Tribunal adjusts transfer pricing for corporate entity in agricultural commodities trade

The Tribunal allowed the appeal of the assessee, a resident corporate entity engaged in trading agricultural commodities, challenging the adjustment proposed by the Transfer Pricing Officer to the Arm's Length Price of international transactions related to merchanting trades. The Tribunal held that the assessee's functions were similar to business auxiliary service providers and directed the Assessing Officer to compute the Arm's Length Price using Operating Profit (OP) to Value Added Cost (VAC) as the Profit Level Indicator, excluding the cost of goods.

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Issues Involved:

1. Adjustment to the Arm's Length Price (ALP) of international transactions relating to merchanting trades.

Summary:

Issue 1: Adjustment to the ALP of International Transactions Relating to Merchanting Trades

The assessee, a resident corporate entity engaged in trading and merchanting trades of agricultural commodities, challenged the final assessment order dated 21.07.2022, which included an adjustment proposed by the Transfer Pricing Officer (TPO) to the ALP of international transactions related to merchanting trades. The TPO had rejected the assessee's use of Transactional Net Margin Method (TNMM) with Operating Profit (OP)/Value Added Cost (VAC) as the Profit Level Indicator (PLI), instead insisting on OP/Operating Cost (OC) as the PLI, leading to a proposed adjustment of Rs. 82,12,60,000/-.

The assessee argued that it acted merely as a facilitator in merchanting trades, with minimal value addition and risk, earning a fixed profit margin of 10 basis points on the purchase price. The assessee's role was limited to administrative functions, and the goods never entered India's custom barriers, being transferred in high seas.

The assessee contended that the PLI of OP/VAC was appropriate, as the comparables selected were business auxiliary service providers with no cost of goods, and the assessee's functions and risks were similar. The assessee cited various judicial precedents supporting the use of Berry ratio (OP/VAC) under Rule 10(B)(1)(e).

The Revenue argued that the assessee was a high seas trader assuming all associated risks and rewards, and the application of Berry ratio was inappropriate. The Revenue also noted the lack of segmented financial reporting and questioned the genuineness of the merchanting trades.

The Tribunal observed that the assessee's functions in merchanting trades were akin to those of business auxiliary service providers. It held that the cost of goods should not be included in the denominator of the PLI, aligning the profit margin computation with that of the comparables. The Tribunal directed the Assessing Officer to compute the ALP using OP/VAC as the PLI, excluding the cost of goods.

In conclusion, the Tribunal allowed the assessee's appeal, directing the adjustment to be computed using the appropriate PLI.

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