CARGILL FOODS INDIA PVT. LTD. V. ASSISTANT COMMISSIONER OF INCOME TAX

ITA/938/2017

AI Insights

Cargill Foods India Pvt. Ltd., the appellant, challenged the decision of the Tribunal regarding the application of the Berry Ratio and TNMM for international transactions with its AE. The company, involved in manufacturing and trading edible oil and plastic films, had declared a net loss for the assessment year 2007-08. Upon scrutiny, the Assessing Officer identified international transactions with an AE, leading to a referral to the Transfer Pricing Officer, who accepted the Arm's Length Price for most transactions except two, which involved a total of `3,25,20,839. The Tribunal rejected the company's arguments that the advance consideration received and the discount offered to the AE were commercially prudent and part of normal trade practice. The High Court agreed with the Tribunal's findings, emphasizing that the income from interest on advance payments and the discounts offered were not justifiable under the circumstances presented.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 751812 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 06-11-2017
• Assessment Year: misc
• Other Referred Cases: Sumitomo Corporation India Pvt. Ltd. v. CIT 387 ITR 611, M/s. Panasonic Sales & Services (I) Company Limited Vs. Assistant Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: RAHUL CHAUDHARY
• Assessee Lawyers: NAGESWAR RAO; SANDEEP KARHAIL; PARTH
• Keywords: Arm's Length Price; International Transactions; Transactional Net Margin Method; Transfer pricing; Berry Ratio
• Section: 10B; 260A; 10C

Judgement Text

"ITA 938/2017 Page 1 $~22 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 938/2017, C.M. APPL.39852/2017 CARGILL FOODS INDIA PVT. LTD. ..... Appellant Through : Sh. Nageswar Rao, Sh. Sandeep. S. Karhail and Sh. Parth, Advocates. versus ASSISTANT COMMISSIONER OF INCOME TAX ..... Respondent Through : Sh. Rahul Chaudhary, Sr. Standing Counsel. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE SANJEEV SACHDEVA O R D E R % 06.11.2017 The assessee in its appeal under Section 260A of the Income Tax Act, 1961 questions the decision of the Tribunal and urges that in firstly rejecting its contentions with respect to application of Berry Ratio and Transactional Net Margin Method (TNMM) method, the authorities committed an error in law and consequently that the adjustment made in the present case was unsupported by proper application of Rules 10B or 10C of the Income Tax Rules, 1962 [hereafter “the 1962 Rules]”. The assessee is a manufacturer as well as a trader; it was incorporated as a joint-venture and eventually became 100% subsidiary of M/s. Cargill Mauritius Limited. The commodities it manufactures and trades are edible oil and plastic films. For AY ITA 938/2017 Page 2 2007-08, it declared net loss of `26,85,38,165/-; upon selection for scrutiny, the Assessing Officer (AO) found that the returns involved international transactions with its Associated Enterprise (AE); the matter was referred to the Transfer Pricing Officer (TPO), who largely accepted the Arm’s Length Price (ALP) for various international transactions except with respect to two, i.e. principal payment towards purchase and the payment made (sale), both aggregating `3,25,20,839/-. The assessee’s plea to the Dispute Resolution Panel (DRP) was unsuccessful. It, therefore, approached the Tribunal. The assessee contended that the advance consideration it received from its AE was a commercially prudent arrangement which enabled it to save-up interest and that the other side of the transaction, i.e. sale at a discount of 5% to its AE was a part of normal trade practice. This contention was rejected by the Tribunal. Sh. Nageswar Rao, learned counsel for the assessee made contentions in support of the grounds of appeal. He submits that the judgment in Sumitomo Corporation India Pvt. Ltd. v. CIT 387 ITR 611 has upheld the application of the Berry Ratio which was understood in the circumstances of the present case. It is submitted that the circumstance that the assessee obtained and kept advance consideration for 6 months cannot be held against it as it was part of a commercially prudent decision which enabled it to save-up interest; the adjustment made on this score was, therefore, not reasonable and ought not to be upheld. It is also contended that granting 5% discount to the AE as compared to the purchase price, in the circumstances, ITA 938/2017 Page 3 was also part of the trade. The findings of the Tribunal show that the assessee had worked-out its international transactions by application of Comparable Uncontrolled Prices Method (CUP) but during the course of the proceedings, it was modified to TNMM. Its contention was firstly rejected by advertence to Rule 10 of the 1962 Rules which arms the AO/TPO with the discretion of applying the most appropriate method. Next dealing with the application of Berry Ratio, the Tribunal then proceeded to deal with the Berry Ratio and other arguments pertaining to cash discount on advance payments; it observed as follows: “9. The ld. AR has contended that Berry ratio is applied while benchmarking the merchanting activity transactions. The concept of Berry Ratio has been approved by the Hon 'ble Delhi High Court and the Delhi Bench of the Tribunal. We find this submission of the assessee is out of context in the facts of present case. The assessee has used Berry Ratio while applying TNMM to benchmark the international transactions. Once, CUP has been accepted as the most appropriate method there is no question of applying any other method to corroborate the analysis made under CUP. The assessee has to explain the benchmarking of international transactions by applying the most appropriate method selected to benchmark the transaction. 10. In so far as allowing of cash discount is concerned there is no quarrel on the allowability of cash discounts. The Chennai Bench of the Tribunal in the case of M/s. Panasonic Sales & services (I) Company Limited Vs. Assistant Commissioner of Income Tax (supra) had accepted the allowability of cash discounts without ITA 938/2017 Page 4 reducing selling price. The Tribunal in the said case had categorically observed that cash discounts cannot be equated with trade discounts. In the present case, the assessee has admitted that what has been offered to AE is trade discounts. This fact is clearly evident from the perusal of sample agreement placed on record by the assessee at page 170 of Paper Book-I. It is an undisputed fact that allowing discounts is normal practice in business transactions. The discounts are offered for early realization of payments and sometimes for receiving advance payments as well. However, such transactions have to be explained with rational for discounts offered. In the present case, the entire emphasis of the ld. AR of the assessee was in explaining the merchanting activities transactions and the discounts offered for prepayment through TNMM, whereas both the sides agree that CUP is the most appropriate method. Once, having accepted CUP as the most appropriate method there was no need for the assessee for explaining the transaction by applying TNMM. The assessee has to explain the benchmarking of transaction by applying the most appropriate method, i.e. the CUP in the present case. We do not find any merit in the submissions of the ld. AR of the assessee. Accordingly, ground Nos. 2 and 3 raised in the appeal by the assessee are dismissed.” This Court is of the opinion that the Tribunal’s findings cannot be faulted. The interest offering which the assessee emphasises is nothing but an income attributable to the transaction which it had sought to utilize. In the circumstances, the authorities’ decision, therefore, cannot be characterized as erroneous. The provisions of the acts and rules apply in making the adjustments in the present case; the same would apply even in the case of discount for the sale transaction which was undertaken after six months. ITA 938/2017 Page 5 For the above reasons, no question of law arises. The appeal is accordingly dismissed along with the pending application. S. RAVINDRA BHAT, J SANJEEV SACHDEVA, J NOVEMBER 06, 2017/AJK "