AI Drafter 
TaxTMI 
TaxTMI 
2015 (7) TMI 915
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.... finally the assessment was completed u/s 143(3) of the Act, vide order dated 21.01.2015 at a total income of Rs. 14,49,14,380/-. 3 The Ld. Counsel, Shri Himanshu Shekhar Sinha submitted that Marubeni Itochu Steel Inc., 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 environmental systems. MO is a general trading company (also popularly known as sogo shosha in Japanese terms) dealing only in steel. MO has the ownership control of Marubeni Singapore which, inturn holds 99% share capital & Marubeni Japan holds remaining 1% of Marubeni India. 4. The appellant/assessee, Marubeni-Itochu Steel India Private Limited ("MIIP") / "the Appellant") brought to the notice of the TPO that assessee is a service and trading company and provides liaisoning supp....
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.... 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 Expenses (OP/VAE) for support services and Operating Profit/Sales (OP/Sales) for trading activity was selected as the Profit Level Indicator(hereinafter referred to as "PLI") to benchmark its international transactions entered with its Associated Enterprise.(see page 88-89 of P.B.). 9. That, in order to arrive at arm's length price, the appellant company carried out a benchmarking analysis; and to benchmark its indenting segment, appellant identified comparable companies (service providers) 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/V....
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....288/- : (a) The provisions of Rule 10B(1)(e)(i) that that the Rules prescribe that the net profit margins should be computed in relation to cost incurred or sales affected or assets employed 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 Rs. 948 Crores (which are purchases/sales in the books of the AE and upon which MIIP earns service fee/commission) to the cost base of the assessee; (d) Proceeded to compute the arm's length price of the said transaction by applying the percentage of operating profit earned by externally identified comparable companies to the aforesaid cost base and accordingly, made upward adjustment to the total income of the assessee; (e) The assessee is reimbursed based on cost plus model; (f) The commission busin....
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.... was Rs. 14,20,93,288. 15. That pursuant to the directions of the DRP and order giving effect by the TPO, the AO in the order of assessment dated 21.01.2015 determined income of the appellant at Rs. 14,49,14,380/- by making an upward adjustment of Rs. 14,20,93,551/- to the Arm's Length Price declared by the appellant. 16. The appellant, being aggrieved, has preferred the instant appeal before us. 17. Ground No. 2 to 8 of Grounds of Appeal are regarding addition of Rs. 142,093,551/- on account of alleged understatement of arm's length price in respect of commission income earned by the appellant from its AEs. 18. The Ld counsel for the assessee submitted that the TPO/AO has added Rs. 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 the aforesaid conclusion. As per the Ld counsel, the TPO has acted outside his jurisdicti....
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....product-specific advertising campaigns. Yes No Distribution Network: Distribution networks 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 operations and profitability; and ensuring component availability. Yes No Warranty and replacement services: The warranty support function is generally performed by the entity from which the customer receives a level of service prescribed by the legal obligation under the warranty Yes No Warehousing activities : Warehousing activities is performed for stocking the goods in which the trader deals in. It involves decision regarding level of inventory to be stocked, insurance and other incidental ac....
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....ld 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 funds are not locked in the cost of goods, title in goods never vests with the assessee contracts are entered in the name of SCJ and its affiliates at one end and the customers in India also in their own names. In these unrebutted facts on record, the TPO was not correct in holding that the 'costs' as per the Rule were FOB value of goods." 23. Similarly, the ld. Counsel took our attention to the view of the decision of co-ordinate bench in the case of Mitsubishi India Pvt. Ltd. [LT.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 A....
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....indenting transaction the assessee has not to incur any such financial obligation or carry any significant 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 performing coordination and sales support functions for its AEs. It does not assume title of the goods and the risks associated with such assumption of title are not borne by it in the service fee/commission business. The assets that are employed in assumption of the title to the goods are different from service transactions carried out without assumption of title. The assessee earns commission from its AEs on export to India or, in few cases, import from India. The FOB value is the sum of sales and purchases in the books of AEs. According to him, it does not make any sense to include this value ....
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....ontract manufacturer. Further, this function is also not mentioned in the TP Report Identifying appropriate source of goods The assessee is not involved in Identifying appropriate source of goods. Further, this function is also not mentioned in the TP Report. Warehousing of goods The assessee is not involved in Warehousing of goods with respect to its commission transactions. Further, this function is also not mentioned in the TP Report. Control over contracted manufacturer and quality control over manufacturing process The 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. Further, this function is also not mentioned in the TP Report. Consignment of the goods The assessee is not involved in ....
