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2023 (6) TMI 1211 - AT - Income TaxTP adjustment - ALP of the international transactions relating to merchanting trades - what should be the PLI of the assessee qua the PLI of the comparables? - only variation made by the TPO to the PLI of the assessee is to add the cost of goods to the denominator - HELD THAT - Admittedly, in the TP study report, the assessee had furnished segmental information regarding both the merchanting trades segment and physical trade segment. 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. When there is no allegation either by RBI or any other regulatory authority regarding merchanting trades segment of the assessee, in our view, DR cannot give a new dimension to the entire issue by making allegations which are not borne out on record. DR 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.
Issues Involved:
1. Adjustment to the Arm's Length Price (ALP) of international transactions relating to merchanting trades. Summary: Issue 1: Adjustment to the ALP of International Transactions Relating to Merchanting Trades The assessee, a resident corporate entity engaged in trading and merchanting trades of agricultural commodities, challenged the final assessment order dated 21.07.2022, which included an adjustment proposed by the Transfer Pricing Officer (TPO) to the ALP of international transactions related to merchanting trades. The TPO had rejected the assessee's use of Transactional Net Margin Method (TNMM) with Operating Profit (OP)/Value Added Cost (VAC) as the Profit Level Indicator (PLI), instead insisting on OP/Operating Cost (OC) as the PLI, leading to a proposed adjustment of Rs. 82,12,60,000/-. The assessee argued that it acted merely as a facilitator in merchanting trades, with minimal value addition and risk, earning a fixed profit margin of 10 basis points on the purchase price. The assessee's role was limited to administrative functions, and the goods never entered India's custom barriers, being transferred in high seas. The assessee contended that the PLI of OP/VAC was appropriate, as the comparables selected were business auxiliary service providers with no cost of goods, and the assessee's functions and risks were similar. The assessee cited various judicial precedents supporting the use of Berry ratio (OP/VAC) under Rule 10(B)(1)(e). The Revenue argued that the assessee was a high seas trader assuming all associated risks and rewards, and the application of Berry ratio was inappropriate. The Revenue also noted the lack of segmented financial reporting and questioned the genuineness of the merchanting trades. The Tribunal observed that the assessee's functions in merchanting trades were akin to those of business auxiliary service providers. It held that the cost of goods should not be included in the denominator of the PLI, aligning the profit margin computation with that of the comparables. The Tribunal directed the Assessing Officer to compute the ALP using OP/VAC as the PLI, excluding the cost of goods. In conclusion, the Tribunal allowed the assessee's appeal, directing the adjustment to be computed using the appropriate PLI.
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