9911796707
TMI Blog2013 (6) TMI 550X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Additional Director of Income Tax, Transfer Pricing Officer-II(2), New Delhi (Ld. TPO)/Ld. AO have erred both in law and on facts in making an addition of Rs. 3,97,10,488/- on account of alleged understatement of arm's length price in respect of commission income earned by the Appellant from its Associated Enterprises ("herein after referred to as AEs"). The finding and conclusions in this regard have been reached without any material and is a vitiated finding. 3. The order of Ld. AO & directions of Ld. DRP along with learned Transfer Pricing Officer's order under section 92CA(3) of the Act is based on complete disregard of the facts of the case of the Appellant and the statutory provisions of law. The learned AO/TPO/DRP has erred in disregarding the following apparent on facts and in law on the facts and circumstances of the case of the Appellant: (a) That the Appellant has complied with the Indian transfer pricing regulations by maintaining appropriate documentation as mandated by Section 92D of the Act and Rule 10D of the Income-tax Rules, 1962 ("Rules"). Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangibles for which it is not being adequately compensated by the AE. 5. That on facts and in law the ld. AO/TPO/DRP erred in not granting relief of +/-5% under proviso to section 92C(2) of the Act; 6. On the facts and circumstances of the case, the Ld. DRP has erred in not examining the validity of initiation of penalty proceedings u/s271(1)(c). 7. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other." In ITA No.-5433/Del/2012 "1. On the facts and circumstances of the case, the order passed by the learned Assessing Officer (AO) under Section 143(3) read with Section 144C of the Act is bad, both in the eyes of law and on the facts of the case. 2. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in assessing the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of the case, the Hon'ble DRP has erred, both on facts and in law, in rejecting the contention of the assessee that the benefit of arms'' length range of + 5% be given in view of proviso to section 92C(2) of the Act. 9. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in disallowing an account of Rs. 25,965/- on account of depreciation on printer at the rate of 15% as against 60% claimed by the assessee, allowable under the Act. 10. On the facts and circumstances of the case, the learned AO has erred both on facts and law in levying interest under Section 234B of the Act. 11. The appellant craves leave to add, amend or alter any of the grounds of appeal." 3. From a perusal of the grounds in 2007-08 assessment year, it can be seen that out of the 7 grounds raised, which have been reproduced above, ground nos.-1 & 7 are general in nature and are specifically addressed vide ground nos.-2-5 qua the adjustment of Rs. 3.97 crores odd. We find that Ground no-6, is pre-mature and since it does not arise in the present proceedings the same is dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. The services typically provided by Sojitz India are as follows :- * Support Services for facilitating trading activities of AE. * Networking with customers. * Identifying potential customers or suppliers. Ownership Structure : Sojitz Corporation Japan has the ownership control of Sojitz Asia which in turn holds 100% share capital of Sojitz India. Sojitz Asia Pte Ltd (AE) ¯ Singapore &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; * In a separate class of transactions entered into with unrelated parties, in identical circumstances, assessee had earned a different margin as compared with the assessee transacting with its AE. 6.4. Accordingly for the above mentioned reasons, the assessee was issued a show cause notice and required to explain the same. The show cause noticed issued to the assessee is reproduced in internal pages 3,4 & 5 of the TPO's order. Apart from that the TPO also compared the commission earned on trading sales made in non-AE segment with the assessee's services as a service provider segment and observed that the margin earned respectively was 1.81% and 1.48%. Accordingly he required the assessee to explain why margin of 1.81% should not be adopted to compute the margin that the assessee should have earned on the total FOB value of the goods transacted by it. 6.5. It may be pertinent at this point to extract the relevant portion from the show cause notice reproduced in the TPO's order. 6.6. The same reads as under:- "8. On comparison of commission earned on trading, sales made in non AE segment and in your AE segment, the following p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port service to its AE's. It was urged that if the margin of the limited trading activity entered into by the assessee on its own with non-AE's is considered to be applied to the commission earned as a service provider then it would necessarily tantamount to re-characterization of its auxiliary support service as a trading activity and as such would run foul of Rule 10B(1)(e)(i). 