AI Drafter 
TaxTMI 
TaxTMI 
2015 (8) TMI 922
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....spute Resolution Panel. 4. The assessee company is a wholly owned subsidiary of Mitsui & Co. Ltd., Japan. Mitsui & Co. Ltd., Japan is one of the leading sogo shosha establishment in Japan. Sogo shosha means general trading and these companies are general trading companies. These companies play an important role in linking buyers and sellers for wide range of products. The range is very wide that it includes grain and oil, machinery, equipment, etc. 5. The assessee company being a subsidiary of the Mitsui & Co. Ltd., Japan provide support services to the various group entities of Mitsui & Co. Ltd., Japan. This support services is the main activity whereby it acts as a facilitator for the transactions entered into by Mitsui & Co. Ltd., Japan and other group entities of the Mitsui & Co. Ltd., Japan. 6. During the assessment year 2007-08 the assessee company has entered into following transactions:- Transaction (Rs.) 1. Provision of services 528,379,089 2. Purchase and sale of goods 118,385,397 3. Purchase of capital goods 1,987,760 4. Interest received 2,227,448 5. Reimbursement of expenses received/ receivable ....
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....is not treated as trading business in substance. You are also required to show cause as to why Rs. 4512 crores should not be included in the cost base of service/commission segment. I propose to apply OP/TC percentage of comparable companies, searched from Prowess on the combined cost base, including the value of goods on which commission is earned by Mitsui India, related to AE segment to arrive at the arm's length profit fro the trading and service/commission segment. A set of following comparable companies were search from database available in the public domain after applying a turnover filter of Rs. 100 Crore in the trading companies. Final set of the comparable companies are hereunder: Company Name OP/OE (percentage)* Frost International Ltd. 1.99 P K S Ltd. 4.34 General Commodities Pvt. Ltd. 3.04 Sakuma Edports Ltd. 2.08 Kotak Ginning & Pressing Inds. Ltd. 2.94 Cottage Industries Exposition Ltd. 3.04 Euro Vistaa (India) Ltd. 5.78 Average (Mean) (percentage) 3.32 * Note: Financial Data of FY 2006-07 9. Computation of arm's length profit from service/commission segment is given below: Approx. ....
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....: Cost base of AE segment (AE-service segment + AE-Commission segment) (A) 45,589,044,859 Mean of OP/TC of comparables (Arm's length OP/TC): (B) 2.49% Operating profit reported: (C) 59,774,453 Arm's length profit (D)=(A)X(B) 1,135,167,217 Difference to be adjusted = D-C(Rs) 1,075,392,764 12. Aggrieved by the draft assessment order passed by the AO as per the recommendations of the TPO, the assessed filed objection before the learned DRP. 13. The learned DRP upheld the action of the learned TPO in recharacterizing the transaction as that of a trader as against service provider. It, however, directed the TPO to exclude one comparable viz., Cottage Industries consequent to which the margin got increased from 2.49% to 2.56%. The adjustment thus was increased from Rs. 107,53,92,764/- to Rs. 110,73,05,095/- in assessment year 2007-08. In the A.Y. 2008-09 14. During the assessment year 2008-09, the assessee company entered into following transactions:- Transaction (Rs.) 1. Provision of services 687,916,048 2. Purchase of goods 127,624,787 3. Sale of goods 23,9....
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.... is nothing but a trading facilitation both in form and substance. There is no allegation nor any material brought on record to suggest that support services/intending transactions are trading transactions submitted by the Learned AR. He submitted further that the TPO has not been able to identify any intangible being created as is being alleged regarding human intangible/supply chain. The Mitsui Japan has been operating since long and doing business on its own since long. The assessee company was established only to provide support services to the existing business of the Mitsui Japan and as such to cut price such transaction and compare the same with the trading transactions is not correct.TPO has not been able to point out any error in the comparables submitted by the appellant company and the same being at arm's length, the adjustment proposed by the TPO and as confirmed by the DRP needs to be deleted. The TPO has gone wrong in benchmarking the business support services provided by the assessee company to AE with that of independent trading transactions for determining the arm's length price in respect of business support services. 18. It was further argued by the ld. AR ....
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....at the right price, at the right time and in the right condition, is wrong and against the facts. In this regard reference made by the TPO in its order about the assessee company having developed knowledge of products and design, knowledge of acquisition, knowledge of quality control, knowledge of storage is wrong and against the facts. These are none of the activities of the assessee company as is evident from the description of business support service provided by it. Assessee company simply provides facilitation services to entities in supply chain without being a part of the supply chain. The assessee company has created human intangibles. In this regard the AR submitted that TPO has just made a literary reference in his order about human intangibles and held that assessee has created human capital intangible ignoring the facts and the detailed reply submitted by the assessee. The facts are that the activities performed by the assessee are routine, preparatory and auxiliary in nature which does not create any intangibles. Organizations providing support services employ human resources for the same and that does not lead to creation of any intangibles. Assessee's role is limi....
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....t of luxury goods or commodities is higher as compared to the percentage of commission or brokerage for high value products like gold, bullion. Similarly the percentage of commission or brokerage for consumer products is always higher as compared to the industrial products. Thus even where commission rate based on value of goods sold to be applied the nature and type of product n respect of which such services have been rendered have to be taken into consideration and then a comparison needs to be made with the commission rate prevalent in respect of such product goods. In the present case the nature of products and items varies a lot. The TPO without even looking at any of these items details has in a most arbitrary manner considered trading as one and the same to support services and applied trading margin in different nature of the product and items to the support services taking turnover of the AE as the basis. That the TPO was not justified in re-characterizing the transaction of business support services as that into trading and applying the profit margin in the trading as the PLI. 21. It was argued by the ld. AR that in the preceding assessment year i.e. 2006-07, the a....
