Sojitz India (P) Ltd., New Delhi V. DCIT, New Delhi

ITA 5186/DEL/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2682 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-05-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 19-02-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 21-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN C I T D R TP
• Keywords: Depreciation; Transfer pricing; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary; Wrong claim
• Section: 143(3); 92D; 234B; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI B.C.MEENA, ACCOUNTANT MEMBER IN I.T.A .NOS.-5186/DEL/2011 & 5433/DEL/2012 (ASSESSMENT YEARS-2007-08 & 2008-09) SOJITZ INDIA (P) LTD., VS DCIT, 7 TH FLOOR, EROS CORPORATE TOWERS, CIRCLE-9(1), NEHRU PLACE, NEW DELHI. C.R. BUILDING, NEW DELHI PAN-AAICS8883N (APPELLANT) (RESPONDENT) APPELLANT BY: SH.VED JAIN, FCA RESPONDENT BY: SH.PEEYUSH JAIN, CIT DR TP ORDER PER DIVA SINGH, JM IN BOTH THESE APPEALS FILED BY THE ASSESSEE AGAINST THE ASSESSMENT ORDERS FOR 2007-08 AND 2008-09 ASSESSMEN T YEARS, THERE IS A COMMON ISSUE OF ARMS LENGTH PRICE ADJUSTMENT. AS SUCH IT IS CONSIDERED APPROPRIATE TO DECIDE THE APPEALS BY WAY OF A COMMON ORDER. 2 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 2. THE GROUNDS RAISED BY THE ASSESSEE IN 2007-08 & 2008-09 ASSESSMENT YEARS READ AS UNDER :- IN ITA NO.-5186/DEL/2011 1. THAT THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 9(1), NEW DELHI HAS ERRED BOTH ON FACTS AND, IN LAW IN DETERMINING INCOME OF THE APPELLANT AT RS.5,86,29,915/- IN AN ORDER OF ASSESSMENT DATED 22.09.2011 FRAMED U/S 143(3) READ WITH SECTION 144C OF THE ACT AS AGAINST THE DECLARED INCOME OF THE APPELLANT OF RS.1,88,72,880/- 2. THAT THE LEARNED ADDITIONAL DIRECTOR OF INCOME T AX, 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 ARMS 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 ALON G WITH LEARNED TRANSFER PRICING OFFICERS 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 T HE 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). FURTHER, THE APPELLANTS USE OF TRANSACTION NET MARGIN METHOD (TNMM) WITH OP/TC AS THE 3 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 PROFIT LEVEL INDICATOR (PLI HAS BEEN DISCARDED WITHOUT ANY JUSTIFICATION WHATSOEVER; B) THAT THE LEARNED AO/TPO/DRP HAS ERRED IN ADOPTING HIS OWN METHOD TO DETERMINE THE ALP OF THE APPELLANTS INTERNATIONAL TRANSACTIONS WITHOUT DEMONSTRATING THE EXISTENCE OF ANY ONE OF THE FOUR CONDITIONS PROVIDED IN SECTION 92C(3) WHICH IS A MANDATORY REQUIREMENT FOR MAKING ADJUSTMENT UNDER SECTION 92CA(3) OF THE ACT; C) THAT THE LEARNED AO/TPO/DRPS METHOD OF COMPUTING THE ARMS LENGTH PRICE IS NOT IN ACCORDANCE WITH ANY OF THE METHODS SPECIFIED IN SECTION 92C(1); D) THAT THE LEARNED TPO HAS ERRED IN RE- CHARACTERIZING THE COMMISSION/INDENT TRANSACTIONS OF THE APPELLANT AS TRADING/PROPER TRANSACTIONS AND BY APPLYING THE GROSS PROFIT MARGIN EARNED FROM TRADING TRANSACTIONS IN THE NON-ASSOCIATED ENTERPRISE SEGMENT ON THE VALUE OF GOODS ON WHICH COMMISSION WAS EARNED. E) THAT THE LEARNED TPO HAS ERRED IN TREATING THE COMMISSION AND TRADING TRANSACTIONS AS COMPARABLE WITHOUT ANY REGARD TO PRINCIPLES LAID DOWN IN SUB-RULES (2) AND (3) OF RULE 10B; F) THAT THE LEARNED AO/TPO/DRP HAS FAILED TO APPRECIATE THE DIFFERENCE IN RISK PROFILE OF THE INDENT AND PROPER TRANSACTIONS. IN PARTICULAR, IN THE INDENT BASED TRANSACTIONS THERE ARE NEGLIGIBLE CREDIT RISK AND FOREIGN EXCHANGE RISK ON ACCOUNT OF FLUCTUATION OF RATE OF EXCHANGE. IN FACT, IN THE INDENT BASED TRANSACTIONS, THE FUNCTION IS TO MERELY FOLLOW UP ON BEHALF OF THE CUSTOMERS AND NOT DEAL WITH THE PROSPECTIVE CUSTOMERS OF THE CUSTOMERS OF THE APPELLANT; THE RISK IS LIMITED TO THE COMMISSION AMOUNT AND NOT TO THE GROSS AMOUNT OF SALES; G) THAT THE LEARNED AO/TPO/DRP HAS OVERLOOKED THAT IN RESPECT OF INDENT BASED TRANSACTION, 4 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 SERVICE TAX IS APPLICABLE AND IN RESPECT OF PRINCIPAL BASED TRANSACTIONS, SALES TAX IS APPLICABLE. THUS, APPARENTLY, THE TWO TRANSACTIONS ARE DIFFERENT CLASSES OF TRANSACTIONS. 4. THAT THE LEARNED AO/TPO/DRP HAS ERRED IN HOLDING THAT THE APPELLANT HAS CREATED HUMAN AND SUPPLY CHAIN INTANGIBLES FOR WHICH IT IS NOT BEING ADEQUAT ELY COMPENSATED BY THE AE. 5. THAT ON FACTS AND IN LAW THE LD. AO/TPO/DRP ERRE D 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 EXCLUSI VE 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 TI ME 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 FACT S 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 INCOME OF THE APPELLANT AT RS.146,77,09,241/- AS AGAINST INCOME OF RS.3,13,76,134/- DECLARED BY THE APPELLANT. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS 5 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ERRED, BOTH ON FACTS AND IN LAW IN MAKING AN ADDITI ON OF RS.143,63,07,142/- AS DIFFERENCE IN ARMS LENGT H PRICE DETERMINED BY TRANSFER PRICING OFFICER (TPO) AND THE APPELLANT. 4(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE HONBLE DRP HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING ADDITION ON ACCOUNT OF ARMS LENGTH PRICE BY APPLYING THE GROSS PROFIT MARGIN EARNED FROM TRADIN G TRANSACTION WITH NON-ASSOCIATED ENTERPRISES ON THE VALUE OF GOODS ON WHICH COMMISSION HAS BEEN EARNED. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E TPO HAS ERRED, BOTH ON FACTS AND IN LAW, IN ALTERIN G THE BUSINESS MODEL OF THE APPELLANT BY RE- CHARACTERIZING THE COMMISSION TRANSACTIONS OF THE APPELLANT AS TRADING TRANSACTIONS, AND BY APPLYING THE GROSS PROFIT MARGIN EARNED FROM TRADING TRANSACTIONS WITH NON-ASSOCIATED ENTERPRISES ON THE VALUE OF GOODS ON WHICH COMMISSION INCOME HAS BEEN EARNED BY THE APPELLANT. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED TPO HAS ERRED, BOTH ON FACTS AND IN LAW, IN MAKING THE ABOVE ADDITION ON THE BASIS THAT THE ASSESSEE HAS CREATED HUMAN INTANGIBLES AND SUPPLY CHAIN INTANGIBLES FOR WHICH IT HAS NOT BEE N ADEQUATELY COMPENSATED IGNORING THE NATURE OF THE BUSINESS TRANSACTION UNDERTAKEN BY THE APPELLANT. 6. WITHOUT PREJUDICE TO ABOVE, THE LEARNED TPO HAS FAILED TO APPRECIATE THE FACT THAT EVEN IF THE ADDI TION PROPOSED TO THE TOTAL INCOME OF THE APPELLANT IS ACCEPTED THE APPELLANTS OPERATING PROFIT ON COST WOULD INCREASE TO AN ABSURDLY HIGH FIGURE OF MORE THAN 973%. 7(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LEARNED TPO HAS ERRED, BOTH ON FACTS AND IN LAW, IN 6 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ARBITRARILY REJECTING THE DETAILED TRANSFER PRICING STUDY DONE BY THE ASSESSEE AS PER SECTION 92D OF THE ACT. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LEARNED TPO HAS ERRED, BOTH ON FACTS AND IN LAW IN DETERMINING THE ARMS LENGTH PRICE OF COMMISSION EARNED FROM ASSOCIATED ENTERPRISES BASED ON CONJECTURE AND SURMISES. 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HONBLE 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 AGAIN ST 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 ALT ER ANY OF THE GROUNDS OF APPEAL. 3. FROM A PERUSAL OF THE GROUNDS IN 2007-08 ASSESS MENT YEAR, IT CAN BE SEEN THAT OUT OF THE 7 GROUNDS RAIS ED, WHICH HAVE BEEN REPRODUCED ABOVE, GROUND NOS.-1 & 7 ARE GENERAL IN NATURE AND ARE SPECIFICALLY ADDRESSED VIDE GROUND NOS.-2-5 QUA TH E ADJUSTMENT OF RS.3.97 CRORES ODD. WE FIND THAT GROUND NO-6, IS P RE-MATURE AND SINCE IT DOES NOT ARISE IN THE PRESENT PROCEEDINGS THE SAME IS DISMISSED. 4. SIMILARLY, ON A PERUSAL OF THE GROUNDS AGITATED IN 2008-09 ASSESSMENT YEAR REPRODUCED IN THE EARLIER PART OF THIS ORDER, IT WOULD 7 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 BE SEEN THAT IN ALL THE ASSESSEE HAS RAISED 11 GRO UNDS . OUT OF THESE, GROUND NOS.-1,10 & 11 ARE GENERAL IN NATURE AS SUCH STAND COVERED IN GROUND NOS.-3-8 WHICH ARE RAISED AGITAT ING THE ADDITION OF RS.143.63 CRORES, VIDE GROUND NO-9, IT IS AGITATED THAT THE DEPRECIATION ON COMPUTER PRINTER SHOULD BE ALLOWED AT 60% AS AGA INST 15% ALLOWED BY THE ASSESSING OFFICER (HEREINAFTER REFERRED TO A S THE AO) 5. WE FIRST PROPOSE TO DISCUSS THE FACTS AVAILABLE ON RECORD QUA EACH OF THE YEARS SEPARATELY. FACTS PERTAINING TO 2007-08 ASSESSMENT YEAR : 6. IN 2007-08 ASSESSMENT YEAR, THE ASSESSEE DECLAR ED AN INCOME OF RS.1,88,72,880/- BY WAY OF FILING A RETUR N. THE BUSINESS PROFILE/OWNERSHIP STRUCTURE OF THE ASSESSEE AS DISC USSED BY THE TRANSFER POLICE OFFICER (HEREINAFTER REFERRED TO AS THE TPO) OF HIS ORDER ALL AS UNDER AND EXTRACTED HERE UNDER:- 2. BUSINESS PROFILE :- PROFILE OF THE COMPANY:- THE SOJITZ WAS FORMED THROUGH THE BUSINESS INTEGRAT ION BETWEEN NICHIMEN CORPORATION AND NISSHO IWAI CORPORATION. THESE TWO COMPANIES HAVE A HISTORY OF OVER A CENTURY. THIS BUSINESS INTEGRATION TOOK SHAPE IN D EC 2002 AND WAS FOLLOWED ON APRIL 2003 BY THE INCORPORATION OF A JOINT HOLDING COMPANY. THE PRINCIPLE OPERATING ARM S OF THE GROUP, NICHIMEN CORPORATION AND NISSHO IWAI CORPORA TION WERE MERGED TO FORM A NEW SINGLE ENTITY, SOJITZ COR PORATION ON APRIL 1, 2004. SOJITZ CORPORATION JAPAN (SCJ) IS A ENTITY HEADQUAR TERED IN TOKYO. SCJ IS A GENERAL TRADING COMPANY (ALSO POPU LARLY 8 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 KNOWN AS SOGO SHOSHA IN JAPANESE TERMS) DEALING IN A WIDE RANGE OF PRODUCTS AND SERVICES. SOJITZ GROUP HAS OPERATIONS IN AROUND 50 COUNTIES WORLDWIDE AND OPER ATES WITH A NETWORK OF 740 CONSOLIDATED SUBSIDIARIES AND AFFILIATED COMPANIES IN JAPAN AND OVERSEAS. SOJITZ BUSINESS ACTIVITIES ARE WIDE RANGING, COVERING MACH INERY AND AEROSPACE, ENERGY AND MINERAL RESOURCES, CHEMIC AL AND PLASTICS, REAL ESTATE DEVELOPMENT AND FOREST PR ODUCTS, CONSUMER LIFESTYLE RELATED BUSINESS AND NEW BUSINES S DEVELOPMENT INCLUDING IT SOLUTIONS. THE SERVICES TYPICALLY PROVIDED BY SOJITZ INDIA ARE AS FOLLOWS :- SUPPORT SERVICES FOR FACILITATING TRADING ACTIVITIE S 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 SOJI TZ INDIA. SOJITZ ASIA PTE LTD (AE) SINGAPORE 99.99% INDIA SOJITZ INDIA PVT. LTD (ASSESSEE) 9 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 6.1. THE T.P.O CONSIDERING THE FACT THAT THE ASSES SEE COMPANY WAS A 100% SUBSIDIARY OF SOJITZ, AE (ASSOCIATE ENTERPRISES) ASIA WHICH WAS ITSELF A 100% SUBSIDIARY OF SOJITZ CORPOR ATION, JAPAN, (HEREINAFTER REFERRED TO AS SCJ) WHO WAS PROVIDING SERVICES OF A SERVICE PROVIDER HAD ALSO UNDERTAKEN SOME TRADING A CTIVITIES ON ITS OWN REQUIRED THE ASESSEE TO EXPLAIN WHY MARGINS E ARNED IN THE TRADING ACTIVITY WITH NON AE BE NOT APPLIED TO THE MARGINS EARNED IN ACTIVITY WITH THE AES. THE TPO OBSERVED THAT THE A SSESSEE HAD ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIO N IN 2006-07 FINANCIAL YEAR:- S.NO. TYPE OF INTERNATIONAL TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) 1. IMPORTS TNMM 837,321 2. PROVISION OF BUSINESS INFORMATION AND SALES SUPPORT SERVICES TNMM 173,018,363 3. REIMBURSEMENT OF EXPENSES BY ASSOCIATED ENTERPRISES TNMM 77,663,108 10 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 6.2. THE TPO HAD NOTED THAT THE ASSESSEE HAD BENC HMARKED ITS INTERNATIONAL TRANSACTION RELATING TO PROVIDING BUSINESS SUPPORT SERVICES USING THE TRANSACTIONAL NET MARGIN METHOD (HEREINAFTER REFERRED TO AS TNMM METHOD) AS THE MOST APPROPRIATE METHOD (HEREINAFTER REFERRED TO AS MAM ) WITH OPERATING PR OFIT/TOTAL COST AS PROFIT LEVEL INDICATOR) (HEREINAFTER REFERRED TO AS OP/TC AS PLI). THE ASSESSEE COMPUTED ITSELF AS THE TESTED PARTY SHOWING A MARGIN OF 5.47% AND THE MARGIN OF THE 13 COMPARABLES TAKEN WAS COMPUTED AT 9.15%. EXERCISIN G THE + 5% OPTION UNDER THE PROVISO TO SECTION 92C(2), THE ASS ESSEE CLAIMED ITS INTERNATIONAL TRANSACTION TO BE AT ARMS LENGTH. 6.3. THE METHOD ADOPTED BY THE ASSESSEE WAS NOT AP PROVED BY THE TPO FOR THE FOLLOWING REASONS :- IN THE PLI CALCULATED, THE DENOMINATOR DID NOT CON TAIN THE FOB VALUE OF THE GOODS. THE COMPUTATION OF MARGIN IN THE CASE OF COMPARABLES SIMILARLY DID NOT DEMONSTRATE THE VALUE OF GOODS OR SERVICES ON WHICH RETURN HAD BEEN CALCULATED. THE FOB VALUE OF GOODS TRANSACTED THROUGH ASSESSEE WERE NOT FURNISHED. IN A SEPARATE CLASS OF TRANSACTIONS ENTERED INTO W ITH 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 REA SONS, THE ASSESSEE WAS ISSUED A SHOW CAUSE NOTICE AND REQUIRED TO EXPL AIN THE SAME. THE SHOW CAUSE NOTICED ISSUED TO THE ASSESSEE IS RE PRODUCED IN INTERNAL PAGES 3,4 & 5 OF THE TPOS ORDER. APART F ROM THAT THE TPO 11 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ALSO COMPARED THE COMMISSION EARNED ON TRADING SALE S MADE IN NON- AE SEGMENT WITH THE ASSESSEES SERVICES AS A SERVIC E PROVIDER SEGMENT AND OBSERVED THAT THE MARGIN EARNED RESPECT IVELY WAS 1.81% AND 1.48%. ACCORDINGLY HE REQUIRED THE ASSES SEE TO EXPLAIN WHY MARGIN OF 1.81% SHOULD NOT BE ADOPTED TO COMPUT E THE MARGIN THAT THE ASSESSEE SHOULD HAVE EARNED ON THE TOTAL F OB VALUE OF THE GOODS TRANSACTED BY IT. 6.5. IT MAY BE PERTINENT AT THIS POINT TO EXTRACT T HE RELEVANT PORTION FROM THE SHOW CAUSE NOTICE REPRODUCED IN THE TPOS 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 POSITION EMERGES : PARTICULARS NON-AES AE TOTAL FOB VALUE OF GOODS TRADED 959,808,865 12,151,252,480 COMMISSION EARNED 17,393,089 180,227,181 197,620,270/- SEGMENTAL GROSS PROFIT MARGIN (AS CALCULATED) 1.81% 1.48% FROM AN ANALYSIS OF THE ABOVE COMPUTATION, IT IS SE EN THAT IN YOUR TRADING TRANSACTION WITH YOUR AE, YOU HAVE EAR NED A GROSS PROFIT MARGIN OF 1.48%. IN THE SEGMENT RELATING TO TRADING WITH NON AES, YOU HAVE EARNED A GROSS PROFIT MARGIN OF 1 .81%. ON THE BASIS OF DETAILED EXAMINATION OF FAR ANALYSIS I N YOUR TP REPORT, IT IS NOTICED THAT THERE IS NO SIGNIFICANT DIFFERENCE BETWEEN THE FUNCTIONS PERFORMED, ASSETS UTILIZED AN D RISKS 12 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ASSUMED BY YOU IN YOUR TRADING TRANSACTION IN YOUR NON AE SEGMENT AND ALSO THE TRANSACTIONS PERFORMED BY YOU WHEREIN YOU HAVE PURPORTEDLY EARNED ONLY COMMISSION INCOME OR A FIXED FEE. WHILE ANALYZING THE FUNCTIONS PERFORMED BY YOU, IT IS ALSO NOTICED THAT YOU ARE CREATING HUMAN INTANGIBLE S AND SUPPLY CHAIN INTANGIBLES, FOR WHICH APPARENTLY YOU ARE NOT BEING ADEQUATELY COMPENSATED IN YOUR TRANSACTIONS W ITH YOUR AE. 6.7. IN RESPONSE THERETO, THE ASSESSEE SUBMITTED T HAT FOR BENCHMARKING OF THE INTERNATIONAL TRANSACTION RELAT ING TO RENDERING OF SUPPORT SERVICES, IT HAS USED THE TNMM AS THE MOS T APPROPRIATE METHOD. IT WAS ALSO CLARIFIED THAT THE COMPARABLES SELECTED IN THE TRANSFER POLICY (HEREINAFTER REFERRED TO AS THE T.P) REPORT, ARE ALSO SERVICE COMPANIES AND FOR THE COMPUTATIONS THE RETU RN ON OPERATING EXPENSES IS THE TREATMENT OF BOTH THE COMPARABLE CO MPANIES AND THE TESTED PARTIES WAS ALIKE. 