BEPS) project, titled Guidance on Transfer Pricing Aspects of Intangibles , while it is accepted that the principles of locational savings will not only apply to business restructuring but also generally to all situations where location savings are present .....

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independent enterprises operating under similar circumstances would allocate any retained net location savings. We are in considered agreement with this approach but then no such exercise, as suggested in the above four step process, has been carried out in the present case, nor is there any concrete finding even about something as fundamental as existence of locational savings. The TPO has raised some murmurs of locational savings being present in this case but such vague generalities are devo .....

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ived by the independent customer. The question of allocating the locational savings between the AEs would have arisen only when there were any such locational savings but given the facts of the present case that aspect of the matter is wholly academic in effect. 47. The facts & circumstance being similar, we concur with the aforesaid view of the co-ordinate bench and so the adjustment for use of locational savings was unwarranted. 48. Thereafter, the Coordinate Bench considered the other iss .....

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pply chain intangibles and human assets intangibles, but the intangible so developed by the assessee are routine intangibles developed only during the course of work carried out by the assessee and any other intangibles, other than the ones developed in the course of this business, are owned by the AEs and not the assessee company. It is only when intangibles are owned by the person, using these intangibles or transferring these intangibles per se, that the question for compensating for use or t .....

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that is quite different from the intangibles that the assessee uses in the business activities as an input or at the starting point, and, even if there were any such intangibles at the starting point, these intangibles could only have belonged to the AEs of the assessee. The value of intangibles created in the process of carrying out the business activity cannot be built in the compensation for carrying out the activity which leads to creation of these intangibles. In any event, the onus is on .....

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similar activity will essentially have the same intangibles, and no adjustments can be justified or warranted in the cases of routine intangibles. In view of these discussions, as also bearing in mind entirety of this case, the action of the TPO is devoid of any legally sustainable merits on this count as well. 72. The particular business model which gives rise to this edge, assuming that there is indeed an edge, to the assessee is a result of group synergy and intangibles as a result of such gr .....

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expertise which the Tribunal has held to be human capital and supply chain intangibles but such description does not in any way reveal how the appellant bears any risk - either enterprise or economic . Summing up the decision, Their Lordships have further observed that, Tax authorities should base their conclusions on specific facts, and not on vague generalities, such as "significant risk", "functional risk", "enterprise risk" etc. without any material on record t .....

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or assumed. It is to be demonstrated, on the basis of cogent material, by the revenue authorities. 49. Since the facts and circumstance being similar, we concur with the aforesaid observation of the Coordinate Bench and respectfully following the same, we are of the view that use of intangibles cannot be inferred or assumed and needs to be demonstrated on the basis of cogent materials by the TPO/AO and adjustment for use of intangibles was unwarranted. Thereafter, we take note that the Coordina .....

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n assets intangibles; and (c) use of berry ratio is unworkable due to adjustments for variations in accounting policies for recording costs. 64. None of these objections, for the reasons we will set out now, merits acceptance. Rule 10B(1)(e)(i) and use of berry ratio 65. As for the objection that use of berry ratio is not permitted under rule 0B(1)(e)(i) as it does not deal with costs incurred, sales effected or assets employed or to be employed, it proceeds on the fallacy that the basis of comp .....

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relevant. When cost of inventory is excluded from the cost base, for all practical purposes, cost bases consists only of the operational costs. In our considered in a situation in which trading is on back to back basis without anything actually going to the current assets and flash title of goods is held only momentarily, it could indeed actually be a relevant base as to what are the operating costs or value added expenses - particularly when, as we have noted above, no resources are used in the .....

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c element of assets which can be related to high current assets. The TPO has mentioned about use of intangibles but on the question of intangibles as well, for the reasons we will set out in a short while, the stand of the TPO was devoid of any legally sustainable foundation. It is not the case of the TPO that the assessee owns any significant unique intangibles, which are acquired by the assessee at a specific cost , which have significant replacement cost or which are developed otherwise than .....

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pplication of berry ratio 67. As regards the alleged unsuitability of use of berry ratio due to operational difficulties due to variations in accounting policies, it is sufficient to take note of the fact that coordinate benches of the Tribunal have upheld the use of berry ratio in appropriate cases, including the case of GAP International Sourcing India Pvt Ltd (supra), and that no specific issues are raised by the TPO with regard to operational difficulties in the cases of selected comparables .....

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e trading activities only, the issue regarding classification of operating costs are somewhat academic. 69. There is, therefore, neither there is anything inappropriate in the use as such of berry ratio per se, nor there are any real issues with respect to accounting policies of the assessee vis-à-vis accounting policies of the comparables finally selected. Obviously, as final comparables are not yet selected, there cannot be any question of the accounting policies adopted by the comparab .....

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id that, we must may also reiterate that when we are only dealing with trading activities of the tested party and the comparables, without any processing or other costs, the occasion for any impact of significant variations in the accounting policies does not arise. There can be little scope of differences in approach so far as trading costs are involved. 50. In the light of the above decision, respectfully following the same, we repel the contention of the TPO and uphold the contention of the a .....

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ies are concerned stands restored to the assessment stage. The matter will be examined afresh in the light of the above observations which we respectfully concur with that laid by the co-ordinate bench in Mitsubhishi Corporation India Pvt. Ltd. (supra) and the matter is remanded back to be examined afresh at the assessment stage. 52. Next issue is with report to service fee segment which the TPO treated as trading segment. As per the assessee, the assessee is involved in two segments i.e. tradin .....

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wing the order of the Hon ble jurisdictional High Court decision in the case of M/s Li & Fung India Pvt. Ltd vs. CIT (361 ITR 85) has upheld the contention of the assessee that it is no longer open to the revenue authorities to reconstruct the financial statements of the assessee by including the cost of products incurred by its AEs, in respect of which services are rendered, in its reconstructed financial statements and then putting the hypothetical trading profits, so arrived in their reco .....

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isclosed as service/ commission income is infact trading income. Accordingly, the cost of goods sold by the AEs, which was ₹ 2927,92,05,406, was also to be included in cost base of the service/commission segment and then ALP was recomputed. So far as this aspect of the matter is concerned, the issue is now covered in favour of the assessee by Hon ble jurisdictional High Court s decision in the case of Li & Fung wherein Their Lordships have, interalia, observed as follows: …&hell .....

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for application of the TNMM. Rule 10B(1)(e) recognizes that "the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise ..." (emphasis supplied). It thus contemplates a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as .....

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ribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. 81. Clearly, therefore, it is impermissible to make notional additions in the cost base and thus take into account the costs which are not borne by the assessee. It is so opined by Hon ble jurisdictional High Court on a careful analysis of rule 10B(1)(e)(i). It is, therefore, no longer open to the revenue authorities to reconstruct the financial statements of the assessee by i .....

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