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....n considering that the activity of a service provider is similar to the activity of a trader." 24. The learned AR further submitted that the issue is also covered by the judgment of Hon'ble jurisdictional Delhi High Court in the case of Li and Fund India Pvt. Ltd. vs. CIT 361 ITR 85 (Delhi). Further the above judgment has also been considered again recently by Delhi Bench of ITAT in the case of Mitsubhishi Corporation India (P) Ltd. vs. DCIT, ITA No. 5042/Del/11 dated 21.10.2014 where facts are identical and similar issue has come up and the coordinate bench has held that TPO was not justified in re19 characterizing the transaction as trading transaction and it has been further held that cost of sales can't be included. 25. It was further submitted by the learned AR that even as per TPO's computation no adjustment can be made to the arm's length price in view of the proviso to Section 92C as applicable for the assessment years under consideration the margin is within 5% of the price at which international transaction has been undertaken by the assessee company. In this regard the learned AR submitted that the TPO after holding that cost of goods sold is a relevant criteria ha....
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....y the AR as all these companies are providing support services to the parent company in Japan engaged in Sogo Shosha i.e. general trading companies, but still each of the case has to be considered on its own merit. 27. On the issue of consistency as argued by the learned AR it was submitted by the Learned CIT(DR) that in the year under consideration the TPO has carried out an in-depth analysis and hence the acceptance of the assessee's arm's length price in the preceding year cannot be a ground to not to make adjustment in the year under consideration. On the issue of the alternative submission of the learned AR it was submitted that this benefit is not available to the assessee company as the method applied is only one method i.e. Transactional Net Margin Method. It was contended that the benefit of this proviso will be available only when arm's length price is determined by applying two methods and the difference in the two methods is within 5 per cent. 28. We have considered the arguments advanced by the parties and gone through the orders of the authorities below as well as the judgments relied upon. On going through the order of TPO in the case of the assessee and the or....
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....tomers. Mitsubishi India's sales personnel requirements are Identified by Mitsubishi India and also remuneration of sales personnel is determined by Mitsubishi India. Mitsubishi India is responsible for billing and collection. Mitsubishi India provides market research relating to local market and develops marketing strategy. -Identifying potential customers and suppliers. -Information gathering. -Facilitating communication -Arrangement of logistics. -Accounting and administration. -Developing long term strategic policies. -Dealing with finance, accounting, IT and legal issues. -Human Resource Management: (b) risks assumed by the assessee: -bears volume risk -bears foreign exchange risk -bears manpower risk (c) assets used by the assessee: -Fixed asset" 29. In the order passed by the learned TPO in the case of the assessee before us, the FAR analysis stated by the TPO in para 5.2.1 is exactly the same as stated hereinabove in the case of Mitsubishi Corporation India (P) Ltd.. The conclusion drawn by the TPO and quoted in the judgment of the Mitsubishi Corporation India (P) Ltd. in para 9 of the order are also exactly the same as in pa....
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....es incurred by the AEs in respect of which the assessee company has rendered services and then to work out the profit for determination of the arm's length prices. Our view is also supported by the judgment of the Delhi Tribunal in the case of Sojitz India (P) Ltd. vs DCIT (Supra) where a similar issue has come up. In that case also the learned TPO has included the cost of sale of all the AEs while determining the arm's length price and has also considered the transactions entered into by the assessee company as transaction that of trading activity. The ITAT has examined this issue and has held as under:- "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&....
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....ecord, nothing has been brought on record by the TPO to either justify that the assessee has made 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 recharacterizing the nature....
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....ing network. Sojitz India has not developed and does not 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 i....
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.... per Rule 10B(1)(e)(i), the TPO, in the facts of the present case, was justified in holding 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) ** ** ** (c) ** ** ** (d) ** ** ** (e) Transactional net margin method, by which- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation....
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....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 utilizing any skills which they may have acquired during employment as no specific skills for indenting are required for indenting and acting as a facilitator. It is not the case of the department that the assessee is performing critical functions which admittedly are performed by the AE or that the assessee is contributing by way of analysis, reports and opinions, being provided as such value added services are being performed wherein the analysis/opinions may turn out to the correct or grossly wrong as such due to the high risks of both eventualities occurring the personnel are necessarily highly qualified sought after experts, commanding high salaries. The simple performance of a low risk activity of facilitator does not lead to the conclusion that a human intangible is being created. It is seen that there is no material on record as to how supply chain intangibles are being created as the assessee i....
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....AR analysis set out in the TPO's order, which is summarized in paragraph 7 earlier in this order, does not support the inclusion of inventory costs in the cost base either. 57. In our considered view, to sum up, in a situation in which a business entity does not assume any significant inventory risk or perform any functions on the goods traded or add any value to the same, by use of unique intangibles or otherwise, the right profit level indicator should be operating profit to operating expenses i.e. berry ratio. In such a situation, no other costs are relevant since (a) the cost of goods sold, in effect, is loses its practical significance, (ii) there is no value addition, and, accordingly, there are processing costs involved, and (iii) there is no unique intangible for which the business entity is to be compensated. 65. As for the objection that use of berry ratio is not permitted under rule 10B(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 computation, as set out in rule 10B(1)(e)(i), is exhaustive whereas it is only illustrative and it ends with the expres....
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....d 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 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 analy....