6.8 IT WAS ALSO CLARIFIED THAT THE ASSESSEE IS A R OUTINE AUXILIARY SUPPORT SERVICE PROVIDER WITH LIMITED RISK, IT WAS ALSO URGED THAT COMPARED TO ITS SUPPORT SERVICE SEGMENT ITS TRADIN G , WITH NON- AES BUSINESS WAS COMPARATIVELY VERY MEAGRE. IT WAS ALS O SUBMITTED THAT THERE WAS A SIGNIFICANT DIFFERENCE IN THE NATURE, O F BUSINESS AND THE FUNCTIONS PERFORMED; ASSETS DEPLOYED AND RISKS ASSU MED, (HEREINAFTER REFERRED TO AS FAR ANALYSIS) ,OF THE TWO DIFFERENT ACTIVITIES. IT WAS EXPLAINED THAT IN AUXILIARY SUPPORT SERVICE RETURN IS EARNED ON THE VALUE ADDED EXPENSES, IT INCURS IN PERFORMING THE R OUTINE MARKETING SUPPORT FUNCTIONS. ACCORDINGLY IN SUCH CASES, ADDI NG COST OF GOODS SOLD (HEREINAFTER REFERRED TO AS COGS) CANNOT BE THE BASIS FOR CONSIDERING BENCH MARKING AS IT IS MERELY PROVIDING SUPPORT SERVICE TO 13 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ITS AES. IT WAS URGED THAT IF THE MARGIN OF THE L IMITED 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 W OULD RUN FOUL OF RULE 10B(1)(E)(I). 6.9. IT WAS FURTHER ELABORATED THAT COGS DID NOT A DDRESS THE FUNCTIONS PERFORMED ASSETS EMPLOYED AND RISKS ASSUM ED. THE COST OF SALES IN THE DENOMINATOR WOULD HAVE BEEN INCLUDED, HAD THE ENTITY BEEN PERFORMING MANUFACTURING FUNCTIONS WHICH IS NO T THE POSITION IN THE CASE AT HAND. 6.10. REFERRING TO THE DEFINITION OF THE TNMM IN R ULE 10B(1)(E)(I) & (II), IT WAS SUBMITTED THAT THE COST REFERRED TH EREIN DID NOT INCLUDE COGS BECAUSE NO SUCH COST HAS BEEN INCURRED BY TH E ASSESSEE IN THE PERFORMANCE OF ITS BUSINESS FUNCTIONS. THE FU NCTIONS 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 P ARA 4.7 IN REGARD TO THE CREATION OF HUMAN INTANGIBLES AND SUP PLY INTANGIBLES, IT WAS SUBMITTED THAT THE DETAILED FAR ANALYSIS IN THE TP REPORT HAD CHARACTERIZED THE ASSESSEE AS LOW END SERVICE PROVI DER WHO BEARS A MINISCULE RISK. THE LOW END ACTIVITIES PERFORMED, IT WAS SUBMITTED DO NOT REQUIRE ANY SPECIFIC SKILLS SET AS SUCH NO HUMA N INTANGIBLES OR SUPPLY CHAIN INTANGIBLES ARE CREATED. THE ACTIVITI ES PERFORMED, IT WAS STATED ARE ROUTINE, PREPARATORY AND AUXILIARY IN NA TURE AND IT CAN NOT 14 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 BE SAID TO CREATE ANY INTANGIBLES. AN INTANGIBLE, IT WAS CONTENTED WOULD NECESSARILY MEAN TO BE AN ASSET WHICH WOULD B E CAPABLE OF BEING TRANSFERRED OR LICENSED FOR A CONSIDERATION. THE ASSESSEE, IT WAS SUBMITTED MERELY ACTED AS A LINK BETWEEN THE SU PPLIERS AND THE CUSTOMERS. MANY CUSTOMERS IN INDIA ARE GLOBAL CUST OMERS FOR THE AES AND THE ROLE AND FUNCTIONS OF SOJITZ INDIA, IT WAS STATED IS LIMITED TO THAT OF A ROUTINE COORDINATION AND SUPPORT SERVICE PROVIDER. 6.12. ASSAILING, THE BELIEF THAT THE ASSESSEE HAS CREATED SUPPLY CHAIN INTANGIBLE THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE BEFORE THE TPO FROM PAPER 8 ARE EXTRACTED HEREUNDER :- SUPPLY CHAIN ACTIVITIES TRANSFORM RAW MATERIALS AN D COMPONENTS INTO A FINISHED PRODUCT THAT IS DELIVERE D TO THE END CUSTOMER, INTERNATIONAL SUPPLY CHAIN INCLUDES MANUFACTURING, SELLING, DISTRIBUTING, WAREHOUSING, LOGISTIC AND BUYING ACTIVITIES PERFORMED BY SEVERAL ENTITIES ACROSS THE BOUNDARIES OF THE NATIONS. SOJITZ INDIA MERELY PROVIDES FACILITATION SERVICES TO ENTITIES IN THE SUPPLY CHA IN WITHOUT BEING A PART OF SUPPLY CHAIN BARRING A FEW CASES WH ERE IT DOES PRINCIPAL BUSINESS IN THE NON AE SEGMENT. IN FACT, SOJITZ INDIA HAS BEEN ABLE TO PERFORM ITS FACILITAT ION ACTIVITIES BECAUSE SOJITZ JAPAN HAS STRONG RELATION WITH A VAST NETWORK OF MANUFACTURERS, DISTRIBUTORS, AND BU YERS. IN THE GIVEN FACTUAL MATRIX, THERE IS NOTHING WHICH CA N BE CLASSIFIED AS HUMAN OR SUPPLY CHAIN INTANGIBLE. EVEN IF SUCH AN INTANGIBLE IS ASSUMED (WITHOUT CONCEDING) T O EXIST, IT IS NEITHER CREATED NOR OWNED BY SOJITZ IN DIA. PROVIDING SUPPORT SERVICES BY NO STRETCH OF IMAGINA TION CAN BE CONSIDERED AS CREATION OF INTANGIBLES FOR TH E AES IN INDIA. 15 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 6.13. HOWEVER NOT CONVINCED WITH THE EXPLANATION O FFERED, THE TPO HELD THAT THE PLI USED BY THE ASSESSEE DID NOT CAPTURE THE COST OF THE GOODS TRANSACTED THROUGH IT, HENCE IT WAS HE LD THAT IT IS NOT AN APPROPRIATE PLI. FURTHER ON CONSIDERING RULE 10B(1 )(E)(I), HE WAS OF THE VIEW THAT THE NET PROFIT MARGIN SHOULD BE COMPU TED IN RELATION TO COST INCURRED OR SALES AFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED AND THEY DID NOT PRESCRIBE FOR VALUE ADDED EXPENDIT URE TO BE CONSIDERED AS BASE FOR COMPUTING THE NET PROFIT MA RGINS. THUS HE WAS OF THE VIEW THAT THE COMPENSATION MODULE SHOULD BE EXPRESSED AS A PERCENTAGE OF FOB PRICE OF GOODS. HE ALSO HEL D THAT HUMAN INTANGIBLE AND SUPPLY CHAIN INTANGIBLE HAD ALSO BEE N CREATED. ACCORDINGLY HE WAS OF THE VIEW THAT WHILE COMPUTING ARMS LENGTH PRICE, THE GROSS PROFIT MARGIN OF 1.81% EARNED BY T HE ASSESSEE ON ITS TRADING SEGMENT SHOULD BE APPLIED AND NOT THE MARGI N OF 1.48% EARNED IN ITS TRADING TRANSACTION WITH ITS AE. A CCORDINGLY AN ARMS LENGTH ADJUSTMENT OF RS.3,97,10,488/- WAS MADE AS U NDER:- COMMISSION INCOME EARNED FROM AES @ 1.48% ON RS.12,151,252,480/- =RS.180,227,181/- ARMS LENGTH COMMISSION INCOME @1.81% ON RS.12,151,252,480/-=RS.219,937,669/- DIFFERENCE=RS.39,710,488/- % OF ARMS LENGTH MARGIN TO INTERNATIONAL TRANSACTI ON =22.03%. 6.14. ACTING ON THE RECOMMENDATION OF THE TPO, THE AO MAD E AN ADJUSTMENT OF RS.3,97,10,488/- IN THE ARMS LENGTH PRICE. 16 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 7.1. AGGRIEVED BY THIS, THE ASSESSEE APPROACHED THE DISPUTE RESOLUTION PANEL (HEREINAFTER REFERRED TO AS DRP) OBJECTING TO THE ADJUSTMENT RECOMMENDED BY THE TPO AND PROPOSED BY T HE AO IN THE DRAFT ASSESSMENT ORDER. HOWEVER, NOT CONVINCED BY THE OBJECTIONS AND THE ARGUMENTS ADVANCED ON BEHALF OF THE ASSESSE E, THE DRP CONFIRMED THE ACTION OF THE TPO. 7.2. ACCORDINGLY THE AO PASSED THE IMPUGNED ORDER I N CONFORMITY WITH THE DIRECTIONS OF THE DRP. AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. FACTS PERTAINING TO 2008-09 ASSESSMENT YEAR :- 8. THE ASSESSEE IN THE YEAR UNDER CONSIDERATION DEC LARED AN INCOME OF RS.313,76,134/- HEREIN ALSO THE ASSESSEE BENCH-MARKED ITS INTERNATIONAL TRANSACTION RELATING TO BUSINESS SUPP ORT SERVICE USING TNMM AS THE MOST APPROPRIATE METHOD WITH OP/TC AS P LI. 8.1. THE TPO IN THE YEAR UNDER CONSIDERATION ALSO D ID NOT ACCEPT THE CHARACTERIZATION OF THE ASSESSEE WHICH ACCORDING TO THE ASSESSEES FAR ANALYSIS WAS AS UNDER :- THE FUNCTIONAL ANALYSIS SERVES AS A FOUNDATION TO CHARACTERIZE ENTITIES FOR PURPOSES OF INTER-COMPANY TRANSFER PRICING. BASED ON THE FACTS AS PRESENTED IN THE ABOVE ANALYSIS OF FUNCTIONS PERFORMED, ASSETS EMPLO YED AND RISKS BORNE, IT IS POSSIBLE TO CHARACTERIZE SOJ ITZ INDIA AS A ROUTINE SERVICE PROVIDER THAT ASSUMES NORMAL BUSINESS RISKS. 17 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 8.2. THE TPO FOLLOWING THE VIEW TAKEN IN THE EARLIE R YEAR WAS OF THE VIEW THAT ON EXAMINING THE DETAILS, THE FOLLOWING P OINTS EMERGED:- 5.5. ON THE BASIS OF ABOVE DETAILS FURNISHED BY THE ASSESSEE FOLLOWING POINTS EMERGED:- THE ASSESSEE HAS TWO KINDS OF INTERNATIONAL TRANSACTIONS VIZ. TRADING AND INDENTING. THE ASSESSEE HAS CHOSEN EXTERNAL TNMM TO BENCHMARK THE INTERNATIONAL TRANSACTIONS BY AGGREGATING ALL THE INTERNATIONAL TRANSACTIONS. WHILE COMPUTING THE MARGIN OF THE TESTED PARTY THE SALE AND THE COMMISSION INCOME RECEIVED ON THE INDENTING HAVE BEEN CLUBBED AND THE MARGIN HAS BEEN COMPUTED USING OP/OC AS THE PLI. THE FOB VALUE OF GOODS TRANSACTED THROUGH THE ASSESSEE HAS NOT BEEN CONSIDERED WHILE COMPENSATING THE ASSESSEE. IN A SEPARATE CLASS OF TRANSACTIONS ENTERED INTO WI TH UNRELATED PARTIES, IN IDENTICAL CIRCUMSTANCES, THE ASSESSEE HAD EARNED A DIFFERENT MARGIN AS COMPARED TO THE ASSESSEE 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 CREAT ED 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 ASSES SEE 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. 18 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 8.4. ACCORDINGLY AFTER ISSUING A SHOW CAUSE NOTICE TO THE ASSESSEE AND CONSIDERING THE EXPLANATION, HE PROPOSED AN ADJ USTMENT 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 ARMSS LENGTH MARGIN 1,612,004,591 LESS GROSS MARGIN SHOWN BY THE ASSESSEE 175,697,44 9 DIFFERENCE FOR WHICH ADJUSTMENT IS REQUIRED TO BE MADE 1,436,307,142 9. IN THIS YEAR ALSO THE ASSESSEE AGITATED THE ADDI TION MADE IN THE DRAFT ASSESSMENT ORDER BASED ON THE TPOS ORDER BEF ORE THE DRP. ACCORDINGLY BEFORE THE DRP ALSO THE ASSESSEE RAISE D VARIOUS GROUNDS AS IN THE EARLIER YEAR AGITATING THE ISSUES ON THE GROUND THAT RE-CHARACTERIZATION ON THE FACTS WAS NOT PERMISSIBL E UNDER LAW; THE METHOD APPLIED BY THE TPO WAS ASSAILED, THE ACTION OF HOLDING THAT THE COMMISSION IS EARNED ON THE FOB VALUES OF GOOD S WAS ALSO ASSAILED; THE ACTION WAS FURTHER ASSAILED ON THE GR OUND THAT ABSURD RESULTS WOULD ARISE IF THE CONSEQUENCES OF PROPOSED ADDITION WERE APPLIED AS THEN IMPOSSIBLY HIGH OPERATING PROFIT AN D COST WOULD BE YIELDED. SIMILARLY, THE FINDING THAT THE ASSESSEE HAD CREATED HUMAN AND SUPPLY CHAIN INTANGIBLES WERE ALSO ASSAILED. 19 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 9.1. HOWEVER, THE DRP DID NOT AGREE WITH THE CONTEN TION ADVANCED ON BEHALF OF THE ASSESSEE AND UPHELD THE ACTION OF THE TPO WHICH RESULTED IN THE PASSING OF THE IMPUGNED ORDER UNDER CHALLENGE BY THE ASSESSEE. 9.2. THE SPECIFIC REASONING AND FINDING OF THE DRP ON THE ISSUE IS FOUND DISCUSSED IN PARA 5.1 & 5.2 OF THE SAID ORDER . THE SAME IS REPRODUCED HEREUNDER :- 5.1. DURING THE HEARING BEFORE THE PANEL, SUBMISSI ONS MADE BEFORE THE TPO WERE REITERATED. IT WAS ARGUED THAT THE TPO WAS NOT JUSTIFIED IN RE-CHARACTERIZING THE COMMISSION/INDENT TRANSACTIONS TO THE TRADING TRANS ACTIONS AND BY APPLYING GROSS PROFIT MARGIN EARNED IN NON-A E TRADING SEGMENT. IT WAS ARGUED THAT ASSESSEE WAS A SUPPORT SERVICE PROVIDER AND NOT A FULL FLEDGED TRA DER AS HELD BY THE TPO. IT WAS CONTENDED THAT THERE WAS N O JUSTIFICATION IN INCLUDING THE VALUE OF GOODS IN TH E OC AND PLI AS THE TAXPAYER NEVER TOOK POSSESSION OF THE GO ODS, DID NOT CARRY OUT ANY WAREHOUSING ACTIVITY AND DID NOT ASSUME THE RISKS WHICH A NORMAL TRADER UNDERTAKES. IN SUPPORT OF THE CLAIM THAT IT WAS A SERVICE PROVIDER , IT WAS STATED THAT ASSESSEE HAD PAID SERVICE TAX AND VAT. AS REGARDS THE INTANGIBLES, IT WAS STATED THAT THE ASS ESSEE WAS A ROUTINE SERVICE PROVIDER AND DID NOT OWN ANY INTANGIBLES. IT WAS ALSO CONTENDED THAT THE TPO HA D NOT FOLLOWED ANY OF THE METHODS PRESCRIBED IN THE ACT. IT WAS ALSO ARGUED THAT THE TPO HAS NOT DEMONSTRATED AS TO WHICH OF THE FOUR CONDITIONS MENTIONED IN SECTION 9 2C(3) OF THE ACT EXISTED. 5.2. THIS PANEL HAS CAREFULLY CONSIDERED THE FACTS OF TH E CASE AND SUBMISSIONS OF THE ASSESSEE. AS MENTIONED ABOVE, THE ASSESSEE PROVIDED USEFUL INFORMATION AND 20 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 SUPPORT SERVICES TO THE AES IN FACILITATING THEIR T RADING ACTIVITIES. THE FUNCTIONS PERFORMED BY IT HAVE BEE N DISCUSSED IN DETAIL IN THE ORDER OF THE TPO. IT HA S BEEN RIGHTLY OBSERVED BY HIM 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 BE FORE 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 ADDRESSE D 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 ENTITI ES OF SOJITZ CORPORATION, JAPAN (SCJ) AND SCJ ALONG WITH ITS AFF ILIATES HAS BEEN IN THIS LINE OF BUSINESS, FOR ALMOST SIX DECADES. IT WAS SUBMITTED THAT FOR MORE THAN 50 YEARS, SCJ HAS AN INTERNATIONAL PRESEN CE AND A GLOBAL RECOGNITION AMONGST ITS CUSTOMERS SPREAD OVER MORE THAN 17 ODD COUNTRIES AND HAS BEEN CARRYING ON THIS BUSINESS EV EN 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 C OUPLE OF YEARS AND IN FACT THIS IS THE FIRST YEAR IN WHICH THE COMPANY IS FULLY FUNCTIONAL AS A SERVICE PROVIDER, THE OCCASION OF CREATING HUMAN CHAIN AND SUPPLY CHAIN INTANGIBLES DID NOT ARISE. REFERRING TO THE MATERIAL AVAILABLE ON RECORD, IT WAS CONTENDED THAT IT IS AN ACCEPTED POS ITION AS FAR AS THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE TO ITS GROUP ENTITIES OF 21 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 SCJ, IS CONCERNED THAT THE ASSESSEE IS ADMITTEDLY A SERVICE PROVIDER ONLY. THE SERVICES IT WAS STATED HAVE BEEN ENUMERA TED IN BOTH THE YEARS IN THE TPOS ORDERS FOR BOTH THE YEARS AS WEL L AS THE DRPS ORDERS, WHICH CLEARLY ADDRESS THE FACT THAT IT WAS A MERE SERVICE PROVIDER. THE SERVICE RENDERED IT WAS STATED HAVE EVEN BEEN ENUMERATED IN PARA 5.6 OF THE DRPS ORDER IN 2008-0 9 ASSESSMENT YEAR AS WELL AS IN THE EARLIER YEAR. THUS THE ACTI VITIES AS A SERVICE PROVIDER ARE ACCEPTED BY THE DEPARTMENT. IT WAS EL ABORATED THAT IT IS NOT THE CASE OF THE DEPARTMENT THAT THE ORDERS HAVE BEEN PROCURED BY THE ASSESSEE FOR SCJ AS THE RECORD SHOWS THAT SCJ N EGOTIATES CONTRACTS WITH ITS CUSTOMERS DIRECTLY AND THE RECO RD ALSO SHOWS THAT SOJITZ INDIA I.E THE ASSESSEE CAME INTO EXISTENCE I N 2005. THE SCJ, JAPAN IT WAS STATED HAS ITS OWN CUSTOMERS WHO HAVE BEEN INTERACTING WITH SCJ OVER THE YEARS. IT WAS ELABORATED THAT AS AND WHEN SCJ WANTS TO IMPORT GOODS FOR BUYERS IN INDIA, SCJ CONT ACTS ITS JAPANESE SUPPLIERS AND SCJ ITSELF ENTER INTO A CONTRACT WITH THE BUYERS IN INDIA; SIMILARLY FOR EXPORTS FROM INDIA, IT WAS URGED THAT SCJ ENTERS INTO A CONTRACT WITH INDIAN SUPPLIER DIRECTLY. THE ROLE O F THE ASSESSEE I.E SOJITZ INDIA IS THAT OF A MERE FACILITATOR AND A ME RE SERVICE PROVIDER. 