6.9. It was further elaborated that COGS did not address the functions performed assets employed and risks assumed. The cost of sales in the denominator would have been included, had the entity been performing manufacturing functions which is not the position in the case at hand. 6.10. Referring to the definition of the TNMM in Rule 10B(1)(e)(i) & (ii), it was submitted that the cost referred therein did not include COGS because no such 'cost' has been incurred by the assessee in the performance of its business functions. The functions performed by the assessee are marketing supportive functions the cost of which is reflected in the operating expenses. 6.11. Addressing the observations of the TPO, in Para 4.7 in regard to the creation of human intangibles and supply intangibles, it was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the view that the net profit margin should be computed in relation to cost incurred or sales affected or assets employed or to be employed and they did not prescribe for value added expenditure to be considered as base for computing the net profit margins. Thus he was of the view that the compensation module should be expressed as a percentage of FOB price of goods. He also held that human intangible and supply chain intangible had also been created. Accordingly he was of the view that while computing arms' length price, the gross profit margin of 1.81% earned by the assessee on its trading segment should be applied and not the margin of 1.48% earned in its 'trading transaction' with its AE. Accordingly an arms' length adjustment of Rs. 3,97,10,488/- was made as under:- "Commission Income earned from AEs @ 1.48% on Rs. 12,151,252,480/- =Rs. 180,227,181/- Arm's length commission income @1.81% on Rs. 12,151,252,480/-=Rs. 219,937,669/- Difference=Rs. 39,710,488/- % of arm's length margin to international transaction =22.03%." 6.14. Acting on the recommend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see transacting with its AE." 8.3. Accordingly consistent with the view taken in the earlier year, the TPO was of the view that the assessee has created human intangibles and supply chain intangibles. Thus in line with the view taken in the earlier year, he was of the view that it would be appropriate to apply the margin earned by the assessee in the trading transaction in the non-AE segment which was 13.29% to the FOB of the goods transacted through the assessee with its AE. 8.4. Accordingly after issuing a show cause notice to the assessee and considering the explanation, he proposed an adjustment of Rs. 14,3637,142/- in the following manner :- Details Amount FOB Value of goods 12,129,455,163 Gross Margin as earned by the assessee in the Non AE Trading Segment 13.29% Gross arms's length margin 1,612,004,591 Less Gross Margin shown by the assessee 175,697,449 Difference for which adjustment is required to be made 1,436,307,142 9. In this year also the assessee agitated the addition made in the draft assessment order based on the TPO's order before the DRP. Accordingly before the DRP also the assessee raised various grounds as in the earlier ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im that the assessee played a major role in identifying the suppliers, networking with the buyers, helps in collections of accounts receivable, quality control, logistics and vendor development." 10. Aggrieved by this, the assessee is in appeal before the Tribunal in both the years. 10.1. Inviting attention to the material available on record and reading from the orders of the TPO, Ld. AR addressed the Bench on the nature of activities undertaken by the assessee and referring to the material available on record, it was contended that the assessee is only a service provider to the various group entities of Sojitz Corporation, Japan (SCJ) and SCJ along with its affiliates has been in this line of business, for almost six decades. It was submitted that for more than 50 years, SCJ has an international presence and a global recognition amongst its customers spread over more than 17 odd countries and has been carrying on this business even prior to the existence of the assessee company who has come into existence only in March 2005. In the background where the assessee has been in existence as a service provider only for the last couple of years and in fact this is the first year in wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and for the said purpose it communicates with SCJ or its affiliates and gathers information on demand and supply of the commodities. The said functions, it was contended are completely distinct and separate and operate in entirely different business model vis-à-vis a trading business. 10.3. In the limited trading activities in which the assessee has ventured into it was urged that the customers have been identified by the assessee at its own initiative and these are not the customer of SCJ. It was elaborated that as is well known a trader ventures for himself, consequently he exposes himself to all the risks of buying and selling activities as such as a trader the assessee in the said activity has necessarily taken a price risk; an inventory risk; risk of capital deployment in inventory debtors etc. and is called upon to take risks on warranty and on credit extended etc. Accordingly the functions performed, the assets deployed and the risk assumed in trading activity are materially distinct and peculiar to the said activity and can no where to be stated to be identical to what risks a business support service provider would be exposed to. The risks being high, it was urge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a service provider as the assessee performs the function of a mere facilitator. 