ADM Agro Industries Kota & Akola P Ltd Vs ACIT (ITAT Delhi)
Conclusion: In present facts of the case, the Hon’ble ITAT observed that since, the assessee is found to be functionally comparable to the business auxiliary service providers, therefore it is established that the assessee has undertaken limited functions and risk in the merchanting trades segment and earns a fixed profit margin. Therefore, the cost of goods cannot be included in the denominator of the PLI (Profit Level Indicator).
Facts: In present facts of the case, assesse have challenged the final assessment order dated 21.07.2022 passed u/s. 143(3) read with section 144C(13) of the Income-tax Act, 1961 pertaining to assessment year 2018-19, in pursuance to the directions of learned Dispute Resolution Panel (DRP). The assessee is engaged in the following streams of activities namely Trading activity and Merchanting trades.
In the year under consideration, the assessee undertook various international transactions with its Overseas Associated Enterprises (AEs) and in the audit report in Form 3CBE reported their transactions. After verifying the 3CBE report as well as Transfer Pricing Study Report (TPSR) of the assessee, the TPO accepted the ALP of the trading segment. Whereas, in respect of merchanting trades, the TPO observed that the assessee has benchmarked such activities by applying Transactional Net Margin Method (TNMM) using Operating Profit(OP)/Value Added Cost(VAC) as the Profit Level Indicator (PLI). Further, for comparative analysis, it selected 13 companies in the business auxiliary services segment as comparables. As against the margin shown by the assessee at 604.17%, the average margin of the comparables works out to 5.51% – 11.12%. Thus, the assessee claimed the transactions with AEs in the merchanting trades to be at arm’s length. The TPO, however, did not accept assessee’s claim. He observed that while the PLI of the comparables is Operating Profit(OP)/Operating cost(OC), the PLI of the asseseee is OP/VAC. Thus, he observed that the assessee has not provided any justifiable reason why the PLI different from the PLI of the comparables was taken. He observed, the PLI of OP/VAC, otherwise known as Berry ratio, taken by the assessee as against OP/OC has rendered the benchmarking of the assessee flawed. He observed, in case OP/OC is taken as PLI of the assessee, the profit margin will work out to 0.09% as against OP/OC (Median) of the comparables of 9.51%. Accordingly, he issued a show cause notice to the assessee to explain why OP/OC should not be taken as PLI of the assessee to determine the net margin. Though, the assessee furnished a detailed reply opposing the adoption of OP/OC as PLI on the ground that since, the comparables are in business auxiliary services, they do not have any cost of goods, hence, the assessee has taken OP/VAC as the PLI after reducing cost of goods. TPO, however, was not convinced with the submissions of the assessee. Adopting OP/OC as the PLI of the assessee, he proceeded to determine the arm’s length margin of the assessee qua the comparables and proposed an adjustment of Rs.82,12,60,000/- to the ALP disclosed by the assessee. While framing the draft assessment order, the Assessing Officer added back the transfer pricing adjustment proposed by the TPO. Challenging the said adjustment, the assessee raised objections before learned DRP. However, learned DRP upheld the action of the TPO.
The Hon’ble ITAT observed that the crux of the dispute lies within a narrow compass, as to, what should be the PLI of the assessee qua the PLI of the comparables. In Form 3CEB, the assessee has reported revenue from two separate segments, firstly, merchanting trades segment and secondly, trading segment. In merchanting trades, the assessee enters into a purchase contract with one of its overseas AE, viz, ADM Sarl. Whereas, it sells the purchased goods to another overseas AE, ADM Asia Pacific. Though, technically, the assessee had entered into purchase and sale contracts for buying and selling goods, however, in reality, the assessee merely acts as a facilitator of buying and selling of goods between the two AEs. As per the business model, the goods purchased from ADM Sarl are sold to ADM Asia Pacific in high seas without entering the custom barriers of India. Thus, essentially, the goods are transferred in the high seas from original seller of goods to the ultimate buyer without entering into the territorial waters of India. Thus, factually, the goods never come to assessee’s inventory and stored in any warehouse in India. In fact, the aforesaid purchase and sale transactions between the two overseas AEs through the assessee take place instantaneously on back to back basis. Even, the entire logistics of loading and unloading the commodities are managed by the overseas AEs, viz., ADM Sarl and ADM Asia Pacific. The assessee is neither engaged in arranging logistics nor in packaging or labelling of the commodities. It is also a fact on record that both the seller and buyer are pre-determined and prices of the commodities are pre-fixed. The assessee only provides certain administrative functions. Hence, the role of the assessee is limited. Thus, to recover the administrative cost with little mark-up, the assessee is remunerated at 10 basis points of the purchase invoice.
From the aforesaid facts, it was clear that the functions performed and risk undertaken by the assessee is that of a business auxiliary service provider and not different from them. It is further established from the fact that the comparables selected by the assessee are business auxiliary service providers and the TPO has found them to be functionally similar to the assessee. That being the functionality of the assessee and the comparables, it needs to be examined whether PLI adopted by the assessee is acceptable.
It is a fact on record that the operating cost of the comparables are not inclusive of cost of goods, as they are business auxiliary service providers, hence, they do not have any cost of goods. Since, the assessee is found to be functionally comparable to the business auxiliary service providers, it is established that the assessee has undertaken limited functions and risk in the merchanting trades segment and earns a fixed profit margin. Therefore, the cost of goods cannot be included in the denominator of the PLI. Thus, for the assessee, return on value added cost will be the relevant base for computing the net profit margin to bring the profit margin of the comparables in alignment with that of the assessee.
Further it was observed that neither the TPO nor DRP have made any adverse comment regarding the merchanting trades segment. Further, when there is no allegation either by RBI or any other regulatory authority regarding merchanting trades segment of the assessee, then learned Departmental Representative cannot give a new dimension to the entire issue by making allegations which are not borne out on record. Thus, considering the fact that in the PLI of the comparables, cost of goods is not included in the denominator. Hence, cost of goods cannot form part of the denominator of PLI. Accordingly AO was directed to compute the ALP by applying PLI of operating profit to value added cost, excluding the cost of goods.
On basis of the above, appeal was partly allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned appeal has been filed by the assessee challenging the final assessment order dated 21.07.2022 passed u/s. 143(3) read with section 144C(13) of the Income-tax Act, 1961 pertaining to assessment year 2018-19, in pursuance to the directions of learned Dispute Resolution Panel (DRP).
2. At the outset, Shri Ajay Vohra, learned Sr. Counsel, appearing for the assessee, on instructions, submitted that the assessee does not want to press ground No.1. Accordingly, this ground is dismissed as not
3. In ground Nos. 2 to 8, the issue raised by the assessee relates to adjustment proposed by the Transfer Pricing Officer (TPO) to the Arm’s Length Price (ALP) of the international transactions relating to merchanting trades.
4. Briefly, the facts are, the assessee is a resident corporate entity. As
stated, the assessee is engaged in the following streams of activities :
[i] Trading Activity : In this segment, the assessee undertakes physical trading of agricultural commodities, such as, sorghum, barley, wheat, oilseeds, yellow peas etc.
[ii] Merchanting trades: In this segment, the assessee undertakes merchanting trade in agricultural commodities under Foreign Exchange Management Act and guidelines issued by Director General of Foreign Trade (DGFT).
5. In the year under consideration, the assessee undertook various international transactions with its Overseas Associated Enterprises (AEs) and in the audit report in Form 3CBE reported following transactions:
