Appeal Details
Counselvise Citation
[2015] 140 COUNSELVISE.COM (IT) 91436 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 month(s) 18 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
24-07-2015
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Next Hearing Date
29-04-2015
Assessment Year
2010-2011
Appeal Filed On
06-02-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY., JUDICIAL MEMBER ITA NO.761/DEL /2015 ASSESSMENT YEAR: 2010-11 MARUBENI ITOCHU STEEL INDIA PVT. LTD., 806-804, 8 TH FLOOR, AMBADEEP BUILDING, 14 KASTURBA GANDHI MARG, NEW DELHI-110001 (PAN AAECM 6453 G) VS. DCIT, CIRCLE 16(1), 318 C.R. BUILDING, I.P. ESTATE, NEW DELHI 110 002 APPELLANT) (RESPONDENT DATE OF HEARING : 29.04.2015 DATE OF PRONOUNCEMENT 24.07.2015 ASSESSEE BY : SHRI HIMANSHU SHEKHAR SINHA, ADVO CATE AND SHRI LALIT ATTAL, CA. RESPONDENT BY: SHRI JUDY JAMES, STANDING COUNSEL, D R AND SHRI AAMIR AZIZ, ADVOCATE DR. PER: A.T. VARKEY., J.M. THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE, IS D IRECTED AGAINST THE ASSESSMENT ORDER DATED 21.01.2015 PASSED U/S 14 3(3) R.W.S144C (13) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT). THE RELEVANT ASSESSMENT YEAR IS 2010-11. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS ENGAGED IN THE BUSINESS OF TRADING OF STEEL ITEMS AND PROVIDES LIA SIONING SUPPORT 2 ITA NO.761/DEL /2015 SERVICES TO ITS PARENT AND AFFILIATES FOR PURCHASE AND SALE OF GOOD FROM INDIA. THE ASSESSEE COMPANY FILED E-RETURN OF INCOM E ON 24.09.2010, DECLARING A TOTAL INCOME OF RS.28,20,829/-. AFTER P ROCESSING THE RETURN OF INCOME U/S 143(1) OF THE ACT, THE CASE WAS SELEC TED FOR SCRUTINY ASSESSMENT; AND FINALLY THE ASSESSMENT WAS COMPLETE D U/S 143(3) OF THE ACT, VIDE ORDER DATED 21.01.2015 AT A TOTAL INC OME OF RS.14,49,14,380/-. 3 THE LD. COUNSEL, SHRI HIMANSHU SHEKHAR SINHA SUB MITTED THAT MARUBENI ITOCHU STEEL INC., JAPAN (HEREINAFTER REFE RRED TO AS 'MO') WAS FORMED BY THE MERGER OF THE STEEL PRODUCTS DIVI SIONS OF MAJOR GENERAL TRADING COMPANIES ITOCHU CORPORATION AND MA RUBENI CORPORATION. THE PROFILE OF THE MARUBENI GROUP IN P ARTICULAR IS DOMESTIC TRADING, IMPORT/EXPORT, AND OVERSEAS TRADI NG OF IRON AND STEEL AND OTHER RELATED PRODUCTS. MARUBENI GROUP IS A GLO BAL TRADING HOUSE WITH ACTIVITIES IN CHEMICALS, ENERGY, INFRASTRUCTUR E PROJECTS, RESOURCE DEVELOPMENT, TELECOMMUNICATIONS, MULTIMEDIA AND ENV IRONMENTAL SYSTEMS. MO IS A GENERAL TRADING COMPANY (ALSO POPU LARLY KNOWN AS SOGO SHOSHA IN JAPANESE TERMS) DEALING ONLY IN STEE L. MO HAS THE 3 ITA NO.761/DEL /2015 OWNERSHIP CONTROL OF MARUBENI SINGAPORE WHICH, INTU RN HOLDS 99% SHARE CAPITAL & MARUBENI JAPAN HOLDS REMAINING 1% O F MARUBENI INDIA. 4. THE APPELLANT/ASSESSEE, MARUBENI-ITOCHU STEEL IN DIA PRIVATE LIMITED ('MIIP') / 'THE APPELLANT') BROUGHT TO THE NOTICE OF THE TPO THAT ASSESSEE IS A SERVICE AND TRADING COMPANY AND PROVIDES LIAISONING SUPPORT SERVICES TO ITS PARENT AND AFFILIATES FOR P URCHASE AND SALE OF GOODS FROM INDIA. IT ACTS AS A COMMUNICATION CHANN EL BETWEEN ITS PARENT/AFFILIATES COMPANIES AND THIRD PARTIES IN IN DIA. 5. THE ASSESSEE STATES THAT IT IS ENGAGED IN UNDER TAKING TWO TYPES OF TRANSACTIONS WITH ITS GROUP COMPANIES : A) PROVISION OF SUPPORT SERVICES TO ITS GROUP COMPA NIES - SERVICE SEGMENT - WHERE SALES AND PURCHASES IN RELA TION TO THE IMPORT AND EXPORT IS RECORDED IN THE BOOKS OF A E. THE SERVICES INCLUDE THE FOLLOWING : FURNISHING INFORMATION REGARDING STEEL PRODUCTS A ND INDIAN STEEL MARKET; PROVIDING INFORMATION CONCERNING TRANSPORTATION, CUSTOMS CLEARANCE AND ANY OTHER INFORMATION AS REQUIRED BY THE AES; 4 ITA NO.761/DEL /2015 RECEIVING AND DELIVERING OF RELATIVE DOCUMENTS REQUIRED IN THE CONTRACTS AND SHIPPING DOCUMENTS AS REQUIRED BY THE AES; ACTING AS A CHANNEL OF COMMUNICATION BETWEEN THE AES AND THE END-CUSTOMER; ANY OTHER ACTIVITIES AS MAY BE NECESSARY FOR THE SMOOTH PERFORMANCE OF THE AE'S TRANSACTIONS, AS INSTRUCTED BY THE AE. B) PURCHASE OF STEEL PRODUCTS FROM ITS GROUP COMPAN IES, FOR THE PURPOSE OF RESALE IN INDIA - TRADING SEGMENT : BACK TO BACK TRADING TRANSACTIONS ON THE BASIS OF CONFIRMED ORDERS FOR THE PURPOSE OF RESALE TO PRE- IDENTIFIED CUSTOMERS IN INDIA. 6. DURING THE FINANCIAL YEAR 2009-10 RELEVANT TO AY 2010-11, THE ASSESSEE COMPANY HAD ENTERED INTO THE FOLLOWING INT ERNATIONAL TRANSACTIONS WITH ITS AES: S. NO . NATURE OF INTERNATIONA L TRANSACTION SEGMEN T METHOD SELECTED VALUE (INR) MARGIN OF PROFIT OF ASSESSEE MARGIN OF PROFIT OF COMPARE- ABLES 1. IMPORT OF FINISHED GOODS (STEEL PRODUCTS TRADING TNMM PLI = OP/SALES 164,233,837 0.80% (SEE PAGE 59 OF PB) 0.61% (SEE PAGE 59 OF PB) 2. PROVISION OF SUPPORT SERVICES TNMM 83,581,435 7.91% 7.52% 5 ITA NO.761/DEL /2015 INDENT PLI = OP/VAE (SEE PAGE 59 OF PB) (SEE PAGE 59 OF PB) 3. REIMBURSE- MENTS PAYABLE 16,518,068 4. REIMBURSE- MENTS PAYABLE NA 1,28,20,471 COST-TO-COST 7. FOR THE PURPOSE OF ESTABLISHING ARM'S LENGTH PRI CE (ALP) OF ITS INTERNATIONAL TRANSACTIONS ENTERED WITH ITS ASSOCIA TED ENTERPRISES (AES), THE APPELLANT COMPANY HAD UNDERTAKEN A TRANS FER PRICING STUDY (PAGES 55-121 OF P.B.) AS PROVIDED UNDER RULE 10D OF THE INCOME-TAX RULES, 1962 (HEREINAFTER REFERRED TO AS 'RULES') READ WITH SECTION 92D OF THE ACT. 8. THE APPELLANT COMPANY HAD APPLIED TRANSACTION NE T MARGIN METHOD (HEREINAFTER REFERRED TO AS 'TNMM') AS THE M OST APPROPRIATE METHOD AND, OPERATING PROFIT/VALUE ADDED EXPENSES ( OP/VAE) FOR SUPPORT SERVICES AND OPERATING PROFIT/SALES (OP/SAL ES) FOR TRADING ACTIVITY WAS SELECTED AS THE PROFIT LEVEL INDICATOR (HEREINAFTER REFERRED TO AS 'PLI') TO BENCHMARK ITS INTERNATIONAL TRANSAC TIONS ENTERED WITH ITS ASSOCIATED ENTERPRISE.(SEE PAGE 88-89 OF P.B.). 9. THAT, IN ORDER TO ARRIVE AT ARM'S LENGTH PRICE, THE APPELLANT COMPANY CARRIED OUT A BENCHMARKING ANALYSIS; AND TO BENCHMARK ITS 6 ITA NO.761/DEL /2015 INDENTING SEGMENT, APPELLANT IDENTIFIED COMPARABLE COMPANIES (SERVICE PROVIDERS) BY APPLYING APPROPRIATE SEARCH FILTERS AND AVERAGE OP/VAE OF THESE COMPARABLE COMPANIES WAS COMPUTED A T 7.52% (USING MULTIPLE-YEAR DATA I.E. DATA FOR FINANCIAL Y EARS 2007-08, 2008- 09 AND 2009-10)( PAGE 102 OF P.B.). THE APPELLANT C OMPUTED ITS OWN OP/VAE AT 7.91 % FOR THE FINANCIAL YEAR 2009-10 ( P AGE 118 OF THE PAPER BOOK).SINCE THE OP/VAE (7.91%) OF THE APPELLA NT IS BETTER THAN THE OP/VAE (7.52%)OF THE COMPARABLES, AS SUCH, INDENTING TRANSACTION ENTERED WITH THE AE WAS CLAIMED TO BE A T ARM'S LENGTH. FURTHER, SIMILARLY TO BENCHMARK THE INTERNATIONAL T RANSACTION IN THE TRADING SEGMENT, APPELLANT SELECTED 17 COMPARABLES BY APPLYING APPROPRIATE SEARCH FILTERS AND AVERAGE OP/SALES OF THESE COMPARABLE COMPANIES WAS COMPUTED AT 0.61 % (USING MULTIPLE-YE AR DATA I.E. DATA FOR FINANCIAL YEARS 2007-08, 2008-09 AND 2009-10) ( PAGE 93 OF P.B.). THE APPELLANT COMPUTED ITS OWN OP/SALES AT 0.80% FO R THE FINANCIAL YEAR 2009-10 (PAGE 118 OF P.B.) AND SINCE THE MARGI N OF PROFIT OF THE APPELLANT IS BETTER THAN THE MEAN MARGIN OF THE COM PARABLES, AS SUCH, TRADING TRANSACTION ENTERED WITH THE AE WAS CLAIMED TO BE AT ARM'S LENGTH. 7 ITA NO.761/DEL /2015 10. HOWEVER, THE TRANSFER PRICING OFFICER (HEREIN AFTER REFERRED TO AS 'TPO') RE-CHARACTERIZED THE INDENT BASED TRANSAC TIONS AS TRADING TRANSACTIONS. THAT VIDE AN ORDER DATED 24.01.2014 (PAGES 145-174 OF APPEAL DOCUMENTS), THE TPO REJECTED THE APPROACH ADOPTED BY THE ASSESSEE AND RECOMPUTED THE ARM'S LENGTH PRICE OF I NTERNATIONAL TRANSACTIONS PERTAINING TO INDENT SEGMENT. ACCORDIN G TO THE LD COUNSEL, WHILE REJECTING THE ASSESSEE'S APPROACH, T HE TPO RE- CHARACTERIZED THE COMMISSION/SERVICE BUSINESS OF TH E ASSESSEE AS TRADING BUSINESS WITHOUT ANY MATERIAL ON RECORD. AC CORDING TO HIM, THE TPO ALLEGED THAT THE ASSESSEE IS THE OWNER OF S UPPLY CHAIN MANAGEMENT AND HUMAN INTANGIBLES AND WENT ON TO ADD THAT COMPENSATION MODEL OF THE ASSESSEE DOES NOT ACCOUNT FOR THE PROFIT ATTRIBUTABLE TO LOCATION SAVINGS. THE LD COUNSEL SU BMITS THAT BASED ON SUCH ALLEGATIONS, THE TPO ADDED THE VALUE OF RS.955 .85 CRORES I.E. VALUE OF GOODS ON WHICH THE ASSESSEE HAS EARNED COM MISSION, TO THE COST BASE OF SERVICE FEE AND COMMISSION SEGMENT PER TAINING TO AES WITHOUT REALIZING THAT VALUE OF RS.955.85 CRORES W AS RECORDED AS SALES/PURCHASES IN THE BOOKS OF AES. SUBSEQUENTLY, TPO UNDERTOOK A FRESH SEARCH OF COMPANIES PURPORTEDLY ENGAGED IN ST EEL TRADING 8 ITA NO.761/DEL /2015 ACTIVITIES AND OP/TC MARGIN OF SELECTED TRADING COM PANIES I.E. 2.26% WAS USED AS THE BENCHMARK FOR MAKING ADDITION ON TH E ENHANCED COST OF THE ASSESSEE. ACCORDING TO LD COUNSEL, BASED ON SUCH ERRONEOUS APPROACH, TPO MADE ADJUSTMENT OF RS.209,893,288/- T O THE TOTAL INCOME OF THE ASSESSEE. 