10.5. Similarly, in regard to the allegations of the creation of supply chain intangibles herein also it was urged the assessee company has not developed any knowledge of product, design nor knowledge of or quality control or storage etc as the only service provided by the assessee is of a facilitator. These facts will be evident from the description of the business support service provided to the TPO in the both years. It was urged that the assessee, merely provided facilitating services to entities in the supply chain without ever being part of the supply chain. 10.6. In the above background, it was contended that the reasoning of the TPO for adding cost of goods sold while computing margin is not the correct approach and Rule 10B(1)(e)(i) specifically prohibits such an action. The said Rule, it was submitted, specifically provides, that net profit margin in relation to transaction entered into with an AE is to be computed in relation to cost incurred or sales affected or assets employed or to be employed by the enterprise. It was submitted that the cost incurred herein would mean the cost incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed by the TPO and upheld by the DRP very absurd results will follow. For the said proposes attention was invited to synopsis dated 19.02.2013 in 2008-09 assessment year relevant portion from pages 13-14 is being extracted hereunder:- Particulars Audited Accounts Reconstructed accounts by Ld. TPO Total Income 30,40,69,090 30,40,69,090 Total Expenditure 27,66,12,688 27,66,12,688 Profit Before Tax 2,74,56,402 1,46,37,63,544 PBT/Sales/revenue 9.03% 481.39% Capital 8,00,00,000 8,00,00,000 8,00,00,000 Reserves and surplus 1,98,15,112 1,98,15,112 Net worth 9,98,15,112 9,98,15,112 Return on capital employed 27.51% 1466.47% Perhaps, it is impossible to earn 1466.47% return on capital in any business. If we take the transfer pricing adjustment and reconstruct accounts with indent sales treating as trading sales, then the turnover ratio will be as below. 10.9. Addressing the past history in assessee's own case, it was his argument that this itself will demonstrate as to how and why re-characterizing of the business support service into trading activity can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO. Accordingly where the nature of services remain the same applying the margin earned in the trading activity is not the correct approach either under law or on facts. 10.12. Emphasis was laid on the aspect that there is no dispute over the fact that the nature of services provided by the assessee have remained the same. As such there was no occasion for the TPO to re-characterize the transaction of business support services as trading activity. Reiterating the facts reliance was placed on the past history of the assessee on the issue it was urged that absurd conclusions can be drawn if the said action is upheld. Attention was invited to the adjustment of Rs. 3 crore odd and Rs. 143 crore odd proposed by the TPO more or less from the same turnover from the very same activities applying the margins of 1.81% and 13.29%, would result where cost as adopted by the TPO based on FOB value of goods is varying between Rs. 1215 crore odd and Rs. 1212 crore odd. The commission earned by the assessee, it was urged is commensurate with the volume namely Rs. 18 crore odd and Rs. 17 crore odd in the years under consideration. The addition proposed, on the other hand for the very same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion method and the Tribunal upheld the CIT(A)'s action in holding that mark up is to be applied to the cost incurred and not the cost of rendering advertising space on behalf of AE. Accordingly it was the contention that the proposed additions upheld by the DRP proved by the AO deserves to deleted. 11. The Ld. DR, on the other hand relied upon the order of the TPO's and the DRP which confirmed the TPO's order in both the years. 11.1. In support of the same, it was contended that the TPO has held that the method adopted by the assessee is not the correct method as such heavy reliance is being placed thereon. It was also his argument that no doubt the assessee is a service provider but for bench-marking what better comparison than assessee's own activity with non-AE. Inviting attention to the well accepted common practice in the market, it was his submission that it is a well known fact that commission in respect of business transaction is always computed with reference to the value of goods for which the commission has been received. As such there, it was urged there was no relevance in the arguments advanced on behalf of the assessee that the FOB value is to be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arms' length price, the assets so used have to be taken into consideration. 11.7. It was also his submission that it is a well known fact that in such a business, the basis of the starting point is always the gross value of the goods in respect of which services have been rendered and most definitely not the cost incurred in providing indenting services. For the said purpose, reliance was placed upon, order dated 16/12/2012 ITA No.