10.2. IT WAS EMPHASIZED THAT THE ASSESSEE DOES NOT BEAR ANY RISK WHATSOEVER AS NEITHER THE TITLE IN GOODS RESTS IN ASSESSEES NAME AT ANY POINT OF TIME NOR DOES IT HOLD POSSESSION OF THE MERCHANDISE AT ANY POINT OF TIME AS SUCH AT NO POINT OF TIME DO ES IT BEAR ANY, OF THE RISKS TO WHICH A NORMAL TRADE IS EXPOSED NAMELY, PR ICE RISK, INVENTORY RISK, WARRANTY RISK, CREDIT RISK, ETC. AS AT NO POI NT OF TIME ITS CAPITAL IS EMPLOYED EITHER IN PURCHASE, SALE OR INVENTORY OR M AKING PURCHASES 22 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ON CREDIT OR SALES ON CREDIT WHICH ARE SOME OF THE RISKS TO WHICH A NORMAL TRADER WOULD BE EXPOSED AS ITS MAIN FUNCTION AND INFACT THE ONLY FUNCTION IS TO MAINTAIN CONTACT WITH THE SUPPL IERS TO ENSURE A TIMELY DELIVERY OF MERCHANDISE TO THE CUSTOMERS IN THE QUALITY/GRADE AND QUANTITY DESIRED AND FOR THE SAID PURPOSE IT CO MMUNICATES WITH SCJ OR ITS AFFILIATES AND GATHERS INFORMATION ON DE MAND AND SUPPLY OF THE COMMODITIES. THE SAID FUNCTIONS, IT WAS CONTEN DED ARE COMPLETELY DISTINCT AND SEPARATE AND OPERATE IN ENTIRELY DIFFE RENT BUSINESS MODEL VIS--VIS A TRADING BUSINESS. 10.3. IN THE LIMITED TRADING ACTIVITIES IN WHICH T HE ASSESSEE HAS VENTURED INTO IT WAS URGED THAT THE CUSTOMERS HAVE BEEN IDENTIFIED BY THE ASSESSEE AT ITS OWN INITIATIVE AND THESE ARE NO T THE CUSTOMER OF SCJ. IT WAS ELABORATED THAT AS IS WELL KNOWN A TRA DER 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 RI SK; RISK OF CAPITAL DEPLOYMENT IN INVENTORY DEBTORS ETC. AND IS CALLED UPON TO TAKE RISKS ON WARRANTY AND ON CREDIT EXTENDED ETC. ACCORDINGL Y THE FUNCTIONS PERFORMED, THE ASSETS DEPLOYED AND THE RISK ASSUMED IN TRADING ACTIVITY ARE MATERIALLY DISTINCT AND PECULIAR TO T HE SAID ACTIVITY AND CAN NO WHERE TO BE STATED TO BE IDENTICAL TO WHAT RISK S A BUSINESS SUPPORT SERVICE PROVIDER WOULD BE EXPOSED TO. THE RISKS BE ING HIGH, IT WAS URGED IF THE VENTURE SUCCEEDS THE REWARDS CAN ALSO BE HIGH. AS SUCH THE ACTION OF THE TPO IN TREATING THE TWO SEPARATE SETS OF ACTIVITIES AT PAR IS UNWARRANTED ON LAW AND FACTS. IT WAS SUBMITT ED THAT THE DRP IN UPHOLDING THE ORDER OF THE TPO HAD GRAVELY ERRED IN TREATING THE 23 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 TRADING ACTIVITY AND THE ACTIVITY OF A SUPPORT SERV ICE PROVIDER ALSO AT PAR. THE DRP HAS ALSO ERRED ON FACTS AND LAW IN PRE SUMING THAT THE MARGINS EARNED BY THE TRADER WOULD NECESSARILY APPL Y TO THE SUPPORT SERVICE PROVIDER IGNORING THAT THE FACTS AND CIRCUM STANCES OF THE TWO ACTIVITIES ARE ENTIRELY DISTINCT AND SEPARATE. 10.4. SIMILARLY, THE FINDINGS OF THE TPO IN THE TW O YEARS UNDER CONSIDERATION WHICH HAVE BEEN UPHELD BY THE DRP IN REGARD TO HUMAN INTANGIBLES AND SUPPLY CHAIN INTANGIBLES WERE ALSO ASSAILED. IT WAS REITERATED THAT IT SEEMS TO HAVE BEEN LOST SIGHT OF THE BASIC FACT THAT THE ASSESSEE CANNOT BE CREDITED FOR DEVELOPING THE BUSINESS OF SCJ GROUP OF ENTITIES. THE BUSINESS OF SCJ AFFILIATES WITH ITS CUSTOMERS EITHER FOR EXPORT OR FOR IMPORT IN INDIA AND IN THE REST OF THE WORLD HAS BEEN DEVELOPED AND CREATED AND HAS BEEN IN EXISTENC E MUCH PRIOR TO THE CREATION OF THE ASSESSEE AS SUCH TO CONCLUDE TH AT THE SUPPLY CHAIN INTANGIBLE AND HUMAN INTANGIBLE ARE BEING CREATED B Y THE ASSESSEE IT WAS URGED IS A COMPLETE MISUNDERSTANDING OF FACTS A ND IGNORING THE MATERIAL AVAILABLE ON RECORD. IT WAS SUBMITTED THA T THE ASSESSEE HAS BEEN ARGUING RIGHT FROM THE TPO STAGE IN BOTH THE Y EARS THAT THE ACTIVITIES PERFORMED ARE ROUTINE PREPARATORY AND A UXILIARY IN NATURE AND AS SUCH DO NOT CREATE ANY INTANGIBLES. ASSES SEES ROLE IT WAS URGED IS LIMITED TO PROVIDING SUPPORT SERVICE AS A FACILITATOR. IT WAS URGED THAT NO WHERE HAS IT BEEN BROUGHT ON RECORD T HAT IT WAS THE EXPERTISE OF THE ASSESSEE WHICH HAS RESULTED IN BRI NGING BUSINESS FOR THE AE AS THE FACTS ON RECORD ARE THAT SCJ, JAPAN H AS RELIED UPON ITS OWN RELATIONS WITH ITS OWN VAST NETWORK OF MANUFACT URERS, DISTRIBUTORS AND BUYERS FOR BUSINESS WHEREIN THE ASSESSEE ONLY P ROVIDES ROUTINE 24 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 SERVICES FOR WHICH NO SEPARATE SKILLS ARE REQUIRED. IT WAS URGED THAT IN THE EVENTUALITY AN EMPLOYEES LEAVES, HE DOES NOT CA RRY ANY SPECIFIC SKILLS OR KNOWLEDGE FOR WHICH THE ASSESSEE CAN REST RAIN HIM FROM USING IT ELSEWHERE IN THE BUSINESS WORLD AND SIMILA RLY THE SUBSTITUTE DOES NOT REQUIRE ANY SPECIFIC TRAINING TO ADJUST WI TH THE REQUIREMENT OF THE ROLE AS A SERVICE PROVIDER AS THE ASSESSEE PERF ORMS 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 T HE 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. THES E FACTS WILL BE EVIDENT FROM THE DESCRIPTION OF THE BUSINESS SUPPORT SERVIC E PROVIDED TO THE TPO IN THE BOTH YEARS. IT WAS URGED THAT THE ASSES SEE, MERELY PROVIDED FACILITATING SERVICES TO ENTITIES IN THE S UPPLY CHAIN WITHOUT EVER BEING PART OF THE SUPPLY CHAIN. 10.6. IN THE ABOVE BACKGROUND, IT WAS CONTENDED TH AT 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 SU BMITTED, SPECIFICALLY PROVIDES, THAT NET PROFIT MARGIN IN RELATION TO TR ANSACTION ENTERED INTO WITH AN AE IS TO BE COMPUTED IN RELATION TO COST IN CURRED OR SALES AFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE. IT WAS SUBMITTED THAT THE COST INCURRED HEREIN WOULD M EAN THE COST INCURRED BY THE ENTERPRISE WHICH IN THE CASE OF THE ASSESSEE WOULD MEAN THE COST INCURRED IN PROVIDING THE SERVICES. AS ADMITTEDLY SINCE 25 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 NO SALES HAVE BEEN AFFECTED BY THE ASSESSEE, IT WOU LD NOT BE APPROPRIATE TO TAKE COSTS OF SALES FOR COMPUTING MA RGIN. 10.7. IT WAS ALSO ARGUED BY HIM THAT EVEN OTHERWIS E IT IS NOT CORRECT TO APPLY COMMISSION RATE BASED ON THE VALUE OF GOODS SOLD BECAUSE IT IS AN ACCEPTED FACT THAT THE COMMISSION WOULD BE DICTATED APART FROM OTHER VARIOUS FACTORS ALSO BY THE NATURE AND TYPE OF PRODUCT IN RESPECT WHICH THE SERVICES HAVE BEEN RENDERED. IT WAS HIS ARGUMENT THAT WHEN THE NATURE OF SERVICES HAVE BEEN RENDERED AND THE TRADING HAS BEEN CLOSED QUA THE SAME PRODUCT TH EN ALL THINGS BEING EQUAL, SOME COMPARISON COULD HAVE BEEN CONTEM PLATED BUT HERE THERE IS NO ATTEMPT EVEN TO LOOK AT THE MERCHA NDISE IN WHICH TRADING HAS BEEN VENTURED FOR THE FIRST TIME. IT WA S EMPHASIZED THAT PERCENTAGE OF BROKERAGE OR COMMISSION FOR PROCURING BUSINESS IN RESPECT OF LUXURY GOODS OR COMMODITIES IS HIGHER AS COMPARED TO THE PERCENTAGE OF COMMISSION OR BROKERAGE FOR HIGH VALU E PRODUCTS LIKE GOLD, BULLION ETC. SIMILARLY, THE PERCENTAGE OF CO MMISSION FOR CONSUMER PRODUCTS IS ALWAYS HIGHER AS COMPARED TO T HE INDUSTRIAL PRODUCTS AS THE SALE AND PRICES OF THE CONSUMER PRO DUCTS ARE DICTATED BY FADS AND TRENDS IN THE MARKET WHICH MAY BE OF SH ORT DURATION. IT WAS HIS SUBMISSION THAT EVEN WHERE COMMISSION RATE BASED ON VALUE OF GOODS SOLD IS TO BE APPLIED SIMILARITY IN NATURE AND TYPE OF PRODUCT IN RESPECT OF WHICH SERVICES HAVE BEEN RENDERED HAS TO BE ESTABLISHED SAME . IN THE FACTS OF THE PRESENT CAS E, THE NATURE OF PRODUCTS AND ITEMS VARY A LOT AND NO SUCH EFFORT HA S BEEN MADE BY THE TPO. ON ACCOUNT OF THIS FACT, IT WAS HIS CONT ENTION THAT THE COMPENSATION MODEL TO DETERMINE THE ARMS LENGTH PRI CE BASED ON A 26 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 SINGLE RATE OF COMMISSION OF TOTAL FOB VALUE OF ALL TYPES OF GOODS TO BE SOLD MOST DEFINITELY WILL NOT BE AN APPROPRIAT E METHOD. IN THE FACTS OF THE PRESENT CASE, IT WAS HIS CONTENTION TH AT THE TPO WITHOUT LOOKING AT ANY OF THESE ITEMS DETAILS HAS IN A MOST ARBITRARY MANNER CONSIDERED TRADING ACTIVITY AS ONE AND COMPARABLE, TO THE ACTIVITY OF SUPPORT SERVICES AND APPLIED TRADING MARGIN EARNED IN DIFFERENT NATURE OF PRODUCTS AND ITEMS FOR WHICH SUPPORT SERVICES H AVE BEEN RENDERED TO THE AES. 10.8. IT WAS URGED THAT IF WE CONSIDER TRANSFER PR ICING ADJUSTMENT AS PROPOSED BY THE TPO AND UPHELD BY TH E DRP VERY ABSURD RESULTS WILL FOLLOW. FOR THE SAID PROPOSES ATTENTION WAS INVITED TO SYNOPSIS DATED 19.02.2013 IN 2008-09 ASS ESSMENT YEAR RELEVANT PORTION FROM PAGES 13-14 IS BEING EXTRACT ED 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 RESERVES AND SURPLUS 1,98,15,112 1,98,15,112 27 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 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 O N CAPITAL IN ANY BUSINESS. IF WE TAKE THE TRANSFER P RICING ADJUSTMENT AND RECONSTRUCT ACCOUNTS WITH INDENT SAL ES TREATING AS TRADING SALES, THEN THE TURNOVER RATIO WILL BE A S BELOW. 10.9 ADDRESSING THE PAST HISTORY IN ASSESSEES OW N CASE, IT WAS HIS ARGUMENT THAT THIS ITSELF WILL DEMONSTRATE AS T O HOW AND WHY RE- CHARACTERIZING OF THE BUSINESS SUPPORT SERVICE INT O TRADING ACTIVITY CAN LEAD TO EXTREMELY IMPOSSIBLE RESULTS. ELABORATING T HIS ARGUMENT, FURTHER ATTENTION WAS INVITED TO THE POSITION IN 20 07-08 ASSESSMENT YEAR I.E THE FIRST YEAR UNDER CONSIDERATION. REFER RING TO THE SAME, IT WAS SUBMITTED THAT IT CAN BE SEEN THAT WHEREAS IN O NE YEAR THE TPO APPLIED THE MARGIN OF 1.81% TO THE SUPPORT SERVICES AND IN THE NEXT ASSESSMENT YEAR 2008-09, THE MARGIN APPLIED HAS BE EN 13.29%, IN BOTH THE YEARS THE ACTIVITY REMAINED THE SAME. IT WAS EMPHASIZED THAT IN 2006-07 ASSESSMENT YEAR, THE ASSESSEES MET HOD OF BENCH- MARKING ITS INTERNATIONAL TRANSACTION RELATING TO P ROVISION OF BUSINESS SUPPORT SERVICES USING TNMM AS 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 T O THE COMPARABLES. IT WAS EMPHASIZED THAT THE BASIS FOR COMPUTATION I.E OP/TC AS PLI WAS NOT INTERFERED WITH AND HAS BEEN C ONSISTENTLY SHOWN BY THE ASSESSEE AND ONLY IN THESE TWO YEARS, THE METHOD WAS 28 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 NOT ACCEPTED. THE ABSURD RESULTS TO WHICH THIS MET HOD OF THE TPO IF FOLLOWED IS APPLIED IT WAS URGED CAN BE DEMONSTRATE D FURTHER FROM THE FACT THAT ON MORE OR LESS THE SAME TURNOVER, APPLYI NG THE TRADING MARGIN IN THE TWO YEARS NAMELY 1.81% AND 13.29% WIL L LEAD TO ABSURD SITUATIONS. 10.10 INVITING ATTENTION TO THE TPOS ORDER FOR THE SUBSEQUENT ASSESSMENT YEAR I.E 2009-10, IT WAS SUBMITTED THAT THE ARMS LENGTH PRICE DETERMINED BY THE ASSESSEE HAS BEEN ACCEPTED AS THE DEPARTMENT FOUND THAT MARGINS IN SERVICE PROVIDER S ECTOR WERE HIGHER. THIS FACT IT WAS URGED SHOWS THAT THE RISKS IN THE TWO ACTIVITIES WERE VERY DIFFERENT, CONSEQUENTLY THE REWARDS ALSO. THE TRADING ACTIVITY HAS SHOWN IN THE THREE YEARS A RANGE OF 1.81%, 13.29% AND 0.59% BECAUSE THE RISKS ARE HIGH AND THUS VARIED. 10.11. IT WAS EMPHASIZED THAT THERE IS NO CHANGE IN THE NATURE OF SERVICES BEING PROVIDED BY THE ASSESSEE T O ITS ASSOCIATES ENTERPRISES SINCE MARCH 2005 WHEN THE ASSESSEE COMP ANY WAS INCORPORATED AND THE ASSESSEE HAS BEEN CONSISTENTLY BENCH-MARKING ITS INTERNATIONAL TRANSACTION RELATING TO BUSINESS SUPPORT SERVICES USING TNMM AS THE MOST APPROPRIATE METHOD WITH OP/TC AS P LI. AS SUCH IT WAS HIS ARGUMENT THAT THIS IS A CORRECT METHOD WHIC H IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR TO THE YEARS UNDER CONSIDERATION HAS BEEN ACCEPTED AND IN THE IMMEDIAT ELY SUBSEQUENT ASSESSMENT YEARS, NO ADDITION WAS MADE BY THE TPO. ACCORDINGLY WHERE THE NATURE OF SERVICES REMAIN THE SAME APPLYI NG THE MARGIN EARNED IN THE TRADING ACTIVITY IS NOT THE CORRECT A PPROACH EITHER UNDER LAW OR ON FACTS. 29 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 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 OCCAS ION FOR THE TPO TO RE-CHARACTERIZE THE TRANSACTION OF BUSINESS SUPP ORT SERVICES AS TRADING ACTIVITY. REITERATING THE FACTS RELIANCE WA S 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 UPHE LD. 