TaxTMI 
TaxTMI 
2023 (6) TMI 1211
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....LP) of the international transactions relating to merchanting trades. 4. Briefly, the facts are, the assessee is a resident corporate entity. As stated, the assessee is engaged in the following streams of activities : (i). Trading Activity : In this segment, the assessee undertakes physical trading of agricultural commodities, such as, sorghum, barley, wheat, oilseeds, yellow peas etc. (ii). Merchanting trades: In this segment, the assessee undertakes merchanting trade in agricultural commodities under Foreign Exchange Management Act and guidelines issued by Director General of Foreign Trade (DGFT). 5. In the year under consideration, the assessee undertook various international transactions with its Overseas Associated Enterprises (AEs) and in the audit report in Form 3CBE reported following transactions : (i). Merchanting activities(Sales) 906,74,08,330/- (ii). Merchanting activities (Purchase) 905,83,49,086/- (iii). Purchase of traded goods(Yellow & Green peas) 59,61,31,527/- (iv). Payment of interest 29,081/- 6. After verifying the 3CBE report as well as Transfer Pricing Study Report (TPSR) of the assessee, the TPO ....
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....on-resident entities, are pre-identified and the assessee merely acts as a facilitator/service provider/arranger. Explaining further, he submitted, assessee enters into purchase contract with ADM International Sarl, Switzerland(ADM Sarl) and a back to back sale contract with ADM, Asia Pacific Trade Pte. Ltd. (ADM Asia Pacific) to buy and sell agricultural commodities, such as sorghum, barley and wheat. He submitted, the sale and purchase contracts are entered into instantaneously and title to the goods involved in the merchanting activities is transferred immediately in high seas without entering the custom barrier of India. He submitted, the logistics of loading and unloading the commodities are managed by the original buyer and seller, ie., ADM Sarl and ADM Asia Pacific and the assessee is not engaged in either managing logistics or packaging and labelling of the goods. He submitted, even, the assessee does not take possession of the goods involved in the merchanting activities, hence, has no responsibility of maintaining warehouses and storing the goods. 8. He submitted, the price for purchase and sale of goods under the merchanting activities are based on price information p....
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.... to the merchanting activities, the assessee has a separate segment of physical trade and the inventory in the books of account are entirely on account of such physical trades. 10. He submitted, this can be further demonstrated from the fact that in merchanting trades, commodities traded are corn, sorghum, barley and wheat, whereas the inventory maintained by the assessee for physical trade pertain to yellow peas and oilseeds. He submitted, for merchanting trades, the assessee has neither kept any inventory nor has any fixed asset, as only few employees in India from accounting and finance department are involved primarily for preparing contracts, raising invoices and other accounting and administrative functions in relation to trades. Thus, he submitted, in such scenario, the assessee is merely undertaking auxiliary support function, which cannot be considered to have contributed in developing supply chain or creating human asset intangibles with reference to merchanting trades. He submitted, the buyer and seller in merchanting trades are related parties and predetermined and the assessee merely resells the goods to a pre-identified AE after purchasing from another AE and retai....
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.... is permissible under Rule 10(B)(1)(e). Thus, he submitted, the adjustment should be deleted. 13. Per contra, learned Departmental Representative submitted, the audited financials of the assessee do not make any distinction between the traded goods and merchanting goods. He submitted, as per the audited financials, the assessee has only one segment of trading activities. Drawing our attention to the Transfer Pricing Study Report, he submitted, as per the segmental reporting, the assessee is primarily engaged in the business of trading of agricultural products and there is no mention of merchanting activities in the segmental reporting. As regards assessee's contention that in the merchanting trade segment, it is more like a risk free entity as it is only indulging in flash transfer of title and receiving 10 basis points on the purchase invoice value, learned Departmental Representative, inviting reference to RBI Circular No. RBI/2019-20/152 dated 23.01.2020 submitted that the circular clearly provides that the merchanting trader should be genuine trader of goods and not merely financial intermediaries who operate on behalf of somebody. Thus, he submitted, the basic premise of th....
