9911796707
TMI Blog2015 (8) TMI 922X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany is a wholly owned subsidiary of Mitsui & Co. Ltd., Japan. Mitsui & Co. Ltd., Japan is one of the leading sogo shosha establishment in Japan. Sogo shosha means general trading and these companies are general trading companies. These companies play an important role in linking buyers and sellers for wide range of products. The range is very wide that it includes grain and oil, machinery, equipment, etc. 5. The assessee company being a subsidiary of the Mitsui & Co. Ltd., Japan provide support services to the various group entities of Mitsui & Co. Ltd., Japan. This support services is the main activity whereby it acts as a facilitator for the transactions entered into by Mitsui & Co. Ltd., Japan and other group entities of the Mitsui & Co. Ltd., Japan. 6. During the assessment year 2007-08 the assessee company has entered into following transactions:- Transaction (Rs.) 1. Provision of services 528,379,089 2. Purchase and sale of goods 118,385,397 3. Purchase of capital goods 1,987,760 4. Interest received 2,227,448 5. Reimbursement of expenses received/ receivable 52,587,644 6. Reimbursement of expenses paid/payable 100,737,320 &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores should not be included in the cost base of service/commission segment. I propose to apply OP/TC percentage of comparable companies, searched from Prowess on the combined cost base, including the value of goods on which commission is earned by Mitsui India, related to AE segment to arrive at the arm's length profit fro the trading and service/commission segment. A set of following comparable companies were search from database available in the public domain after applying a turnover filter of Rs. 100 Crore in the trading companies. Final set of the comparable companies are hereunder: Company Name OP/OE (percentage)* Frost International Ltd. 1.99 P K S Ltd. 4.34 General Commodities Pvt. Ltd. 3.04 Sakuma Edports Ltd. 2.08 Kotak Ginning & Pressing Inds. Ltd. 2.94 Cottage Industries Exposition Ltd. 3.04 Euro Vistaa (India) Ltd. 5.78 Average (Mean) (percentage) 3.32 * Note: Financial Data of FY 2006-07 9. Computation of arm's length profit from service/commission segment is given below: Approx. Cost base of AE-segment (AE service segment + AE- trading segment) 45,589,044,859 (A) Mean of OP/TC of comparables (Arm's length OP/TC): (B) 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength profit (D)=(A)X(B) 1,135,167,217 Difference to be adjusted = D-C(Rs) 1,075,392,764 12. Aggrieved by the draft assessment order passed by the AO as per the recommendations of the TPO, the assessed filed objection before the learned DRP. 13. The learned DRP upheld the action of the learned TPO in recharacterizing the transaction as that of a trader as against service provider. It, however, directed the TPO to exclude one comparable viz., Cottage Industries consequent to which the margin got increased from 2.49% to 2.56%. The adjustment thus was increased from Rs. 107,53,92,764/- to Rs. 110,73,05,095/- in assessment year 2007-08. In the A.Y. 2008-09 14. During the assessment year 2008-09, the assessee company entered into following transactions:- Transaction (Rs.) 1. Provision of services 687,916,048 2. Purchase of goods 127,624,787 3. Sale of goods 23,900,120 4. Purchase of assets 1,289,604 5. Reimbursement of expenses received/ receivable 53,342,485 6. Reimbursement of expenses paid/payable 127,537,685 15. The learned TPO following order of assessment year 2007-08, recharacterized the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible being created as is being alleged regarding human intangible/supply chain. The Mitsui Japan has been operating since long and doing business on its own since long. The assessee company was established only to provide support services to the existing business of the Mitsui Japan and as such to cut price such transaction and compare the same with the trading transactions is not correct.TPO has not been able to point out any error in the comparables submitted by the appellant company and the same being at arm's length, the adjustment proposed by the TPO and as confirmed by the DRP needs to be deleted. The TPO has gone wrong in benchmarking the business support services provided by the assessee company to AE with that of independent trading transactions for determining the arm's length price in respect of business support services. 18. It was further argued by the ld. AR that the company is engaged in providing business support services to various group companies of Mitsui Japan. For this it has entered into arrangements whereby it provides business support services which include:- (i) Support in business promotion (ii) Collection of market information (iii) Coordination w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of the assessee company as is evident from the description of business support service provided by it. Assessee company simply provides facilitation services to entities in supply chain without being a part of the supply chain. The assessee company has created human intangibles. In this regard the AR submitted that TPO has just made a literary reference in his order about human intangibles and held that assessee has created human capital intangible ignoring the facts and the detailed reply submitted by the assessee. The facts are that the activities performed by the assessee are routine, preparatory and auxiliary in nature which does not create any intangibles. Organizations providing support services employ human resources for the same and that does not lead to creation of any intangibles. Assessee's role is limited to that of a routine coordination and support service provider. It is Mitsui Japan which has the expertise, a strong relation with a vast network of manufacturers, distributors and buyers. 