-7977/Mum/2010 in the case of Bayer Material Science Pvt. Ltd. v. ACIT. 11.8. Reliance was also placed upon the judgement of the Coordinate Bench in the case of Li and Fung India Pvt. Ltd. 12 ITR (TRIB) 748 wherein it has been held that the Indian entity should get 80% of the total margin earned by its associates enterprise on account of the fact that there was a human chain intangibles asset which the assessee had deployed. 11.9. Attention was also invited to another order of the Delhi Bench of the Tribunal which had already been relied upon by the Ld. AR namely GAP International Sourcing Pvt. Ltd. referring to the said order, it was his submission that although therein the cost of goods sold has not been the basis of the TP adjustment however th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be over emphasized as it is on this edifice that the conclusion in the context of the Rules and provisions, in TP matters can be drawn. Similarly the applicability of the principles of law, as considered in the judgements and orders on which reliance has been placed upon by the parties can be thus considered. In the facts present in the case at hand it is trite law to mention that a judgement decides only what it is called upon to decide. Contextually the principles laid down therein are to be considered in the context of the questions which are required to be considered in peculiar facts and circumstances of that specific case. Thus emboldened by the over-riding and imperative necessity and obsessive compulsions of addressing the facts correctly, we propose to set out once again for out consideration the facts available on record despite, the fact that they had been discussed in the earlier past of this order. Being a fact driven branch of law to our minds the said exercise is necessary. 12.1. As observed in the earlier portion of this order, we have brought out the business profile of the assessee as taken into consideration by the TPO in both the years and have also dwelled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jitz Corporation on April 1, 2004. SCJ is a Japanese entity headquartered in Tokyo. SCJ is a general trading company (also popularly known as sogo shosha in Japanese terms) dealing in a wide range of products and services. Sojitz group has operations in around 50 countries worldwide and operates with a network of 740 consolidated subsidiaries and affiliated companies in Japan and overseas. Sojitz' business activities are wide-ranging, covering machinery and aerospace, energy and mineral resources, chemicals and plastics, real estate development and forest products, consumer lifestyle-related business, and new business development including IT solutions." 12.3. The profile of the SCJ Corporation is as under :- 2.2. Profile of the Group There are two major categories of trading companies in Japan: a "sogo Shosha," which is a general or integrated trading company, and specialized trading companies that deal only in specific fields. These sogo shosha are a unique type of business enterprise that is seen only in Japan. They supply raw materials and technologies purchased from around the world to steel, chemical and other manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; Ships involve the supply of shipbuilding equipment and marine-related equipment, the brokering, purchase and sale of new and secondhand ships, and the ownership of ships. Energy & Mineral Resources Division * Oil, gas, and LNG Oil and gas includes upstream investments and loans; FPSO (floating production, storage, and offloading) vessel ownership; the sale of production equipment and devices; and petroleum product trading, imports, and sales throughout Asia. LNG operations involve investments in gas liquefaction facilities and receiving terminals; LNG vessel ownership; and the import and sale of LNG. * Coal *Coal involves investing in, developing and operating coal mines and the sale of steaming, coking and PCI (pulverized coal injection) coal. * Mineral resources Mineral resources activities include investments in mines and the sale of ore; importing of iron ore, aluminum ingots and copper billet to Japan; and trading of precious metals. * Power a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in many categories, including raw materials for textiles, textile fabrics, bed linen and apparel. * Foods Food operations are guided by the main themes of "food safety and peace of mind" and include grains, seafood, meat, and other products. Sojitz has a large number of contract producers and JVs in Japan and other countries. Overall, the company has an integrated value chain extending from upstream raw materials and processing to downstream retail sales. * General commodities General commodities cover products such as woodchips, infant products, tobacco, motorcycle parts, tires, and many other items. Sojitz has its distinct supply chains in each market. New Business Development Group * ICT Information & Communication Technology (ICT) operations include consolidated subsidiary Nissho Electronics Corporation, which provides customers with highly advanced network solutions. * Content Content