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 TURN OVER 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 AD DITION PROPOSED, ON THE OTHER HAND FOR THE VERY SAME ACTIVITY AND VO LUME IS VARYING FROM RS.3 CRORE ODD TO RS.143 CRORE ODD. THE ABSU RDITY IN THE SAME IT WAS SUBMITTED IS DEMONSTRATED FROM THE FACT THAT THE NATURE OF THE ACTIVITY REMAINS THE SAME. 10.13 IT WAS SUBMITTED THAT IF THE FACTS FOR THE TWO YEARS UNDER CONSIDERATION ARE PERUSED, IT WOULD SHOW THAT DESPI TE THERE BEING NO DIFFERENCE IN THE NATURE OF ACTIVITY BY THE ASSESSE E AND NEGLIGABLE VARIATION IN VOLUME OF BUSINESS SIMPLY APPLYING THE MARGINS, EARNED IN THE TRADING ACTIVITY OF THE TWO YEARS, THE ABSU RD RESULTS ARE YIELDED. IT WAS HIS SUBMISSION THAT THE TPO HAS COMPLETELY I GNORED THE FACT THAT EVEN THE TOTAL PROFIT OF THE AE FOR WHOM SERVI CES HAVE BEEN 30 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 RENDERED BY THE ASSESSEE WOULD BE MUCH LESS THAN WH AT, IT IS SUGGESTED THE ASSESSEE SHOULD HAVE CHARGED FOR THE SUPPORT SERVICE TO AE. ELABORATING THIS ARGUMENT FURTHER IT WAS CO NTENDED THAT A PERUSAL OF THE BALANCE SHEET OF THE COMPANY WOULD S HOW THAT THE TPO PRESUMES THAT ON THE TOTAL CAPITAL OF THE ASSESSEE COMPANY WHICH WAS JUST RS. 8 CRORES AND THE COMPANY WHOSE MAIN AC TIVITY ADMITTEDLY WAS JUST TO PROVIDE SUPPORT SERVICES IS CONSIDERED TO HAVE DONE, BUSINESS WITH JUST RS. 8 CRORE TRADING OF MORE THAN RS.1200/- CRORES AND EARN A PROFIT OF ALMOST RS.161 CRORES AS HAS BE EN DETERMINED BY THE TPO. THE POSITION DEVICES ECONOMIC PRINCIPLES , AND IS UNIMAGINABLE. 10.14 . RELIANCE WAS PLACED UPON IN ITA NO-5147/DE L/2011 IN THE CASE OF GAP INTERNATIONAL SOURCING INDIA PVT. L TD. VS. ACIT DATED 18.09.2012 WHEREIN IT HAS BEEN ACCEPTED THAT IN RES PECT OF A FACILITATING FUNCTION WHICH IS SIMILAR TO A SERVICE PROVIDER IN THE CASE OF THE ASSESSEE, THE APPROPRIATE PLI FOR DETERMINING A RMS LENGTH PRICE WOULD BE OP/TC AND NOT PERCENTAGE OF FOB VALUE OF THE GOODS. 10.15 RELIANCE WAS ALSO PLACED UPON THE ORDER OF THE TRIBUNAL IN THE CASE OF DCIT VS CHEIL COMMUNICATION INDIA PV T. LTD. 137 TTJ 539(DEL) WHEREIN IT HAS BEEN HELD THAT IN THE TYPE OF SERVICES WHICH THE ASSESSEE THEREIN WAS ENGAGED IN NAMELY ASSESSEE WAS AN ADVERTISING AGENCY ENGAGED IN UNDERTAKING ADVERTISI NG SERVICES FOR ITS CUSTOMERS IN RESPECT OF THEIR PRODUCTS AND BRANDS I N THE CAPACITY OF AN AGENT. THE PAYMENTS MADE TO THE THIRD PARTIES WERE CLAIMED TO MERE PASS THROUGH IN NATURE AND RECOVERED FROM THE CUSTO MERS AND ASSESSEE WAS A MERE INTERMEDIARY BETWEEN THE VENDOR AND THE 31 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ULTIMATE CUSTOMERS. THE ASSESSEE HAD FOLLOWED NET REVENUE RECOGNITION METHOD AND THE TRIBUNAL UPHELD THE CIT( A)S ACTION IN HOLDING THAT MARK UP IS TO BE APPLIED TO THE COST I NCURRED AND NOT THE COST OF RENDERING ADVERTISING SPACE ON BEHALF OF AE . ACCORDINGLY IT WAS THE CONTENTION THAT THE PROPOSED ADDITIONS UPHE LD BY THE DRP PROVED BY THE AO DESERVES TO DELETED. 11. THE LD. DR, ON THE OTHER HAND RELIED UPON THE ORDER OF THE TPOS AND THE DRP WHICH CONFIRMED THE TPOS ORDER IN BOTH THE YEARS. 11.1. IN SUPPORT OF THE SAME, IT WAS CONTENDED TH AT THE TPO HAS HELD THAT THE METHOD ADOPTED BY THE ASSESSEE IS NOT THE CORRECT METHOD AS SUCH HEAVY RELIANCE IS BEING PLACED THERE ON. IT WAS ALSO HIS ARGUMENT THAT NO DOUBT THE ASSESSEE IS A SERVIC E PROVIDER BUT FOR BENCH-MARKING WHAT BETTER COMPARISON THAN ASSESSEE S OWN ACTIVITY WITH NON-AE. INVITING ATTENTION TO THE WELL ACCEPT ED COMMON PRACTICE IN THE MARKET, IT WAS HIS SUBMISSION THAT IT IS A W ELL KNOWN FACT THAT COMMISSION IN RESPECT OF BUSINESS TRANSACTION IS AL WAYS COMPUTED WITH REFERENCE TO THE VALUE OF GOODS FOR WHICH THE COMMISSION HAS BEEN RECEIVED. AS SUCH THERE, IT WAS URGED THERE W AS NO RELEVANCE IN THE ARGUMENTS ADVANCED ON BEHALF OF THE ASSESSEE TH AT THE FOB VALUE IS TO BE DISREGARDED. 11.2. ADDRESSING THE ARGUMENTS THAT THE PAST HIST ORY OF THE ASSESSEE ON WHICH HEAVY RELIANCE IS BEING PLACED, IT WAS HIS SUBMISSION THAT EACH YEAR IS AN INDEPENDENT YEAR AN D ACCEPTANCE OF THE ASSESSEES METHOD IN THE PRECEDING ASSESSMENT Y EAR CANNOT BE A 32 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 BINDING PRECEDENT. REGARDING THE POSITION FOR 2009 -10 ASSESSMENT YEAR, IT WAS HIS SUBMISSION THAT EVEN THOUGH NO ADD ITION HAS BEEN MADE BUT THE FACT REMAINS THAT THE METHOD OF THE AS SESSEE HAS NOT BEEN EXCEPTED. ACCORDINGLY IT WAS HIS SUBMISSION T HAT THE DEPARTMENTAL STAND HAS NOT VARIED. 11.3. IT WAS HIS EARNEST SUBMISSION THAT INTERNAL COMPARABLES ARE THE PREFERABLE COMPARABLES AND THE TPO IS JUSTI FIED IN APPLYING SUCH INTERNAL COMPARABLES AND IT IS OF NO CONSEQUEN CES THAT IN ONE YEAR SUCH INTERNAL COMPARABLES GIVE A VERY LOW MARG IN AS COMPARED TO A HIGHER MARGIN IN THE SUBSEQUENT YEAR. FOR THE SAID PROPOSITION, RELIANCE WAS PLACED UPON IN ITA NO.-3869/DEL/2010 IN BIRLASOFT INDIA LTD. VS DCIT ORDER OF THE DELHI BENCH DATED 28.01. 2011. 11.4. INVITING FURTHER ATTENTION TO RULE 10B(1)(E )(I) REGARDING TNMM, IT WAS CONTENDED THAT THE SAID RULE CLEARLY S TATED THAT THE NET PROFIT MARGIN REALIZED BY AN ENTERPRISE FROM INTER NATIONAL TRANSACTION IS TO BE COMPUTED IN RELATION TO SALES AFFECTED. A CCORDINGLY IT WAS URGED THAT THE TPO WAS CORRECT IN BENCH-MARKING, TH E SERVICE CHARGES RECEIVED BY THE ASSESSEE IN RELATION TO THE SALES A FFECTED. 11.5. SUPPORTING THE ACTION OF THE TPO IN RE-CHAR ACTERIZING THE TRANSACTION AND BENCH-MARKING THE SAME, RELIANCE WA S ALSO PLACED UPON ITA NO-2469/MUM/2006 IN SERDIA PHARMACEUTICALS INDIA VS ACIT BY ITS ORDER DATED 31.12.2010. IN THE FACTS O F THE PRESENT CASE, IT WAS SUBMITTED THAT THE TPO HAS RIGHTLY RE-CHARACTER IZED THE TRANSACTION OF THE ASSESSEE AS A TRADER AND HAS RIG HTLY BENCH-MARKED THE SAME WITH A SIMILAR ACTIVITY CARRIED BY THE ASS ESSEE WITH NON AES. 33 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 THE MARGINS SO EARNED IN RESPECT OF THE ACTIVITIES CARRIED OUT FOR THE SUPPLIES HAVE RIGHTLY BEEN APPLIED FOR DETERMINATIO N OF THE ARMS LENGTH PRICE. 11.6. ADDRESSING THE FINDINGS OF THE TPO UPHELD B Y THE DRP IN REGARD TO THE DEVELOPMENT OF THE HUMAN CHAIN INTANG IBLES, IT WAS HIS CONTENTION THAT THE ASSESSEE HAS BUILT THE SAME AND DUE IMPORTANCE HAS NOT BEEN GIVEN BY THE ASSESSEE IN THE COURSE OF THE ARGUMENTS, TO THE SAID FACT. AS SUCH THESE ARE ASSETS OF THE ASS ESSEE COMPANY AND WHILE DETERMINING THE ARMS LENGTH PRICE, THE ASSET S SO USED HAVE TO BE TAKEN INTO CONSIDERATION. 11.7. IT WAS ALSO HIS SUBMISSION THAT IT IS A WEL L 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 HAV E BEEN RENDERED AND MOST DEFINITELY NOT THE COST INCURRED IN PROVID ING INDENTING SERVICES. FOR THE SAID PURPOSE, RELIANCE WAS PLACE D UPON, ORDER DATED 16/12/2012 ITA NO.-7977/MUM/2010 IN THE CASE OF BAYER MATERIAL SCIENCE PVT. LTD. VS ACIT. 11.8. RELIANCE WAS ALSO PLACED UPON THE JUDGEMENT OF THE CO- ORDINATE BENCH IN THE CASE OF LI AND FUNG INDIA PVT . LTD. 12 ITR (TRIB) 748 WHEREIN IT HAS BEEN HELD THAT THE INDIA N ENTITY SHOULD GET 80% OF THE TOTAL MARGIN EARNED BY ITS ASSOCIATES EN TERPRISE ON ACCOUNT OF THE FACT THAT THERE WAS A HUMAN CHAIN IN TANGIBLES 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. 34 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 AR NAMELY GAP INTERNATIONAL SOURCING PVT. LTD. REF ERRING 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 HO WEVER THE TP WAS UPHELD BY ADOPTING AND ADDING 32% OF THE COST INCUR RED IN PROVIDING SUPPORT SERVICES. 11.10. IT WAS ALSO SUBMITTED THAT THE ARGUMENT ADV ANCED ON BEHALF OF THE ASSESSEE THAT PROFIT EARNED BY THE AE SHOULD HAVE ANY RELEVANCE AND BEARING ON THE ISSUE IT WAS URGED CA NNOT BE A CONSIDERATION WHILE BENCH-MARKING THE INTERNATIONAL TRANSACTION ENTERED INTO WITH THE AE AND FOR DETERMINING THE AR MS LENGTH PRICE. AS SUCH IT WAS NOT RELEVANT TO CONSIDER IN THE FACTS O F THE PRESENT CASE AS TO HOW MUCH PROFIT THE AE HAS MADE IN THE PRESENT C ASE IN RESPECT OF THE TRADING BUSINESS FOR WHICH IT PROVIDED SUPPORT SERVICES AND WHAT WAS RELEVANT IS THE DETERMINATION OF THE ALP WITH R EFERENCE TO THE SERVICES PROVIDED AND THE TPO ON THESE FACTS IS VER Y MUCH JUSTIFIED IN CONSIDERING THE MARGIN EARNED WITH TRADING ENTERED INTO WITH NON AE. 11.11. ACCORDINGLY IN THE ARGUMENTS THAT THERE IS A VARIATION IN THE TWO YEARS OF MARGINS APPLIED NAMELY 1.81% AND 13.29%, IT WAS URGED IS NOT RELEVANT. ATTENTION WAS ALSO INVITED TO ANOTHER ORDER OF THE DELHI BENCH IN ITA NO-5568/DEL/2010 AND ITA NO. -5680/DEL/2011 DATED 31.10.2012 IN THE CASE OF INTERRA INTERNATION AL TECHNOLOGIES INDIA PVT. LTD. THE SAID ORDER, IT WAS HIS SUBMISS ION ALSO SUPPORT THE DEPARTMENTAL STAND. AS SUCH, IT WAS HIS SUBMISSION THAT THE IMPUGNED ORDERS DESERVE TO BE UPHELD. 35 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. IN OUR EXPERIENCE THE TRANSFE R PRICING ISSUES NECESSARILY ARE EXTREMELY FACTUAL IN NATURE AND ANY ATTEMPT TO IGNORE THE NUANCED CHANGES IN FACTS AND CIRCUMSTANCES CAN LEAD TO WRONG CONCLUSIONS. CONSEQUENTLY FOR A PERSON OR AN AUTH ORITY ADJUDICATING ON THE ISSUES ARISING IN THESE MATTERS, THE NEED T O MAINTAIN A CONSTANT ALERTNESS OF NOT FALLING IN THE TRAP/ DANG ERS OF APPLYING PRINCIPLES WHICH MAY NOT BE SUPPORTED BY FAR ANALYS IS ETC SO THAT THE CONCLUSIONS DO NOT SUFFER FROM THE TAINT OF SUBJECT IVISM AND ARBITRARINESS, CANNOT BE OVER EMPHASIZED. THUS ON A CAREFUL CONSIDERATION OF THE FACTS CIRCUMSTANCES AND POSITI ON OF LAW IN THE LIGHT OF THE JUDGEMENTS AND ORDERS CITED BEFORE THE BENCH, WE ARE OF THE VIEW THAT IN THE PECULIAR FACTS AND CIRCUMSTANC ES, IT IS NECESSARY FIRST TO CONSIDER THE NATURE OF THE BUSINESS AND THE BUSINESS PROFILE OF THE ASSESSEE FOR OUR PURPOSES IN ORDER TO DECIDE T HE ISSUES BEFORE US. THE RELEVANCE AND IMPORTANCE OF SUCH AN EXERCI SE CANNOT BE OVER EMPHASIZED AS IT IS ON THIS EDIFICE THAT THE C ONCLUSION IN THE CONTEXT OF THE RULES AND PROVISIONS, IN TP MATTERS CAN BE DRAWN. SIMILARLY THE APPLICABILITY OF THE PRINCIPLES OF LA W, AS CONSIDERED IN THE JUDGEMENTS AND ORDERS ON WHICH RELIANCE HAS BEEN PLACED UPON BY THE PARTIES CAN BE THUS CONSIDERED. IN THE FACTS P RESENT IN THE CASE AT HAND IT IS TRITE LAW TO MENTION THAT A JUDGEMENT DE CIDES ONLY WHAT IT IS CALLED UPON TO DECIDE. CONTEXTUALLY THE PRINCIPLES LAID DOWN THEREIN ARE TO BE CONSIDERED IN THE CONTEXT OF THE QUESTION S WHICH ARE REQUIRED TO BE CONSIDERED IN PECULIAR FACTS AND CIR CUMSTANCES OF THAT SPECIFIC CASE. THUS EMBOLDENED BY THE OVER-RIDING AND IMPERATIVE NECESSITY AND OBSESSIVE COMPULSIONS OF ADDRESSING T HE FACTS 36 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 CORRECTLY, WE PROPOSE TO SET OUT ONCE AGAIN FOR OUT CONSIDERATION THE FACTS AVAILABLE ON RECORD DESPITE, THE FACT THAT TH EY 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 OR DER, WE HAVE BROUGHT OUT THE BUSINESS PROFILE OF THE ASSESSEE A S TAKEN INTO CONSIDERATION BY THE TPO IN BOTH THE YEARS AND HA VE ALSO DWELLED UPON THE OWNERSHIP STRUCTURE. IT IS SEEN THAT NEIT HER THE TPO NOR THE DRP OR FOR THAT MATTER THE CIT DR ASSESSEE HAS EIT HER DISPUTED THE BUSINESS PROFILE OR THE OWNERSHIP STRUCTURE. THE BU SINESS PROFILE OF THE ASSESSEE SHOWS THAT IT CAME INTO EXISTENCE IN MARCH 2005. SINCE THEN IT HAS BEEN RENDERING SERVICES TO THE GROUP EN TITIES OF SOJITZ CORPORATION, JAPAN, HEADQUARTERED IN TOKYO. IT MAY BE PERTINENT TO REFER THAT SOJITZ CORPORATION, JAPAN HAS THE OWNERS HIP AND CONTROL OF SOJITZ ASIA PVT. LTD., SINGAPORE, I.E THE ASSOCIATE ENTERPRISE AE WHICH IN TURN HOLDS 99.99% SHARE CAPITAL OF THE ASSESSEE. IT IS NOT DISPUTED THAT THE ASSESSEE HAS BEEN PROVIDING SERVICES TO T HE SOJITZ CORPORATION, JAPAN AND ITS GROUP ENTITIES. SCJ IS A GENERAL TRADING COMPANY (POPULARLY KNOWN AS SOGOSHOSHO IN JAPANESE TERMS) DEALING IN A WIDE RANGE OF PRODUCTS AND SERVICES. IT IS AN ADMITTED FACT THAT SCJ HAS OPERATIONS IN AROUND 50 COUNTRIES WORLD-WIDE AND OPERATES WITH A NETWORK OF 740 CONSOLIDATED SUBSIDI ARIES AND AFFILIATED COUNTRIES IN JAPAN AND OVERSEAS. 12.2. THE NATURE OF THE BUSINESS ACTIVITIES ARE STA TED TO BE WIDE RANGING COVERING MACHINERY AND AERO SPACE ENERGY AN D MINERAL RESOURCES, CHEMICAL AND PLASTICS, REAL ESTATE DEVEL OPMENT AND FOREST 37 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 PRODUCTS, CONSUMER LIFE STYLE RELATED BUSINESS AND NEW BUSINESS DEVELOPMENT INCLUDING IT SOLUTIONS. THESE FACTS HA VE NOT BEEN DISPUTED EITHER BY THE TPO OR THE DRP OR FOR THAT M ATTER BY THE LD. CIT DR IN THE COURSE OF HIS ARGUMENTS. FOR READY-R EFERENCE, IT IS CONSIDERED APPROPRIATE TO EXTRACT RELEVANT PORTION FROM THE TP STUDY OF 2006-07 FINANCIAL YEAR:- 2. BUSINESS DESCRIPTION 2.1 THE OWNERSHIP STRUCTURE SOJITZ CORPORATION JAPAN (HEREINAFTER REFERRED TO AS SCJ) HAS THE OWNERSHIP CONTROL OF SOJITZ ASIA WHICH IN T URN HOLDS 100% SHARE CAPITAL OF SOJITZ INDIA. SCJ WAS ESTABL ISHED IN APRIL, 2003. THE SOJITZ GROUP WAS FORMED THROUGH THE BUSINESS INTEGRATION BETWEEN NICHIMEN CORPORATION AND NISSHO IWAI CORPORATION. THESE TWO COMPANIES HAVE A HISTORY OF OVER A CENTURY. THIS BUSINESS INTEGRATION TOOK SHAPE IN D ECEMBER 2002 AND WAS FOLLOWED ON APRIL 1, 2003, BY THE INCO RPORATION OF A JOINT HOLDING COMPANY. THE PRINCIPAL OPERATIN G ARMS OF THE GROUP, NICHIMEN CORPORATION AND NISSHO IWAI CORPORATION WERE MERGED TO FORM A NEW SINGLE ENTITY , SOJITZ CORPORATION ON APRIL 1, 2004. SCJ IS A JAPANESE ENTITY HEADQUARTERED IN TOKYO. S CJ IS A GENERAL TRADING COMPANY (ALSO POPULARLY KNOWN AS SO GO SHOSHA IN JAPANESE TERMS) DEALING IN A WIDE RANGE O F PRODUCTS AND SERVICES. SOJITZ GROUP HAS OPERATIONS IN AROUND 50 COUNTRIES WORLDWIDE AND OPERATES WITH A N ETWORK OF 740 CONSOLIDATED SUBSIDIARIES AND AFFILIATED COM PANIES IN JAPAN AND OVERSEAS. SOJITZ BUSINESS ACTIVITIES AR E WIDE- RANGING, COVERING MACHINERY AND AEROSPACE, ENERGY A ND MINERAL RESOURCES, CHEMICALS AND PLASTICS, REAL EST ATE 38 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 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 UNDE R :- 2.2. PROFILE OF THE GROUP THERE ARE TWO MAJOR CATEGORIES OF TRADING COMPANIES IN JAPAN: A SOGO SHOSHA, WHICH IS A GENERAL OR INTEG RATED 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 TH E WORLD TO STEEL, CHEMICAL AND OTHER MANUFACTURING COMPANIES, WHEREUPON THOSE THAT WERE PROVIDED WITH SUCH RAW MATERIALS, ETC., PLAYED THE ROLE OF PROCESSING THESE MATERIALS AND MANUFACTURING THEM INTO PRODUCTS TO B E SOLD, AND SELLING THEM IN DOMESTIC AND OVERSEAS MARKETS. THE FUNCTIONS OF THE SOGO SHOSHA INCLUDED THE FOLLOWING : TRANSACTION FUNCTIONS, SUCH AS TRADING; STOCKING FUNCTIONS, SUCH AS WAREHOUSING; INFORMATION-RELATED FUNCTIONS, SUCH AS INFORMATION GATHERING; FINANCIAL FUNCTIONS, SUCH AS FINANCING; MARKETING FUNCTIONS; AND COORDINATOR FUNCTIONS. DUE TO THIS VARIED FUNCTIONS HANDLED BY THESE COMPANIES, THERE RELATIONSHIP WITH MANUFACTURES AND RETAILERS WENT BEYOND THAT OF A WHOLESALER THAT SIM PLY PASSED GOODS FROM ONE TO ANOTHER. THEY ALSO SUPPLIE D THEIR CUSTOMERS WITH BUSINESS-RELATED INFORMATION, MADE VARIOUS BUSINESS-RELATED PROPOSALS, AND BECAME JOIN T GUARANTORS, ETC., SUPPORTING THEIR CUSTOMERS IN VAR IOUS ASPECTS AS A BUSINESS PARTNER. 