2014 (7) TMI 476 - HC - Income Tax

Transfer pricing adjustments - determination of ALP - Functional profile not considered Assessee being a trader or service provider Held that - The international transactions reported by the assessee are of four kinds; services, commission, cost to cost reimbursement as well as from sale of products imported from the Associated Enterprise Tribunal was rightly of the view that the nature of assessee's business is to undertake role of a trade intermediary - purchases are made by the assessee are recorded as such in its books of accounts and thereafter when sold, the sales recorded as such - The title in the goods is held by the assessee for some time - assessee deals on a principle to principle basis - the activity cannot be bracketed with the activity of a commission agent or a broker - the activity in question is akin to trading activities. There was no infirmity in the reasoning of the Tribunal that transactions are akin to trading and cannot be considered activities of a commission agent or a broker - appropriate comparables would have to be considered for determination of the ALP - entities which are similarly placed as the assessee including in respect of their functional and risk profile as well as working capital exposure would be chosen as comparables thus, there is no reason to interfere in the order of the Tribunal Decided against Assessee.

Summary

Issues:
Transfer pricing adjustment based on functional profile of the assessee.

Analysis:
The case involved an appeal under Section 260A of the Income Tax Act, 1961 challenging the order passed by the Income Tax Appellate Tribunal (ITAT). The appellant, a subsidiary of a Japanese company, contested the character assessment as a trader by the Assessing Officer, Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP). The dispute centered around the functional profile of the appellant in relation to international transactions. The TPO rejected the Profit Level Indicator used by the appellant, leading to a significant income enhancement. The DRP upheld the transfer pricing additions, prompting the appeal before the Tribunal.

The appellant argued that its functional profile was that of a service provider, not a trader, as it acted as an intermediary for its parent company's transactions without carrying inventory or significant working capital. The appellant contended that profit margins should be calculated based on operating costs, excluding the cost of goods sold. Additionally, the appellant suggested comparing with similarly situated companies if considered as a trader. The ITAT analyzed the nature of the appellant's business as a trade intermediary, holding that the activities were akin to trading, not that of a commission agent or broker. The ITAT emphasized that the transactions were on a principal-to-principal basis, concluding that appropriate comparables should be chosen for determining the Arm's Length Price (ALP).

The High Court upheld the ITAT's decision, stating that the appellant's activities were trading-like and not that of a commission agent or broker. The Court clarified that comparables should consider entities similarly placed as the appellant in terms of functional profile, risk exposure, and working capital. The Court dismissed the appeal, finding no grounds to interfere with the Tribunal's order, providing clarity on the selection of comparables for determining the ALP.