TMI Blog2023 (6) TMI 1211X X X X Extracts X X X X X X X X Extracts X X X X ..... e upon the case of the TPO or learned DRP by enlarging the scope of the appeal. Thus, considering the fact that in the PLI of the comparables, cost of goods is not included in the denominator, in our view, the same would also apply to the assessee. Hence, cost of goods cannot form part of the denominator of PLI. Accordingly, we direct the Assessing Officer to compute the ALP by applying PLI of operating profit to value added cost, excluding the cost of goods. Grounds are allowed. - ITA No. 2281/Del/2022 - - - Dated:- 13-6-2023 - SHRI G. S. PANNU , PRESIDENT AND SHRI SAKTIJIT DEY , JUDICIAL MEMBER For the Assessee : Sh. Ajay Vohra , Sr. Advocate Ms. Ananya Kapoor , Advocate For the Revenue : Sh. Rajesh Kumar , CIT - DR ORDER PER SAKTIJIT DEY , J. M. : Captioned appeal has been filed by the assessee challenging the final assessment order dated 21.07.2022 passed u/s. 143(3) read with section 144C(13) of the Income-tax Act, 1961 pertaining to assessment year 2018-19, in pursuance to the directions of learned Dispute Resolution Panel (DRP). 2. At the outset, Shri Ajay Vohra, learned Sr. Counsel, appearing for the assessee, on instructions, submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e observed, the PLI of OP/VAC, otherwise known as Berry ratio, taken by the assessee as against OP/OC has rendered the benchmarking of the assessee flawed. He observed, in case OP/OC is taken as PLI of the assessee, the profit margin will work out to 0.09% as against OP/OC (Median) of the comparables of 9.51%. Accordingly, he issued a show cause notice to the assessee to explain why OP/OC should not be taken as PLI of the assessee to determine the net margin. Though, the assessee furnished a detailed reply opposing the adoption of OP/OC as PLI on the ground that since, the comparables are in business auxiliary services, they do not have any cost of goods, hence, the assessee has taken OP/VAC as the PLI after reducing cost of goods. TPO, however, was not convinced with the submissions of the assessee. Adopting OP/OC as the PLI of the assessee, he proceeded to determine the arm s length margin of the assessee qua the comparables and proposed an adjustment of Rs.82,12,60,000/- to the ALP disclosed by the assessee. While framing the draft assessment order, the Assessing Officer added back the transfer pricing adjustment proposed by the TPO. Challenging the said adjustment, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee earns fixed profit margin of 10 basis points on purchase price, which covers the administrative cost with a little mark-up. 9. Learned counsel submitted, since the assessee did minimal value addition in respect of the goods purchased and sold under the merchanting trades, such value addition could be considered akin to that done by business auxiliary service providers for application of TNMM. He submitted, unlike a routine trading activity where traders buy goods from vendors for re-sale purpose and stock the same in their custody and perform several functions and bear multiple risk, the assessee had not gone through that process, as the merchanting trades were conducted in high seas beyond the custom barriers of India, wherein, the transfer and title of goods passes from ADM Sarl to ADM Asia Pacific instantaneously on back to back basis. He submitted, the substantive difference in the functional and risk profile between the merchanting and physical trade business has been recognized in various judicial precedents. In this context, he drew our attention to a decision of Tribunal in the case of Kargil India Pvt. Ltd. vs. Addl. CIT (ITA No. 4095/Del/2010 dated 28.11.2013). He s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating margins of comparables in business auxiliary service provider segment. He submitted, the operating cost base of the comparables, being service providers, is similar to the value added cost base of the assessee with respect to merchanting activities primarily comprising of employee cost and other related/allocable overheads, such as, rent, electricity, communication expense etc. Thus, he submitted, in the given circumstances, the PLI of the assessee has to be OP/VAC. In this context, he drew our attention to OECD guidelines on berry ratio. Further, in support, he relied upon the following decisions : (i). Sony Ericsson Mobile Communications India (P) Ltd. v. CIT (2015) 55 taxmann.com 240(Delhi) (ii). Sumitomo Corporation India(P) Ltd. v. CIT (TS-493-HC- 2016(DEL)-TP) (iii). Li Fung India Pvt. Ltd. v. CIT (ITA No. 306/2012) (iv). Mitsubishi Corporation India Ltd. vs. DCIT (ITA No. 5042/Del/2011 dated 21.10.2014). (v). Marubeni Itochu Steel India Pvt. Ltd. v. DCIT (ITA No. 761/Del/2015 dated 24.07.2015) (vi). Schefenacker Motherson Ltd v. ITO (123 TTJ 509) Delhi. (vii). Cheil Communications India Pvt. Ltd. v. DCIT (ITA No. 712/Del/2019 dated 30.11.