39 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 THE PROFILE OF THE SOJITZ GROUP IN PARTICULAR IS DO MESTIC TRADING, IMPORT/EXPORT, AND OVERSEAS TRADING OF VAR IOUS PRODUCTS AS MENTIONED ABOVE. THE MAIN BUSINESS OF SCJ CAN BE CATEGORIZED UNDER T HE FOLLOWING SEGMENTS: MACHINERY & AEROSPACE DIVISION AUTOMOBILES AUTOMOBILE OPERATIONS OF THE GROUP CONSISTS OF THE EXPORT OF COMPLETE BUILTUP (CBU) VEHICLES AND KNOCKED DOWN (KD) COMPONENTS, AND ASSEMBLY AND SALES; AUTOMOBILE PARTS AND ENGINEERING; AND ACTIVITIES IN AFTER-SALES MARKETS. INFORMATION & INDUSTRIAL MACHINERY INFORMATION & INDUSTRIAL MACHINERY OPERATIONS MAINL Y CONSIST OF THE MANUFACTURE AND SALE OF BEARING, PRIMARILY AT A JV IN CHINA, SALES OF SURFACE MOUNTE D TECHNOLOGY (SMT) EQUIPMENT AND TELECOMMUNICATIONS EQUIPMENT, AND STEEL PLANT TRANSACTIONS IN JAPAN AND OVERSEAS. AEROSPACE AEROSPACE BUSINESS INVOLVES SUPPORT FOR SALES OF BOEING COMMERCIAL AIRCRAFT IN JAPAN (WHICH HAVE A MARKET SHARE OF MORE THAN 85%) AND THE SALE OF CANADAS BOMBARDIER COMMUTER AIRCRAFT IN JAPAN (MARKET SHARE OF 100%). SHIPS 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 40 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 OIL, GAS, AND LNG OIL AND GAS INCLUDES UPSTREAM INVESTMENTS AND LOANS; FPSO (FLOATING PRODUCTION, STORAGE, AND OFFLOADING) VESSEL OWNERSHIP; THE SALE OF PRODUCTIO N EQUIPMENT AND DEVICES; AND PETROLEUM PRODUCT TRADING, IMPORTS, AND SALES THROUGHOUT ASIA. LNG OPERATIONS INVOLVE INVESTMENTS IN GAS LIQUEFACTION FACILITIES AND RECEIVING TERMINALS; LN G VESSEL OWNERSHIP; AND THE IMPORT AND SALE OF LNG. COAL COAL INVOLVES INVESTING IN, DEVELOPING AND OPERATIN G 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 AND ENERGY & CHEMICALS PLANTS POWER AND ENERGY & CHEMICALS PLANTS OPERATIONS INCLUDE ENERGY AND CHEMICAL PLANTS, AND THE SUPPLY AND OPERATION OF POWER PLANTS IN JAPAN AND OVERSEAS. RENEWABLE ENERGY CHEMICALS & PLASTICS DIVISION CHEMICALS CHEMICAL PRODUCTS INVOLVE THE HANDLING OF ABOUT 1,400 ITEMS WORLDWIDE, INCLUDING ORGANIC, INORGANIC , SPECIALTY AND FINE CHEMICALS. PLASTICS 41 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 PLASTICS INCLUDE THE SUPPLY OF PLASTIC MATERIALS OF OVERSEAS PLANTS OF JAPANESE COMPANIES, MAINLY IN CHINA AND ASIA, AND THE SUPPLY OF PLASTIC PARTS, PACKAGING MATERIALS, ELECTRONIC MATERIALS, AND OTHE R PRODUCTS THROUGH JVS WITH PROMINENT OVERSEAS MANUFACTURERS. FERTILIZER FERTILIZER OPERATIONS COVER FERTILIZER MANUFACTURIN G AND SALES COMPANIES IN THAILAND, THE PHILIPPINES AND VIETNAM; METHANOL METHANOL OPERATIONS ARE CENTERED ON A METHANOL PLANT IN INDONESIA. REAL ESTATE DEVELOPMENT & FOREST PRODUCTS DIVISION CONDOMINIUMS CONDOMINIUMS AND THE DEVELOPMENT OF RETAIL PROPERTY ARE THE CORE BUSINESS. THE OBJECTIVE IS TO CONTRIBUTE TO SOCIETY THROUGH BUSINESS THAT ACCURATELY REFLECT CHANGES IN SOCIETY AND MARKETS. DEVELOPMENT OF RETAIL PROPERTY IN REAL ESTATE OPERATIONS, SOJITZ IS A COMPREHENSIV E REAL ESTATE DEVELOPER WITH A DIVERSE RANGE OF DEVELOPMENT EXPERTISE BACKED BY A POWERFUL BUSINESS NETWORK AND INFORMATION GATHERING SKILLS. FOREST PRODUCTS IN FOREST PRODUCTS, SOJITZ IS RECOGNIZED AS A LEADE R IN JAPANS FOREST PRODUCTS MARKET. SOJITZ IMPORTS TIMB ER AND TIMBER PRODUCTS FROM MANY SOURCES, CONDUCTS OFFSHORE TRADING OF FOREST PRODUCTS, INVESTS IN OVERSEAS FOREST PRODUCT SUPPLY BASES, AND HAS OPERATIONS IN JAPAN COVERING THE DISTRIBUTION OF 42 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 FOREST PRODUCTS AND HOUSING AND CONSTRUCTION MATERIALS. CONSUMER LIFESTYLE BUSINESS DIVISION TEXTILES TEXTILES ARE ONE OF SOJITZS TRADITIONAL STRENGTHS. THE COMPANY HAS COMPETITIVE PRODUCTS IN MANY CATEGORIES, INCLUDING RAW MATERIALS FOR TEXTILES, T EXTILE 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 43 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 CONTENT OPERATIONS INCLUDE THE PROVISION OF CAPITAL TO A PRODUCTION COMMITTEE AND THE EXPORT OF ANIME AND OTHER CONTENT THROUGH SOJITZ OVERSEAS NETWORK. ENVIRONMENT ENVIRONMENTAL OPERATIONS INCLUDE A COMPREHENSIVE RECYCLING BUSINESS THAT PRIMARILY INVOLVES THE RECYCLING OF AUTOMOBILES AND THE PROPER MANAGEMENT OF WASTE MATERIALS. HEALTHCARE IN ITS HEALTHCARE BUSINESS SOJITZ UNDERTAKES A BROA D RANGE OF ACTIVITIES FROM SUPPLYING THE LATEST MEDIC AL EQUIPMENT TO ACTING AS LICENSING AGENT FOR DRUG DISCOVERY VENTURES, PROVIDING HEALTH FOODS AND ESSENTIAL HEALTHCARE SERVICES, AS WELL AS CLINICAL TRIAL SUPPORT AND OTHER SERVICES. OVER THE YEARS, SCJ EXPANDED TO BECOME A MAJOR COMM ERCIAL ENTERPRISE TRADING BOTH IN JAPAN AND OVERSEAS. IT OPERATES THROUGH 12 DOMESTIC AND 91 FOREIGN BRAN CHES WITH CONSOLIDATED EMPLOYEE STRENGTH OF 18,642 EMPLOYEES, OFFERING A TRULY GLOBAL NETWORK OF SERVICES. THESE COMPANIES PLAY AN IMPORTANT ROLE IN LINKING B UYERS AND SELLERS FOR PRODUCTS. WHAT MAKE THEM UNIQUE ARE THE IR SIZE, SCOPE, INFORMATION-GATHERING CAPABILITIES, AND FUNC TIONAL DIVERSITY. THE SOGO SHOSHA TRADITIONALLY AND STILL TODAY, ARE CONCENTRATED IN HIGH-VOLUME, LOW-MARGIN COMMODITIES . THEY HANDLE THE IMPORTING, EXPORTING, AND TRADING OF OVE R 20,000 ITEMS INCLUDING METALS, MACHINERY, ENERGY, CHEMICAL S, TEXTILES, FOODSTUFFS, AND GENERAL MERCHANDISE. SOME OF THE VALUE ADDED SERVICES BEING PROVIDED BY SOJITZ GROUP INCLUDE MARKET INFORMATION PROVISION, CREDIT SUPERVISION & FINANCING, TRANSPORTATION LOGISTICS AND PROJECT O RGANIZER. 44 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 12.4. IN THE DESCRIPTION OF ASSESSEES BUSINESS, TP STUDY BRINGS OUT THE FOLLOWING FACTS :- 2.3 DESCRIPTION OF THE ASSESSEES BUSINESS SOJITZ INDIA HAS ITS CORPORATE OFFICE AT NEW DELHI AND A BRANCH OFFICE ALONG WITH A WAREHOUSE AT MUMBAI. SOJ ITZ INDIA WAS PRIMARILY INCORPORATED TO UNDERTAKE TRADI NG ACTIVITY. THE COMPANY IS ENGAGED AS A SERVICE PROVI DER TO THE VARIOUS SUBSIDIARIES OF SCJ FOR PROVIDING SALES SUPPORT AND BUSINESS INFORMATION. SCJ UNDERTAKES ITS TRADING ACTIVITIES IN INDIA THR OUGH SOJITZ INDIA. IN CASE OF IMPORT OF GOODS FOR BUYERS IN IND IA, SCJ HAS A CONTACT WITH THE JAPANESE SUPPLIER. FURTHER, SCJ ALSO ENTERS INTO A CONTRACT WITH THE BUYERS IN INDIA. AC CORDINGLY, SOJITZ INDIA IS A MERE FACILITATOR FOR THESE IMPORT SALES TRANSACTION. SIMILARLY, FOR EXPORTS ALSO SOJITZ IND IA IS A MERE FACILITATOR. SCJ ENTERS INTO A CONTRACT WITH THE IN DIAN 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 SO JITZ OVERSEAS GROUP COMPANIES. SOJITZ INDIA HANDLE DIFFE RENT PRODUCTS AND COMMODITIES DURING THE FINANCIAL YEAR 45 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 2006-07 THROUGH ITS DIFFERENT COMMODITY DEPARTMENTS , SOME OF WHICH ARE MENTIONED BELOW: MACHINERY; AUTOMOBILES; TELECOMMUNICATIONS; CHEMICAL; AND IRON ORE ETC PRIMARILY, SOJITZ INDIA DEALS IN EXPORT OF IRON ORE , CHEMICALS, MARINE PRODUCTS AND ANY OTHER INDUSTRIAL PRODUCTS TO JAPAN AND OTHER PARTS OF THE WORLD. IMPORTS CONSIST OF CHEMICALS, HIGH TECHNOLOGY MACHI NERY, COMPONENTS FOR THE AUTOMOBILE AND TELECOMMUNICATION INDUSTRY, AND ITEMS OF GENERAL MERCHANDISE. IN GENERAL, SOJITZ INDIAS TRADING TRANSACTIONS CAN BE CLASSIFIED INTO TWO GROUPS-INDENT SALES AND PROPER SALES. INDENT CAN ALSO BE CLASSIFIED INTO-IMPORT FROM OTHER COUNTRY INTO INDIA, EXPORT FROM INDIA INTO OT HER COUNTRY. ON ITS INDENT TRADING TRANSACTIONS, SOJITZ INDIAS ROLE IS THAT OF A MERE SERVICE PROVIDER. THEREFORE, SOJITZ INDIA NEVER TAKES TITLE OR POSSESSION OF THE MERCHANDISE AT ANY MOMENT AND BEARS NO PRICE RISK ON INVENTORY. COMMISSION EARNED BY SOJITZ INDIA IN THE INDENT SALES ACCOUNTS FOR AROUND 88.67% OF ITS TOTAL TURNOVER DURING FY 2006-07. MAJORITY OF THE COMMISSION EARNE D IS FROM AE. AND AMONG THE GROUP COMPANIES SOJITZ INDIA S MAJORITY OF THE COMMISSION IS FROM SOJITZ JAPAN. SOJITZ INDIAS ONLY RISK ON THESE TRANSACTIONS IS V OLUME RISK (OR LOSS OF CUSTOMER RISK-I.E., THE TURNOVER O F THIS BUSINESS MAY NOT BE SUFFICIENT TO COVER ITS COSTS). THE MAIN TYPES OF COMMODITIES TRADED ON THIS BASIS ARE IRON ORE, MACHINERY, CHEMICALS ETC. 46 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 SOJITZ INDIAS MAIN FUNCTION IN INDENT SALES BUSINE SS IS TO MAINTAIN CLOSE CONTACTS WITH THE SUPPLIERS TO ENSUR E TIMELY DELIVERY OF MERCHANDISE TO THE CUSTOMERS, IN THE QUANTITY AND GRADE DESIRED (FOR EXPORTS); MAINTAINI NG CLOSE CONTACTS WITH SOJITZ JAPANS CUSTOMERS IN IND IA TO UNDERSTAND THEIR NEEDS (FOR IMPORTS); COMMUNICATING WITH SOJITZ JAPAN OR ITS AFFILIATES; GATHERING INFORMATI ON ON DEMAND AND SUPPLY CONDITIONS OF THESE COMMODITIES I N INDIA; AND LIAISING WITH GOVERNMENT OR INDUSTRY GRO UPS. IN CASE OF PROPER TRANSACTIONS, THE ASSESSEE PERFORMS TRADING FUNCTION. IT TAKES THE OWNERSHIP OF THE GOODS BEFORE SELLING TO THE BUYER. SOJITZ INDIA DOE SNT ENGAGE IN ANY SIGNIFICANT PROPER TRANSACTION DURING THIS PERIOD. ACCORDINGLY, SOJITZ INDIA PROVIDES SUPPORT SERVICES FOR FACILITATING BOTH EXPORTS AND IMPORTS IN INDIA THRO UGH SOJITZ JAPAN AND OTHER GROUP COMPANIES. THE SUPPORT SERVICES INCLUDE GATHERING INFORMATION ABOUT CUSTOM ER REQUIREMENTS, PRODUCTS, LOCAL PRICES, MARKET TREND, ETC. 12.5. IN REGARD TO THE COMPETITION, IT FACES FOLLOW ING FACTS ARE NARRATED :- 12.5.1. COMPETITION THE ASSESSEE FACES A COMPETITION FROM PLAYERS OPERATING IN INDIA AND ACROSS THE GLOBE. THE ASSESS EE HAS TO PROVIDE COMPETITIVE SERVICES TO ITS AE, SO A S TO SECURE ITS INCOME SOURCE. THE AE HAS THE LIBERTY TO ROUTE THE TRADING BUSINESS TRANSACTION AND TO AVAIL THE S ERVICES OF ANY OTHER INTERMEDIATOR FOR SOURCING THE PRODUCT S FROM INDIA. THE SUPPORT SERVICES THAT THE ASSESSEE IS PERFORMING ARE ALSO PERFORMED BY OTHER PLAYERS AS W ELL LIKE MARUBENI AND ITOCHU. THEREFORE THERE IS A COMPETITION IN THE MARKET FOR THE SAID SERVICES. 47 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 HOWEVER DURING THE PART OTHER NATIONAL TRADING COMPANIES HAVE ALSO ARISEN. THERE ARE SOME SOUTH KOREAN TRADING COMPANIES AS WELL THAT HAVE BECOME SUBSTANTIAL IN SCOPE AND SIZE IN RECENT YEARS AND H AVE CONTRIBUTED SIGNIFICANTLY TO THE ECONOMIC DEVELOPME NT OF KOREA. OTHER LARGE, MULTIPRODUCT TRADING COMPANIES EXIST: KESCO IN FINLAND; BEIJERINVEST AND KR IN SWEDEN; CFBALLY IN SWITZERLAND, ACKLANDS AND PROVINGO, H RUSSEL, WAJAX, AND WESTBURNE INTERNATIONAL IN CANAD A; JARDINE MATHESON IN HONG KONG; AND BOUSTEADCO AND INCHCAPE IN SINGAPORE. 12.6. THE NATURE OF SERVICES RENDERED BY THE ASSESS EE ARE ALSO NOT DISPUTED FOR WHICH PAYMENTS HAVE BEEN MADE AS COMMI SSION NAMELY I) SUPPORT SERVICES FOR FACILITATING THE TRADING A CTIVITIES OF AE: II). NETWORKING WITH CUSTOMERS; III). IDENTIFYING POTENTIAL CUSTOMERS OR SUPPLIERS ETC. 12.7. A PERUSAL OF VOLUME I PAGE 214-296 OF THE A SSESSEES PAPER BOOK WHICH CONTAINS A TRANSFER PRICING DOCUME NTATION FOR THE YEAR UNDER CONSIDERATION WOULD SHOW THAT THE DESCRI PTION OF ASSESSEES BUSINESS PROFILE DESCRIBES ASSESSEE AS A MERE FACILITATOR FOR IMPORT/EXPORT OF GOODS FOR SCJ. THE CONTRACT E NTERED INTO BY SCJ IS DIRECTLY WITH THE INDIAN BUYER OR SELLER AS THE CASE MAY BE AND THE ASSESSEE ONLY PROVIDES SERVICES OF A FACILITATOR. IN ITS BUSINESS PROFILE, IT IS ALSO SET OUT IN ITS TP STUDY THAT THE TRANSAC TIONS WHICH THE ASSESSEE ENTERS INTO CAN BE CLASSIFIED INTO TWO GRO UPS NAMELY A) INDENT SALES AND II) PROPER SALES. THE INDENT SAL ES HAVE BEEN FURTHER CLASSIFIED INTO IMPORT FROM ANOTHER COUNTRY INTO IN DIA AND EXPORT FROM INDIA TO ANOTHER COUNTRY. 