20. On the issue of inclusion of cost of sales in the denominator it was submitted by the Learned AR that reasoning given by the TPO in the order that compensation model in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f product n respect of which such services have been rendered have to be taken into consideration and then a comparison needs to be made with the commission rate prevalent in respect of such product goods. In the present case the nature of products and items varies a lot. The TPO without even looking at any of these items details has in a most arbitrary manner considered trading as one and the same to support services and applied trading margin in different nature of the product and items to the support services taking turnover of the AE as the basis. That the TPO was not justified in re-characterizing the transaction of business support services as that into trading and applying the profit margin in the trading as the PLI. 21. It was argued by the ld. AR that in the preceding assessment year i.e. 2006-07, the assessee's method of benchmarking its international transaction relating to provision of business support services using TNMM at the most appropriate method with OP/TC as PLI has been accepted and the addition was made only with regard to the margin computed with reference to the comparables used. The basis for computation i.e. OP/TC as PLI was not tinkered with. That there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T in the case of Mitsubhishi Corporation India (P) Ltd. vs. DCIT, ITA No. 5042/Del/11 dated 21.10.2014 where facts are identical and similar issue has come up and the coordinate bench has held that TPO was not justified in re19 characterizing the transaction as trading transaction and it has been further held that cost of sales can't be included. 25. It was further submitted by the learned AR that even as per TPO's computation no adjustment can be made to the arm's length price in view of the proviso to Section 92C as applicable for the assessment years under consideration the margin is within 5% of the price at which international transaction has been undertaken by the assessee company. In this regard the learned AR submitted that the TPO after holding that cost of goods sold is a relevant criteria has not taken the issue to its logical conclusion. Per contrary he has proposed an adjustment of Rs. 107,53,92,762/- whereas considering the provisions of proviso to section 92C(2) no adjustment was called for. It was submitted that the proviso to Section 92C actually talks about comparing the price of international transaction with the Arm's length Price so determined. Thus even if it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the preceding year cannot be a ground to not to make adjustment in the year under consideration. On the issue of the alternative submission of the learned AR it was submitted that this benefit is not available to the assessee company as the method applied is only one method i.e. Transactional Net Margin Method. It was contended that the benefit of this proviso will be available only when arm's length price is determined by applying two methods and the difference in the two methods is within 5 per cent. 28. We have considered the arguments advanced by the parties and gone through the orders of the authorities below as well as the judgments relied upon. On going through the order of TPO in the case of the assessee and the order passed by the ITAT in the case of Mitsubishi Corporation India (P) Ltd., we note that the facts of the two cases are almost similar. In this regard we note that the ITAT in Para 7 of its order has recorded the FAR analysis carried out by the TPO. It may be relevant to quote para 7 of the order passed by the ITAT in the case of Mitsubishi Corporation India (P) Ltd. (supra) as under:- "7. As the Transfer Pricing Officer rightly noted, the main issue in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... administration. -Developing long term strategic policies. -Dealing with finance, accounting, IT and legal issues. -Human Resource Management: (b) risks assumed by the assessee: -bears volume risk -bears foreign exchange risk -bears manpower risk (c) assets used by the assessee: -Fixed asset" 29. In the order passed by the learned TPO in the case of the assessee before us, the FAR analysis stated by the TPO in para 5.2.1 is exactly the same as stated hereinabove in the case of Mitsubishi Corporation India (P) Ltd.. The conclusion drawn by the TPO and quoted in the judgment of the Mitsubishi Corporation India (P) Ltd. in para 9 of the order are also exactly the same as in para 5.3 of the TPO's order in the case of the assessee company. Thus we are of the view that the facts of the present case are similar to the facts of the Mitsubishi Corporation India (P) Ltd. In the Mitsubishi Corporation India (P) Ltd.