11. THE TPO RECORDED THE FOLLOWING OBSERVATIONS AND REASONS IN MAKING THE AFORESAID ADJUSTMENT OF RS. 209,893,288/ - : (A) THE PROVISIONS OF RULE 10B(1)(E)(I) THAT THAT THE RULES PRESCRIBE THAT THE NET PROFIT MARGINS SHOULD BE COM PUTED IN RELATION TO COST INCURRED OR SALES AFFECTED OR ASSE TS EMPLOYED OR TO BE EMPLOYED. THE RULES DO NOT PRESCR IBE FOR VALUE ADDED COST OR VALUE ADDED EXPENDITURE TO BE CONSIDERED AS BASE FOR COMPUTING THE NET PROFIT MAR GINS. IN VIEW OF ABOVE PROVISION, THE CLAIM OF THE ASSESSEE FOR USE OF BERRY RATIO IS NOT ACCEPTABLE BEING CONTRARY TO RULES 10B(L)(E); (B) TREATED THE SERVICE FEE/COMMISSION SEGMENT AS EQUIVALENT TO TRADING BUSINESS, AND DISREGARDED THE FUNCTIONAL AND RISK DIFFERENCES BETWEEN THE TWO SEGMENTS; (EMPHASIS ADD ED) (C) ADDED RS. 948 CRORES (WHICH ARE PURCHASES/SALE S IN THE BOOKS OF THE AE AND UPON WHICH MIIP EARNS SERVICE FEE/COMMISSION) TO THE COST BASE OF THE ASSESSEE; 9 ITA NO.761/DEL /2015 (D) PROCEEDED TO COMPUTE THE ARM'S LENGTH PRICE OF THE SAID TRANSACTION BY APPLYING THE PERCENTAGE OF OPERATING PROFIT EARNED BY EXTERNALLY IDENTIFIED COMPARABLE COMPANI ES TO THE AFORESAID COST BASE AND ACCORDINGLY, MADE UPWAR D ADJUSTMENT TO THE TOTAL INCOME OF THE ASSESSEE; (E) THE ASSESSEE IS REIMBURSED BASED ON COST PLUS MODEL; (F) THE COMMISSION BUSINESS OF THE ASSESSEE IS EQU IVALENT TO THE TRADING BUSINESS AND ACCORDINGLY COMPARED THE ASSESSEE WITH TRADING COMPANIES AND ALSO THE COMPAN IES INVOLVED IN MANUFACTURING ACTIVITIES; (G) THE ASSESSEE AS PART OF THIS NETWORK AND THE S YNERGY CREATED BY THE SAME SHOULD BE DERIVING INCOME COMMENSURATE TO THE INTANGIBLES INVOLVED. THE NETWO RK OF WHICH ASSESSEE IS A PART CONSISTS OF WHOLESALER, MANUFACTURER, CHEMICAL DEALERS, PAPER TRADERS ETC. IT IS DOING PROCUREMENT AND AS WELL AS SOURCING FOR MANUFACTURERS AND ALSO OF WHOLESALER. ON THIS BASIS , THE ASSESSEE CAN BE COMPARED WITH ALL THE COMPARABLES CONFRONTED TO HIM, WHEREIN THE RECEIPTS ARE FROM TH E TRADING OF COMMODITIES IRRESPECTIVE OF THE TYPE OF THE COMMODITY OR THE WAY IN WHICH IT IS PRODUCED; (H) THAT APPELLANT COMPANY HAS DEVELOPED UNIQUE IN TANGIBLES LIKE SUPPLY CHAIN MANAGEMENT INTANGIBLES AND HUMAN ASSET INTANGIBLE FOR WHICH IT IS NOT BEING ADEQUATELY COMPENSATED; 10 ITA NO.761/DEL /2015 (I) THE COMPENSATION MODEL OF THE ASSESSEE DOES NO T INCLUDE THE PROFIT ATTRIBUTABLE TO THE ASSESSEE ON ACCOUNT OF LOCATION SAVING; AND (J) THE ASSESSEE HAS PERFORMED ALL THE CRITICAL FUN CTIONS, ASSUMED SIGNIFICANT RISKS AND USED BOTH TANGIBLES A ND INTANGIBLES DEVELOPED OVER A PERIOD OF TIME. 12. RELYING UPON THE TPO ORDER DATED 24.01.2014, TH E ASSESSING OFFICER VIDE HIS ORDER DATED 07.02.2014 DETERMINED THE INCOME OF THE APPELLANT COMPANY AT RS. 212,713,840/-. 13. AGGRIEVED AGAINST THE AFORESAID DRAFT ORDER OF THE ASSESSMENT, THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DISPUT E RESOLUTION PANEL (DRP). ACCORDING TO THE LD COUNSEL IN THE OBJECTION S, ASSESSEE SPECIFICALLY POINTED OUT THAT TPO HAS MADE UPWARD A DJUSTMENT BY ASSUMING INCORRECT FACTS; AND ACCORDING TO HIM, DES PITE THE OBJECTIONS OF THE ASSESSEE AND WITHOUT APPRECIATING THE SUBMIS SIONS AND EVIDENCE LED BY THE ASSESSEE COMPANY, DRP ISSUED DIRECTIONS DATED 14.11.2014 TO THE AO/TPO TO ADOPT RS.648 CRORE AS THE CORRECT FOB VALUE FOR THE PURPOSE OF COMPUTING ADJUSTMENT FOR THE VALUE OF IN TERNATIONAL 11 ITA NO.761/DEL /2015 TRANSACTIONS. AND, DRP UPHELD THE ORDER OF THE AO/T PO IN RESPECT OF ALL OTHER GROUNDS. 14. THEREAFTER, THE TPO ISSUED EFFECT ORDER DATED 1 4.01.2015 IN ACCORDANCE WITH THE DIRECTIONS ISSUED BY THE DRP AD OPTING RS.648 CRORE AS THE CORRECT FOB VALUE FOR THE PURPOSE OF C OMPUTING ADJUSTMENT FOR THE VALUE OF INTERNATIONAL TRANSACTI ONS. THE REVISED ADJUSTMENT COMPUTED BY TPO WAS RS.14,20,93,288. 15. THAT PURSUANT TO THE DIRECTIONS OF THE DRP AND ORDER GIVING EFFECT BY THE TPO, THE AO IN THE ORDER OF ASSESSMEN T DATED 21.01.2015 DETERMINED INCOME OF THE APPELLANT AT RS .14,49,14,380/- BY MAKING AN UPWARD ADJUSTMENT OF RS.14,20,93,551/- TO THE ARM'S LENGTH PRICE DECLARED BY THE APPELLANT. 16. THE APPELLANT, BEING AGGRIEVED, HAS PREFERRED T HE INSTANT APPEAL BEFORE US. 17. GROUND NO. 2 TO 8 OF GROUNDS OF APPEAL ARE REGA RDING ADDITION OF RS.142,093,551/- ON ACCOUNT OF ALLEGED UNDERSTAT EMENT OF ARM'S LENGTH PRICE IN RESPECT OF COMMISSION INCOME EARNED BY THE APPELLANT FROM ITS AES. 12 ITA NO.761/DEL /2015 18. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO/AO HAS ADDED RS.648 CRORE (RECORDED AS SALE/PURCHASE IN TH E BOOKS OF THE AES) IN THE AE SEGMENT WHICH ACCORDING HIM TANTAMOU NT TO TREATING THE SERVICE/COMMISSION BUSINESS OF THE ASSESSEE AS THAT OF A TRADER WITHOUT STATING ANY REASON WHATSOEVER. ACCORDING TO HIM, NO BASIS FOR ARRIVING AT THIS CONCLUSION HAS BEEN STATED IN THE SAID ORDER. NO EVIDENCE OR MATERIAL HAS BEEN BROUGHT ON RECORD BY THE TPO/ AO TO REACH THE AFORESAID CONCLUSION. AS PER THE LD COUN SEL, THE TPO HAS ACTED OUTSIDE HIS JURISDICTION BY CHALLENGING THE C OMPENSATION MODEL OF THE ASSESSEE. IN THIS REGARD, THE LD COUNSEL SUB MITS THAT IT IS A SETTLED PRINCIPLE IN TAX JURISPRUDENCE THAT THE BUS INESS MODEL METHOD/ TRANSACTION CHOSEN BY A TAXPAYER HAS TO BE RESPECTE D AND IT NOT OPEN TO THE REVENUE TO DICTATE THE BUSINESS MODEL. ACCORDIN G TO HIM, THE TPO HAS ONLY CONTENDED THAT TRADING TRANSACTIONS AND SE RVICE/ COMMISSION TRANSACTIONS ARE EQUIVALENT WITHOUT ASSIGNING ANY REASON TO ARRIVE AT THIS CONCLUSION. HOWEVER, THE LD COUNSEL POINTED OU T THAT THE ASSESSEE ON THE CONTRARY HAS POINTED OUT EXTENSIVE DISSIMILA RITIES IN DETAIL AND TOOK OUR ATTENTION TO THE CHART WHICH REFLECTS THE SUMMARY OF 13 ITA NO.761/DEL /2015 FUNCTIONS & RISKS OF SERVICE SEGMENT & TRADING AS P ROVIDED IN TPO REPORT IS REPRODUCED BELOW FOR QUICK REFERENCE : S.NO. CATEGORY TRADING SEGMENT INDENT SEGMENT MIIP AES MIIP AES 1. SUPPORT SERVICES 2. CORPORATE STRATEGY 3. PRICE NEGOTIATION & CONTRACTUAL AGREEMENTS 4. MANAGEMENT & ADMINISTRATIVE FUNCTIONS 5. PROCUREMENT 6. TRANSPORTATION, WAREHOUSING & INVENTORY MANAGEMENT 7. IDENTIFICATION OF CUSTOMERS 7. SALES & PRICING 19. A PERUSAL OF THE CHART BELOW SHOWS THE SUMMARY OF RISK BORNE BY MIIP& GROUP COMPANIES S.NO. CATEGORY TRADING SEGMENT INDENT SEGMENT MIIP AES MIIP AES 1. MARKET RISK LIMITED 2. PRODUCT/SERVICE LIABILITY RISK LIMITED 3. CREDIT RISK LIMITED 4. FOREIGN EXCHANGE RISK 5. MANPOWER RISK 6. LEGAL & STATUTORY RISK 7. VOLUME RISK 7. INVENTORY RISK 20. FURTHER, THE ASSESSEE ALSO DEMONSTRATED BEFORE THE TPO/DRP BY WAY OF HIGHLIGHTING THE DIFFERENCE BETWEEN FAR OF T RADERS VIS-A-VIS SERVICE/COMMISSION BUSINESS THAT COMMISSION/SERVICE SEGMENT OF THE 14 ITA NO.761/DEL /2015 ASSESSEE CANNOT BE RE-CHARACTERISED AS TRADING BUSI NESS WITHOUT ANY COGENT REASONS AND THE LD COUNSEL TOOK OUR ATTENTIO N TO THE TABLE GIVEN BELOW TO BUTTRESS HIS ARGUMENTS:- COMPARABILITY FACTORS TRADING BUSINESS SERVICE/ COMMISSION BUSINESS REMARKS MARKETING STRATEGY AND DEVELOPMENT : MARKETING STRATEGY AND DEVELOPMENT FUNCTIONS ARE THOSE ACTIVITIES THAT DETERMINE THE POSITIONING OF A FIRM'S PRODUCTS IN A MARKET, AND ESTABLISH MARKETING TECHNIQUES THAT BRING PRODUCTS TO THE CUSTOMERS' ATTENTION. YES NO OR VERY LIMITED FUNCTIONS HIGHER REMUNERATION IN TRADING BUSINESS SHOULD BE ATTRIBUTED TO ADDITIONAL FUNCTIONS PERFORMED AND ADDITIONAL RISKS ASSUMED IN TRADING BUSINESS AS COMPARED TO SERVICE/ COMMISSION BUSINESS. SALES AND PRICING : PRODUCT PRICING HAS STRATEGIC AND TACTICAL COMPONENTS. STRATEGIC PRICING INVOLVES A TRADE-OFF BETWEEN PRODUCT MARGINS AND SALES VOLUME. TACTICAL ASPECTS INVOLVE PRICE ADJUSTMENTS TO MEET LOCAL OR TEMPORARY MARKET CONDITIONS, ESTABLISH PRICES FOR PRODUCT IMPROVEMENTS, OR ASSIST DISTRIBUTORS IN MEETING COMPETITIVE CHALLENGES. YES NO MARKETING AND ADVERTISING: MARKETING FUNCTIONS INCLUDE OVERALL DEVELOPMENT OF BRAND AWARENESS IN THE MARKETPLACE, AND THE CREATION AND IMPLEMENTATION OF PRODUCT-SPECIFIC ADVERTISING CAMPAIGNS. YES NO DISTRIBUTION