48 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 12.8. ON THE INDENTING TRANSACTIONS, THE ASSESSEE I S A SERVICE PROVIDER AND IN THAT CAPACITY AT NO POINT OF TIME EITHER IT TAKES POSSESSION OF THE MERCHANDISE OR ENTERS INTO CONTRACTS IN ITS OWN NAM E. CONSEQUENTLY IT BEARS NO PRICE RISK ON INVENTORY RISK. IT IS ALSO NARRATED IN THE TP STUDY FILED BY THE ASSESSEE THAT THE COMMISSION EAR NED BY THE ASSESSEE IN THE INDENT SALES ACCOUNTS, BE IT EXPORT OR IMPORT IT ACCOUNTS FOR ABOUT 88.67% OF ITS TOTAL TURN OVER FO R 2006-07 FINANCIAL YEAR AND MAJORITY OF THE COMMISSION EARNED IS FROM ITS AE AND AMONGST THE GROUP COMPANIES, THE ASSESSEES MAJORIT Y OF THE COMMISSION IS FROM SCJ, JAPAN AND THE ONLY RISK WHI CH THE ASSESSEE IS EXPOSED TO IS THE VOLUME RISK. AS ASSESSEE IS A MERE SERVICE PROVIDER AND ALL DECISION MAKING NEGOTIATING PLANNI NG AND NETWORK OF SCJ IS UTILISED BY SCJ ITSELF SINCE VOLUME RISK IS DIRECTLY BORNE BY THE SCJ AND ITS ASSOCIATES THE ASSESSEES RISK HERE IS ALSO MINIMAL. THE FUNCTIONS IN INDENT SALES BUSINESS IS TO MAINTAIN C LOSE CONTACTS WITH THE SUPPLIERS TO ENSURE TIMELY DELIVERY OF MERCHAND ISE TO THE CUSTOMERS IN THAT QUANTITY AND GRADE DESIRED FOR EX PORTS; MAINTAINING CLOSE CONTACTS WITH SCJ CUSTOMERS IN INDIA TO UNDER STAND 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. HERE IN LIKE A NORMAL TRADER, THE ASSESSEE TAKES THE OWNERSHIP OF THE GOO DS BEFORE SELLING THEM TO THE BUYERS. THE TPS STUDY DEFINES THAT THE ASSESSEES ENGAGEMENT IN THIS ACTIVITY IS NOT SIGNIFICANT. HOW EVER IT HAS NOT ENGAGED IN ANY SIGNIFICANT PROPER TRANSACTION DURIN G THIS PERIOD. 49 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 12.10. THE TRANSFER PRICING STUDY IN CHAPTER 2 AS REPRODUCED ABOVE, ADDRESSES THE COMPETITION, IT FACES FROM TH E PLAYERS OPERATING IN INDIA AND ACROSS THE GLOBE. ACCORDINGLY IT SEEK S TO JUSTIFIY THAT THE SERVICES PROVIDED HAVE TO BE COMPETITIVE SO AS TO S ECURE ITS INCOME SOURCE AS THE AE HAS THE LIBERTY TO ROUTE THE TRADI NG BUSINESS TRANSACTIONS AND TO AVAIL THE SERVICES OF ANY OTHER INTERMEDIARIES FOR SOURCING THE PRODUCTS FROM INDIA. 12.11 IN THE TP STUDY, ADDRESSING THE FUNCTIONS, A SSETS AND RISKS ANALYSIS AT PAGE 239, OF THE PAPER BOOK (INTE RNAL PAGE 22 OF THE TP STUDY) IT IS INFORMED THAT THE ASSOCIATED ENTER PRISE UNDERTAKES ALL THE TRADING ACTIVITY AND CORE MARKETING FUNCTIONS AND THE ASSESSEE PROVIDES ONLY SUPPORT SERVICES. THE FUNCTIONS OF THE AE AS INFORMED WHETHER AS AN EXPORTER OR AN IMPORTER AND EVEN AS A DOMESTIC TRADER IN JAPAN INVOLVES SOURCING PRODUCTS AND DEVELOPING BUSINESS OPPORTUNITIES WORLDWIDE, MARKETING AND DISTRIBUTION OF WIDE VARIETY OF PRODUCTS. THE AE ENTERS INTO A CONTRACT WITH THE B UYER/ SELLER WITH REGARD TO THE SUPPLY OF GOODS DIRECTLY. 12.12. THE T.P STUDY FURTHER SHOWS THAT THE DEVEL OPMENT OF STRATEGIES, ENTERING NEW VENTURES, MARKETING AND SA LES FUNCTIONS ARE ALL PERFORMED BY THE AE, ALL MAJOR DECISIONS RELATI NG TO SERVICING THE CONTRACT AND RELATED SERVICES ARE ALSO TAKEN BY THE AE IN TERMS OF THE EXTENT, TIMING, SEQUENCE AND PRIORITIZATION ETC. F URTHER DECISIONS RELATING TO ENTERING INTO NEW MARKETS AND FORAYS IN TO EMERGING TECHNOLOGIES ARE ALSO TAKEN BY THE AE. THE ASSESSE E ON THE OTHER HAND UNDERTAKES INDENT SALES ON BEHALF OF SCJ. THE TRANSACTIONS INVOLVED AS PER PAGE 240 OF THE PAPER BOOK (INTERNA L PAGE 23 OF THE 50 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 TP STUDY), ARE DESCRIBED AS LOW LEVEL ACTIVITY AND RELATIVELY LIMITED RISK FOR THE ASSESSEE IN COMPARISON TO A TYPICAL INDIAN EXPORT/IMPORT COMPANY. 12.13. IT IS SEEN THAT IT IS CLAIMED THAT THE ASS ESSEE MERELY ACTS AS AN INTERMEDIARY AND AT NO POINT OF TIME IS PART OF THE SUPPLY CHAIN. THE CONTRACTS AS PER THE TP STUDY ARE ALWAYS ENTERE D INTO BY THE SCJ OR ITS GROUP ENTITIES WITH THE INDIAN EXPORTER OR I MPORTER AS THE CASE MAY BE. SINCE THE CUSTOMERS ARE LOCATED IN INDIA, THE ASSESSEE MERELY MAINTAINS RELATIONSHIP WITH THE CUSTOMERS IN INDIA FOR SCJ AND ITS AFFILIATES. ADDRESSING THE LOW LEVEL OF FUNCTI ONS PERFORMED, THE TP STUDY, DESCRIBES THE ASSESSEE AS ACTING MERELY AS A CONDUIT. THE CUSTOMERS LARGELY BEING TRADITIONAL, CONSEQUENTLY THE MARKETING EFFORTS IN IDENTIFYING THE CUSTOMERS ARE ALSO MINIM AL. THE NEGOTIATIONS WITH THE SUPPLIER AND THE CUSTOMERS ARE ALWAYS UNDE RTAKEN BY SCJ AND THE ASSESSEE MERELY ACTS AS A CONDUIT FOR PASSI NG THE INFORMATION BETWEEN THE SCJ AND THE CUSTOMERS. CONSEQUENTLY AN ALYZING THE FUNCTIONS PERFORMED SHOW THAT THE ASSESSEE WAS DESC RIBED AS A LIMITED SERVICE PROVIDER WITH A MINIMUM RISK IN REG ARD TO THE STRATEGIC POLICIES: FINANCE AND ACCOUNTING, IT LEGAL AND HUMA N RESOURCES MANAGEMENT ETC. 12.14. IT IS SEEN THAT THE ASSESTS UTILIZED BY TH E ASSESSEE ARE VEHICLES, LEASE HOLD IMPROVEMENTS, COMPUTERS OFFICE EQUIPMENT, FURNITURE AND FIXTURE ALL TOTALING TO ABOUT RS.1,1 0,10,079/-[ AS PER THE PAGE 248 OF THE TP REPORT]. AS PER THE TP STUDY REP ORT ON RECORD WHICH HAS NOT BEEN CONTROVERTED THE INTANGIBLES RE QUIRED TO CARRY OUT THE OPERATIONS OF THE ASSESSEE ARE OWNED BY SCJ AND THAT THE SCJ 51 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 POSSESSES ENTREPRENEUR KNOWLEDGE WITH RESPECT TO TH E OPERATION OF THE GLOBAL TRADING NETWORK. THE ASSESSEE IS STATED TO HAVE NEITHER DEVELOPED NOR DOES NOT IT HAVE ANY INTANGIBLES ASSE T 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 BUSINESS SOJITZ JAPAN GETS FROM INDIA, AND THEREFORE THE ASSESSEE BEARS THIS RISK, AS LOW TURN OVER MAY AFFE CT ITS PROFITABILITY WHICH RISK TOO IS DIRECTLY BORNE BY THE AE SO ASSES SEE IS ONLY INDIRECTLY AFFECTED); FOREIGN RISK (ASSESSEE PAID IN CURRENCIE S OF AE SO DIFFERENCE IN RESPECTIVE CURRENCY AND CONVERSION RA TES IS BORNE BY ASSESSEE), WARRANTY RISK (NO WARRANTY RISK BORNE BY THE ASSESSEE). CONSIDERING ALL THESE ASPECTS THE ASSESSEE IS CLASS IFIED AS LOW RISK BORNE COMPANY. ACCORDINGLY AFTER CONSIDERING TH E DETAILED, FAR ANALYSIS OF THE ASSESSEE CONSIDERED THE TP STUDY A VAILABLE ON RECORD WHICH HAS NOT BEEN CONTROVERTED BY THE TPO OR THE D RP, IT IS SEEN THAT AS FAR AS THE INDENTING ACTIVITIES ARE CONCERN ED THE ASSESSEE IS ENGAGED IN A LOW RISK ACTIVITY. 12.16 A FURTHER STUDY OF ITS TRANSFER POLICY REPO RT SHOWS THAT THE ASSESSEE, FOR SELECTING THE MOST APPROPRIATE METHOD (MAM), CONSIDERING THE APPLICABILITY/ FEASIBILITY OF EACH OF THE PRESCRIBED METHODS NAMELY 52 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 * COMPARABLE UNCONTROLLED PRICE METHOD (CUP) * RESALE PRICE METHOD (RPM) * COST PLUS METHOD (CPM) * TRANSACTION NET MARGIN METHOD (TNMM) * PROFIT SPLIT METHOD.(PSM) DISCARDS ALL EXCEPT TNMM, FOR THE REASONS GIVEN AT PAGES 251 TO 255. SINCE THE SELECTION OF METHOD IS NOT AN ISSUE IN TH E PRESENT PROCEEDINGS REFERENCE THERE TO IS BEING AVOIDED. C ONSIDERING THE NATURE OF THE TRANSACTION AND THE AVAILABILITY OF R ELEVANT COMPARABLE DATA, TNMM WAS CONSIDERED TO BE THE MOST APPROPRIAT E METHOD IN SELECTING THE COMPARABLES. DISCUSSION THEREON IS AL SO BEING AVOIDED AS IT IS NOT AN ISSUE RAISED IN THE PRESENT PROCEED INGS. THE ASSESSEE TOOK ITSELF AS THE TESTED PERSON THE OP/TC WAS CONS IDERED AS THE MOST APPROPRIATE PLI BY THE ASSESSEE. 12.17. IN THE ABOVE BACKGROUND IT IS SEEN THAT TH E TPO HAS DISCARDED THE METHOD AND COMPUTED THE ARMS LENGTH P RICE (ALP) ON THE BASIS OF PROFIT EARN BY THE ASSESSEE IN ITS TRA DING ACTIVITY AND THE MARGIN EARNED THEREON HAS BEEN APPLIED ON THE BASIS OF TOTAL FOB VALUE OF THE GOODS. 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 UN DER:- (A) WHETHER THE TPO ON FACTS WAS JUSTIFIED TO TREAT THE INDENTING ACTIVITY AT PAR WITH THE TRADING ACTIVITY ; 53 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 (B) IF THE ANSWER TO THE QUERY POSED IN (A) IS YES THEN WERE THE MARGINS EARNED IN THE TRADING ACTIVITY BY THE ASSESSSEE 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 S ERVICES 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, AR E BEING ELABORATED IN THE FOLLOWING PARAS BASED ON THE BUSI NESS PROFILE, FAR ANALYSIS ETC. WHICH WE HAVE DELIBERATED ON IN THE E ARLIER PARAS. 54 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 12.20. THE UNREBUTTED FACTS AVAILABLE ON RECORD IS THAT THE ASSESSEE IS A SERVICE PROVIDER TO THE EXTENT OF 88. 67% OF ITS TOTAL EARNINGS. AS PER THE CONTRACTED TERMS AND THE UNR EBUTTED STAND OF THE ASSESSEE IT IS MERELY PROVIDING INDENTING SERV ICES. AT NO POINT OF TIME THE TITLE IN GOODS OR POSSESSION OF THE MERCHA NDISE IS IN ASSESSEES HANDS. THE CONTRACT IS ENTERED INTO BY SCJ AND INDIAN CUSTOMERS DIRECTLY WHETHER FOR EXPORT OR IMPORT. THE NEGOTIATIONS ARE DIRECTLY DONE BY SCJ AND THE INDIAN CUSTOMERS AND THE ASSESSEE MERELY FUNCTIONS AS A FACILITATOR. LOOKING AT THE NATURE OF SERVICES RENDERED AND THE ARGUMENTS ADVANCED WHICH ALSO REMA IN UNREBUTTED AND AS SUCH ARE TAKEN TO BE CORRECT THE ASSESSEE D OES NOT NEED TO INCUR COST EITHER FOR MAINTAINING OR STORING THE IN VENTORY OR FOR THE TRANSPORTATION AS THE TITLE IN GOODS IS NEVER HELD BY THE ASSESSEE FOR ITS INDENTING ACTIVITY AS A SERVICE PROVIDER. CONS EQUENTLY THE ASSESSEE IS NOT EXPOSED TO ANY CREDIT RISK IN MAINT AINING THE INVENTORY NOR IS THE ASSESSEE EXPOSED TO PRICE RISK OR THE RI SK LINKED WITH OFFERING CREDIT SALES. FROM THE NATURE OF THE RISK PROFILE OF THE ASSESSEE AND ON CONSIDERING THE FUNCTIONS PERFORMED AND THE ASSETS DEPLOYED IT CAN BE SAFELY CONCLUDED TO BE THAT OF A LOW RISK BUSINESS, WHICH HAS ALSO BEEN THE CLAIM OF THE ASSESSEE. IT IS A MATTER OF RECORD THAT IN THESE YEARS THE ASSESSEE HAS ALSO SH OWN PROFITS ON ITS OWN TRADING WITH NON AES. IN THE FACTS AVAILABLE O N RECORD, NOTHING HAS BEEN BROUGHT ON RECORD BY THE TPO TO EITHER JUS TIFY THAT THE ASSESSEE HAS MADE A WRONG CLAIM ON FACTS WHILE CLAI MING TO BE ENGAGED IN INDENTING ACTIVITIES OR WAS INFACT PERFO RMING ALL OR SOME OF THE FUNCTIONS OF A TRADER, IN WHICH EVENTUALITY TH E TPO WOULD HAVE BEEN WELL WITHIN HIS RIGHTS TO RE-CHARACTERIZE T HE ASSESSEES 55 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 INDENTING ACTIVITIES AS A TRADING ACTIVITY. IT IS AN ACCEPTED ECONOMIC PRINCIPLE THAT THE TRADER ACTING AS AN ENTREPRENEUR IS EXPOSED TO PRICE RISK, COST RISK, CREDIT RISK, WARRANTY RISK ETC, WH ICH WOULD NECESSITATE THE CONTRACT BEING ENTERED INTO AND NEGOTIATED BY A SSESSEE. IN ITS INDENTING ACTIVITY THESE FACTS ARE NOT EVIDENT. A CCORDINGLY THE QUESTION POSED IN (A) IS ANSWERED IN THE NEGATIVE. 12.21 CONSIDERING THE NEXT QUESTION POSED, EV EN IF THE ANSWER IN (A) IS IN THE NEGATIVE, WE SEE THAT THERE IS NO RE ASONING AND JUSTIFICATION FOR APPLYING THE MARGINS EARNED IN T RADING ACTIVITY TO INDENTING ACTIVITY AS THE TWO ARE DISTINCT AND SEPA RATE. MERELY BECAUSE THE ASSESSEE WAS ALSO HAVING A SMALL LEVEL OF TRADING ACTIVITY IN ITS OWN NAME, THERE IS NO REASON AVAILABLE ON R ECORD EITHER JUSTIFYING THE ACTION OF RE-CHARACTERIZING THE NA TURE OF ASSESSEES ACTIVITY FROM A SERVICE PROVIDER TO THAT OF A TRADE R. AS OBSERVED, NEITHER THE TPO HAS LEAD ANY DISCUSSION NOR HAS THE DRP CARED TO THROW ANY LIGHT ON THE ASPECT FOR UPHOLDING THE ACT ION OF THE TPO. WHERE ALL THE CRITICAL FUNCTIONS WERE BEING PERFORM ED BY THE AE, THE SERVICES PROVIDED, AS A FACILITATOR, BY THE ASSESSE E CANNOT BE TREATED AS A TRADING ACTIVITY. THE PERFORMANCE OF THE CRIT ICAL FUNCTIONS, LIKE DECISIONS TO ENTER INTO CONTRACT, TO NEGOTIATE THE TERMS OF THE CONTRACT, TO DECIDE THE LEVEL AND EXTENT OF EXPOSURE FOR PRIC E 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 ASSES SEE WAS EVER EXPOSED TO ANY OF THOSE RISKS AS SUCH, THE TWO ACTI VITIES COULD NOT BE TREATED AT PAR AND THUS INVITED A SIMILAR TREATME NT. 56 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 12.22. THE LD. CIT DR HAS RELIED UPON VARIOUS DECIS IONS IN SUPPORT OF THE TPOS ORDER AND THE ORDER OF THE DRP WHICH WE P ROPOSE TO DISCUSS SUBSEQUENTLY. HOWEVER IT CAN NEVER BE OVER EMPHASIZED THAT EACH DECISION OPERATES ON ITS OWN PECULIAR FACTS AN D CIRCUMSTANCES. THIS HOLDS EQUALLY GOOD FOR ORDERS AND JUDGEMENTS R ENDERED IN THE CONTEXT OF TRANSFER PRICING AS EACH CHANGE OR NUANC ED CHANGE IN FACTS AND CIRCUMSTANCES WOULD CALL FOR A DETAILED APPRECI ATION OF FACTS AND CIRCUMSTANCES OF BOTH SETS OF CASES. TRANSFER PRIC ING LITIGATION AS WE HAVE SEEN IS VERY FACT DRIVE. CONSEQUENTLY FOR AP PRECIATING THE PRINCIPLES LAID DOWN IN THE JUDGEMENTS AND ORDERS, A DETAILED FACTUAL STUDY OF THE BUSINESS MODEL FAR ANALYSIS AND EVEN E CONOMIC CONDITIONS, IF NEED BE, HAVE TO BE CLOSELY EXAMINED . ONLY THEN THE APPLICABILITY OR RELEVANCE OF THE PRINCIPLE LAID D OWN BE CONSIDERED. THE ISSUES BEING PURELY FACTUAL NECESSARILY WARRAN T A DETAILED DISCUSSION. 12.23. IN THE FACTS OF THE PRESENT CASE IT IS SEEN THAT THE ASSESSEE IS USING THE NETWORK OF SCJ FOR RENDERING ITS SERVICES. REFERENCE MAY ALSO BE MADE TO PAGE 248 OF THE PAPER BOOK WHICH CONTAINS THE TP STUDY OF THE ASSESSEE THE SAME IS R EPRODUCED FOR READY REFERENCE. PATENTS, LICENSE RIGHTS, AND OTHER INTELLECTUAL PRO PERTY RIGHTS THE VARIOUS INTANGIBLES REQUIRED TO CARRY OUT THE OPERATIONS OF THE ASSESSEE NAMELY TRADEMARK, PATENT S, LICENCE, ARE OWNED BY SOJITZ JAPAN. 57 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 SOJITZ JAPAN POSSESSES ENTREPRENEURIAL KNOWLEDGE W ITH RESPECT TO THE OPERATION OF THE GLOBAL TRADING NETW ORK. SOJITZ INDIA HAS NOT DEVELOPED AND DOES NOT USE ANY INTANGIBLE ASSETS IN ITS BUSINESS OPERATIONS IN IND IA. 12.24. AS SUCH IT IS SEEN THAT NO INTANGIBLE ASSET S ARE HELD BY THE ASSESSEE IN TERMS OF SUPPLY CHAIN INTANGIBLE S ETC. IT IS FURTHER SEEN THAT THE AE IS TRADING IN A DIVERSE RANGE OF GOODS RIGHT FROM AERO SPACE, CHEMICALS, PLASTICS, HIGH TECHNOLOGY M ACHINERY, AUTOMOBILES, TELE-COMMUNICATIONS INDUSTRY OR REALIT Y ETC. AND NO EFFORT HAS BEEN MADE TO SHOW THAT THE LIMITED TRADING ACTI VITY BELONGS TO WHICH OF THOSE SEGMENTS WERE ANYWAY THE FAR ANALYSI S SHOWS THAT THERE IS NO COMPARISON IN THE 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 A CTIVITIES 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 MAR GINS EARNED IN TRADING ACTIVITY TO THOSE EARNED IN THE INDENTING SERVICE S. AS SUCH, WE FIND OURSELVES UNABLE TO AGREE WITH THE REASONING AND TH E DECISION OF THE 58 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 TPO WHICH HAS BEEN UPHELD BY THE DRP. AT THE COST OF REPETITION THE CONSISTENT AND UNREBUTTED MATERIAL AVAILABLE ON REC ORD SHOWS THAT IN THE TRADING ACTIVITY, THE ASSESSEE HAS ENTERED INTO CONTRACTS WITH THE PARTIES IN INDIA IN ITS OWN NAME. THE TITLE IN GOO DS HAS BEEN HELD FOR THESE CONTRACTS IN ASSESSEE OWN NAME AS SUCH THE AS SESSEE AS ANY OTHER TRADER HAS EXPOSED ITSELF TO THE PRICE RISK, THE CREDIT RISK AND OTHER RELATED RISKS OF INVENTORY RISK ETC. THE NE GOTIATIONS 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 RIS K BORNE IS COMPLETELY DIFFERENT. THE RISKS BEING OF A HIGHER LEVEL THE R EWARDS IF THE VENTURE SUCCEEDS CAN ALSO MOVE UPWARDS IN REGARD TO THE TRA DING ACTIVITY. THIS FACT IS DEMONSTRATED FROM ASSESSEES OWN RECOR D OF THE TWO YEARS UNDER CONSIDERATION WHEREAS IN THE FIRST YEAR IT IS 1.81%, IN THE OTHER IT IS 13.29%. 