(supra), the ITAT has held that it is impermissible to make notional addition in the cost base and then take into account the cost which are not borne by the assessee. The ITAT while giving the above finding has relied upon the judgment of the Hon'ble jurisdictional Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that of trading activity. The ITAT has examined this issue and has held as under:- "12.18 In the aforementioned background we are of the view that in order to adjudicate upon the issues it would be appropriate for us to formulate the questions as under:- (a) Whether the TPO on facts was justified to treat the indenting activity at par 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t being entered into and negotiated by assessee. In its indenting activity these facts are not evident. Accordingly the question posed in (a) is answered in the negative. 12.21 Considering the next question posed, even if the answer in (a) is in the negative, we see that there 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 recharacterizing 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, warran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two activities 12.25. Accordingly on account of these facts, we are unable to agree with the TPO who chose to re-characterize the activities of the service provider and treated them at par with the activities 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the 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; ** ** ** 12.31. In the facts of the present case which have been discussed at length while considering the action of the TPO in re-characterizing the transactions, we are of the view that on the basis of the detailed FAR analysis of the assesses, the "costs" referred to in Rule 10 B (1)(e)(i) does not suggest that in the facts of a case like the present case the 'costs' would mean the FOB value of goods. The assessee demonstrably is a low risk entity as a service provider functioning as a facilitator who is not exposed to price risk, warranty risk, inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/opinions may turn out to the correct or grossly wrong as such due to the high risks of both eventualities occurring 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 is using the network and intangibles of its AE. 12.33 Coming to the final question (d), which we have posed to ourselves since the answer to question (a) is in the negative the question regarding justification on facts in applying margins earned in trading activity to the profits of indenting activity for working out the Arms Length Price requires to be considered. For the said purpose we are of the view that elaborate discussions are not necessary as it would necessitate re-iterating the distinctions in the two separate sets of activities and the conclusions on the detailed FAR analysis already done in the earlier paras especially while considering queries (a) and (b). Accordingly relying on the same we hold that there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue intangible for which the business entity is to be compensated. 65. As for the objection that use of berry ratio is not permitted under rule 10B(1)(e)(i) as it does not deal with costs incurred, sales effected or assets employed or to be employed, it proceeds on the fallacy that the basis of computation, as set out in rule 10B(1)(e)(i), is exhaustive whereas it is only illustrative and it ends with the expression "or having regard to any other relevant base". Just because a cost base is not of costs incurred, sales effected or assets employed, such a base does not cease to permissible under rule 10B(1)(e)(i) unless such a base can be held to be irrelevant. In view of the elaborate discussions earlier, justifying exclusion of inventory costs, the cost of base of the operating expenses is relevant. When cost of inventory is excluded from the cost base, for all practical purposes, cost bases consists only of the operational costs. In our considered in a situation in which trading is on back to back basis without anything actually going to the current assets and flash title of goods is held only momentarily, it could indeed actually be a relevant base as to what are the operating c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. 81. Clearly, therefore, it is impermissible to make notional additions in the cost base and thus take into account the costs which are not borne by the assessee. It is so opined by Hon'ble jurisdictional High Court on a careful analysis of rule 10B(1)(e)(i). It is, therefore, no longer open to the revenue authorities to reconstruct the financial statements of the assessee by including the cost of products incurred by the AEs, in respect of which services are rendered, in its reconstructed financial statements, and then putting the hypothetical trading profits, so arrived at in these reconstructed financial statements, to the tests for determining arms' length price. Respectfully following the esteemed views of Their Lordships, we hold that the adjustments carried out in the cost base of ALP computation, in respect of service fee/commission segment, are indeed devoid of legally sustainable merits. We direct the Assessing Officer to delete these adjustments." 31. Respectfully following the above judgment of the coordina ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