NETWORK: DISTRIBUTION NETWORKS ENABLE THE FIRM TO LOCATE CUSTOMERS, DETERMINE THEIR NEEDS, AND PROVIDE SERVICES OR PRODUCTS TO MEET THOSE NEEDS. IN ADDITION, THESE NETWORKS ENHANCE FIRM'S DEVELOPMENT OF A TRADEMARK/TRADE NAME. YES VERY LIMITED AFTER - SALES SERVICE: AFTER-SALES SERVICE IS A MEAN BY WHICH A FIRM DIFFERENTIATES ITS PRODUCTS FROM THOSE OF OTHERS. AFTER-SALES SERVICE INCLUDES DEVELOPING TECHNICAL SUPPORT AND YES NO 15 ITA NO.761/DEL /2015 TRAINING FOR DISTRIBUTORS AND DEALERS; PROVIDING DISTRIBUTORS WITH ADVICE AND TRAINING TO IMPROVE OPERATIONS AND PROFITABILITY; AND ENSURING COMPONENT AVAILABILITY. WARRANTY AND REPLACEMENT SERVICES : THE WARRANTY SUPPORT FUNCTION IS GENERALLY PERFORMED BY THE ENTITY FROM WHICH THE CUSTOMER RECEIVES A LEVEL OF SERVICE PRESCRIBED BY THE LEGAL OBLIGATION UNDER THE WARRANTY YES NO WAREHOUSING ACTIVITIES : WAREHOUSING ACTIVITIES IS PERFORMED FOR STOCKING THE GOODS IN WHICH THE TRADER DEALS IN. IT INVOLVES DECISION REGARDING LEVEL OF INVENTORY TO BE STOCKED, INSURANCE AND OTHER INCIDENTAL ACTIVITIES. YES NO INVENTORY RISK : INVENTORY RISK RELATES TO THE LOSSES ASSOCIATED WITH CARRYING FINISHED PRODUCT INVENTORY. LOSSES INCLUDE OBSOLESCENCE, SHRINKAGE, OR MARKET COLLAPSE, SUCH THAT PRODUCTS ARE ONLY SALEABLE AT PRICES THAT PRODUCE A LOSS YES NO INVENTORY CARRYING COST LIKE WAREHOUSE RENT AND INSURANCE COST YES NO CUSTOMER CREDIT RISK: CUSTOMER CREDIT RISK IS BORNE BY A FIRM WHEN IT SUPPLIES PRODUCTS OR SERVICES TO A CUSTOMER. YES NO FOREIGN EXCHANGE RISK: FOREIGN EXCHANGE RISK OCCURS WHEN PURCHASES OF MATERIALS, RESOURCES, OR SERVICES ARE DENOMINATED IN ONE CURRENCY, WHILE SALES OF FINISHED PRODUCT ARE DENOMINATED IN ANOTHER CURRENCY. YES LIMITED TO SERVICE FEE/ COMMISSION TO BE RECEIVED. LESSER FOREIGN EXCHANGE RISK AS COMPARED TO TRADING BUSINESS. 16 ITA NO.761/DEL /2015 21. SO, THE LD COUNSEL CONTENTED THAT THERE IS NO JUSTIFICATION OF RE- CHARACTERIZING THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITHOUT ANY COGENT REASONS IN COMPLETE DISREGARD OF THE BUS INESS MODEL ADOPTED BY THE ASSESSEE. IN THE COMMERCIAL WORLD TH ERE ARE VARIOUS TYPES OF BUSINESS MODELS WHICH ARE SELECTED BY THE ENTITIES BASED ON COMMERCIAL FACTORS AND EXPEDIENCY. SERVICE FEE AND COMMISSION MODEL IS ONE OF THE BUSINESS MODELS. THE ASSESSEE H AS CHOSEN TO FOLLOW THE BUSINESS MODEL OF SERVICE FEE COMMISSION AND THERE IS NO JUSTIFICATION FOR THRUSTING THE BUSINESS MODEL OF T RADING BUSINESS TO SERVICE FEE/COMMISSION MODEL. 22. ON THIS ASPECT, THE OBSERVATIONS OF THE CO-ORDI NATE BENCH IN THE CASE OF SOJITZ INDIA PVT. LTD. [I.T.A. NO. 5186/DE1 /2011 & 5433/DEL/2012] WAS BROUGHT TO OUR NOTICE WHICH IS R EPRODUCED AS UNDER : PARA 12.25 '....WE ARE UNABLE TO AGREE WITH THE TPO WHO CHOSE TO RE- CHARACTERIZE THE ACTIVITIES OF THE SERVICE PROVIDER AND TREATED THEM AT PAR WITH THE ACTIVITIES OF A TRADER SINCE THE NATURE OF THE ACTIVITIES OF A TRADER AND SERVICE PR OVIDER ARE MATERIALLY DISTINCT AND DIFFERENT.' 17 ITA NO.761/DEL /2015 PARA 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 O F THE VIEW THAT ON THE BASIS OF THE DETAILED FAR ANALYSIS OF THE ASSESSEES, THE 'COSTS' REFERRED TO IN RULE 10 B (1) (E)(I) DOES NOT SUGGEST THAT IN THE FACTS OF A CASE LIKE T HE 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 EX POSED TO PRICE RISK, WARRANTY RISK, INVENTORY RISK, ETC., WH OSE FUNDS ARE NOT LOCKED IN THE COST OF GOODS, TITLE IN GOODS NEVER VESTS WITH THE ASSESSEE CONTRACTS ARE ENTERED IN TH E NAME OF SCJ AND ITS AFFILIATES AT ONE END AND THE CUSTOM ERS IN INDIA ALSO IN THEIR OWN NAMES. IN THESE UNREBUTTED FACTS ON RECORD, THE TPO WAS NOT CORRECT IN HOLDING THAT THE 'COSTS' AS PER THE RULE WERE FOB VALUE OF GOODS.' 23. SIMILARLY, THE LD. COUNSEL TOOK OUR ATTENTION T O THE VIEW OF THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF MITSUB ISHI INDIA PVT. LTD. [LT.A. NO. 50421DE1L1L] WHEREIN IT WAS HELD BY THE ITAT THAT: 80. COMING TO THE SERVICE FEEL COMMISSION SEGMENT, WE HAVE NOTED THAT AS REGARDS THE SERVICE FEEL COMMISS ION SEGMENT, THE TPO HAS RE-CHARACTERIZED THE SAME AS T RADING ACTIVITIES AS HE WAS OF THE VIEW THAT THE RIGHT COU RSE OF ACTION WILL BE TO TREAT THE SAME AS EQUIVALENT TO T RADING SEGMENT, BECAUSE WHAT THE ASSESSEE HAS DISCLOSED AS SERVICE/ COMMISSION INCOME IS IN FACT TRADING INCOM E. ACCORDINGLY, THE COST OF GOODS SOLD BY THE AES, WHI CH WAS RS.2927,92,05.406, WAS ALSO TO BE INCLUDED IN C OST BASE OF THE SERVICE/COMMISSION SEGMENT AND THEN ALP WAS RECOMPUTED. SO FAR AS THIS ASPECT OF THE MATTER IS 18 ITA NO.761/DEL /2015 CONCERNED, THE ISSUE IS NOW COVERED IN FAVOUR OF TH E ASSESSEE BY HON'BLE JURISDICTIONAL HIGH COURT'S DEC ISION IN THE CASE OF LT & FUNG WHEREIN THEIR LORDSHIPS HAVE, INTER ALIA, OBSERVED AS FOLLOWS : ...........THIS COURT IS OF OPINION THAT TO APPLY THE TNMM, THE ASSESSEE'S NET PROFIT MARGIN REALIZED FROM INTERNATIONAL TRANSACTIONS HAD TO BE CALCULATE D ONLY WITH REFERENCE TO COST INCURRED BY IT, AND NOT BY ANY OTHER ENTITY, EITHER THIRD PARTY VENDORS OR THE AE. TEXTUALLY, AND WITHIN THE BOUNDS OF THE TEXT MUST BE AO/TPO OPERATE, RULE 10B(1)(E) DOES NOT ENABLE CONSIDERATION OR IMPUTATION OF COST INCURRED BY THIRD PARTIES OR UNRELATED ENTERPRISES TO COMPUT E THE ASSESSEE'S NET PROFIT MARGIN FOR APPLICATION OF THE TNMM. RULE 10B(1) (E) RECOGNIZES THAT 'THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO CO STS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE.. (EMPHASIS SUPPLIED). IT THUS CONTEMPLATES A DETERMINATION OF ALP WITH REFERENCE TO THE RELEVANT FACTORS (COST, ASSETS, SA LES ETC.) OF THE ENTERPRISE IN QUESTION, I.E. THE ASSES SEE, AS OPPOSED TO THE AE OR ANY THIRD PARTY. THE TEXTUA L MANDATE, THUS, IS UNAMBIGUOUSLY CLEAR. 40. THE TPO'S REASONING TO ENHANCE THE ASSESSEE'S COST BASE BY CONSIDERING THE COST OF MANUFACTURE AN D EXPORT OF FINISHED GOODS, I.E., READY-MADE GARMENTS BY THE THIRD PARTY VENDORS (WHICH COST IS CERTAINLY NOT THE COST INCURRED BY THE ASSESSEE), IS NOWHERE SUPPORTED BY TILE TNMM UNDER RULE 10B(1)(E) OF TILE RULES. HAVING DETERMINED THAT (TNMM) TO BE THE MOST APPROPRIATE METHOD, THE ONLY RULES AND NORMS PRESCRIBED IN THAT REGARD COULD HAVE BEEN 19 ITA NO.761/DEL /2015 APPLIED TO DETERMINE WHETHER THE EXERCISE INDICATED BY THE ASSESSEE YIELDED AN ALP. 24. THE LD. COUNSEL TOOK OUR ATTENTION TO THE DECIS ION OF CO-ORDINATE BENCH IN THE CASE OF SUMITOMO INDIA PVT. LTD. [I.T .A. NO. 328/DEL/2014] WHEREIN IT WAS HELD BY THE ITAT THAT: '23. WE AGREE WITH THE ASSESSEE'S PROPOSITION THAT THE NATURE OF INDENTING TRANSACTION IS DIFFERENT FROM T HE TRADING TRANSACTIONS. THE TRADING TRANSACTION INVOL VES RISK AND FINANCES, WHEREAS IN THE INDENTING TRANSACTION THE ASSESSEE HAS NOT TO INCUR ANY SUCH FINANCIAL OBLIGA TION OR CARRY ANY SIGNIFICANT RISK.' 25 THE LD COUNSEL THEREAFTER SUBMITTED THAT IT ALSO NEEDS TO BE NOTED THAT THE QUESTION OF ADDING THE FOB VALUE ON WHICH THE ASSESSEE HAS EARNED SERVICE FEE/COMMISSION AS COST OF GOODS SOLD (COGS) IN THE COST BASE DOES NOT ARISE BECAUSE THE ASSESSEE DOES NOT TRADE IN ANY GOODS WHILE PERFORMING THE SERVICE OF FACILITATION OF TRADE AND SUCH TRANSACTION HAS NEVER BEEN ROUTED THROUGH THE BOOKS OF THE ASSESSEE. IT DOES NOT TAKE ANY TITLE OF THE GOODS I N FORM OR IN SUBSTANCE WHILE PERFORMING COORDINATION AND SALES SUPPORT FUN CTIONS FOR ITS AES. IT DOES NOT ASSUME TITLE OF THE GOODS AND THE RISKS ASSOCIATED WITH SUCH ASSUMPTION OF TITLE ARE NOT BORNE BY IT I N THE SERVICE FEE/COMMISSION BUSINESS. THE ASSETS THAT ARE EMPLOY ED IN ASSUMPTION 20 ITA NO.761/DEL /2015 OF THE TITLE TO THE GOODS ARE DIFFERENT FROM SERVIC E TRANSACTIONS CARRIED OUT WITHOUT ASSUMPTION OF TITLE. THE ASSESSEE EARNS COMMISSION FROM ITS AES ON EXPORT TO INDIA OR, IN FEW CASES, IMPORT FROM INDIA. THE FOB VALUE IS THE SUM OF SALES AND PURCHASES IN THE BOOKS OF AES. ACCORDING TO HIM, IT DOES NOT MAKE ANY SENSE TO INC LUDE THIS VALUE IN THE ASSESSEE'S SERVICE/COMMISSION SEGMENT. COST INC URRED BY THE ASSESSEE IN PROVIDING SUCH SALES SUPPORT AND COORDI NATION SERVICES ARE ALREADY BUILT IN THE PROFIT AND LOSS ACCOUNT AND DO ES NOT WARRANT ANY ADDITION TO THE COST BASE OF THE ASSESSEE. 26, THE LD COUNSEL SUBMITS THAT THE AO HAS PROPOSED TO APPLY A SET OF TRADING AND MANUFACTURING COMPANIES TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSE SSEE. HEREIN, THE LD COUNSEL, SUBMITTED THAT THE LAW PROVIDES THE USE OF COMPARABLE DATA OF UNCONTROLLED TRANSACTIONS WITH REFERENCE TO THE FUN CTIONS PERFORMED, ASSETS EMPLOYED AND THE RISKS ASSUMED BY THE TESTED PARTY AND THE COMPARABLE COMPANIES. BASED ON THE FUNCTIONAL ANALY SIS IN THE TP REPORT, IT IS EVIDENT THAT THE ASSESSEE IS ENGAGED IN PROVISION OF COMMISSION AND SERVICES TO ITS AES IN RELATION TO I TS INDENT SEGMENT. THUS, ACCORDING TO LD COUNSEL, THE APPLICATION OF A SET OF STEEL TRADING 21 ITA NO.761/DEL /2015 COMPANIES THAT ASSUME ALL ENTREPRENEURIAL RISKS IS UNJUSTIFIED. OVER AND ABOVE THIS, THE LD COUNSEL SUBMITTED THAT SELEC TING MANUFACTURING COMPANIES AS PART OF THE COMPARABLE SET IS A GROSS MISAPPLICATION OF THE TRANSFER PRICING PROVISIONS IN INDIA. 27. THE LD COUNSEL SUBMITTED THAT THE TPO HAS ERRED IN STATING THAT THE ASSESSEE AS PART OF THIS NETWORK AND THE SYNERG Y CREATED BY THE SAME SHOULD BE DERIVING INCOME COMMENSURATE TO THE INTANGIBLES INVOLVED. THE NETWORK OF WHICH ASSESSEE IS A PART C ONSISTS OF WHOLESALER, MANUFACTURER, CHEMICAL DEALERS, PAPER T RADERS ETC. IT IS DOING PROCUREMENT AND AS WELL AS SOURCING FOR MANUF ACTURERS AND ALSO OF WHOLESALER. ON THIS BASIS, THE ASSESSEE CAN BE C OMPARED WITH ALL THE COMPARABLES CONFRONTED TO HIM, WHEREIN THE RECEIPTS ARE FROM THE TRADING OF COMMODITIES IRRESPECTIVE OF THE TYPE OF THE COMMODITY OR THE WAY IN WHICH IT IS PRODUCED. THUS, OTHER THAN R ELATED PARTY OBJECTIONS OF THE ASSESSEE TO THE COMPARABLE COMPAN IES CONFRONTED BY THE SHOW-CAUSE NOTICE IS NOT ACCEPTABLE. 28. ACCORDING TO THE LD COUNSEL, THE TPO ALLEGED TH E FOLLOWING WHILE STATING THAT THE ASSESSEE OWNS SUPPLY CHAIN M ANAGEMENT INTANGIBLES AND STATED THAT THE ASSESSEE HAS MENTIO NED THESE FUNCTIONS 22 ITA NO.761/DEL /2015 IN ITS TP REPORT FOR WHICH THE ASSESSEE MET THE ALL EGATION AS GIVEN BELOW : ALLEGATION OF TPO REMARK OF THE ASSESSEE QUALIFYING THE CONTRACT MANUFACTURER THE ASSESSEE IS NOT INVOLVED IN QUALIFYING THE CONTRACT MANUFACTURER. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT IDENTIFYING APPROPRIATE SOURCE OF GOODS THE ASSESSEE IS NOT INVOLVED IN IDENTIFYING APPROPRIATE SOURCE OF GOODS. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT. WAREHOUSING OF GOODS THE ASSESSEE IS NOT INVOLVED I N WAREHOUSING OF GOODS WITH RESPECT TO ITS COMMISSION TRANSACTIONS. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT. CONTROL OVER CONTRACTED MANUFACTURER AND QUALITY CONTROL OVER MANUFACTURING PROCESS THE ASSESSEE IS NOT INVOLVED IN CONTROL OVER CONTRACTED MANUFACTURER AND QUALITY CONTROL OVER MANUFACTURING PROCESS. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT. SCHEDULING OF THE PRODUCTS AND ORDER TRACING THE ASSESSEE IS INVOLVED IN SCHEDULING OF THE PRODUCTS AND ORDER TRACING. PACKAGING AND LABELING THE ASSESSEE IS NOT INVOLVED IN PACKAGING AND LABELING. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT. QUALITY CONTROL THE ASSESSEE IS NOT INVOLVED IN 23 ITA NO.761/DEL /2015 QUALITY CONTROL. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT. CONSIGNMENT OF THE GOODS THE ASSESSEE IS NOT INVOLV ED IN CONSIGNMENT OF THE GOODS. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT TRANSPORTATION OF THE GOODS TO THE PORT OF DEPARTURE THE ASSESSEE IS NOT INVOLVED IN TRANSPORTATION OF THE GOODS TO THE PORT OF DEPARTURE. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT. RANDOM QUALITY CHECK PRIOR TO SHIPPING THE ASSESSEE IS NOT INVOLVED IN RANDOM QUALITY CHECK PRIOR TO SHIPPING. FURTHER, THIS FUNCTION IS ALSO NOT MENTIONED IN THE TP REPORT. 29. IT WAS POINTED OUT BY THE LD COUNSEL THAT IN AD DITION, THE TPO ALLEGED THAT THE ASSESSEE IS BEARING SINGLE CUSTOME R RISK WHEREIN THE ASSESSEE COULD NOT WORK WITH ANY OTHER UNRELATED PA RTY AS PER AGREEMENT WITH THE AE. THIS ALLEGATION ACCORDING TO LD COUNSEL IS BASED ON ASSUMPTION AND CONTRARY TO THE EVIDENCES F URNISHED BY THE ASSESSEE THAT IT IS DEALING WITH MANY CUSTOMERS AND DOES NOT UNDERTAKE ANY SINGLE CUSTOMER RISK. THE LD COUNSEL WONDERED AS TO HOW THE TPO CAME TO SUCH A CONCLUSION AND STATED TH AT IF HE HAS ARRIVED AT SUCH A CONCLUSION BASED ON ANY AGREEMENT THEN THE TPO DID 24 ITA NO.761/DEL /2015 NOT SHARE THE SAID AGREEMENT WHICH HE HAS RELIED UP ON WHILE ALLEGING THAT THE ASSESSEE BEARS SINGLE CUSTOMER RISK. 30. FURTHER, THE LD COUNSEL SUBMITTED THAT THE TPO ALSO ALLEGED THAT THE ASSESSEE IS BEARING SOURCING RISK, RISK ASSOCIA TED WITH DEVELOPMENT AND USE OF INTANGIBLES, RISK ASSOCIATED WITH QUALITY SERVICE AND BEARS CAPACITY UTILIZATION RISK WHICH A CCORDING TO HIM, ARE PURELY BASED ON ASSUMPTIONS AND WITHOUT ANY MATERIA L OR EVIDENCE ON RECORD. 31. IT WAS SUBMITTED BY THE LD COUNSEL THAT THE TPO HAS ALSO ALLEGED THAT THE ASSESSEE OWN PROPRIETARY INFORMATION WITH RESPECT TO COMMISSION BUSINESS WHICH IS NOTHING BUT AN INTANGI BLE ASSET. SUCH ALLEGATION IS ALSO BASED ON ASSUMPTION. REMARK OF T HE ASSESSEE WITH RESPECT TO EACH POINT IS PROVIDED BELOW IN TABLE : PROPRIETARY INFORMATION OWNED BY ASSESSEE AS ALLEGED BY TPO REMARK OF THE ASSESSEE KNOWLEDGE OF SUB- CONTRACTOR KNOWLEDGE OF SUB- CONTRACTORS IS GENERAL INFORMATION WHICH IS PUBLICLY AVAILABLE. KNOWLEDGE OF PRODUCTS & DESIGN THERE ARE NO DESIGNS WITH RESPECT TO STEEL AND CHEMICAL INDUSTRY IN WHICH THE ASSESSEE IS PRIMARILY DEALING WITH RESPECT TO COMMISSION BUSINESS. 25 ITA NO.761/DEL /2015 KNOWLEDGE OF ACQUISITIONS THE ASSESSEE DOES NOT HA VE ANY KNOWLEDGE RELATING TO ACQUISITIONS. IT IS MERELY PROVIDING SUPPORT SERVICES AND ACQUISITIONS HAVE NO RELEVANCE TO ITS BUSINESS. KNOWLEDGE OF DISTRIBUTION AND SUPPLY THE ASSESSEE IS ENGAGED IN PROVIDING SUPPORT SERVICES AND THEREFORE KNOWLEDGE OF DISTRIBUTION AND SUPPLY IS IRRELEVANT. KNOWLEDGE OF QUALITY CONTROL QUALITY CONTROL FUNCTION IS UNDERTAKEN BY A MANUFACTURER AND NOT BY A SERVICE PROVIDER, PARTICULARLY SUPPORT SERVICES AS RENDERED BY THE ASSESSEE. KNOWLEDGE OF STORAGE THE ASSESSEE IS ENGAGED IN PROVIDING SUPPORT SERVICES AND THEREFORE KNOWLEDGE OF STORAGE IS IRRELEVANT. KNOWLEDGE OF LOGISTICS INVOLVED IN EXPORTS OF GOODS THE ASSESSEE IS ENGAGED IN PROVIDING SUPPORT SERVICES AND THEREFORE KNOWLEDGE OF LOGISTICS IS IRRELEVANT. 32. THE LD COUNSEL SUBMITTED THAT THE TPO HAS ALLEG ED THAT THE ASSESSEE HAS GENERATED LOCATION SAVINGS DUE TO HUGE DIFFERENCE IN COST OF PROCUREMENT BETWEEN HIGH COST ECONOMY AND LOW CO ST ECONOMY LIKE INDIA. 26 ITA NO.761/DEL /2015 33. THE AFORE SAID VIEW OF THE TPO ACCORDING TO LD COUNSEL SUGGEST THAT HE HAS FAILED TO COMPREHEND THE BUSINE SS MODEL OF THE ASSESSEE AND WRONGLY APPLIED THE CONCEPT OF THE LOC ATION SAVINGS IN THE FACTS OF THE CASE PRESENT BEFORE HIM. THE LD CO UNSEL REITERATED THAT THE ASSESSEE HAS PERFORMED COORDINATION AND SALES S UPPORT ACTIVITIES FOR ITS AES. THE ASSESSEE EARNS COMMISSION OR SERVI CE FEE FOR COORDINATION AND SALES SUPPORT ACTIVITIES. IN FACT THE VERY BASIS ON WHICH THE TPO HAS CONCLUDED THAT LOCATION SAVINGS S HOULD BE ATTRIBUTED TO THE ASSESSEE IS WRONG. IT IS THE AES WHICH PROCURE GOODS FROM SUPPLIERS IN INDIA OR SELLS GOODS TO BUYERS IN INDIA. THE TERMS AND CONDITIONS OF SUCH SALES/PURCHASES ARE DETERMIN ED BETWEEN THE AES OF THE ASSESSEE AND THE INDIAN SUPPLIERS/BUYERS . ACCORDING TO LD COUNSEL, IT IS PURELY A BUSINESS DECISION BETWEEN I NDIAN BUYERS/SELLER AND THE AES AND THEY DEAL AT ARM'S LENGTH. FURTHER, IT WAS EMPHASISED BY THE LD COUNSEL THAT THE ASSESSEE DOES NOT IDENTI FY THE CONTRACT MANUFACTURER AS ALLEGED BY THE TPO AND IT IS A MATT ER OF FACT THAT INDIAN SUPPLIERS, FROM WHOM THE AES BUYS VARIOUS CO MMODITIES ARE NOT CAPTIVE MANUFACTURERS OF THE AES. IT WAS POINTE D OUT BY THE LD 27 ITA NO.761/DEL /2015 COUNSEL THAT THE ASSESSEE IS NOT A CAPTIVE SERVICE PROVIDER AS IT IS NOT BOUND TO PROVIDE SERVICES TO ITS AES ONLY. 34. STRONG RELIANCE WAS PLACED BY THE LD COUNSEL O N THE HONBLE DELHI HIGH COURT RULING OF LI & FUNG INDIA PVT. LTD . (ITA 306/2012) WHEREIN THE HONBLE HIGH COURT HAS REJECTED THE APP LICATION OF PRINCIPLES OF LOCATION SAVINGS AND HUMAN AND SUPPLY INTANGIBLES WITHOUT ANY BASIS. THE HONBLE HIGH COURT HAS ALSO HELD THAT THE COST OF GOODS OF THE ASSOCIATED ENTERPRISES CANNOT FORM PART OF THE COST BASE OF THE INDIAN TESTED PARTY'S PLI. 35. THE LD COUNSEL BROUGHT TO OUR NOTICE THAT THE TPO DURING THE ASSESSMENT PROCEEDINGS FOR AY 2007-08 HAD ACCEPTED THE CHARACTERIZATION OF THE ASSESSEE AS A SERVICE PROVI DER. FURTHER, THE CIT(A) HAS ALSO UPHELD THE COMPARISON OF THE ASSESS EE WITH THAT OF SERVICE PROVIDERS, SO THERE BEING NO CHANGE IN FACT S, THERE WAS NO NECESSITY FOR THE TPO TO DEPART FROM THE SAID VIEW. IN LIGHT OF THE AFORESAID SUBMISSION, IT WAS PLEADED THAT ADDITION MADE BE HELD AS UNSUSTAINABLE. 36. ON THE OTHER HAND THE LD. DR SUBMITTED THAT TH E ASSESSEE IS AGGRIEVED THAT HIS TRANSFER PRICING APPROACH HAS BE EN REJECTED AND 28 ITA NO.761/DEL /2015 THAT HIS COMMISSION/SERVICE BUSINESS HAS BEEN CHARA CTERIZED AS THAT OF A TRADING BUSINESS AND ALSO THAT FOB VALUE HAS BEEN INCLUDED IN THE COST BASE, AMONGST VARIOUS OTHER GROUNDS. ACCORDING TO LD DR M/S MARUBENI INDIA IS A SERVICE AND TRADING COMPANY AND PROVIDES LIASIONING SUPPORT SERVICES TO ITS PARENT AND AFFIL IATES FOR PURCHASE AND SALE OF GOODS IN INDIA. IT ACTS AS A COMMUNICATION CHANNEL BETWEEN ITS PARENT/AFFILIATES COMPANIES AND THIRD PARTIES IN IN DIA. THE ASSESSEE HAS USED OP/VAE AS THE PLI FOR APPLICATION OF THE TNMM METHOD ON SUPPORT SERVICES. ACCORDING TO LD DR IN ORDER TO AP PROACH THE MAIN CONTENTIOUS ISSUES AS STATED ABOVE, IT IS IMPORTANT TO UNDERSTAND THE RELEVANT PROVISIONS OF THE TP RULES AS PRESCRIBED B Y THE STATUTE UNDER RULE 10B AND TOOK OUR ATTENTION TO RULE 10B. 37. IT WAS SUBMITTED BY THE LD. DR THAT FUNCTIONS P ERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED BY RESPECTIVE PARTIES TO THE TRANSACTIONS ARE INTRINSICALLY LINKED AND INTERTWINED WITH THE M ETHOD TO BE ADOPTED FOR THE PURPOSE OF COMPUTING THE PLI OF AN ASSESSEE . FURTHER IT WAS ALSO SUBMITTED BY THE LD DR THAT THE APPROACH OF TH E TAX PAYER WHILE PREPARING THE TP STUDY SHOULD FOLLOW THE MANDATE OF SECTION 92C READ WITH RULE 10B OF THE ACT AND INCOME-TAX RULES , 1962 29 ITA NO.761/DEL /2015 RESPECTIVELY. ACCORDING TO LD DR, THE PRESCRIBED ME THODOLOGY TO BE ADOPTED WHILE CONDUCTING A TP STUDY SHOULD CONTAIN ALL FACTORS ENUMERATED IN RULE 10B(2), NAMELY SUB RULES (A) TO (D). SO, ACCORDING TO THE LD. DR, THE ASSESSEE IN THE INSTANT CASE FAI LED TO FOLLOW THE RIGHT APPROACH AS PRESCRIBED IN RULE 10B(2). FOR THE PURP OSE OF ADOPTING THE METHOD AS MANDATED IN SUB RULE (1), SUB RULE (2 ) HAS BEEN LAID DOWN FOR THE PURPOSE OF DRAWING UP A COMPREHENSIVE TRANSFER PRICING STUDY. 38. ACCORDING TO THE LD DR IN THE INSTANT CASE IT I S WORTH NOTICEABLE THAT THE TAXPAYER HAS FAILED TO FOLLOW THE PRESCRIB ED APPROACH IN THE TRUE SENSE, THEREBY HOODWINKING THE TAX AUTHORITIES FOR THE PURPOSE OF ADOPTING THE METHOD TO BE ADOPTED AS PER SUB RULE ( L)(E). ACCORDING TO THE LD DR, TNMM METHOD PRESCRIBES THREE BASES NAMEL Y, COST, ASSETS AND SALES AND ALSO ANY OTHER RELEVANT BASE. THIS FO RMS THE DENOMINATOR OF THE PLI WHICH ULTIMATELY CALCULATES THE NET PROFIT MARGIN. APPLYING THE DOCTRINE OF EJUSDEM GENEREIS, WHERE PARTICULAR WORDS ARE FOLLOWED BY GENERAL WORDS, THE GENERAL WO RDS HAVE TO CONSTRUED AS LIMITED TO THINGS OF THE SAME KIND AS THOSE SPECIFIED AND 30 ITA NO.761/DEL /2015 HENCE THE CONSTRUCTION OF THE RULES WOULD INCLUDE I N THE CONTEXT OF 'ANY OTHER RELEVANT BASE', THE FOB VALUE IN THE INS TANT CASE. 39. IN THE INSTANT CASE, THE ACCORDING TO THE LD DR , THE TPO RIGHTLY REJECTED THE BERRY RATIO (PLI) ADOPTED BY THE ASSES SEE AND THE TPO AFTER REJECTING THE BERRY RATIO OF THE ASSESSEE, CH OOSE TO FOLLOW OP/TC AS THE PLI FOR COMPUTING NET PROFIT MARGIN IN THE S UPPORT SERVICES SEGMENT. IN ORDER TO FIND THE APPROPRIATE PLI, IT I S CRITICALLY IMPORTANT TO HAVE RELEVANT DATA BEFORE THE TAX AUTHORITIES SU CH AS THOSE ENUMERATED IN RULE 10B{2}. THE ASSESSEE IN THE INST ANT CASE HAS NOT DEMONSTRATED BEFORE THE TAX AUTHORITIES, THE FOLLOW ING :- (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INC LUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMEN T AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. 40. ACCORDING TO LD DR, THE MANDATE IS CLEAR, THAT EVERY TP REPORT SHOULD CONTAIN INFORMATION PERTAINING TO THE ABOVE FOR THE PURPOSE OF THE APPLYING THE PLI, AND APPLYING THE METHOD AND C OMPUTING THE ALP FOR THE TRANSACTION. THE LD DR CONTENTED THAT T HE FINDINGS OF THE TPO CANNOT BE IGNORED ON PAGE 158 PARAS (A) TO {G} WHICH 31 ITA NO.761/DEL /2015 CATEGORICALLY RECORDS THAT A SUBSTANTIAL PORTION OF THE PROFITS WHICH THE ASSESSEE WOULD HAVE EARNED HAD THE ARRANGEMENT BETW EEN THE TAXPAYER AND ITS ASSOCIATED ENTERPRISES BEEN AT ARM 'S LENGTH. AT PAGE 167 OF THE APPEAL PAPER BOOK WHERE THE TPO RECORDS THAT THE TP REPORT DOES NOT DEMONSTRATE WHETHER AE HAS EITHER T ECHNICAL CAPACITY OR MANPOWER TO ASSIST THE ASSESSEE. IN THE ABSENCE OF ANY CREDIBLE EVIDENCE, SUCH GENERAL REMARKS TO SOMEHOW PROVE THE INVOLVEMENT OF THE AE CANNOT BE ACCEPTED. 41. THE LD DR SUBMITTED THAT THE TPO AFTER CAREFULL Y EXAMINING THE FACTS AND LAW IN THE CASE NOTES THAT SEVERAL UNIQUE INTANGIBLES HAVE BEEN DEVELOPED BY THE ASSESSEE AND USED BY THE AE F OR ITS BUSINESS IN INDIA, THEREBY ENHANCING THE PROFITABILITY OF THE A E WITHOUT ASSUMING ANY RESPONSIBILITY. THE LD DR SUBMITTED THAT THE AS SESSEE BEARS A SUBSTANTIAL AMOUNT OF RISK AS THE SUPPLY CHAIN MANA GEMENT OF THE ASSESSEE IS USED BY ITS AE AND ITS AFFILIATES IN JA PAN AND ASIA RESPECTIVELY. IN THE RISK ANALYSIS PART OF THE TP R EPORT, THE ASSESSEE HAS THE FOLLOWING RISK IN CONNECTION WITH SUPPORT SERVI CES, NAMELY, MARKET RISK, PRODUCT/SERVICE LIABILITY RISK, CREDIT RISK, FOREIGN 32 ITA NO.761/DEL /2015 EXCHANGE RISK, MANPOWER RISK, LEGAL AND STATUTORY R ISK AND VOLUME RISK. 42. THE LD DR SUBMITTED THAT IT IS WORTHWHILE TO RE AD THE PROVISIONS OF RULE 10B(2)(SUPRA) IN GENERAL AND MORE PARTICULA RLY RULE 10B(2)(D) WITH THE STUDY CONDUCTED BY THE ASSESSEE AND FARTHER CONTENDED THAT IT WILL BE AMPLY CLEAR THAT THE ASSE SSEE HAS FAILED TO CONSIDER THE VARIOUS FACTORS ENUMERATED THERE UNDER IN THE RULES FOR THE PURPOSE OF CONDUCTING THE TP STUDY. THEREFORE T HE TPO WAS RIGHT IN REJECTING THE TP APPROACH OF THE ASSESSEE. 43. WITH REGARD TO ADDING OF FOB VALUE TO COST BASE OF THE PLI, AND THE ASSESSEE RELIANCE UPON LI & FUNG JUDGMENT OF TH E DELHI HIGH COURT THE LD DR POINTED TO US THAT THE SAID ORDER H AS BEEN CHALLENGED BY THE DEPARTMENT IN THE HON'BLE APEX COURT AND THE SLP HAS BEEN ADMITTED AND LEAVE GRANTED AND TOOK OUR ATTENTION T O THE COPY OF THE ORDER OF HONBLE SUPREME COURT ADMITTING THE SLP OF THE DEPARTMENT. HOWEVER WE NOTE THERE IS NO STAY GRANTED BY HONBLE SUPREME COURT WHILE ADMITTING THE SLP. 44. ACCORDING TO LD. DR, IN LI AND FUNG INDIA, THE ASSESSEE WAS A CAPTIVE OFFSHORE SOURCING PROVIDER AND WAS MERELY A SUPPORT SERVICE 33 ITA NO.761/DEL /2015 PROVIDER, WHEREAS IN THE INSTANT CASE, THE ASSESSEE DEALS IN BOTH TRADING AS WELL AS SUPPORT SERVICE (ASSESSEE 'S ADM ISSION IN THE TP STUDY). SO AT THE OUTSET THE SEGMENTS IN WHICH THE ASSESSEE DEALS IN DIFFER WITH THE CASE OF LI AND FUNG. THE DIFFERENCE IS ALSO EVIDENT IN THE SPECIFIC CATEGORIES OF PRODUCTS TRANSFERRED AND SERVICES RENDERED, HENCE THE ASSETS DEPLOYED AND RISK ASSUMED CAN NEVE R BE THE SAME AS CAN BE SEEN FROM THE TABLE REPRODUCED IN LI AND FUN G'S CASE. THIS AGAIN IS SUPPORTED BY RULE 10B(2)(1) & (2). A ND LASTLY, IT IS THE LEVEL OF RISK IN THE STEEL INDUSTRY THAT CAN NEVER BE COMPARED TO ONE DEALING WITH CONSUMER GOODS (LI AND FUNG). THEREFOR E RISK BEING INTRINSICALLY CONNECTED TO THE FUNCTION PERFORMED A ND THE ASSETS DEPLOYED, THE LEVEL OF RISK DEMONSTRATED BY THE TAX PAYER IN THE INSTANT CASE IS INADEQUATE AND HENCE IT CAN ONLY BE PRESUME D THAT THE ASSESSEE WAS INVOLVED IN THE KEY FUNCTIONS OF THE BUSINESS, UNLESS CATEGORICALLY REBUTTED WITH SUFFICIENT EVIDENCE. THE DECISION IN THE CASE OF LI AND FUNG PROCEEDED ON A DIFFERENT FOOTING AND CANNOT BE OF ANY HELP TO THE ASSESSEE. SO THE LD DR DOES NOT WANT US TO INTE RFERE IN THE ORDER IMPUGNED BEFORE US. 34 ITA NO.761/DEL /2015 45. WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE TH ROUGH THE RECORDS. WE FIND THAT THE ASSESSEE COMPANY IS A PA RT OF ONE OF THE LEADING SOGO SHOSHA ESTABLISHMENT IN JAPAN. SOG O SHOSHA, A JAPANESE EXPRESSION, MEANS GENERAL TRADING. SO T HEY ARE GENERALLY DESCRIBED AS GENERAL TRADING COMPANIES. THE ASSE SSEE IS A WHOLLY OWNED SUBSIDIARY OF MO. THESE SOGO SHOSHA COMPAN IES ARE UNIQUE IN THE WORLD OF COMMERCE AND PLAY