12.27. WHILE HOLDING THAT THE MARGINS OF ONE ACTIV ITY CANNOT BE APPLIED TO OTHER ACTIVITY WE CONSIDER IT NECESSARY TO ADDRESS ANOTHER ASPECT OF THE ISSUE AS LD. CIT DR HAS SPECIFICALLY RELIED UPON ORDERS OF THE ITAT FOR THE PROPOSITION THAT THE TPO CAN RE -CHARACTERIZE THE TRANSACTION UNDER THE ACT. WE HOLD THAT NO DOUBT TH AT THE TPO UNDER THE INCOME TAX ACT AND THE RULES THERE UNDER HAS TH E POWERS TO RE- CHARACTERIZE THE TRANSACTION IF SO WARRANTED ON FAC TS, IN THE FACTS OF THE PRESENT CASE, THIS POWER HAS BEEN ERRONEOUSLY E XERCISED. ON A DETAILED CONSIDERATION OF THE FUNCTIONS PERFORMED B Y THE ASSESSEE IN THE TWO SEPARATE CLASS OF ACTIVITIES AND, CONSIDERI NG THE ASSETS UTILIZED BY THE ASSESSEE IN THE TWO VENTURES AND ON A CONSID ERATION OF THE RISKS TO WHICH THE ASSESSEE IS EXPOSED TO IN THE TW O ACTIVITIES AS 59 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 DISCUSSED ABOVE WE ARE OF THE CONSIDERED THAT ON FA CTS RE- CHARACTERIZATION WAS NOT CALLED FOR AND FURTHER THE MARGIN EARNED IN ONE CANNOT BE BLINDLY APPLIED TO THE OTHER ACTIVITY IN THE FACTS OF THE PRESENT CASE. 12.28 . THUS IN VIEW OF THE ABOVE THE ANSWER POSED IN (B) WHICH WAS TO BE ANSWERED ONLY IF (A) WAS IN THE AFFIRMAT IVE, HAS STILL BEEN DECIDED AS PARTIES HAD ADDRESSED AND THE FACTS WER E AVAILABLE ON RECORD, IS ALSO NECESSARILY ANSWERED IN THE NEGATIV E. 12.29 THE QUERY POSED IN (C) CALLS UPON US TO DE CIDE WHETHER AS PER RULE 10B(1)(E)(I), THE TPO, IN THE FACTS OF THE PRESENT CASE, WAS JUSTIFIED IN HOLDING THAT NET PROFITS MARGINS SHOULD BE COMPUTED IN RELATION TO FOB VALUE OF GOODS/ OR THE OPERATING CO ST TO THE ASSESSEE. THE SAID QUERY WAS ALSO TO BE ADDRESSED ONLY IF THE ANSWER POSED TO US IN THE SAID QUESTION WAS IN THE AFFIRMATIVE. HE REIN ALSO IT IS SEEN THAT ALTHOUGH THE ANSWER IS IN THE NEGATIVE BUT, S INCE THE PARTIES HAVE ADDRESSED AND THE FACTS ARE AVAILABLE ON RECORD WE PROPOSE TO DEAL WITH THE SAID QUESTION ALSO. 12.30. RULE 10 B (1) (C) (I) READS AS UNDER:- DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 92C. 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SEC TION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A) 60 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 (B) ... (C) .. (D) . (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH- (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E 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 REGAR D 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 COS TS REFERRED TO IN RULE 10 B (1)(E)(I) DOES NOT SUGGEST THAT IN THE FA CTS 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 SER VICE PROVIDER FUNCTIONING AS A FACILITATOR WHO IS NOT EXPOSED TO PRICE RISK, WARRANTY RISK, INVENTORY RISK, ETC., WHOSE FUNDS ARE NOT LOC KED IN THE COST OF GOODS, TITLE IN GOODS NEVER VESTS WITH THE ASSESSEE CONTRACTS ARE ENTERED IN THE NAME OF SCJ AND ITS AFFILIATES AT ON E END AND THE CUSTOMERS IN INDIA ALSO IN THEIR OWN NAMES. IN THE SE UNREBUTTED FACTS ON RECORD, THE TPO WAS NOT CORRECT IN HOLDING THAT THE COSTS AS PER THE RULE WERE FOB VALUE OF GOODS. AS SUCH (C) IS A LSO DECIDED ACCORDINGLY. 12.32. ARGUMENTS ON THE CREATION OF AND CONTRIBUTI NG TO THE HUMAN INTANGIBLES AND SUPPLY CHAIN INTANGIBLES HAVE BEEN ADDRESSED AS SUCH WE PROPOSE TO ADDRESSES THESE ALSO AT THIS STA GE. SINCE WE ARE 61 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 OF THE VIEW THAT ISSUES IN TRANSFER PRICING ARE VER Y FACT SPECIFIC AND CONCLUSION NECESSARILY ARE FACT DRIVEN AS SUCH IT M AY BE PERTINENT TO ADD THAT WHILE DELIBERATING ON FACTS WE HAVE ALSO T AKEN INTO CONSIDERATION THE ORDERS RELIED UPON BY THE PARTIES , SPECIFICALLY THE DEPARTMENT, WHILE DECIDING THE ISSUE IN ASSESSEES FAVOUR. HOWEVER IN ORDER TO MAINTAIN COHERENCE AND LUCIDITY IN OUR FINDINGS WHICH ARE FACT DRIVEN, WE PROPOSE TO DISCUSS THE JUDGEMENTS SUBSEQUENTLY. FOR THE PRESENT PURPOSES ON CONSIDERATION OF THE FUNCTI ONS PERFORMED BY THE ASSESSEE, THE ASSETS DEPLOYED USING THE INTANGI BLES OF SCJ NETWORKS, THE RISKS TO WHICH THE ASSESSEE IS CONSEQ UENTLY EXPOSED WE ARE UNABLE TO CONCUR WITH THE CONCLUSION OF THE TPO THAT THE ASSESSEE HAS CREATED HUMAN ASSETS AND SUPPLY CHAIN INTANGIBLES. THE UNREBUTTED FACT ON RECORD IS THAT THE ASSESSEE HAS BEEN ABLE TO RENDER SERVICES UTILIZING THE NETWORK OF THE AE AND ALL INTANGIBLES AND PATENTS ETC. UTILIZED INTERNALLY BELONG TO THE AE A ND THE LEVEL AND DEGREE OF THE QUALIFICATION REQUIRED OF THE PERSONN EL OF THE ASSESSEE IS LOW AND SKILL REQUIREMENT IS SO LOW THAT NO SPEC IFIC SKILLS ARE REQUIRED BY THE PERSONNEL WHO REPLACE THE EXISTING PERSONNEL WHO MAY CHOOSE TO MOVE ON FOR BETTER OPTIONS. THE ASSE SSEE DOES NOT NEED TO AND CANNOT RESTRAIN THE LEAVING PERSONNEL F ROM UTILISING ANY SKILLS WHICH THEY MAY HAVE ACQUIRED DURING EMPLOYM ENT AS NO SPECIFIC SKILLS FOR INDENTING ARE REQUIRED FOR INDE NTING 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 A NALYSIS, REPORTS AND OPINIONS, BEING PROVIDED AS SUCH VALUE ADDED SERVIC ES ARE BEING PERFORMED WHEREIN THE ANALYSIS/OPINIONS MAY TURN OU T TO THE CORRECT OR 62 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 GROSSLY WRONG AS SUCH DUE TO THE HIGH RISKS OF BOTH EVENTUALITIES OCCURING THE PERSONNEL ARE NECESSARILY HIGHLY QUALI FIED SOUGHT AFTER EXPERTS, COMMANDING HIGH SALARIES. THE SIMPLE PERFO RMANCE OF A LOW RISK ACTIVITY OF FACILITATOR DOES NOT LEAD TO THE C ONCLUSION 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 IT S AE. 12.33 COMING TO THE FINAL QUESTION (D), WHICH WE H AVE POSED TO OURSELVES SINCE THE ANSWER TO QUESTION (A) IS IN TH E NEGATIVE THE QUESTION REGARDING JUSTIFICATION ON FACTS IN APPLYI NG MARGINS EARNED IN TRADING ACTIVITY TO THE PROFITS OF INDENTING ACTIVI TY FOR WORKING OUT THE ARMS LENGTH PRICE REQUIRES TO BE CONSIDERED. FOR TH E 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 F AR ANALYSIS ALREADY DONE IN THE EARLIER PARAS ESPECIALLY WHILE CONSIDER ING QUERIES (A) AND (B). ACCORDINGLY RELYING ON THE SAME WE HOLD THAT THERE IS NO JUSTIFICATION TO APPLY THE MARGINS OF TRADING ACTIV ITY TO INDENTING ACTIVITY IN THE FACTS OF THE PRESENT CASE. 12.34. WE FURTHER SUPPORT THE VIEW TAKEN, BY REFER RING TO 2006-07 ASSESSMENT YEAR WHEREIN THE REVENUE HAS ACC EPTED THE METHOD APPLIED AND ONLY ON COMPARABLES THERE HAVE B EEN A DISPUTE. SIMILARLY IN 2008-09 ASSESSMENT YEAR, THAT IS THE I MMEDIATELY SUBSEQUENT ASSESSMENT AFTER THE TWO YEARS UNDER CON SIDERATION, SAME METHOD HAS BEEN FOLLOWED BY THE ASSESSEE. ACCO RDING TO THE LD. CIT DR THE METHOD HAS NOT BEEN ACCEPTED THOUGH ADJUSTMENTS 63 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 HAVE NOT BEEN MADE AS THE MARGINS IN THE TRADING A CTIVITY VIS--VIS THE INDENTING ACTIVITY, DECLINED. THE LD. CIT D.R H AS BEEN AT PAINS TO EMPHASIZE THAT NO DOUBT NO ADJUSTMENT WAS MADE IN T HE TP PROCEEDINGS FOR 2009-10 ASSESSMENT YEAR BUT NO DEVI ATION HAS BEEN MADE FROM THE STAND TAKEN BY THE DEPARTMENT IN THE TP PROCEEDINGS. 12.35. ACCORDINGLY ON FACTS FOR THE DETAILED RE ASONING GIVEN HEREINABOVE ON THE ISSUES ADDRESSED BEFORE US WE ARE OF THE VIEW THAT THE TPOS ACTION UPHELD BY THE DRP CANNOT BE UPHELD BY US. 13. WE NOW PROPOSE TO DISCUSS THE ORDERS/JUDGEMEN TS WHICH HAVE BEEN REFERRED TO BY THE PARTIES, FOR OUR CONSI DERATION WHICH WE HAVE CONSIDERED BEFORE ARRIVING AT THE CONCLUSION. THE PRINCIPLES LAID DOWN IN THE JUDGEMENTS/ORDERS IN THE FACTS OF THE C ASES HAVE BEEN KEPT IN MIND BEFORE ARRIVING AT THE CONCLUSION. H OWEVER FOR THE SAKE OF CONVENIENCE AND LUCIDITY THEY ARE BEING DISCUSSE D SEPARATELY HEREUNDER:- 13.1. THE FIRST ORDER WHICH WE PROPOSE TO DISCUSS I S THE ORDER DATED 16.12.2011 IN 13.1.2 ITA NO.07977/MUM/2010 IN THE CASE OF BAYER MATERIAL SCIENCE PVT. LTD. 13.1.1 IT IS SEEN THAT THEREIN THE STAND OF THE A SSESSEE, WAS THAT THE TRADING ACTIVITY AND THE INDENTING AC TIVITY WAS SIMILAR AS SUCH SEGMENTAL PROFITS WERE NOT REQUIRED TO BE CONS IDERED. THIS STAND OF THE ASSESSEE WAS NEITHER APPROVED BY THE T PO NOR BY THE ITAT AS THE FAR ANALYSIS DEMONSTRATED THAT THE FUNC TION AND RISKS OF THE TWO ACTIVITIES WERE VERY DIFFERENT. 64 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 13.1.2 THE ASSESSEES CLAIM WAS THAT ASSETS U TILIZED WERE SAME FOR BOTH THE ACTIVITIES AND CERTAIN EXPENSES ON BEI NG 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 SA ID CASE WAS THAT THE TURNOVER WAS ACHIEVED THROUGH THE EFFORTS OF THE AS SESSEE 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 PRESE NT CASE THE ASSESSEE IS ONLY A SERVICE PROVIDER AND ACTS AS A F ACILITATOR AND THE FAR ANALYSIS AVAILABLE ON RECORD HAS NOT BEEN REBUT TED. THE STAND OF THE TPO WHICH HAS BEEN APPROVED BY THE ITAT INFACT SUPPORTS, THE VIEW TAKEN IN THE PRESENT PROCEEDINGS THAT THE INDE NTING ACTIVITY CANNOT BE TREATED AT PAR WITH THE TRADING ACTIVITY . 13.2. ORDER DATED 31.12.2010 IN ITA NO.02469/MUM/2 006 AND OTHERS IN THE CASE OF SERDIA PHARMACEUTICALS (INDIA) PVT. LTD. VS ACIT, MUMBAI HAS ALSO BEEN REFERRED TO BY THE LD. CIT DR IN SUP PORT OF THE PROPOSITION THAT TRANSACTIONS CAN BE RE-CHAR ACTERIZED BY THE T.P.O. 13.2.1 AT THE OUTSET THERE CAN BE NO QUARREL WITH THE SAID PROPOSITION AS POWERS TO DO SO HAVE BEEN VESTED ON THE TPO. HOWEVER, THERE IS A CAVEAT WHICH OPERATES WHILE EXE RCISING THE POWER WHICH NECESSARILY IS TO BE BALANCED WITH THE DUTY TO DO SO ONLY ON CONSIDERATION OF THE FACTS AVAILABLE ON RECORD WHIC H NECESSITATE SUCH AN ACTION AND IT IS NOT AN ARBITRARY UNFETTERED POW ER. 65 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 13.2.2. A PERUSAL OF THE SAID ORDER WOULD SHOW T HAT THE FINDINGS THEREIN WERE ON A PECULIAR AND SPECIFIC, SET OF FA CTS IN WHICH THE ASSESSEE WAS OPERATING AND THOSE FACTS ARE NOT IN O PERATION IN THE PRESENT PROCEEDINGS. FOR READY-REFERENCE, WE REPRO DUCE PARA 92 FROM THE SAID ORDER :- 92. WE, HOWEVER, SEE NO SUBSTANCE IN THIS PLEA. WHEN AN EXCESSIVE PAYMENT FOR GOODS OR SERVICES IS MADE TO AN ASSOCIATED ENTERPRISES, IT HAS TWO IMPLICATIONS- FI RST, THAT DOMESTIC TAX LIABILITY IS REDUCED IN RESPECT OF INC OME OF THE ENTERPRISES SITUATED IN THAT TAX JURISDICTION, AND SECOND, A PAYMENT FOR DIVIDEND, ROYALTY OR OTHER INCOME IS MA DE TO THE FOREIGN AE IN THE GARB OF PAYMENT MADE TO THE F OREIGN AE IS WRONGLY CHARACTERIZED AS PAYMENT OF GOODS OR SERVICES, IT IS ONLY A NATURAL COROLLARY OF THIS FI NDING THAT THE PAYMENT SO MADE IN EXCESS OF ARMS LENGTH PRICE MUS T HAVE SOME OTHER CHARACTER. WHILE A LOWER DEDUCTION , ON ACCOUNT OF ALP ADJUSTMENT, NEUTRALIZES THE EROSION OF DOMESTIC TAX BASE CAUSED BY REPORTING ARTIFICIALLY LOWER PROFITS, A SIMPLICTOR ALP ADJUSTMENT DOES NOT NEUTR ALIZE THE NON-TAXABILITY, IN SOURCE COUNTRY, OF THE PAYME NT OF DIVIDEND, ROYALTY OR OTHER INCOMES TO THE FOREIGN A ES, IN THE GARB OF PAYMENT FOR GOODS OR SERVICES. MANY COUNTRIES, INCLUDING CANADA- BY WAY OF SECTION 247( 2) OF CANADIAN INCOME TAX ACT, NEUTRALIZE THIS ILL EFFECT OF A PAYMENT IN EXCESS OF ARMS LENGTH PRICE BY PROVIDIN G FOR RE-CHARACTERIZING THE AMOUNT PAID IN EXCESS OF ALP. IN INDIA, RE CHARACTERIZATION PROVISIONS IN RESPECT OF PAYMENTS MADE IN EXCESS OF ALP HAVE NOT YET BEEN LEGISLATED, BUT THAT DOES NOT MEAN THAT JUDICIAL PR ECEDENTS FROM THE COUNTRIES WHERE RECHARACTERIZATION OF PAYM ENT 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, C ONTINUE TO 66 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 BE AS RELEVANT AND AS USEFUL AS THEY WOULD HAVE BEE N IN THE ABSENCE OF SUCH RE CHARACTERIZATION PROVISIONS IN THE RESPECTIVE COUNTRIES. THE RATIONALE AND LOGIC OF T HESE DECISIONS CONTINUES TO REMAIN UNAFFECTED BY THESE PROVISIONS. THE OBJECTION RAISED BY THE LEARNED CO UNSEL IS DEVOID OF LEGALLY SUSTAINABLE MERITS. 