operations include the provision of capital to a production committee and the export of anime and other content t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also Sojitz India is a mere facilitator. SCJ enters into a contract with the Indian supplier directly for the purchase and sales transactions. The assessee has entered into various arrangements with different subsidiaries of SCJ and the main services among others include the following: Business support services * Support in business promotion * Support in after sales services * Collection of market information * Coordination with customers * Collection of Account Receivables from client on behalf of AE. Divisions Sojitz India is provides support services to its Sojitz Overseas Group Companies. Sojitz India handle different products and commodities during the Financial Year 2006-07 through its different commodity departments, some of which are men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any significant proper transaction during this period. Accordingly, Sojitz India provides support services for facilitating both exports and imports in India through Sojitz Japan and other Group Companies. The support services include gathering information about customer requirements, products, local prices, market trend, etc. 12.5. In regard to the competition, it faces following facts are narrated :- 12.5.1. Competition The Assessee faces a competition from players operating in India and across the globe. The Assessee has to provide competitive services to its AE, so as to secure its income source. The AE has the liberty to route the trading business transaction and to avail the services of any other intermediator for sourcing the products from India. The support services that the assessee is performing are also performed by other players as well like Marubeni and Itochu. Therefore there is a competition in the market for the said services. However during the part other national trading companies have also arisen. There are some south Korean trading companies as well that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... volume risk is directly borne by the SCJ and its associates the assessee's risk here is also minimal. The functions in indent sales business is to maintain close contacts with the suppliers to ensure timely delivery of merchandise to the customers in that quantity and grade desired for exports; maintaining close contacts with SCJ customers in India to understand the needs for imports communicating with SCJ, Japan etc. 12.9. The unrebutted TP Report states that in the category of proper transactions as opposed to indent sales, the assessee has performed trading functions at its own risk. Herein like a normal trader, the assessee takes the ownership of the goods before selling them to the buyers. The TPS study defines that the assessee's engagement in this activity is not significant. However it has not engaged in any significant proper transaction during this period. 12.10. The transfer pricing study in Chapter 2 as reproduced above, addresses the competition, it faces from the players operating in India and across the globe. Accordingly it seeks to justifiy that the services provided have to be competitive so as to secure its income source as the AE has the liberty to rou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the functions performed show that the assessee was described as a limited service provider with a minimum risk in regard to the strategic policies: Finance and Accounting, IT Legal and Human Resources Management etc. 12.14. It is seen that the assets utilized by the assessee are vehicles, lease hold improvements, computers office equipment, furniture and fixture all totaling to about Rs. 1,10,10,079/- [as per the page 248 of the TP report]. As per the TP Study Report on record which has not been controverted the intangibles required to carry out the operations of the assessee are owned by SCJ and that the SCJ possesses entrepreneur knowledge with respect to the operation of the global trading network. The assessee is stated to have neither developed nor does not it have any intangibles asset in its business operation in India. For rendering services to the AEs the assessee uses the global network of SCJ. 12.15 Looking at the risks to which the assessee is exposed as per the Transfer Pricing Report, it is seen that assessee has no Credit Risk (as the AE is directly invoicing the end customer the risk is borne by them); Volume Risk (assessee's commission is dependent on busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the trading activity ; (b) If the answer to the query posed in (a) is "yes" then were the margins earned in the trading activity by the assessee with non AEs correctly applied to the indenting activity with AEs ; (c) If the answer to the query posed in (b) is "yes" then would the 'costs' referred to in Rule 10B (1) (e) (i) be the FOB value of goods on the facts of the present case or would it be the operating cost of the assessee; (d) If the answer posed to the query in (a) is "no" then is there any justification on facts in applying the margins earned in the trading activity to the profits of indenting activity for working out the Arms Length Price. 12.19. On a consideration of the business profile of the assessee as available on record and the nature of services rendered and the risk profile of the assessee, we are of the view, that the TPO erred in considering that the activity of a service provider is similar to the activity of a trader. The decisive factors as to why the question framed in (a) has been answered in the negative, are being elaborated in the following paras based on the Bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no reasoning and justification for applying the margins earned in trading activity to indenting activity as the two are distinct and separate. Merely because the assessee was also having a small level of trading activity in its own name, there is no reason available on record either justifying the action of re-characterizing the nature of assessee's activity from a service provider to that of a trader. As observed, neither the TPO has lead any discussion nor has the DRP cared to throw any light on the aspect for upholding the action of the TPO. Where all the critical functions were being performed by the AE, the services provided, as a facilitator, by the assessee cannot be treated as a trading activity. The performance of the critical functions, like decisions to enter into contract, to negotiate the terms of the contract, to decide the level and extent of exposure for price risk, credit risk, warranty risk etc are some of the risks to which a trader is exposed. The record shows that at no point of time the assessee was ever exposed to any of those risks as such, the two activities could not be treated at par and thus invited a similar treatment. 12.22. The Ld. CIT DR h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of a trader since the nature of the activities of a trader and service provider are materially distinct and different. 12.26. As we have held on facts that the two sets of activities are distinct and different, consequently we are of the view that there is no justification for applying the margins earned in trading activity to those earned in the indenting services. As such, we find ourselves unable to agree with the reasoning and the decision of the TPO which has been upheld by the DRP. At the cost of repetition the consistent and unrebutted material available on record shows that in the trading activity, the assessee has entered into contracts with the parties in India in its own name. The title in goods has been held for these contracts in assessee own name as such the assessee as any other trader has exposed itself to the price risk, the credit risk and other related risks of inventory risk etc. The negotiations for the same has directly been done by the assessee and not by the SCJ. As such not only the efforts required but even the risk borne is completely different. The risks being of a higher level the rewards if the venture succeeds can also move upwards in regard to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he most appropriate method, in the following manner, namely : (a) ** ** ** (b) ** ** ** (c) ** ** ** (d) ** ** ** (e) Transactional net margin method, by which- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the personnel of the assessee is low and skill requirement is so low that no specific skills are required by the personnel who replace the existing personnel who may choose to move on for better options. The assessee does not need to and cannot restrain the leaving personnel from utilising any skills which they may have acquired during employment as no specific skills for indenting are required for indenting and acting as a facilitator. It is not the case of the department that the assessee is performing critical functions which admittedly are performed by the AE or that the assessee is contributing by way of analysis, reports and opinions, being provided as such value added services are being performed wherein the analysis/opinions may turn out to the correct or grossly wrong as such due to the high risks of both eventualities occuring the personnel are necessarily highly qualified sought after experts, commanding high salaries. The simple performance of a low risk activity of facilitator does not lead to the conclusion that a human intangible is being created. It is seen that there is no material on record as to how supply chain intangibles are being created as the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen that therein the stand of the assessee, was that the trading activity and the indenting activity was similar as such segmental profits were not required to be considered. This stand of the assessee was neither approved by the TPO nor by the ITAT as the FAR analysis demonstrated that the function and risks of the two activities were very different. 13.1.2 The assessee's claim was that assets utilized were same for both the activities and certain expenses on being asked, were allocated on a turnover basis. The approach of the assessee in allocating the common assets utilized at 1:1 ration was not approved. 