TaxTMI 
TaxTMI 
2013 (6) TMI 550
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....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 Rs. 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 law. The learned AO/TPO/DRP has erred in disregarding the following apparent on facts and in law on the facts and circumstances of the case of the Appellant: (a) That the Appellant has complied with the Indian transfer pricing regulations by maintaining appropriate documentation as mandated by Section 92D of the Act and Ru....
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.... 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 t....
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....rprises based on conjecture and surmises. 8. On the facts and circumstances of the case, the Hon'ble DRP has erred, both on facts and in law, in rejecting the contention 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 Rs. 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 Rs. 3.97 crores odd. We find th....
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.... estate development and forest products, consumer lifestyle related business and new business development including IT solutions. The services typically provided by Sojitz India are as follows :- * Support Services for facilitating trading activities of AE. * Networking with customers. * Identifying potential customers or suppliers. Ownership Structure : 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 &n....
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....ly did not demonstrate the value of goods or services on which return had been calculated. * The FOB value of goods transacted through assessee were not furnished. * In a separate class of transactions entered into with unrelated parties, in identical circumstances, assessee had earned a different margin as compared with the assessee transacting with its AE. 6.4. Accordingly for the above mentioned reasons, the assessee was issued a show cause notice and required to explain the same. The show cause noticed issued to the assessee is reproduced in internal pages 3,4 & 5 of the TPO's order. Apart from that the TPO also compared the commission earned on trading sales made in non-AE segment with the assessee's services as a service provider segment and observed that the margin earned respectively was 1.81% and 1.48%. Accordingly he required the assessee to explain why margin of 1.81% should not be adopted to compute the margin that the assessee should have earned on the total FOB value of the goods transacted by it. 6.5. It may be pertinent at this point to extract the relevant portion from the show cause notice repro....
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....value added expenses, it incurs in performing the routine marketing support functions. Accordingly in such cases, adding cost of goods sold (hereinafter referred to as COGS) cannot be the basis for considering bench marking as it is merely providing support service to its AE's. It was urged that if the margin of the limited trading activity entered into by the assessee on its own with non-AE's is considered to be applied to the commission earned as a service provider then it would necessarily tantamount to re-characterization of its auxiliary support service as a trading activity and as such would run foul of Rule 10B(1)(e)(i). 6.9. It was further elaborated that COGS did not address the functions performed assets employed and risks assumed. The cost of sales in the denominator would have been included, had the entity been performing manufacturing functions which is not the position in the case at hand. 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 ....
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....3. However not convinced with the explanation offered, the TPO held that the PLI used by the assessee did not capture the cost of the goods transacted through it, hence it was held that it is not an appropriate PLI. Further on considering Rule 10B(1)(e)(i), he was of the view that the net profit margin should be computed in relation to cost incurred or sales affected or assets employed or to be employed and they did not prescribe for value added expenditure to be considered as base for computing the net profit margins. Thus he was of the view that the compensation module should be expressed as a percentage of FOB price of goods. He also held that human intangible and supply chain intangible had also been created. Accordingly he was of the view that while computing arms' length price, the gross profit margin of 1.81% earned by the assessee on its trading segment should be applied and not the margin of 1.48% earned in its 'trading transaction' with its AE. Accordingly an arms' length adjustment of Rs. 3,97,10,488/- was made as under:- "Commission Income earned from AEs @ 1.48% on Rs. 12,151,252,480/- =Rs. 180,227,181/- ....
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....s the PLI. * The FOB value of goods transacted through the assessee has not been considered while compensating the assessee. * In a separate class of transactions entered into with unrelated parties, in identical circumstances, the assessee had earned a different margin as compared to the assessee transacting with its AE." 8.3. Accordingly consistent with the view taken in the earlier year, the TPO was of the view that the assessee has created human intangibles and supply chain intangibles. Thus in line with the view taken in the earlier year, he was of the view that it would be appropriate to apply the margin earned by the assessee in the trading transaction in the non-AE segment which was 13.29% to the FOB of the goods transacted through the assessee with its AE. 8.4. Accordingly after issuing a show cause notice to the assessee and considering the explanation, he proposed an adjustment of Rs. 14,3637,142/- in the following manner :- Details Amount FOB 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 ass....