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee enters into a trade transaction only when it can earn reasonable return covering its administrative cost. Meaning thereby, it is not the AEs but the assessee who determines when to enter into the trade. Further, he submitted, in the TP study report, there is no mention of retaining of fixed price margin of 10 basis points. Learned Departmental Representative submitted, assessee s contention that it has not undertaken any risk or has undertaken limited risk, is unacceptable as the materials on record reveal that the assessee is involved in all the activities/functions which happens in any independent high seas purchase/sale transaction. He submitted, once the purchase contract is signed, the risk and the title of the goods immediately passes from seller to the assessee and the assessee company becomes the owner. Therefore, the assessee becomes responsible for all the risks associated with the goods. He submitted, even, the assessee is required to arrange insurance. He submitted, the insurance documents also make it clear that it has to be arranged and covered by the assessee. He submitted, as per the terms of the purchase contract, all the taxes, levies, duty etc. present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar entities with different yardsticks. For instance, as mentioned during the course of hearing also, use to two different PLIs meaning comparing two elephants and taking height as yardstick for one elephant and weight as yardstick for another elephant. Use of two different PLIs in one case, that in comparability studies will always fetch unreliable results which can never be applied any TP study. Further the transfer pricing guidelines, even if it may be subjective but the subjectivity can never be taken to be point where it results in absurdity. Thus it is humbly prayed that in view of the above discussion, the assessee's appeal may kindly be dismissed as all the issues raised by the assessee are not backed by any evidence and also they are in contradiction to the transfer pricing provisions of the Income Tax Act. 15. As regards judicial precedents cited by learned counsel for the assessee, learned Departmental Representative submitted, they are distinguishable on facts, hence, not applicable to assessee s case. 16. In rejoinder, learned sr. counsel submitted, the audited financial statements of the assessee have been prepared in accordance with the Indian ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s forming part of the PLI, such as, operating profit, value added cost have been accepted by the TPO. Therefore, the submission made by the Departmental Representative regarding lack of segmental bifurcation etc. is outside the purview of appeal, as it is neither the case of the TPO nor DRP. Therefore, he submitted, at this stage, learned Departmental Representative cannot improve upon the reasoning of the departmental authorities so as to enlarge the scope of the appeal. 18. We have patiently and carefully heard the parties, given a thoughtful consideration to the detailed submissions made, both orally and in writing, perused the materials on record and also applied our mind to the judicial precedents cited before us. 19. The crux of the dispute lies within a narrow compass, as to, what should be the PLI of the assessee qua the PLI of the comparables. Before we proceed to address this issue, it needs to be observed that in Form 3CEB, the assessee has reported revenue from two separate segments, firstly, merchanting trades segment and secondly, trading segment. In so far as the trading segment is concerned, the assessee, though, purchases (agricultural products) from its AEs, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the role of the assessee is limited. Thus, to recover the administrative cost with little mark-up, the assessee is remunerated at 10 basis points of the purchase invoice. 21. From the aforesaid facts, it is clear that the functions performed and risk undertaken by the assessee is that of a business auxiliary service provider and not different from them. It is further established from the fact that the comparables selected by the assessee are business auxiliary service providers and the TPO has found them to be functionally similar to the assessee. That being the functionality of the assessee and the comparables, it needs to be examined whether PLI adopted by the assessee is acceptable. The TPO has rejected the PLI of OP/VAC on the ground that it is not in conformity with Rule 10(B)(1)(e). Of course, the DRP has endorsed the view of the TPO. 22. At this stage, it is necessary to look into the relevant statutory provisions relating to determination of ALP of international transactions with AEs. Section 92 of the Act provides for computation of income having regard to the ALP of international transactions with AE. Section 92C of the Act provides the methods for computation of AL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the operating expenditure incurred by the assessee. The operating expenditure incurred by the assessee effectively captures the functions performed and risk undertaken by the assessee. Thus, in a case where assessee uses an intangible as a part of its business, berry ratio may not be an appropriate PLI, as the value of such intangible would not be captured in the operating cost. Similarly, berry ratio is not appropriate PLI for determining the ALP in cases where the assessee may be having substantial fixed assets since, the value added by such assets would not be captured in berry ratio. However, it can be applied where the operating expense adequately represent all functions performed and risks undertaken. Thus, the Hon ble High Court held that berry ratio is effectively applied only in case of stripped down distributors who have no financial exposure and risk in respect of the goods distributed by them. Various other decisions cited by learned Sr. counsel lay down the ratio that Rule 10(B)(1)(e) does not completely rule out applicability of berry ratio. 24. Keeping in perspective the legal position enunciated in the judicial precedent cited before us, if we examine the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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