13.2.3 HOWEVER FOR THE JUSTIFICATION OF RE-CHARA CTERIZING THE INDENTING ACTIVITIES AS A TRADING ACTIVITY IN THE P RESENT CASE SOME NECESSARY EXERCISE HAS TO BE DONE BY THE TPO. IT H AS TO BE DEMONSTRATED FROM FACTS TO SHOW AS TO HOW THE ASSES SEE THOUGH CALLING ITSELF A SERVICE PROVIDER WAS ACTUALLY AC TING AS A TRADER. NO SUCH DISCUSSION, REASONING OR FACT IS ON RECORD. O N THE CONTRARY, THE CONSISTENT STAND OF THE ASSESSEE IS THAT NEITHER TH E GOODS HAVE BEEN PURCHASED IN ITS NAME NOR ARE THE CONTRACTS ENTERE D INTO ARE IN THE NAME OF THE ASSESSEE AS SUCH NEITHER THERE IS A PRI CE RISK, INVENTORY RISK NOR, CREDIT RISK ETC. AS SUCH IN THE ABSENCE OF FACTS JUSTIFYING THE RE-CHARACTERIZATION OF THE TRANSACTION THE POWERS O F THE TPO WHICH HAVE BEEN UPHELD FOR RE-CHARACTERIZING IN THE FACTS OF SERDIA PHARMACEUTICALS CASE DOES NOT HELP THE REVENUE, IN THE PRESENT PROCEEDINGS. THE TPO IN SERDIA PHARMACEUTICAL CAS E HAD DISCUSSED THE FAR ANALYSIS OF THE ASSESSEE AND FOUND IT TO BE CONTRARY TO THE STATED STAND. ON THE FACTS OF THE PRESENT CASE, WE ARE UNABLE TO CONCUR WITH THE STAND OF THE REVENUE NAMELY THAT TH E TPO WAS JUSTIFIED IN RE-CHARACTERIZING THE TRANSACTION, AS THE ORDER OF THE TPO AND THE DRP ARE DEVOID OF DISCUSSION ON FACTS AND P ROCEED ON GENERAL ASSUMPTIONS. THE ORDER OF THE MUMBAI BENCH OF THE CO- ORDINATE BENCH IN THE CASE OF SERDIA PHARMACEUTICAL S INDIA VS ACIT 67 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 PROCEEDS ON FACTS AVAILABLE ON RECORD AND WHICH ARE PECULIAR TO ITSELF AND IT DOES NOT LAY DOWN ANY GENERAL PROPOSITION. 13.3. ATTENTION HAS ALSO BEEN INVITED BY THE REVENU E TO THE ORDER DATED 20.01.2011 IN ITA NO.-3839/DEL/2010 AND OTHER S IN BIRLA SOFT (INDIA) LTD. VS DCIT IN SUPPORT OF THE PROPOSITION THAT INTERNAL COMPARABLES ARE PREFERABLE TO OTHER COMPARABLES. 13.3.1 THE SAID PROPOSITION IS AN ACCEPTED PROPOS ITION. THE RATIONALITY FOR PREFERRING THEM IS BASED ON THE FACT THAT FOR INTERNAL COMPATABLES NO ADJUSTMENTS, NEED BE MADE AS FAR ANA LYSIS REMAINS THE SAME. HOWEVER FOR DOING SO THE NATURE OF SERVIC E/PRODUCT IN RESPECT OF WHICH TRANSACTIONS, HAVE BEEN UNDERTAKEN WITH RELATED PARTIES AND UNRELATED PARTIES ARE NECESSARILY HAVE TO BE THE SAME AND IDENTICAL. 13.3.2 IN THE FACTS OF THE PRESENT CASE, LOOKING AT THE DIVERSE NATURE OF TRADING ACTIVITIES ENTERED INTO B Y THE ASSOCIATED ENTERPRISE WITH ITS INDIAN CUSTOMERS RANGING FROM M ACHINERY AND AEROSPACE, ENERGY AND MINERAL RESOURCES, CHEMICAL A ND PLASTICS, REAL ESTATE DEVELOPMENT AND FOREST PRODUCTS, CONSUMER LI FESTYLE RELATED BUSINESS AND NEW BUSINESS DEVELOPMENT INCLUDING IT SOLUTIONS WHEREIN THE ASSESSEE IS A SERVICE PROVIDER AND THE TRADING ACTIVITY WHICH THE ASSESSEE HAS DONE AT ITS OWN LEVEL IS LIM ITED TO SOME SALES TO LOCAL ENTITIES. NO COMPARISON HAS BEEN MADE AND THE MATERIAL DISTINCTION IN THE TWO ACTIVITIES NAMELY THAT OF A FACILITATOR AND THOSE OF A TRADER ARE SEPARATE AND DISTINCT WHICH MAKES THE CONCLUSION ARRIVED AT IN THE SAID ORDER/INAPPLICABLE. 68 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 13.3.3. THERE IS NO SIMILARITY BETWEEN THE INTERNAL COMPARABLES APPLIED AND THE INTERNATIONAL TRANSACTIONS OF SUPPO RT SERVICES ENTERED INTO WITH THE AE. NOT ONLY THE TWO ACTIVITIES ARE E NTIRELY DISTINCT WHICH IS THE MATERIAL DISTINCTION BUT EVEN OTHERWISE, NO SIMILARITY HAS BEEN ESTABLISHED IN THE NATURE OF GOODS INWHICH THE AES 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 WHI LE BENCH-MARKING THE INTERNATIONAL TRANSACTIONS IN ORDER TO ARRIVE A T 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 P ROPOSITION THAT TRANSFER PRICING ADJUSTMENT AT BEST CANNOT EXCEED T HE 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 WA S TURNED DOWN ON THE REASONING THAT IN THE ABSENCE OF ANY PROVISI ON IN THE ACT AND THE RULES AND ALSO PRACTICAL DIFFICULTIES AS THE PR OFILE OF THE ENTIRE GROUP WAS NOT SUBJECTED TO SCRUTINY OF THE INDIAN A UTHORITIES, THE REQUEST WAS TURNED DOWN. 13.4.2 IN THE FACTS OF THE PRESENT CASE, NEITHE R THE TPO HAS DIRECTLY PROCEEDED ON THAT FOOTING NOR HAS THAT BE EN THE RATIONAL CANVASSED BY THE ASSESSEE FOR ASSAILING THE DEPARTM ENTAL STAND. THE SAID ORDER HAS NO RELEVANCE IN THE FACTS OF THE PRE SENT CASE. THE 69 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 TPO HAS PROCEEDED ON THE FOOTING THAT THE TWO ACTIV ITIES ARE SIMILAR AND ON CONSIDERATION OF THE BUSINESS PROFILE, A FAR ANALYSIS OF THE ASSESSEE, WE HAVE COME TO THE CONCLUSION THAT THE T WO ACTIVITIES ARE NOT SIMILAR AS SUCH THE PROPOSITION THAT PROFIT OF THE AE CAN NOT BE A CONSIDERATION WHILE BENCH-MARKING THE INTERNATIONAL TRANSACTIONS IN THE FACTS OF THE PRESENT CASE HAS NO RELEVANCE. CONSEQUENTLY THE FINDING THEREIN HAS NO BEARING ON THE PRESENT PROCE EDINGS. 13.5. RELIANCE ON BEHALF OF THE REVENUE HAS ALSO BE EN PLACED UPON THE ORDER DATED 30.09.2011 OF THE TRIBUNAL IN ITA N O-5156/DEL/2010 IN THE CASE OF LI & FUNG (INDIA) PVT. LTD. COPY FILED BY THE LD. CIT DR. 13.5.1 A PERUSAL OF THE SAID ORDER RENDERED BY ONE OF US (LD. AM) WOULD SHOW THAT THE ASSESSEE COMPANY THEREIN PROVID ED BUYING/SOURCING SERVICES FOR SUPPLYING THE CONSUMER GOODS FROM INDIA FOR ITS AE LI FUNG INDIA PVT. LTD, HONG KONG WHO WA S SOURCING THE GOODS ON BEHALF OF ITS INTERNATIONAL CUSTOMERS. TH E ASSESSEE WAS PAID SERVICE CHARGES FOR THE SERVICES COMPUTED ON T HE BASIS OF COST PLUS MARK UP METHOD. 13.5.2 THE CRUCIAL FACT FOR HOLDING THAT FOB VALU E OF GOODS SHOULD BE THE BASIS FOR COMMISSION OF THE ASSESSEE WAS THE FA CT THAT THE ASSESSEE ADMITTEDLY UTILIZING ITS HUMAN INTANGIBLES AND SUPPLY CHAIN INTANGIBLES WHICH HAD CREATED BY IT AT ITS OWN COST HAD PERFORMED ALL, THE CRITICAL FUNCTIONS AND IN THE FACTS OF THAT CAS E AND THE AE DEMONSTRABLY AND ADMITTEDLY HAD NO COMPETENCE TO EX ECUTE THE CONTRACTS ON ITS OWN AND THUS BEING COMPLETELY DEPE NDENT ON 70 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ASSESSEE FOR RENDERING THE SERVICES, WAS EARNING CO MMISSION ON FOB VALUE OF GOODS AND THE ASSESSEE, ON THE OTHER H AND WAS BEING MEAGERLY COMPENSATED BY COST PLUS MARK UP. 13.5.3 THUS IN THOSE FACTS WHERE ALL THE CRITICAL FUNCTION S WERE BEING PERFORMED BY THE ASSESSEE UTILIZING ITS UNIQUE INTANGIBLES, WHO HAD THE PROFESSIONAL AND TECHNICAL CAPABILITIE S WHICH WAS FURTHER DEMONSTRATED FROM THE FACT AS THE ASSESSEE IN THE F ACTS OF THAT CASE IN THE EARLIER YEARS WAS CLAIMING AND HAD BEEN ALLOWED SEC 80.0 DEDUCTIONS. THUS THE EXISTENCE OF EXPERT KNOWLEDGE AND THE DEMONSTRATED CORE COMPETENCE OF THE ASSESSEE WAS O N RECORD. THERE IS NO SUCH EVIDENCE/MATERIAL AVAILABLE ON REC ORD TO SUGGEST THAT THE ASSESSEE WHICH CAME INTO EXISTENCE IN MARCH 20 05 HAD THE EXPERT KNOWLEDGE AVAILABLE FOR TAKING CRITICAL DECI SION. THE CRITICAL DECISIONS ADMITTEDLY WERE TAKEN BY THE AES I.E SCJ AND ITS AFFILIATES WHO HAVE BEEN GLOBAL PLAYERS FOR OVER 50 YEARS. TH E 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 O F 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 CRITI CAL FUNCTIONS WERE BEING PERFORMED BY THE ASSESSEE WHO WAS PAID ONLY O N 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 ARMS LENGTH. THE EARNING OF THE AE RECEIVED AS A PERCENTAGE OF FOB WAS COMPLETELY D EPENDENT ON 71 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 THE ASSESSEE WHO HAD USED ITS TANGIBLE AND UNIQUE I NTANGIBLES DEVELOPED OVER THE YEARS AT ITS OWN COST UTILISED T HE SUPPLY CHAIN MANAGEMENT AND DELIVERY, LOCATION & ADVANTAGE QUA M ANUFACTURES AND LABOUR COSTS AND ITS PRICING COST ADVANTAGES TO MAKE AVAILABLE TO THE AE WHO WAS UNABLE TO EXECUTE THE CONTRACTS ON I TS OWN, THUS WHEN THE AE COULD EARN COMMISSION ON FOB VALUE OF G OODS WHY SHOULD THE ASSESSEE BE DEPRIVED OF IT SINCE CRITICA L FUNCTIONS WERE BEING PERFORMED BY THE ASSESSEE. AS A RESULT THE OVERALL EARNINGS OF THE AE WERE REDUCED TO 20:80 RATIO. THE FACTS AND FAR ANALYSIS, IN THE PRESENT PROCEEDINGS ARE ENTIRELY DIFFERENT. IT WAS ALSO HELD THEREIN THAT THE AMOUNT OF ADJUSTMENT COMPUTED BY T HE TPO CAN NOT EXCEED THE AMOUNT WHICH COULD HAVE BEEN RECEIVED BY THE AE. THE COMPENSATION WAS ALLOCATED IN THE RATIO OF 80:20 BE TWEEN THE ASSESSEE AND ITS AE. 13.6 ATTENTION ON BEHALF OF THE REVENUE HAS ALSO BE EN INVITED TO ORDER DATED 31.01.2013 IN ITA NO-5095/DEL/2011 IN T HE CASE OF SUMITOMO CORPORATION INDIA PVT. LIMITED VS. DCIT CA SE. 13.6.1. A PERUSAL OF THE SAID ORDER SHOWS THAT TRA DING TRANSACTIONS WERE HELD TO BE DIFFERENT FROM INDENTI NG TRANSACTIONS AS SUCH IT SUPPORTS THE VIEW TAKEN. THE ASSESSEE THER E IN AGREED THAT THE MARGINS EARNED WITH NON-AES, BE APPLIED TO MARG INS EARNED FROM THE AE AS IT WAS THE SAME SERVICE. THUS WHEN THER E WERE INTERNAL COMPARABLES IN THE SAME NATURE OF TRANSACTIONS THEY WERE THE PREFERABLE, COMPARABLES. RELEVANT FINDINGS ARE REP RODUCED HEREUNDER FROM THE SAID ORDER:- 72 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 23. WE AGREE WITH THE ASSESSEES PROPOSITION THAT THE NATURE OF INDENTING TRANSACTION IS DIFFERENT FR OM THE TRADING TRANSACTIONS. THE TRADING TRANSACTION INVO LVES RISKS AND FINANCES. WHEREAS IN THE INDENTING TRANSACTION THE ASSESSEE HAS NOT TO INCUR ANY SUCH FINANCIAL OBLIGA TION OR CARRY ANY SIGNIFICANT RISK. MOREOVER, WE NOTE THAT IN RESPECT OF INDENTING TRANSACTION WITH NON-AES, THE AVERAGE MEAN MARGIN OF PROFIT OF 2.26% HAS BEEN ACCEPTED BY THE TPO. WE FURTHER FIND THAT THE INDENT BUSINESS OF T HE ASSESSEE WAS NOTHING BUT TRADE FACILITATION AND IS PURELY OF INDENT NATURE BOTH IN FORM AND SUBSTANCE. NO MATER IAL HAS BEEN BROUGHT ON RECORD TO REGARD THE INDENT TRANSAC TION AS TRADING TRANSACTIONS. ACCORDINGLY IT IS SEEN THAT NO STRENGTH CAN BE DE RIVED BY THE REVENUE FROM THE SAID ORDER AS IN THE FACTS OF THE PRESENT CASE IT SUPPORTS THE CASE OF THE VIEW TAKEN. 13.7 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. VS ACIT (2012) 25 TAXMANN.COM 414 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 T P ADJUSTMENT. 13.7.1 FOR THE SAID PURPOSE IT IS NECESSARY TO RE FER TO THE FACTS CONSIDERED BY THE CO-ORDINATE BENCH. IN THE S AID CASE, THE 73 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ASSESSEE WAS A WHOLLY OWNED SUBSIDIARY OF GAP INTER NATIONAL, 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 A PPROPRIATE METHOD FOR DETERMINATION OF ALP. THE TPO, HOWEVER, LOOKI NG AT THE FUNCTION ASSETS AND RISKS ANALYSIS (FAR) AND OTHER FACTORS, REJECTED THE ASSESSEES COST PLUS 15 PER CENT ALP AND HELD THAT COMMISSION AT THE RATE OF 5 PER CENT ON THE FOB VALUE OF GOODS SOURCE D BY THE FOREIGN ENTERPRISE THROUGH INDIAN VENDORS WAS THE MOST APPR OPRIATE PROFIT LEVEL INDICATOR (PLI) FOR DETERMINING ALP. THIS WA S SO BECAUSE THE FUNCTIONS PERFORMED, ASSETS OWNED AND RISKS ASSUMED BY THE ASSESSEE WERE SUBSTANTIALLY MORE THAN LIMITED RISK AND ASSESSEES FUNCTIONS WERE NOT ONLY THAT OF A SERVICE PROVIDER BUT OF A HIGHER RESPONSIBILITY. FURTHER IT WAS INFERRED THAT THE A SSESSEE CREATED SUBSTANTIAL INTANGIBLE ASSETS THROUGH ITS OPERATION S. THE TPO ALSO ALLEGED THAT ON ACCOUNT OF OPERATING IN A LOW COST ECONOMY, THE ASSESSEE HAD GENERATED LOCATION SAVINGS IN INDIA WH ICH HAD NOT BEEN FACTORED INTO IN ITS REMUNERATION MODEL. THE TPO THUS REJECTED THE ASSESSEES COST PLUS REMUNERATION BASED MODEL. TPO S REPORT WAS 74 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 ACCEPTED BY DRP. THE ISSUE WAS AGITATED BY THE ASS ESSES BEFORE THE TRIBUNAL. 13.7.2 CONSIDERING THE FAR ANALYSIS IT W AS HELD BY THE CO- ORDINATE BENCH THAT THE ASSESSEE WAS A LOW RISK PRO CUREMENT SERVICE PROVIDER. THE CO-ORDINATE BENCH CONCLUDED THAT THE ASSESSEE PROPOSED THE USE OF TNMM AS THE MOST APPROPRIATE ME THOD WITH NET PROFIT/TOTAL COST AS PLI. THE DEPARTMENT ACCEPTED THE TNMM WITH A PERCENTAGE OF FOB VALUE OF GOODS PROCURED BY PARENT AS PLI. THE DISPUTE IN REGARD TO USE OF THE SAME CONSIDERING TH E FAR ANALYSIS AND ORDER OF LI & FUNG THE ISSUE WAS DECIDED IN THE FOL LOWING MANNER: VI. CONSIDERING ABOVE WE CONCLUDE THAT NON RISK BEARING PROCUREMENT FACILITATING FUNCTIONS WHICH AR E PREORDAINED BY CONTRACT AND HAND BOOK, THE APPROPRI ATE PLI WILL BE NET PROFIT/TOTAL COST AND NOT THE % OF FOB VALUE OF GOODS SOURCED BY AE. ACCORDINGLY, WE UPHOLD THE NET PROFIT/TOTAL COST REMUNERATION MODEL ADOPTED BY THE ASSESSEE. HAVING HELD SO NOW WE PROCEED TO DECIDE THE PERCENTAGE OF MARKUP TO BE APPLIED TO ASSESSEES CO ST. 13.7.3. SINCE IN THE FACTS OF GAP INTERNATIONAL SOURCING TH E ASSESSEE HAD APPLIED COST PLUS 15 % ALP AND THE ENT IRE COMMISSION OF LI & FUNG GROUP TO LI & FUNG INDIA WAS WORKED OU T AS PER THE CALCULATIONS PROVIDED BY THE ASSESSEES COUNSEL, HI S SUGGESTION THAT THE OP/TC OF LI & FUNG INDIA WORKED OUT OF 32.43 % BE APPLIED. THE SAID PROPOSAL OF THE ASSESSEE WAS ACCEPTED AND 32% COST PLUS MARK UP WAS ACCEPTED IN GAP INTERNATIONAL. IN THE FACTS OF THE PRESENT 75 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 CASE THE SAID FINDINGS HAS NO ROLE TO PLAY AS IT WA S A CONCESSION GIVEN BY THE ASSESSEE IN THE SAID CASE. 14. ACCORDINGLY FOR THE REASONS DISCUSSED HEREINABOVE ON FACTS AND LAW IN THE LIGHT OF THE ARGUMENTS ADVANCED BEFORE T HE BENCH AND THE MATERIAL AVAILABLE ON RECORD THE GROUND NO 2-5 IN ITA NO- 5186/DEL/2011 AND GROUND NO 3 TO 8 IN ITA NO- 543E/ DEL/2012 ARE DECIDED IN ASSESSEES FAVOUR. 15. IN ITA 54331/DEL/2012 IN THE REMAINING GROUND 9 THE ASSESSEE HAS ASSAILED THE ACTION OF THE TPO UPHELD BY THE DR P IN LIMITING DEPRECIATION TO 15% IN REGARD TO THE COMPUTER PER IPHERALS AS OPPOSED TO THE 60 % AS PER ASSESSES CLAIM . IT IS SEEN THAT THE ISSUE IS NO LONGER RES INTEGRA AS THE SAME STANDS COVERED BY THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN ASSESSEES FAVO UR IN THE CASE OF CIT VS. BSES RAJDHANI LIMITED BOTH THE PARTIES HAVE BEE N HEARD. THE AO IS DIRECTED TO GRANT NECESSARY RELIEF. GROUND NO -9 IS ALLOWED. IN THE RESULT, ITA 5186/DEL/2011 IS ALLOWED AND ITA 5433/DEL/2012 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 15 TH OF MAY 2013. SD/- SD/- (B.C. MEENA) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL ME MBER DATED:15/05/2013 *AMIT KUMAR*/R.NAHEED 76 ITA NO.. 5433/DEL-2012 & ITA NO. 5186/DEL-2011 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI