TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1290
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....A 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 & installation activities, and accordingly operated as....
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....ly, 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 of the case and in law, the Ld. DRP/ΑΟ/ΤΡΟ have erred in rejecting the 'Other method' applied by the Appellant to benchmark its i....
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....he 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 responsibility of maintaining warehouses and storing the goods. Besides this, the assessee has not maintained any inventory of goods since purchases have been made against the confirmed orders. Ld. AR submitted, the limited economic value add....
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....mited 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 sells it only to its AEs. Said vendor and customer has also been identified by its AE- Samsung SDI Korea. 27.2. Appellant sells the traded goods as it is without any value addition; 27.3. Procurement is made from Elentec India against confirmed order 27.4. No role in technical specification of battery 27.5. Appellant only gets the flash title of the goods which are transferred dir....
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....o 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 determining ALP in cases of Assessee's who have substantial fixed assets since the value added by such assets would not be captured in Berry ratio. "46. It can be seen from the above that the Berry ratio can be used only in very limited circumstances and the limitations that we have listed above are by no means exhaustive. There is also a view expressed that use of Berry ratio as a PLI results in indicating less than fair ALPs in tax jurisdiction where the Assessee's have a lower bargaining po....
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....it 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 accounted for, almost entirely, in their operating expenses. To reflect the reality of distributors' economic significance and to provide an arm's length return to DuPont's Swiss subsidiary, Berry utilized a ratio that has since been named in his honour and is computed as gross profit to operating expenses. There are some variants to this ration but that aspect of the matter is not really relevant for the present purposes. 51. The underlying assumption for applicability of berry ratio is that the ret....
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.... 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): "2.108. A situation where Berry ratios can prove useful is for intermediary activities where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. In such cases, the resale price method may not be applicable given the absence of uncontrolled sales, and a cost plus method that would provide for a mark-up on the cost of goods sold might not be applicable either where the cost of goods sold consists in controlled purchases..." 35. The United Nations Practical Manual on Transfer Pricing for Developing Countries, 2021 provides gui....
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....ports 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 Operating Revenue 617,605,335 617,605,335 617,605,335 Operating Cost 605,138,551 605,138,551 605,138,551 GP 31,905,325 31,905,325 31,905,325 VAE 19,438,551 19,438,551 19,438,551 TP Adjustment (INR) 12,949,035 NIL NIL 11. On the other hand, ld. CIT DR for the Revenue submits that the assessee is working under medium and normal risk environment and therefore, Berry ratio for PLI is not applicable. For this, Ld.CIT DR relied upon the order of TPO and ld. DRP. Since the assessee is also manufactured goods and also taken care of repairs and post sales services therefore, the same should be taken as the normal distributor. He further submits that the assessee in its TP study report submitted wherein para 5.2.1 the function....
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....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 employees to India to provide technical assistance and training to SDII's engineers to enable them to perform effective quality control." 13. Ld.CIT DR further drew our attention to the Profit & Loss Account where the assessee had paid technical assistance and related fee of INR 81,69,448/- and thus, submits that the assessee is not a low risk distributor that the AO has rightly applied TNMM method to compute the ALP. 14. Heard the contentions of both parties and perused the material available on record. From the facts, it is seen that the assessee though has started commercial production that continue only for one month and did the trading of the products that mobile batteries for the remaining periods for the previous year. The assessee cannot treated as a normal trader who is doing trading activity of various goods of number of ....
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....y 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 determining ALP in cases of Assessee's who have substantial fixed assets since the value added by such assets would not be captured in Berry ratio. "46. It can be seen from the above that the Berry ratio can be used only in very limited circumstances and the limitations that we have listed above are by no means exhaustive. There is also a view expressed that use of Berry ratio as a PLI re....
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....terprise 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 relation to cost incurred or sales effected or assets employed, but, having regard to any other relevant base also. The expression "any other relevant base" is wide enough to align the computation of margin of the assessee and the comparables. 23. Thus, if we go by the provision of rule 10B(1)(e), the return on value added ....
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....he 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 a new dimension to the entire issue by making allegations which are not borne out on record. At this stage, learned Departmental Representative cannot improve upon the case of the TPO or learned DRP by enlarging the scope of the appeal. Thus, considering the fact that in the PLI of the comparables, cost of goods is not included in the denominator, in our view, the same would also apply to the assessee. Hence, cost of goods cannot form part of the denominator of PLI. Accordingly, we direct the Assessing Officer to compute the ALP by applying PLI of operating profit to value added cost, excluding the cost of goods. Grounds are allowed. 17. This view is further supported by the judgement of Mitsubishi Corporation India (P.) Ltd. vs CIT (supra) and various other judgments which are relied upon by the assessee. 18. In view of the above-mentioned facts, we are of the view that the Berry ratio is applicab....
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....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 demonstrated observed by the assessee. Accordingly, the adjustment made is hereby deleted. Ground No.8 raised by the assessee is thus, allowed. 22. Ground No.9 raised by the assessee is regarding levy of interest which is consequential in nature and AO is directed to charge the interest on the income computed after giving effect to the order of the Tribunal. 23. Ground No.10 raised by the assessee is against the initiation of penalty proceedings u/s 270A of the Act for alleged under reporting of income which is pre-mature hence, dismissed. 24. In the result, appeal of the assessee is partly allowed. ITA No.5475/Del/2024 [Assessment Year 2021-22] 25. Ground No. 1 is general in nature thus, not adjudicated. 26. Ground No.5 is not pressed by the assessee hence, dismissed. 27. Ground Nos.2, 3 & 4 raised by the assessee having common issues which have already been decided in favour of the assessee in ITA No.3472/Del/2024....