13.1.3 The material fact prevalent in the said case was that the turnover was achieved through the efforts of the assessee which is a relevant point/ fact to be taken into consideration and it is not a fact in the present proceedings. In the facts of the present case the assessee is only a service provider and acts as a facilitator and the FAR analysis available on record has not been rebutted. The stand of the TPO which has been approved by the ITAT infact supports, the view taken in the present proceedings that the indenting activity cannot be treated at par with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terization of payment in excess of ALP payment is permissible, cease to be relevant in India. These decisions, though they go a step further than the present legal position in India, continue to be as relevant and as useful as they would have been in the absence of such re characterization provisions in the respective countries. The rationale and logic of these decisions continues to remain unaffected by these provisions. The objection raised by the learned counsel is devoid of legally sustainable merits." 13.2.3 However for the justification of re-characterizing the indenting activities as a trading activity in the present case some necessary exercise has to be done by the TPO. It has to be demonstrated from facts to show as to how the assessee though calling itself a "service provider" was actually acting as a "trader". No such discussion, reasoning or fact is on record. On the contrary, the consistent stand of the assessee is that neither the goods have been purchased in its name nor are the contracts entered into are in the name of the assessee as such neither there is a price risk, inventory risk nor, credit risk etc. As such in the absence of facts justifying the re-characte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot only the two activities are entirely distinct which is the material distinction but even otherwise, no similarity has been established in the nature of goods in which the AE's have transacted with the buyer Indian supplier and the assessee has traded at its own level. 13.4. Attention has also been invited on behalf of the revenue to the order dated 31.10.2012 in ITA No.-5568/Del/2010 in the case of Interra Information Technologies (India) Pvt. Ltd for the proposition that profit of the AE cannot be a consideration while bench-marking the international transactions in order to arrive at Arms Length Price. 13.4.1 A perusal of the said order shows that Ld. AR in the facts of the said case requested the Bench to lay down the proposition that transfer pricing adjustment at best cannot exceed the amount of margins retained by the assessee, as well as the AE. A perusal of para 67,68 & 69 would show that the said request was turned down on the reasoning that in the absence of any provision in the Act and the Rules and also practical difficulties as the profile of the entire group was not subjected to scrutiny of the Indian authorities, the request was turned down. 13.4.2 In the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was on record. There is no such evidence/material available on record to suggest that the assessee which came into existence in March 2005 had the expert knowledge available for taking critical decision. The critical decisions admittedly were taken by the AEs i.e. SCJ and its affiliates who have been global players for over 50 years. The contracts were entered into in their names, negotiations were done by them and the critical decisions of timing, extent, exposed were all taken by them wherein the assessee was merely a facilitator. 13.5.4 As such the finding arrived in the order of Li & Fung India Pvt. Ltd. proceeds on peculiar facts and circumstances of that case where the AE was held to be not capable of executing the contracts and was receiving commission on FOB value and all the critical functions were being performed by the assessee who was paid only on cost plus basis. Thus on these facts, it was held that such a transaction in the face of it could not be said to be at arm's length. The earning of the AE received as a percentage of FOB was completely dependent on the assessee who had used its tangible and unique intangibles developed over the years at its own cost util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reliance has also been placed on order dated 18.09.2012 in ITA No-5147/Del/2011 in the case of Gap International Sourcing (India) Pvt. Ltd. v. ACIT for the proposition that Li & Fung case was considered and distinguished by the assessee. The Revenue has relied upon the same for the proposition that make up of 32% was upheld in the TP adjustment. 13.7.1 For the said purpose it is necessary to refer to the facts considered by the co-ordinate Bench. In the said case, the assessee was a wholly owned subsidiary of GAP International, USA, and was engaged in facilitating sourcing of apparel merchandise from India for the parent group. It filed its TP report claiming TNMM with cost plus 15 per cent remuneration to be the most appropriate method for determination of 'ALP'. The TPO, however, looking at the function assets and risks analysis (FAR) and other factors, rejected the assessee's cost plus 15 per cent ALP and held that commission at the rate of 5 per cent on the FOB value of goods sourced by the foreign enterprise through Indian vendors was the most appropriate profit level indicator (PLI) for determining ALP. This was so because the functions performed, assets owned a ..... 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