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....transaction undertaken by it. He submitted, though, sales from merchanting trades contribute 98% of the total revenue earned by the assessee, however, the expenses allocated to merchanting trades constitutes 0.19% of the total expenses, which has absolutely no basis. He submitted, the PLI of berry ratio adopted by the assessee is not at all applicable as the assessee is a full-fledged trader of goods and the value of goods definitely has a role in the profits earned. Finally he summed up his submissions as under : 1) The assessee company is clear cut high seas trader as it performs all the functions of high seas trader and also assumes all the risks associated with the high seas trade. 2) In the case of assessee company , there is no such things as merchanting activities and the artificial difference is sought to be created between merchanting trade and normal trade which appears to be done only for the sake of transfer pricing benchmarking study. 3) The assessee company assumes the title of the goods and after taking the ownership of the goods is exposed to all risk and rewards. 4) The assessee company cannot be treated as a stripped down distri....
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...., as, both the activities fall under the broad spectrum of trading. He submitted, based on accounting treatment alone, it cannot be inferred that the functional and risk profile of the merchanting trades and other physical trades carried out by the assessee are same from transfer pricing standpoint. Further, he submitted, at this stage, learned Departmental Representative cannot make out a new case for the department, as the distinction of merchanting trades and physical trade has been acknowledged by the TPO and he has accepted assessee's determination of ALP for physical trades. Whereas, he made adjustment only on merchanting trades undertaken by the assesse. As regards the contention of the Revenue that as per RBI Circular, only genuine merchanting trade transactions are allowed and not financial intermediaries, learned counsel submitted that the assesse undertakes genuine buy-sell trades of physical commodities and is not a financial intermediary in the sense it does not act as a link between the parties like mutual funds, bank etc. 17. He submitted, learned Departmental Representative has failed to appreciate the nature of functions performed and risk assumed in the physica....
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.... far as merchanting trades segment is concerned, the assessee had applied TNMM as the most appropriate method to benchmark the transactions. Not only the TPO has accepted applicability of TNNM, but has also accepted the comparables selected by the assessee, who are basically business auxiliary service providers. The assessee has computed its profit margin by applying OP/VAC as the PLI. While doing so, the assessee has excluded cost of goods from the denominator. It is the case of the TPO that since the PLI of the comparables is OP/OC, the assessee cannot have a different PLI, but it has to be OP/OC. 20. As discussed earlier, in merchanting trades, the assessee enters into a purchase contract with one of its overseas AE, viz, ADM Sarl. Whereas, it sells the purchased goods to another overseas AE, ADM Asia Pacific. Though, technically, the assessee had entered into purchase and sale contracts for buying and selling goods, however, in reality, the assessee merely acts as a facilitator of buying and selling of goods between the two AEs. As per the business model, the goods purchased from ADM Sarl are sold to ADM Asia Pacific in high seas without entering the custom barriers of India....
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....ecomes clear, the computational mechanism is in several steps. In the first step, the net profit margin of the enterprise (in the present case, the assessee) realised from the international transaction with AE has to be computed in relation to cost incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. In the second step, the net profit margin realised by an enterprise (in the present case, comparables) from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. In the third step, necessary adjustments, if any, is made to the profit margin of comparables to take care of the differences that may be arising in the margin of the controlled transactions, which could materially affect the amount of net profit margin in the open market. In the fourth and fifth steps, the net profit margins of the controlled and uncontrolled transactions are compared and the ALP is determined. Thus, as could be seen from the computational mechanism provided in rule 10B(1)(e), it is not rigid but flexible. The net profit margin of the assessee can be computed not only in relat....
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....cord that the operating cost of the comparables are not inclusive of cost of goods, as they are business auxiliary service providers, hence, they do not have any cost of goods. Since, the assessee is found to be functionally comparable to the business auxiliary service providers, it is established that the assessee has undertaken limited functions and risk in the merchanting trades segment and earns a fixed profit margin. Therefore, in our view, the cost of goods cannot be included in the denominator of the PLI. Thus, for the assessee, return on value added cost will be the relevant base for computing the net profit margin to bring the profit margin of the comparables in alignment with that of the assessee. 25. Having held so, for the sake of completeness, we are of the view that various contentions of learned Departmental Representative need to be addressed. In course of hearing, learned Departmental Representative submitted that the accounts of the assessee as well as the TP study report disclose only one segment, i.e., trading segment. The merchanting trades segment is nowhere found either in TP study report or anywhere else. Thus, he has submitted that assessee's contention ....