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....s panel has carefully considered the facts of the case and submissions of the assessee. As mentioned above, the assessee provided useful information and support services to the AEs in facilitating their trading activities. The functions performed by it have been discussed in detail in the order of the TPO. It has been rightly observed by him that the assessee played a major role in identifying the suppliers, networking with the buyers, helps in collections of accounts receivable, quality control, logistics and vendor development." 10. Aggrieved by this, the assessee is in appeal before the Tribunal in both the years. 10.1. Inviting attention to the material available on record and reading from the orders of the TPO, Ld. AR addressed the Bench on the nature of activities undertaken by the assessee and referring to the material available 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 it....
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....ther in purchase, sale or inventory or making purchases on credit or sales on credit which are some of the risks to which a normal trader would be exposed as its main function and infact the only function is to maintain contact with the suppliers to ensure a timely delivery of merchandise to the customers in the quality/grade and quantity desired and for the said purpose it communicates with SCJ or its affiliates and gathers information on demand and supply of the commodities. The said functions, it was contended are completely distinct and separate and operate in entirely different business model vis-à-vis a trading business. 10.3. In the limited trading activities in which the assessee has ventured into it was urged that the customers have been identified by the assessee at its own initiative and these are not the customer of SCJ. 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 ris....
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....for which no separate skills are required. It was urged that in the eventuality an employees leaves, he does not carry any specific skills or knowledge for which the assessee can restrain him from using it elsewhere in the business world and similarly the substitute does not require any specific training to adjust with the requirement of the role as a service provider as the assessee performs the function of a mere facilitator. 10.5. Similarly, in regard to the allegations of the creation of supply chain intangibles herein also it was urged the assessee company has not developed any knowledge of product, design nor knowledge of or quality control or storage etc as the only service provided by the assessee is of a facilitator. These facts will be evident from the description of the business support service provided to the TPO in the both years. 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) specifical....
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....at any of these items details has in a most arbitrary manner considered trading activity as one and comparable, to the activity of support services and applied trading margin earned in different nature of products and items for which support services have been rendered to the AEs. 10.8. It was urged that if we consider transfer pricing adjustment as proposed by the TPO and upheld by the DRP very absurd results will follow. For the said proposes attention was invited to synopsis dated 19.02.2013 in 2008-09 assessment year relevant portion from pages 13-14 is being extracted hereunder:- Particulars Audited Accounts Reconstructed accounts by Ld. TPO Total 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% Pe....
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....ssessee company was incorporated and the assessee has been consistently bench-marking its international transaction relating to business support services using TNMM as the most appropriate method with OP/TC as PLI. As such it was his argument that this is a correct method which in the immediately preceding assessment year to the years 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 Rs. 3 crore odd and Rs. 143 crore odd proposed by the TPO more or less from....
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.... the assessee therein was engaged in namely assessee was an advertising agency engaged in undertaking advertising services for its customers in respect of their products and brands in the capacity of an agent. The payments made to the third parties were claimed to mere pass through in nature 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 com....
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....ties carried out for the supplies have rightly been applied for determination of the arms' length price. 11.6. Addressing the findings of the TPO upheld by the DRP in regard to the development of the human chain intangibles, it was his contention that the assessee has built the same 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 ma....
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....subjectivism and arbitrariness, cannot be over emphasized. Thus on a careful consideration of the facts circumstances and position of law in the light of the judgements and orders cited before the Bench, we are of the view that in the peculiar facts and circumstances, it is necessary first 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 comp....
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....ed in April, 2003. The Sojitz Group was formed through the business integration between Nichimen Corporation and Nissho Iwai Corporation. These two companies have a history of over a century. This business integration took shape in December 2002 and was followed on April 1, 2003, by the incorporation of a joint holding company. The principal 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....
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....nd sale of bearing, primarily at a JV in China, sales of Surface Mounted Technology (SMT) equipment and telecommunications equipment, and steel plant transactions in Japan and overseas. * Aerospace Aerospace business involves support for sales of Boeing commercial aircraft in Japan (Which have a market share of more than 85%) and the sale of Canada's Bombardier commuter aircraft in Japan (market share of 100%). * Ships Ships involve the supply of shipbuilding equipment and marine-related equipment, the brokering, purchase and sale of new and secondhand ships, and the ownership of ships. Energy & Mineral Resources 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 termin....