AN IMPORTA NT ROLE IN LINKING BUYERS AND SELLERS FOR PRODUCTS RANGING FRO M BULK COMMODITIES, SUCH AS, GRAIN AND OIL TO MORE SPECIAL ISED PRODUCTS LIKE INDUSTRIAL EQUIPMENTS, RANGING FROM NOODLES TO MISS ILES. THE PECULIARITIES OF SOGO SHOSHA COMPANIES HAVE BEEN GIVEN ELABORATELY BY THE COORDINATE BENCH OF THIS TRIBUNA L IN MITSUBISHI CORPORATION INDIA PVT. LTD. VS. DIT (ITA NO.5042/DE L/2011 ORDER DATED 21.10.2014) WERE ALSO LIKE THE ASSESSEE (MARU BENI ITOCHU STEEL INDIA PVT. LTD.) ALSO BELONGED TO THE SOGO SHOSHA ESTABLISHMENT IN JAPAN. IN THE SAID CASE ALSO, WE FIND THAT THE SAM E ISSUES, WHICH ARE SEEN IN THIS MATTER, HAVE BEEN DISCUSSED IN DETAIL, EVALUATED AND ADJUDICATED. WE FIND THAT THE TPO HAD OBSERVED TH AT THE PLI ARRIVED BY THE ASSESSEE TAKING THE BERRY RATIO HAS NOT BE EN FOUND ACCEPTABLE 35 ITA NO.761/DEL /2015 FOR THE TPO BECAUSE, AS PER HIM, THE PROVISIONS OF RULE 10B(1)(E)(I) PRESCRIBE THAT NET PROFIT MARGINS SHOULD BE COMPUTE D IN RELATION TO COSTS INCURRED, SALES EFFECTED OR ASSETS EMPLOYED O R TO BE EMPLOYED AND AS PER HIM, THE RULES DO NOT PRESCRIBE FOR VALU E ADDED COST OR VALUE ADDED EXPENDITURE TO BE CONSIDERED AS BASE FO R COMPUTING NET PROFIT MARGINS. ON THE SAID REASONING, THE CLAIM O F THE ASSESSEE FOR USE OF BERRY RATIO WAS NOT ACCEPTED BY THE TPO W HICH, ACCORDING TO HIM, BEING CONTRARY TO RULE 10B(1)(E)(I). THE S AME ISSUE, WE FIND, WAS BEFORE THE COORDINATE BENCH IN MITSUBISHI CORPO RATION INDIA PVT. LTD. (SUPRA) WHEREIN THE TRIBUNAL DEALT WITH THE SA ME AND NEGATED THE CONTENTION OF TPO AND UPHELD THE ASSESSEES ACTION OF USE OF BERRY- RATIO, AND WE NOTE THAT FACTS & CIRCUMSTANCES OF TH AT CASE WERE IDENTICAL & SIMILAR. 46. BEFORE GOING TO THE BERRY-RATIO, THE BENCH IN M ITSUBISHI CORPORATION (SUPRA) WENT AHEAD TO ADDRESS THE TPOS VIEW THAT COMPENSATION MODEL OF ASSESSEE DOES NOT INCLUDE THE PROFIT ATTRIBUTABLE TO THE ASSESSEE ON ACCOUNT OF LOCATION SAVING, WHICH IN THE 36 ITA NO.761/DEL /2015 INSTANT CASE ALSO THE TPO WAS OF THE SAME VIEW, WHE REIN THE BENCH OBSERVED AS UNDER :- TPOS STAND ON LOCATIONAL SAVINGS NOT BEING ACCOUNTED FOR 70. WE HAVE ALSO NOTED THAT THE TPO HAS ALSO TAKEN UP A POINT REGARDING LOCATIONAL SAVINGS WHICH, ACCORDING TO HIM, HAVE ACCRUED TO THE AES BUT THE COMPENSATION MODEL, WHICH PROVIDES FOR A MARK UP ON COSTS, DOES NOT TAKE INTO ACCOUNT THE BENEFITS FROM THE LOCATIONAL SAVINGS. IT IS ELEMENTARY THAT LOCATIONAL SAVINGS CAN ONLY R ELATE TO NET SAVINGS IN COSTS THAT MAY BE DERIVED BY AN MNE GROUP THAT RELOCATES SOME OF ITS ACTIVITIES TO A PLACE WH ERE LABOUR OR REAL ESTATE EXPENDITURES, TO CITE ONLY A COUPLE OF EXAMPLES, ARE LOWER THAN IN THE LOCATION WHERE THE ACTIVITIES WERE INITIALLY PERFORMED. IT FOLLOWS THA T THE SAVINGS HAVE TO BE WITH RESPECT TO THE ACTIVITIES A ND OPERATIONS PERFORMED, WHICH MNE WAS EARLIER PERFORM ING AT ANOTHER LOCATION, AND NOT WITH RESPECT TO THE CO STS OF PURCHASES. THEREFORE, IF AN ASSESSEE IS ABLE TO BUY A PRODUCT OR SERVICE AT A LOWER PRICE VIS--VIS PRICE IN ANOTHER JURISDICTION, INCLUDING THE DOMICILE I.T.A. NO.: 5042/DEL/11 ASSESSMENT YEARS 2007-08 PAGE 39 OF 95 JURISDICTION, SUCH PURCHASES OF GOODS OR SERVICES P ER SE DONOT GIVE RISE TO A LOCATIONAL SAVING FOR THE PURP OSE OF ALP DETERMINATION. IN THE PRESENT CASE, THE PRICE ADVANTAGE TO THE ASSESSEE, ON ACCOUNT OF SOURCING H IS PURCHASES FROM INDIA, THUS MAY NOT AMOUNT TO ANY LOCATIONAL SAVINGS AT ALL, BUT THEN, AS WE COULD MA KE OUT FROM A PERUSAL OF MATERIAL ON RECORD, THAT PRECISEL Y IS THE CASE OF THE TPO. NO DOUBT UNITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES DOES INCLUDE LOCATIONAL SAVINGS IN ITS COMPARABILITY ANALYSIS AND DEFINES IT AS NET COST SAVINGS THAT AN MNE REALIZES AS A RESULT OF RELOCATION OF 37 ITA NO.761/DEL /2015 OPERATIONS FROM A HIGH COST JURISDICTION TO A LOW C OST JURISDICTION BUT THEN IT IS NOT EVEN TPOS CASE THAT ANY BUSINESS OPERATIONS HAVE BEEN RELOCATED FROM ANOTHE R LOCATION TO THIS LOCATION. THERE IS NO SPECIFIC IDE NTIFICATION OF LOCATIONAL SAVINGS OR EVEN EFFORTS TO COMPUTE TH E SAME. IN ANY EVENT, LOCATIONAL SAVINGS IN PROCUREMENT OF GOODS, EVEN IF ANY, WILL ARISE TO THE AES ACTUALLY BUYING THE GOODS AND NOT THE ASSESSEE ASSISTING SUCH BUYING BY WAY OF ACTING AS AN INTERMEDIARY. IN A RECENT OECD REPO RT, RELEASED AS PART OF A SERIES OF DELIVERABLES PURSUA NT TO THE ACTION PLAN ON BASE EROSION AND PROFIT SHIFTING (BE PS) PROJECT, TITLED GUIDANCE ON TRANSFER PRICING ASPECTS OF INTANGIBLES, WHILE IT IS ACCEPTED THAT THE PRINCIPLES OF LOCATIONAL SAVINGS WILL NOT ONLY APPLY TO BUSINESS RESTRUCTURING BUT ALSO GENERALLY TO ALL SITUATIONS WHERE LOCATION SAVINGS ARE PRESENT, IT IS ALSO STATED THA T IN DETERMINING HOW LOCATION SAVINGS ARE TO BE SHARED BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, IT IS NECESSARY TO CONSIDER (I) WHETHER LOCATION SAVINGS EXIST; (II) THE AMOUNT OF ANY LOCATION SAVINGS; (III) THE EXTENT TO WHICH LOCATION SAVINGS ARE EITHER RETAINED BY A MEM BER OR MEMBERS OF THE MNE GROUP OR ARE PASSED ON TO INDEPENDENT CUSTOMERS OR SUPPLIERS; AND (IV) WHERE LOCATION SAVINGS ARE NOT FULLY PASSED ON TO INDEPEN DENT CUSTOMERS OR SUPPLIERS, THE MANNER IN WHICH INDEPEN DENT ENTERPRISES OPERATING UNDER SIMILAR CIRCUMSTANCES W OULD ALLOCATE ANY RETAINED NET LOCATION SAVINGS. WE ARE IN CONSIDERED AGREEMENT WITH THIS APPROACH BUT THEN NO SUCH EXERCISE, AS SUGGESTED IN THE ABOVE FOUR STEP PROCE SS, HAS BEEN CARRIED OUT IN THE PRESENT CASE, NOR IS THERE ANY CONCRETE FINDING EVEN ABOUT SOMETHING AS FUNDAMENTA L AS EXISTENCE OF LOCATIONAL SAVINGS. THE TPO HAS RAISED SOME MURMURS OF LOCATIONAL SAVINGS BEING PRESENT IN THIS CASE BUT SUCH VAGUE GENERALITIES ARE DEVOID OF LEGALLY SUSTAINABLE FOUNDATION. THE ALLOCATION OF I.T.A. NO .: 5042/DEL/11 ASSESSMENT YEARS 2007-08 PAGE 40 OF 95 LOCATION SAVINGS COMES INTO PLAY ONLY WHEN THESE SA VINGS 38 ITA NO.761/DEL /2015 ARE NOT DIRECTLY PASSED ON TO THE INDEPENDENT CUSTO MERS AND THUS ADD TO THE PROFITS OF THE GROUP AS A WHOLE . HOWEVER, IN A SITUATION IN WHICH THE GROUP IS ONLY A FACILITATOR, AS SOGO SHOSHA BUSINESS MODEL APPARENT LY ENVISAGES, THERE MAY NOT BE ANY LOCATIONAL SAVINGS TO THE GROUP. THESE LOCATIONAL SAVINGS MAY AT BEST BE DERI VED BY THE INDEPENDENT CUSTOMER. THE QUESTION OF ALLOCATIN G THE LOCATIONAL SAVINGS BETWEEN THE AES WOULD HAVE ARISE N ONLY WHEN THERE WERE ANY SUCH LOCATIONAL SAVINGS BU T GIVEN THE FACTS OF THE PRESENT CASE THAT ASPECT OF THE MATTER IS WHOLLY ACADEMIC IN EFFECT. 47. THE FACTS & CIRCUMSTANCE BEING SIMILAR, WE CONC UR WITH THE AFORESAID VIEW OF THE CO-ORDINATE BENCH AND SO THE ADJUSTMENT FOR USE OF LOCATIONAL SAVINGS WAS UNWARRANTED. 48. THEREAFTER, THE COORDINATE BENCH CONSIDERED THE OTHER ISSUE THAT HAS BEEN RAISED BEFORE US THAT IS IN RESPECT TO TH E TPOS CONTENTION THAT THE ASSESSEE IS THE OWNER OF THE SUPPLY CHAIN INTANGIBLES AND HUMAN ASSET INTANGIBLES HAS ALSO CROPPED IN MITSUBI SHI CORPORATION INDIA PVT. LTD. (SUPRA) WHEREIN THE COORDINATE BENC H HELD AS FOLLOWS:- HUMAN ASSET INTANGIBLES AND SUPPLY CHAIN INTANGIBL ES CORRECTNESS OF TPOS STAND 71. COMING TO TPOS OBSERVATIONS THAT THE COMPENSAT ION MODEL ADOPTED IN THIS CASE DOES NOT PROVIDE FOR MEE TING THE COSTS OF DEVELOPING SUPPLY CHAIN INTANGIBLES AND HU MAN 39 ITA NO.761/DEL /2015 ASSETS INTANGIBLES, BUT THE INTANGIBLE SO DEVELOPED BY THE ASSESSEE ARE ROUTINE INTANGIBLES DEVELOPED ONLY DUR ING THE COURSE OF WORK CARRIED OUT BY THE ASSESSEE AND ANY OTHER INTANGIBLES, OTHER THAN THE ONES DEVELOPED IN THE C OURSE OF THIS BUSINESS, ARE OWNED BY THE AES AND NOT THE ASS ESSEE COMPANY. IT IS ONLY WHEN INTANGIBLES ARE OWNED BY T HE PERSON, USING THESE INTANGIBLES OR TRANSFERRING THE SE INTANGIBLES PER SE , THAT THE QUESTION FOR COMPENSATING FOR USE OR TRANSFER OF INTANGIBLES ARISE. THERE IS NOTH ING TO CORROBORATE AND SUPPORT THE VAGUE GENERALIZATION TH AT COST PLUS METHOD DOES NOT CAPTURE THE COMPENSATION FOR DEVELOPMENT AND USE OF INTANGIBLES. IT IS NOT EVEN THE CASE OF THE TPO THAT THESE INTANGIBLES WERE ACQUIRED OR DEVELOPED BY THE ASSESSEE BY INCURRING CERTAIN SPEC IFIC COSTS AND SUCH COSTS ARE NOT TAKEN INTO ACCOUNT IN THE COMPENSATION MODEL. IN THE PROCESS OF CARRYING ON A BUSINESS ACTIVITY, AN ASSESSEE MAY DEVELOP CERTAIN INTANGIBLES BUT THAT IS QUITE DIFFERENT FROM THE IN TANGIBLES THAT THE ASSESSEE USES IN THE BUSINESS ACTIVITIES A S AN INPUT OR AT THE STARTING POINT, AND, EVEN IF THERE WERE ANY SUCH INTANGIBLES AT THE STARTING POINT, THESE INTANGIBLE S COULD ONLY HAVE BELONGED TO THE AES OF THE ASSESSEE. THE VALUE OF INTANGIBLES CREATED IN THE PROCESS OF CARRYING OUT THE BUSINESS ACTIVITY CANNOT BE BUILT IN THE COMPENSATI ON FOR CARRYING OUT THE ACTIVITY WHICH LEADS TO CREATION O F THESE INTANGIBLES. IN ANY EVENT, THE ONUS IS ON THE REVEN UE AUTHORITIES TO DEMONSTRATE AND QUANTIFY, ON THE BAS IS OF COGENT MATERIAL AND REASONABLE BASIS, THE VALUE OF INTANGIBLES WHICH HAS NOT BEEN TAKE INTO ACCOUNT IN THE ARMS LENGTH PRICE OF THE SERVICES SO RENDERED. IT IS ALSO IMPORTANT TO NOTE THAT NOT ONLY THAT THERE SHOULD B E INTANGIBLES IN USE BUT THESE INTANGIBLES SHOULD BE UNIQUE INTANGIBLES WHICH MAY NOT BE POSSESSED BY THE COMPA RABLE ENTITIES. THERE IS NO UNIQUE INTANGIBLE POINTED OUT IN THIS CASE. ANY COMPARABLE INVOLVED IN THE SIMILAR ACTIVI TY WILL ESSENTIALLY HAVE THE SAME INTANGIBLES, AND NO ADJUS TMENTS CAN BE JUSTIFIED OR WARRANTED IN THE CASES OF ROUTI NE 40 ITA NO.761/DEL /2015 INTANGIBLES. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THIS CASE, THE ACTION OF THE TPO I S DEVOID OF ANY LEGALLY SUSTAINABLE MERITS ON THIS COUNT AS WEL L. 72. THE PARTICULAR BUSINESS MODEL WHICH GIVES RISE TO THIS EDGE, ASSUMING THAT THERE IS INDEED AN EDGE, TO THE ASSESSEE IS A RESULT OF GROUP SYNERGY AND INTANGIBLES AS A R ESULT OF SUCH GROUP SYNERGY CANNOT, THEREFORE, BE ASSIGNED T O THE ASSESSEE ALONE. IN ANY EVENT, WHEN THE IMPACT OF GR OUP SYNERGY IS TAKEN INTO ACCOUNT, IT IS ONLY WHEN IT C ONSISTS OF DELIBERATE CONCERTED ACTION BENEFITS, AND NOT WHEN IT MERELY CONSISTS OF THE PASSIVE ASSOCIATION BENEFITS. THERE IS NO SUCH SUGGESTION OF DELIBERATE CONCERTED ACTION BENEFITS IN THE PRESENT CASE. 73. IN ANY EVENT, AS OBSERVED BY HONBLE DELHI HIGH COURT, IN LI & FUNGS CASE (SUPRA), THE ASSESSE MAY HAVE DEVELOPED EXPERIENCE AND EXPERTISE WHICH THE TRIBUN AL HAS HELD TO BE HUMAN CAPITAL AND SUPPLY CHAIN INTANGIBLES BUT SUCH DESCRIPTION DOES NOT IN ANY WA Y REVEAL HOW THE APPELLANT BEARS ANY RISK - EITHER ENTERPRISE OR ECONOMIC . SUMMING UP THE DECISION, THEIR LORDSHIPS HAVE FURTHER OBSERVED THAT, TAX AUTHORITIES SHOULD BASE THEIR CONCLUSIONS ON SPECIFIC FACTS, AN D NOT ON VAGUE GENERALITIES, SUCH AS 'SIGNIFICANT RISK', 'FUNCTIONAL RISK', 'ENTERPRISE RISK' ETC. WITHOUT A NY MATERIAL ON RECORD TO ESTABLISH SUCH FINDINGS. IF S UCH FINDINGS ARE WARRANTED, THEY SHOULD BE SUPPORTED BY DEMONSTRABLE REASON, BASED ON OBJECTIVE FACTS AND T HE RELATIVE EVALUATION OF THEIR WEIGHT AND SIGNIFICANC E . THESE OBSERVATIONS EQUALLY APPLY TO THE FACT SITUAT ION BEFORE US AS WELL. AS LEARNED COUNSEL FOR THE ASSESSEE VER Y APTLY PUTS IT, ALL THESE INTANGIBLES, AS PERCEIVED BY THE TPO, ARE MORE OF HIS FIGMENT OF HIS IMAGINATION RATHER THAN BASED ON ANY COGENT MATERIAL. THE USE OF INTANGIBLES CANNOT BE INFERRED OR ASSUMED. IT IS TO BE DEMONSTRATED, ON T HE BASIS OF COGENT MATERIAL, BY THE REVENUE AUTHORITIES. 41 ITA NO.761/DEL /2015 49. SINCE THE FACTS AND CIRCUMSTANCE BEING SIMILAR, WE CONCUR WITH THE AFORESAID OBSERVATION OF THE COORDINATE BENCH A ND RESPECTFULLY FOLLOWING THE SAME, WE ARE OF THE VIEW THAT USE OF INTANGIBLES CANNOT BE INFERRED OR ASSUMED AND NEEDS TO BE DEMONSTRATED ON THE BASIS OF COGENT MATERIALS BY THE TPO/AO AND ADJUSTMENT FOR U SE OF INTANGIBLES WAS UNWARRANTED. THEREAFTER, WE TAKE N OTE THAT THE COORDINATE BENCH ADJUDICATED THE BERRY RATIO AS U NDER:- TPOS OTHER OBJECTIONS TO APPLICATION OF BERRY RAT IO 63. WE HAVE NOTED THAT THE TPO HAS RAISED THREE OTH ER OBJECTIONS WITH RESPECT TO THE BERRY RATIO, I.E. (A ) USE OF BERRY RATIO IS NOT PERMITTED UNDER RULE 10B(1)(E)(I ) AS IT DOES NOT DEAL WITH COSTS INCURRED, SALES EFFECTED O R ASSETS EMPLOYED OR TO BE EMPLOYED; (B) USE OF BERRY RATIO IS NOT APPROPRIATE TO THE FACTS OF THIS CASE AS THERE ARE UNIQUE INTANGIBLES LIKE SUPPLY CHAIN INTANGIBLES AND HUMAN ASSETS INTANGIBLES; AND (C) USE OF BERRY RATIO IS UNWORKAB LE DUE TO ADJUSTMENTS FOR VARIATIONS IN ACCOUNTING POLICIES F OR RECORDING COSTS. 64. NONE OF THESE OBJECTIONS, FOR THE REASONS WE WI LL SET OUT NOW, MERITS ACCEPTANCE. RULE 10B(1)(E)(I) AND USE OF BERRY RATIO 65. AS FOR THE OBJECTION THAT USE OF BERRY RATIO IS NOT PERMITTED UNDER RULE 0B(1)(E)(I) AS IT DOES NOT DEA L WITH COSTS INCURRED, SALES EFFECTED OR ASSETS EMPLOYED O R TO BE EMPLOYED, IT PROCEEDS ON THE FALLACY THAT THE BASIS OF 42 ITA NO.761/DEL /2015 COMPUTATION, AS SET OUT IN RULE 10B(1)(E)(I), IS EX HAUSTIVE WHEREAS IT IS ONLY ILLUSTRATIVE AND IT ENDS WITH TH E EXPRESSION OR HAVING REGARD TO ANY OTHER RELEVANT BASE. JUST BECAUSE A COST BASE IS NOT OF COSTS INCURRED, SALES EFFECTED OR ASSETS EMPLOYED, SUCH A BASE DOES NOT C EASE TO PERMISSIBLE UNDER RULE 10B(1)(E)(I) UNLESS SUCH A B ASE CAN BE HELD TO BE IRRELEVANT. IN VIEW OF THE ELABORATE DISCUSSIONS EARLIER, JUSTIFYING EXCLUSION OF INVENT ORY COSTS, THE COST OF BASE OF THE OPERATING EXPENSES IS RELEV ANT. WHEN COST OF INVENTORY IS EXCLUDED FROM THE COST BASE, F OR ALL PRACTICAL PURPOSES, COST BASES CONSISTS ONLY OF THE OPERATIONAL COSTS. IN OUR CONSIDERED IN A SITUATION IN WHICH TRADING IS ON BACK TO BACK BASIS WITHOUT ANYTHING A CTUALLY GOING TO THE CURRENT ASSETS AND FLASH TITLE OF GOOD S IS HELD ONLY MOMENTARILY, IT COULD INDEED ACTUALLY BE A REL EVANT BASE AS TO WHAT ARE THE OPERATING COSTS OR VALUE AD DED EXPENSES PARTICULARLY WHEN, AS WE HAVE NOTED ABOV E, NO RESOURCES ARE USED IN THE INVENTORIES. USE OF BERRY RATIO WHEN TESTED PARTY HAS HIGH LEVEL OF CURRENT ASSETS 66. AS FOR THE OBJECTION REGARDING USE OF THIS RATI O ONLY IN THE SITUATIONS IN WHICH CURRENT ASSETS ARE NOT SIGN IFICANT, THERE CANNOT INDEED BE MUCH DISPUTE WITH THIS PROPO SITION ON PRINCIPLE BUT THERE IS NOTHING ON THE RECORD TO EVIDENCE THAT THERE ARE HIGH CURRENT ASSETS IN THE PRESENT C ASE EITHER. SUCH VAGUE GENERALITIES, AS RESORTED TO THE TPO, CA NNOT BE SUSTAINED IN LAW. THERE IS NO MENTION ABOUT ANY SPE CIFIC ELEMENT OF ASSETS WHICH CAN BE RELATED TO HIGH CURR ENT ASSETS. THE TPO HAS MENTIONED ABOUT USE OF INTANGIB LES BUT ON THE QUESTION OF INTANGIBLES AS WELL, FOR THE REA SONS WE WILL SET OUT IN A SHORT WHILE, THE STAND OF THE TPO WAS DEVOID OF ANY LEGALLY SUSTAINABLE FOUNDATION. IT IS NOT THE CASE OF THE TPO THAT THE ASSESSEE OWNS ANY SIGNIFIC ANT UNIQUE INTANGIBLES, WHICH ARE ACQUIRED BY THE ASSES SEE AT A SPECIFIC COST , WHICH HAVE SIGNIFICANT REPLACEMENT COST OR WHICH ARE DEVELOPED OTHERWISE THAN AS A BYE PRODUCT OF 43 ITA NO.761/DEL /2015 CARRYING OUT ROUTINE BUSINESS ACTIVITIES OF THE ASS ESSEE. AS WE HAVE NOTED ELSEWHERE IN THIS ORDER, NOT ONLY THA T THERE SHOULD BE INTANGIBLES IN USE IN THE BUSINESS AND OW NED BY THE ASSESSEE BUT SUCH INTANGIBLES SHOULD BE UNIQUEU NIQUE TO THE ASSESSEE WHICH ARE NOT FOUND IN THE COMPARABLES . A TRAINED WORKFORCE, UNLESS IT HAS SIGNIFICANT DEVELO PMENT COST OR REPLACEMENT COST, IS A ROUTINE BUSINESS INT ANGIBLE WHICH ALMOST ALL COMPARABLES WILL HAVE. COST CLASSIFICATION ISSUES IN APPLICATION OF BERRY RATIO 67. AS REGARDS THE ALLEGED UNSUITABILITY OF USE OF BERRY RATIO DUE TO OPERATIONAL DIFFICULTIES DUE TO VARIATIONS I N ACCOUNTING POLICIES, IT IS SUFFICIENT TO TAKE NOTE OF THE FACT THAT COORDINATE BENCHES OF THE TRIBUNAL HAVE UPHELD THE USE OF BERRY RATIO IN APPROPRIATE CASES, INCLUDING THE CASE OF GAP INTERNATIONAL SOURCING INDIA PVT LTD (SUPRA), AND THAT NO SPECIFIC ISSUES ARE RAISED BY THE TPO WITH REGARD TO OPERATIONAL DIFFICULTIES IN THE CASES OF SELECTED COMPARABLES. THE PROBLEM, THUS, IS HYPOTHETICAL PRO BLEM AT THIS STAGE WHICH MAY ARISE IN CASE THERE ARE SIGNIF ICANT ISSUES IN THE ACCOUNTING POLICIES OF THE COMPARABLE S VIS- VIS THE ASSESSEE. THAT STAGE HAS NOT YET COME AS TH E COMPARABLES ARE YET TO BE FINALIZED, AND NO SUCH SP ECIFIC ISSUES ARE RAISED WITH RESPECT TO THE COMPARABLES U SED IN THE ANALYSIS SO FAR. 68. IN ANY CASE, WHEN WE ARE DEALING WITH BUSINESS ENTITIES ENGAGED IN THE TRADING ACTIVITIES AND ALL THEIR OPE RATING EXPENSES PERTAIN TO THE TRADING ACTIVITIES ONLY, TH E ISSUE REGARDING CLASSIFICATION OF OPERATING COSTS ARE SOM EWHAT ACADEMIC. 