AI Drafter 
TaxTMI 
TaxTMI 
2025 (7) TMI 1290
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 3. First we take appeal of the assessee in ITA No.3472/Del/2024 [Assessment Year 2020-21]. ITA No.3472/Del/2024 [Assessment Year 2020-21] 4. Brief facts of the case are that the assessee, M/s. Samsung SDI India Pvt. Ltd. is a subsidiary of Samsung SDI Co. Ltd., engaged in the business of manufacturing and trading in Battery packs used in mobile phones and was incorporated on 10.04.2019, having its registered office in Noida. The assessee e-filed its return of income, declaring NIL income on 14.02.2021 for the year under consideration. The same was processed u/s 143(1) of the Act on 30.03.2021, determining the total income at NIL. However, due to challenges faced by the assessee company in obtaining manufacturing licenses and other commercial reasons, with effect from 01.01.2020, the assessee company has shifted its business model from manufacturing to distribution of battery packs, wherein it purchased battery packs from a single Indian vendor, namely Elentec India Pvt. Ltd. ('Elentec') and sold the same to a single Indian customer, namely, Samsung India Electronics Pvt. Ltd. ('SIEL'). From the period April 2019 to November 2019, it carried out test-runs & i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....4 wherein adjustment of INR 1,27,79,403/- were computed for distribution segment and of INR 11,22,976/- for manufacturing segment and accordingly, the total adjustment of INR 1,39,02,379/- was proposed by the TPO. Subsequently, the AO passed final assessment order on 26.09.2024 u/s 143(3)/144C(13) r.w.s. 144B of the Act wherein the total income of the assessee was assessed at INR 1,39,02,380/- after making addition on account of transfer pricing adjustment after the directions given by the Ld. DRP amounting to INR 1,39,02,379/-. 6. Against this order, the assessee is in appeal before the Tribunal by taking following grounds of appeal:- 1. "That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO has erred in making addition of Rs. 1,39,02,380/- to the loss of Rs. 3,66,84,816/-declared by the Appellant in its return of income for AY 2020-21. 2. That the Ld. DRP/AO/TPO erred in not adjusting the returned losses of Rs. 3,66,84,816/- for the relevant AY against the addition of Rs. 1,39,02,380/- to the income of the Appellant, which, if adjusted, would have nullified the demand on the Appellant. 3. That on the facts and circumstances o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2 are general in nature hence, not adjudicated. 8. Ground Nos. 3 and 5 raised by the assessee are not pressed hence, dismissed. 9. In Ground No.4 to 7, the assessee has challenged the action of AO/TPO/DRP in determining the ALP of international transactions related to distribution segment by applying PLI of Net cost plus margin under TNMM as against Berry ratio taken by the assessee for computing PLI. 10. Ld.AR for the assessee submitted that under distribution segment, the assessee placed orders for purchase of goods against confirmed order received from its customer and since there is only one supplier i.e. Elentec and only customer i.e. SEIL, the assessee is not required extensive marketing activities and limited marketing were carried out. Ld. AR further submitted, that assessee enters into purchase contract with Elentec and a back to back sale contract with SEIL to sell the mobile batteries, where the purchases and sale contracts are entered into instantaneously. He submitted, even, the assessee does not take possession of the goods involved in the distribution activities and goods were directly transferred from the supplier to the customer hence, has no responsibili....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... via their parent entities Research and Development ✓ x x Vendor and Customer Identification ✓ x - Purchase of Finished Products Limited to purchase price determination ✓ (Against confirmed orders) - Quality Control x ✓ Limited Distribution Limited to sale price determination ✓ (Against confirmed orders) - Logistics and Warehousing x x ✓ Marketing ✓ Limited x After Sale Services x ✓ X Support Activities x ✓ x Summary of risks assumed Risk Related Parties Unrelated Party SDI Korea Samsung SDI Elentec India/SIEL Business/Market Risk ✓ Limited ✓ Research and Development Risk ✓ x x Inventory Risk x x ✓ Product Liability Risk ✓ Limited ✓ Credit and Collection Risk x Limited x 27. From the above tables, it is evident that the Appellant's FAR has following attributes and hence, it is a limited function and risk distributor: 27.1. Buys battery packs from one seller Elentec India and se....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and risk undertaken by the Assessee. The relevant paragraphs are extracted below for reference: 45. Traditionally, the denominator of the ratio only comprised of selling, general and administration expenses. However, the Treasury Legislation of USA also included depreciation as a part of the Operating Expenses used as a denominator in the berry ratio. As is apparent, Berry ratio has limited applicability; it can be used effectively only in cases where the value of goods have no role to play in the profits earned by an Assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. In other words, the operating expenditure incurred by the Assessee effectively captures all functions performed and risks undertaken by the Assessee. Thus, in cases where an Assessee uses intangibles as a part of its business. Berry ratio would not be an apposite PLI as the value of such tangibles would not be captured in the operating cost and, therefore, it would not be appropriate to compute the ALP based on net profit margin having regard to the operating cost as a relevant base. Similarly, Berry ratio would not be an appropriate PLI for determini....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s analysis, Charles Berry determined that the best method for determining an arm's length result was to compare the Swiss distributor's mark-up on operating expenses to the same mark-up earned by uncontrolled (Le, third-party) distributors performing aubstantially similar functions. Berry's key Insight in the case was that distributors should earn a return commensurate to the distribution services performed and that the value of the products being distributed, in other words, was irrelevant. The implicit emphasis was thus on the service element even in trading activity, and in the costs incurred on rendering this service rather than in the value of goods traded. That was a case in which the assessee was simply involved in distributorship function without much risks, though certainly much more risks than in a back to back trading, associated with inventories or with uncertainties of normal trading. The key contribution to the economic activity was recognized as performing the distributorship function rather than the value of goods sold. Accordingly, distributors must achieve a particular gross profit in order to compensate them for their services, the costs of which are ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the same and particularly as there is no value addition or involvement of unique intangibles, the berry ratio should also be equally relevant as in the case of a limited risk distributor." 33. The use of OP/VAE or the Berry Ratio as an appropriate PLI has also been upheld in the following judicial precedents in India: * DHL Logistics (P.) Ltd. v. DCIT, [2020] 115 taxmann.com 40 (Mumbai-Trib) (refer pg. 76 of CLC) * Marubeni Itochu Steel India (P.) Ltd. v. Dy. CIT [2015] 60 taxmann.com 464/ [2016] 156 ITD 620 (Delhi-Trib.)/(ITA No. 761/Del/2015 dated 24-7-2015) (refer pg. 105 of CLC) * Dy. CIT v. Cheil Communications India (P.) Ltd. [2011] 11 taxmann.com 205 (Delhi) (refer pg. 123 of CLC) * Agility Logistics (P.) Ltd. v. DCIT, [2022] 138 taxmann.com 545 (Mumbai - Trib.) (refer pg. 150 of CLC) * ADM Agro Industries Kota & Akola (P.) Ltd. v. ACIT [2023] 151 taxmann.com 232 (Delhi - Trib.) (refer pg. 140 of CLC) 34. Further, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2022 provides guidance regarding applicability of the Berry Ratio and reads as under (refer pg 263 of CLC): ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the final assessment order, the Appellant's GP/VAE will be at arm's length and the entire addition will get deleted. It is submitted that even if NP/VAE (Net Profits/Value Added Expenses) is considered as PLI, Appellant's NP/VAE will be at arm's length. The same is evident from the below computation: Sr.No. Company Name TPO Unadjusted Margins Berry Ratio Allowed (GP/VAE) Berry Ratio Allowed (NP/VAE) 1. Ramakrishna Electro Components Pvt.Ltd. 1.51% 1.34 0.34 2. Susan Electricals India Pvt.Ltd. 1.66% 1.23 0.23 3. Shree N M Electricals Ltd. 3.04% 1.55 0.55 4. Sumitron Exports Pvt.Ltd. 3.82% 1.17 017 5. EnarayanElex India Pvt.Ltd. 4.20% 1.80 0.80 6. Aditya Industech Ltd. 7.32% 1.35 0.35 7. Balaji Switchgears Pvt.Ltd. 7.57% 1.91 0.91 8. Gemini International Pvt.Ltd. 11.09% 1.68 0.68 9. Vallabh Impex (India) Pvt.Ltd. 13.56% 1.95 0.95 Count 9 9 9 35th Percentile 3.82% 1.35 0.35 Median 4.20% 1.55 0.55 65th Percentile 7..32% 1.73 0.68 SDI Margins 2.06% 1.64 0.64 Op....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lity control which reads as under:- e. Quality Control "Quality Control activities involve establishing and enforcing minimum standards to ensure that inferior goods/services are not sold to consumers. This process involves testing and analysing the finished product/service. Quality control can be pursued by employing a combination of automated quality control equipment and qualified inspectors. For conducting its assembly operations, Elentec India procures raw materials (lithium lon cell) from SDI Korea and its affiliates, which comply with quality guidelines / parameters defined by SDI Korea. SDI Korea performs quality control procedures for all such raw materials provided to Elentec India. There is no role of SDII in the procurement function of raw material by Elentec India. However, during Elentec India's assembly operations, SDII's engineers, comprising of a team of three personnel, monitor and control the quality of the battery packs so assembled, to ensure compliance with quality standards prescribed by SDI Korea / SEC Korea. In the initial stages of SDII's operations (i.e. manufacturing operations), SDI Korea had sent certain ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en care in the in the margin retained by the assessee. From the perusal of the financial statement, it is seen that the assessee has not incurred any cost on account of finance charges i.e. no interest is paid to financial institutions or banks which further prove that the assessee is having sufficient funds. Under these circumstances, it can be held that the assessee is a low risk distributor. 15. The Hon'ble Delhi High Court in the case of Sumitomo Corporation India (P.) Ltd. vs CIT (supra) while considering the application of Berry ratio has observed as under:- 45. "Traditionally, the denominator of the ratio only comprised of selling, general and administration expenses. However, the Treasury Legislation of USA also included depreciation as a part of the Operating Expenses used as a denominator in the berry ratio. As is apparent, Berry ratio has limited applicability; it can be used effectively only in cases where the value of goods have no role to play in the profits earned by an Assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. In other words, the operating expenditure incurred by the Assessee effectively ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....I by making following observations: 22. At this stage, it is necessary to look into the relevant statutory provisions relating to determination of ALP of international transactions with AEs. Section 92 of the Act provides for computation of income having regard to the ALP of international transactions with AE. Section 92C of the Act provides the methods for computation of ALP. TNMM is one of the approved methods for computing ALP. Rule 10B(1)(e) lays down the mechanism for computation of ALP under TNMM. On a holistic reading of Rule 10B(1)(e), it becomes 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 adjustmen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in case of stripped down distributors who have no financial exposure and risk in respect of the goods distributed by them. Various other decisions cited by learned Sr. counsel lay down the ratio that Rule 10(B)(1)(e) does not completely rule out applicability of berry ratio. 24...... 25..... 26. On examination of facts on record, we find that the aforesaid submissions of learned Departmental Representative are extraneous to the issue at hand. Admittedly, in the TP study report, the assessee had furnished segmental information regarding both the merchanting trades segment and physical trade segment. The TPO has also accepted the segmental analysis of the assessee. In fact, he has accepted the transactions in trading segment to be at ALP. As discussed earlier, the only variation, he has made in merchanting trades segment, is in relation to PLI of the assessee. Thus, neither the TPO nor DRP have made any adverse comment regarding the merchanting trades segment. Further, when there is no allegation either by RBI or any other regulatory authority regarding merchanting trades segment of the assessee, in our view, learned Departmental Representative cannot give ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and hence, has issued directions for adopting transaction-by-transaction approach. As far as international transactions related to manufacturing activity such as 'machinery installation', test run & Inspection' & 'commercial production' are concerned, considering the fact that assessee had test run the manufacturing process during the FY Itself and thereafter stopped it after only one month, this Panel is of the view that manufacturing transactions should not be benchmarked using the TNMM method but using 'other method' as proposed in the TPSR." 21. Further, from the perusal of para 6.2 of the order giving effect dated 24.06.2024 passed by the TPO, he admitted that Ld.DRP has rejected the application of TNMM for benchmarking the international transactions under manufacturing segments. However, Ld.TPO/AO has made an adjustment of INR 11,22,976/- by observing that there is a shortfall in distribution segment of 2.14% and thus, proportionate adjustment was made. Since we have already held the transfer pricing value taken by the assessee in the case of distribution segment as reasonable and proper therefore, their remained no difference as has been demons....