Case Law Details
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.
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