69. THERE IS, THEREFORE, NEITHER THERE IS ANYTHING INAPPROPRIATE IN THE USE AS SUCH OF BERRY RATIO PER SE , NOR THERE ARE ANY REAL ISSUES WITH RESPECT TO ACCOUNTIN G POLICIES OF THE ASSESSEE VIS--VIS ACCOUNTING POLICIES OF TH E COMPARABLES FINALLY SELECTED. OBVIOUSLY, AS FINAL 44 ITA NO.761/DEL /2015 COMPARABLES ARE NOT YET SELECTED, THERE CANNOT BE A NY QUESTION OF THE ACCOUNTING POLICIES ADOPTED BY THE COMPARABLES VIS--VIS ACCOUNTING POLICIES OF THE AS SESSEE BEING SO SIGNIFICANTLY DIFFERENT THAT THE VERY COMP ARABILITY IS NOT POSSIBLE. THE APPREHENSIONS ARE PREMATURE. W E, THEREFORE, SEE NOTHING WRONG IN PRINCIPLE IN USE OF BERRY RATIO IN THE CASE OF AN ASSESSEE LIKE THE ONE BEFOR E US THOUGH, IN THE ABSENCE OF ANY SPECIFIC COMPARABLES BEFORE US, IT IS NOT POSSIBLE TO VISUALIZE AND DEAL WITH T HE DIFFICULTIES WITH REGARD TO VARIATIONS IN, AND IMPA CT OF, ACCOUNTING POLICIES IN SUCH CASES. HAVING SAID THAT , WE MUST MAY ALSO REITERATE THAT WHEN WE ARE ONLY DEALI NG WITH TRADING ACTIVITIES OF THE TESTED PARTY AND THE COMP ARABLES, WITHOUT ANY PROCESSING OR OTHER COSTS, THE OCCASION FOR ANY IMPACT OF SIGNIFICANT VARIATIONS IN THE ACCOUNTING POLICIES DOES NOT ARISE. THERE CAN BE LITTLE SCOPE OF DIFFER ENCES IN APPROACH SO FAR AS TRADING COSTS ARE INVOLVED. 50. IN THE LIGHT OF THE ABOVE DECISION, RESPECTFULL Y FOLLOWING THE SAME, WE REPEL THE CONTENTION OF THE TPO AND UPHOLD THE CONTENTION OF THE ASSESSEE THAT BERRY RATIO ADOPTED BY THE A SSESSEE DOES NOT OFFEND RULE 10B. 51. IN VIEW OF THESE DISCUSSIONS, IN OUR CONSIDERED VIEW, THE USE OF BERRY RATIO AS PLI IS APPROPRIATE TO THE FACTS A ND CIRCUMSTANCES OF THIS CASE, THE OBJECTIONS TAKEN BY THE AUTHORIT IES BELOW TO THE USE OF BERRY RATIO ARE UNSUSTAINABLE IN LAW, AND TH E ADJUSTMENTS FOR USE OF INTANGIBLES AND LOCATIONAL SAVINGS ARE U NWARRANTED. 45 ITA NO.761/DEL /2015 WITH THESE OBSERVATIONS, THE COMPUTATION OF ALP SO FAR AS BUY SELL SEGMENT OF ASSESSEES ACTIVITIES ARE CONCERNED STANDS RESTORED TO THE ASSESSMENT STAGE. THE MATTER WILL BE EXAMINE D AFRESH IN THE LIGHT OF THE ABOVE OBSERVATIONS WHICH WE RESPECTFUL LY CONCUR WITH THAT LAID BY THE CO-ORDINATE BENCH IN MITSUBHISHI C ORPORATION INDIA PVT. LTD. (SUPRA) AND THE MATTER IS REMANDED BACK TO BE EXAMINED AFRESH AT THE ASSESSMENT STAGE. 52. NEXT ISSUE IS WITH REPORT TO SERVICE FEE SEGMEN T WHICH THE TPO TREATED AS TRADING SEGMENT. AS PER THE ASSESSEE, TH E ASSESSEE IS INVOLVED IN TWO SEGMENTS I.E. TRADING SEGMENT AND S ERVICE FEE/COMMISSION FEE SEGMENT. IN RESPECT TO THE COMP UTATION OF ALP BY THE ASSESSEE REFLECTED FOR TRADING SEGMENT IS NO T DISPUTED BY THE TPO. HOWEVER, IN RESPECT TO THE OTHER SEGMENT WHIC H WAS CLAIMED BY THE ASSESSEE AS INCOME FROM SERVICE FEE/COMMISSI ON FEE SEGMENT, THE TPO, HOWEVER, DISAGREES WITH THE ASSESSEES CON TENTION AND TREATS IT AS INCOME FROM TRADING ACTIVITY. THE SAME ISSUE CROPPED IN MITSUBISHI CORPORATION INDIA PVT. LTD. (SUPRA) WHER EIN THE COORDINATE BENCH FOLLOWING THE ORDER OF THE HONBLE JURISDICTI ONAL HIGH COURT 46 ITA NO.761/DEL /2015 DECISION IN THE CASE OF M/S LI & FUNG INDIA PVT. LT D VS. CIT (361 ITR 85) HAS UPHELD THE CONTENTION OF THE ASSESSEE THAT IT IS NO LONGER OPEN TO THE REVENUE AUTHORITIES TO RECONSTRUCT THE FINAN CIAL STATEMENTS OF THE ASSESSEE BY INCLUDING THE COST OF PRODUCTS INCURRED BY ITS AES, IN RESPECT OF WHICH SERVICES ARE RENDERED, IN ITS RECO NSTRUCTED FINANCIAL STATEMENTS AND THEN PUTTING THE HYPOTHETICAL TRADIN G PROFITS, SO ARRIVED IN THEIR RECONSTRUCTED FINANCIAL STATEMENTS, TO THE TESTS FOR DETERMINING ARMS LENGTH PRICE. THE COORDINATE BENCH HELD AS F OLLOWS :- SERVICE FEE/ COMMISSION SEGMENT OF ASSESSEES ACTIV ITIES 80. COMING TO THE SERVICE FEE/ COMMISSION SEGMENT, WE HAVE NOTED THAT AS REGARDS THE SERVICE FEE/ COMMISS ION SEGMENT, THE TPO HAS RE-CHARACTERIZED THE SAME AS T RADING ACTIVITIES AS HE WAS OF THE VIEW THAT THE RIGHT COU RSE OF ACTION WILL BE TO TREAT THE SAME AS EQUIVALENT TO T RADING SEGMENT, BECAUSE WHAT THE ASSESSEE HAS DISCLOSED AS SERVICE/ COMMISSION INCOME IS INFACT TRADING INCOME. ACCORDI NGLY, THE COST OF GOODS SOLD BY THE AES, WHICH WAS RS.2927,92,05,406, WAS ALSO TO BE INCLUDED IN COST BASE OF THE SERVICE/COMMISSION SEGMENT AND THEN ALP WAS RECOMPUTED. SO FAR AS THIS ASPECT OF THE MATTER IS CONCERNED, THE ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY HONBLE JURISDICTIONAL HIGH COURTS DECISION IN THE CASE OF LI & FUNG WHEREIN THEIR LORDSHIPS HAVE, INTERALIA , OBSERVED AS FOLLOWS: 47 ITA NO.761/DEL /2015 ..THIS COURT IS OF OPINION THAT TO APPLY THE TNMM, THE ASSESSEES NET PROFIT MARGIN REALIZED FROM INTERNATIONAL TRANSACTIONS HAD TO BE CALCULATED ONLY WITH REFERENCE TO COST INCURRED BY IT, AND NOT BY ANY OTHER ENTITY, EITHER THIRD PARTY VENDORS OR THE AE. TEXTUALLY, AND WITHIN THE BOUNDS OF THE TEXT MUST THE AO/TPO OPERATE, RULE 10B(1)(E) DOES NOT ENABLE CONSIDERATION OR IMPUTATION OF COST INCURRED BY THIRD PARTIES OR UNRELATED ENTERPRISES TO COMPUTE THE ASSESSEES NET PROFIT MARGIN FOR APPLICATION OF THE TNMM. RULE 10B(1)(E) RECOGNIZES THAT 'THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE ...' (EMPHASIS SUPPLIED). IT THUS CONTEMPLATES A DETERMINATION OF ALP WITH REFERENCE TO THE RELEVANT FACTORS (COST, ASSETS, SALES ETC.) OF THE ENTERPRISE IN QUESTION, I.E. THE ASSESSEE, AS OPPOSED TO THE AE OR ANY THIRD PARTY. THE TEXTUAL MANDATE, THUS, IS UNAMBIGUOUSLY CLEAR. 40. THE TPOS REASONING TO ENHANCE THE ASSESSEES COST BASE BY CONSIDERING THE COST OF MANUFACTURE AND EXPORT OF FINISHED GOODS, I.E., READY-MADE GARMENTS BY THE THIRD PARTY VENDERS (WHICH COST IS CERTAINLY NOT THE COST INCURRED BY T HE ASSESSEE), IS NOWHERE SUPPORTED BY THE TNMM UNDER RULE 10B(1)(E) OF THE RULES. HAVING DETERMINED THAT (TNMM) TO BE THE MOST APPROPRIATE METHOD, THE ONLY RULES AND NORMS PRESCRIBED IN THAT REGARD COULD HAVE BEEN APPLIED TO DETERMINE WHETHER THE EXERCISE INDICATED BY THE ASSESSEE YIELDED AN ALP. 48 ITA NO.761/DEL /2015 81. CLEARLY, THEREFORE, IT IS IMPERMISSIBLE TO MAKE NOTIONAL ADDITIONS IN THE COST BASE AND THUS TAKE I NTO ACCOUNT THE COSTS WHICH ARE NOT BORNE BY THE ASSESS EE. IT IS SO OPINED BY HONBLE JURISDICTIONAL HIGH COUR T ON A CAREFUL ANALYSIS OF RULE 10B(1)(E)(I). IT IS, THE REFORE, NO LONGER OPEN TO THE REVENUE AUTHORITIES TO RECONS TRUCT THE FINANCIAL STATEMENTS OF THE ASSESSEE BY INCLUDI NG THE COST OF PRODUCTS INCURRED BY THE AES, IN RESPEC T OF WHICH SERVICES ARE RENDERED, IN ITS RECONSTRUCTED FINANCIAL STATEMENTS, AND THEN PUTTING THE HYPOTHET ICAL TRADING PROFITS, SO ARRIVED AT IN THESE RECONSTRUCT ED FINANCIAL STATEMENTS, TO THE TESTS FOR DETERMINING ARMS LENGTH PRICE. RESPECTFULLY FOLLOWING THE ESTEEMED VIEWS OF THEIR LORDSHIPS, WE HOLD THAT THE ADJUSTME NTS CARRIED OUT IN THE COST BASE OF ALP COMPUTATION, IN RESPECT OF SERVICE FEE/COMMISSION SEGMENT, ARE INDE ED DEVOID OF LEGALLY SUSTAINABLE MERITS. WE DIRECT THE ASSESSING OFFICER TO DELETE THESE ADJUSTMENTS. ONCE THIS NOTIONAL ADJUSTMENT IS DELETED, THE ALP DETERMINATION IS TO BE DONE ON THE BASIS OF THE COMMISSION/SERVICE FEES. AS WE HAVE STATED EARLIER IN THIS ORDER AS WELL, IN THE COURSE OF PROCEEDINGS BE FORE US, THE ASSESSEE HAS FILED FRESH COMPUTATION OF THE ALP WHICH ATTEMPTS TO DEMONSTRATE THAT, IF NOTIONAL ADJUSTMENTS MADE BY THE TPO ARE DELETED, NO ALP ADJUSTMENT WILL BE WARRANTED. HOWEVER, WE ARE NOT INCLINED TO GO INTO VERIFICATIONS WHICH MUST TAKE P LACE AT THE ASSESSMENT STAGE. 53. RESPECTFULLY FOLLOWING THE RATIO LAID BY THE HO NBLE PREDICTED HIGH COURT IN LI & FUNG OUT THAT OF THE CO-ORDINATE BENCH IN MITSUBISHI (SUPRA) WE DEEM IT APPROPRIATE TO UPHOLD THE GRIEVANCES OF THE ASSESSEE IN PRINCIPLE, AS THE TERMS ABOVE, DELE TE THE NOTIONAL 49 ITA NO.761/DEL /2015 ADJUSTMENTS BY TPOS ADOPTING COST BASE OF THE AES IN ASSESSEES ALP DETERMINATION, AND REMIT THE MATTER TO THE FILE OF THE TPO FOR THE NECESSARY FACTUAL VERIFICATIONS ON IMPACT OF THIS C ORRECTIONS. ACCORDINGLY, THE MATTER STANDS RESTORED TO THE FILE OF THE TPO IN THIS RESPECT ALSO. 54. IN THE RESULT, SO FAR AS GRIEVANCES AGAINST ALP ADJUSTMENT OF RS.14,20,93,551/- ARE CONCERNED, THE MATTER STANDS RESTORED TO THE FILE OF THE TPO BUT IN THE TERMS INDICATED ABOVE. THUS, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. (ORDER PRONOUNCED IN THE OPEN COURT ON 24.07. 2015) SD/- SD/- (S.V. MEHROTRA) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 24. /07/2015. COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI
Mehul