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....p; In forest products, Sojitz is recognized as a leader in Japan's forest products market. Sojitz imports timber and timber products from many sources, conducts offshore trading of forest products, invests in overseas forest product supply bases, and has operations in Japan covering the distribution of forest products and housing and construction materials. Consumer Lifestyle Business Division * Textiles Textiles are one of Sojitz's traditional strengths. The company has competitive products in many categories, including raw materials for textiles, textile fabrics, bed linen and apparel. * Foods Food operations are guided by the main themes of "food safety and peace of mind" and include grains, seafood, meat, and other products. Sojitz has a large number of contract producers and JVs in Japan and other countries. Overall, the company has an integrated value chain extending from upstream raw materials and processing to downstream retail sales. * General commodities General com....
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....at New Delhi and a branch office along with a warehouse at Mumbai. Sojitz India was primarily incorporated to undertake trading activity. The company is engaged as a service provider to the various subsidiaries of SCJ for providing sales support and business information. SCJ undertakes its trading activities in India through Sojitz India. In case of import of goods for buyers in India, SCJ has a contact with the Japanese supplier. Further, SCJ also enters into a contract with the buyers in India. Accordingly, Sojitz India is a mere facilitator for these import sales transaction. Similarly, for exports also Sojitz India is a mere facilitator. SCJ enters into a contract with the Indian supplier directly for the purchase and sales transactions. The assessee has entered into various arrangements with different subsidiaries of SCJ and the main services among others include the following: Business support services * Support in business promotion * Support in aft....
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....ction in indent sales business is to maintain close contacts with the suppliers to ensure timely delivery of merchandise to the customers, in the quantity and grade desired (for exports); maintaining close contacts with Sojitz Japan's customers in India to understand their needs (for imports); communicating with Sojitz Japan or its affiliates; gathering information on demand and supply conditions of these commodities in India; and liaising with government or industry groups. In case of proper transactions, the Assessee performs trading function. It takes the ownership of the goods before selling to the buyer. Sojitz India doesn't engage in any significant proper transaction during this period. Accordingly, Sojitz India provides support services for facilitating both exports and imports in India through Sojitz Japan and other Group Companies. The support services include gathering information about customer requirements, products, local prices, market trend, etc. 12.5. In regard to the competition, it faces following facts are narrated :- 12.5.1. Competition The....
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....of the merchandise or enters into contracts in its own name. Consequently it bears no price risk on inventory risk. It is also narrated in the TP study filed by the assessee that the commission earned by the assessee in the indent sales accounts, be it export or import it accounts for about 88.67% of its total turn over for 2006-07 financial year and majority of the commission earned is from its AE and amongst the group companies, the assessee's majority of the commission is from SCJ, Japan and the only risk which the assessee is exposed to is the volume risk. As assessee is a mere service provider and all decision making negotiating planning and network of SCJ is utilised by SCJ itself Since volume risk is directly borne by the SCJ and its associates the assessee's risk here is also minimal. The functions in indent sales business is to maintain close contacts with the suppliers to ensure timely delivery of merchandise to the customers in that quantity and grade desired for exports; maintaining close contacts with SCJ customers in India to understand the needs for imports communicating with SCJ, Japan etc. 12.9. The unrebutted TP Report states that in the category of pro....
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....e TP study are always entered into by the SCJ or its group entities with the Indian exporter or importer as the case may be. Since the customers are located in India, the assessee merely maintains relationship with the customers in India for SCJ and its affiliates. Addressing the low level of functions performed, the TP study, describes the assessee as acting merely as a conduit. The customers largely being traditional, consequently the marketing efforts in identifying the customers are also minimal. The negotiations with the supplier and the customers are always undertaken by SCJ and the assessee merely acts as a conduit for passing the information between the SCJ and the customers. Consequently analyzing the functions performed show that the assessee was described as a limited service provider with a minimum risk in regard to the strategic policies: Finance and Accounting, IT Legal and Human Resources Management etc. 12.14. It is seen that the assets utilized by the assessee are vehicles, lease hold improvements, computers office equipment, furniture and fixture all totaling to about Rs. 1,10,10,079/- [as per the page 248 of the TP report]. As per the TP Study Report on record....
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.... it is not an issue raised in the present proceedings. The assessee took itself as the tested person the OP/TC was considered as the most appropriate PLI by the assessee. 12.17. In the above background it is seen that the TPO has discarded the method and computed the Arms Length Price (ALP) on the basis of profit earn by the assessee in its trading activity and the margin earned thereon has been applied on the basis of total FOB value of the goods. 12.18 In the aforementioned background we are of the view that in order to adjudicate upon the issues it would be appropriate for us to formulate the questions as under:- (a) Whether the TPO on facts was justified to treat the indenting activity at par with the trading activity ; (b) If the answer to the query posed in (a) is "yes" then were the margins earned in the trading activity by the assessee with non AEs correctly applied to the indenting activity with AEs ; (c) If the answer to the query posed in (b) is "yes" then would the 'costs' referred to in Rule 10B (1) (e) (i) be the FOB value of goods on the facts of the present case or w....
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....e a wrong claim on facts while claiming to be engaged in indenting activities or was infact performing all or some of the functions of a trader, in which eventuality the TPO would have been well within his rights to re-characterize the assessee's indenting activities as a trading activity. It is an accepted economic principle that the trader acting as an entrepreneur is exposed to price risk, cost risk, credit risk, warranty risk etc, which would necessitate the contract being entered into and negotiated by assessee. In its indenting activity these facts are not evident. Accordingly the question posed in (a) is answered in the negative. 12.21 Considering the next question posed, even if the answer in (a) is in the negative, we see that there is no reasoning and justification for applying the margins earned in trading activity to indenting activity as the two are distinct and separate. Merely because the assessee was also having a small level of trading activity in its own name, there is no reason available on record either justifying the action of re-characterizing the nature of assessee's activity from a service provider to that of a trader. As observed, neither the TPO....
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....t use any intangible assets in its business operations in India." 12.24. As such it is seen that no intangible assets are held by the assessee in terms of supply chain intangibles etc. It is further seen that the AE is trading in a diverse range of goods right from aero space, chemicals, plastics, high technology machinery, automobiles, tele-communications industry or reality etc. and no effort has been made to show that the limited trading activity belongs to which of those segments were anyway the FAR analysis shows that there is no comparison in the two activities 12.25. Accordingly on account of these facts, we are unable to agree with the TPO who chose to re-characterize the activities of the service provider and treated them at par with the activities of a trader since the nature of the activities of a trader and service provider are materially distinct and different. 12.26. As we have held on facts that the two sets of activities are distinct and different, consequently we are of the view that there is no justification for applying the margins earned in trading activity to those earned in the indenting services. As such, we find ourselves unable to agree with the re....
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....ng that net profits margins should be computed in relation to FOB value of goods/ or the operating cost to the assessee. The said query was also to be addressed only if the answer posed to us in the said question was in the affirmative. Herein also it is seen that although the answer is in the negative but, since the parties have addressed and the facts are available on record we propose to deal with the said question also. 12.30. Rule 10 B (1) (c) (i) reads as under:- Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely : (a) ** ** ** (b) ** ** ** ....
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....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 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 req....
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....tment 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 that the trading activity and the indenting activity was similar as such segmental profits were not required to be considered. This stand of the assessee was neither approved by the TPO nor by the ITAT as the FAR analysis demonstrated that the function and risks of the two activities were very different. 13.1.2 The assessee's....
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....ength 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 relevant in India. These decisions, though they go a step further than the present legal position in India, continue to be as relevant and as useful as they would have been in the absence of such re characterization provisions in the respective countries. The rationale and logic of these decision....
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....ities 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 distinction but even otherwise, no similarity has been established in the nature of goods in which the AE's have transacted with the buyer Indian supplier and the assessee has traded at its own level. 13.4. Attention has also been invited on behalf of the revenue to the order dated 3....
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....ch 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 available on record to suggest that the assessee which came into existence in March 2005 had the expert knowledge available for taking critical decision. The critical decisions admittedly were taken by the AEs i.e. SCJ and its affiliates who have been global players for over 50 years. The contrac....
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....enting 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 (India) Pvt. Ltd. v. ACIT for the proposition that Li & Fung case was considered and distinguished by the assessee. The Revenue has relied upon the same for the proposition that make up of 32% was upheld in the TP....