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....isitions have no relevance to its business. 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 exports of goods The assessee is engaged in providing support services and therefore knowledge of logistics is irrelevant. 32. The Ld counsel submitted that the TPO has alleged that the assessee has generated location savings due to huge difference in cost of procurement between high cost economy and low cost economy like India. 33. The afore said view of the TPO according to Ld counsel suggest that he has failed to comprehend the business model of the assessee and wrongly applied the concept of the location savings in the facts of the case present before him. The Ld counsel reiterated that the assessee has performed coordina....
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....s for purchase and sale of goods in India. It acts as a communication channel between its parent/affiliates companies and third parties in India. The assessee has used OP/VAE as the PLI for application of the TNMM method on support services. According to Ld DR in order to approach the main contentious issues as stated above, it is important to understand the relevant provisions of the TP rules as prescribed by the Statute under Rule 10B and took our attention to Rule 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 DR, the prescribed methodology to be adopted while conducting a TP study should contain all factors enumerated in Rule 10B(2), namely sub rules (a) to (d). So, according to the ld. DR, the assessee in the instant case failed....
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....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 DR submitted that the TPO after carefully examining the facts and law in the case notes that several unique intangibles have been developed by the assessee and used by the AE for its business in India, thereby enhancing the profitability of the AE without assuming any responsibility. The Ld DR submitted that the assessee bears a substantial amount of risk as the Supply Chain Management of the assessee is used by its AE and its affiliates in Japan and Asia respectively. In the risk analysis part of 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 10....
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....e expression, means 'general trading'. So they are generally described as 'general trading companies'. The assessee is a wholly owned subsidiary of MO. These "Sogo Shosha" companies are unique in the world of commerce and play an important role in linking buyers and sellers for products ranging 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 find that the same issues, which are seen in this matter, have been discussed in detail, evaluated and adjudicated. We find that the TPO had observed that the PLI arrived by the assessee taking the 'Berry Ratio' has not been found acceptable for the TPO because, as per him, the provisions of Rule 10B(1)(e)(i) prescribe that net profit margins should be computed in relation to costs incurred, sales eff....
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.... 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 savings' in its comparability analysis and defines it as "net cost savings that an MNE realizes as a result of relocation of operations from a high cost jurisdiction to a low cost jurisdiction" but then it is not even TPO's case that any business operations have been relocated from another location to this location. There is no specific identification of locational savings or even efforts to compute the same. In any event, locational savings in procurement of goods, even if any, will arise to the AEs 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 a....
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....'s observations that the compensation model adopted in this case does not provide for meeting the costs of developing supply 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 transfer of intangibles arise. There is nothing to corroborate and support the vague generalization that cost plus method does not "capture the compensation for development and use of intangibles". It is not even the case of the TPO that these intangibles were acquired or developed by the assessee by incurring certain specific costs and such costs are not taken into account in the compensation model. In the process of carrying on a business activity, an assessee may develop certain intangibles but that is quite different from the intangibles that the assessee uses in the bus....
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....ablish such findings. If such findings are warranted, they should be supported by demonstrable reason, based on objective facts and the relative evaluation of their weight and significance". These observations equally apply to the fact situation before us as well. As learned counsel for the assessee very aptly puts it, all these intangibles, as perceived by the TPO, are more of his figment of his imagination rather than based on any cogent material. The use of intangibles cannot be inferred 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 Coordinate Bench adjudicated the "Berry Ratio" as under:- "TPO's other objections to application of Berry Ratio 63. We have noted that the TPO has raised three other objections with respect to the berry ....
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.... 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 as a bye product of carrying out routine business activities of the assessee. As we have noted elsewhere in this order, not only that there should be intangibles in use in the business and owned by the assessee but such intangibles should be uniqueunique to the assessee which are not found in the comparables. A trained workforce, unless it has significant development cost or replacement cost, is a routine business intangible which almost all comparables will have. Cost classification issues in application 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 be....
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.... 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 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. trading segment and service fee/commission fee segment. In respect to the computation of ALP by the assessee reflected for trading segment is not disputed by the TPO. However, in respect to the other segment which was claimed by the assessee as income from service fee/commission fee segment, the TPO, however, disagrees with the assessee's contention and tr....
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....oyed 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 opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear. 40. The TPO's reasoning to enhance 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 venders (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the 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 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 finan....